Power market seams get FERC attention

Michael Giberson

Today’s edition of Power Markets Week quotes me on the topic of resolving seams between RTO power markets. (I don’t have a link, the newsletter is by subscription only.) In the nature of shameless self-promotion, I’ll quote the interesting parts (i.e. the paragraphs mentioning me), along with only as much extraneous information as is necessary to make sense of what I am quoted as saying. That will keep me within “fair use” limits, right?

(Background on the “Lake Erie loop gaming strategy” is available in two earlier posts: “Lack of coordination between RTOs provides multi-million dollar gaming opportunity“; “Senator calls for FERC probe of traders using Lake Erie loop strategy“)

From “FERC investigating trading across seams while others cite Constellation in loop flows”, Power Markets Week (August 25, 2008):

The Federal Energy Regulatory Commission on Thursday said that since May its Office of Enforcement has been investigating power transactions that created loop flows in the Lake Erie region.

The flows in turn caused congestion that numerous parties claim caused hundreds of millions of dollars in increased costs. At the same time, FERC approved emergency tariff revisions that the New York Independent System Operator sought to help counter the loop flows….

The regional transmission organization and a number of regional market monitors have been looking into trading strategies that caused an increase in loop flows between NYISO and the PJM Interconnection in the Lake Erie region.

Market observers say the issue of the loop flows presents a critical window of opportunity for federal regulators to overcome lingering seams issues. Seams issues can arise when neighboring grid operators have different operational protocols, market designs and planning, and can have an impact on things such as congestion and loop flows.

Michael Giberson, an energy economist at Texas Tech University and formerly an economist with Potomac Economics, said what could go a long way to help solve issues associated with seams would be for a FERC commissioner to take this issue head on.

“Someone at FERC needs to champion this,” he said, adding that there needs to be a substantive effort, and “not a few paragraphs in an order,” but actual substance.

Consultants familiar with seams issues also said some guidance from FERC could help in solving the problems.

“FERC could make it more of a priority,” said Sam Newell, a principal with the Brattle Group consulting firm.

PJM and MISO have elaborate protocols set up to manage grid operations jointly in efforts to eliminate seams. This allows the two grid operators to share information and not to be “constantly surprised” by operating conditions, said Giberson.

The grid operators have also tried to make inroads on the seams issues through stakeholder working groups, but apparently with mixed results.

If the grid operators fail to talk to each other and seams issues continue to play out, another approach that may force a resolution could be coordinated, single dispatch for the RTOs, or in other words a super pool, some said.

At a NYISO meeting earlier this month discussing the Lake Erie loop flows, a stakeholder warned that if the RTOs failed to act in this instance and decide to remain islands without sharing information, there may be the “horrible alternative” to be forced into something like a “super pool.”

NYISO staff fired back that it wanted to take the “leadership role” in getting to the bottom of the issues surrounding the loop flows.

Getting something like multiregional coordinated dispatch could solve a number of these issues, sources said, however the move would be extremely difficult because RTOs would lose some autonomy with a super pool, and states may be reluctant to give up some control.

Also, sources said some participants, particularly generators, may be reluctant to see better coordination because it may take away some profitable opportunities such as when price spikes occur across RTO borders.

But rather than coming down hard from the top and mandating something like a super pool, Giberson said he’d rather see a “bottom-up approach” with someone taking the initiative to bring everyone together to communicate and provide better coordination with neighbors.

Betting on the weather as a way to manage risks

Michael Giberson

You’ve heard the old joke about the weather, right? — everybody talks about the weather but nobody ever does anything about it. Well now you* can do more than just talk about the weather, you* can bet** on it.

*By “you” I mean, “accredited investors with a minimum net worth of $1 million,” pursuant to CFTC regulations, according to this story about WeatherBill appearing on Portfolio.com. Which isn’t me, but might be you. Or maybe, by “you” I mean, “businesses, not individuals,” due to Federal Trade Commission rules, according to this Newsweek story on WeatherBill.

**By “bet” I don’t mean to imply gambling is involved, according to the WeatherBill site, their contracts are “commodity contracts intended to be used as risk-management instruments.” So by “bet” I just mean you can take on a risk that, for example, you can use to offset a financial weather-based risk you are already exposed to.

