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FERC's Market Design: The End of a 'Noble Dream'

How state opposition cowed the feds and turned a powerful rule into just a set of talking points.
Fortnightly Magazine - February 15 2003

in RTO West, the regional grid system sports a Jeckyll-and-Hyde personality. The system is not homogeneous. On one hand, the companies say, the West enjoys a "relatively robust grid system" strung out along the length of certain major river systems. Beyond that, however, the remaining grid system is best characterized as "relatively lean."

The robust half of the Western grid does a good job of integrating the high-capacity (but energy-constrained) hydro resources located in those valleys, allowing highly efficient regional planning. The other half, however, delivers energy from remote thermal baseload plants, such as the coal-fired plants located in the eastern part of the RTO West region. It is marked by relatively expensive long-haul lines designed "to just fit" the local load or generating plant, spanning a region with a sparse population. These lines could just as well be classified as generation assets for rate-making or allocation. In no way do they resemble the spider-web sort of pattern that you would see in an integrated grid system back East. In many instances, the companies say, the grid owners and operators must pay close attention to specific local generator characteristics (voltage, VARs, output levels, remedial action schemes, etc.), just to support the transmission capability into, out of, or through the area.

These two bifurcated grids, the companies say, have encouraged a highly complex structure of bilateral transmission contracts that carry physical rights and maximize system performance. The structure has led RTO West to propose a variant at odds with SMD, whereby the region "catalogues" physical rights and allows participants to choose if and when to convert those physical rights into financial congestion rights ("financial transmission options"-FTOs-in Northwest parlance).

If these contracts were abrogated, the companies say, and if all physical rights were redistributed as financial congestion rights, whether as full FTO "strips" or chopped into hourly pieces, then contract rights holders would be certain to see a significant reduction of their pre-existing rights. The whole, then, is greater than the sum of the parts. Full conversion of physical contract rights into financial hedging rights would cause short-term transmission revenues to fall, making it difficult for transmission owners to recover fixed costs and creating "a substantial cost shift" among grid owners in the RTO.

Against this backdrop, the Washington UTC insists that the region cannot flourish with LMP:

"The hydropower system offers great dispatch flexibility. … This is already our most cost-efficient dispatch, since the hydropower system has no direct marginal fuel costs. LMP, transmission congestion pricing, day-ahead markets, single-system dispatch, and mandatory real-time balancing markets could, in theory, be implemented in the Pacific Northwest, but to what purpose?

"Worse yet, the [SMD] provides no assurance that the flexibility benefits of the hydropower system in the Pacific Northwest will not be lost under the proposed congestion management and CRR mechanisms."

In particular, the UTC chafes at claims by FERC staff that New Zealand makes LMP work with its largely hydro system. As Washington state points out, New Zealand can dispatch its hydro plants more or less independently, while most hydro plants in the Pacific