Tom Adams

December 11, 2002

Mr. Don Dennison
Chairman
New Brunswick Market Design Committee
c/o Energy Secretariat
New Brunswick Department of Natural
Resources and Energy
P.O. Box 6000
Fredericton, New Brunswick
E3B 5H1

email: info@nbmdc-ccmnb.ca

Dear Mr. Dennison,

Please accept the following comments on the “New Brunswick Market Design Committee – First Interim Report.”

Recommendation 1-1 states that “The MDC will pursue the development of a bilateral contract market for New Brunswick.” The MDC has suggested that physical bilaterals would be realized through “transmission rights between the injection and withdrawal points,” a phrase that suggests a contract path concept of physical transmission right. I urge the committee to reconsider its position on both these foundational market design questions.

As California and the UK are both experiencing now, bilateral markets make it very difficult for non-dispatchable but otherwise efficient generators to realize their full contribution to the system. Individual systems based on fuel cells, package cogeneration, or wind power need liquid, seamless real-time markets to optimize their value. In the absence of these markets, non-dispatchable generation options would all be at an artificial disadvantage relative to integrated, internally diversified portfolios of supply assets.

Adopting a bilateral contract model would limit the future prospects of any electricity market you might establish. The FERC is now in the midst of a process to develop a standard market design. That process is strongly influenced by the highly successful PJM model. One of the promising aspects of Ontario’s electricity market is its explicit effort to harmonize with neighbouring US markets. This effort is institutionalized through a Memorandum of Understanding between the IMO, NYISO, NEISO, and PJM. Unless New Brunswick’s market model is compatible with neighbouring markets, it will be much more costly than necessary to realize trading opportunities with neighbouring markets. Therefore, I recommend working toward the standard market design being advanced by the FERC process.

A bilateral market would limit buy-side competition to only large customers because it would be extremely difficult to administer for anything but a very few customers. A bilateral market cannot be scaled up to eventually accommodate all consumers unless heroic effort is undertaken. The multi-billion-dollar cost to build the UK’s NETA market is a recent example.

Physical transmission rights, which are suggested in the MDC report, can only be fictional because physical tranmission rights are not logically consistent with the operational reality of integrated AC transmission networks. The Ontario Independent Electricity Market Operator has had difficulties dealing with situations where its market rules are inconsistent with operational practices. Ontario’s decision to adopt a one-zone price for electricity by ignoring the effects of transmission congestion is an example. Based on this experience, let me urge that the committee try to ensure the proposed market rules match as closely as possible the operational requirements of your system.

In 1996, Energy Probe published a broader discussion of the relative advantages of a pool-based market over a bilateral or “wheeling” market specifically related to the circumstances in New Brunswick.¹

I would be delighted to assist your committee in any way I can. Best wishes to you and your committee in your challenging task.

Sincerely,
Tom Adams
Executive Director
Energy Probe

¹New Brunswick’s Power Failure: Choosing a Competitive Alternative, 9 October, 1996, by Thomas Adams
Presentation to the New Brunswick Legislative Assembly, Standing Committee on Crown Corporations