How Organized Wholesale Markets Work

Foreword

Foreword

This professional reference is one of a series Energy Compliance, Inc. publishes for registered entities and the people who run their compliance programs.

I’ve spent more than thirty years on every side of the bulk electric system. I’ve operated control centers as a Reliability Coordinator, Transmission Operator, and Power System Operator. I’ve audited grid facilities and signed off on findings as a senior compliance auditor. I’ve worked enforcement matters from inside the regulator’s process. For the last several years I’ve advised registered entities directly through the firm I founded.

The entities that do reliability well share a common habit. They take the standards seriously without confusing them with reliability itself. They know that a NERC Reliability Standard is a floor, not a ceiling. They know that compliance is something an auditor evaluates, but reliability is something a system either delivers or doesn’t. They prepare for audits by building programs that survive real questions, not binders that look thick.

That’s the perspective these references try to share. Each one focuses on a single topic. A standard family, an operational function, a regulatory framework, or an emerging industry challenge. Each one walks through how the topic actually works.

These references are written for the compliance manager who wants to understand the system, not just memorize requirements. For the legal counsel who has to brief a board honestly. For the senior operator who’s been told that compliance and reliability are the same thing and suspects they aren’t. And for the new compliance hire who got handed a binder and told good luck.

These references aren’t marketing material disguised as content. They’re the result of three decades of doing this work and watching it succeed and fail. I’ve written them in the same voice I use in a control room or in front of a Regional Entity audit team. Direct, evidence-grounded, honest about what the standards do and do not require.

Energy Compliance exists because most of the consulting offered to registered entities today is structured for billable hours rather than for outcomes. Every engagement is led by one senior practitioner. We don’t bring five people to a meeting that needs one. We automate the work that should be automated. We apply senior judgment to the work that requires it. If that approach matches what you’re looking for in a compliance partner, the back of this reference has our contact information.

If not, the reference still belongs to you. Take what’s useful. Apply it well. And remember the only test that ultimately matters: when the system needs to perform, does it?

Rob Smith, Founder, Energy Compliance, Inc.

EC-WP-401 How the Organized Wholesale Electric Markets Work

Chapter 1

Institutional Purpose of Organized Wholesale Electric Markets

through the economic overlay to their underlying relationships with the grid, this report provides the foundational knowledge that stakeholders need to recognize the role that organized wholesale power markets play in supporting high reliability of the Grid within the overall institutional framework of Grid reliability.

Incentives for Pricing Responsibility Wholesale markets for electricity were not established as efficient market institutions or commerce institutions per se. Rather their institutional form was established to address the operational and coordination challenges of managing real-time system operation on a wide area transmission system comprised of many independent resources and retailers while maintaining centralized generation and transmission control. The electricity market acts as a medium to translate system requirements into behavior of resources on the grid, while at the same time enabling real-time control of the grid.

In principle an organized market is an institution designed to overcome the shortcomings of a decentralized planning of a highly coupled physical system like an electricity network. In particular, the physical system of interest is characterized by at least three peculiar facts. First, it is not economically feasible to store economically significant amounts of energy in the form that is actually produced and consumed. Second, the system must be continuously balanced. Third, the physical law (ohm’s law) that the system obeys makes the delivery of energy from a given production point to a given consumption point depend on a set of circumstances that are neither under the control of producers, nor of consumers. Thus, letting the production and consumption decisions be determined by bilateral decentralized negotiations among individual producers and consumers leads to outcomes that are mutually inconsistent with the requirement of satisfactory functioning of the system. In other words, it is necessary to impose a coordination mechanism, in the form of an organized market, that forces each individual to behave in a way that is consistent with the constraints and needs of the system as a whole.

Standardization is the fundamental institutional logic that underpins the operation of organized markets. These markets introduce certain characteristics to goods, rules for membership, and procedures for the settling of transactions in order to provide rules to reduce complexity to a minimum resulting from bilateral negotiations between thousands of possible counterparties. The standardization rules of organized markets help in enhancing reliability. System operators can assume a large number of parameters to

take into account in real time to know how the resources of the network can be used in accordance with constraints and operating margins of the equipment of the network. Markets are seen more as coordination mechanisms than as commercial places.

Reliability is a key element in market design. The system constraints are recognized in the market design. The transmission limits, the reserve requirements, the contingency criteria are all included in the market clearing algorithm to ensure that the scheduled generation and demand are physically deliverable. The

market optimization is therefore performed under the constraint of reliability rules defined by both technical and operational standards. The final schedule obtained from the market is a reflection of both the economic preference of the market participants and the reliability constraints.

Organized markets set priorities also. In the absence of market structures decisions about which resources will be called upon to supply new demand because of a change in system condition is very much a bilateral or operational judgement. In markets it is specified by rule and is a necessary part of providing reliability through a structured response to system changes with the maximum degree of predictability and uniformity in the least number of individual instances.

While markets provide a variety of functions at times of normal operation, during periods of system stress markets clearly serve to help maintain reliability. The economics of scarcity pricing, buying or pricing into the reserve market, and other types of uplifts are intended to indicate the level of supply and demand within a system, and to reflect the amount of capacity and reserve needed to meet customer requirements, but are not an economic reflection of real scarcity. These market mechanisms can impact the behavior of all participants and provide important reliability enhancing effects, without the need for operational control of the grid.

It is a mistake to confuse the institutional role of markets with the ephemeral and often turbulent effects to which market actions lead. Turbulence, controversy and politics inevitably come with the territory. Obscuring the market’s underlying stabilizing role will continue to happen, in that people tend to mistake volatile market effects or socially unacceptable market outcomes for inherent contradictions of markets themselves. While the short-term impacts of markets are inherently open to discussion, the underlying constraints and costs they reveal have not changed.

All the activities carried out in an organized wholesale market aim to establish a framework of accountability. With transparent rules and outcomes that are easy to observe, markets enable regulation, reliability standards bodies, and others to determine

whether system requirements are being met and whether market design remains consistent with reliability standards. Accountability without blurring the lines between the commercial and reliability functions.

The institutional purpose of organized wholesale electric markets is fundamental to analyzing individual market design features. Market designs and the corresponding rules for trading energy, capacity and ancillary services define how each is used to preserve each of the reliability goals. Understanding this institutional purpose explains why design features are specified as such, and hence also why markets have a role in reliability governance that is more than just economic.

End-of-Chapter Summary

We examine the organized wholesale electric market’s institutional role from a system reliability perspective. While economic theories portray wholesale electric markets as price-setting arenas in which supply and demand determine the marginal price of electricity, we show that such markets play an institutional role far more complex. Because participation in such markets is governed by rules that determine who participates and how they act, constraints inherent in the system are built into the market structure, and supply and demand are modified so that market participation reflects the needs of the system, wholesale electric markets serve an institutional role similar to that of other coordination mechanisms that support system reliability. Their institutional role provides the framework through which particular designs within the market’s structure can be evaluated from a system reliability perspective.

Chapter 2

Energy Market Constructs and Reliability Alignment

Energy markets are probably the most visible part of the wholesale electric market. Their main function is that of price formation and trading. But from a reliability perspective, energy market structures are used to perform an underlying function of great significance to ensure that the resources required in real time and in advance are appropriately marshaled in a way consistent with system constraints and operating procedures. Energy markets are built to reflect the hour-to-hour need to manage supply and demand in a grid whose physical transmission constraints must at all times be recognized. Energy market constructs transform system conditions into dispatch results through mechanisms of scheduling and trading. These processes utilize load forecasts, resource offerings and network constraints to produce an economical schedule that is technically feasible. Reliability is a built-in feature of this construct as the operating conditions and contingency requirements, as well as system security constraints act as boundaries for the market outcome. Temporal characteristics of energy markets differ depending on reliability time frames. The day-ahead market provides a predictive mechanism in which Generation resources are committed and schedules are constructed based on projected real time conditions. The anticipation of the system real time state allows for reliability measures such as resource planning to address potential constraints, contingencies preparation, and management of uncertainty prior to occurrence. Real-time markets subsequently adjust the day-ahead scheduling to meet real-time conditions and to ensure supply and demand balance and stability. Energy market pricing not only serves as an economic tool, but it can also convey reliability information. The locational pricing variations embedded in that pricing reflect constraints in the transmission system and periods of system stress, and can thereby give insights into capacity constraints and situations requiring closer monitoring. The energy market pricing does not create these reliability constraints – it only reveals them for all to see and for market participants and regulatory bodies to take note. Energy markets do not operate independently of operational authority. The system operator has the ability to intervene in real time if operational reliability conditions necessitate taking actions that differ from those determined through the market. This highlights the fact that energy markets are a support tool for operational decisions that are carried out under the authority of the reliability standards. Energy market structures also have an indirect impact on long-term reliability. Low prices for extended periods of time and high prices for brief periods of time can indicate where the grid may be constrained or where resources are insufficient. This information is then used in planning models and discussions about energy market design. While energy

markets are not intended to provide resource adequacy, they are an important source of information for reliability and governance decisions. Energy markets and reliability are aligned for good reason. The design of the market structures embeds knowledge of system constraints and operating procedures in a transparent and predictable manner. When this alignment is preserved, energy markets can support high performance, decentralized resource behavior in wide area systems without the need for centrally owned or controlled assets. One can develop an understanding of energy market structures, products and processes with a reliability perspective. This understanding can serve as a basis to further investigate other market mechanisms. Capacity and ancillary service markets are developed to cover reliability aspects that cannot be addressed through energy markets alone. They are inherently linked to the energy market structures, products and processes, and thus build on the coordination framework established through energy markets.

End-of-Chapter Summary

The purpose of the design of energy markets is to ensure energy supply reliability by utilizing market mechanisms to organize the quantities of energy products supplied and demanded in various time scales through incorporation of energy system constraints and operating requirements in market pricing and scheduling. Markets that match supply and demand at all levels of planning, without diminishing grid management control, are a crucial element of the reliability-through-market design.

