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The Power Market: E-Commerce for All Electricity Products

Fortnightly Magazine - February 1 2000

lies in bilateral trading of energy, transmission and ancillary services through flow-based scheduling, facilitated by the Internet and the technology of e-commerce.

Let's face it. New transmission lines are difficult to construct. Yet local markets remain fractured for want of grid connections. Transmission must be used more efficiently. Why not use e-commerce to buy and sell transmission rights at prices derived from bids and offers?

In most of the United States, transmission is reserved and purchased on the Internet using the open access same-time information system (OASIS), required by the FERC. However, further evolution of these systems is needed so that a transmission contract at market prices can be completed almost instantly. E-commerce allows for rapid bilateral trading at multiple locations, adjusting quickly to changing conditions. Faster trading cuts risk while increasing volume. It's more efficient. Instantaneous trading of both energy and transmission will drive the price difference between local markets toward the market price of transmission between the local markets.

FERC-imposed price caps on the sale and resale of transmission present a major impediment to U.S. markets. Instead, the FERC should permit and encourage transmission sales at prices determined in open trade. Wide-area access fees that reduce the pancaking of transmission rates will recover the basic revenue requirements of transmission owners without inhibiting trade. Revenues from transmission sales at market prices will offset these basic revenue requirements, keeping revenue-neutral the net effect on consumers.

Our focus here is on wholesale markets, but e-commerce should prove no less essential on the retail side. Furthermore, in addition to the United States, many other countries are restructuring their power industries. Because the Internet is global, all countries can move quickly and with little cost into a new age of efficient, reliable markets for electricity.

Pool-Based RTOs: Costly and Inefficient

The PJM, New York and California Independent System Operators (ISOs) are pool-based RTOs. A pool RTO uses central dispatch, optimization and auctions to procure services and calculate after-the-fact, real-time hourly and daily prices. The proposed RTOs in Nevada and Texas resemble our idealized, market-enabling RTO, but no RTO to date encompasses our complete e-commerce vision.

Pool RTOs that operate so called "markets" use central dispatch systems similar to those of a vertically integrated utility monopoly. Prices are computed in a series of periodic auctions and optimization procedures, run by the RTO. In California, a separate central organization, the California Power Exchange, administers day-ahead and hour-ahead energy auctions, while the California ISO administers the ancillary service capacity auctions and real-time energy dispatch.

Unlike both e-commerce markets and current practice outside of pool RTOs, a pool RTO accepts energy schedules without requiring or allowing physical transmission reservations. A pool RTO will redispatch generation to bring transmission flows within flowgate limits. Participants are charged the incremental cost of this redispatch.

It appears convenient to allow energy schedules without transmission reservations. However, the pool RTO must have sufficient energy bids and offers to economically dispatch the generation needed to resolve congestion. That makes the pool RTO the dominant monopoly in energy markets. Such a monopoly distorts the market and