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Rethinking WEPEX: What's Wrong with Least Cost?

Fortnightly Magazine - January 1 1998

and provide ancillary services.

We accept the companies' clarification. In addition, we will require that the ISO be allowed to use all information it receives in order to develop a least-cost schedule (for energy and ancillary service) in performance of its responsibilities to efficiently manage congestion and satisfy its control area responsibilities. %n2%n

With this clear admonition last year from the FERC, the ISO, the PX and the three major electric utilities returned to the Commission on Aug. 15, 1997, when they submitted Phase II of their proposed restructuring of the California electric market. They won conditional FERC approval on Oct. 30. %n3%n

The Cost of Saying "No"

Unfortunately, however, WEPEX has not said "yes." Rather, the WEPEX response - now accepted by the FERC - is better characterized as "whenever it makes a difference, the answer is no." There are restrictions on least-cost dispatch, but the WEPEX sponsors contend that if the market will solve the problem, economic dispatch is not necessary; this is the old "bilateral-only" argument reborn. But if the market cannot solve the problem, then the WEPEX restrictions will apply to prevent the system operator from clearing the market. Although it was still a moving target as the deadline approached, even after the latest round of conditional FERC approvals on Oct. 30, the WEPEX proposal does not conform to the initial FERC requirement. These restrictions on economic or least-cost dispatch are not a surprise. %n4%n What is surprising is that the FERC has apparently acquiesced to the contorted logic and shifted the burden of proof against the provision of economic dispatch.

The contortion in the logic is most evident when we look at the WEPEX rules for real-time dispatch and balancing. For brevity, we pass over the day-ahead forward market where the analysis of the restrictions on economic dispatch is more contentious. But in the real-time market, where the system operator is responding to changing conditions, we are by definition in the period after the interval where participants in the market can do anything on their own to achieve equilibrium or an efficient outcome. (See sidebar, "Banking on Bids" and comment by FERC on the ISO's "unique position" to facilitate trades.)

In real time, only the system operator can minimize cost and achieve equilibrium, and in WEPEX this is forbidden when the system is not naturally in equilibrium. Restrictions are built in expressly to prevent the least-cost outcome of equilibrium in the energy market. %n5%n The system operator is required to ignore certain bids for changes in real-time balances. Instead, the system operator will deliberately pick a more expensive dispatch at a time when the market cannot possibly undo the damage. Inevitably, these restrictions can create anomalies like some market participants paying for their imbalances at prices greater than they had offered to change these same imbalances if only the system operator had considered their bids.

In response to these restrictions, the FERC imposed several reporting requirements on the WEPEX system operator in an attempt to test the proposition that the restrictions on least-cost dispatch do not matter.