UNIT-4 RESTRUCTURE 4.

1 Introduction to Restructuring
The electric power industry has over the years been dominated by large utilities that had an overall authority over all activities in generation, transmission and distribution of power within its domain of operation. Such utilities have been often been referred to as Vertically Integrated Utilities (VIU) .Such utilities served as the only electricity provider in the region and were obliged to provide electricity to everyone in the region. nalogous to perceived competitions in airline, telephone, and natural gas industries which demonstrated that vertically integrated monopolies could not provide services as efficiently as competitive firms, the electric power industry plans to improve its efficiency by providing a more reliable energy at least cost to customers. competition is guaranteed by establishing a restructured environment in which customers could choose to buy from different suppliers and change suppliers as they wish in order to pay mar!et"based rates. Under the process of restructuring and deregulation, vertically integrated utilities (VIU) are unbundled legally or functionally. #holesale generation and retailing of electricity is opened for competition. #holesale electricity mar!ets are organi$ed with several generation companies that compete to sell their electricity in a centrali$ed pool or through bilateral contracts with buyers. In retail competition, customers can choose among different sellers or buy directly from the wholesale mar!et. n important point to note is that the restructuring process was however not uniform in all countries. #hile in many instances, it started with the brea!ing up of a large vertically integrated utility, in certain other instances restructuring was characteri$ed by the opening up of small municipal monopolies to competition. In brief, the governments advocating deregulation or restructuring want competition in energy production, and they want to see significant levels of customer choice in the retail mar!et for electricity. t the same time, it recogni$es that it is best to have only one transmission and one distribution system in any one area. Therefore, the purpose of deregulation is to restructure the electricity supply industry so that power production and retail sales are competitive, while delivery is still a regulated, monopoly franchise business.

4.2 rc!itecture o" Restructured or #eregulated $o%er System

The typical structure of a deregulated electricity supply system with lin!s of information and money flow between various players is shown in figure %.&. 'urther, the architecture shown in the figure is not a universal one. There e(ist variations across countries and systems. The possibility of having such a comple( nature of information flow has been one of the driving factors in the process of deregulation of the power sector. The introduction of restructuring in the electric industry has brought several new entities in the electricity mar!et place, while on the other hand redefining the scope of activities of many of the e(isting players. Variations e(ist across mar!et structures over how each entity is particularly

defined and over what role it plays in the system. )owever, on a broad level the following entities can be identified*

'igure %.& Structure of +eregulated ,ower System a. &eneration Com'anies (&ENC)S** This may refer either to individual generating units or more often to a group of generating units within a single company ownership structure with the sole ob-ective of producing power, and commonly referred to as independent power producers (I,,). +ifferent mar!ets may classify generators based on their rated capacity or in the way, the generators have been contracted to operate in the mar!et. b. Transmission Com'anies (TR NSC)S** The transmission companies are those entities, which own and operate the transmission lines. Their prime responsibility is to transport the electricity from the generators to the customer, and ma!ing available the transmission system to all entities in the mar!et. 'or their services, they levy a transmission tariff. In some systems, these transcos are classified according to the operating voltage levels.

c. #istri+ution Com'anies (#ISC)S** The distribution companies are usually those entities owning and operating the local distribution networ! in an area. They buy wholesale electricity either through the spot mar!ets or through direct contracts with gencos and supply electricity to the end"user customers. d. Customers, customer is an entity consuming electricity. In deregulated mar!ets, the customer has several options for buying electricity. It may choose to buy electricity from the spot"mar!et by bidding for purchase, or may buy directly from a genco or even from the local distribution company. e. Inde'endent System )'erator (IS)** The IS. is an entity entrusted with the responsibility of ensuring the reliability and security of the entire system. It is an independent authority and does not participate in the electricity mar!et trades. It usually does not own generating resources, e(cept for some reserve capacity in certain cases. In order to maintain the system security and reliability, the IS. procures various services such as supply of emergency reserves, or reactive power from other entities in the system. f. -ar.et )'erator* The /ar!et .perator is an entity responsible for the operation of the electricity mar!et trading. It receives bid offers from mar!et participants and determines the mar!et price based on certain criteria accordance with the mar!et structure. The mar!ets may have different trading schemes such as hourly trading for the ne(t day or trading in futures" wee!, months or years ahead. Individuals wor!ing on restructuring would agree on a basic principle that access to transmission services should accommodate consumer choice and supply competition. 0estructuring in electricity industry will create new business opportunities where new firms selling new products and services will appear, consumers will have alternatives in buying electricity services, and new technologies such as metering and telecommunications devices will develop.

4./ Restructuring -odels 0 Electricity -ar.et -odels,

The electricity industry is, in principle, -ust li!e any other producer or manufacturer of goods in that the electrical product (!#h) is made at a particular location and needs to be transported to the customer who has contracted to purchase that product at a certain price. 1ormally, some form of a mar!et is set up in a democratic society so that purchasers can 2shop around3 for the product that best suits them, at the price they consider to give the best value. 'or efficiency and e(pediency, trading mar!ets have a recogni$ed infrastructure whereby intermediaries purchase and resell commodities in varying 4uantities and arrange for delivery to varying locations. In the case of electrical energy, there is only one product, and at every time instant the amount produced must e4ual the amount consumed, otherwise the fre4uency will vary. 5onse4uently, loo!ed at from a mar!et"structure viewpoint, there must be a direct and continuous connection between generators and the customers, but the various mar!et intermediaries, such as coordinators or controllers and energy bro!ers or traders, can be