WeatherBill is using a lot of weather data and some complex computer processing to open up the specialized world of customized weather risk management and make it available to more kinds of businesses (and perhaps “accredited investors”, too). As mentioned in the Portfolio.com and Newsweek stories, businesses from car washes to ski resorts to restaurants with patios have used WeatherBill to help hedge their exposure to weather-based risks.

Yahoo computer scientist David Pennock offers additional commentary, describing the operation “as a combinatorial prediction market with an automated market maker”. See also discussion on WeatherBill at MidasOracle, including early skeptical remarks by Eric Zitzewitz which appear not to be borne out by WeatherBill’s early and apparently successful experience.

Texas court favors wind turbines over claims of spoiled views and nuisance noise

Michael Giberson

A couple of weekends ago I took a quick trip from Lubbock to Austin to visit my brothers and their families, the first time I’ve taken that trip since I moved back to Texas from Virginia. I knew a few wind turbines had popped up since my last drive down US 84, perhaps 18 years ago, but still I was surprised by the extent of the development. From about Post, Texas southeast to Sweetwater and then east to Abilene — a stretch of about 120 miles — there is almost always a wind turbine somewhere in sight.

At points the wind turbines were so numerous as to be, to me, awe inspiring.

Not everyone likes them, of course, and neighbors of the Horse Hollow Wind Energy Center near Abilene sued owner FPL Energy in 2005, “saying the turbines were too loud, lowered their property values and ruined their scenic views,” according to an Associated Press story. AP reports:

After the two-week trial in which noise levels and land values were discussed, jurors ruled in favor of FPL Energy.

In a ruling issued Thursday, the 11th Court of Appeals said the trial judge did not err because Texas law “does not provide a nuisance action for aesthetical impact.” But the appeals court seemed sympathetic to landowners.

“We do not minimize the impact of FPL’s wind farm by characterizing it as an emotional reaction,” the judges wrote in the ruling. “Unobstructed sunsets, panoramic landscapes, and starlit skies have inspired countless artists and authors and have brought great pleasure to those fortunate enough to live in scenic rural settings. The loss of this view has undoubtedly impacted plaintiffs.”

I don’t mind wind turbines so much – when I saw vast wind farms I imagined many smoke stacks that weren’t belching dark smoke into the air. Of course, I can drive by a oil refinery and imagine how it makes possible an 800-mile weekend trip to visit family.

HT to Environmental Capital, which provides several other useful links. Tim Haab observes Green vs. Green conflict at Environmental Economics.

Useful perspective on speculation in oil markets

Michael Giberson

Geoffrey Styles offers some perspective on the Vitol S.A. affair. (Vitol was indirectly revealed to have had a rather large position in NYMEX’s oil contracts when the CFTC reclassified a single trader from “commercial” to “non-commercial.” The CFTC did not name Vitol, but enough information was available that industry insiders were able to discern the company involved.) According to the Washington Post, Vitol held approximately 11 percent of outstanding contracts in the market.

The Washington Post headlined its report online: “A Few Speculators Dominate Vast Market for Oil Trading.” But, as Tyler Cowen remarks, “influence” may be a better choice of words than “dominate.”

I recall that folks said that Amaranth dominated natural gas futures, too, and yet somehow all of their domination led to multi-billion dollar losses and the disbanding of the firm.

Anyway, if you’ve read some of the news reports about the CFTC reclassification, then you should also read Styles for a deeper perspective on the news.

UPDATE: NewsWatch: Energy also has comments.

STILL MORE: Bloomberg reports that the CFTC disputes the Washington Post‘s claim that “financial firms speculating for their clients or for themselves account for about 81 percent of the oil contracts on NYMEX.” Accorder to the Bloomberg article:

The agency said the 81 percent figure cited in the Post story seems to count an entire group of traders, those labeled “swaps dealers,” as speculators even though some of them are engaged in hedging for commercial entities.

(The Styles piece found via The Energy Collective.)

Will Pandora be an Internet radio royalty casualty?

