Restructured Power System

TRADITIONAL POWER INDUSTRY:

 The electric power industry has been operated as a vertically integrated regulated
monopoly that owned the generation, transmission and distribution facilities.
 It has also been a local monopoly, in the sense that in any area one company or
government agency sold electric power and services to all customers.
 The regulations are generally imposed by the government or the government
authority. Restructure of Power Systems
 These essentially represent a set of rules or
framework that the government has
imposed so as to run the system smoothly
and with discipline, without undue
advantage to any particular entity at the
cost of end consumer.
 All practical power systems of earlier days
used to be regulated by the government.
Fig.1 : Basic structure of power system.
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CHARACTERISTICS OF TRADITIONAL POWER INDUSTRY:

1. Monopoly franchise : Only the national or local electric utility was permitted to
produce, transmit, distribute and sell commercial electric power within its service
territory.
2. Obligation to serve : The utility had to provide electricity for the needs of all
consumers in its service area, not just those that were profitable.
3. Regulatory oversight : The utility’s business and operating practices had to
confirm to guidelines and rules set down by government regulators.
4. Regulated rates : The electric utility’s rates were either set or regulated in
accordance with government regulatory rules and guidelines.
5. Guaranteed rate of return : The government guaranteed that regulated rules
would provide the electric utility with a reasonable or fair profit margin above its
cost.
6. Least cost operation : The electric utility was required to operate in a manner
that minimized overall revenue requirements.

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 Need to Restructure of Systems:
 Vertically integrated monopolies could not provide services as efficiently as
competitive firms as in airline, telephone and natural and gas industries.
 The electric power industry plans to improve its efficiency by providing a more
reliable energy at least cost to customers through restructuring.
 A competition is guaranteed by establishing a restructured environment in
which customers could choose to buy from different suppliers and change
suppliers as they wish in order to pay market based rates.

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UNBUNDLING GENERATION, TRANSMISSION AND DISTRIBUTION:

 To implement competition, vertically integrated utilities are required to unbundle

their retail services into generation, transmission and distribution.
 Competition is introduced in the generation activity by allowing other private
participants in this segment.
 In contrast to the vertically integrated case where all the generation is owned by the
same utility, there is a scope for private players to sell their generation at
competitive prices.
 The generators owned by the earlier vertically integrated utility will then compete
with these private generators.
 Generation utilities will no longer have a monopoly, small businesses will be free to
sign contract for buying power from cheaper sources, and utilities will be obligated
to deliver or wheel power over existing lines for a fee (non- discriminatory).
 The vertically integrated system is steadily restructuring to a more market based
system in which competition will replace the role of regulation in setting the price of
electric power.

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 The main objective of electric power restructuring is to significantly reduce the cost
of power charged to small businesses and consumers.
 The cost of electricity generation will be reduced by driving prices through market
forces and more competition.
 This task will be accomplished by creating an open access environment that will
allow consumers to choose a provider for electric energy.
 On April 24,1996 Federal Energy Regulatory Commission (FERC) Issued Final rule 888
requiring all public utilities that own, control or operate facilities for transmitting
electric energy in interstate commerce to file open access non-discriminatory tariffs.
 This rule caused public utilities to functionally unbundle wholesale generation and
transmission services.
 The basic premise of transmission open access is that the transmission
owners/providers treat all transmission users on a non-discriminatory and
comparable basis regarding access to and use of the transmission system and
services.
 In addition FERC issued Rule 889, for the development of an electronic
communication system called Open Access Same Time Information System (OASIS).

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BENEFITS OF DEREGULATION:

 The competitive environment offers a good range of benefits for the customers as
well as the private entities.
 It is claimed that some of the significant benefits of power industry deregulation
would include:
1. Electricity price will go down: It is a common understanding that the
competitive prices are lesser than the monopolist prices. It significantly reduces
the cost of power charged to small business and customers. The cost of
electricity generation will be reduced by driving prices through market forces
and more competition.
2. Choice for customers: The customer will have choice for its retailer. The retailers
will compete not only on the price offered but also on the other facilities
provided to the customers. These could include better plans, better reliability,
better quality, etc. This will provide greater incentives for short and long term
efficiencies than is provided by economic regulation.
3. Customer-centric service: The retailers would provide better service than what
the monopolist would do.

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BENEFITS OF DEREGULATION:

4. Innovation: The regulatory process and lack of competition gave electric

utilities no incentive to improve or to take risks on new ideas that might
increase the customer value.
5. Under deregulated environment: The electric utility will always try to innovate
something for the betterment of service and in turn save costs and maximize
the profit.
6. Business opportunities: Restructuring in electricity industry will create new
business opportunities where new firms selling new products and services will
appear, consumers will have alternatives in buying electricity services, and new
technologies such as metering and telecommunication devices will develop.

