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

there's the virtue of the financial right ... it divorces use. It's also the vice."

This short passage captures the essence of FERC's effort to devise a standard design for energy and transmission markets for regional transmission organizations (RTOs). In simple terms, it's a work in progress.

Any standard market design (SMD) must include many individual components: (1) an energy market, (2) a reserve market, (3) generation adequacy, (4) market monitoring, and (5) "slicing and dicing" (the allocation of functions between RTOs and independent for-profit transmission companies). Some elements, such as the first on the list, appear absolutely necessary on "day one." But Reem Fahey, for instance, of Edison Mission Energy, argues that definitions of reserve criteria will vary between regions, making early agreement on reserve market design nearly impossible for RTOs such as the Midwest ISO, which contains multiple control areas straddling several regional reliability councils. Make it a "day 2" issue, she says, while acknowledging that single-region groups such as ERCOT in Texas have managed to get reserve markets up and running right from the start.

Of course, FERC's SMD effort will not occur in isolation. Even as the commission moves toward its promised notice of proposed rulemaking (NOPR) in Docket RM01-12, to be issued perhaps by the start of summer, the California ISO (CAISO) is working on a parallel but somewhat different track.

By order of FERC, the CAISO must meet its own deadline of May 1 to file plans both for a new day-ahead market (DAM) for energy and a new regime for congestion management. In that effort, known as "MD02," CAISO has proposed a complete overhaul. MD02 would emulate many attributes of PJM markets. CAISO, in MD02, has proposed a bid-based, security-constrained regime for full nodal and locational marginal pricing (LMP) for its 3,000-plus buses. That move has even drawn raves from Harvard professor William Hogan. One key feature of MD02 would allow CAISO for the first time to manage congestion on an intrazonal level through market-based incentives. Yet the effort could prove difficult. CAISO has said in some statements filed at FERC that it would welcome a deadline extension beyond May 1. A technical conference was set for April 4-5 in San Francisco to help meet the deadlines.

Yet, to make the issue even more confused, CAISO has now proposed an interim plan that seems neither fish nor fowl. In its Tariff Amendment 42 (TA 42), filed at the end of January, CAISO proposed a litany of short-term measures that would apply Band-Aids on the old design (which FERC calls "dysfunctional") while waiting for a new regime. Some find this interim effort distracting. Dynegy calls it a "stealth" market design. As its main aim, TA 42 would control intrazonal congestion through bid caps, penalties, and other top-down techniques-exactly the opposite of the philosophy behind MD02. Many see the TA 42 amendment as paving the cowpath-worse than no fix at all.

These two tracks-one in California, the other in Washington-offer policymakers a once-in-a-lifetime chance to remake the electric utility industry. To quote a phrase, the "possibilities are