The PJM Interconnection is what they call a "tight" power pool. As the Federal Energy Regulatory Commission has explained, tight power pools "extensively coordinate" their planning and operations, with central dispatch of generating plants. This coordination builds reliability--one of the long-term benefits, says the FERC, of a tight power pool.

Coordination also builds market power, however. And, as we all know from FERC Order 888, market power in transmission stands as "the single greatest impediment" to electricity competition.

This conflict--coordination versus competition--has prompted calls for an independent system operator to run the grid. What's at issue, however, is whether the ISO should also plan and manage power resources.

Are power pools wound too tight for true competition?

Like Apron Strings

PECO Energy believes that, as a tight power pool, PJM might just have to loosen up a bit to make way for competition.

On June 9, joined by others, including the Coalition for Competitive Electric Markets (an ad hoc group of power marketers), PECO filed documents with the FERC to counter plans filed a week earlier on behalf of PJM by the seven so-called "supporting companies," each a longtime utility member of the pool (along with PECO). The supporting companies had proposed a new ISO for PJM--one that would both manage the grid and operate the pool's new voluntary power exchange. This battle between PECO, power marketers and PJM member companies, appears very much like an East Coast version of the "poolco vs. bilateral" debate that played out in California over the past few years.

In short, PECO envisions a new, "ultimate ISO"--a standalone transmission company operating on a for-profit basis. It would manage and own the grid, but abstain from taking bids in any energy market, such as a pool-based power exchange. And, more than that, the ISO would no longer mandate an installed capacity requirement for load-serving companies, but instead would rely on call contracts for load balancing. After all, as PECO has suggested, a capacity obligation is nothing more than "an artifact of pooling" by vertically integrated utilities. As such, capacity requirements should play no part in the creation of an ISO.

Richard Tabors, an engineer and witness for the CCEM, bolsters PECO's claim: The PECO proposal is the simplest. It's a standalone, for-profit ISO. It puts control and ownership in the same hands, creating incentives for capacity upgrades in transmission.

"We had proposed that idea in California two years ago. I think it's the only thing that makes any sense."

By contrast, the seven supporting companies favor team play over individual responsibility: Because the PECO proposal would so drastically reduce the level o coordination ...[it] would be in direct contradiction of the policies adopted by Congress."

Meanwhile, PECO fears that PJM's ISO may remain "tied to the apron strings" of utilities that own the transmission lines.

"Part and Parcel"

"As we've proposed it, the ISO is nothing but a transmission utility. We think that cuts away a lot of the complications."

That's the view from Robert Spencer, director of interconnections arrangements for PECO Energy.

"Perception is very important in markets," adds Spencer. "Our approach has tried to avoid bundling energy and transmission, and the complexities that imposes on governance, and the potential for conflicts of interest and discrimination."

Here, Spencer is addressing the question of transmission pricing. In a recent column ("PJM's Brave New World," June 1, 1997, p. 4), I reported how the supporting companies had proposed a transmission tariff based on locational marginal pricing. Transmission prices would reflect differences in the price of electricity between one location and another--a result of constraints in transmission capacity.

Since that column ran, PECO, the CCEM and the supporting companies have each filed a new set of proposals with the FERC. You can download and print more than two dozen relevant documents at http://www.pjm.com/FERC_filings_053197_all.html.

You'll also discover why the supporting companies continue to tout the benefits of tight pools.

In a news release issued by July 7, the supporting companies argued that PECO's plan would reduce the level of coordination by eliminating central dispatch, reserve sharing and coordination with neighboring pools. To bolster their view, they quote an opinion from the New Jersey Board of Public Utilities that favors an ISO built on the old pool structure: "We [the BPU] are not convinced that the power exchange and grid management and reliability functions need to be separated. Indeed, we see the separation of these functions as giving rise to inefficiencies and added costs and complexities."

Paradoxically, the supporting companies see a for-profit ISO as perhaps less than independent. With an end to installed capacity requirements and with the ISO relying on call contracts to purchase balancing services, the supporting companies question whether the ISO, as owner of transmission assets, might have a financial interest in the economic performance of a power market participant, thus violating one of the FERC's guiding principles for ISOs.

Meanwhile, other parties worry about governance--whether marketers, consumers and even conservationists will find adequate representation on the ISO's board of managers.

David Wooley, counsel to the Pace University Energy Project, notes environmental and consumer concerns. "ISO management could have an intended or unintended bias against renewables, energy efficiency or even distributed generation. The way things are being set up, utilities will have strong economic incentives to favor their own generation."

Mollie Lampi, counsel for the New Jersey Public Interest Group Citizens Lobby, adds that public interest concern extends to transmission pricing, and the LMP model proposed by the supporting companies.

"The problem with locational pricing is that it doesn't provide a flourishing secondary market. Node-to-node transactions are not particularly fungible.

"And renewables need a strong secondary market," adds Lampi. "You need to know how much it will cost you to bring power across a constrained interface before you decide to bring power from one region to another. The zonal method [proposed by CCEM] would offer a better foundation for a secondary market.

"The same questions are on the table in the New York Power Pool filing. [See, FERC Docket Nos. OA97-470, ER97-986.] However, the New York governance proposal is more friendly to environmental and consumer groups," she says.

"We imagine that these issues will become part and parcel of many other pool filings."

Trader or Traitor?

I asked Spencer why PECO, of all the eight traditional utility members of PJM, had decided to buck to tide. He stressed that PECO's experience in wholesale power trades helped convince the company to break from the other members and go it alone.

"We were forced by necessity to get into the wholesale power marketing, business several years ago because we had generation not in rate base. As a result, we became very active in power marketing--both locally and in other parts of the country. We've learned a lot about how competitive wholesale markets work. We have felt that we can bring a trader's perspective to the debate."

Richard Tabors concurs: "If you're a trader--and that's with a 'd'--then your transaction has no value until the end point is known."

Editor

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