Lynne Kiesling

Pandora is a vast online radio resource, with many subscribers who are huge fans of its services. But it may go out of existence in the near future as a consequence of Internet royalty payments:

Pandora — practically the poster child for online radio — says it will shut down if royalty rates enacted in March of 2007 are not altered soon.

Despite all of those warnings, the rates remain intact and must be observed by webcasters, even as the battle over them continues. Aside from a few concessions to small webcasters and those with lots of unique streams, Washington lawmakers have not altered the rates, which currently require Pandora to fork over 70 percent of its revenue to labels and artists. …

If Washington lawmakers want to ensure that legal music services cannot compete with under-the-radar alternatives that pay nothing to artists, they’re doing a bang-up job. …

While all forms of U.S. radio pay royalties to songwriters and publishers through rights organizations such as BMI and Ascap, record labels and recording artists have not received performance royalties from radio in this country, because radio was thought to have a promotional effect on sales. With sales flagging, labels and artists are trying to collect licensing fees from all uses of their music, including radio. Satellite radio stations must pay a small percentage of revenue, while terrestrial radio stations currently pay no royalty to labels and recording artists.

As I’ve asked here at KP over and over and over and over and over, why does this unreasonable and demonstrably poor policy persist? Is the U.S. Copyright Royalty Board that clueless? Or is it just that the broadcast radio interests are really good at playing them?

Pandora has already ceased streaming radio to the U.K. because of these royalties that they have to pay and terrestrial stations do not. Is it going to take the death of a large, popular site like Pandora for meaningful change to happen here?

The Save NetRadio Coalition has more information and ways to make sure that this issue stays in Congress’s face until they muster the gumption to deal with it.

Electricity consumption and autonomous control: technology and prices to devices for decentralized coordination

Lynne Kiesling

One of my favorite things about our house renovation is the spiffy, brandy-new Kitchenaid refrigerator that you can see in the corner of this kitchen photo:


It’s well-designed, it’s energy-efficient, it keeps our food and drink beautifully … and, because I am particular about mineral and biological tastes in water, I love its built-in water filter for both water and ice cubes.

Yesterday morning as I was pouring water for tea, the “filter” button on the door display turned orange, and the display now shows the message “order filter”. Without my having to do anything, the designers of the refrigerator programmed it to communicate this information to me when the remaining filter capacity fell to 20%.

In my Pavlovian way, what do you think I did? I naturally looked up the part number and did an online search for the filter. I found a filter store with prices that are 5% off of retail, I don’t have to pay sales tax (which is meaningful in Cook County, which has the highest sales tax in the country), and I got an email about two hours later that the filter had already shipped. In fact, I bought two, so I won’t have to think about this again for another year. DONE! And I was happy that my refrigerator was intelligent enough to communicate this information to me.

But think about it … this capability is just the tip of the iceberg (pun intended!). What if, instead of just an orange light on the display, the filter depletion triggered one of two things, depending on how I set it up?

1. An email to me with links to the correct part, so I don’t have to dredge out the owner’s manual, and links to filter vendors.

2. Automatic filter ordering from the online filter vendor of my choice; the refrigerator could arrive pre-programmed for a specific Kitchenaid-approved vendor, but through a remote web interface with my refrigerator using my house’s wires or wireless I can choose a different one if I prefer, and I can choose to order multiples at the same time, so my refrigerator interface can keep track of my filter inventory.

These are the transactions of the future. This is the beginnings of embedded intelligence in appliances, and the individual consumer’s autonomous control that such intelligence enables. It enables autonomous control to lead to overall decentralized coordination in the electric power system. Think about it …

Notice that in this future I can choose how much human involvement I want to have in the filter replacement transaction; I can either receive the information and do it manually, or I can program the appliance, “set it and forget it”, and a filter will arrive without my having to go out of my way to deal with it.

All that’s required to make these transactions and this functionality possible is ethernet capabilities in the appliance, and some programming and thoughtful customer service-oriented interface design on the part of the appliance vendor. More simply put, the fridge just needs an IP address and a spiffy, user-friendly web interface through which I can see it on my house’s network and adjust its settings to suit my preferences (and changes in my preferences over time). Adding the technology to add that functionality would not increase the cost of the appliance substantially, and they could start by doing it in the top-end of the product line and then proliferating it through the broader mass-market products.

