Don't Rush the Seamstress: Second Thoughts on the Marriage of the Northeast Grids
By Marija Ilic and Leonard Hyman
Why a standard design in each ISO is no guarantee of regional coordination.
How do you complete an efficient transaction that requires the cooperation of two or more markets when each is operated independently of the other?
That is the "seams" issue that so concerns the Federal Energy Regulatory Commission (FERC), and the participants in the electric utility industry. This problem-conducting power transactions between geographic areas under well-defined rules and transmission tariffs-marks one of the main obstacles to the growth of electricity trading across the U.S.
In response, the FERC issued Order 2000, 1 with an implied assumption that the formation of regional transmission organizations (RTOs) would lead to the necessary upgrades of the transmission network. These RTOs would serve as improved, second-generation versions of independent systems operators (ISOs) which have already formed in a handful of regions around the country to manage the local transmission grid.
In June, the FERC took two major steps regarding the ISOs already in place in the Northeast U.S. that should give reason to pause to an interested observer. Earlier, these three northeastern ISOs (New York, New England and PJM) had proposed vague plans to add RTOs to their regional structures, without a clear vision of how the RTOs and ISOs would interact, or how the new setup would encourage improvements in the transmission networks. The ISOs had developed a memorandum of understanding (MOU) 2 which would lead to a solution of the seams problem.
In the first of these two steps, the FERC singled out the operating platform and software of the PJM region and declared it to be the industry standard. 3 That gave the three northeastern ISOs their marching orders. In the second step, the FERC ordered the three ISOs, plus the new PJM West, to enter into 45 days of negotiations that should lead to the formation of a single RTO. 4 The commission proposed this shotgun marriage because: "[I]n order to successfully address seams issues...and to establish efficient markets in the Northeast, it is necessary that all four entities combine to form a single RTO." 5
By now, however, we should have learned that public policy decisions can produce unintended consequences. 6 The California fiasco, alone, should cause warning lights to go off whenever a public agency decides to impose not only market structures but also software solutions.
So, for the sake of argument, we will assert that this rush to enforce consolidation, with the rules of operation set out by the FERC, will not solve the seams problem in a timely and efficient manner, but instead will lock in the Northeast electricity market to nothing more than a jazzy variation on the old utility paradigm.
What is wrong with the standard market design envisioned for the Northeast?
Actually, there is nothing standard about the design, other than the desire to make it the sole operating/software platform by implementing it everywhere.
In many ways, the standard market design (SMD) is a makeshift solution for the selection of suppliers, without clear signals or incentives to