considered as facilitators in this process. To create competition in power mar!et there may be different ways of restructuring the power industry. The various mar!et models proposed to chart the evolution of the electricity supply industry from a regulated monopoly to full competition are classified in the following manner* &. 5lassification based on energy trading. 6. 5lassification based on contractual models. 7. 5lassification based on ownership of transmission networ!. 4./.1 -odels 1ased on Energy Trading, This type of classification is based on the level of competition, i.e. on which side the competition e(ists, wholesale level or retail level. (i* -odel 1, -ono'oly -odel In this model, a single entity is ta!ing care of all the business activities such as generation, transmission and distribution of electric power to the end consumers. Usually (but not necessarily), in this !ind of model, the monopoly lies with government. It is 4uite natural that this !ind of model should have strict regulation in order to protect end customers against monopoly. /ost of the electric power systems obeyed this model prior to deregulation. 'igure %.6 corresponds to the traditional monopoly model

(a)

(b)

'igure %.6 (a) Vertically Integrated Utility (b) +istribution is handled by one or more separate companies

(ii* -odel 2, Single $urc!asing gent -odel In this model, there is a competition in the wholesale sector, i.e. generation. )ere, Independent ,ower ,roducers (I,,s) are permitted. ll generators sell their power to the central pool or power purchasing agency, which in turn sell, it to state distribution utilities or distribution companies in the service area. ll power generated by generating companies (8915.S) must be sold only to a purchasing agency and not to any other agency. +istribution companies (+IS5.s) are only able to purchase from the purchasing agency. They do not have a choice of choosing their power supplier. In this model, sales from power pool to retailers ta!e place at a pre"set tariff price. 9fficiency considerations suggest that this tariff should follow the marginal cost of the system while at the same time covering the total costs to the purchasing agency. This tariff should then be modified appropriately from time to time. 0etail tariffs, in a competitive retail mar!et, would inevitably tend to follow the cost of purchasing at the purchasing agency, wholesale tariff. This model can accommodate the social obligation policies to be implemented by the government.

(a) (b) 'igure %.7 ,urchasing gency /odel (a) integrated version (b) disaggregated version

(iii*

-odel /,2!olesale Com'etition -odel In this model, no central organi$ation is responsible for the provision of electrical energy. Instead, discoms purchase the electrical energy consumed by their customers directly from generating companies. These transactions ta!e place in a wholesale electricity mar!et. The largest customers are often allowed to purchase electrical energy directly on the wholesale mar!et. The wholesale mar!et can ta!e the form of a pool or of bilateral transactions. t the wholesale level, the only functions that remain centrali$ed are the operation of the spot mar!et, and the operation of the transmission networ!. t the retail level, the system remains centrali$ed because each discom not only operates the distribution networ! in its area but also purchases electrical energy on behalf of the consumers located in its service territory. This model creates considerably more competition for the generating companies because the wholesale price is determined by the interplay of supply and demand. .n the other hand, the retail price of electrical energy must remain regulated because small consumers cannot choose a competing supplier if they feel that the price is too high. This leaves the distribution companies e(posed to sudden large increases in the wholesale price of energy.

'igure %.% #holesale 5ompetition /odel of 9lectricity /ar!et

(iv*-odel 4,Retail Com'etition -odel 'igure %.: illustrates the ultimate form of competitive electricity mar!et in which all customers can choose their supplier. ;ecause of the transaction costs, only the largest customers choose to purchase energy directly on the wholesale mar!et. /ost small and medium customers purchase it from retailers, who in turn buy it in the wholesale mar!et. In this model, the <wires= activities of the distribution companies are normally separated from their retail activities because they no longer have a local monopoly for the supply of electrical energy in the area covered by their networ!. In this model, the only remaining monopoly functions are thus the provision and operation of the transmission and distribution networ!s.

'igure %.: 0etail 5ompetition /odel of 9lectricity /ar!et .nce sufficiently competitive mar!ets have been established, the retail price no longer has to be deregulated because small consumers can change retailer when they

are offered a better price. Implementing this model, however, re4uires considerable amounts of metering, communication and data processing. The cost of the transmission and distribution networ!s is still charged to all their users. This is done on a regulated basis because these networ!s remain monopolies. /ost countries are somewhere between /odel & (monopoly, vertically integrated structures) and /odel % (completely open, competitive energy trading). There are many problems and difficulties in transferring from one model to another, not least of which is the need to set up an appropriate infrastructure, including the necessary control, metering and information technology to achieve a free mar!et at reasonable cost. In addition, a considerable reeducation and re"training of utility employees is re4uired to enable the 2new3 philosophies of mar!eting and improved customer services to be provided. 4./.2 -odels 1ased on Contractual greements, (i* $oolCo -odel, ,ool5o is defined as a centrali$ed mar!etplace that clears the mar!et for buyers and sellers where electric power sellers>buyer submit bids and prices into the pool for the amounts of energy that they are willing to sell>buy. The ,ool5o model is comprised of competitive power providers as obligatory members of an independently owned regional power pool, vertically integrated distribution companies, vertically integrated transmission companies and a single and separate entity responsible for* establishing bidding procedures, scheduling and dispatching generation resources, ac4uiring necessary ancillary services to assure system reliability, administering the settlement process and ensuring non" discriminatory access to the transmission grid. ,ool5o does not own any generation or transmission components and centrally dispatches all generating units within the service -urisdiction of the pool. ,ool5o controls the maintenance of transmission grid and encourages an efficient operation by assessing non"discriminatory fees to generators and distributors to cover its operating e(penses. In a ,ool5o, sellers and buyers submit their bids to in-ect power into and out of the pool. Sellers compete for the right to in-ect power into the grid, not for specific customers. If a power provider bids too high, it may not be able to sell power. .n the other hand, buyers compete for buying power and if their bids are too low, they may not be getting any power. In this mar!et, low cost generators would essentially be rewarded. ,ower pools would implement the economic dispatch and produce a single (spot) price for electricity, giving participants a clear signal for consumption and investment decisions. #inning bidders are paid the spot price that is e4ual to the highest bid of the winners. lthough buyers and sellers in a ,ool5o are prevented from ma!ing individual contracts for power, participants may hold optional financial instruments called Contracts for Differences (CFDs). These contracts are long"term price hedging bilateral contracts between generators and distribution utilities or retail customers. These contracts allow a physical dispatch of individual generating units by

