Nodes to You: Transmission

1
Nodes to You Transmissions market test in PJM

• Robert J. Michaels
• California State University, Fullerton
• and
• Econ One Research and Consulting, Inc.
• Achieving Optimal Transmission Pricing
• Risk Publications
• Houston, Texas
• Nov. 8, 1999

2
The lessons so far from PJM

• Few noticeable improvements in short-run
  efficiency
• Increased risk inhibits growth of bilateral
  transactions
• Inadequacy of official transmission congestion
  contracts FTRs
• Unresolved market power issues
• Unclear long-run signals
• Questionable usefulness of economics professors

3
PJM One kind of perfection

• Economists and the perfectly competitive ideal
• Time-varying energy prices, market based PX bids
  after 4/1/99
• PX and ISO operate as a unit, bilaterals possible
• Ancillary services bundled, cannot be
  self-provided
• LMP calculated from PX price at 1744 nodes,
  applies to all transactions
• Fixed Transmission Rights FTR allocated by load
  to servers, remainder auctioned

4
How perfect is it?

• Why arent other goods priced this way?
• Ideal pricing at wholesale, few usable signals at
  retail
• Differential risk exposures of utilities and
  non-utilities
• Knowing the nodal price only after it happens
• The invalid market order analogy
• Negative prices
• LMP overcollections, FTR allocations, and
  barriers to entry

5
Costs, benefits, and transfers

• Foregone opportunities setup and operating
  charges v. bilaterals and competing exchanges
• Imposition of institutions rather than letting
  market decide
• Move from the complex to the simple?
• Costs of redispatch and costs of capital
• 1,744 thin markets or a handful of liquid ones?
• Costs of increased uncertainty
• Overcollections their size and redistribution

6
What about congestion?

• 1998 some congestion 17 percent of hours
• Not all peak
• Average east-west differentials 46 to 75
• East-West???? Hogan said there werent zones
• Changes in price averages cannot be linked to
  LMP, result from expected causes
• Old Dominions complaint
• 1998 monthly spot sales 440 M, congestion
  charges 18.4 M, excess congestion rents 4.1 M

7
Gettting the Prices Right

• Why reject a simpler zone system?
• The 1997 zonal experiment
• One zone and obvious arbitrage
• No way to create other zones or tariffs then
• One zone, two zones, or more like a hundred?
• The uneasy case for a hundred zones
• The Constellation merger application

8
Fixed Transmission Rights I

• Blunting the impact of LMP on utilities
• Point-to-point and network service
• Load servers get allocations by noncoincident
  peak, monthly auction of remainder
• FTRs are specific to receipt and delivery points
• Hard to aggregate for transactions using multiple
  generators
• PJM requirement for source identification
• Pricing reversals require two-way FTRs for
  complete hedge

9
Fixed Transmission Rights II

• If monopoly power matters, the most competent
  would-be monopolist will win the bidding
• Generation ownership increases potential market
  power
• With retail competition, rights follow service to
  retail loads
• Differential effects on utilities and
  non-utilities?
• What rights for marketers?
• The future shape of the auction

10
Hubs and risk

• Because it rebundles, nodal pricing makes
  separation of commodity and transport risk
  impossible
• Deaths of the Eastern Hub and Sellers Choice
• Can we be sure nodal prices are at fault?
• Western Hub volumes and liquidity
• The forlorn NYMEX contract
• A comparison with Cinergy
• The hubs according to Professor Hogan

11
LMP and market power I

• The non-story of seller concentration
• Relevance of the HHI statistic
• Question of geographic boundaries
• The transmission owners interest -- not
  expanding constrained capacity
• Particularly if it has not divested generation
• Market power harder to exercise where there are
  futures, forwards, and easy bilaterals

12
LMP and Market Power II

• Easier to exercise if transmission pricing
  facilitates de facto load pockets
• If risk of capacity withdrawal gives physical
  rights holders market power, deal with it
  directly
• Will near-term adjustment markets for unused
  transmission allow an adequate window for trade?
• The power of the central market
• Or is it denial of the right to trade through
  the ISO? Hogan
• Is it sufficient that everyone else trades mostly
  paper?
• The pattern of cross-subsidies

13
The long run

• Nodal prices increase uncertainty, cut
  transaction horizons
• Why rely on them for long-run signals and capital
  recovery?
• If they are 50 percent randomness, what do they
  mean?
• And are they better than prices for physical
  rights?
• Signals to build transmission or generation?
• Are 7,000 MW really coming by 2002?

14
I have seen the future...

• Hoecker and the future is PJM
• Hogan not really and its efficient like I
  said
• By a short-term static standard?
• Bailey close and 7 of the 8 PJM utilities
  support it
• Supporting Companies not really and we were
  the ones who designed it
• Michaels What kind of competition did you expect
  incumbent monopolists to design?