[BETA] Fortnightly

THE PRICING TURMOIL THAT STRUCK MIDWEST POWER markets during the week of June 22, with allegations of price gouging and calls for a wholesale price cap imposed by the Federal Energy Regulatory Commission (see Docket EL98-53), made for good copy but has obscured what's really going on.

"In the pleadings to FERC, I saw no evidence of price gouging," says attorney Jeffrey Watkiss, who represents power marketers who have asked the Commission for wholesale market reform.

"To the contrary, short-term prices seemed to behave as one would expect in a competitive market for a scarce commodity that cannot economically be stored. It spiked briefly and then returned to stable levels."

Markets go up and down, but the real story concerns the transmission network and the rules that govern both access to the lines and relief from line-loading congestion. These questions resound especially in the Midwest, where individual utilities operate the control areas, and where utilities are locked in a battle between supporters of two competing proposals for grid management.

Some utilities are looking beyond the traditional independent system operator, to other structures, such as transcos, gridcos and independent transmission companies. These terms all refer to the idea of an investor-backed, for-profit company that would both own and operate the transmission grid. Transco supporters insist that ISOs serve only as a transitional half-measure on the road to the end game.

Thomas M. Lenard, senior fellow and director of regulatory studies at The Progress and Freedom Foundation, observes: "The transco model is attractive precisely because it permits the owner of transmission assets to be the system operator. Users never transmit power across the network. You don't define transmission at all. You simply sell power at some nodes and buy at others."

And with gas-powered turbines offering cheap onsite power, the grid seems poised to go competitive. Lenard adds, "Gas-turbine generation technology makes the natural gas pipeline network a potential competitor of the electricity grid. In the language of economists, the grid is becoming 'contestable.'"

Off the Beaten Path

On June 5, three weeks before prices exploded, the North American Electric Reliability Council asked the FERC to certify that its transmission loading relief procedures comply with the FERC's pro forma transmission tariffs. In particular, the TLR rules permit the curtailment of transmission service to relieve the impact of parallel (loop) flows on grid systems that are not located directly on the contract path of the curtailed transaction. The FERC took the matter under consideration, but in its routine notice announcing the NERC filing, it advised that utilities could apply the TLR rules within the Eastern Interconnection pending a final decision, in light of the "serious reliability problems that could result if the ... TLR procedures were discontinued during the current summer period" (Docket No. EL98-52).

Soon afterward, Detroit Edison intervened, protesting both NERC's TLR proposal and the Commission's interim approval. It attacked the "off-path" rule as premature under NERC's own procedures and injurious to Michigan electric systems: "The Michigan systems and others are affected by significant parallel flows around Lake Erie that can result from