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Missed Opportunity: What's Right and Wrong in the FERC Staff Report on the Midwest Price Spikes

Fortnightly Magazine - November 15 1998

For example, FERC shows that during the week of June 22, 1998, ECAR and MAIN averaged outages of 17,500 MWs or about 12 percent of capacity. If this fact had been set in a probabilistic analysis, it would not have been seen and described as unusual, but as falling in the range of events to be expected, given the situation with nuclear plant availability.

Note that every outage, whether plant or transmission, is unique, but the average effect and average variation is the proper focus of analysis. The same is true of demand, which was less extreme than indicated. For example, most MAIN utilities did not experience their annual peak during June because the weather was not uniformly hot. Usually, there is more correlation between MAIN utility peaks.

Second, it is true that a market in equilibrium will tend to have some period of significant LOLP during the summer peak. (See Figure 3.) However, a capacity-short market will have too much LOLP, too many shortages, and too many spikes.

Third, a significant LOLP correlates with the chance that the market will end up on the vertical section of the supply curve, where buyers set the price. The buyers in this case are utilities acting as agents, expressing their willingness to pay to avoid a blackout. (See Figure 4.) This situation reflects an implicit "contract" between customers and utilities, arbitrated by regulatory authorities. Decisions are ideally based on the survey literature, which indicates that the average end user is willing to pay about $7,000/MWh or higher to avoid a blackout.

If the FERC staff report had applied this three-step approach, in combination with microeconomic theory and common sense, it would have reached several conclusions:

• 1998 (em Prices reflected the fact that the market was very close to generation shortages and blackouts.

• 1999 (em Prices will likely be lower, but only if weather is normal. Hot weather over a broad Midwest area next summer could well mean 1999 will be worse than 1998.

• Uncertainty (em Hot weather and sudden retirements could make the transition even tougher than expected.

There is currently no procedure in place to prevent retirement of existing units, especially nuclear units, during the transition to competition. The retirement without warning and explicit make-up actions of the huge Zion nuclear plant in Illinois was a leading cause of the 1998 price spikes, though it was not described as such by the FERC staff report.

Moreover, the seeming complacency about the lack of ISOs in the Midwest (the recently approved Midwest ISO still leaves most of the region outside an ISO structure) only adds to problems. This lack leaves no independent forum for Midwest decision making on reliability. It also prevents any comprehensive approach in providing credible information on such key parameters as demand, plant availability, LOLP, and transmission. Price information is important but other information is also crucial, especially as long as nearly all end users are dependent on events in the wholesale markets in which they cannot legally participate.

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