Now take the next step: imagine and dream well beyond the autonomous filter replacement transaction. Once the refrigerator has an IP address and is on my home network, I can control it remotely with the right network access and user interface. Now dream big … I can program it to cycle its cooling in response to changes in electricity prices.

Remember that in aggregate in the residential economy, refrigerators consume more electricity than space heating, water heating, or lighting; how big a share of electricity consumption your refrigerator accounts for depends on its features (especially age) and the other uses in your home, but in any case, the fridge is a pretty serious chunk of your typical house’s consumption. That means it’s a substantial share of your electricity bill, and that if you can reduce its power use without harming your food, you can be just as well off but save yourself money. Due to the physics of thermal mass, you can cycle off refrigeration for a while without damaging food, especially if the doors stay closed.

Imagine a hot August afternoon, and you have an IP-enabled refrigerator on your home network. Moreover (and this is the crucial part), you have a contract with a retail energy service provider (either your utility or a competing retailer) under which you are charged real-time prices for the electricity commodity portion of your service. This contract also means that your home has a digital meter that can communicate this price signal into your home and its devices and appliances; the meter is the communication gateway.

This arrangement opens up a wide range of possibilities for you. You can program your refrigerator’s compressor to turn down or off if the electricity price goes above a certain set of trigger prices; notice that this functionality is continuous, it’s not just an on-off thing. Say you’re a working mom, and you want to know when your kids get home from school; you can program the refrigerator to send you an email or an SMS if the door opens during the hours you are at work (because what’s the first thing kids do when they get home? Eat!). If you are particularly concerned about your budget, you can set an electricity budget for your refrigerator, and have it modify its settings and behavior to manage itself to your budget target. Or suppose that you care deeply that the power you consume is only generated from renewable energy; then you can set your fridge to cycle off if all renewable sources on your network are maxed out and your next kilowatt will come from a fossil fuel generator. And if you are having an important dinner party and have delicate, expensive food in the fridge, you can override all of this stuff.

And you can do it autonomously. Or you can adjust it through a remote access web interface.

Now imagine that quite a few of us have this setup in our homes. What is the aggregate outcome? Individually, we each use the technology and the retail price contract to adapt our behavior to suit our personal, individual best outcomes. We use the technology and the pricing to save money while still getting the functions we want from the appliance, and from our electric service. In aggregate, these autonomous choices change demand patterns in ways that reduce demand in expensive periods, which will induce wholesale electricity market prices to do a better job of reflecting both consumer preferences and the actual costs of supplying power at a given time. Those changing demand patterns, and the ability to change behavior autonomously, can also lead to reduced energy use, particularly if it means less use of less energy-efficient (higher heat rate) generators to meet peak demand.

Imagine how technology and retail choice enable us to enjoy that kind of autonomy and achieve these benefits through decentralized coordination. I look forward to that future enthusiastically.

The consequences of falling oil prices, and the benefits of high oil prices

Lynne Kiesling

At Econbrowser, Jim Hamilton has a very thorough post on the economic consequences of falling oil prices. Consumer confidence, inflation, GDP, Fed policy, … and his conclusion is not very optimistic in the short run.

In fact, here’s a question for you: will the short-run and long-run adaptations of consumers and producers actually be beneficial enough to make high oil prices net beneficial? And is it possible for that adaptation to include the political will to streamline energy policy away from targeted subsidies/pork?

The wonderful economist Robert Pindyck takes on some of these questions in a recent interview in which he comments on the energy policy proposals of the two dominant presumptive Presidential nominees.

Pindyck — an expert in microeconomics and industrial organization, the behavior of resource and commodity markets, capital investment decisions, and econometric modeling — recently examined the energy plans put forth by senators Barack Obama and John McCain as posted on their web sites. He was not impressed.

But, as Pindyck acknowledges, being honest about what it would take to wean Americans off oil could be political suicide.

