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An Inconvenient Fact

Why the standard market design refuses to die.

Fortnightly Magazine - December 2006

Hold on to your hats. The vaunted and vilified “standard market design” (SMD), once thought dead and buried, has been resuscitated, with all attendant chaos and rhetoric, but this time in the guise of a new proposal that debuted in early August under the code name “open dispatch.”

This new construct, as remarkable in its way as Einstein’s theory of indeterminate space and time, declares that electric transmission, long seen as one of a triumvirate of unique and essential utility industry sectors (along with generation and distribution), is little more than a mirage.

Rather, it is the sequencing and dispatching of generating units, accomplished in real time along principles of marginal cost, and with full respect for the physics and security constraints of the grid, that constitutes the real “service”—the single substantive activity and one that warrants full federal regulation. In this view, the three true industry sectors are: (1) generation; (2) dispatch; and (3) “load assets” (or distribution). Transmission, along with his sidekick “open access,” becomes odd man out—not so much a function as a playing field, in which transactions take place.

Open dispatch frowns on the Newtonian concept of a precise contract path, or that transactions and service should depend on static measurements of grid capacity. The only useful guidepost becomes the dynamic and security-constrained market equilibrium, as dictated by the unit dispatch—the only facet of grid operation that is truly amenable to ironclad mathematical modeling, and efficient execution by computer software.

A simple notion, perhaps. Yet it mocks the Federal Power Act, plus a full century of legal and economic precedent. Critics see open dispatch as a poorly veiled attempt to resurrect the SMD, leading inexorably to mandatory participation in regional transmission organizations (RTOs), or at least formation of independent grid coordinators, in the style of Duke or Mid-American Energy. They decry this “second bite at the apple,” noting that Congress had wanted to ban the SMD outright in the 2005 Energy Policy Act (EPACT), but removed such language only after FERC itself had agreed to drop SMD as a policy alternative. These opponents warn that advocacy of open dispatch could “re-open old wounds” in the relationship among Congress, state regulators, and the Federal Energy Regulatory Commission (FERC)—wounds, they say, that “only recently have begun to heal.”

The testing ground for this new theory is the notice of proposed rulemaking (NOPR) issued last spring, in which FERC took a surgical approach and recommended a series of micro refinements to the pro forma Open Access Transmission Tariff (OATT) it first approved in 1996 in Order 888. On its face, the NOPR proposes dozens of modest modifications to the tariff to make the point-to-point (PTP) transmission service that is offered to merchants more comparable to network service more often provided to native load:

Capacity benefit margin (CBM) —FERC wants uniform standards, or else offer CBM as a separate service;

Energy and generator imbalances —FERC touts ideas from Bonneville

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