Authority and Responsibility of the ISO: Objectives, Options and Tradeoffs

Abstract

The widespread movement toward deregulation of the electric power industry around the world and in the US is fueled by technological and social changes that led to a fundamental reexamination of conventional wisdom concerning natural monopolies and economies of scale in this industry. The central planning paradigm and vertical integration in that industry rationalized by the conventional wisdom has led to inefficient investment policies and high electricity prices. The primary objective of deregulation in the electric power industry has been to promote long-term efficiency through prudent investment and technical innovation by unleashing competitive forces in the electricity market. While there is little disagreement with regards to this long-term goal, alternative implementation proposals differ radically with respect to the immediate approach and the short-term objectives that must be pursued for achieving the long-term goal. A major area of dispute is the extent of centralized control and “market management” that is needed to assure system reliability and that is desirable from a social efficiency perspective. There is general agreement that the physical characteristics of electricity impose requirements for real time central coordination in order to assure reliable service. It is also agrred upon that decentralized decision making is an important element of competitive markets and as such is a desiarble goal in aq restructured electricity industry. The dispute center on the “how much” questons, on what is essential and what is optional, on the relationship between short-term and long-term efficiency and on the tradeoffs involved in short-term policy choices. The objective of this paper is to articulate the range of options available, underlying assumption and tradeoffs involved in choosing among the available options raise questions that need to be addressed in making such choices.

“The significant problems we face cannot be solved at the same level of thinking we were at when we created them” Albert Einstein