IF AN INDEPENDENT SYSTEM OPERATOR OVERSEES THE TRANS-
mission grid, how much independence is too much? Should ISOs cede control over dispatch to scheduling coordinators, or market functions to a power exchange? Addressing some of these questions, a new report released in April by The Progress & Freedom Foundation criticizes a restructured electric industry built on ISOs with restricted authority.
"A highly regulated transmission network, especially one regulated from Washington, has the potential to seriously undermine the gains from introducing competition," said Michael Block, author of the report and professor of law and economics at the University of Arizona.
The report, Deregulating Electricity: Progress in the States,
compares the restructuring methods used by 16 states in advanced stages of restructuring. It analyzes the typical model for restructuring which consists of: (1) a competitive generation sector; (2) a jointly owned, independently operated but highly regulated transmission network; and (3) locally regulated distribution companies that have exclusive service territories.
Block found that the wires component of the emerging model is questionable. In the report, he suggested that Congress develop an alternative to the ISO model devised by the Federal Energy Regulatory Commission. Specifically, he said Congress should enact a bill allowing transmission system owners to define property rights and to operate the grid as a competitively ruled joint venture.
Avoiding a "Bad Idea"
The report agreed with comments of the New Jersey Public Utilities Commission that separate ISOs and power exchanges, as devised in California, are inefficient: "Only by integrating dispatch and the spot market can the full coordination economies of centralized dispatch be realized." It finds that the approach taken by the Pennsylvania-New Jersey-Maryland Power Pool (em a fully integrated ISO/PX with nodal pricing (em is the most efficient structure for transmission and dispatch.
PJM, meanwhile, had fought a PECO proposal to create a privately held grid company that would own (em not merely operate (em transmission lines and operate on a profit basis. PPF advocates creation of exactly that type of PECO-favored gridco.
According to William Hogan, Research Director of the Harvard Electricity Policy Group, the separation of the ISO and PX is a "very bad idea," and he added that the two entities "are doing the same thing," which is why they need a seamless interface. He observed that the separation "creates many opportunities for mischief," and that he hopes such separation is not repeated. "We have seen the future, and it is PJM," Hogan said.
The PJM/California debate will continue, as other entities decide whether to give redispatch authority to the ISO, as in the PJM model, or whether to prohibit the ISO from engaging in redispatch as in the California model. Under the latter model, redispatch is assigned to scheduling coordinators. But PJM, like the New England and New York ISOs, started as a power pool, making it easier to put central dispatch under one roof, unlike California, which did not begin with a power pool.
The recently proposed Alliance ISO held its first public conference April 3 in Arlington, Va., to flesh out details of the ISO based on its Phase 1 report issued March 14. Alliance ISO, which could stretch from Michigan to North Carolina, would include a residual power pool to settle deviations and an optional trading mechanism for bulk energy. It would not be a full-fledged power exchange.
While Alliance ISO remains in planning stage, it would be allowed to order dispatch or redispatch for reliability purposes. But responsibility for carrying out the RPP function may move to a separate, independent body other than the ISO. Also, the Phase 1 report called for development of rules for working with one or more PXs.
Should ISOs direct the generation dispatch decisions of control area operators if the ISO is not a control area operator? That question was debated at the FERC-sponsored ISO conference held April 15-16 in Washington, D.C. Another issue of debate was whether the ISO acts as a stepping stone to the gridco and should be designed with that evolution in mind. Finally, participants questioned whether a gridco, either for profit or not for profit, was preferable to a nonprofit ISO that does not own transmission facilities.
Market Power and Structure
During the March 18 presentation in Washington, D.C., Block expressed concern over the eventual structure of power markets, which has received limited attention. He said coordinated dispatch, and not the wires part of the business, is the real monopoly.
Kenneth Gordon, senior vice president with National Economic Research Associates, emphasized the failure to distinguish between market power and market advantage and issues of utility incumbency value. Gordon observed that while analysts are clear on market power, regulators "screw it up." For example, they combine the wrong issues, such as those involving horizontal and vertical market concerns.
Block also pointed out that there is no clear consensus over the need for generation plant divestiture. At the start of competition, economists generally agreed that divestiture was important, but now there is disagreement, reflected in the various state implementations. The weakest expression of the concern for market power is the mere implementation of affiliate rules; the strongest is divestiture.
Stephen Merrill, representing Citizens for State Power, a group that stands for the timely deregulation of electricity at the state level, pointed out that residents of New Hampshire pay 13.5 cents per kilowatt-hour for electricity. Merrill, the former governor of New Hampshire, said that high prices are due to a unique set of circumstances. "We think our idiosyncratic problems should be settled in New Hampshire."
While the report preferred state restructuring over federal action, it did call for repeal of the Public Utility Holding Company Act and the Public Utility Regulatory Policies Act. Merrill said he had talked to a U.S. congressman that day who said only about six members of the House of Representatives would pass a test on electric deregulation, meaning there was no reason for Congress to act. Hogan said it was "good" that Congress had not yet acted, indicating that the "really hard problems are dealing with FERC's authority."
Ken Gordon noted that federal activity on electric deregulation has slowed, and that he found it "unlikely that Bliley will get a bill through this year."
The report criticized use of a "wires charge" for stranded cost recovery, because that would impact power consumption. Instead it promotes the use of access or meter charges based on past usage or customer class, and finds that more attention should be paid to recovery mechanism design.
Meanwhile, Merrill called New Hampshire's attempt at allowing stranded cost recovery a "sleight of hand." He said the PSC ruled that all stranded costs could be recovered if the cost does not exceed the Northeast's average costs. But because the state already has the highest costs, it cannot be done. Merrill noted he had appointed two members of the PSC, so that perhaps he was criticizing himself, but he believes the PSC took such action to pay back Northeast Utilities for its financial problems and resulting bankruptcy.
Lori A. Burkhart is a contributing legal editor at Public Utilities Fortnightly.
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