EU Energy Policy Blog

In a recent talk at London I discussed the strengths and weaknesses of alternative models of electricity transmission network and system operator ownership and governance. This discussion may help to inform the debate in the EU regarding these issues.

There is a myriad of transmission ownership arrangements worldwide. However, three main types can be identified for comparison purpose:

- The VISO wherein the system operator is vertically integrated into generation but where the system operator and transmission maintenance, operations and investment are functionally separated from the vertically integrated firm’s generation and marketing businesses. In the U.S., this functional separation is mandated by law and monitored by the federal regulator (FERC). Vertically integrated utilities in the US operating under FERC Orders 888/889/890 and related interconnection and functional separation orders provide a good example.

- The ISO wherein the system operator is separated both from transmission and generation. It only owns the control room, system operating software, and associated communications facilities to ensure the economical and reliable dispatching of generating facilities connected to the network. Generally speaking, the transmission grid remains owned by generators subject to various functional separation regulations. National Grid’s role as system operator in Scotland and PJM’s role as system operator in the Eastern U.S. belong to this type.

- The ITSO wherein the system operator both owns and operates the grid but is separated from generation. It eliminates all potential conflicts of interest. This type as well is typically accompanied by organized spot markets for energy and ancillary services organized by the ISO and which it uses to balance supply and demand on the system consistent with reliability rules. National Grid in England and Wales, Red Electrica in Spain exemplify this model.

I see the strengths and weaknesses of each model as follows:

VISO
- Politically convenient
- Ultimately any benefits of vertical integration are lost
- Functional separation and information transfer restrictions (2003 Northeast Blackout)
- Potential benefits of horizontal integration of TOs are not realized
- Continued litigation over self-dealing and vertical market power problems
- Contest between political power of incumbents and power of regulator and competition authorities
- Requires strong regulator and competition authority
- Functional separation evolves toward a crippled ISO
- Ultimately incompatible with liberalized wholesale and retail markets with good performance attribute

ISO
- politically more acceptable compared to ITSO
- The devil is in details
- ISOs with “deep functional” responsibilities that are well integrated with wholesale market work reasonably well
- Inefficiencies from absence of vertical integration with TO functions:
o Efficient coordination of maintenance and investment planning can be challenging
o Interconnection process is cumbersome
- Effective governance and regulation of ISO are also challenging, especially if not-for-profit:
o What are the incentives?
o Soft budget constrains if not-for-profit
o Stakeholder process is cumbersome
o Good performance based regulation is more difficult
- The responsibilities of the ISO tend to expand over time to deal with these inefficiencies:
o TOs become passive owners of regulated assets that march to the ISOs orders

ITSO
- The ideal model in theory
- Independence is structural
- Focused business model
- For profit ITSO is easier to regulate with performance based regulation since objectives and incentives are clear
- Requires well developed performance based regulatory mechanisms
- Some functional separation required if there are unregulated line soft business (e.g., interconnections)
- Restructuring to create regional ITSO is very challenging politically
- Existing ITSO’s have exhibited good performance in all dimensions

This list was presented at the Cambridge-MIT Electricity Conference in London on September 28, 2007. See below if you want to get all the slides of my talk.

Paul Joskow, Massachusetts Institute of Technology

This entry was posted on Sunday, October 7th, 2007 at 9:33 pm and is filed under Electricity, English. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.