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Frontlines

How Einstein discovered relativity, locational pricing, and participant-funded transmission.
Fortnightly Magazine - February 1 2003

The Laws of Physics

How Einstein discovered relativity, locational pricing, and participant-funded transmission.

Space and time. Energy and mass. All is relative. Nothing is ever exactly what it seems. Take the story of Albert Einstein. Perhaps you know how he mulled the nature of the universe as he rode the streetcar to his desk job at the Patent Office in Berlin-how he published three scientific papers in 1905 in the journal Annalen der Physik that explained Brownian Motion, the photoelectric effect, and the special theory of relativity, thereby changing the history of man and his world.

Yet you may not be entirely familiar with another side to that story-how just a few years earlier, Einstein already had discovered risk management, energy trading, and locational marginal pricing (LMP)-the latter being a key tenet of a standard market design (SMD) for wholesale electricity, now endorsed by the Federal Energy Regulatory Commission (FERC).

But I get ahead of myself. Let's go back to the beginning-back to the start of the 21st century.

MANY IN THE ELECTRIC INDUSTRY OPPOSE FERC'S SMD BECAUSE LMP CAN'T HELP TO RATIONALIZE THE TRANSMISSION GRID. They admit that LMP shows power producers where to build (by highlighting where prices are highest). But they counter that LMP does nothing to incentivize grid expansion, which they say is the real infrastructure need. These Luddites warn of threats to reliability. They see no reason why anyone would build a new transmission line to capture a locational price advantage if a power producer could then wipe out that advantage by siting a turbine in just the right place.

The Luddites would put their trust in top-down resource planning. They would rely on "independent" regional grid agencies to study the costs and to determine when and where to build new transmission to preserve reliability, as defined by a static standard of engineering efficiency.

Consider the South and Southeast United States. Many complain about power producers building too many plants in Louisiana and nearby states-way more capacity than needed to meet local needs. Indeed, Chairman Pat Wood and Commissioner William Massey have often wondered aloud at various technical conferences about how FERC might tailor its SMD to minimize the problem.

You see, the builders choose their sites to take advantage of access to natural gas pipelines and lower their fuel costs. They pay scant attention to how their projects affect the electric transmission grid. And that has utilities bristling. FERC's policy on generation interconnection forces utility transmission owners to pay for expanding the grid to accommodate all those new plants and to export the power to where it's eventually sold. Such expansion is seen as wasteful.

Utilities and even some state regulators have accused the merchant gens of "dictating" the course of future grid expansion. They will accept competitive generation-and perhaps even LMP-but only if transmission remains planned, regulated, and protected from the market.

AS LATE AS THE NINETEENTH CENTURY, SOME PHYSICISTS STILL HELD THAT SPACE AND TIME, LIKE GENERATION AND TRANSMISSION, WERE TANGIBLE AND DISCREET. To support their view, scientists imagined the universe suffused with an

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