Chandley - Revised: September 17, 2001 A Standard Market...

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Revised: September 17, 2001 A Standard Market Design for Regional Transmission Organizations John D. Chandley 1 It is time for the Federal Energy Regulatory Commission (FERC) to define the principles for a standard electricity market design and to begin consistently applying those principles to the market rules now being developed by Regional Transmission Organizations (RTOs). FERC’s recent RTO orders make it abundantly clear that the fundamental purpose of forming independent RTOs is not merely to “operate the grid,” nor only to ensure non-discriminatory access to essential grid facilities and services. In addition to these undisputed RTO responsibilities, an essential function of RTOs is to create and operate RTO-coordinated markets. Competing generators, customers/buyers and traders will use RTO-coordinated markets to support bilateral contracting and a wide range of commercial market transactions. The markets will also serve a broader national objective of pursuing the public interest in the benefits of market competition. RTOs will use these markets to maintain regional reliability through system balancing, congestion management and provision of operating reserves and security services, thus assuring a safe and dependable electricity system and a reliable supply of electricity. The success of RTO markets is therefore critical to system reliability, as well as national economic well being. Market experiences in various regions have demonstrated beyond debate that poor market designs can expose affected states and participants to enormous risks. Given these risks, FERC can no longer afford to avoid the hard job of defining a workable, robust and efficient market design. And because the electricity grid functions across huge interconnected regions – as one coordinated system -- the market rules that apply across the country must be fundamentally compatible, as well as technically sound. In short, if the nation is to embrace competitive markets as the appropriate structure for the electricity industry, FERC must define and articulate the principles for a standard market design and insist that RTOs use those principles to develop their market rules. This paper describes a set of foundation principles for such a standard design. FERC’s Policy Orders FERC has been attempting for almost a decade to restructure the electric industry to foster competitive electricity markets. After pursuing this objective under the existing industry structure through Orders 888 and 889, FERC has now concluded that it must create RTOs to achieve the goal of fostering competitive markets. In Order 2000, 2 its “Millennium Order,” FERC called upon jurisdictional transmission-owning utilities to create RTOs and to transfer 1 The author is a member of the LECG market design group led by Harvard’s William Hogan and LECG’s Scott Harvey. The paper is based on electricity market design principles developed over several years by Drs. Hogan and Harvey, other members of the design group, and other international experts in market
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Chandley - Revised: September 17, 2001 A Standard Market...

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