Chapter 3

Capacity Market Constructs and Resource Adequacy Context

Capacity markets Existence of capacity markets relates to a aspect of reliability other than real-time, balance and short-term scheduling. The purpose of these institutions is to ensure resource adequacy by forecasting resource capacity required to satisfy system peak loads under stress or contingency conditions. From a reliability framework perspective, capacity markets address temporal and investment related issues that cannot be managed in energy markets. Resource adequacy is a term that generally refers to the ability of the transmission and generation resources of a grid or a utility to supply the predicted future load and reserve requirements of that area of the system over some future planning period. Resource adequacy deals with future potential system problems as of some future date while operational reliability or real time reliability deals with current system problems. Capacity market products create an obligation and/or an incentive which ties the future resource adequacy needs of the grid to certain “building blocks” or constructs. Because the pricing of capacity markets is based on multi year ahead capacity requirements, the procurement of capacity is not typically tied to annual or hourly operating periods. The temporal separation between capacity market operations and the reliability events they seek to prevent is important to understand in order to develop effective policies that support planning decisions. In particular, understanding the relationship between capacity market design and planning can shed light on how resources and their associated reliability impacts are accounted for in advance of actual imbalances or power shortages. This discussion primarily focuses on the shorter term dynamics of load and resource dynamics and less so on longer-term trends. Basic to understanding capacity market planning is the ability to forecast future load and understand the capacity requirements that will need to be met to ensure sufficient reliability margin. This information allows for more structured planning and analysis to assess whether the expected amount of available capacity will be sufficient to meet the loads and account for uncertainties of uncertain resource performance. The reliability function of capacity constructs is

rooted in the fact that capacity products focus on availability rather than energy production. Capacity products are designed to measure the degree of capacity commitment to provide capacity during peak hours of system demand, irrespective of the frequency with which resources are called upon to provide energy under normal circumstances. This is because there are a number of low-frequency reliability events that carry high value to end-users, and the energy markets do not fully reflect the level of these

values. Capacity resources also have associated performance metrics related to reliability. These are intended to align the incentives of resource providers with the reliability needs of the system during times of high demand. The specific design of these capacity markets has been varied from region to region, but the underlying reliability concept has been consistent. The purpose of capacity markets has been to insure that the capacity resources that are included in the available capacity calculations are available when needed to counter-act potential reliability risks during peak demand hours. As recently posted on FERC Docket EF6-1231-000, capacity markets do not supplant planner judgment or reliability standards. Capacity markets are in addition to the deterministic and probabilistic planning models which form the basis of assessing resource adequacy based on a priori engineering defined standards. The capacity market auction then uses market mechanisms to bid out the needed capacity resources to meet the assessed need. But still who defines resource adequacy and its associated risk? In this case, it is still the planning world defining these terms and not the competitive capacity market. Capacity constructs are also related to institutional and regulatory aspects. For instance capacity markets may not be needed in places where the State or the utility is held in charge of providing sufficiency. In other cases centralizing capacity auctions can represent a way to impose adequate coordination among the wide variety of market actors present and between different States or areas. This indicates that capacity constructs are not necessarily a natural part of the market mechanism, but rather the result of specific governance choices. Reliabilitywise, capacity markets have their pros and cons. On the pros side, they give us some insight into future forecasted margin as well as some indication of when supply might be constrained and therefore when the available supply or margins are lower. On the cons side, they are a very complex system with a host of uncertain parameters that are subject to change and therefore only provide a rough estimate of supply and demand, along with only a rough estimate of when supply and demand might not meet. All of these variables mean that CM’s need to be designed in sync with key grid planning metrics, performance management and monitoring

mechanisms. To understand capacity market constructs as reliability resources one must look at this in context. As discussed in the overarching paper capacity markets are a means of dealing with the long term adequacy issues that may arise in situations where costs and risks of providing reliability are diffused and not borne directly by customers or individual resources. This does not diminish the role of the traditional standards and planning based resource adequacy regime in the North American electric system.

End-of-Chapter Summary

Capacity market products are used to ensure long-term resource adequacy by setting a forecast of future availability of capacity on the grid under high demand conditions. They provide reliability benefits by complementing the planning analysis and matching the quantities of capacity committed to the

quantities of potential shortages as identified in the planning analysis. The impact of capacity market products is bounded by the design choices made by regulators and utilities and by the broader grid reliability performance.

Chapter 4

Ancillary Service Constructs and Operational Reliability

Ancillary service constructs address reliability needs arising from the dynamic and real-time nature of electric system operations. These needs are different from the energy and capacity needs that are addressed through constructs providing electricity and capacity supplies over specific time periods. Rather than supplying electricity or providing capacity reserves over specific time periods, ancillary services constructs address the need to provide on-line system stability, frequency, voltage, and real time contingency capabilities on a continuous basis. Using reliability analysis as a foundation, the ancillary service constructs provide a regulatory and market-based framework for converting these needs into a set of manageable commodities. Ancillary Services are required because of characteristics of a power system. For example, the power system frequency should be maintained within narrow limits, voltages should be operated within specific margins to allow movement of real power in transmission lines and proper heating in transmission lines and transformers, and the system should be able to readily respond to unexpected loss of generation or transmission facilities. The need for these Ancillary Services is a permanent part of a power system and their provision and determination of amounts required is independent of any market policy that may be adopted. Rather, their provision and amounts to be purchased are governed by normal power system design and operational criteria as established by grid reliability rules and operating procedures. Ancillary service products construct a formal system for procuring these reliability services prior to time of need. Products are just a way of defining certain characteristics or services that are required for providing such reliability, such as ramp rate and restoration capacity products, etc. These products and the corresponding characteristics were not simply created by market designers in a vacuum; rather they can be viewed as an attempt to define reliability requirements in more concrete terms necessary to provide for real-time system reliability. Viewed from an institutional perspective, ancillary service markets disclose the system operating needs required to provide reliability. It enables explicit determination of

the required quantities and compensates the resources that provide them, eliminating the informal relations and assumption of supply that otherwise would prevail. Market disclosure of required system operating capabilities facilitates better understanding and determination by the system operator of available supply capacities needed to cope with anticipated system conditions. Load responding resources are also used to build ancillary service constructs and to aid in priority setting in real time

operations. Resources that provide ancillary services are subject to particular requirements regarding response and do not necessarily follow priority of merit in terms of energy dispatch. The importance of reliability of the ancillary services which must be maintained or switched on under particular conditions means that separate market constructs are needed while still providing for operational discretion when necessary. The Ancillary Services and Energy Markets relationship highlights one of the several layers that support the reliability of the power system. Energy markets provide the basic schedule under which resources will operate and the ancillary services provide the level of flexibility and response that is needed around that basic schedule in order to support reliability. The Ancillary Services constructs are used to ensure that reliability is not a chance or a product of resource voluntary response, but is instead an inherent part of the energy market structure. One of the key considerations for ancillary service designs is oversight. Because the ancillary services have a direct impact on the reliability of the power system, their design definitions, quantities and performance criteria are under close scrutiny by regulatory bodies and reliability entities. Changes to these designs are often driven by increased knowledge of the power system rather than purely economic factors. As system conditions change, the need for ancillary services can change. Changes in system parameters such as resource mix, load characteristics, and inter-regional power flow can all lead to changes in the type and amount of ancillary services required. Ancillary service constructs allow for an adaptive institutional response to these changes without altering the underlying reliability rules. This shows the complex interplay between system physics and market design. The purpose of Ancillary Service constructs as reliability resources in the power system is to realize their function as separate market products appropriately referred to as reliability products. This points out that the Ancillary Service constructs are not merely additional functional features of the power system but rather separate resource elements that constitute reliability supporting mechanisms and thus form an integral part of the market infrastructure in an organized

wholesale market. Thus they represent separate fundamental resource elements in the institutional framework of the power system in complex interconnected networks and, hence, are of essential importance to secure system operation.

End-of-Chapter Summary

Ancillary service constructs are a way of ensuring reliability of operation. Important system stability and spinning reserve requirements are transposed into a market framework through a structured format. The purpose of the ancillary service constructs is to promote transparency, to prioritize the important features and to ensure that reliability requirements are fully integrated into the energy markets, while at the same time ensuring operational freedom and responsibility.

Chapter 5

Interaction Between Market Constructs and Real Time Operations

Energy Imbalance Market Reliability Measures Market structures and real time operations The interactions among market structures and real time operations are critical to understanding how markets can support reliable grid operation while providing for the exercised degree of independent transmission system operation. The energy, capacity and ancillary service markets define a framework of expectations for future system performance. However, these expectations are frequently not met in real time. The interactions among market outcomes and the exercise of operational control are a key to determining the degree of reliability that is provided. Market constructs operate in real time through a set of pre defined rules and procedures governed by a pre-determined schedule of events. These can be as simple as the day-ahead energy schedule or capacity reserves, or as complex as the schedule and associated rules governing the provision of ancillary services. Whatever form these rules and schedules take, their overarching goal is to bring the system into a pre-coordinated state at the start of real time to eliminate or reduce the initial period of uncertainty associated with changes in real-time system conditions and the impact of variable generation and loads on anticipated levels of supply and demand, and known constraints and contingencies. While reliability wise the advance coordination afforded by these rules and associated procedures is necessary, it is not sufficient to accommodate unforeseen changes. While markets are intended to deal with known and predicted differences in supply and demand, real time operations are inherently uncertain and significant volatility, even that which is predictable, cannot be fully captured by market processes. Events such as: Changes in peak demand or shifts in the shape of the load curve Unexpected failures of generation or transmission Plant shut-downs for maintenance Severe weather events or other unforeseen external events Unforeseen interactions of new projects within the system All require some level of operational response. Once operational authority is exercised under the reliability standard to address any of these events, the market outcome is no longer relevant. Actions taken to

manage real-time conditions, including adjustments to the order of merit, resource re-assignment, or utilization of SpC resources, may not be in line with the market schedule. In organized markets, security constraints define the priority hierarchy. An organized market is built on the premise of providing sufficient systems operation capability, rather than imposing restrictions. Generator operators should not have to choose between following market-clearing instructions or maintaining reliability through

