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Let's Get Physical

To manage congestion on the power grid, most traders would rather book a firm path than risk a loss on a financial hedge.

Fortnightly Magazine - January 15 2001

PTRs, or "physical transmission rights.")

Some RTOs, such as the Southern Companies (SeTrans Grid) and the Southwest Power Pool (SPP) have proposed a hybrid model that would combine physical, flow-based FTRs with LMP for settling imbalances. Enron likes this form better (SPP's idea avoids a "common trap"), but listen to this critique from the American Public Power Association:

"Southern's proposal ... is almost purely theoretical. ... While evidently the current rage among theoretical economists ... there have only been a few short years of practical experience with such market structures in this country. And that experiences has been at best unpromising-and at worst disastrous."

"WE HELD A PUBLIC SYMPOSIUM ," says Ricky Bittle, vice president of planning rates and dispatch for Arkansas Electric Cooperative Corp., in describing how the new RTO Southwest Power Pool would manage congestion, under its "binary" plan with the proposed Entergy transco.

As Bittle adds, "prominent proponents of various congestion management mechanisms participated." He runs down the names: "Larry Ruff of Energy & Economics Consulting, Bill Hogan of Harvard University, Narasimha Rao of Tabors Caramanis & Associates, and Ed Cazalet of Automated Power Exchange.

"After several meetings of the congestion sub-team, two proposals emerged. One group promoted LMP ... the other group promoted physical rights at flowgates. ... This hybrid [nodal LMP to clear imbalances, FTRs traded in a forward market] received the support of parties on both sides of the debate."

Why does PJM still win the loyalty of some traders? Morgan Stanley Capital Group is one that prefers financial over physical: "GridFlorida has not justified why a nodal congestion pricing mechanism, like that used by PJM, was not proposed instead of [this] unproven flowgate-based system." Morgan Stanley complains that a physical model will force GridFlorida "to constantly redefine" which flowgates matter the most. By contrast, it claims that PJM's financial model is much more flexible:

"Such nodal systems allow the market to decide which paths are commercially relevant. As new congestion develops with changing flow patterns, the aggregated LMP values will reflect the changing system conditions ... the market price will evolve with the changing flow patterns."

And liquidity matters, too. At the Northwest Power Planning Council, Wallace Gibson (manager for system analysis) complains that under the physical scheme proposed by RTO West, "those without FTRs will not be able to schedule on congested paths at all unless they can arrange independent bilateral redispatch arrangements."

"In principle," he adds, "given enough market liquidity, either a physical rights scheme or a financial rights scheme ... will work satisfactorily. ... However, in the absence of adequate market liquidity ... a physical rights scheme is much more significantly handicapped than a financial rights scheme and may offer very little in the way of market access."

"WHY DOES LIFE HAVE TO BE SO COMPLICATED ?" That's the view from Dynegy, which staunchly opposes PJM's LMP vision.

"Rather than trying to find or to create the perfect market-something that even if found or created would only last for a fleeting instant," Dynegy would prefer just to deal with congestion,