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Don't Rush the Seamstress: Second Thoughts on the Marriage of the Northeast Grids

Why a standard design in each ISO is no guarantee of regional coordination.
Fortnightly Magazine - September 1 2001

clearly some backtracking that will occur now.

Q: How will this "backtracking" affect software development?
Oliva: To answer that, I've got to explain to you that there's certain process involved for the RTO in hiring vendors and building software. First of all, you need regulatory approval. How many RTOs are there that really have specific approval from the FERC over a market design? In the Northeast, for instance, the problem is identifying who the party is who will engage the vendors. Let's assume that this new Northeast RTO forms and takes on the basic market design and structure of PJM. But if there is to be some designation of PJM as the spearhead party for software contracting, when does that designation actually occur?

Q: At the "seams" conference on regional coordination at the FERC back in June, we heard talk that new deadlines could upset contracts with software vendors. How do you see it?
Oliva: If I'm a software vendor working in New England-even if I've got a contract-I would be concerned now whether I can even continue work or else recover damages for projects that don't proceed to completion.

Q. Even if the industry consolidates into just four RTO's-as the FERC wants-the regions likely will adopt different rules. Will that stifle a true nationwide electricity market?
Oliva. No, and here's why. Think about the gas industry. The gas pipelines are better off today than they were before Order 636, because they now have unbundled gas transmission from the commodity business and have focused on creating value in an entirely new business-the pipes-only business. This process will also take place in the electric industry, and should yield similar benefits.

Q. In the upper Midwest and the Great Plains, they've talked of forming a "Crescent Moon" RTO to protect them from higher costs in case they're forced to join a larger RTO. How will they fare?
Oliva: When you have areas of high-cost transmission that must span long distances to serve small loads, yes, you could have some negative effects in terms of cost shifting. But, remember that transmission represents only a small part of the total cost picture. For a region like you describe, that has been somewhat leery of joining a larger RTO, I think what it boils down to is that some regions might not reap the same degree benefits that others might.

Q: Let's get back to market design. Some regions favor physical flowgates to allocate transmission rights and manage congestion. Others rely on financial rights. How does that affect power marketers operating nationwide?
Oliva: It is true that we have different models across the country for transmission rights and congestion management. New York and PJM both follow a financial model based on LMP (locational marginal pricing), though New York is not as granular as PJM in terms of the number of pricing nodes. By contrast, GridSouth, RTO West and DesertStar envision a physical rights model. Alliance, MISO and the Southwest Power Pool have proposed a hybrid model that would marry aspects of the physical and financial models. "Can