discretionary economic decisions such as bypassing prices or altering bids. Instead, the ability to deviate from market results should be provided through well-understood operating procedures and governed through defined accountability protocols. The interaction between markets and operations shows the limits of the economic optimization. The market clearing algorithm calculates an optimum solution within the constraints provided, but operational issues and emergent phenomena cannot all be expressed within those constraints. Operational judgment, which is based on situational awareness and reliability criteria, corrects and supplements what can be expressed in the market rules. This is why markets and operations must be institutionalised within a company but function independently of each other. Market constructs have an influence on real time operations; the energy schedule influences the choice of resources to comprise the baseline, the AS schedules influence the extent to which possible control actions can be used and the definitions of capacity influence the likely make-up of available spare resources. However operational decisions are still determined in real time and are a response to current circumstances and emerging changes in the operating environment. Transparency and accountability processes are key to managing this relationship. Any deviations from market outcome because of reliability actions will be recorded and managed through established procedures and mechanisms. Reliability actions taken to manage the risks associated with volatility will not affect the accountability of generators to price outcomes where there are deviations caused by reliability actions. Market and real time operations interact in many ways which can influence the long-term development of markets. Frequent intervention in the market or recurring operational constraints can be an indication that some aspects of the market design are not in line with the needs of the system. RTOs/ISOs use this operational knowledge to assist in market design discussions and planning assessments, thus ensuring the markets continue to evolve in a manner that is compatible with the real time operations of the grid. The interaction between reliability markets and operational reliability management explores the reasons that market performance is not the sole criterion for evaluating reliability markets. As discussed earlier, markets have to fit into the framework of operational reliability management and be compatible with uncertainty and system security priorities, in order to ensure that operational freedom is maintained and decisions are not frequently necessary to interfere with operational activity, while also ensuring that when interference is necessary, operational freedom is not impaired.

End-of-Chapter Summary

The various types of market structures and real time operations are organized in a hierarchy that takes into account reliability of supply. While markets determine the coordination of schedules and forecasts, operational decisions are made on the basis of real time market information, in order to ensure that the markets do not obstruct reliable operation of the power system under even the most complex and uncertain conditions.

Chapter 6

Reliability Risks, Limitations, and Market Exposure

The wholesale electric market is often examined relative to efficiency, price outcomes and market participant behavior. It is often the reliability significance, and resulting market limitations, that is most evident in their lack of coverage. Reliability risks are disclosed in wholesale electric markets rather than mitigated. Understanding the role of market limitations is important to recognizing how markets may operate as part of a broader reliability framework for addressing potential systemic security issues. A major source of potential trouble in restructured electricity markets stems from the unavoidable abstraction required to translate phenomena of the physical electric system into the terminology of the market. The laws of physics do not allow too much room for arguments about definitions and usage. Energy, capacity and ancillary service markets can at best be seen as crude approximations to somewhat more refined physical requirements. While enabling efficient coordination of system-wide resources at the margins, the resulting definitions, rules and prices may fail to reflect the many intricacies, unique features, locational differentials and unintended consequences inherent in the physics of the power system that cannot be easily and inexpensively quantified. These are the areas where true reliability risks remain. Temporal mismatch is another constraint in the power system. The electricity market operates on discrete intervals and planning horizons, but reliability events in the power system may occur on arbitrarily short timescales, or on very long timescales that are uncertain a priori. Scarcity conditions such as cascading failures, or severe weather events may develop more quickly than they can be addressed through the market. In such scenarios, the system may require additional real time operations in order to maintain reliability. Resource and capacity performance are also market assumptions. A market assumes adequate resource and capacity performance based on capacity and resource assumptions. The capacity constructs are based on the assumption that sufficient skilled resources will be available when required and the ancillary service constructs assume that the actual response characteristics will correspond to the modeled characteristics. Deviations from these assumptions can lead to reliability risks, particularly during stressed conditions where correlated outages and performance degradation are more likely to occur. That being said, risk associated with market exposure is a surface level risk that only highlights the underlying risks and does not do anything to mitigate them. Transmission constraints are one of the areas where market effectiveness is often challenged. Although the market uses transmission limits as derived from the analysis of capacity transfer functions and constricted optimum power flow, actual system conditions may differ from these analysis results owing

to planned or unforeseen transmission outages, deratings, or changes in power flow that are sometimes above expected levels. Congestion pricing is a means of economically managing transmission constraints, but pricing does not clear physical transmission constraints. Therefore, reliability measures may be necessary to mitigate local transmission problems occurring when generators follow price signals and grid reliability is at risk. Behavioral considerations further complicate the relationship between markets and reliability. Market participants respond to incentives embedded in constructs, which may not always align perfectly with reliability objectives under all conditions. While oversight mechanisms exist to monitor and address problematic behavior, the reliance on economic incentives introduces exposure to strategic response that must be managed through governance and regulation rather than operational control alone. Another way in which market exposure affects reliability risk is through its impact on public and policy perception. Price spikes, power shortages and other market-driven events that occur occasionally can put the spotlight on aspects of the power system that are not normally visible to the public. Because these problems arise in market-based systems as opposed to being suppressed by regulatory intervention, they are often characterized as symptoms of “deregulation” or “market volatility.” They are often described as “problems caused by the market.” What is lost in the rhetoric is that the market is simply bringing to the surface the problems that were always present in the power system but are now visible only occasionally. The market brings to light problems or “stress” that occur from time to time but does not create them. Although the limitations of markets affect the reliability of markets, the reliability of markets is not diminished by the fact that markets are limited as tools for the supply and delivery of energy. Rather, the limitations of markets serve to define the boundaries within which the markets can be effectively used by the operators of the transmission system, by regulatory bodies and by other affected parties. Within these defined boundaries, markets can be effectively used while still preserving other elements such as reliability standards, planning criteria and operational authority. Reliability governance is based on the assumption that no

single solution can be implemented to manage risk on the grid. After implementing all the rules of an organized market to provide coordination, transparency and alignment of incentives, there will always be risks to manage in parallel. Hence, the ability of markets to act as effective reliability resources is necessarily predicated on the overall reliability of the grid.

End-of-Chapter Summary

This dissertation addresses the reliability challenge arising from organized wholesale electric markets that discover reliability risks and constraints rather than eliminate them. These constraints can arise due to a variety of causes, ranging from abstraction, temporal mismatch, performance assumptions, transmission constraints, to the behavior of participants in these new wholesale markets. Understanding these constraints demonstrates that markets are mere coordination mechanisms to ensure reliability

within well defined and understood boundaries, and that markets therefore do not constitute a general remedy to deal with reliability risks inherent in power systems.

Chapter 7

Governance, Oversight, and Accountability in Market Environments

Organization: Wholesale electric markets that are operated on a collective basis (i.e., as a wholesale market) generally operate within a governance and regulatory framework that balances the competing needs of providing price responsive services to consumers, while at the same time ensuring reliability and accountability. It is recognized that the activities of the wholesale electric market affect the reliability of the bulk power system, even though the wholesale market does not operate under regulatory authority. Thus, governance is a key factor in helping to ensure that the market design and rules of operation remain consistent with reliability standards and regulatory requirements. All Market governance is based upon the Commission action and order approving and prescribing tariffs for the governance of the market. Market rules, product definitions, settlement procedures and mitigation programs and protocols are all Commission approved and mandated. The RTOs/ISOs act only as Commission approved Process Agents to enforce the Commission’s approved tariffs and market rules. They do not have any discretion to amend or deviate from such approved market rules in any respect unless so directed by the Commission. The surveillance of market activity is reinforced by a market monitoring function. Market monitoring functions are used to analyse the effects of market activity, as well as the behaviour and structure of the actors involved in the market, in order to determine whether any irregularity has been committed, and to verify that the market rules have been properly designed. The market monitoring activity is complementary to the regulation body’s enforcement powers. It consists of providing the information needed for an accurate regulation of the market activities. Reliability oversight under this approach is carried out in parallel under the standards-based regime established by NERC and the Regional Entities. Market participation does not change the reliability obligations of the registered entities. The reliability standards do not change whether or not the output of a generation facility is sold in the market and the compliance reviews evaluate performance on a pre determined set of criteria as opposed to post-market economic results. Hence the parallel reliability oversight ensures that the market structures do not erode the reliability accountability. Complexity of governance arises at the interface of market outcomes and state goals. The state’s choices concerning resources, the design of incentives and regulation can affect market dynamics without changing the underlying market rules. This occurs in regulated markets that must be compatible with the market sovereignty principle of being neutral administrators of federally ordained creations. In organized markets, the politics of governance can provide a means of dealing with the unintended consequences

that arise. Without bestowing policy functions on market participants. Prices, schedules, monitoring reports and planning assessments are some of the information required for ensuring transparency in the governance of a market. Ensuring high levels of transparency in a market is one of the basic principles for market governance. Publication of prices, schedules, monitoring reports and planning assessments to enable external verification of how a market performs and whether its reliability aspects are in line with the observed market performance and transparency in general, allows for better accountability towards regulatory and oversight bodies, customers, end users, reliability organisations and other relevant parties, who can monitor and observe the functioning of the market mechanisms developed for different sets of supply and demand conditions and verify that the market outcomes are in line with the established objectives. accountability is widely distributed rather than being concentrated in a single entity. Thus, individual RTOs and ISOs are accountable for exercising their operational responsibilities in relation to market rules, as are other entities for their operational responsibilities. Likewise, market participants have direct accountability for their adherence to rates and reliability standards, while the regulatory body is charged with ensuring that all of these entities discharge their accountsabilities appropriately. This is a natural consequence of recognizing that reliability and market performance are the products of dynamic interaction rather than the activity of a single actor or institution. Understanding governance and accountability is key to explaining the incremental nature of self organization of markets and their design. Changing a market structure requires approval from possibly several regulatory agencies, public hearings and reliability studies. Slow or constrained pace of change may be frustrating, but it is required to ensure that the underlying market infrastructure does not endanger the reliability of critical infrastructure that may be provided by a market that has yet to adopt new rules or structures. Governance and oversight are elements of an organized market that fall within the reliability function. They

are designed to maintain system stability by providing rules under which market structures allow for the management of risks as they arise, while continuing to align with the broader principles of reliability. Without appropriate governance and oversight, a market will not be able to discipline itself and other stakeholders in such a way as to act as a reliability supporting mechanism to the broader power system.