their owners and allow consumers to establish long"term prices. 5'+s are established as a mechanism to stabili$e power costs to customers and revenues for generators. Using 5'+s, any differences between the spot price and the contract price would be offset by cash payments by generators to customers. n e(ample of 5'+s is as follows* a buyer (load) and a seller (generator) agree on a price of ?:>/#h. #hen ,ool5o3s price (/ar!et 5learing ,rice) drops to ?%>/#h, the buyer pays ?% to the ,ool5o and ?& (difference) to the seller. #hen /ar!et 5learing ,rice increases to ?@>/#h, the buyer pays ?@ to the ,ool5o and is paid ?& by the seller. (ii* 1ilateral Contracts (#irect ccess* -odel, The ;ilateral 5ontracts model has two main characteristics that would distinguish it from the ,ool5o model. These two characteristics are* the role of Independent System .perator is more limitedA and buyers and sellers could negotiate directly in the mar!etplace. In this model, small customer3s aggregation is essential to ensure that they would benefit from competition. This model permits direct contracts between customers and generators without entering into pooling arrangements. ;y establishing non"discriminatory access and pricing rules for transmission and distribution systems are guaranteed. #holesale suppliers would pay transmission charges to a transmission company to ac4uire access to the transmission grid and pays similar charges to a distribution company to ac4uire access to the local distribution grid. In this model, a distribution company may function as an aggregator for a large number of retail customers in supplying a long" term capacity. lso, the generation portion of a former integrated utility may function as a supplier or other independent generating companies, and transmission system would serve as common carrier to contracted parties that would permit mutual benefits and customer3s choice. ny two contracted parties would agree on contract terms such as price, 4uantity and locations, and generation providers would inform the IS. on how its hourly generators would be dispatched. (iii* 3y+rid -odel, The hybrid model combines various features of the previous two models. The hybrid model differs from the ,ool5o model as utili$ing the ,ower 9(change (,B) is not obligatory and customers are allowed to sign bilateral contracts and choose suppliers from the pool. The pool would serve all participants (buyers and sellers) who choose not to sign bilateral contracts. The 5alifornia model is an e(ample of the hybrid model. This structure has advantages over a mandatory pool as it provides end"users with the ma(imum fle(ibility to purchase either from the pool or directly from suppliers. customer who would choose a ,B option with 5'+s could ac4uire the economic e4uivalent of bilateral contracts. s in the ,ool5o case, if generators opt to compete through the pool, they would submit competitive bids into the ,B. ll bilateral contracts would be scheduled to meet their loads unless they would constrain transmission lines. Coads not provided bilaterally would be supplied by an economic dispatch of generating units through bids in the pool.

The e(istence of the pool can efficiently identify individual customer3s energy re4uirements and simplify the balancing process of energy supply. The hybrid model would enable mar!et participants to choose between the two options based on provided prices and services. The hybrid model is very costly to set up because of separate entities re4uired for operating the ,B and the transmission system. 4././ -odels 1ased on t!e o%ners!i' o" Transmission Net%or., (i* IS) -odel, The Independent System .perator /odel is practiced in those countries in which transmission companies are also providing the generation and distribution services in their area of operation. Secondly, sufficient numbers of e4ual si$ed transmission companies e(ist in the mar!et and it is not possible to club the system operation function with any of these companies for commercial reasons. Therefore, separation of ownership of the transmission assets from the system operation function is considered necessary to avoid any preferential treatment for dispatching its own generation. (ii* Transmission System )'erator (TS)* -odel, In this model, the operation of the grid and the ownership of the grid, which is responsible for development of transmission system and to provide non"discriminatory open access to all eligible mar!et participants. It is also responsible for system operation functions. 1eutrality is an important aspect of the TS. to ensure an efficient mar!et. This model is prevalent in whole of the 9urope.

