How Einstein discovered relativity, locational pricing, and participant-funded transmission.
Fortnightly Magazine - February 1 2003

The Laws of Physics

How Einstein discovered relativity, locational pricing, and participant-funded transmission.

Space and time. Energy and mass. All is relative. Nothing is ever exactly what it seems. Take the story of Albert Einstein. Perhaps you know how he mulled the nature of the universe as he rode the streetcar to his desk job at the Patent Office in Berlin-how he published three scientific papers in 1905 in the journal Annalen der Physik that explained Brownian Motion, the photoelectric effect, and the special theory of relativity, thereby changing the history of man and his world.

Yet you may not be entirely familiar with another side to that story-how just a few years earlier, Einstein already had discovered risk management, energy trading, and locational marginal pricing (LMP)-the latter being a key tenet of a standard market design (SMD) for wholesale electricity, now endorsed by the Federal Energy Regulatory Commission (FERC).

But I get ahead of myself. Let's go back to the beginning-back to the start of the 21st century.

MANY IN THE ELECTRIC INDUSTRY OPPOSE FERC'S SMD BECAUSE LMP CAN'T HELP TO RATIONALIZE THE TRANSMISSION GRID. They admit that LMP shows power producers where to build (by highlighting where prices are highest). But they counter that LMP does nothing to incentivize grid expansion, which they say is the real infrastructure need. These Luddites warn of threats to reliability. They see no reason why anyone would build a new transmission line to capture a locational price advantage if a power producer could then wipe out that advantage by siting a turbine in just the right place.

The Luddites would put their trust in top-down resource planning. They would rely on "independent" regional grid agencies to study the costs and to determine when and where to build new transmission to preserve reliability, as defined by a static standard of engineering efficiency.

Consider the South and Southeast United States. Many complain about power producers building too many plants in Louisiana and nearby states-way more capacity than needed to meet local needs. Indeed, Chairman Pat Wood and Commissioner William Massey have often wondered aloud at various technical conferences about how FERC might tailor its SMD to minimize the problem.

You see, the builders choose their sites to take advantage of access to natural gas pipelines and lower their fuel costs. They pay scant attention to how their projects affect the electric transmission grid. And that has utilities bristling. FERC's policy on generation interconnection forces utility transmission owners to pay for expanding the grid to accommodate all those new plants and to export the power to where it's eventually sold. Such expansion is seen as wasteful.

Utilities and even some state regulators have accused the merchant gens of "dictating" the course of future grid expansion. They will accept competitive generation-and perhaps even LMP-but only if transmission remains planned, regulated, and protected from the market.

AS LATE AS THE NINETEENTH CENTURY, SOME PHYSICISTS STILL HELD THAT SPACE AND TIME, LIKE GENERATION AND TRANSMISSION, WERE TANGIBLE AND DISCREET. To support their view, scientists imagined the universe suffused with an all-pervasive ether. This ether lacked substance but was considered real enough to give the appearance of a structural architecture. Like regulated transmission, it offered an engineering benchmark by which to judge the position and worth of any object in the cosmos.

Michelson and Morley even set up an elaborate experimental apparatus in Cleveland in an attempt to measure the velocity of the Earth as it sped through the ether, by measuring the difference between the upstream and downstream speed of light, just as a swimmer pulling against a current would seem to go faster than in calm water.

But the experiment failed. The two streams of light showed no measurable difference in velocity. Michelson and Morley succeeded in fixing time and space as artificial benchmarks, but in the process learned nothing about the true speed of light.

SOME NOW REALIZE SMD'S FAULT LIES NOT WITH LMP BUT IN EFFORTS TO REGULATE TRANSMISSION EVEN AS GENERATION GOES FREE. Their reasoning is simple and elegant. They argue that if a power producer builds a merchant generating plant to capture a market advantage, then any new transmission line build to accommodate that plant-even if required in the name of "reliability"-is in truth every bit as much of a "merchant" or "economic" investment as is the plant itself. Indeed, the line could well be characterized as a generation asset. To fund that line through regulated or socialized rates would create a publicly funded subsidy for the accommodated plant, giving it an advantage over a comparable merchant plant that would not require a grid expansion to facilitate operations.

This new way of thinking has taken hold in the Southeast, where industry groups working to form the SeTrans regional transmission organization describe the notion as "participant-funded transmission." They would rely on private capital to build "economic" transmission and let the investors reap the rewards. The old paradigm of planning and regulation would extend only to so-called "reliability" transmission.

Working for SeTrans, Consultant Michael Schnitzer from the Northbridge Group urges FERC to treat transmission expansion as a non-merchant project only when absolutely necessary to keep the lights on:

"The load is forecast. You run the load flow models. You apply the security and reliability criteria. And if there are places where you need transmission investment because you just can't serve the load, then those are [socialized]."

Schnitzer counters that anything else will undermine LMP. After all, a new power plant and a new transmission line are both solutions to the same problem. To put the private money of a merchant generator in direct competition with ratepayer money belonging to a transmission provider who is supposedly "independent" from the market (the FERC's vaunted "ITP") will distort LMP and distort markets, as he explains:

"Anything that's not reliability we leave in the participant-funded pot, because that's part of the interplay between generation and transmission in finding the competitive solution that's lowest cost.

"We've got LMP's which give price signals, but this is how we actually make it real for new generators that there's a transmission consequence to where they locate."

Southern Co. Policy and Planning Director Bruce Edelston emphasizes the notion that private investors should fund all grid expansion aimed at bringing product to customers:

"If Southern Company needs to make a transmission investment to provide service or designate a new network resource for our native load, we should be required to participant-fund those investments just as anybody else.

"We cannot optimally plan the transmission system any longer, and we should not try and pretend that we can."

SO IT TURNS OUT THAT WHILE YOU CAN'T IGNORE THE LAWS OF PHYSICS, YOU'VE GOT TO CHOOSE BETWEEN NEWTON AND EINSTEIN. Traditional regulation, as with the physics of Newton, can flourish as long as markets trade at low velocities. You can regulate generation and transmission, holding each to an artificially planned benchmark. We've done it before. The system will function. But you will never know the true price of energy.

By contrast, think of the SMD as the physics of Einstein. It won't tell you how many plants to build. It won't tell you if and when to build more transmission. Indeed, the vary fabric of generation and transmission may become skewed or distorted.

But you will discover the price of energy.And it is price discovery, and that alone-certainly not some vague notion of grid "independence"-that offers the only worthy justification for the SMD.

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