End-of-Chapter Summary

Governance and oversight mechanisms that constrain and guide the operation of organized wholesale electric markets have a direct impact on market behavior and potential abuse. Tariffs, market monitoring, standards-based reliability oversight, and transparency all play a role in helping to ensure accountability in a decentralized system where no single entity has complete responsibility.

Chapter 8

Market Evolution, System Change, and Reliability Adaptation

Wholesale electric markets are organized entities, operated within an changing system environment. This dynamic environment is a reflection of changing resource and load characteristics, emerging technology advancements and policy requirements, all of which challenge the fundamental design of wholesale markets and corresponding grid reliability performance. In this environment, market evolution is not discretionary – it is a requirement for the sustainability of using wholesale markets as a tool to enhance grid reliability. System change occurs because new assumptions do not fit with the original design of the market construct. Different characteristics of new resources can impact availability, respondability and performance during stressed conditions. New load characteristics, such as changes in peak loads, load variability or increased load sensitivity to changes in price or weather can also occur. These effects need to be accommodated within an organized market, while maintaining the reliability based design elements that are central to the design of the market. Market evolution implies adjustments in the definition of the market product, the size of the trade lots and the settlement mechanisms. The goal of these adjustments is not necessarily an economically optimal behaviour, but rather an adjustment to the actual characteristics of the power system and the levels of performance required, which might not be fully accounted for by the market assumptions. From the reliability point of view, market evolution will be necessary to bridge the gaps between modelling assumptions and real system performances. Indeed markets are representations of power systems and therefore the market model should reflect the power system characteristics, and this often requires adjustment. The pace of system change has given rise to tension points within the governance processes. The reliability risks can arise more quickly than can address via market redesign. Under these circumstances, the short term solutions, operating procedures or business practices are typically employed as a stop gap measure to allow time for development of the longer term market changes. This work brings to light the relationship between markets and operational authority. A variety of market dynamics and institutional constraints limit the extent to which the market evolution can change. In many cases, new changes have to be introduced through lengthy and bureaucratic governance and stakeholder approval processes that inherently entail political and social trade-offs and corresponding levels of governance oversight. While ensuring that proper governance and oversight procedures are in place to prevent inappropriate and irresponsible activity, these additional layers can further exacerbate the degree of time lag between when a change is required and when it is actually introduced. These governance constraints play a

critical role in shaping the extent to which reliability adaptation in electricity markets can effectively tap into knowledge obtained from operational experience. The interaction between market development and planning activities is important. Planning studies help determine that the planned developments in the power system correspond to the reliability requirements identified by means of planning studies, the needs of which cannot be fully met by the existing market structure. The findings of the planning studies should be a starting point for the market design activities, thus making sure that the needed adequacy and operating capacity for the future are provided in a market structure which will correspond to the reliability needs arising from the planned power system developments. In other words, markets should be seen as dynamic tools, which are established on the basis of planning studies rather than being static means of ensuring reliability. While the changing nature of regional electricity markets suggests a dynamic system, the markets are not moving toward a single optimal power system design. Market changes are influenced by the many facets of system design, regulation, and public policy that differ in each region. Reliability goals remain unchanged, but the approaches taken to meet those goals differ from region to region. This heterogeneity is a reflection of the successful, though complex, model of a unified system that is not uniform in the same way that ice cream is uniform. Viewing the evolution of markets as an adaptation for reliability changes the terms of the discussion about the effectiveness of markets. Problems and market redesign are not indicative of market failure, but rather an indication of the ongoing nature of the work required to adjust market design rules to the changing structure of the system. A market design can be considered effective for providing reliable services if it results in markets that enable reliability accountability, while at the same time providing centralized and transparent resource pricing signals.

End-of-Chapter Summary

The organized wholesale electric markets must adjust to the changing conditions on the transmission grid in order to remain relevant as a tool for ensuring reliability. The adjustment process is aimed at matching market design rules to the actual operation of the grid, through a governance process that leverages knowledge of transmission planning and operations. The need for evolution of organized wholesale markets highlights the complex and adaptive nature of systems planning and management, where the grid and market structures are interdependent and subject to dynamic changes through the governance process. The need for adjustment does not stem from a fixed market design that has to be implemented, but rather from the dynamic interplay between grid changes and governance process.

Chapter 9

Boundaries Between Markets and Reliability Authority

One of the signature characteristics of an organized wholesale electric market is that there is a distinction between the market management activities on the one hand and the reliability functions on the other. This distinction was more or less inherent in historical institutional arrangements but has since been intentionally and formally crafted into a regulatory doctrine aimed at ensuring certain aspects of system reliability. Understanding the nature of this market-distinct/reliability-prone boundary is important in and of itself, but it also turns out to be crucial for appreciating the inner workings of organized markets embedded in a general-purpose reliability framework. All markets operate through some form of market product or commodities that embody the construct that transforms what the system requires into an economic signal. The energy schedule, capacity commitments and ancillary service orders are derived from rules-based processes involving input from Market Participants and forecasting of system conditions. While the outcomes derived from these processes serve as basis for the systems’ anticipation of the behavior of the resources, they do not represent operational Reliability directives. Market results are thus all contingent upon the assumptions built into their processes. The reliability authority is based on the reliability functions assigned to the entity in accordance with reliability standards and operating agreements. Some entities are registered by NERC as Reliability First providers and perform functions such as: Balancing transmission operation reliability coordination This authority is mandated by reliability standards and system security requirements rather than by the market. Once a determination of a reliability violation is made, authority personnel may take whatever actions are necessary to avert or mitigate any violation that affects reliability, regardless of any market consequences. In practice the boundary between market and reliability functions is most evident during periods of system stress. When actual supply does not match forecast demand, when resources fail, or when some other event impacts real time operations, market scheduling rules are necessarily supplanted by reliability functions. Thus the need to perform capacity switches to restore supply balance, to take involuntary demand from specific segments of the system, to redispatch resources away from negotiated trades, or to

activate reserve capacity all reflect the basic and overriding principle that sufficient reliability must be provided in a system at all times to protect against loss of reliability due to deviation from market determined plans. It is important to recognize that the existence of the boundary does not constitute a

market failure event. Rather it is a reflection of the institutional fact that in a complex physical system such as here in question, different coordination mechanisms are required at different times. Markets are intended to be a means of limiting the need to exercise authority and of minimizing the extent to which such authority must be exercised in compliance with reliability standards. The boundary is also enforced by accountability mechanisms. Reliability actions are subject to post-event review and/or compliance audit to validate performance to the relevant standard. Market deviations caused by reliability actions are tracked and settle-out procedures are followed. These mechanisms ensure that the exercise of reliability authority is observable, justifiable, and free from financial consequence in cases where economic impacts are affected. What happens if one gets confused about the system boundary? This mis-assignment of system boundaries can lead to misunderstandings and mis expectations. If markets are considered to be within the boundary, people may assume that every challenge related to power delivery should be addressed through the price mechanism and markets, instead of the operation of boundaries and mutual agreements. On the other hand, if reliability initiatives are seen as being outside of the “market boundary” this overlooks the fact that those choices were made in a planned manner in order to provide greater levels and quality of supply than would otherwise be delivered given the need to ensure affordability of that supply. Likewise, if one misunderstands the scope of the “market boundary” this makes it much harder to have an informed understanding of the performance of the market or the regulations that govern reliability in an energy system. The boundaries between markets and reliability authority are also an important factor in design choices. Market designs will need to be designed with the limitations and interrelationships to operational functions in mind. Likewise reliability institutions and their standards and practices must take into account the market structures and mechanisms, and not seek to depend on markets for non-economic aspects of reliability. Understanding the mutual limits of authority will be a key issue in achieving effective interlinkages between markets and reliability institutions. Preserving the boundary between the power market and the reliability grid is key in maintaining the “rules of the game” that underpin the concept that markets enable but do not otherwise control the operation of a reliable grid. This concept is essential to ensure that the market outcome is considered legitimate and by extension that the reliability initiative is seen as objective. In a fully market-based economy that has integrated high voltage grids that are engineered to operate reliably, the concept of separating market and grid governance is vital to maintaining economic efficiency and grid reliability.

End-of-Chapter Summary

Organized wholesale electric markets and reliability authority are the rule-governed entities that operate within a boundary defined by an order of precedent governing priorities of operation. Markets establish coordinately agreed-upon expectations, and the reliability authority enforces in real time market activity under mandatory standards defined by those rules. Preserving this operational boundary is central to

ensuring accountability among the various actors in the system, to achieving coordination in real time among the vast array of operating participants, and to providing the overall reliability of the system as a whole.