4.4 Transmission $ricing,

4.4.1 $ur'oses o" $ricing, ll industry restructuring plans, regardless of the -urisdiction, envision only one transmission system run <for the public benefit= as a type of monopoly franchise. The ob-ective of any transmission"pricing scheme is to allocate all or part of the e(isting and new cost of transmission system to the customers. Therefore, government regulation will set the tariffs (prices), which means that transmission tariff structure, and the way it is determined and applied are elements of policy. ny transmission pricing strategy should see! to achieve the following basic goals* a. Recover Costs* 'ees for transmission use must produce revenue to cover all the e(penses of investment, operation, and maintenance, as well as provide a small, (regulated) level of profit for the owners. b. Encourage E""icient Use* the price structure (relative cost as a function of the service sought, e.g., amount of power transported, distance, etc. should give incentives for using the transmission system efficiently. The meaning of efficiency is the sub-ect of much disagreement, but everyone agrees pricing should encourage it. c. Encourage E""icient Investment* the price structure and the way money is paid to owners should provide an incentive for investment in new facilities where they are needed. .therwise, how can one e(pect the transmission system to be e(panded as

need growsD This is really a payment to owners issue, but some pricing issues impact it. 4.4.2 Re4uirements o" a $ricing System, pricing system must satisfy the following re4uirements* a. 5air, 9(actly what is fair and what isn3t might be debatable, but most people will agree that any pricing system must be fair or e4uitable to all users. /ost people feel this means it must not unduly penali$e or favor certain classes of customer or certain types of buying behavior or usage. b. Trans'arent and Sim'le, ,ricing system should be able to transmit right economic signals to all consumers, traders and producers of electrical energy and, therefore should be as transparent and simple as possible. c. Understanda+le, ny pricing system must be understandable to its customers. If a pricing mechanism is so comple( that their users do not trust their ability to ma!e good buying decisions, they will not use the product and will see! other ways to satisfy their needs. d. 2or.a+le, pricing system so complicated that it cannot be implemented economically is impractical. /any seeing good ideas in pricing re4uire measurement of power flow at so many points, and system analysis so detailed, that it is 4uestionable if they can be implemented successfully, and it is doubtful that their cost is -ustifiable. 4.4./ Cost Com'onents in Transmission, There are many different cost components that one needs to consider when it comes to performing a transmission transaction. These are the costs that the transmission companies incurs in order to while providing a satisfactory transmission transaction laid down in the contractual terms. The ma-or components of the cost of transmission transaction are * a. )'erating Cost, These costs are incurred by a transmission company in carrying out the transactions generally related to the cost of rescheduling of generation as well as those related to maintaining the system voltages, reactive power support and line flow limits. In those systems where the transmission company is also the central authority in dispatching generation, the cost can be obtained by appropriate .,' simulation where the operating cost is the dual of the demand"supply constraint. b. )''ortunity Cost, These costs are associated with the benefits, which the transmission company has to forgo in order to provide a transmission service. The unreali$ed benefits can be because the transmission company could not use cheaper generation resource due to transmission overloads. .r the unreali$ed revenue from those firm transactions, that could not be supported due to the operating constraints being binding. c. Rein"orcement Cost, This is the capital cost of new transmission facilities needed to accommodate a transmission transaction. This component applies only to firm transactions.

d. E6isting Cost, This is the cost of e(isting facilities associated with the investment already made in the system. This cost needs to be allocated to the transmission transactions on a rational basis. 8enerally the total cost of a transmission transaction is the sum of the above four components, though the component that actually figures in the cost is determined from the type of transaction. 4.4.4 -et!ods 0 Tec!ni4ues 0 -et!odologies o" Transmission $ricing, Since a transmission company provides its transmission facilities to the different mar!et players, an appropriate pricing scheme would therefore ideally be one that recovers the various costs (discussed earlier) from the users of the system in a rational manner. To this effect, pricing schemes for transmission have evolved around three basic philosophies* (i* Em+edded-Cost 1ased $aradigm (ii* Incremental Cost 1ased $aradigm The embedded cost based pricing schemes are based on the total transmission cost allocation to various transactions while the incremental cost based pricing see!s to identify the additional burden on a transmission system from one particular transaction. 4.4.4.1 Em+edded Cost 1ased Transmission $ricing, This method consider the embedded capital costs and average annual operation costs of e(isting facilities while determining the transmission costs. 'or each transmission line, the net plant cost is calculated for each year of the transaction period. This is calculated using the replacement cost, average service life and depreciation reserve of the line capital investment. 9mbedded cost"based pricing methods are used commonly throughout the transmission utility industry. 'our of the more commonly !nown embedded cost"based methods used for allocating transmission charges are* a. 5ontract ,ath /ethod b. ,ostage Stamp /ethod c. /#"/ile /ethod d. ;oundary 'low /ethod Contract $at! -et!od, The contract path is fiction path method. The physical load flow of a single transaction may be different from the contractual load flow, particularly in the meshed electricity networ!. Transmission pricing becomes comple( when electricity does not flow over the contracted path. 5ontract path method selects a specific continuous path between the seller and buyer for wheeling transaction. ll changes in the power flows through the transmission facilities which are not along the contract path are ignored. The path chosen must have sufficient unused capacityE to carry the amount of power to be transported. The selection of the contract is, however, not usually based on the power flow study to identify the facilities actually involved in the transaction. .nce the contract path has been determined, all or a part of the transmission cost

related to the specified path is assigned to the transaction and wheeling charges are calculated according to the e4uation*
WC t = TLk
k

