The blackout could doom deregulation, but why treat reliability and reform as either-or?
Fortnightly Magazine - October 1 2003


The blackout could doom deregulation, but why treat reliability and reform as either-or?

Driving west near Cleveland on the Ohio Turnpike back in August, a few days after the big blackout, I saw what looked like a small helicopter hovering up ahead, about 25 feet from the top of a transmission tower.

Was this a prank? Had terrorists struck? Or was it the local TV news station, just trying to get a closer look?

At 70 miles per hour, I soon drew abreast of the scene and looked out the side window. The power lines lay just past the highway shoulder, with Lake Erie not far beyond. And I was not mistaken. I squinted but could not discern any company logo on the 'copter. But as the pilot tried to keep his craft steady, I clearly spotted a second passenger (an engineer, I presume), leaning his torso out the open side door, stretching his safety harness as far as he dared. He held a pair of binoculars to his eyes and appeared to look up and down the line in both directions-checking for damage, I presume, though I could not say why, since no trees were near and I couldn't detect any unusual sagging.

I would have liked to stay and watch. But within seconds I had sped past the scene, leaving time only to steal a few more quick glances out the rearview mirror. But I continued to wonder about what I'd seen. Was it "good utility practice?" After all, a strong puff of wind from off the lake and we would have had déjà vu all over again.


Congress likely will see the uncertainty of markets and the uncertainty that plagued Midwest grid operators on Aug. 14 as one and same. How many voters would recognize the nuances between PJM, a regional control area run as a single system, and the Midwest Independent system Operator, a Holy Roman Empire of 20-plus utilities, each claiming its own control area, and each seeing itself as sovereign of its own domain. What the voters don't notice, Congress will be only to happy to ignore.

Yet I believe that reliability and a move to markets need not be mutually exclusive. Rather, they must march forward together, in step, for either to succeed. You can find evidence for that argument wherever you choose to look.

Even the North American Electric Reliability Council (NERC) can be seen admitting the usefulness of markets. The latest example came when NERC threw in the towel on its own pilot program for a value-based redispatch-a primitive market-friendly method NERC had proposed back in 1999 (remember e-tags?) for avoiding the lingering sense of discrimination that comes with incidents of transmission loading relief (TLR). Thus, in a little-noted report filed at the Federal Energy Regulatory Commission on Sept. 11, NERC said it would abandon its market redispatch program, since it's now clear that you get a much better result by using more market-committed protocols, such as locational marginal pricing. "The limited benefits … do not justify the further investments it would take," said NERC.

The redispatch program was uneconomic and impractical, NERC added, because it required transmission customers to know in advance which flowgate would be impacted, and it forced them to counter the impact of the entire transaction at the protected flowgate, rather than just simply to offset the flow of power to be otherwise curtailed by the TLR .

It's like the difference between trying to design a barter economy and relying on a freely exchangeable currency.

Of course, NERC will now retain its TLR program, but only as an absolute last resort. In NERC's eyes, apparently, the primary method for balancing the grid should come through a comprehensive congestion management system. And that means markets and LMP.

Meanwhile, NERC will leave it to the North American Energy Standards Board (NAESB) to see if NAESB might want to resurrect and continue research on the primitive market redispatch protocol. When last I checked, NAESB's executive director, Rae McQuade, had notified FERC that she supported NERC's move to abandon work on the MRD program, but she proposed that the commission should convene a technical conference to figure out how to devise a market-based redispatch program in areas that have not as yet implemented an LMP regime.

You might as well study to make bricks without straw. Except for the rare emergency-the Aug. 14 "mistake by the lake" offers a ready example-it seems to me that you'd better have a price-based justification if you're going to be curtailing transmission service, even in the name of reliability.


For an example, look to California, where the ISO is struggling to manage a way to compensate reliability must-run (RMR) plant owners (generators that must run on certain occasions to maintain reliability), now that the California Power Exchange is defunct (see FERC Dkt. No. ER03-1221, CAISO proposal filed Aug. 18, 2003).

Back in the good ol' days, PX operations provided an alternative price to set off as a benchmark against the standard price stated in RMR contracts. But now, without the PX price available as a benchmark, the ISO lacks a good way (other than a never-ending rate case) to review the reasonableness of payments to gen owners to compensate them for plant operations when called for purposes of reliability.

Furthermore, since the unscheduled RMR calls come in real time, they add supply to the system in real time for which no load exists to act as a sink. This development forces the ISO into all sorts of acrobatic compromises.

Of course, the ISO could allow the scheduling of "dummy" or "virtual" load ahead of real time, but that would violate California's requirement that all schedules must be balanced-each volume sold must come with a volume purchased-an anti-market bias that creates problems of its own.

Foreclosed from that option, to make way for the incoming RMR power supplies, the ISO would find itself obliged somehow to force other supplies out of the real-time market. To do that, the ISO would turn to accepting large volumes of decremental bids-offers to withhold supply. Yet the ISO on many occasions has faulted the "dec game" as a source of market manipulation, so the ISO must somehow accommodate this essential but unscheduled RMR energy-energy necessary for reliability but undisciplined by price. The result, of course, is chaos, as the ISO readily admits as it describes what has happened in the past:

"This glut of energy depressed the real-time imbalance energy price, encouraging load-serving entities to under-schedule their demand so as to serve their demand at the depressed real-time price."

Yet haven't we been told many times how excessive reliance on real-time trading proved a disaster for California?

The lesson remains clear: We'll have our pick of remedies after all the reports come in from all the committees and task forces assigned to study the Northeast blackout, but who's going to trust those remedies unless they have a value-based grounding derived from the discipline of a market price?


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