Chapter 10

Energy, Adequacy, and Operational Services as Distinct Reliability Functions

Capacity Markets and Electricity Pricing Reforms have created market designs known as “organized wholesale markets”. The language surrounding the design of these wholesale markets is widely accepted and familiar. In fact, the language focuses on particular solutions to specific reliability problems in such a way as to obscure the fact that the various pieces, energy scheduling, forward capacity market products, and other operational services, are dealing with very different problems. Hence, modeling these items as particular “constructs” does not acknowledge that each serves a very different purpose in securing reliability of the power system. Energy scheduling deals with the continuous balancing problem of the power system operation. Coordination is its main reliability contribution. Energy market scheduling achieves regional schedule consistency among the generators and grid resources based on a forecast of regional loads, capacity, and transmission constraints. The contribution of reliability services in Energy Markets is more on the process of achieving the schedule rather than on the price of the economic model itself. In other words, Energy Markets contributions to reliability are more on achieving transmission system and resource compatibility at the margins to prevent a thousands of decentralized actions from resulting in an infeasible or unstable state in the power system. In the world of grid operations there are many types of risks. One of them is forward adequacy. It’s different from real-time reserves in that it deals with the risk of not having enough generation and storage capacity to cover potential peak demand days. It’s more of a planning and grid investment challenge, rather than a real time operational one. The reliability value of having adequate forward looking risk management measures, is that they try to address potential future shortages before they turn into real time supply shortages – thus dealing with issues that can be solved at the planning and investment level, rather than at the last minute of the real time grid operations. The Operational support services deal with time urgency and the need for immediate reaction. The requirements for frequency control, contingency response and voltage support originate from the inherent dynamics of the grid, and are not directly linked to the exposure to market price variability. These services are needed because even a perfectly scheduled grid will experience short term changes and deviations. Thus the reliability contribution of these services is mainly protective in nature, securing the grid stability against rapid changes. If we view

them as distinct concepts, it should become clear why no single market attribute or component can single-handedly secure reliability. Coordination without sufficiency does not avert scarcity; sufficiency without being able to provide adequate responses does not avert disturbances; and being able to provide adequate responses does not avert unnecessary activation of emergency response capacity. The organized market, as we have seen, uses various market design rules to secure each of these properties, using different sets of rules tailored to different time frames. The definition of the categories of Reliability, Capacity, Spinning and Reserve also impacts the level of performance required from each market product. Non-performance of schedule, non-availability during peaks and failure to respond during contingencies are all examples of different reliability risks that have been measured in various ways by different organizations. Functionally separating the reliability functions is critical for good governance of changes to market rules to ensure that the evolution of the market proceeds in a disciplined manner. It is wrong to assume that solutions to adequacy challenges are sufficient to address operational challenges associated with reliability. Similarly, it is incorrect to assume that operational reliability enhancements will be sufficient to address changes brought in to address permanent resource adequacy shortages. Good market design practice requires that market participants and authorities know what aspect of reliability is being addressed, and what is not. Separating Energy Scheduling, Adequacy Coordination and Operations Support as Reliability Functions enhances the communication of activities related to these individual functions with reliability standard bodies. These reliability standards define expected outcomes for each of these reliability functions, although they may utilize varying criteria, timeframes and responsibility mechanisms. Because these standards are not met in a uniform manner in market environments, it is important to understand that these market rules do not supersede these reliability standards. The structured analysis of these reliability functions makes possible more accurate assessments of organized power markets. Their performance is not judged on an identical set of performance criteria, but rather on criteria appropriate to each type of risk that the structural elements of the market were organized to control. This enables more accurate, and therefore more responsive evaluations.

End-of-Chapter Summary

The reliability of an organized wholesale market is ensured through different sets of institutional arrangements that correspond to the different types of system risks. These include energy scheduling for coordination of supply and demand, supply reserves for ensuring adequate supply, and operational support services for providing reliability of supply during disturbance. The separation of these functions highlights the respective contributions of design, incentives and market mechanisms in the overall reliability of the system.

Chapter 11

Reliability Outcomes, Measurement, and Institutional Feedback

Reliability performance in the OWL market does not solely relate to market outcomes or price behaviour. Reliability outcomes are the outcome of the interaction of market, grid operations, planning and standards of reliability. This paper aims to contribute to the understanding of reliability measurement and institutional feedback in the context of OWL wholesale markets. It addresses a number of important questions in relation to how reliability performance should be measured and understood in the context of the wholesale market and how measurements of reliability performance are used to provide institutional feedback and to assess the design and operation of wholesale markets within the reliability framework. Reliability measurement is a function of performance to established standards or criteria and is generally not associated with economic criteria. Performance standards relative to loss of load, operating limits, frequency and disturbance response are the basis for defining system security measures to be observed through reliability studies, event analyses and monitoring. Such measurements are generally unrelated to market transaction determinations. The market exerts only an indirect influence on defining these reliability measurements. The organized market regions will utilize data gathered in real-time from the market activities to assess grid reliability but this data will not be a substitute for grid reliability assessment. The scheduling outcome, system reserves and voltage control operations data are used to demonstrate the state of the grid prior to occurrence of any grid reliability incidents. These data are used to carry out after-event reviews to determine if the Market Rules appropriately reflected system conditions prior to the occurrence of a grid reliability incident. The purpose of the exercise is methodological (i.e. after the fact and indicative) rather than regulatory. Several mechanisms were engaged to facilitate Institutional feedback. Event Reviews carried out under reliability oversight identified performance gaps and coordination failures; Planning Assessments included learning from system experience to prepare future editions of the Adequacy and Transmission Region Assessments; Market Monitoring investigated whether

Market Rules were a cause of the incentives or outcomes that aggravated or unveiled reliability risks. Each of these sources of information acted separately but together formed the basis for institutional learning. This loop allows the markets and reliability organization to maintain their separateness while allowing for a level of flexibility. Markets will not correct the reliability problems of the other markets in isolation. Findings in one market are used to inform the discussions of the grid planning and governance

organization that lead to rule changes, operating procedures changes and planning changes. This allows the needed changes to be based on what really happened in the system as opposed to what the designers thought it would do. There are measurement issues associated with the topic. Some reliability risks such as correlated effects related to the degradation of resources and extreme weather effects may not be fully reflected in the measurements. While an organized market may make these effects visible under stress conditions, new measurement methodologies will be required to properly characterize and understand the nature of these effects. Institutional feedback requires an ability to distinguish between a single event vs a systemic issue. Transparency is very important in this context. While reliability assessments, market performance reviews and event analyses may be made available in the public domain to allow scrutiny and discussion, their primary purpose is to provide an independent verification of events, their impact and the subsequent management of networks in a way that ensures the transparency of reliability outcomes are not influenced by the marketing success of the intervals between disruptions. Reliability outcomes must be managed within the overall reliability governance framework of the network. Why do markets evolve in a piecemeal fashion? Looking at the reliability outcomes that are included in institutional feedback explains part of the answer. The slow motion evolution of the market is the result of accumulated learning rather than a reaction to individual unexpected events. Therefore this approach contributes to security while ensuring that the reliability rules and market incentives stay in sync over time. Reliability measurement and feedback therefore can be seen as the glue that links the real-word of power system operations and the design of market rules. The markets supply the data and the exposure; the reliability frameworks the tools for analysis and assessment of the performance of systems, generation and transmission to name a few; and the governance mechanisms are what convert the results of that analysis into the action needed to ensure that any needed changes are made in a controlled and disciplined manner. And so organized markets function as a subsystem within a larger system architecture focused on reliability.

End-of-Chapter Summary

In an organized market, the reliability performance is measured against the standards and Key Performance Indicators (KPIs) set for reliability and operations, rather than the market outcomes. Institutional feedback for an organized market is derived from reliability studies, planning analyses and oversight reviews and helps shape the direction of the market, while separating market outcomes from reliability performance. This enables ongoing tracking and accountability to ensure the market remains aligned with reliability goals.

Chapter 12

Organized Markets as Coordination Institutions Rather Than Control Systems

Wholesale electricity markets are often described using vocabulary that implies top-down control, optimization, and predictability, words that obscure the real institutional roles markets play in power systems. Markets do not operate their assets or deliver specific quantities of energy in the operating sense. Their roles are more about coordinating complex systems of disparate ownership and decisionmaking authority to deliver reliability without the need for centralized control of individual resources. Coordination is needed because of the inherent characteristics of the electric power industry. Generation, transmission and load are all owned and operated by separate, typically competing, organizations with potentially different objectives, commitments and risk positions. Without some coordination among these functions the uncoordinated demand and supply decisions could be inconsistent with power system reliability. An organized market supplies an institutional framework to accomplish the necessary coordination between the demand and supply functions and to provide the appropriate link between the power system reliability constraints and the electricity market. As observed earlier, coordination through markets is based on standardising expectations. Products are defined, obligations are prescribed, and terms of settlement agreed in order to allow heterogeneous agents to interact under conditions of maximum predictability which, in turn, leads to reliability since it eliminates large amounts of uncertainty about the behaviour, availability or priority of resources. Markets are therefore also mechanisms for coordination by means of alignment rather than by means of command. Market Monitoring Review Volume 6, Phase 2 introduces a new perspective on market monitoring. The existing focus on validating market operations to ensure pricing conformity has given way to a more operational perspective. The Grid Operator must continue to ensure stability and implement solutions to any disturbances arising in the electrical system. This requires the Grid Operator to act as a coordinator for ensuring grid stability and security. - This role is limited in nature; the electrical system cannot oblige the work specified in the market rules, and the

market cannot act immediately to deal with any occurrence in the electrical system. These restrictions have been deliberately introduced to ensure that those under market rules who have involuntary responsibility for providing reliability services under Mandatory Reliability Criteria retain operational

control when necessary to respond to stability or security threats. The role of markets is to influence the behavior of others. In any event, Grid Operator decisions in respect of the electricity network will always be based on compliance with established reliability criteria. The difference between coordination and control is important, especially during periods of system stress. Scarcity, constraint or imbalance in the market is not necessarily an order, and operational authority is used to correct the situation. The market only provides information on the state of the system. The market is there to provide system information and align individual and corporate incentives; it is not a source of operational direction. Viewing an organized market as a coordination institution can provide insight as to the nature of accountability in the market. Primary accountability in the market remains a matter of distributed responsibilities assigned to individual Market Participant Entities and functions. An Operations Market Administrator’s accountability is for compliance with Operations Market Rules and the effectiveness of the coordination mechanisms it imposes. This allocation of accountabilities is consistent with the standards-based view of reliability and the principle of shared accountabilities. This perspective is highly relevant to market design debates. Suggesting that firms should be directed through markets from the planning table rather than having their operational discretion shaped by rules, or that policy decisions should be translated into markets rather than being administered is all attempts to over-stretch markets as a governance mechanism. An appropriate market design always takes into account the limitations of coordination through markets, and the focus is on making prices align with those goals for which markets cannot substitute central authority, if only because central authorities are capable of more nuanced reasoning than simple rules could reflect, and even if bureaucracies lack full operational grasp of the complex actions they want to require. If we see organized markets as coordination institutions rather than control institutions, then this perspective acts as a stabilizing lens when evaluating market performance. Markets are successful if they minimize friction, increase transparency and help participants to behave in a rule-based fashion within a reliability-centered world view, rather than through command.

