Coordination for Competition in an Electricity Market. Response to an Inquiry Concerning Alternative Power Pooling Institutions Under the Federal Power Act

Excerpt from the executive Summary:

Coordination through a well designed pool-based electricity market can be a large part of the solution to the problems of promoting open access and competition. Experience in other countries strongly supports this conclusion and the key elements travel well. Analysis of the underlying conditions of electricity supply highlights the role of effective pooling arrangements in cutting through the complexity of the electricity system and exploiting the benefits of coordination for competition.

The "Poolco" model embodies the lessons of best practice found elsewhere and provides a coherent framework for addressing the key elements of efficient pricing, open access, and market choices, all while preserving the necessary requirements for operating reliability. This generic Poolco model has been advanced by public and private utilities in different locations and different circumstances. The broad attraction of the Poolco proposal across the country and in other nations stems in part from the gradual recognition that the Poolco is not a radical proposal. Rather, Poolco recognizes what exists today and what must happen under any system for a competitive electricity market.

Any efficient system for organizing the electricity market should include least-cost dispatch as a centerpiece. To be sure, the least-cost dispatch concentrates only on the short-run and the greater part of the value of a competitive system is to be found in the long-run decisions that will control contracting and investment. However, least-cost dispatch based on participant bids is the ideal short-run outcome that would appear in a competitive market if it were possible for all the many participants to define the appropriate property rights and conduct all the complex trades in the network. Because of the complexity of these trades and the lack of workable definitions of key physical property rights, the common judgment is that a system operator is needed to coordinate the dispatch, at least for some fraction of the flexible plants. Since the operator must function to provide coordination services, least-cost dispatch provides the natural framework that replicates as close as possible the ideal outcome of the short-term competitive market. The Poolco model accepts and builds on this least-cost dispatch. And working from this starting point, the other features needed for the market can be derived within a consistent framework. The bidding prices and least-cost dispatch provide naturally the level playing field for all market participants, both large and small. There is no special advantage to size in benefitting from dispatch diversity and acquiring backup supplies. These services are available to all on the same basis. The separation of ownership from control guarantees open access to the dispatch and related services to facilitate entry and the pursuit of the forces of competition.