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Fortnightly Magazine - February 15 2000

considerable advantages (many fostered through government policies). Would the authors, for the sake of consistency, want the U.S. Treasury to recoup from their regions the government-provided financial benefits enjoyed by nuclear power, including DOE research funds, investment tax credits, and liability insurance and limits? Or perhaps businesses in those regions should refund the benefits associated with the government-funded St. Lawrence Seaway, water treatment plants, highways and ports?

It is time to end the interregional food fight and focus on those topics that benefit electric consumers nationwide.

C. Clark Leone


Public Power Council

Portland, Ore.

Ending LMP Would Be a Mistake

Competition would suffer without locational marginal pricing, reader asserts.

David Magnus Boonin and Stephen R. Fernands ("Power Markets Disconnected? How to Reconcile Retail with Wholesale," Public Utilities Fortnightly Sept. 15, 1999, p. 58) make several excellent points regarding the state of electricity markets. In particular, their suggestion of eliminating capacity obligations is long overdue.

Why Require Installed Capacity? In the competitive generation markets being implemented in several regions of the United States, one of the most contentious issues is how to implement a capacity market that effectively and efficiently provides the right reliability signals to market participants. The difficulty stems from the continued reliance on a centrally planned framework for maintaining the reliability of the electrical system. The concept of "installed capacity" harks back to the era of vertically integrated utilities operating in a monopoly fashion with little or no competition from other generation providers. It is simply incongruous to establish a system of centrally determined, mandatory capability responsibilities on top of a competitive, bid-based market for power. The result is a meaningless market for capacity, as evidenced by the present installed capacity market in New England. Most importantly, such a market has failed to deliver its crucial purpose - providing a reliability signal for investment by market participants.

Rather than trying to fit the square peg of installed capacity into the round hole of competitive power markets, why not abolish these capacity obligations, as Boonin and Fernands suggest (albeit for different reasons)? Market participants in New England, New York and PJM have both privately and publicly discussed this alternative. In Australia, there are no obligations or markets for capacity. Internalizing the value of reliability into the energy prices has resulted in Australian market participants willing to invest in reliability-driven generation and transmission projects. To date, a significant number of generation and transmission projects have been proposed in Australia, partly to capitalize on price differentials resulting from reliability signals being incorporated into energy prices.

Why State PUCs Mistrust Markets. Admittedly, many state regulators (and some personnel of independent system operators) have yet to accept this approach. They fear that without a capacity obligation, reliability would be compromised and, upon a failure of the system, they would be held accountable. There is a mistrust of the market, a feeling that even with the right price signals, market participants will not respond and necessary investments will not be made. Even in Australia, certain needed reliability-driven investments have not been proposed, leading to the