Pt Ppeak

where, #5t F transmission or wheeling charge for transaction (?>hr) T5! F transmission charge of the contract path ! (?>hr) ,t F magnitude of transacted power (/#) ,pea! F system pea! demand (/#) dvantages, &. 'ull cost recovery is possible as costs of both e(isting assets and new assets along the contract path are considered. 6. It benefits investors and encourages for an efficient level of investment. 7. The system creates a simple and stable pricing rule, and is easy to implement. #isadvantages, &. Transmission affects the other parallel paths in the electricity meshed networ!s. Transmission facilities that are not included in the contract path might re4uire costly upgrades in order to accommodate the flow of the transmitted power. The transmission utility will face uphill tas!s in obtaining the revenue needed for the upgrades as these facilities are not included in the contracted path in the first place. 6. )owever, ma-ority of the transacted power may actually flow through transmission lines outside the contracted path and hence the actual operating environment may be ignored. 7. It overloo!s the possibility of outages occurring in the contract path, which would impose additional flows on neighboring systems that are not parties of the contract path. $ostage Stam' -et!od, The name of this scheme has understandably, evolved from the basis on which postage stamps are priced i.e. the customer only pays according to the weight of the pac!age, not on the basis of distance of delivery points, or how the pac!age will contribute to the postal re4uirement, etc. ,ostage Stamp is the most common but unsophisticated method used by electric utilities, where every transmission customer pays a single rate for any transmission transaction within a defined region, regardless of the contractual origin and contractual destination of the electricity transmitted and, is the same for every customer. postage stamp rate of transmission service may be calculated by summing up all transmission cost and divide it by system pea! demand thus producing a flat amount per /#. The customer transmission charge is given by the pea! demand involved in the customer transaction multiplied with the postage stamp rate. P Rt = TC t PPeak

where 0t is the transmission price for transaction t. T5 G total transmission charges. ,t is the power of transaction (transaction load at the time of system pea! load condition) in /#. ,,ea! is the system pea! load in /#. dvantages, &. The main attractive factor about using this method is the absence of power flow e(ecutions and associated studies to identify the involved parties. Thus, evaluation of the transmission charges is easy to handle and compute. #isadvantage, &. +isregard of the actual system operation. 6. The transmission charges allocated are not related to the pattern of the actual power flow, as a result of it, it is very li!ely to send the incorrect economic signals to the transmission customers e.g. a transaction with generator and load in short electrical distance would cross subsidi$e a transaction with heavy system usage (long electrical distance between in-ection and receipt). -2--ile -et!od, The postage stamp and contract path methods are not considering the actual system operating condition for the estimation of transmission charges. )ence the transmission charges determined using these methods provide an incorrect economic signal to the transmission customers. The /#"/ile method is an embedded cost method that is also !nown as a line"by"line method because it considers, in its calculations, changes in /# transmission flows and transmission line lengths in miles. The method calculates charges associated with each wheeling transaction based on the transmission capacity use a function of the magnitude of transacted power, the path followed by transacted power, and the distance travelled by transacted power. The /#"/ile method is also used in identifying transmission paths for a power transaction. The /#"/ile method is the first pricing strategy proposed for the recovery of fi(ed transmission cost based on the actual use of transmission networ!. The method guarantees the full recovery of fi(ed transmission costs and reasonably reflects the actual usage of transmission system. The embedded transmission charges are assigned to the customer based on the airline distance (mile distance) between in-ection and receipt and the magnitude of transmitted power (/#)
Rt = TC DT . PM PX i
i

where,
t

,B is /#"/ile value +T is airline distance ,/ is power magnitude

T5 is total transmission charges. lternatively, the price charged for transmission transaction in (?>/#) is given as
RTi Pj A Ti .Li .F j = j Pj A Ti i

where, RTi is the price charged for transaction Ti in ?>/# Pj AT is the loading of line - due to transaction Ti, /# C- is the length of the line -, mile. '- is a pre"determined unit cost reflecting the cost per unit capacity of the line, ?>/#" /ile dvantages, &. The advantage about /#"/ile method is that it overcomes some of the limitations of the rolled"in"embedded methods. 6. It see!s to allocate the cost of wheeling based on the actual operating system usage as close as possible. #isadvantage, &. Insufficient recovery of its embedded capital cost. This is because the total circuit power flows are usually smaller than the full capacities. 6. This method is only charging for a base case networ! and not ta!ing the system reserve into consideration. 1oundary 5lo% -et!od, The boundary flow method is also !nown as ,ower llocation /ethod (, /). 5hanges in the /# boundary flow of the wheeling utility due to a wheeling transaction are included in the cost of wheeling either on a line basis or net interchange basis. The changes in either individual boundary line or net interchange are obtained after performing the two power flow e(ecutions successively with and without wheeling for every year. The base loads levels of the system in the power flow e(ecutions can be at pea! load or any appropriate level. Using the ratio of the change in the real power outflow to the magnitude of the wheeled power, the , / factor is obtained.
i

( Flow final ,t Flowinitial ,t ) ARR t T PAM Cost = Magnitude of wheeled power

RR is the total transmission annual revenue re4uirement for the systemA T is set of all ties. 4.4.4.2 Incremental Cost 1ased Transmission $ricing, 9(pressing in simple terms, incremental costs are the difference between the transmission costs with wheeling transactions and those without wheeling transactions. The concept of incremental cost"based pricing is to consider only the new transmission costs caused

by new wheeling transactions when evaluating charges for these transactions. In other words, only new transactions that forced the construction of the new facilities are charged the full incremental cost of those facilities. This is a distinctive difference from the embedded cost"based pricing scheme. The incremental cost can be defined as

!C =
where,
MW f ,&, y

MWf,&y !C ,yf

y Y f F!

