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Rethinking WEPEX: What's Wrong with Least Cost?

Fortnightly Magazine - January 1 1998

%n6%n Under the circumstances, such reporting is good and necessary. Perhaps this will be sufficient, but there are at least two reasons not to be sanguine. The first concern is that the focus is on the estimated total cost of the dispatch restrictions. This criterion is incomplete. The real advantage of the system operator providing an economic dispatch service is to deal with complicated network interactions and make it easier for market participants to engage in transactions, especially small players who would find it hard otherwise to obtain balancing support. Are we confident that the balanced schedules and supplemental bids offered without economic dispatch are the same as those that would result with economic dispatch? This is an implicit assumption of the FERC reporting requirement. Or would behavior be different, as the proponents of the restrictions seem to anticipate? No good reason exists to impose the restrictions. But there are plenty of reasons to remove the restrictions, which only make the system operator's job more difficult.

The second concern is that the procedures for calculating the costs of the restrictions are incomplete and are being developed within the convoluted zonal framework that embodies the latest vision of the contract path for transmission. The zonal framework presents its own incentive problems, the pursuit of which goes beyond the scope of the present comment. Suffice it to say that the pervasive WEPEX reference to the "two" sides of a transmission interface constraint between zones is all an elaborate fiction. If there are looped connections in the transmission network, then the constrained lines do not have just two sides. Every location will have a different effect on the constraints. Hence, every location will have a different marginal cost that can be determined only by using the distribution factors of a full contingency constrained power flow model, an unpleasant reality from which WEPEX is not exempt. Experience has shown that it is quite easy to obfuscate these real effects and obscure the degree of cost shifting. Given the California precedent of "Inactive Zones" designed to spread the costs around, getting agreement on this impact analysis may not be so easy.

We could eliminate these problems by giving the WEPEX system operator the simple charge to follow the original FERC guidance and using standard procedures for economic dispatch of energy and ancillary services. Then we could turn to other neglected topics, like transmission congestion contracts, that have been pushed aside by the distracting debate. It turns out that it is a lot harder to say no to the three questions; the market structure would be better and simpler if the WEPEX system operator could just say yes.

William W. Hogan is the Thornton Bradshaw Professor of Public Policy and Management, John F. Kennedy School of Government, Harvard University, and senior advisor of Putnam, Hayes & Bartlett Inc. This presentation draws on work for the Harvard Electricity Policy Group and the Harvard-Japan Project on Energy and the Environment. Many individuals provided helpful comments. The author has consulted on electric market reform and transmission issues for British National Grid