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Ancillary Services: A Call for Fair Prices

Fortnightly Magazine - January 1 2000

of the customer's coincident load-following amount to the total load-following amount. The use of coincident load following, rather than noncoincident load following, is important because not all loads reach their intra-hour minimum and maximum values at the same time. A customer with noncoincident load following should be charged less than a customer whose load-following requirement is coincident with the system's requirement. Generally speaking, high load-following hours have load changes that span the full 60 minutes.

Figure 4 shows the absolute value of system load following and the coincident contributions from the two components. This figure shows the importance of the industrial load during the hours of mild load-following changes. In particular, during hours 0 through 4, 7 through 17, 19, 20, and 24, the industrial load accounts for more of the total load-following requirement than does the nonindustrial load. (It is likely that the cost of load following is modest during these low system-load-following hours.) Unlike the nonindustrial load, the industrial load's load-following pattern is not predictable from day to day.

Because of the pattern shown in Figure 4, the industrial loads account for more of the load-following requirement than we had initially anticipated: 56 percent, far above their 34 percent share of total load. (Correspondingly, the nonindustrial shares of load-following and energy are 44 percent and 66 percent.) Given this substantial difference between shares of load and load following, customer-specific assignment of load following is probably warranted for these large industrial customers.

Implications

Our study shows that charging customers for these two ancillary services (regulation and load following) on the basis of average loads can be inequitable. In particular, we found that certain large industrial customers with volatile loads use these services disproportionately, and in an unbundled environment they likely would not pay their fair share under traditional rate structures used in most FERC-approved transmission tariffs.

In our study, the proposed billing method would reduce the regulation and load-following charges otherwise assigned to nonindustrial customers by 75 percent and increase the charges to industrial customers by 140 percent. These sorts of subsidies, inherent in today's pricing methods for ancillary services, cannot and would not be sustained.

Indeed, customers who operate certain industrial processes with near-time-invariant loads, such as aluminum smelters and paper mills, justifiably will claim they require none of these services and, therefore, should not have to pay for them.

Eric Hirst and Brendan Kirby are consultants in electric-industry restructuring in Oak Ridge, Tenn. They thank Gregory Pakela for his very helpful comments on a draft of this article.

1 Docket No. RM99-2-000, May 13, 1999 (F.E.R.C.).

2 Order 888, Docket Nos. RM95-8-000, RM94-7-001, April 24, 1996 (F.E.R.C.).

3 Hirst, E. and B. Kirby, "Unbundling Generation and Transmission Services for Competitive Electricity Markets: Examining Ancillary Services," NRRI 98-05, National Regulatory Research Institute, Columbus, Ohio, January 1998.

4 See FERC Docket No. ER99-3719, filed July 23, 1999.

5 Wolak, F., R. Nordhaus, and C. Shapiro, "Preliminary Report on the Operation of the Ancillary Services Markets of the California Independent System Operator," Market Surveillance Committee, California Independent System Operator, Folsom, Calif., Aug.