MW

PWFy

s f ,s,y

the change in /# flow due to the contracted transmission service on incremental facility f for year y. the change in /# flow due to the transmission service on facility f for all

MW f , s ,
!C f , y

incremental customer s in year y that re4uires this incremental facility. the incremental cost of facility f in year y which is the sum of depreciation on facility f, incremental cost of capital, incremental ta(es and incremental e(penses. F!" "Y# #the sets of incremental facilities, incremental customer sales, and service life years of each incremental facility, respectively. PWFy the appropriate present worth factor. To calculate the incremental transmission prices two methods have been proposedA short" run incremental cost pricing (S0I5) and long"run incremental cost pricing (C0I5). Short"run incremental costs are the incremental costs of variable costs which include transmission losses, congestion cost and ancillary services cost. The long"run incremental costs include incremental cost of both variable and fi(ed costs. /arginal costs and incremental costs differ in the way they are evaluated. /arginal costs can be defined as the additional cost incurred by an additional transmission of one unit (e.g. one /#h), whereas incremental costs are calculated by reviewing the transmission system costs with and without the entire transmission transaction. S!ort Run Incremental Cost $ricing, In the short"run incremental cost pricing method, the operation cost of a new wheeling transaction is computed and allocated to that transaction. n .,' model is used to estimate the transmission transaction operating costs that accounts for all operating constraints including transmission system constraints

and generation scheduling constraints. It should be noted that S0I5 of a transmission transaction can be negative. Since revenues collected through S0I5 methodology only compensate for the operating cost incurred by a transaction, this pricing could discourage host utilities from e(panding their transmission system. 7ong Run Incremental Cost $ricing, C0I5 is for the change in total costs incurred by the wheeling companies in providing wheeling service. The change in costs includes* (i) The investment costs for reinforcements to accommodate the wheel, or credit for delaying or avoiding reinforcementsA and (ii) The change in operating (production) costs and incremental operation and maintenance costs incurred due to wheel. The operating cost component may be evaluated based on the same principles as Short 0un Incremental 5ost. The reinforcement cost component of a transmission transaction can be evaluated based on the changes caused in long"term transaction plans due to the transmission transaction. Similar to operating costs, reinforcement costs could be negative indicating that the transaction have resulted in the deferral of planned transmission reinforcements. lthough the concept of reinforcement cost is straightforward, its evaluation is very difficult that involves solving the least cost transmission e(pansion problem. )ere again, there are concerns related to allocation of the reinforcement costs among multiple transactions that collectively cause such costs.

4.8 ) SIS ()'en ccess Same Time In"ormation System*

4.8.1. Introduction, In early &HH:, 'ederal 9lectricity 0egulatory 5ommission ('905) issued a 1otice of ,roposed 0uling (1.,0) which re4uired all owners of transmission lines to offer vailable Transmission 5apacity ( T5) for sale to any customer. This 1.,0 was termed the E/ega1.,0E, since it was a ma-or step toward utility deregulation. In response to /ega" 1.,0, the other 1.,0 and individuals3 commentsA '905 .rder 1o. III and '905 .rder 1o. IIH were issued on pril 6%, &HH@. The two orders were issued with intent to bring about a competition to the wholesale electricity mar!et, accelerate the mar!et competition, lower electricity prices and create more choices for consumers. '905 .rder 1o. IIH re4uired transmission providers to create and .pen ccess Same Time Information System (. SIS) bulletin board on the Internet, and re4uired transmission providers to functionally separate their transmission employees from wholesale energy sales and purchase employees. It is perceived that, by opening open and comparable information to all potential users of a transmission system, the networ! would constitute part of the foundation for competition in the wholesale electricity supply industry. ) SIS is an electronic Internet-+ased communication system %!ic! is re4uired +y 5ederal Electricity Regulatory Commission to +e used +y all transmission 'roviders in t!e US as a near-instantaneous transmission reservation system. 2it! t!is

communication system9 com'eting %!olesale utilities9 including transmission 'roviders o%n generation o'erations9 %ill !ave t!e a+ility to monitor simultaneously t!e transmission availa+ility and costs. T!is system %ould 'rovide t!e on-line transmission in"ormation to allo% instantaneous reservations and9 at t!e same time9 minimi:e any "avoritism given to transmission 'roviders a""iliated entities. . SIS permits posting, viewing, uploading, and downloading of transmission capability in standardi$ed protocols. The data posted on . SIS clearly identify what service is available which re4uest were accepted, denied, interrupted or curtailed. . SIS permits it users to reserve capacity on transmission system, purchase ancillary services, resell transmission services to others and purchase ancillary services from third party suppliers. Users can rely on . SIS to obtain information related to transmission system, re4uest services over the transmission system and provide a process for re4uesting transmission service. . SIS is a tool for assuring a level paying field to all transmission customers and monitoring transmission owner compliance in the electric power industry. 4.8.2. Structure o" ) SIS 4.8.2.1 &uiding $rinci'les to #esign ) SIS, a. T!e "irst 'rinci'le is nondiscriminatory access to in"ormation * all customers should have an open access to the re4uired information. It was perceived that this principle would be composed of three parts* 1. minimum set of . SIS functionalities would be available to all customersA

