Strength through diversity

Electric Perspectives, Mar/Apr 1996 by Vancko, Ellen

Although the purpose of the independent system operator (ISO) contained in various proposals to restructure the U.S. electric utility industry is always the same--to establish a neutral coordinating mechanism that will enhance competition without jeopardizing system security or reliability--the functions and authority vested in the ISO differ in almost all cases. Likewise with the numerous pooling arrangements that have been and are being developed throughout the world: The details of these agreements vary significantly, although their common goal is to provide nondiscriminatory open access.

What does this mean for the Federal Energy Regulatory Commission (FERC) as it crafts new regulations to ensure comparable open access wholesale transmission services? First, diversity is likely to be the rule rather than the exception, as the number of market participants continues to grow, so too will the variety of trading agreements developed to meet their individual needs. Instead of attempting to achieve uniformity across existing systems, the Commission should encourage and help all regions and institutions to adapt to evolving market conditions.

Allowing for regional differences, in turn, means that it would be useful if FERC adopted some guidelines to evaluate new market structures and test their effectiveness. To that end, Edison Electric Institute offered six principles at FERC's technical conference on comparability for power pools last December.

Pool rules and policies should be set in the interest of retail customers. Pool governance should be established to protect the interest of the parties that ultimately must pay for the total cost of electricity, the retail customers. That is, pool participants' voting representation should be a function of the retail load they serve. At the same time, because it ultimately benefits end-use customers to encourage many suppliers to bring economic product to the market, those who do not serve retail load should be able to help shape pool objectives, policies, and procedures.

Market participants should be offered maximum choice regarding suppliers and trading instruments. The intent of open access is to permit increased trading in electricity. It would be inconsistent to adopt a national policy to encourage competition on the one hand and to restrict trading arrangements on the other. The instruments for such trading may be traditional bilateral or multilateral physical supply contracts or some form of hedging (financial) contracts. There is no need to compel parties to discard one form in favor of another.

Markets should be clear and easily understood by all participants. Such markets will attract more traders than markets that are difficult to understand, e.g., the market for common stock vs. the market for derivatives. Even though electricity is inherently more difficult to trade than other commodities, it is possible to create market arrangements that do not require inordinate administrative effort.

Access to wholesale markets should be nondiscriminatory. Generally, no operational, commercial, or administrative obligation should offer any unfair advantage or disadvantage to any party. Consequently, pool membership requirements should not be unduly stringent. At the same time, however, they should protect customers in one part of the network from bearing costs that should be apportioned to others.

Transmission tariffs should not constrain market designs. Trading participants should first agree on the shape of the markets that will offer maximum opportunity for wholesale competition and then develop tariffs consistent with those markets. A range of options should be permitted, including both contract path and network service tariffs. Compulsory pro forma tariffs could disrupt existing pools and discourage new alternatives.

A minimum level of operational and technical requirements should be established for all market participants. Detailed written documentation that clearly states their obligations should be available to all participants. And, as those participants grow in both number and type, economic enforcement penalties should be developed if necessary to maintain security standards. FERC should support the enforcement of such requirements and the assessment of penalties for failure to comply.

In short, different pooling arrangements imply different applications of open access and comparability standards. No single structure is right for all regions. Indeed, many of the benefits of robust wholesale competition already are being obtained through varied pooling arrangements across the country. New regulations and policies should neither inhibit currently efficient operations nor preclude market innovation.

Ellen Vancko is manager of power supply regulation at Edison Electric Institute.