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DISADVANTAGES OF DEREGULATION:

1. Implementation: Improper implementation or hasty implementation of

restructuring may lead to very high whole sale market prices leading to
electricity crisis like that happened in California in 2000-2001, which threatened
to wreck its economy and caused collateral damage throughout the West.
2. Employee Uncertainty: Restructuring often causes employees to panic and
wonder how the changes will affect their job security. When the news gets out
that the company is restructuring, some employees may begin looking for new
employment.
3. Stress: The stress of the restructuring sometimes takes away from the staff's
focus on their actual work.

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 STRUCTURAL COMPONENTS OF RESTRUCTURED SYSTEM:

 The structural components representing various segments of the electricity

market as:
1. Generation Companies (GENCOS),
2. Power Marketers (PM),
3. Power Exchange (PX),
4. Scheduling Coordinators (SC),
5. Independent System Operator (ISO)
6. Ancillary Services (AS),
7. Transmission Owners (TO),
Fig. 1: Structural components of various segments.
8. Retail Service Providers (R) and
9. Distribution Companies (DISCOS):

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1. GENCOS (Generating Company) :
a) Gencos is the primary generation sectors.
b) Gencos is an owner-operator of one or more generators that runs them and
bids the power into the competitive marketplace.
c) Open transmission access allows Gencos to access the transmission network
without distinction and competition.

2. Power Marketer:
a) Power Marketers is the secondary generation sectors.
b) An agent for generation facilities.
c) It markets power on behalf of the generators, may arrange transmission or
ancillary services as needed, considered as an intermediary between the
buyer and the seller and expected to reduce prices for customers.

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3. Transmission Owners/Providers (TO):
 The basic premise of transmission open access is that the transmission
owners/providers treat all transmission users on a non-discriminatory and
comparable basis regarding access and use of the transmission system and
services.
 This requirement could be difficult to ensure if the transmission owners have any
financial interests in energy generation or supply.
 A general trend is, therefore to designate an Independent System Operator (ISO) to
operate the transmission system and facilitate provision of transmission services.
 Maintenance of the transmission system remains the responsibility of the
transmission owners.

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4. Disco (Distribution Company):
 It is the owner-operator of the local power delivery system, which delivers power
to individual businesses and homeowners.
 In some places, the local distribution function is combined with retail function, i.e.
to buy wholesale electricity either through the spot market or through direct
contracts with Gencos and supply electricity to the end use customers.
 The Discos does not sell the power.
 It only owns and operates the local distribution system, and obtains its revenue by
wheeling electric power through its network.

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5. Power Exchange (PX):
 Even though short term and long term financial energy transactions could be in
bilateral forms in the electricity industry where contracted parties agree
individually for certain terms such as price, availability and quality of products,
industry restructuring proposals have concluded the necessity of creating a new
market place to trade energy and other services in a competitive manner.
 This market place is termed as Power Exchange(PX) or sometimes called spot price
pool.
 This market place permits different participants to sell and buy energy and other
services in a competitive way based on quantity bids and prices.
 Participants include utilities, power marketers, brokers , load aggregators, retailers,
large industrial customers and co-generators.
 PX is a new independent, non-government and non-profit entity which accepts
schedules for loads and generation resources.
 It provides a competitive market place by running an electronic auction where
market participants buy and sell electricity and can do business quickly and easily.

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 Through an electronic auction, PX establishes an MCP for each hour of the
following day for trades between buyers (demands) and sellers(suppliers).
 In this market place PX does not deal with small consumers.
 PX manages settlement and credit arrangements for scheduling and balancing of
loads and generation resources.
 It submits balanced demand and supply schedules for successful bidders to ISO
(Independent System Operator) and performs settlement functions with ISO as
well as PX participants such as UDCs (Utility Distribution Companies), marketers,
aggregators etc.
 It also submits ancillary service bids to ISO for maintaining system reliability,
adjustment bids.
 PX guarantees an equal and non-discriminatory access and competitive
opportunities to all participants.