Pindyck’s policy proposal: eliminate alternative energy subsidies and/or implement carbon pricing and a gasoline tax:

Look, what are going to be needed ultimately is a tax on carbon and a tax on gasoline — a large one. Another way to have a tax on carbon is to have a cap-and-trade system so you only allow a certain amount of carbon dioxide to be emitted. That will raise the cost of carbon. A gasoline tax would greatly reduce gasoline use. It would create the incentives we need for other energy sources, including conservation.

The theory behind Pindyck’s proposals is straightforward microeconomics, including its absorption of the Austrian concept of the subjectivity of preferences. Targeted subsidies presume that the party choosing the targets (i.e., the Federal government) knows what the “optimal” alternatives are, which means both that they know the relative costs and benefits across all alternative energy technologies AND that they know the preferences and evaluation of opportunity costs of all of the affected consumers. Similarly, regulatory responses are prey to the same fallacy of centralized control critique.

Only government is arrogant enough to presume such knowledge, or to be indifferent to the costs imposed by their failure to aggregate such knowledge.

Thanks to The Economist’s Free Exchange blog and to Mark Thoma at Economist’s View for the link.

UPDATE: see also posts from Greg Mankiw (touting the “Pigou Club” interpretation of Pindyck’s remarks, naturally) and from John at Environmental Economics on the Pindyck interview.

The book is available! Pricey, but available

Lynne Kiesling

At some point recently in my various travels, I managed to make it into my office, where I found a large envelope with a book in it. My book! Titled Deregulation, Innovation and Market Liberalization: Electricity regulation in a continually evolving environment:

Over the past 50 years the US economy has experienced economic dynamism and technological change at a dizzying pace, driven substantially by innovation in digital communication technology. This dynamism has had limited effects in the electricity industry, and institutional change within the industry to adapt to these changes has been variable. Many states in the U.S. do not participate in open wholesale markets, and even more states have either no retail markets or have implemented such a restricted and politicized version of retail markets that potential retail market entrants still face substantial entry barriers. This book explores institutional design and regulatory policies in the US electricity industry that can adapt to unknown and changing conditions produced by economic, social, and technological change.

Whereas the dominant regulatory paradigm has traditionally been centralized economic and physical control based on natural monopoly theory and power systems engineering, the ideas presented and synthesized by Kiesling compose a different paradigm – decentralized economic and physical coordination through contracts, transactions, price signals, and integrated intertemporal wholesale and retail markets. Digital communication technology, and its increasing pervasiveness and affordability, make this decentralized coordination possible. Kiesling argues that with decentralized coordination, distributed agents themselves control part of the system, and in aggregate their actions produce order. Technology makes this order feasible, but the institutions, the rules governing the interaction of agents in the system, contribute substantially to whether or not order can emerge from this decentralized coordination process.

It’s available now (add to cart!) at the Routledge site.

Lisa Gold, researcher

Lynne Kiesling

OK, I *love love love* my job, love being an economist, love teaching, love talking to policymakers and firms about technology and policy … but I am having serious career envy of Lisa Gold (as represented at her new blog), who did research for Neal Stephenson’s Baroque Cycle trilogy. If I got this kind of endorsement from him:

Ms. Gold roams at ease through the most difficult and recondite topics, like an Indiana Jones of the world of letters.

I think I might just expire in ecstasy. Being able to immerse oneself in problem solving by doing literary research through the arcana of centuries would just be too.much.fun.

Her blog also promises to offer lots of advice for writers and researchers, which will be useful even to those of us whose daily perambulations involve more mundane non-fiction. Take, for example, the usage note from the Oxford American Writer’s Thesaurus for “utilize” that she quotes:

This is a puff-word. Since it does nothing that good old use doesn’t do, its extra letters and syllables don’t make a writer seem smarter. Rather, using utilize makes you seem like either a pompous twit or someone so insecure that he’ll use pointlessly big words in an attempt to look smart… What’s worth remembering about puff-words is something that good writing teachers spend a lot of time drumming into undergrads: “Formal writing” does not mean gratuitously fancy writing; it means clean, clear, maximally considerate writing.

I think I’m in platonic syntatical love … And I’m definitely going to use her advice in teaching my freshman seminar this fall!

Massive hat tip to Cory Doctorow for the link.