July 1, 2001
L.A. Loves a Loophole
There's no getting around it...
The market speaks but we don't listen.
Will someone please tell me: Where is the proof that the electric utility industry needs more investment in electric transmission? Is it not possible that we already have enough miles of high-voltage line?
I can scarcely turn around but see a new conference or workshop on how to encourage the electric industry to invest more in transmission infrastructure. The Federal Energy Regulatory Commission (FERC) leads that charge, though as a regulator it ought to stay neutral.
Yet most still agree that anyone who would want to invest in transmission must be crazy, since after the line is built, a merchant can come along and build a power plant at a fraction of the cost and relieve the congestion that made the new line worthwhile.
All this has encouraged some to favor physical flowgates instead of financial rights to manage grid congestion. They criticize a bid-based, security-constrained, PJM-style market for producing locational marginal prices (LMP) at the nodal level because, while LMP tells merchant generators exactly where to build new power plants, it offers no help in figuring out where to add new grid capacity.
(The problem lies with the mathematics. Using the equations used to calculate LMP, it turns out that any number of different combinations and patterns of physical grid constraints can operate to produce the same set of LMPs. You have multiple simultaneous equations for which the variables cannot be solved. You can never know for sure where lies the transmission constraint that is absolutely responsible for causing a price spike at some weird location.)
So the industry continues to attack FERC's standard market design, arguing that because it gives us prices that fail to encourage the new grid investment that we so obviously need, the prices must be flawed-along with the model.
I remember a time, not long ago, when some rogue scientists asked for room on an orbiting satellite to study ozone depletion in the upper atmosphere above the poles. When the data came back the experts rejected it out of hand. The numbers could not possibly be true, they said. Otherwise, we would face a global catastrophe.
I've heard also of other examples of truths debunked: How in the 1920s it was calculated that growth in telephone use eventually would force our entire population to work as switch operators to clear the traffic. Or how 19th century London would end up putting millions to work at the end of a shovel, to clear the manure from streets increasingly jammed with horses and carriages.
These predictions all came true. But they were also dead wrong.
FERC'S MISTAKE LIES IN THINKING THAT ELECTRIC RESTRUCTURING STARTS AND ENDS WITH TRANSMISSION REFORM.
That is a red herring-a lesson that FERC thinks it learned from natural gas-when, in fact, it is price discovery that really matters.
While FERC cites the differences between gas and electricity (contrasts in jurisdiction, vertical integration, storage capability, etc.) as why it can't manage to duplicate its gas industry success on the electric side, the irony is that the gas success