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6. Electric Service Provider(ESP):
a. Broker: An agent for either entities in negotiating contracts to purchase and /or buy
electric energy and other services without owing any transmission or generation
facilities and at the same time does not take ownership of the energy purchased or
sold for its agents.
b. Load Aggregator: Any marketer, broker, public agency, city, country or special
district, that combines the loads of multiple end-use-consumers in facilitating the
sale and purchase of electric energy, transmission, and other services on behalf of
these customers. Load aggregators are specialised in bringing buyers together, may
arrange for additional services, and negotiate contract terms with retailers and
energy service companies for their clients.
c. Retailers: An ESP that can be aggregators, brokers and marketers who enters into a
direct access transaction with an end-use-customer. They compete on the basis of
price and services to reach and sell only electricity or electricity and other services.
d. Co-generator: An entity that owns a generation unit that produces electricity and
another form of useful thermal energy such as heat or steam to be used for
industrial , commercial, heating or cooling purposes, and cogeneration is the
simultaneous production of both usable heat or steam and electricity from a
common fuel source.

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7. Scheduling Coordinators (SC):
 SCs arrange trading between generators and customers.
 SC plays an intermediary between ISO, retailers and customers.
 Each SC submits balanced schedules and provides settlement ready data to ISO.
 Each SC maintains a year around, 24 hour scheduling centre and provides non
emergency operating instructions to generators and retailers.
 Each SC provides the ISO with its customers demand, supply schedule and
transmission use and ISO runs the information through a computer program to check
for transmission congestion.
 If no congestion exists, ISO will send approval signal to the SC, otherwise the SC will
be advised to sell, buy or trade power to resolve the situation.
 The ISO may provide suggested alternatives to the SC for removing the congestion.
 SC plays a critical role in restructured power systems.
 Moreover SC’s may negotiate bilateral contract with or between its participants,
aggregate contracts between market participants, act as an Electric Service Provider,
deliver services and sign direct retail access contracts with consumers.
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  SCs may also own, contract for or broker generation, and bundle generation and
load.
 In the day-ahead and hour-ahead markets, SC’s schedule at each hour must
balance the power injected into the system and the power extracted from the
system.
 The ISO is not allowed to adjust individual schedules of SCs’ participants
(generators or consumers).
 Only SCs have this power, with one exception in the case of extreme emergency
(such as severe outages) when the ISO is authorized to change generation or/and
load to secure the system.

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8. Independent System Operator (ISO)
 A competitive generation market and retail direct access necessitated an
independent operational control of the grid.
 The independent operation of the grid was not guaranteed without an independent
entity, so it is called Independent System Operator (ISO).
 An ISO is independent of individual market participants such as transmission
owners, generators, distribution companies and end users.
 The basic purpose of ISO is to ensure a fair and a non-discriminatory access to
transmission services and ancillary services to maintain the real-time operation of
the system and facilitate its reliability requirements.

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 ROLE OF ISO:
 The primary objective of the ISO is matching electricity supply with demand as
necessary to ensure reliability.
 ISO should control generation to the extent necessary to maintain reliability and
optimise transmission efficiency.
In Order No.888, FERC developed eleven principles as guidelines to the electric
industry restructuring to form a properly constituted ISO, through which public
utilities could comply with FERCs non-discriminatory transmission tariff
requirements:
a) ISO governance should be structured in a fair and non discriminatory
manner.
b) An ISO and its employees should have no financial interest in the economic
performance of any power market participant. An ISO should adopt and
enforce strict conflict of interest standards.
c) An ISO should provide open access to the transmission system and all
services under its control at non-pancaked rates pursuant to a single,
unbundled, grid-wide tariff that applies to all eligible users in a non-
discriminatory manner.
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d. An ISO should have the primary responsibility in ensuring short-term reliability of
grid operations. Its role in this responsibility should be well defined and comply with
applicable standards set by NERC(North American Electricity Reliability Corporation)
and regional reliability council.
e. An ISO should have control over the operation of interconnected transmission
facilities within its region.
f. An ISO should identify constraints on the system and be able to take operational
actions to relieve these constraints within the trading rules established by the
governing body. These rules should promote efficient trading.
g. An ISO should have appropriate incentives for efficient management and
administration and should procure services needed for such management and
administration in an open market.
h. An ISOs transmission and ancillary services pricing policies should promote the
efficient use of and investment in generation, transmission and consumption. An ISO
or a Regional Transmission Group (RTG) of which the ISO is a member should
conduct such studies as may be necessary to identify operational problems or
appropriate expansions.
i. An ISO should make transmission system information publicly available on a timely
basis via an electronic information network (OASIS) consistent with the commissions
requirements.
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i. An ISO should develop mechanisms to co-ordinate its activities with neighbouring
control areas.
j. An ISO should establish an Alternate Dispute Resolution (ADR) process to resolve
disputes in the first instance.
 An ISO is mainly responsible for maintaining system integrity by acquiring resources
necessary to remove transmission violations, balance the system in second to second
manner and maintain system frequency at an acceptable level to retain stability.
 As per FERC order 888, each ISO may take one of the following structures:
1. The first structure is mainly concerned with maintaining the transmission
reliability by operating the power market to the extent that the ISO would
schedule transfers in a constrained transmission system . An example of this
proposal is Midwest ISO.
2. The second proposal for a ISO includes a PX that is integral to the ISOs
operation. In some proposal as those of the UK and PJM interconnection, the PX
would function within the same organisation and under the control of the ISO.
The ISO is responsible for dispatching all generators and would set the price of
energy at each hour on the highest price bid in the market.