End-of-Chapter Summary

Wholesale markets for electricity can be viewed as governance institutions that coordinate decentralized decision-making in a highly decentralized system, rather than as direct control devices. Market rules and pricing can serve to impose compliance with established grid norms and to facilitate decentralized monitoring and hence overall system reliability, while preserving the role of rules-based centralized governance and decentralized mutual governance.

Chapter 13

Persistent Tensions Between Economic Signals and Reliability Objectives

The interaction between the wholesale market institutions and the reliability rules in place, in spite of design efforts to mitigate it, creates a source of persistent conflict that cannot be entirely removed through refinement of the details. The market prices and the reliability criteria are based on different principles and accordingly come with a different time scale and a different yardstick of performance. Formalizing the wholesale market activity through institutions, such as centralized markets, does no more than make this conflict visible and more active in practice. All economic information is relative and marginal. Prices express relative positions of scarcity, opportunity cost, and quantity that are relevant at a particular time and place. Reliability targets, by definition, are absolute and fixed. Ensuring the security of a system involves preserving certain conditions within desired bounds, regardless of their cost, whether they are desirable or not, and regardless of whether the resulting trades are profitable or not. The distinction between the two sets of conditions therefore precludes their reconciliation through a mutual alignment. The underlying market tension issues are almost always obvious during system stress conditions. The fact that a particular price is associated with a higher risk does not necessarily mean that the grid operators will take Reliability Actions based on that price level. The determining factor for the grid operators is always the proximity to the individual resource’s operational limits. As has been mentioned frequently, the market resolves only the symptoms of the issues, and brings them to the surface for all to see, but it does not provide any solutions to the underlying problems. Such constraints are often seen as a source of tension, and the management of this tension is an important part of the institution building process. So-called administrative interventions, or “uplift mechanisms” or “must-run” capacity deal with situations where the market cannot be relied upon to generate the economically efficient outcome required by system security conditions. Such measures are often thought of as being “market distorting,” but they really reflect the inevitability of the fact that system security constraints can not be fully factored

into a market determined contract. The persistence of tension will inevitably be reflected in the expectations of various stakeholders in the market. In many cases, market participants that bear a high cost in response to reliability measures, particularly in the short-term, will contend that these measures hamper economic efficiency. Conversely, reliability organizations often express that the markets do not adequately safeguard consumers and supply under vulnerable conditions. It is the regulatory function of

organized markets to ensure that such differing perspectives are appropriately addressed through formal processes rather than through arbitrary individual actions. Events which can disrupt the balance of the power system and affect the electricity market occur after years of efforts to maintain the stability of the system. After a certain number of years, the fact that economic objectives and supply reliability are not always aligned can lead to changes in the characteristics of products and transactions, or in the rules of procurement and pricing. These changes do not mean that the system has failed: they are the normal result of a process of readjustment that ensures the continuity of reliability management in a changing system. It is very important to notice that the fact that there is tension does not imply at all that things have become incompatible. Markets and reliability frameworks and mechanisms can coexist, and should, because each responds to a different need in the system that the other one cannot address on its own. Prices are meant to be a guide for efficient and transparent planning and trading, while Reliability Criteria serve to establish “off-limits” areas in the system for when everything cannot be optimally demanded, purchased and transferred from one point to another. The relationship between the two is about finding a stable position, rather than searching for an equilibrium point. Viewing persistent tension as an intrinsic property of organized markets clarifies the debate on market performance and reform. Rather than designing highly efficient markets, good governance is concerned with making markets more transparent, accountable and subject to the possibility of correction when deviations from optimal performance arise. Organized markets are therefore efficient when they render permanent tension visible and manageable.

End-of-Chapter Summary

Organized wholesale markets are institutions that manifest the inherent conflict between price signals and reliability objectives. This conflict stems from a multiplicity of possible purposes, time horizons and performance indicators, which cannot be completely reconciled or tamed through market infrastructure alone. What governments can do is to try to regulate and regulate the necessary adjustments to this fundamental ambiguity.

Chapter 14

Organized Markets Within Interconnection Scale Reliability

Reliability in the North American electric system is inherently interconnectionwide and, regardless of institutional structure, is delivered through an interconnection-wide system. While an organized wholesale market is defined by a geographic region, the effects of market operations on reliability extend well beyond that borders due to the use of shared transmission facilities, power flows across borders, and mutual contingency exposure. In order to fully understand the role of markets at the interconnection level, it is necessary to examine how region-specific market design and operations interact with the interconnection-wide reliability system. Power flow relations do not respect market boundaries. A transfer in one market does not mean that no power flows out in another market, particularly during times of low system margin. In an organized market environment, power systems have mechanisms in place to account for these interactions through coordinated planning, transmission scheduling, and reliability agreements, each with limitations given the market and institutional boundaries. Markets provide the interface for communication but do not capture in full measure the externalities associated with interconnected systems. Interconnection-wide reliability assessments are an important counter-balance to the regional market perspective. Seasonal reliability assessments, long term reliability analyses and disturbance analysis provide a view of reliability risks at scales larger than any individual market region. They determine reliability risks which are associated with correlated performance of resources, weather extremes and other wide-area transmission issues which may not be observable within a single market region. These markets regions provide data and operational insights to support these interconnection-wide reliability assessments, without detracting from their regional focus. Interaction of markets and transmission reliability on interconnected systems with significant wide area disturbances The grid operations that relate to the market and transmission reliability are significant, but for wide area disturbances, coordinated operating actions, operational procedures, and real time situational awareness are more important than economic

benefits of a subregion. This may call for adjustment or abandonment of Market Schedule Offers and Withdrawals. This highlights that markets operate within the field of reliability authority of the grid. The various market regions differ from each other in terms of interconnection. Market timeframes, reserve control, and operational coordination are not the same at the interconnection boundaries between regions. These differences are due to historical, regulatory and policy factors rather than to

differences in reliability requirements. Coordination of these differences rather than uniformity is required to accommodate these differences while still maintaining a federated market based system. Wide-scale interconnection events also affect market dynamics. Information gleaned from the occurrence of wide-scale disruptions are used to develop reliability standards and to provide a basis for market rule discussions. Markets may be adjusted to reflect interconnection dependencies as observed, however any such changes are made while preserving regional controls and accountability in a dynamic and evolutionary process that occurs on a path of relatively small incremental steps based on lessons learned from interconnection events. In the Interconnection-Scale Reliability context, the organized markets serve as regional tools to enhance reliability within their electric system. While the RTO/ISO functions within the organized markets facilitate coordination at the scale of the high voltage transmission network, risk that arises outside of each region is mitigated through the use of forward looking parallel responses. The reliability of the system is determined more by the interconnection of these markets, than by the individual market regions. From this perspective, organized markets are just one of the many reliability resources in a layered reliability system. Their benefits are derived from facilitating local coordination where the grid is sufficiently decentralized to preclude the need for a centrally coordinated control and from complementing the centralized authority of grid-wide reliability resources that are called-in when grid security demands it.

End-of-Chapter Summary

Each organized wholesale market currently covers a region but these regional boundaries do not necessarily affect the reliability benefits realized in other regions within the interconnection. It is important to understand how these markets interact with the interconnection reliability studies, real time tools, and processes, and how wide area mitigation strategies are coordinated to address their regional role as a coordination tool, in the context of a broader reliability framework.

Chapter 15

Executive Perspective on Markets as Reliability Infrastructure

From the perspective of executive and governance functions, an organized wholesale electric market should be viewed as an element of institutional infrastructure, rather than as a particular market design or set of market rules. Like transmission facilities and reliability standards, markets are part of the broader structural framework in which reliability is achieved. As such, market design may be viewed more as a long-term issue of structural integrity, accountability, and general system consistency, than as a short-term preoccupation with market pricing or other operational metrics. Markets function as infrastructure by providing stable structures of durable coordination that persist through regimes of leadership, policy and environmental change. The rules, timetables and networks of institutions that comprise markets as infrastructure provide stability of coordination across the dynamic instability of the objects they coordinate. Reliability is provided through the stability of market institutions as a means of mitigating the need for ad hoc or discretion-based crisis management. Market analysis at the executive level represents a paradigm shift in view of the changing market structure. This market analysis focuses on the operation and coordination of the power system during transition periods and at the time of potential power shortages. The core of this analysis is therefore whether and how the market design provides sufficient transparency in the operation of the power system and whether it enables adequate planning and timely coordination between market participants to the extent necessary to ensure that it remains possible to take operational counter-measures in the event of looming reliability problems. The principle of economic efficiency must therefore be set in subordination to the principle of providing the necessary basis for reliable power system operation, under all foreseeable scenarios. From this perspective, accountability is viewed differently. The performance of an infrastructure is not necessarily assessed on whether it fails to withstand loads. It is rather a matter of functioning under loaded conditions. Sudden fluctuations in the market price, resulting from the imposition of scarcity pricing, or from the intervention of government authorities, do not necessarily mean that the infrastructure has failed. Rather the system is beginning to expose its vulnerabilities in the context of a fully transparent and coordinated infrastructure and system operation. The role of management is then to establish whether the problems that occur are due to weaknesses in the structure of the infrastructure, or are merely the result of normal risks present in the system. The governance complexity of the electric power industry is another reason that an infrastructure model can be applicable to this sector. As discussed earlier, the electric power industry is subject to multiple layers of oversight as it operates under the

direct supervision of the federal government and the regional reliability organizations as well as the direction of the state public utility commissions and various stakeholders. In this context, executives need to exercise care in order not to confuse the functions of managing the business with those of compliance to the policy dimension and enforcement of reliability standards. Proper governance of the interfaces between these different dimensions is important in order to avoid dysfunctional over extensions or misunderstandings. Viewing markets as reliability infrastructure has implications for both short term operations and longer term planning and policy decisions. Resource development decisions, transmission expansion projects, and demand growth all occur within this market context. While markets do not “cause” these decisions, they determine the way in which any associated externalities interact with and are accommodated by the power system. Framing markets as forms of infrastructure helps to more rigorously assess and understand the potential impacts on reliability that arise from these outside of market events. This is the final principle in the update. Complex systems that are over-engineered will ultimately fail due to their rigidity. An organized market is only effective as long as it remains limited to providing information and facilitating the exchange of signals between individual operators. To preserve operational flexibility and ensure that smart decisions can be made by authorities in those rare situations when the market cannot resolve an issue, this limit must be preserved. For senior leaders to understand that markets, whether organized or spot, are not choice or even mandatory tools to ensure reliability. Rather, they are a required piece of infrastructure, just like a transmission line or generation unit, that must be operated, maintained, and control in a reliable fashion. In fact, the purpose of markets in grids is to provide structural coordination services to the system, rather than provide a specific level of supply and demand.

