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Power Markets Disconnected? How to Reconcile Retail with Wholesale

Fortnightly Magazine - September 15 1999

all capacity both on a day-ahead and a long-term basis.

4. End Locational Marginal Pricing.

Locational marginal pricing marks another wholesale element that has added risk to the business of providing retail supply.

LMP is a method of setting prices for congestion in transmission service, based on how transmission constraints affect the relative price of energy available at different points on the grid. LMP, strangely, is being introduced to wholesale markets where postage stamp rates existed prior to retail competition. To date, it seems only to have introduced unnecessary uncertainty and costs to competitive retail pricing - another way that wholesale rules are slowing competition.

Moreover, LMP has introduced a second distortion, linked to the system used to hedge LMP congestion prices.

Transmission rights (sometimes called fixed transmission rights) allow suppliers of energy to deliver electricity from point of generation to point of use. These rights help a supplier avoid the uncertainty associated with prices charged for line congestion under LMP. In some places (e.g., PJM), FTRs were granted unilaterally by the ISO to incumbent owners of generation and load (i.e., incumbent utilities) at no cost. These incumbents, then, were freed of the risks associated with LMP and/or other potential transmission constraints. The result is that utilities have no LMP risk, while competitive suppliers incur the risk and costs. This wholesale market policy has slowed retail competition.

In reality, LMP is simply an effort to overly fine-tune the pricing of transmission service. LMP was not used prior to retail competition. Elimination of this policy allows for a better connection between the wholesale and retail markets, as the risk of serving particular customers is not increased unnecessarily. This step should make FTRs relatively unimportant, as it will be necessary only to get power onto the grid.

On the other hand, if LMP is not eliminated, system-wide shares of transmission rights should follow the load regardless of the supplier, rather than being summarily assigned to a supplier (particularly the incumbent utility). That would protect customers who shop for electricity from losing a benefit they had prior to competition.

5. Let the Disco Arrange for Transportation.

Historically, the local electric company took on the obligation of providing intra-regional transmission services. The rates were and continued to be regulated by the FERC. Throughout the debate on electric competition and deregulation, all agreed that transmission and distribution services are natural monopolies (i.e., there is no reason to have two sets of wires going down a street) and that these services would remain regulated.

But in some cases, utilities and/or ISOs have decided to shift responsibility for transmission service to the competitive supplier, a seemingly neutral move that nevertheless affects retail markets.

First, the utilities have shifted the cash flow and collection costs of transmission services from the utility to the competitive supplier. Second, the credits that utilities grant for transmission service and the wholesale-regulated price are not always equal. The FERC rate usually is a pure demand charge, while the regulated retail rate usually has an energy component. If the total cost recovery under the two regulated