What is risk management?
No, it's not a brainteaser. It's the driving question behind , a new book from authors Shirley S. Savage and Peter R. Savage that...
different. The Midwest market is the result of bilateral contracts. Under such bilateralism, the right price for delivery is the price that the buyer and the seller have accepted, however high or low.
Sometimes bilateral agreements cannot be reached, but electricity will flow anyway because of the laws of physics. I propose WOLF pricing for these situations. When there is no contract and no scheduled amounts, the WOLF formula price would apply to the entire metered flow. There would be no scheduled offset to the metered amount. In regard to the defaults that allegedly occurred during the week of June 22, WOLF would provide a mechanism to assess liquidated damages. The liquidated damages would be assessed on the difference between scheduled and actual flows.
I support the concept that prices can get very high and very low. I believe in letting the market work. So the price levels that occurred in the Midwest during the week of June 22 do not upset me. I see larger problems in the structure of the current bilateral market. A bilateral market is too granular. This granularity contributes to the market instability when a generator trips or when a marketer defaults.
Granularity affects electricity sales in several ways, each of which must be addressed to improve the operation of the bulk power market.
• Unit commitments. Bilateral sales take time to arrange and usually are for round amounts, such as 50 MW, 100 MW or 500 MW. The appropriate amount may be 59 MW, but the rush to get deals done doesn't allow such precision, creating granularity in the transaction. This is similar to the granularity in utility long-range planning: Do we build a power line that can carry 600 MW? Do we build a 600-MW power plant?
• Hourly transactions. Many power requirements can be for intra-hour periods, such as 14 minutes, and some power requirements can even be measured in seconds or cycles. However, market transactions are typically consummated for a full hour or for a block of hours, such as 16 on-peak hours each weekday. This granularity is again the result of the rush to get deals done.
• Prices. The reported prices are curiously round, whole numbers, sometimes thousands of dollars per MWh. The prices are not precise numbers quoted in dollars and cents. The Securities and Exchange Commission investigated brokers for the large granularity of the spread between quoted bid and ask prices for shares of stock. And that granularity was only a quarter of a dollar per share. In the Midwest in June, we had prices with a granularity of $100 or even $1,000 per MWh.
WOLF pricing of unscheduled flows of electricity was designed to handle each of these granularity issues.
Unscheduled flows of electricity are a frequent occurrence among inter-connected utilities. Unscheduled flows can also be an issue within a utility's system, such as for transactions with transmission-dependent wholesale and retail customers, both for purchases from such customers and for sales to such customers. An unscheduled flow is the difference between the metered amount and any bilateral deal that has been