WHY IS ELECTRICITY COMPETITION NOT WORKING? The principal reason is the failure of Order 888 to accommodate the economic and technological constraints of wholesale power markets.
Why not use the Web to buy and sell transmission rights at prices derived from bids and offers?
You make an offer, I accept. You deliver a product, I deliver money. This simple construct works well in just about any industry you can name. When a willing buyer and seller negotiate a contract, each achieves an outcome he considers best. Moreover, each is obliged to meet the needs of the other - reliably. No central authority sets the price or allocates supply. We depend on markets for reliable production and delivery of other essential goods; why not for electricity?
Now comes the Internet, with the promise of an electronic exchange for many commodities. Food, books, and wholesale commodities, such as steel, already trade over the Web. Electricity, so far an exception to this trend, is an ideal commodity for e-commerce. It is delivered by wire and controlled electronically. The technology of e-commerce is well suited to the real-time matching of supply and demand required by electric power markets. Why not use the Internet wires to trade electricity?
In fact, why not use the Internet to trade all power products, including (a) the electricity commodity, (b) the transmission rights needed for delivery, and (c) the ancillary services that support the grid?
In the United States, the Federal Energy Regulatory Commission has called for the development of regional transmission organizations (RTOs), to better coordinate markets and foster reliability. Yet buyers and sellers still find it difficult to negotiate and deal, even where electric markets have been "deregulated." That is why the FERC cannot afford to miss this historic opportunity to encourage truly competitive markets as it forges a new transmission sector.
No one disputes the FERC on the need for a central operator of the grid; such an operator is essential for reliability. Indeed, the grid operator is like the air traffic controller in the airline industry whose overriding focus is safety. However, just as the air traffic controller is not responsible for flying the aircraft, the power grid operator should not be distracted from assuring reliability by operating markets or performing economic optimizations. The problems that arise in grid management should not justify rules that can distort markets.
The FERC knows well that the physical flow of electricity over the transmission grid does not mirror the path implied by the contract. The reality of the grid differs from the transaction as described on paper. This contradiction is one reason why the commission encourages the formation of RTOs.
Some RTOs (the "pool-based" RTOs) see the contract path approach as a market failure that must be dealt with through centralized dispatch of generation over a very large area. Instead, the Internet and e-commerce technology now offer the capability of integrating markets for energy, transmission and ancillary services in a way that recognizes and rationalizes real-time power flows. The constraints that lie within the transmission grid can be seen as "flowgates" over which energy flows on all paths must be scheduled. Markets will form that can find a more efficient solution than centralized dispatch. The answer