A Concurrent Auction Model for Transmission Congestion Contracts
Network interactions in the electricity system create externalities that have precluded the development of a workable system of fully decentralized “physical” property rights for controlling use of the transmission system in an open access, competitive electricity market.2 Transmission congestion contracts provide a well-defined alternative mechanism to serve in the place of strictly physical property rights related to transmission usage. Any of a number of methods could provide an initial allocation of transmission congestion contracts. For instance, existing users might receive a designated set of contracts based on historical usage patterns, and then the remainder could be assigned to new users. With the availability of well defined transmission congestion contracts, it would be natural to employ an auction for allocating part or all of the contracts to allow for non-discriminatory access through a market mechanism.
KeywordsOptimal Power Flow Congestion Price Complementary Slackness Independent System Operator Congestion Cost
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- 2.W. Hogan “Electricity Transmission Policy and Promoting Wholesale Competition,” Initial Response to the Notice of Proposed Rulemaking Regarding Promoting Wholesale Competition Through Open-Access Non-Discriminatory Transmission Services by Public Utilities, Federal Energy Regulatory Commission, Docket No. RM95-8-000, Harvard University, August 7, 1995.Google Scholar
- 3.There is much less to the distinction between physical and financial transmission rights than meets the eye. In the narrowest definition of strictly physical rights, no use of the transmission system would be allowed without obtaining in advance a matching “physical” reservation that would be acquired somehow in the initial allocation or the secondary market. But practical implementations provide that the reservations could be used either in the “physical” sense of matching actual transmission flows to reservations, or in a “financial” sense in that unused reservations would in effect be bought, sold and reconfigured based on opportunity cost pricing through a spot market coordinated through a bid-based economic dispatch by the ISO. In the presence of an active spot market, this trading of capacity reservations at opportunity cost prices makes the “physical” capacity reservation more like a “financial” contract Whether we call these transmission instruments “capacity reservations” or “transmission congestion contracts” or something else is more a semantic than a substantive issue. How we organize the market, however, does matter because of the rather substantial transaction costs. Forcing people to think of, and treat, the transmission capacity reservations as narrowly defined physical rights that have to be reconfigured, constantly and explicitly, in order to allow for schedules in the transmission system, would create a cumbersome and possibly unworkable system for the actual dispatch. Recognizing that economic dispatch reconfigures and trades these rights implicitly would capitalize on well- estabhshed principles of reliable dispatch and economic efficiency. For further details, see S. M. Harvey, W. W. Hogan and S. L. Pope, “Transmission Capacity Reservations and Transmission Congestion Contracts,” Harvard University, June 6, 1996, (revised October 14, 1996 and filed with the FERC as part of submission of William W. Hogan, Capacity Reservation Open Access Transmission Tariffs Response to FERC Notice of Proposed Rulemaking, Docket No. RM96-11-000, Washington, D.C., October 21, 1996).Google Scholar
- 4.This is the “obligation” form of the TCC. If the payments were discretionary, then the holder would never make a payment to the ISO for the case of a negative congestion difference. This would be the “option” form of the TCC. The option form would require a substantially more complicated feasibility test, and is not considered here. For further discussion, see S. M. Harvey, W. W. Hogan and S. L. Pope, “Transmission Capacity Reservations and Transmission Congestion Contracts,” Harvard University, June 6, 1996, (revised October 14, 1996).Google Scholar
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- 14.The convention to apply the TCC idea only to congestion is not required. Losses could be included, at the cost of requiring some unbalanced TCCs. See S. M. Harvey, W. W. Hogan and S. L. Pope, “Transmission Capacity Reservations and Transmission Congestion Contracts,” Harvard University, June 6, 1996, (revised October 14,1996).Google Scholar
- 15.Whenever there is a spot-market equilibrium set of prices, the revenues from the actual dispatch will exceed the payments required under the TCCs for the general case including losses. In general, there may be conditions where there is no set of equilibrium prices available, due to non-convexities in the optimal dispatch problem. In this (probably rare) case, central dispatch would be required to achieve a welfare maximizing solution, but the ISO might not be able to guarantee the full revenue for the TCCs. For further discussion, see S. M. Harvey, W. W. Hogan and S. L. Pope, “Transmission Capacity Reservations and Transmission Congestion Contracts,” Harvard University, June 6, 1996, (revised October 14, 1996).Google Scholar