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Scarce Resources, Real Business or Threat to Profitability?

Fortnightly Magazine - October 1 1997

serious impact on the system. Bilateral transactions of a given magnitude may not have the same impact on the system as a set of transactions of the same size managed simultaneously by the ISO. Feasibility tests must take into account the uniqueness of each transaction to prevent discrimination against certain market participants.

We believe that the best way to assure fair treatment is to use an iterative auction for transmission system services, on a first-come first-served basis, with the market participants knowing the charge, in advance, as determined by system conditions. The ISO requires no price information about the transaction terms, and the market participant decides for itself how much it will use the system, and at what price. Imposed curtailments affect profitability, which puts the ISO into the business of making commercial decisions for users. As for the need for insurance against unexpected shifts in operating conditions, need for systems services, or pricing, that is a matter between the market participant and insurance companies.

Some industry groups propose to give rights to use the system to specific users at no cost. We view this proposal as discriminatory. The ISO should attempt to optimize social welfare, not allocate profits in a supposedly fair manner, especially when no definition of fairness exists. The ISO, moreover, should not actively curtail individual transactions, since doing so affects individual profits. The market participants, the users of the system, to maximize profits should evaluate the cost of system services, and decide what to do in light of the profit possible from the trade. They auction energy; they can use a similar process to buy system services. They can take insurance against the unexpected, or not do so, making the same type of risk management decision as in any other business.

The concept of charging each transaction relative to the impact that it has on system reliability, which follows from the iterative process that we propose, has another consequence. It provides the system with a way to accumulate the necessary resources to enhance the system and maintain reliability as the market changes. %n5%n The economist marooned on the desert island with one can of tuna fish and no can opener solved his problem by assuming that he had a can opener. We note a similar tendency on the part of ISO organizers and regulators: Just assume that the resources needed to maintain reliability will be made available. Do not specify by whom. In a market-based plan, the users provide the resources.

With reserve margins at their lowest level in 30 years, a transmission system barely larger than it was a decade ago and the country about to launch what could be the most complicated deregulation ever, we would have expected fewer public policy pronouncements and more attention to the details of how to make the system work fairly and efficiently. However, from an investor or managerial standpoint, we would have expected more attention to the question of whether these seemingly technical matters affect profits. They do. People who understand the issues will figure out how to make the