End-of-Chapter Summary

From a managerial point of view, organized wholesale markets can be seen as reliability infrastructure that provides enduring coordination, rather than enduring control. Focusing on the characteristics of markets as reliability infrastructure highlights the importance of reliability, accountability, and alignment of parts with wholes, and underscores the role of markets as fundamental components of a multi-layer reliability system.

Chapter 16

Limits of Market Expansion as a Reliability Strategy

Over the years, the organized wholesale electric markets have continued to evolve and the routine has become to look for market expansion as the solution to address emerging reliability challenges. New products, additional incentives and finer granularity of price signals are all too often proposed to address emerging gaps. While markets may be adjusted to reflect a change in system conditions, market expansion does not always equate to reliability enhancements and can create new risks. Markets are useful where transactions of behavior can be facilitated given well-defined needs that can be explicitly described, quantified, and commercially satisfied through established market structures. Complex reliability and causal relationships requiring higher-order judgments and non-linear modeling and behavior are not easily reducible to markets. Attempting to turn all reliability issues into “markets” can lead to oversimplification and misses the point that real understanding of the underlying reliability cause-and-effect is lost in the market transformation. In relation to expansion of the market, also dependencies related to assumptions incorporated in the design arise. More products, and incentives for customers require more predictions concerning the behaviour of the system, the reaction of the customers, the transient state behavior of the system and a large number of other variables. This leads to a number of sources of potential mis-match of these predictions and the actual performance of the system. This has to be carefully balanced in relation to Reliability Governance when deciding if expansion of the market through more layers is actually a worthwhile risk-reduction effort, or merely a redistribution of risks and uncertainties in less transparent areas. In addition, the governance of power markets will be affected as they are expanded in scope to accommodate new players and practices. The relationships that have been defined in previous market structures are weakened and oversight is undermined when more transactions are allowed outside those structures. Markets are increasingly being characterized not just as part of the existing governance of power systems (primarily through the coordination role of the ISO) but rather as the main system to ensure reliability in various situations. If the existing rules of market governance are relaxed to accommodate the need for new entrants or other perceived reliability challenges it will be much harder to clarify and enforce clear accountabilities. Operational considerations are also a factor when thinking of markets as an expansion reliability resource. Real time security requires speed, clarity of instructions and timeliness of decisions. In a market environment, the rules of the market and the settlement processes are a fixed framework that may not be suited to respond quickly to unforeseen events. Over-reliance on markets as a means of

providing additional reliability resources can mask the time it takes to determine when other operating measures, or non-market solutions are required. Evidence of the limitations comes from history. Many of the reliability challenges addressed through market enhancements were later addressed by other means including changes to planning criteria, transmission construction, operating procedures and grid standards evolution. What began as a market solution was later supplanted by others. While markets may signal the need for some of these complementary actions, they do not fully address the reliability need. Treating markets as the first solution rather than the primary solution risks underinvestment in other important reliability activities. This does not mean that markets must be static. In fact, dynamic refinement is needed to continue to match the market to system conditions. And this refinement can only be done by considering reliability targets and market constraints. Market expansion is not in itself an adequate basis, nor is it justified based on external pressure, unless the additional links and storage facilities are properly assessed through reliability analyses and related market studies. Tightening belts is easier when we have a firm idea of where our market grows and where it does not, in order to have a reliability plan that is appropriate to our business model. Markets are useful tools only insofar as they support, rather than conflict with, our operational authority, planning and technical standards. Only through their interplay are we able to ensure the reliability of our networks.

End-of-Chapter Summary

Increasing the scope of organized markets does not necessarily leads to improvement in reliability. Markets are an instrument to coordinate activities but complex reliability issues cannot always be presented and resolved in the markets. Good governance

needs to understand when improvements in the markets will lead to real reliability improvement and when instead action needs to be taken in the operations, planning or through standards.

Chapter 17

Long Term Reliability Governance in Market Based Systems

The governance of reliability in market based systems is inherently longer term and cannot be driven by short term operational or market considerations. Long term reliability governance is about the sustainability of the roles, mechanisms and processes that enable ongoing reliability of the grid and systems in an changing environment of evolving system conditions, resource mix and changing regulatory requirements. The organised markets are a part of this governance system, not separate to it. Long term governance is ultimately about role retention over time. Markets influence economic behavior, reliability organizations specify performance expectations and operators carry out real time operational actions. Retaining these clear roles over time is important to prevent mission drift. When new problems crop up there is always the temptation to put more functions into markets because they are seen to be “effective”, because markets have observable and measurable outcomes. Long term governance is about preventing that from happening while at the same time upholding the important roles of markets, reliability organizations and operators in relation to an asset. Accountability is a critical factor affecting the durability of the electricity sector reforms. Reliability standards ensured stability of minimum performance levels that were not subject to short term politics or market volatility. The market had to operate within these standards rather than the other way round. This stability was essential for long term governance of the sector, as it ensured that reliability standards remained binding even as market design evolved. Reliability risks are becoming increasingly complex and are more effectively managed through the preservation of institutional memory and lessons learned. Many reliability risk issues develop over time and are only fully understood after many years of operating experience and after a number of significant events have occurred. Good governance is essential to ensure that knowledge in the forms of tools, information and cross functional expertise are preserved and that emerging trends are quickly recognized so that remedial actions can be taken before a system failure occurs. While markets provide a large amount

of information on which we make the decisions that impact our reliability, it is our governance practices that ensure the information we have is properly understood and acted upon. The interaction between markets and planning processes is particularly relevant in the long term. Planning studies have identified a range of potential long term trends such as load growth, resource performance and transmission capacity issues that may not be adequately reflected in market signals. Long term governance is required

to ensure that planning insights are appropriately factored into the evolution of markets, to the extent that short term market outcomes should not displace the need for dedicated adequacy and resilience analyses. On one hand policy changes pose a significant challenge to long term planning in the electricity sector. Different state and federal policies on renewable energy can significantly impact the patterns of resource development and the manner in which markets are accessed. An efficient organized market must strive to remain as far as possible neutral in its operational management of grid issues such as security, supply and demand balance, as well as management of peak demand, in order to limit adverse effects on reliability of supply. In such scenarios, governance structures are essential to address and mitigate potential impacts on reliability in a nonpolitical manner. Long term reliability governance also requires caution in the face of isolated incidents. Market systems with infrastructure are inherently vulnerable to fluctuations in the market that can sometimes lead to dramatic consequences. Governance for durability needs to recognize when a disturbance is part of the normal risks inherent in the system and not in need of structural change because it is simply an isolated event. Overreacting to isolated incidents can disrupt the coordination that is essential to successful durability governance. Long term reliability governance in a market environment requires institutional humility. No one redundancy or mitigation approach can effectively address all uncertainties regarding future supply and demand risks. The electric system market and regulatory framework, standards, operations and planning must remain integrated and bounded in their focus. Only through humble recognition of these limitations will the grid be able to sustain reliability through many decades of dramatic change.

End-of-Chapter Summary

Reliability governance for long term reliability in market based environments is all about defined roles and responsibilities, stable metering, communication and knowledge retention and controlled change. However, coordination and transparency is

provided by organized markets and enduring reliability is maintained through governance of standards, knowledge of future load conditions and stable governance structures that can respond to changing conditions.

Chapter 18

Synthesis of Market Function and Reliability Responsibility

In order to comprehend the role of organized wholesale markets in ensuring reliability of the power system it is necessary to integrate and therefore not to further decompose the energy scheduling, adequacy coordination, operational services, governance and operational functions exercised by the System Operator. These functions do not constitute a pile of cards that can be placed on top of each other in sequence. They are interwoven functions with respect to each other, forming a complex whole where the outcome is the reliability of the power system. Markets affect reliability through the influence on the assumptions of people. These assumptions are based on the market’s perception of the reliability of a component, system or service, the relative importance of different components, systems or services and the expected level of performance. Based on these assumptions, thousands of individual decisions are made that collectively meet the needs of the market. These assumptions serve as a basis for reducing uncertainty, and allow for the effective management of risk. Achieving reliability is largely a matter of ensuring that the assumptions that are made are consistent with the real world of the asset and its operation. Reliability responsibility is a matter of functional responsibility, not market participation. Reliability performers are rewarded and punished based upon their performance to established standards, rather than market outcome. Reliability judgments are therefore shielded from price and commercial incentives when the security of the transmission system is in play; and markets influence the context for those judgments but not the responsibility underpinning them. The relationship between market expectations and reliability responsibility is not static. Experience indicates where expectations and reality are different. Planning work and operating experience gain knowledge of market expectations where they appear not to be met or confirmed. Events happen which had not been foreseen in the market design. This experience is used in the governance process to correct and adapt coordination arrangements without revisiting the underlying accounts of responsibility. This synthesis recognizes that no organized market can be assessed

based solely on success or failure. A market can operate in an intended manner while reliability risk is increasing due to external factors such as severe weather, changing policies, commodity price volatility or physical constraints on the grid. Conversely, reliability can be maintained in spite of market volatility or controversy. What is important to assess is whether coordination of resources and activities is preserved and that market design and rules still provide accountability for actions taken by market

participants. This balance is all about discipline from the institutional side. If market performance is allowed to dictate reliability levels, there will be no accountability. If reliability is addressed by administrative action rather than enforcement of rules, there will be no coordination. Ensuring that there is a clear divide between coordination and accountability, while allowing for fact-based adjustments at the intersection, is key to ensuring long term reliability. This perspective reinforces one of the main messages of this publication. The wholesale markets are not the core of the reliability of the grid neither are they an accessory. They are tools to facilitate coordination towards reliability when aligned with the concept of authorities, judgments and rules that have been developed within the operation of grids. They are part of the means to obtain coherence. This synthesis provides a basis for sound decision making as the system continues to change. Future changes to the design of the market, planning standards, and operating procedures should be evaluated based on the impacts on consistency between institutions as opposed to performance criteria focused on individual merit. Reliability of the planning processes and their reliance on key coordination elements, governance arrangements, and operational authorities should be preserved.

