Providing for transmission in times of scarcity: an ISO cannot do it all

Abstract The main purpose of this paper is to point out issues critical for establishing a good transmission strategy in an energy market. First, it is suggested that a transmission strategy must be discussed in the context of a specific market structure. Responsibilities of a transmission system provider differ fundamentally, depending on the type of energy market it is supposed to serve. To show this, a summary of information assumed to be known to an Independent System Operator (ISO) in three energy market structures is given, i.e., (1) a mandatory ISO, (2) an entirely multilateral market and (3) a voluntary ISO. Next, it is suggested which of the transmission strategies proposed may be most suitable for each of these three markets. In particular, we argue that the proposal by Hogan (Hogan WW. Contract networks for electric power transmission, J Regulatory Economics, 1992; 4: 211–242) naturally lends itself only to a market structure that is a mandatory pool in which all energy price bids are assumed to be known to the ISO. In contrast to this, the proposal by Wu and Varaiya (Wu FF, Varaiya P. Coordinated multilateral trades for electric power networks: theory and implementation, POWER Report PWR-031, University of California Energy Institute, June 1995) is well suited for a bilateral energy market, in which an ISO imposes no requirements on market participants regarding prices of specific energy transactions. Finally, the proposal by Ilic et al. (Ilic M, Graves F, Fink L, DiCaprio A. A framework for operations in a competitive open access environment, Electricity J, March 1996; Ilic M. A possible framework for implementing energy transactions into real-time system operation and pricing for system services. Proceedings of the EPRI Conference on Innovative Approaches to Electricity Pricing: Managing the Transition to Market-Based Pricing, La Jolla, CA, March 1996; Ilic M, Hyman L, Allen EH, Cordero R, Yu C-H, Interconnected system operations and expansion planning in a changing industry: coordination vs. competition. In: Topics in regulatory economics on policy series. Dordrecht: Kluwer Academic, 1997. pp. 307–332) lends itself to a voluntary ISO structure, in which some energy providers are scheduled on a price bid basis by an ISO and some are multilateral. The differences between these three proposals concerning an ISO's responsibility for achieving systemwide efficiency and fair charges for transmission service, particularly at times of scarcity, are analyzed. It is shown that an ISO equipped with the present types of optimization tools for both reliability and efficiency is generally `blind' to questions of fairness with respect to the individual market participants when providing transmission system support. In order to get around this problem, much more work will have to be done by the technical and regulatory communities. The only tools at an ISO's disposal at present are used for systemwide objectives, such as systemwide reliability. While some of this work is under way, it will take some time to develop the actual ISO tools necessary for implementing the fairness criterion metrics (`standards'), whichever ones the community arrives at. (Developing metrics of fair reliability contributions for the individual market participants is a nonunique process, and it may be very difficult to actually agree upon). Meanwhile, in order to have an ISO actively help energy markets in a fair and efficient way in realistic markets, which are likely to be voluntary ISOs, a system user must become an active part of decision making, indicating how much it wishes to use the system at times of scarcity and at which price. One possible way for doing this, based on the Ilic proposal, is described here.