A massive T&D system build-out is starting, but more needs to be done. Executives from Northeast Utilities, Pepco Holdings and ITC Holdings discuss improvements needed for reliability,...
previously negotiated. That difference can be a sale in either direction, such as a sale in addition to the bilateral deal or compensation for underdelivery. The meter determines how much electricity is bought or sold:
• If the meter can be read in MWhs, the sale is granular in MWhs. If the meter can be read in kilowatt-hours, the sale can be granular in kWhs. There is no need to transact in round MWhs to close the deal. The meter sets the precision.
• If the meter provides data in five-minute intervals, each five-minute interval will constitute a different sale period. If the meter provides data in two-second intervals, each two-second interval will constitute a different sale period. Metering technology does not limit the pricing period to clock hours.
WOLF determines the price for such unscheduled amounts. The scheduled amount that went through the meter is priced pursuant to the agreement that determined the scheduled amount.
WOLF prices are set pursuant to a formula that uses system imbalance measurements as the independent variable. As system frequency goes down and as Area Control Error becomes negative, the formula sends the price up. Conversely, as system frequency goes up and as Area Control Error becomes positive, the formula sends the price down. A similar function is used for the geographical dispersion of prices. The WOLF functional form has been proposed as a continuous variable. Granularity enters into WOLF only in regard to the precision with which frequency, ACE, and transmission-line loadings are measured. Prices will jump from one discrete price to another, but only as a measurement of system imbalance jumps from one discrete level to another.
I am not saying that prices around $4,000/MWh are inappropriate. Only that the specific prices might be inappropriate because of their granularity. The appropriate price might have been $4,298.56/MWh. Also, the need might not have been for 500 MW for a full hour. Instead the need might have been an average of 548 MW for 28 minutes. And the appropriate price for that delivery might have had a weighted average price of $8,404.37/MWh. But considering that the specific prices were determined by arms- length bargaining between willing buyers and willing sellers, deference should be given to that process.
Futures Contracts, Options and
WOLF pricing of unscheduled, moment-to-moment flows of electricity will solidify the concept that bilateral contracts are futures contracts. Force majeure clauses will even turn some bilateral contracts into options. For instance, the North American Electric Reliability Council has a program for transmission line loading relief that can abrogate bilateral schedules. Such abrogation can relieve a party of the obligation to deliver, turning the bilateral contract into an option similar to a "put." Conversely, abrogation also can relieve a party of the obligation to receive, turning the bilateral contract into an option similar to a "call." These issues are likely to be addressed in FERC Docket No. EL98-52-000, North American Electric Reliability Council, which is an inquiry into TLR.
The high prices of the week of June 22 also call back to question the