RTO Week

Day 2 -- October 16, 2001

Congestion Management and Transmission Rights

The morning panel discussed congestion management.  The panelists were:  Nancy Brockway, Commissioner New Hampshire PSC; Reem Fahey, Edison Mission; Carol Guthrie, Chevron/Texaco; Shmuel Oren, University of California - Berkley and advises Texas PUC; Andy Ott, PJM; Michael Schnitzer, NorthBridge Group.

General Observations

The Commissioners were again all present (Wood left mid-morning to give testimony on Capitol Hill).  Today, however, FERC Staff was much more active in the discussion and the commissioners asked very few questions.  The topics are so interrelated that many of the same issues already discussed are being rehashed again.  This will probably continue for the rest of the week.  What I have found most encouraging so far has been the widespread support for some of the basic concepts, most notably the need for a real time energy market based using LMP.  Very few panelists have opposed this; at most, a couple of panelists have argued that the real time market should not be standardized -- basically conceding that PJM's system is not going to change in the Northeast but urging that it not be mandated everywhere else.    

Opening Statements

Nancy Brockway:  focus on two topics:  1) flowgate vs. LMP; and 2) relationship between congestion management (CM) and resource planning.  She supports LMP and standard market design in New England.  Flowgate rights are cumbersome, create unnecessary uplift costs - freezing power distribution factors is bad and could result in some free rides.  She is a Hogan follower, and Hogan says flowgates can be done but are too difficult.  With regard to the relationship between CM and resource planning, transmission is a monopoly, and the CM principle is that entrepreneurs make a decision - decide where to site generation or transmission and take a risk.  FERC should not override that principle.  Proposals for transmission expansion can undercut congestion management.

Reem Fahey:  RTO needs to be the grid operator and the market operator.  Cannot use different bid stacks for balancing and congestion.  CM should have a bid-based structure with LMP.  Design of CM should allow flexibility for market participants to be in the spot and forward markets.  Transmission rights - must be financial and not physical and must allow for financial hedging in real time.  FERC should work towards the creation of trading hubs and market participants should have rights from hub to hub and hub to load.  These rights should not interfere with real time dispatch of the system.

Carol Guthrie:  Her company has diverse interests in electricity market - over 4,000 service locations, over 150 suppliers, more than 15 sites where they have industrial generation serving own load (500 MW).  

Shmuel Oren:  Advocates minimal ISOs, direct assignment of congestion costs in real time, flowgate rights proposal because it requires less centralized coordination and supports forward rights.  Does not support "one size fits all."  Need to understand gaming, modes of market failure.  Problems in Texas - people scheduled to cause congestion and then were paid to relieve the congestion.  Need to charge for true congestion when it is predictable.

Andy Ott:  There is consensus in the industry that locational pricing works.  It's an operational tool used to manage reliability of the gird during constraints.  PJM has been using nodal pricing since 1998.  Utilities have run their system on this approach for years - economic dispatch to meet demand.  Cannot do balancing and CM separately -- does not work.  Transmission rights must be financial.  Spot market is physical.  Financial model is the hedging.  You need this separation because it allows players to do bilaterals or buy or sell from the spot market.  Also allows FTRs to be traded and used to protect from congestion.  

Michael Schnitzer:  There is a preferred method of CM - the LMP based CM system with financial rights.  DAM and RT bid-based security constrained locational pricing markets.  Bilateral transactions are allowed.  Transmission rights must be financial, not physical.  Allows transmission users to hedge congestion costs.  Why is CM so important?  Need to get the prices right to give the right signals to the market.  Three goals:  1) get dispatch right - show bilateral contracts and load the right price signal so they can respond accordingly; 2) price signals to generation for location purposes - clarifies responsibility and risk allocations; 3) market signals for when to expand the grid - LMP gives economic price signal and property right in FTRs.

Locational Marginal Pricing

The panelists all agreed that LMP in the real time market is necessary (Schmuel Oren does not oppose it).  Most of the panelists think this needs to be standardized across RTOs.  Andy Ott says the seams will remain a problem and a barrier to trading if the real time market is not standardized.   Carol Guthrie does not favor standardization and urged FERC to not standardize the PJM system throughout the eastern interconnect.  She said FERC should try a couple of different systems and see what works.  

FTRs versus Flowgates

The panelists agreed that transmission rights should be financial, not physical.  Schmuel conceded this point for the discussion but this may not be his preference - unclear.  Most of the panelists, including the PSC commissioner, prefer FTRs rather than flowgates.  Schmuel is a flowgate advocate.  After some discussion, the panelists agreed that FTRs and flowgates could work together, provided that the definition of flowgate is understood.  Andy Ott said flowgates could work with FTRs if the purpose of having flowgates is the same purpose of having hubs (liquidity, standard product), and if a flowgate is defined as a grouping of point-to-point rights, then FTRs and flowgates can coexist.  If a flowgate is a hub for transmission rights, it's okay.  However, if flowgate is defined as a physical boundary requiring scheduling, the two cannot coexist.  Schmuel seemed to agree with this premise, although this is not his preference.  He seems to prefer only flowgates without FTRs.   Brockway seems to prefer FTRs rather than flowgates for fear that flowgates will result in excess socialization of costs.

The panelists also agreed generally that revenues generated from FTRs or flowgates should be allocated to load, but the method of allocation was not agreed upon.

FERC staff asked the panelists to discuss commercially significant flowgates.  Many of the panelists discussed the problem with deciding what constitutes a commercially significant flowgate, and what happens when circumstances change over time, resulting in different flowgates being commercially significant.  Schmuel said you could use either a system that relies only on commercially significant flowgates or one that uses all flowgates, but if participants are willing to accept a system where they are not perfectly hedged, use of commercially significant flowgates is acceptable.  The panelists agreed that these financial rights (either FTRs or flowgates) should be tradable in the secondary market.  The panelists disagreed on whether FTRs or flowgates are actually more tradable.  Andy thinks FTRs are more tradable; Schmuel thinks flowgates are more tradable.

 Options versus Obligations

The panelists discussed the benefits of having FTRs be options but also discussed the additional problems presented to the system operator if FTRs are only options and the FTR holder is not required to flow or pay if it does not flow.  Andy Ott said options will most likely result in fewer FTRs being allocated.  Schnitzer says the issue must be resolved up front.  

The afternoon panel was on Transmission Planning and Expansion.  Steve Walton was a panelist and will be providing a summary of the discussion shortly.  

 Let me know if you have any questions.

 Sarah