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Locational pricing makes the network secure, since the utilities and other market participants get 'paid' to monitor the grid.
Fortnightly Magazine - January 2004

could endanger the entire regional transmission system. 2 Under such circumstances, it would be difficult to envision a penalty structure that would deter this sort of behavior, given the obvious economic windfall that might accrue to a utility on a high-load day. Larger, economic interests often overrun administratively set penalties. Consequently, while mandatory reliability standards might prove useful, they should not be viewed as a panacea.

Investment: Difficult to Target

As was amply demonstrated on Aug. 14, electric transmission is a regional matter, encompassing many states. Electrons do not respect state boundaries. Consequently, transmission expansion requires regional solutions, which are difficult to implement without regional structures. However, even with regional reliability structures, the industry needs a process for determining where investment of one kind or another is most badly needed. Regional market structures that provide price information that reflects system conditions on a continual basis also provide the most transparent and accurate measure for determining where upgrades are needed.

An LMP market uses real-time system condition data, as well as predictive data as provided by a state estimator to derive prices that reflect the system needs. Used over time, these prices provide the baseline necessary for those wishing to make generation investments where a plant would be most useful. This same system also provides the regional transmission organization (RTO) and state entities, which are responsible for rates and siting, with real data to justify investments involving rate allocation. In the case of private or "merchant" transmission investment, these same prices also provide the necessary transparent information to make a justification for capital. 3

Transmission investment alone may not have stopped the August blackout. For answers as to which systems and protocols hold the promise of achieving real reliability in system operations, one needs to concentrate on transparent information that links system conditions with the very strong incentives of economics.

Prices: The Most Effective Tool

Many opponents of electric restructuring have bemoaned the functional separation of generation operation from transmission. This, some have alleged, has undermined reliability. This is clearly not the case, as even vertically integrated utility systems constitute only one part of the total system picture that can affect reliability on a regional basis. 4 In addition, there is nothing in the vertically integrated utility structure that prevents a utility from operating the transmission system and generation fleet in a manner that is beneficial to its economic interest.

For decades we have needed a way to integrate economic incentives to operate various parts of the electric grid in a manner consistent with reliability needs and in a way that yields the most efficient result. The advances in information technology over the past 15 years, combined with the development of LMP, now allow us to achieve this outcome.

LMP is a very precise way to manage congestion. However, lost in the recent discussion on markets has been the relationship this bears to reliability. LMP uses actual system inputs from a large number of points on the system 5 and integrates bid prices into an algorithm that provides real-time, transparent information. This information