Public Power - September 2008 - (Page 22)

What’s Good About RTOs? Instead they were thrust into a volatile market, with enormous price increases and a focus on the short term. Power contracts that once extended for 25 years or more— the life of a power plant—no longer existed. When RTOs were first formed in the late 1990s and early 2000s, they seemed to offer the guaranteed access to transmission that wholesale customers had sought for decades. This was achieved by centralizing tariff administration in an independent entity and “de-pancaking” transmission rates, said Mike Stuart, executive vice president of Wisconsin Public Power Inc. In preRTO electricity markets, utilities The theory behind formation of the RTOs was that RTO administrative staff would replace the transmission staff within utilities, with the RTO becoming the reliability coordinator for the regional electricity grid. The RTO would be responsible for coordinating power flows on the transmission system and planning for expanded needs. This transmission coordinating function of the RTOs is known among industry insiders as “Day 1” markets. Day 1 markets improved the wholesale electricity markets, said Stuart. “If FERC had stopped there, there would be no controversy.” But then FERC decided RTOs should When RTOs were first formed in the late 1990s and early 2000s, they seemed to offer the guaranteed access to transmission that wholesale customers had sought for decades. purchasing blocks of wholesale power would pay a separate fee to each transmission owner whose lines carried power to the buyer’s load. So if Utility A bought power from Utility C, but had to move that power over lines owned by Utility B and Utility D, Utility A would pay a purchased power rate to Utility C and a transmission fee to Utilities C, D and B. When RTOs began managing the transmission systems, wholesale buyers had to pay only a single transmission rate, a concept known as “license plate” pricing, said Stuart. With this change, generators were competing with generators and the price of transmission was reflected in a single regionwide tariff. For wholesale customers, electricity trades had just improved. Ray Wahle, power supply and operations director for Missouri River Energy Services, likes the single transmission tariff. The problem is, he still gets a lot of pancakes. Only 40 to 45 percent of MRES’s load is inside the Midwest Independent Transmission System Operator’s footprint. To deliver power produced at MRES plants located outside of MISO, the joint action agency has to pay pancaked transmission rates. 22 SEPTEMBER 2008 do more than simply coordinate transmission lines, they should become the master dispatchers of power. Thus were born “Day 2” markets. Day 2 markets are elegant in their conception, but putting that system on top of a legacy physical system and legacy contracts was complicated, Stuart said. Before RTOs began dispatching generation, system operators at WPPI, for example, would come in to work on a Monday morning and estimate their generating needs for Tuesday. They would look at weather forecasts and project the load for each hour of Tuesday, then look at what generation would be available from the lowest cost to highest cost and schedule transmission for every hour. They would call other utilities to find lower cost power. During certain periods of the day, WPPI might sell surplus power. When Tuesday arrived, the operators would determine whether the day was going to play out as expected and continue to optimize load throughout the day, while planning for Wednesday. The objective was least-cost dispatch. In this pre-Day 2-market world, all financial transactions were bilateral. Telephone conversations were recorded and may have been followed up by a fax. Records would be reviewed and reconciled at the end of each month, Stuart said. With the introduction of Day 2 markets, the RTO (for WPPI, Midwest Independent Transmission System Operator) took over the function of dispatching generation. With this change, the RTO determines which power costs the least and dispatches the system centrally by conducting a bidbased, security-constrained centralized dispatch, Stuart said. In the Day 2 market everyone offers generation in at a price. The RTO takes all the offers and stacks them, based on the offer price. The RTO then calls generators in to run for various time blocks (1 to 6 p.m. or 12 noon to 3 p.m., etc.). All generators bidding into the market are paid the same price, equal to the highest-priced power needed to meet load. This is called a singleclearing-price market. With the single-clearing-price market, low-cost generators often reap huge profits. In states where retail markets are still regulated, that profit would be returned to customers. In states where retail markets are deregulated, it goes to shareholders. Suppose the RTO needs 3,000 MW to meet demand. A nuclear utility could bid in two of its nuclear units, which each have generating capacity of 1,200. That meets 2,400 of the required 3,000-MW load. Suppose it offers 2,400 MWh for $9.50 a MWh. If the offer were accepted, the utility would be paid $22,800. But the RTO needs another 600 MWh. Two gas turbine operators each bid 300 MWh for $400 per MWh. The bid is accepted. The gas turbine operators each are paid $120,000 (300 MWh times $400). The nuclear utility, meanwhile, gets the gas turbine price for power, since gas was the last (and most expensive) increment purchased. The nuclear utility is paid $960,000 for its 2,400 MWh. That’s a lot of gravy. Transmission congestion charges assessed by the RTO introduced another cost challenge for wholesale customers. Congestion charges are assessed when the transmission line is overloaded and cannot deliver all of the available low-cost (say, $10 per MWh) supply to buyers, said Stuart. When this happens, the load in a congested area pays a higher rate for power that can travel an alPUBLIC POWER

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Public Power - September 2008 Contents Perspective 10 Questions What’s Good About RTOs? Capturing Coal’s Carbon Carbon Safety Valves Greater Glass, Greater Savings Getting Customers to Embrace Compact Fluorescent Lights LEEDing Green Kansas City Shows How to Build Green For Governing Boards Safety Community Broadband Hometown Connections Parting Shot

Public Power - September 2008

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