End-of-Chapter Summary

Reliability outcomes in organized markets are a function of market design as it intersects with standards of responsibility. The market designs give rise to the perceptions, and consequently the degree of disclosure, that market participants have of each other, as well as the enforcement mechanisms of the functions that underpin those designs. The critical factor for grid reliability is that these elements are compatible with each other in a way that does not equate market coordination with control.

Chapter 19

Closing Perspective on Markets as Reliability Supporting Institutions

The role of organized wholesale electric markets can be fully understood only by considering their broader relationship to systems operation. They are not designed to address reliability problems per se, but are an institutional mechanism for coping with the intricacy of ensuring reliability in a large, complex, highly interconnected and highly dispersed system. Markets embody a structural approach to supporting reliability, as a means of imposing a disciplinary framework (as opposed to trying to compel particular outcomes or impose a specified level of performance), with the aim of promoting system wide alignment of interest, as opposed to exercising detailed control over system performance. This perspective serves to provide a more nuanced and informed basis for judging the value of the mechanisms embodied in an organized market. A marketplace exists for a very fundamental reason: it is not economically or physically practical to have centralized ownership and control of almost every area on the North American power grid. At the same time, a large number of utilities can not effectively “vote” with their generators on issues concerning the real time operation of the system if such voting were on an uncoordinated basis. An organized marketplace essentially fills this gap between what is central and what can not be central. In an organized marketplace, competing entities have the opportunity to “enter the market” and make trades with other entities in an environment in which all participants agree on rules-ofthe-road consistent with reliable grid performance. Reliability products and services are a byproduct of this regulatory environment. It is not the marketplace itself that provides those products and services. All the markets discussed in this publication reveal underlying system conditions, harmonize expectations and enhance visibility in short and long-term time horizons. They uncover the underlying system tensions and constraints and therefore make uncertainty and system interdependencies visible. This can be sometimes uncomfortable, as sudden price movements can be unsettling or restrictions can appear as bottlenecks. However, for reliable and thus controllable energy supply governance a clear understanding of

these price dynamics and system interdependencies is indispensable. Equal in importance is what markets do not do: - Define reliability requirements - Enforce performance obligations - Exert operational control These are all defined within our standards, within functional accountabilities and within real time operational controls. These distinctions are critical to our goals of visibility, integrity and enforceability as we look to the future. Reliability challenges in the bulk power system are being influenced by a growing

number of factors outside of market rules and design. Some of these influences include severe weather, transmission and distribution infrastructure, external policy that may influence resource choices, and changes in end-use loads. While these influences are reflected within the market on an economic and rule basis, ultimately they must be managed through coordination among planning, operations, and governance activities. From an oversight and executive perspective, disciplined constraint is in order. Reponding to every need by expanding our footprint to address new market developments would undermine focus and diminish our influence. The principle of reliability is better sustained by purposefully and carefully defining our business, and within carefully defined organizational boundaries, ensuring that our operational knowledge and reliability analyses guide our actions. The long term contribution of organized wholesale markets to grid reliability will be determined more by the quality of governance than by the specifics of market design. Markets that remain marketplaces for coordination, transparency, and price alignment will continue to play a role in reliable grid operations, regardless of changing system conditions. Markets that are expected to replace regulation, discretion or accountability will fail to deliver. This is the final perspective in the ebook. See our earlier perspectives on the topic here. Reliability organizations have wholesale markets as a reliability management tool, but wholesale markets are not reliability guaranties, they are reliability support tools. Hence the conclusion of this ebook. And this is what the other chapters confirm: that wholesale markets work well within the framework of grids that operate according to standards and in compliance with planning and operational rules. Where in such systems the guarantees of reliability are not undermined by an inferior market design, reliability is ensured.

End-of-Chapter Summary

The organized wholesale electric markets were part of a system designed to bring reliability through a more structured coordination and visibility in an otherwise very uncoordinated and opaque system. Markets per se do not enforce nor regulate reliability. Rather, markets have historically functioned within standards-based mechanisms for accounting and exercising operational management over activities. Reliable supply is preserved under strict governance that respects and upholds institution boundaries while allowing informed flexibility in operational response.

Glossary

Glossary

Ancillary Services: Services which must be provided in order to move power from the point of generation to the point of delivery; defined by the necessary activities of Control Areas and Transmission Providers to preserve reliable performance of the interconnected transmission system.

Balancing Authority (BA) - an organization that coordinates resource plans in advance, maintains real time load interchange and generation balance within its Balancing Authority Area, and supplies additional energy to the Western Interconnection frequency in real time.

Bulk Electric System (BES) – Except as modified by the below lists, all Transmission Elements operated above 100 kV and all Real Power and Reactive Power resources interconnected at 100 kV or greater. Excludes facilities used for distribution of electric energy at the point of consumption.

Capacity (Cap) The rated continuous load-carrying ability, in megawatts, of Generation, Transmission or other Electrical Equipment.

Energy - Electrical work over a period of time, expressed in megawatt-hours.

Reliability Coordinator (RC) – The entity that holds the highest level of authority for ensuring reliable operation of the Bulk Electric System (BES), has a view of the BES that is broad enough to encompass the entire BES as it interconnects, and possesses the operating tools, processes, and procedures necessary to prevent or mitigate violations of System Operating Limit or Interconnection Reliability Operating Limit.

Transmission Operator (TOP) - The utility or other entity responsible for the reliability of its local transmission system, and that operates or directs the operation of its transmission facilities.

Terms defined in this glossary have been taken from the NERC Glossary of Terms and are reproduced here with NERC’s permission for convenience. This glossary should not be treated as a substitute for the official Glossary of Terms as published by NERC.

About the Author

About the Author

Rob Smith is a senior electric industry professional with over thirty years of experience across every major function of the North American Bulk Electric System. His work spans reliability coordination, transmission operations, regulatory compliance, and cybersecurity reliability.

Rob has worked directly in real-time grid operations as a Reliability Coordinator, Transmission Operator, and Power System Operator within RTO/ISO and utility control center environments. He has also held senior regulatory and oversight roles, including senior compliance auditor and subject matter expert for NERC Reliability Standards. In those roles he audited grid facilities for compliance with applicable standards, evaluated the adequacy of mitigation actions, supported the development of violation notifications and settlements as part of FERC-directed enforcement actions, and participated in risk based oversight of utility mitigation activities.

Rob founded Energy Compliance, Inc. to bring senior, regulator-side compliance authority to registered entities directly, without the layered staffing, billable-hour overhead, and generalist advice typical of larger consulting firms. Every Energy Compliance engagement is led by Rob personally.

About Energy Compliance, Inc.

About Energy Compliance, Inc.

Energy Compliance, Inc. is an independent consulting and advisory firm focused exclusively on electric reliability, cybersecurity reliability, and regulatory compliance for organizations connected to the North American Bulk Electric System.

Our work supports registered entities, including Generator Owners and Operators, Transmission Owners and Operators, Reliability Coordinators, Balancing Authorities, and Distribution Providers. We work across NERC Reliability Standards, FERC orders, RTO/ISO market participation rules, Regional Entity oversight, and state regulatory frameworks.

We do this work differently than larger consulting firms. Engagements are led by a single senior practitioner with regulator-side experience. We don’t staff for billable hours. We staff for outcomes. Our deliverables are written to be operationally executable and audit-defensible, not to manufacture activity. Where automation can replace manual work, we build the automation. Where senior judgment is required, the senior is in the room.

Energy Compliance is not affiliated with, sponsored by, or endorsed by the North American Electric Reliability Corporation, the Federal Energy Regulatory Commission, or any Regional Entity.

Services Provided

Our services are written to be clearly defensible. Operationally executable in real time. Audit-defensible at compliance review. Every deliverable is structured for the auditor’s question, not the consultant’s binder.

Energy Compliance services include, but are not limited to:

• NERC reliability and compliance advisory support
• Reliability governance and program assessments
• Registration and applicability analysis
• Operational and engineering reliability alignment
• Compliance program design and improvement
• Audit and enforcement support (non-advocacy)
• Mitigation planning and Self-Report development
• Training and executive briefings on reliability frameworks
• Regulator-perspective program reviews

Each engagement is scoped to the entity’s role, function, and bulk system impact.

ENERGY COMPLIANCE PROFESSIONAL REFERENCE

Rigorous Compliance. Defensible Programs. Energy Compliance, Inc. partners with registered entities on the institutional and technical questions that define strong reliability and cybersecurity programs, from classification through audit through enforcement response.

N ERC CO MP LIANC E S ENIO R ADV ISO RY Program support, interpretation, and audit Direct engagement on complex reliability preparation. questions.

I ND USTRY ENGAGEMENT AUD IT D EFENSE Standards development and working-group Notice of Penalty response and settlement participation. posture.

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