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Three-Legged Stool

The smart money now treats transmission as a player. Just like generation. Just like load.

Fortnightly Magazine - April 15 2002

Over at the Federal Energy Regulatory Commission, new chairman Pat Wood has let it be known he might have done it the other way.

If he had been in charge, say the press reports, he would have postponed Order 2000. He would not have asked electric utilities for any commitment to join a regional transmission organization (RTO) until after the FERC had first devised a comprehensive set of rules-a standard market design (SMD)-for RTOs and stand-alone independent transmission companies (transco's, or ITCs).

The idea sounds logical. Pat Wood's process would have defined content first. Pre-empt all those political squabbles over governance, independence, and voluntary-versus-mandatory. Wood would have sidestepped the Midwest-Alliance tiff, and that fractious debate about consolidating RTOs in the Northeast. Instead, with the SMD in place, utilities would have had less reason not to fall in line. FERC already would have done away with any regional model that would give one group a leg up on others.

Yet where would FERC be today with its SMD project if not for PJM and its experience with markets?

Now we know. You could see that for yourself at FERC's "slicing and dicing" workshop held on Feb. 19. That's where FERC took testimony on how to allocate grid and market functions between RTOs and ITCs.

When the folks from PJM took the mike, the words started to make sense. They ran rings around the people from National Grid, MISO (Midwest ISO), TRANSlink, WestConnect and TransConnect, and American Transmission, who still see ITCs and RTOs as rivals in a grand battle for turf.

But today, however, thanks to the process that put Order 2000 first, we know about financial-only transmission rights (FTRs). We know about a day-ahead market. We know about locational marginal pricing (LMP)-linked to a bid-based, security-constrained dispatch, and a full network (nodal) grid model. Armed with that experience, PJM has "discovered" some pretty novel truths:

  • Transmission does not exist simply to give access to markets.
  • Transmission is itself a market product, just like generation. n Transmission competes against generation.
  • Transmission also competes against load (demand-side resources).
  • RTOs don't run transmission. They run the markets. The markets then let transmission compete on price as a self-interested market player.

In hindsight, it turns out that RTOs were never really about transmission. And so the issue is not about deciding which grid elements and functions to assign between ITCs or RTOs, as if they were rival transmission providers. This so-called "slicing and dicing" is a red herring. PJM and the eastern grid groups have moved beyond that.

In fact, RTOs are about markets. RTOs are about gluing back together the old vertically integrated utility model, but by using price discovery and rational property rights, rather than a subjective test of what's just and reasonable.

The key to it all lies buried deep within the control area. There-where the dispatch occurs, where balancing occurs, where congestion is cleared-is where prices and property rights are born. That's what they understand at PJM-and