Changes and Challenges of Managing Power Supply in the Redesigned ISO/RTO Marketplace

By Tudor, David | Management Quarterly, Summer 2004 | Go to article overview

Changes and Challenges of Managing Power Supply in the Redesigned ISO/RTO Marketplace


Tudor, David, Management Quarterly


Every time I start thinking that I understand the power business and all of its nuances, the whole picture changes and I have to start all over. While I do not necessarily endorse all of the changes that are occurring, it is important for our organization to prepare operationally to seek out and manage these new risks on behalf of our owners and customers.

This summary is intended help to cooperative readers understand the magnitude of change that is occurring and the significant new risk that our cooperative program's power supply entities face.

BACKGROUND

In 2002 the Federal Energy Regulatory Commission (FERC)issued a Notice of Proposed Rulemaking (NOPR) keenly named Standard Market Design (SMD). This concept, that was meant to standardize wholesale power rules across the country, was not well received by many power industry participants, and met both support and criticism in Congress. The criticism, which not surprisingly came largely from regions with low cost power, caused FERC to delay SMD implementation. However, this concept was not abandoned, but instead was modified and supported by many of the existing and/or forming transmission system operator organizations called Independent System Operators (ISO) or Regional Transmission Organizations (RTO). The FERC strongly encouraged the ISO/RTO entities to utilize the SMD concepts.

This concept has a new nickname--"New Market Design" (NMD), which is very close to SMD with subtle differences. Unfortunately, NMD can have more risk than reward for cooperatives if you do not proactively protect your transmission rights. Involvement and readiness are the keys to managing your NMD risk.

So what is the purpose of NMD from the regulator's perspective? To provide fair and equitable transmission access and create efficient use of generation and transmission facilities.

Fair and equitable transmission access is a key element to a well functioning and efficient, wholesale power market. In concept, this is no different than giving equal access of highways to transporters that deliver goods and services for us to consume. Could you imagine the price of gasoline if Shell Oil was the only company that was given access to the highways to transport its gasoline to the gas pumps? Even if there were producers

with a lower cost than Shell, they could not get product to the market. That would be unfair and inefficient.

Through the establishment of ISO/RTO entities, the usage of the transmission system and its rate methodology is being drastically changed, which in turn affects the facilities and entities that use the transmission system. NMD has a tremendous amount of momentum and it will be difficult to prevent it from being implemented. It is also difficult to determine its value or detriment to cooperatives until fully implemented.

TRADITIONAL CONTRACT PATH METHOD

The traditional market was based on a transmission contract path method and managed based on decentralized decision making for generation dispatch and transmission access. Decentralized operations resulted in the following arguments by regulators and market participants as the primary need for change:

* Excessive market power to individual companies in some regions

* Inefficiency of operations

* Discriminatory access to transmission for marketing affiliates

* Non-standard market rules at the state, regional, and national levels

* Lack of regional planning for transmission grid expansion

Let's explore a traditional market example of electric generation being sold from point A to point Z. Under the traditional method, and that still being used in many areas of the county, a contract path method is utilized to determine transmission access and the total charge for the transmission 'used' between two points. Let's say that there are 5 transmission owners between A and Z and each must agree that transmission is available through their system and the cost to 'use' their transmission is $3/MWh each.

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