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Pricing the Grid: Comparing Transmission Rates of the U.S. ISOs

Fortnightly Magazine - February 15 2000

access priority assigned to each transmission customer. California, New York and PJM, by contrast, rely upon non-price methods only when price-based methods are not sufficient to fully manage congestion.

The different priority schemes used by ISOs display a common pattern. Customers taking network service and firm point-to-point service share an access priority that is higher than that of non-firm point-to-point service. Among the customers taking the same kind of service, those with longer-duration contracts (e.g., a year) have higher access priority than those with shorter-duration contracts (e.g., a week). Within each of these duration subcategories, priority usually is given to the customers who signed contracts first, though New England also gives higher priority to customers who pay higher prices for their service.

Following such a priority scheme, ERCOT manages congestion by first curtailing non-firm transactions, then short-duration firm transactions and then longer-duration firm transactions. If flows are still too large, ERCOT asks merchant firms to redispatch their planned resources. Each merchant's redispatch responsibility is proportional to its load on the downstream side of the transmission constraint, and each merchant bears the costs of its own redispatch. If further congestion relief is required, ERCOT orders merchants to dispatch their unplanned resources, the costs of which are shared by all customers that benefit from the redispatch.

Through its congestion management scheme, ERCOT assigns redispatch responsibilities without regard to cost. Because merchant firms can have very different costs of redispatch, redispatch costs could be reduced (to the benefit of merchants and consumers) if merchants could trade their redispatch responsibilities among themselves. Without such trades, ERCOT's redispatch scheme could impose unnecessarily high risks on merchant firms, with the costs for some merchants being much higher than the costs for others.

MISO has a priority scheme that curtails non-firm service customers first, then redispatches resources and then curtails firm service customers. MISO requires that network customers and generation owners redispatch their resources at MISO's request. This redispatch is supposed to be undertaken at least cost. The costs of this redispatch are distributed among all the transmission owner's customers, including bundled native load. If the redispatch results in greater available transmission capability, however, the customers using this capability pay for the redispatch. MISO itself does not set generation prices.

Although ISO New England has a comparable priority scheme, it manages congestion primarily through a two-step redispatch process that is similar to the way California manages congestion within zones. First, it determines the uniform market-clearing price that would prevail if there were no transmission constraints. Second, it pays generators to redispatch themselves to relieve the actual transmission constraints. For increases in output, generators are paid their bid price, which always exceeds the uniform market-clearing price. For reductions in output, generators are paid the amount by which the uniform market-clearing price exceeds their bids, thus compensating them for the profits they would lose by reducing output. This system is problematic because it overpays generators upstream from transmission constraints and it encourages gaming by generators located downstream from the constraints. Recognizing such problems, New England plans to switch to price-based congestion