2. ny additional functionality or increased performance would be made available to all customers on a nondiscriminatory basis, sub-ect to reasonable feesA /. ll information by responsible parties would be displayed on the same page or the same file format as that of transmission provider. +. T!e second 'rinci'le is seamless or intero'era+ility * from a customer3s point of view, easy access to information from multiple provides on multiple . SIS nodes would imply seamless interconnections. 'rom a technical point of view, this seamless implies that all systems are interoperable, from the communications lin!s, to application interfaces, through, the database access methods.

c. T!e t!ird 'rinci'le is "le6i+ility, . SIS nodes should have as much fle(ibility to use e(isting communication systems, support added functionality, or even be able to use entirely different functions over the long term. 5ustomers should have the fle(ibility to use commercially available hardware and software that are available from more than one supplier. ;oth providers and customers should have the fle(ibility to develop or purchase their own business applications. d. T!e "ourt! 'rinci'le is e6'anda+ility* . SIS nodes must be built with continuous e(pansion in mind. s new functionality and information re4uirements would

emerge, . SIS nodes must be capable of being upgraded with a minimum loss to the prior investment. e. T!e "i"t! 'rinci'le is customer-driven * it is presumed that customers would base their applications around commercially available des!top hardware and software applications, including database managers and spreadsheets. Therefore, the . SIS design must address !ey customer re4uirements, including, user friendliness, performance, security, and reliability. ". T!e si6t! 'rinci'le is a""orda+ility, providing a basic . SIS functionality must be possible at a reasonable cost while the stated goals for the networ! would be met and more advanced systems would be allowed and encouraged. 4.8.2.2 5unctionality o" ) SIS, The main focus of the . SIS networ! is on the dissemination of the available transfer capability ( T5) information and other re4uired information, processing the transmission service re4uests, and providing its basic function to support power mar!eting and energy trading. . SIS is constructed such that it would involve simulation techni4ues

and communication technology to act as a user"friendly tool for supporting the operations of energy mar!ets.

'igure %.@ Illustration of . SIS 'unction 4.8.2./ rc!itecture o" ) SIS . SIS is a networ! of sub"networ!s called $A ! #nodes. 9ach . SIS node is a subsystem, represented by a computer system that would provide access to the transmission services information by transmission customers (T5). The . SIS nodes itself may consist of variety of computing hardware, software, and internal communication networ!s that comply with '905 re4uirements. In each region of the United States, there is an . SIS which would serve T,s and T5s in the region. 9ach regional . SIS would operate as an on"line clearinghouse of transmission and ancillary services information for the region. The regional . SIS together would form a large national . SIS networ!. The . SIS networ! is open to all 4ualified transmission mar!et participants and other authori$ed users. ll . SIS nodes would be developed as the Internet sites to assure universal access, where a registration and different levels of access codes would be re4uired to assure the security of the system. 0egistered 4ualified customers may use the standard Internet #eb browsers to access . SIS nodes where the . SIS networ! would use security guards to protect data from unauthori$ed users, and to limit access to the specific information re4uired by the user.

The Internet was proposed as a communication media due to its high functionality, consistency of interconnected networ!s and the low cost of services. . SIS would enable T5s, through the Internet, to obtain the available information on T5, costs and tariffs for transmission capacity, and cost of ancillary services. 9ach regional . SIS would have computer as the . SIS node #eb server. This computer is the central storage and management site for the . SIS information. The . SIS node would also have a number of #eb client computers that function as . SIS clients for T,s and T5s. . SIS nodes have three basic interfaces* J Interface between the node and the T5 (customer"node interface), J Interface between different nodes (node"node interface), and J Interface between the node and the T, (node"provider interface)

'igure %.K The 5onceptual . SIS 1etwor! The conceptual structure for the Internet"based . SIS networ! is shown in figure %.K, where . SIS nodes are interconnected through the Internet while any two nodes may or may not be directly interconnected. It is the responsibility of Trans%ission # er&i'es !nfor%ation # Pro&iders#(TSI,s) to install and operate . SIS nodes. ny transmission providers may delegate its responsibility to operate . SIS nodes to any entity that is capable of meeting . SIS re4uirements. s shown in 'ig. 7, each node is connected to one transmission provider or several

transmission providers, and transmission customers are either directly or indirectly connected the . SIS node through the Internet. T5 may opt to use a TSI, as an alternative means to access the . SIS information. If a T5 would li!e to receive the . SIS information with some value added services (such as data analysis) or in a faster manner than the Internet, the T5 may opt to use private connections provided by TSI,s for fees paid to TSI, for this service.

'igure %.I rchitecture of . SIS 1ode The architecture of an . SIS node is illustrated in figure %.I. )ere, the . SIS node is connected to the Internet through a firewall for the security of data. ;efore accessing the . SIS information, all users should register and log into an account. The 9nergy /anagement System (9/S) is connected to the . SIS node to provide accurate T5 calculations in real time. The database function is threefold* J Stores records of T5 and transaction data, J Lueries searches of those records, and J ;ac!up in case of system malfunction.

