From: james.steffes@enron.com
To: steven.kean@enron.com, richard.shapiro@enron.com, ron.mcnamara@enron.com, jean.ryall@enron.com, doug.gilbert-smith@enron.com, christi.nicolay@enron.com
Date: 2001-02-20 08:30:00+00:00
Subject: ERCOT Protocols

Note from Hogan on his views of ERCOT.

Jim


----- Forwarded by James D Steffes/NA/Enron on 02/20/2001 08:29 AM -----

	William Hogan <william_hogan@harvard.edu>
	02/16/2001 10:16 AM
		 
		 To: pat.wood@puc.state.tx.us, judy.walsh@puc.state.tx.us, 
brett.perlman@puc.state.tx.us
		 cc: keith.rogas@ouc.state.tx.us
		 Subject: ERCOT Protocols


February 16, 2001
Public Utility Commission of Texas
Sent via email

Commissioners,

         Once again, I thank you for the courtesy of including me in
yesterday's PUCT workshop on the ERCOT protocols.  It has been my
experience that such open discussion of market design issues, with full
pursuit of any problematic features, is essential in achieving a successful
electricity market.  Unfortunately, the subject is complex and the details
matter.  It is not possible to anticipate every problem, but the evidence
shows that ignoring obvious problems in the hope that the rules can be
easily adapted has not been a successful strategy.  This makes what you are
doing all the more important.

         On reflection after the workshop, I am more concerned about the
argument that emerged about the role of the ISO.  In many instances, to
explain away problems of the type identified by Shmuel Oren, an argument
was made that some administrative rule along with discretionary choices of
the ISO would counteract perverse incentives created by the pricing
system.  If this argument were correct, it would seem to place a
substantial burden on the ISO to undo what the pricing incentives have
done.  When faced with such conditions in California and elsewhere, the ISO
developed a more and more intrusive role in what became less and less of a
market.  To make this unhappy practice part of the official design, to the
point that the ISO is expected to ignore the information in schedules and
do what is right, would seem to be especially problematic.  At a minimum,
it would make the ISO responsible for any difficulties that develop,
without giving the ISO the market tools to avoid the problems.

         Commissioner Wood asked at what point how a coordinated spot
market would differ from the ERCOT protocols.  We pursued the most
important feature--eliminating the balanced schedule requirement--but did
not have time to pursue all the other details.  The presentation I handed
out contains a summary of the key features on page 20.  After the workshop,
I received an email with a recent presentation by John Chandley, a
colleague of mine, that addresses the issues of market design with a focus
on California.  As I indicated in Austin, there are important differences
between ERCOT and California, but on the matter of wholesale market design
there is a great deal in common, such as requiring balanced schedules,
relying on congestion zones, applying different treatment for different
kinds of congestion, using ad hoc pricing rules, and so on.  John's summary
of the recommended reforms for California would apply in large part to the
ERCOT protocols.  I have attached a copy of this presentation for your
information.

         I remain both impressed with all that you have accomplished to
date, and worried that fundamental assumptions in the market design will
recreate problems that we have seen elsewhere.  My recommendation to adopt
a coordinated spot market more like PJM won't solve all problems, but it
would go a long way.  Whatever the difficulty now, it will be much harder
to fix these problems later.  Furthermore, the coordinated spot market role
for the ISO is much more robust.  If the simplifying assumptions of the
ERCOT protocols are true (which I doubt), the coordinated spot market will
end up looking much like the zonal model with a few constraints and easy
bilateral trading.  But if the ERCOT assumptions are wrong, the ERCOT
protocols will face serious problems and the coordinated spot market would
be a solution.  Furthermore, we now know from experience that the
coordinated spot market is neither more complicated nor more expensive than
the alternatives.  The sooner you make a commitment in Texas to adopt this
successful market design, the better.

         I offer these further remarks as I did my comments yesterday, in
the hope that you succeed.  I would be happy to discuss these matters
further, as you decide.

Best Regards,

William W. Hogan
79 John F. Kennedy Street
Cambridge, MA 02138

p.s.  I do not have the mailing list for the workshop participants, but I
have sent a copy of this email to Keith Rogas of the PUCT and I assume he
can forward to the participant list.






William W. Hogan
John F. Kennedy School of Government
Harvard University
79 John F. Kennedy Street
Cambridge, MA 02138
617-495-1317 (o)
617-495-1635 (f)
william_hogan@harvard.edu
http://ksgwww.harvard.edu/people/whogan


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