INTERREGIONAL COORDINATION OFELECTRICITY MARKETSWilliam W. HoganCenter for Business and GovernmentJohn F. Kennedy School of GovernmentHarvard UniversityCambridge, Massachusetts 02138Federal Energy Regulatory CommissionTechnical Conference on Interregional CoordinationWashington, DCJune 19, 20011ELECTRICITY MARKET Interregional CoordinationInterregional coordination of electricity markets is necessary in the large networks in the UnitedStates. There will be many regional interconnected markets.• Regional Market Design. The Regional Transmission Organization (RTO) process providesthe opportunity to establish a workable market design. What happens within a region is at leastas important as what transpires between regions.• Seams and Common Protocols. Common definitions and protocols at the seams can avoidunnecessary complexities that hinder interregional trade.• Day-Ahead Unit Commitment and Scheduling. Common unit commitment decisions andassociated day-ahead scheduling offer many further benefits for improved trading, reliability anddevelopment of consistent transmission rights.• Real-Time Congestion Management. Coordination of congestion management and real-timepricing would provide improved market tools for managing transmission use and one-stopshopping for market participants.Good coordination cannot overcome bad market design. Markets in power, more than mostmarkets, are made; they don't just happen.2ELECTRICITY MARKET A Market FrameworkThe Regional Transmission Organization (RTO) Millennium Order (Order 2000) contains a workablemarket framework that is working in places like the Pennsylvania-New Jersey-MarylandInterconnection (PJM) and New York.Poolco…ISO…IMO…GO/SO…Transco…RTO…: "A rose by any other name …"CoordinatedSpot MarketBid-Based,Security-Constrained,Economic Dispatchwith Nodal PricesThe RTO Order Contains a Consistent Framework12/99Bilateral SchedulesFinancial Transmission RightsLicense Plate Access ChargesMarket-Driven Investmentat Difference in Nodal Prices(TCCs, FTRs, FCRs, ...)3ELECTRICITY MARKET A Market FrameworkThe core feature of a bid-based, security constrained economic dispatch with locational prices canbe found in many existing or announced market designs.• Argentina.• Bolivia.• Chile.• Mexico (proposed).• New England (proposed).• New York.• New Zealand.• Norway (dynamic zones).• PJM.• Peru.• and more .... .The breadth of application and success of the framework dispel the notion that the model is too complex tobe implemented. We now have both the theory and substantial operating experience.1 1William W. Hogan, "Electricity Market Restructuring: Reforms of Reforms," CRRI Conference, Rutgers University, May 25, 2001.http://ksghome.harvard.edu/~.whogan.cbg.ksg/rut052501.pdf4ELECTRICITY MARKET RTO DevelopmentsThe critical features for a successful electricity market include close coordination of the elementsthat determine bid-based security constrained economic dispatch. We know how to make thepieces fit together. And we know that the pieces must fit together.BalancingAncillaryServicesCongestionManagementTransmissionUsageEssential Elements of Integrated Market Design5ELECTRICITY MARKET RTO DevelopmentsThe RTO filings display a great diversity of approaches, but there are some common themes. Mostimportantly, the emphasis is not on the essential elements that seem difficult and controversial.The focus is on governance and issues that seem easier to discuss.Elements of Recent RTO FilingsCongestionManagementBalancingAncillaryServicesTransmissionUsageGovernanceTranscosIncentivesProcess"Details to follow"6ELECTRICITY MARKET Reforms of ReformsMarket design problems have resulted in reforms of reforms in electricity restructuring:• The first region in the United States to abandon a too simplified market model after it failed in practicewas PJM, from its experience in 1997 when its zonal pricing system prompted actions which causedsevere reliability problems. Given this experience, PJM adopted a nodal pricing system that hasworked well since March 1998.2• Subsequently, the original one-zone congestion pricing system adopted for the New Englandindependent system operator (ISONE) created inefficient incentives for locating new generation. Tocounter these price incentives, New England proposed a number of limitations and conditions on newgeneration construction. Following the FERC's rejection of the resulting barriers to entry for newgeneration in New England, there developed a debate over the preferred model for managing andpricing transmission congestion.3 In the end, New England proposed go all the way to a nodal pricingsystem.4 2 William W. Hogan, "Restructuring the Electricity Market: Institutions for Network Systems," Harvard-Japan Project on Energy and the Environment,Center for Business and Government, Harvard University, April 1999, pp. 37-44. 3Federal Energy Regulatory Commission, New England Power Pool Ruling, Docket No. ER98-3853-000, October 29, 1998. 4 ISO New England, "Congestion Management System and a Multi-Settlement System for the New England Power Pool," FERC Docket EL00-62-000,ER00-2052-000, Washington DC, March 31, 2000. The proposal includes full nodal pricing for generation and, for a transition period, zonal aggregation for loads.7ELECTRICITY MARKET Reforms of Reforms(cont.):• New Zealand has reconsidered its reforms and revisited the issues of electricity marketdesign.5 The Government of New Zealand set down principles for reform of the electricitymarket.6 The foremost missing ingredient in the New Zealand wholesale market design is asystem of long-term transmission rights. At the end of 2000, there was common agreementthat extending the model to include FTRs would provide an added tool that would providemechanisms for hedging transmission congestion costs and incentives for long-terminvestment.7• The California market was in trouble well before it spun out of control in the summer of 2000.In California, the approach of a coordinated spot market was explicitly