4.; Trans"er Ca'a+ility on ) SIS

4.;.1. Introduction 'ederal 9lectricity 0egulatory 5ommission ('905) order IIH, mandated that the calculation of vailable Transfer 5apability for each control area and the posting of these values on . SIS to enhance the open access of bul! transmission system by providing a mar!et signal of the capability of a transmission system to deliver energy, which would support competitive bidding in the generation, or energy, mar!et. The vaila+le Trans"er Ca'a+ility ( TC* is a terminology that is used to define and calculate meaningful measures of transfer capability of an interconnected transmission

networ!. Total Trans"er Ca'a+ility (TTC* (in /#) is a direction"specific measures that indicates the ability of interconnected electric systems to move or transfer power in a reliable manner from one area (i.e. an individual electric system, power pool, control area, sub region, or a portion of any of these) to another over e(isting transmission lines (or paths) between those areas under specified system conditions. Since the transfer capability is directional in nature, T5 from rea & to rea 6 is not e4ual, in most cases, to T5 from rea 6 to rea &, i.e. T5&""M6N T56""M&. 4.;.2 Trans"er Ca'a+ility Issues Transfer capability is usually calculated based on off"line computer load"flow simulations of the interconnected transmission networ! under a specific set of assumed operating conditions. .ff"line calculations are used due to the fact that a large amount of computation is needed for calculation. The computation of transfer capability is based on linear and non"linear methods e.g. power flow methods and continuous power flow methods. The non"linear power flow method is usually time consuming as compared to continuation power flow. 0ecently, new techni4ues such as sensitivity based, linear and generali$ed search methods have been proposed to reduce the computation time. Several factors are considered during computations such as pro-ected customer demands, generation dispatch, system configuration, base case schedule transfers, and the contingency cases that reflect the degree of re4uired system security. Transfer capability computations should consider limits imposed on the system components such as thermal, voltage, and stability limits. In addition, uncertainties facing the operation of interconnected power system (uncertainties in load forecasts, forced and scheduled transmission outages, generation unavailability etc) should be ta!en into consideration. significant error in load forecasts could result in an interconnected transmission networ! loading, which in turn could lead to reduction in transfer capability. .n the other hand, loop flows through a transmission networ! or control area may be caused by transfers between two or more neighboring control areas. Coop flows could cause unpredictable results by either increasing or decreasing the transfer capability. 'or these reasons, uncertainties should be 4uantified properly to increase the efficient use and the security of the system and to provide necessary information for system operation and planning. 4.;./ vaila+le Trans"er Ca'a+ility Calculation, The 1orth merican 9lectric 0eliability 5orporation (NERC) defines as measure of the transfer capability remaining in the physical transmission networ! for further commercial activity over and above already committed uses. T5 is an indication of the e(pected transfer capability remaining on the transmission networ!. It is the available transfer capability that could be scheduled to the designated path under the conditions considered in calculating T5 values. vailable Transfer 5apability is a mar!et signal that refers to the capability of a system to transport or deliver energy above that of already subscribed transmission service commitments. /athematically, the T5 value between two points is given as where,
ATC = TTC TRM ( )TC + C(M )

TTC is Total Trans"er Ca'a+ility +et%een t%o 'oints. TT5 is the amount of electric power that can be transferred from one area to another over the interconnected transmission networ! in a reliable manner based on pre"contingency and post"contingency conditions. TR- is Transmission Relia+ility -argin . T0/ is the amount of transfer capability necessary to provide a reasonable level of assurance that the interconnected transmission networ! will be secure. T0/ accounts for inherent uncertainty in system conditions, its associated effects on T5 calculations, and the need for operating fle(ibility to ensure reliable system operation as system conditions change. ETC is E6isting Transmission Commitments including retail customer services between the same points. C1- is Ca'acity 1ene"it -argin. 5apacity ;enefit /argin is defined as the amount of firm transfer capability preserved for Coad Serving 9ntities on the host transmission system where their load is located, to enable the access to generation from interconnected systems to meet generation reliability re4uirements. ,reservation of 5;/ for a load serving entity allows that entity to reduce its installed generating capacity below what may otherwise have been necessary without interconnections to meet its generation reliability re4uirements. The transmission capacity preserved as 5;/ is intended to be used by load serving entity only in times of emergency generation deficiencies.

Review Questions for University Exams

&. #hat do you understand by Vertically Integrated Utilities in power systemD 6. +raw and e(plain the structure of a typical Vertically Integrated Utility. 7. #hat is +eregulationD +raw and e(plain the architecture of a deregulated or restructured electricity supply industry. %. .n what bases are the 9lectricity 0estructuring /odels are classifiedD :. 9(plain with suitable diagrams, the various 9lectricity /ar!et /odels or 0estructuring /odels. @. 9(plain the following 0estructuring /odels a. ,ool5o /odel b. ;ilateral 5ontracts /odel c. )ybrid /odel. K. 9(plain the various purposes or goals of transmission pricing in restructured power system. I. #hat re4uirements must be met by a proper transmission pricing systemD H. 9(plain the various cost components involved in a transmission transaction. &O. +escribe various transmission pricing methodologies in deregulated electricity system. lso enlist their merits and demerits. &&. 9(plain in detail the following transmission pricing methodologies along with their merits and demerits* a. 9mbedded 5ost ;ased ,ricing b. Incremental 5ost ;ased ,ricing. &6. #hat is meant by . SISD 9(plain in detail. &7. 9(plain or list the various guiding principles to design . SIS. &%. 9(plain with neat diagram, the structure of .pen ccess Same Time Information System.

&:. #hat are the various functions performed by . SISD 9(plain with suitable diagram. &@. 9(plain the architecture of . SIS. &K. #hat do you understand by transfer capability on . SISD &I. 9(plain the following terms related to . SIS* a. vailable Transfer 5apability. b. Total Transfer 5apability &H. )ow will you calculate the vailable Transfer 5apability on . SISD #rite a mathematical e(pression of vailable Transfer 5apability.