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 9. Ancillary Services (AS):
 Ancillary services are defined as services which are required to support the
transmission of capacity and energy from resources to loads while keeping a
reliable operation of the transmission system of a transmission provider in
accordance with good utility practice.
 Ancillary service providers supply the transmission network support services that
are needed for reliable operation of the power system.
 In its order 888, FERC has defined six ancillary services that must be provided by
or made available through transmission providers.
 They are
1. Scheduling Control and Dispatch services
2. Reactive supply and voltage control
3. Regulation and frequency response services
4. Energy imbalance service
5. Operating reserve, spinning and supplemental reserve services
6. Transmission constraint mitigation (congestion management).

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  Transmission customers may self-provide these services or buy them through one
of the following methods:
a) Providers of these services advertise their availability via the Open Access
Same Time Information System (OASIS) or commercial exchanges
b) ISO provides these services in real time and charges transmission users.

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RESTRUCTURING MODELS:

 Three major models are being discussed as alternatives to the current vertically
integrated monopoly. The three models are:
1. Pool Co Model
2. Bilateral Contract Model
3. Hybrid Model

1. PoolCo Model:
 A PoolCo is defined as a centralized market place that clears the market for
buyers and sellers where electric power sellers/buyers submit bids and prices
into the pool for the amounts of energy that they are willing to sell/buy.
 The main characteristic of this model is the establishment of independently
owned wholesale power pools served by interconnected transmission systems.
 This pool becomes a centralized clearing market for trading electricity which
would implement competition by forcing distribution utilities to purchase their
power from the PoolCo instead of trading with generating companies.

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 These companies sell power at a market clearing price (MCP) defined by the
PoolCo, instead of a price which is based on generation cost (as is the case in a
vertically integrated monopoly).
 The final price for spot market power (spot markets is where market generators are
paid for the electricity that they have sold to the pool and market consumers are
charged for their electricity consumption.) may exceed MCP to account for charges
that the ISO could obligate customers to pay for the associated ancillary services
and to cover ISO’s overhead costs.
 PoolCo does not own any generation or transmission components and centrally
dispatches all generating units within the service jurisdiction of the pool.
 In a PoolCo, sellers and buyers submit their bids to inject power into and out of the
pool. Sellers compete for the right to inject power into the grid, not for specific
customers.
 If a power provider bids too high, it may not be able to sell power. On the other
hand, buyers compete for buying power and if their bids are too low, they may not
be getting any power.
 In this market, low cost generators would essentially be rewarded. Power pools
would implement the economic dispatch and produce a single price for electricity,
giving participants a clear signal for consumption and investment decisions.

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2. Bilateral Contracts (Direct Access) Model:
 The Bilateral Contracts model has two main characteristics that would distinguish it
from the PoolCo model.
 These two characteristics are: the ISO’s role is more limited; and buyers and sellers
could negotiate directly in the marketplace.
 This model permits direct contracts between customers and generators without
entering into pooling arrangements.
 In this model, small customers’ aggregation is essential to ensure that they would
benefit from competition.
 By establishing non-discriminatory access and pricing rules for transmission and
distribution systems, direct sales of power over a utility’s transmission and
distribution systems are guaranteed.
 Wholesale suppliers would pay transmission charges to a transmission company to
acquire access to the transmission grid and pays similar charges to a distribution
company to acquire access to the local distribution grid.
 In this model, a distribution company may function as an aggregator for a large
number of retail customers in supplying a long-term capacity.
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 Any two contracted parties would agree on contract terms such as price, quantity
and locations, and generation providers would inform the ISO on how its hourly
generators would be dispatched.
 The ISO would make sure that sufficient resources are available to finalize the
transactions and maintain the system reliability.
 To maintain reliability in real time, the suppliers would supply incremental and
decremental energy bids to prevent transmission flow congestion.

3. Hybrid Model:
 The hybrid model combines various features of the previous two models.
 The hybrid model differs from the PoolCo model as utilizing the PX is not obligatory
and customers are allowed to sign bilateral contracts and choose suppliers from the
pool.
 The California model is an example of the hybrid model.
 This structure has advantages over a mandatory pool as it provides end-users with
the maximum flexibility to purchase from either the pool or directly from suppliers.

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