Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

A Hope, A Wing, and A Prayer

On the virtues and vices of ICAP, ACAP, FTRs, hubs, flowgates, DAMs, and gaming.
Fortnightly Magazine - April 15 2002

endless." Here, in the space available, is a brief look at several elements in the SMD debate:

  • Congestion management and locational marginal pricing (LMP)
  • Generation interconnection n Generation adequacy
  • Transmission rights

Yet despite all the complexity, the SMD effort appears to rest on two guiding principles.

The first says that you can define all transactions in terms of money and risk. The second insists that rule no. 1 governs all markets-including electric energy-and solves such intractable problems as reliability, generation adequacy, and the laws of physics of the interconnected grid.

If you believe those two ideas, then you'll like the SMD. But if not, you'll want to buy a contract for differences.

LMP, Congestion and Gaming

Most experts now tout locational marginal pricing as the key to congestion management. Comments from FERC's conferences show wide support for a bid-based, security-constrained dispatch based on full nodal locational prices.

Even some in the hydroelectric industry now appear to accept LMP. But that would mean that for hydro units, which are capacity-rich, but energy-constrained, LMP would not reflect marginal running costs so much as reflect lost opportunity costs, or the cost of giving up future energy sales in exchange for spilling the reservoir today. (Of course, some critics complain that LMP favors generators-that it gives them a road map for investment but makes it difficult to determine where to add transmission capacity to overcome grid congestion.)

Perhaps the best way to understand how LMP plays a crucial role in congestion management is to study what has happened in California, where CAISO has adopted zonal pricing as a less-complicated alternative.

Critics both inside and out of California have long faulted the state's market design for attempting to simplify pricing and congestion management by dividing the ISO region not by nodes, but by zones. The theory assumes that grid conditions will remain relatively uniform within a given zone-that a simple zonal system is good enough. But as a result, CAISO loses the ability to actively manage grid congestion within a single zone. That in turn has forced CAISO to call on scheduling coordinators to submit incremental (inc) or decremental (dec) bids to supply more energy or cut back on plant output, to manage intrazonal congestion.

This regime, say California officials, produces the "Dec Game." They use that term to describe a bidding strategy that allows generators to get paid for withholding energy. Listen to lawyers Charles Robinson and Margaret Rostker, as they describe the Game:

"Generators have discovered that, in situations where a transmission line was out for maintenance, requiring that the generation in that area be limited to prevent the remaining lines from overloading [that] they could schedule their units far beyond the limited local transfer capability in the forward markets." That forces the ISO to accept dec bids in real-time to back off generation supply to mitigate the congestion. The ISO can find itself paying power producers not to generate.

Lawyers from the California Electricity Oversight Board explain how a generator can multiply profits by playing the Dec Game.

"Suppose a supplier incurs generating costs