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Perspective

Fortnightly Magazine - September 1 1998

issue of stranded costs. Under a competitive market, only the market price can be recovered in rates charged to consumers, since competitive forces would otherwise allow customers to go elsewhere for electricity. The excess of the embedded cost over this market price is considered to be stranded. But when market prices zoom by $4,000/MWh for two days, the annual average market price increases by $14.61/MWh. This increase in the annual average market price can lift the average market price to be above embedded cost. In that situation, stranded costs are now windfall profits, at least if market participants have structured their deals appropriately.

Mark Lively is an independent consulting engineer in Gaithersburg, Md. His work has taken him to 48 states and the countries of Australia, Canada, England, Kazakstan, Latvia, South Africa, and Turkmenistan.

1 See Bruce W. Radford, "The Heat's On," Public Utilities Fortnightly, July 15, 1998, p. 6. FERC has several dockets open on the high prices that occurred during the week of June 22, including The Cincinnati Gas & Electric Co., et alia, Docket No. EL98-53 and Steel Dynamics Inc. v. American Electric Power Service Corp., et alia, Docket No. EL98-54.

2 See Mark Lively, "Tie Riding Freeloaders - The True Impediment to Transmission Access," Public Utilities Fortnightly, Dec. 21, 1989; "WOLF Pricing," Public Utilities Fortnightly, Oct. 1, 1994.

3 "Tie-Riding Freeloaders" posited prices of $20/MWh and $800/MWh, producing an implicit price ratio of 40. The prices were constrained because I used tabular presentations, showing only two specific prices. In contrast, for "WOLF Pricing" I used graphical presentations, showing prices that varied continuously, with no upper limit and a lower limit that approached $0.00/MWH. Suffice it to say that the implicit price ratios for those graphs were much higher than 40.

4 Two seconds as a billing period? Ask any control area operator the frequency with which its SCADA system polls the meters on its interties to determine inadvertent interchange and ACE. Ask any control area operator the frequency with which it sends signals to generators to respond to power imbalances. What is the response time for FACTS devices?

5 Time granularity is important for recognizing the use of capacity. Consider a problem that occurred at the beginning of an hour but that got resolved 10 minutes later. Usage during those first few minutes of the hour should incur capacity charges. Reversing the flow during the last 50 minutes should not remove any obligation to pay such capacity charges. See "Capacity Missing From The Futures Market," The Electricity Journal, accepted 1998 May for future publication.

6 The scheduled amount can be shown to be a hedge or a futures transaction, with many of the characteristics of an insurance policy. See Mark Lively, "Electric Transmission Pricing: Are Long-Term Contracts Really Futures Contracts?" Public Utilities Fortnightly, Oct. 15, 1994.

7 Though the textual discussion is limited to frequency and ACE, WOLF has been proposed to include the various integrals of these quantities, such as time error and cumulative inadvertent interchange. Further, WOLF prices would also be spatially differentiated. See for example