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Transmission 2000: Can ISOs Iron Out the Seams?

One Market? The Case for Consolidation
Fortnightly Magazine - May 1 2000

run for awhile and receive empirical evidence," Museler says.

"New York has been up for less than five months, PJM will just start [its congestion market], and New England is a year away. To decide which is the best model you have to let A, B, and C operate for a while," he adds.

When the time comes to ascertain the success of his own market and others, Museler says his measures will be liquidity in the market, satisfaction of the participants, and the ability of the market to respond to the price signals that the LMP system sends them.

Products: Transmission As a Commodity

In the typical ISO, the one product that cannot be bought or sold in a cash spot market is the physical transmission itself. That one great irony undermines efforts to rationalize the transmission business.

Energy is traded, as is capacity in some cases. But traders cannot purchase transmission other than to schedule an energy transaction, or to purchase a financial hedge to insure the energy movement against the likelihood that the grid may be congested. This uncertainty in transmission as a market commodity makes deals inflexible and hinders trading, according to Barber at Citizens Power and Esposito at Dynegy.

"In a typical market that is mature, 90 percent [of the contracted commodity] gets booked out [in a financial settlement] and about 10 percent goes to delivery. The effortlessness of delivery supports the whole market," he says.

Existing market devices for hedging against transmission loss do not work well, Esposito adds.

"You have congestion that you pay on top of your access fee. If you have an FTR (a contract for fixed transmission rights), that is supposed to be a hedge against congestion costs. But that forces you to set up a specific transaction and stick to that transaction and not be able to look for more economically efficient sources," Esposito explains.

"There is also a liquidity problem with FTRs. There was a slide shown by a PJM representative in Philadelphia that showed an expanding gap between a number of bids to buy FTRs and offers to sell. So you have at least those issues."

Dynegy would like to see PJM change from its nodal method of pricing to a zonal method to help increase liquidity, he says.

Second, Esposito's company would like PJM and other ISOs to sell physical rights, not just financial rights, to the system. That would allow market participants to use or not use the firm transmission without penalty.

"Right now on the FTR system, if you do not actually perform your transaction in the way it was originally set up, you are at risk for congestion if the hedge doesn't work. It is what they call a swap rather than an option," says Esposito. "We are not saying get rid of the financial but add a physical in parallel with it."

But ISO New England's Pellegrino says offering the physical firm transmission would be problematic for those participants that have contract rights. He recalls the FERC's desire to promote open access while not