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The Nation's Grid Chiefs: On The Future of Markets

Exclusive interviews with the CEOs of five regional transmission systems.

Fortnightly Magazine - October 2006

foreign. They have a lot of difficulty dealing with [LMP] and they don’t want to deal with it. They abhor it. But it doesn’t matter. The point is that technology is changing.

Look at ERCOT. Look at California. New England started on a new path, but they ended up scrapping it. Every area of the country that has started without LMP, but still wants markets, has ended up paying through the nose.

Fortnightly: What about removing price caps—going to an energy-only market, or full nodal pricing for load? Can we overcome the stumbling blocks?

Harris: We can get rid of every bit of that tomorrow, if every state will allow the full floating price every five minutes to be reflected in the customer’s bill.

Fortnightly: What about the software? Do you have the wizards who can make this happen?

Harris: Sure. That’s no impediment. The problem is that the public will not tolerate the volatility of the short-term price spikes. Just look at what happened in Maryland. Look at what happened in the Midwest, in May of 1999. No policymaker will tolerate short-term price volatility at the retail level.

Up and until the time that states will allow retail customers to see the real-time prices, and pay the real-time prices, you’re forced to create square-peg/round-hole solutions; to create surrogates for scarcity pricing. And that’s all that RPM [reliability pricing model] is—a surrogate for scarcity pricing. You can’t be “energy-only” until people can pay the price reflecting scarcity. And we don’t control that.

Fortnightly: So it’s a matter of consumer education?

Harris: No, it’s a matter of public policy. The policymakers in each state must decide what is better for their citizens. Are they better off allowing them to see and pay the real-time price of electricity? If they’re not, because of the volatility and how high the price can get in the short term, then the only thing you have left is to provide some sort of surrogate for scarcity pricing. We’ve done that, through something we call RPM [reliability pricing model].

You don’t have a choice. Generators have to be able to recover their costs. You have to have enough capacity to run the system. So something has to give.

Fortnightly: What if a state bans imports of coal-fired power or imposes a cost penalty for CO 2 emissions? Could your software and markets deal with that?

Harris: Well, we can track it. We can provide the certificates that would track where the energy was coming from, based on the hour and how much was used. We have the databases that can do that type of problem.

Fortnightly: Are you preparing for this kind of thing—for control of CO 2 emissions?

Harris: No. I have to manage what my staff does. I’m not going to create models for a hypothetical. It’s not a technology question. Can you build environmental constraints into the dispatch? Yes. Is it the right public policy? That hasn’t even been debated yet. It would take FERC to order us to do that.

Fortnightly: I understand you’re not