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Frontlines

The ISO graples with the politics of scarity.
Fortnightly Magazine - July 15 2003

The ISO graples with the politics of scarity.

In regions that have embraced electric industry restructuring, such as New York, New England, and the mid-Atlantic states, where independent system operators (ISOs) have taken over and the standard market design (SMD) has grabbed a foothold over bulk power transactions, one fascinating question still dogs theorists and policymakers alike:

Is a power supply shortage really all that bad?

For more than a century now, the typical power industry engineer has dedicated his life's work to guaranteeing freedom from blackouts for every man, woman, and child, to a certainty that approaches five "nines" to the east of the decimal point. And the engineers have largely succeeded.

But the SMD puts little faith in such efforts. It relishes abundance and scarcity in equal measure, as it weighs the contrasting forces of supply and demand to reveal the energy price and clear markets. During those brief intervals of greatest demand, it relies on gas-fired turbines to supply power to serve the peak. But those turbines seldom run except during periods of extremely high prices. In fact, they cannot recover their fixed costs and high operating costs without the sort of price spikes that scarcity can produce.

The SMD won't work without scarcity, but regulators and politicians cannot survive in a world where they cannot protect ratepayers and voters from high power prices.

Nevertheless, there's no verdict yet on whether regulators will tolerate scarcity or seek to banish it entirely. In fact, it's a good bet that they'll try to have it both ways. If you want evidence, just look to New England, where the ISO has recently proposed three new radical pricing schemes that on first glance might seem to run at cross-purposes. These proposals would:

(1) reduce high prices when a supplier with a dominant market share (a "pivotal" supplier) starts submitting unusual or suspicious bids;

(2) guarantee that high-cost, gas-fired peaking turbines that aren't very profitable most of the time can raise bids and prices as high as necessary to recover all their costs, including fixed costs and capital investment, by setting a "peaking unit safe harbor" (PUSH) threshold; and

(3) ensure that prices will climb to the moon during a period of extreme scarcity by permitting the real-time energy price to rise to the absolute highest allowed level (the region's $1,000 bid cap) and perhaps a bit more, depending on line losses and congestion uplift.

If this policy package seems a little hard to believe, turn to our "Commission Watch" article ("When a Cap Becomes a Floor," p. 14), where I lay out a few more details.

Figuring out how this came about requires a look at rules governing reserve margins, plus an understanding of how certain shortcomings in computer software have literally backed the ISO into a corner.

NEW ENGLAND'S MOVE TO BOOST PRICES AS HIGH AS POSSIBLE DURING A SHORTAGE OWES A DEBT TO ECONOMIST DAVID PATTON, the independent market advisor for ISO New England and the New York ISO. Patton's theories turn the familiar "duty to serve" upside-down. If you read

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