# Presentation: 545401

## Market Design for the West

**Preston Michie****Bonneville Power Administration**
**Chuck Durick**
**Idaho Power Company**
**Harvard Electricity Policy Group**
**Special Session – Western Issues**
**December 5, 2002**

## Overview

**In many respects our design is much like SMD**
**But, our region has some Special Characteristics:**
- Hydro
- Distance
- Low Prices
- Political Resistance
**So, we employed some Design Features that differ from SMD:**
- Balanced Schedules
- Cataloged Transmission Rights
- Options vs. Obligations
**Connect the dots – How the characteristics lead to the features**

**Notes:**
Political resistance has its origins in low prices.

**Regional ****Characteristics**

## Hydro

**System is energy constrained – not capacity constrained**
**Highest NWPP actual peak load in January 2000 was 55,986 MW**
**“****Other Thermal” includes nuclear and combined cycle**

**We have a lot of it**

## Hydro

_**Consequences**_**:**
**There is high value in coordinated operation**
- _Hydro-thermal_ coordination creates firm power and displaces capital
**Cannot coordinate simply on short term price signals**
- Hydro projects are interdependent resources
- River coordination spans multiple plants and long time periods
- Long-term system thinking dominates operational strategy
**Unplanned obligations can disrupt coordination**
- Many non-power constraints affect hydro production
- Hydro not necessarily responsive to ST price or “must run” orders
- Concern about how market mitigation will work
- ST cost is opportunity cost relative to LT use
**Hydro/Thermal coordination causes transmission flow reversals**
- Base loading coal allows using and recharging hydro storage
- Requires broad, flexible transmission rights

## Distance

**Examples:**
**All of PJM could fit entirely within a single Western state.**
**The Idaho Power system serves about 3000 Mw of peak retail load.  Physically, it spans a distance equivalent to that between Washington DC and Lansing, Michigan.**

**We have a lot of it**

## Distance

_**Consequences**_**:**
**Historic transmission development has been rather stingy**
- Long distances and not much load to pay for expensive lines
- Capacity is Leveraged with remedial actions, etc.
**Highly committed**
- Basic operating requirements use much of the capacity
- Preserving rights seen as critical to reliability
**High congestion risk**
- Highly utilized
- Customers fear losing transmission rights will raise costs

## Low Prices

**Retail prices are among the lowest in the nation.**
**Creates a Perception and an Attitude**
- Fear of losing coordinated system benefits and raising NW costs.
- “Ain’t broke, don’t fix it”
**Stakeholder focus on Benefit / Cost**
- “Show me the benefits”
- Little to gain, Much to lose

**We have a lot of it**

## Low Prices

_**Consequence**_**:**
**Necessary to Preserve elements of the past**
- People understand how basic responsibilities are carried today
- Markets should not shift load responsibilities
- Transmission rights should not be taken away or put at risk
- Avoiding cost shifts is a major driver

## Political Resistance

**Opposition in NW is Organized**
- Strong Opposition in many forums
- Paid Advertising Opposing RTO West and SMD
- Regular Congressional Delegation Visits
**Driven by the low prices and fear of the unknown**
- Reinforcing  “Ain’t broke, don’t fix it”
**May be softening**
- Emerging recognition that status-quo can be improved

**We have a lot of it**

## Political Resistance

_**Consequences**_**:**
**May stop the show**
- Challenging FERC action
- Challenging BPA participation
**Need to preserve what we have**
- Preserving transmission rights is important
- Preserving load responsibility is important
**Need to Shift Debate to Facts, not Fears**
- Recent dialog on understanding regional differences is helping
- Further development of RTO West market design proposal is helping
- Need time to sift and winnow ideas
- This is not an easy problem to solve

**Design ****Features**

## Balanced Schedules(a.k.a. Day Ahead Market)

**RTO West requires Balanced DA Schedules **
**Addresses resource adequacy in the DA market**
- Maintains LSE responsibility for having adequate resources
- Preserves these existing obligations in a manner like today
- Preserves existing bilateral market – coordination is not relying on ST prices
**Avoids impacting hydro with unexpected obligations**
- A large draw by short parties may disrupt hydro coordination
- Hydro-thermal coordination often requires energy to be stored rather than used short term
**Other factors supporting balanced schedules**
- Surplus Capacity under  most circumstances
- Demand Response
- Want to encourage forward markets
**Heard arguments against balanced schedules**
- Thin DA Market & Incentive to bias load forecast

## Catalog Transmission Rights

**RTO West preserves existing rights as CTRs **
**Preserving existing rights is critical**
- Most stakeholders see too little to gain to justify much cost or risk
**Existing rights have considerable flexibility**
- Needed for hydro/thermal coordination over wide conditions
- Reflected in historic contracts
**Physical capacity insufficient**
- Over-committed if full historic flexibility is granted
- Couldn’t simply allocate system into new form of rights
**But, the lights stay on**
- Existing uses fit when diversity and displacement are considered
**Existing rights preserved in a non-tradable “pool”**
- Maintains benefits of diversity and displacement

## Options vs. Obligations

**RTO West has options rather than obligations **
**Preserves nature of existing rights**
- Today’s physical rights allow customers to use their rights to accommodate their schedules and pay no congestion costs.  They are not exposed to paying if congestion appears in the opposite direction.
**Stakeholders unwilling to accept paying for flow reversal**
- Flow reversal is a common occurrence in hydro-thermal coordination.  Major lines like the Pacific Intertie reverse loading daily as energy is returned for storage during the night.
**Options are “Use or Lose”**
- No value to holder if not used to cover a schedule
- Promotes liquidity
- Precludes hoarding

## Question for the Day

**Why can’t this work as a starting point?**