The traditional approach to operating electric power systems has emphasized avoiding problems in order to ensure reliability. Thus, for decades, utilities built excess generating capacity, kept power flows on transmission lines well below their physical limits, ran devices that would automatically fix or disconnect components that were starting to malfunction, and in general tried to ensure that the system would hum along with little intervention required.
With the demise of the single utility, a regional system operator is now responsible for scheduling generating units, arranging transmission capacity, and providing other services needed to implement the deals made by generators and customers. But the old-fashioned conservative approach to power system operation is no longer an option because investment and use of power system components must occur for market participants to get paid. Therefore, competitive pressure is on to run the power system closer to its physical limits, notably by increasing electricity flow on the transmission lines.
This less-conservative operation can theoretically bring dramatic reductions in cost. However, today's system operator remains closely regulated and has no financial incentive to operate the system closer to its physical limits, thereby running the risk of delivering less-than-reliable service. Moreover, in many regions, the system operator does not own the transmission system and thus is not in a position to either maintain or improve it. In addition, maintenance on today's transmission lines has been targeted at reduced levels of utilization, not at close-to-the-edge limits where market participants now want to use them.
According to graduate student Yong Yoon and Dr. Ilic, the solution to those problems is the establishment of independent, for-profit transmission companies. Today's non-profit system operator assigns transmission rights and bundles the price of transmission in with electricity price, charging customers after transactions are completed. Instead, transmission should become a commodity that can be bought and sold. And the owners of transmission lines should be permitted to make a profit. Transmission companies would then have an incentive to maximize the service they provide, to operate as efficiently as possible, and to maintain and expand the transmission system as needed to meet potential demand.
In late 2000, the Federal Energy Regulatory Commission (FERC) formally recognized the need for a more active transmission provider. FERC issued an order calling for the creation of "regional transmission organizations" that can provide transmission service to customers. The order calls for regions to submit proposals describing the structure and functioning of an organization that could provide efficient, reliable service, given the characteristics and needs of the region being served.
In January 2001, Dr. Ilic and Mr. Yoon responded to that request. In their comments, they state that optimizing regional transmission systems and services requires participation by a number of entities that perform different functions. Some are regulated, some are not; but when the individual businesses operate to meet their own objectives, their actions must work together to improve the long-term social welfare of all market participants.
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The industry structure that the MIT researchers propose is shown in the figure above. At the lower left appears the market where generators, "load-serving entities" (new for-profit companies that serve groups of customers), and marketers interact, buying and selling electricity. The system operator (SO) oversees the spot market and takes responsibility for the short-term operation of the system. The independent transmission companies (ITCs) own the transmission lines and sell transmission services. The ITCs cooperate closely with the SO to implement all contracts for transmission delivery. The regulator oversees activities of the ITCs and the SO.
To expedite the buying and selling of transmission, Dr. Ilic and Mr. Yoon include in their plan a secondary market for transmission--a financial market for the trading of long-term contracts for transmission rights. Instead of the SO auctioning off long-term contracts (FERC's assumption), sellers and buyers would go to the secondary market to make deals that would reflect the real value of transmission to them. Thus, some customers would continue to get reliable transmission service by paying a higher price, while others might choose to pay less and get interruptible service. The final entity in the structure is the Open Access Same-Time Information System (OASIS), an on-line system run by ITCs and the SO where market participants can get information on the availability and value of transmission, line by line, so they can make informed trading decisions.
Under this structure, the ITC has both the incentive and the ability to maintain its lines and to operate as efficiently as possible. To maximize its profit, it can sell more rights, push its capacity limits, and expand its transmission system where congestion is apt to occur, thus where transmission capacity is most valuable. However, an ITC is typically still a natural monopoly, so it could in theory push up the price of transmission capacity by limiting the capacity it makes available. The MIT researchers therefore recommend that the ITC be subject to price-cap regulation, which limits the price charged for service on a specific transmission line to the market value (the market-clearing price) of that service. Under price-cap regulation, the ITC can increase its profits only if it lowers prices to attract more customers and increases capacity, either by building more transmission lines or by investing in software and instrumentation to identify and manage transmission constraints more carefully.
Economic theory suggests that price-cap regulation will give better incentives than will traditional cost-plus regulation (which gives a fixed rate of return on actual operating costs and capital investment). However, the techniques usually used to calculate price caps are not directly applicable to transmission; and no physical model of the power system has been available for use in analyzing the impacts of transmission price caps.
Mr. Yoon and Dr. Ilic have now created a model that can calculate price-caps for a given transmission line and the investment in new transmission capacity that they would stimulate. Using their physical model of the electric power system, they have performed case studies in which they determined what transmission lines would be built, first assuming traditional cost-plus regulation and then assuming the proposed price-cap regulation. The analytical results show that the hypothetical ITC makes better investments under carefully structured price-cap regulation, building transmission lines that bring the overall power system closer to optimal performance.
Using their new models, the MIT researchers have shown the increases in efficiency that come with their proposed industry structure. In collaborative work, graduate students Ozge Gozum, Bruce Tsuchida, and José Arce have produced computer-based tools that will help in its implementation. Included are methods of achieving system control, techniques for accomplishing transfers of information, new approaches to measuring and ensuring reliability, and a design for an information company to support the OASIS.
In addition, Mr. Yoon, Dr. Ilic, and graduate students Santosh Raikar and Kenneth Collison have developed tools that will help regulators implement price caps. A single regional system may contain thousands of transmission lines and system users. However, the MIT team points out that on uncongested lines, the value of transmission--hence the appropriate price cap--will not change much with time. Therefore, regulators need monitor only those that are prone to congestion. The team has developed an analytical model that can identify the critical lines and clusters of primary users that contribute to that congestion. The regulator can thus monitor those lines, set price caps as required, and post the prices, the transmission lines, and the associated customer clusters on the OASIS. All market participants can quickly see weak areas of the system--areas where investment in additional generating or transmission capacity would most pay off.
Yong Yoon is a PhD candidate and Ozge Gozum is a master's degree candidate, both in the Department of Electrical Engineering and Computer Science. Bruce Tsuchida is a master's degree candidate in the Engineering Systems Division. José Arce is a visiting PhD student at the Energy Laboratory from the Instituto de Energia Electrica, Universidad Nacional de San Juan, San Juan, Argentina. Santosh Raikar is a master's degree candidate in the Engineering Systems Division. Kenneth Collison is a master's degree candidate in the Sloan School of Management. This research was supported by the MIT Energy Laboratory's Consortium on New Concepts and Software for Competitive Power Systems: Operations and Management and jointly by the Electric Power Research Institute and the US Department of Energy's Energy Information Administration. Futher information can be found in references.