2. PS ERC TLR, Reliability and Efficiency Fernando L. Alvarado Professor Electrical and Computer Engineering The University of Wisconsin (also: Senior Consultant, LRCA) Presentation to the Harvard Electricity Policy Group Milwaukee, WI, November 18, 1998 www.pserc.wisc.edu

3. PS ERC Objective Discuss congestion relief alternatives Describe a problem with the present NERC TLR procedures Propose market-efficient alternatives that are compatible with present institutional structures

4. PS ERC Observations Congestion leads to high spatial volatility This is necessary for economic efficiency However, bad rules can increase volatility and reduce efficiency Internalizing loop flows leading to zonal prices may result in inefficiencies Efficiency requires adjusting to conditions Static average prices are inefficient

5. PS ERC Congestion relief alternatives Market-blind Operators deal with security issues only Market-aware Operators deal with security but facilitate markets operation Pure market Market deals with congestion

6. PS ERC Congestion management options Command and control -- no choices (FAA) As internalized ancillary costs (Uplift) By curtailment rules (NERC) By locational spot pricing Spot pricing (Schweppe, Hogan) Transmission-only pricing (TCCs, Glavitsch)

7. PS ERC The NERC TLR Procedure A method for determining who to curtail and by how much Based on pre-computed flow sensitivities Uses “arbitrary” formulas

8. PS ERC The procedure Determine amount to curtail Select curtailment category Firm, non-firm Determine flow sensitivities Ignore those with less than 5% impact Determine transaction size Apply formula, determine amount to curtail

9. PS ERC 6 transactions and 4 flowgates

10. PS ERC Impact of transactions on flows

11. PS ERC The curtailment formula

12. PS ERC The curtailments

13. PS ERC The problems Phantom schedules Inability to create packaged multilateral schedules Ability to play games with contract paths Possible games with the 5% dropout rule Conflicting curtailment rules for multiple congestion

14. PS ERC Phantom schedules

15. PS ERC Consequence of phantom schedule Transaction A to C benefits at the expense of transaction B to C It can also work the other way around It results in gaming behavior It leads to suboptimal, possibly unstable, market conditions

16. PS ERC Packaged multilateral trades The packaged trade has no negative impact

17. PS ERC The curtailed trade This curtails a desirable packaged trade

18. PS ERC Consequences With congestion, optimal trades will (almost) always be packaged trades NERC rules will discourage optimal behavior NERC rules result in much higher spatial volatility We have a model that demonstrates this There are problems with the present NERC rules for TLR Nodal pricing can lead to optimality, but the NERC rules will not get you there

19. PS ERC Another view of curtailment 250 100(limit: 100) 100 250 150 250100 price

20. PS ERC Quantity rationing (NERC) 250 100(limit: 100) 100 250100 Limit transaction 150 200 100

21. PS ERC Transmission pricing 250 150 200 100 (limit: 100) 100 250100 price

22. PS ERC Transmission pricing alternative It is indeed possible to attain secure operation with price signals There are practicality/institutional concerns Speed/reliability of response Degree of participation Use ex-ante contracts Curtailment is, however, compensated The system is voluntary for everyone

23. PS ERC Recommendations (1) Improve NERC rules Allow packaged trades Phantom trades still possible –System could be efficient if no games are played or: permit economic signals Full bid/auction dispatch Use transmission congestion “adders” Average charges are inefficient Explicit voluntary trading of TCCs Can’t have it both ways in the same time frame

24. PS ERC Recommendations (2) Enable futures market that permit hedging against spatial volatility Can be done within existing financial market structures Integrate demand management into the picture Airlines analogy