© 1998 CORBIS CORP.

I Have the pleasure of serving as the guest editor for this issue of the IEEE Power and Energy Magazine on electricity markets. The following five invited articles comprise the issue:

• Balancing Market Priorities with Security Issues, by Massoud Amin
• Real-World Market Representation with Agents, by Vladimir Koritarov
• The Rights to Fight Price Volatility, by O. Alsaç, J. Bright, S. Brignone, M. Prais, C. Silva, B. Stott, and N. Vempati
• Watching Watts to Prevent Abuse of Power, by Anjali Sheffrin, Jing Chen, and Benjamin Hobbs
• Supplying the Generation to Meet the Demand, by Alex Papalexopolous.

In his article Dr. Amin points out issues related to the vulnerability of power systems. According to the author, the power system infrastructure is vulnerable to global disruptions, initiated locally by material failures, natural calamities, intentional attacks, or human errors. The North American power network may realistically be the largest and most complex machine in the world. A secure and reliable operation of power systems is fundamental to the global economy, security of nations, and the quality of citizens' lives in any industrialized nation. Among many issues discussed in the article, the following questions are raised: Will market-based priorities support a strategically secure power system? Who will pay for it and what are the economic incentives for such investments? What overall system architecture is most conducive to maintaining security? The article concludes that since energy policies and technological developments could require long-term commitments as well as sustained investments, it is imperative that all parties involved join hands in managing power systems in a secure and economical fashion.

The article by Vladimir Koritarov addresses the issue that, as power markets are relatively new and continue to evolve, there is a growing need for advanced modeling approaches that simulate the behavior of electricity markets over time and how market participants may act and react to the changing economic, financial, and regulatory environments in which they operate. A new and rather promising approach is to model the electricity market as a complex adaptive system using an agent-based modeling and simulation approach. The article discusses that, unlike conventional electric systems analysis tools, the Electricity Market Complex Adaptive System (EMCAS) model developed by Argonne National Laboratory does not postulate a single decision maker with a single objective for the entire system. Rather, agents in the simulation are allowed to establish their own objectives and apply their own decision rules. This approach allows agents to learn from their previous experiences and change their behavior as future opportunities arise. That is, as the simulation progresses, agents can adapt their strategies based on the success or failure of previous efforts. The article discusses that the approach is especially suited to analyze electricity markets with many participants, each with their own objectives. The EMCAS approach could allow the testing of regulatory structures before they are applied to real power systems.

Dr. Ongun Alsaç and his coauthors provide a comprehensive review of financial transmission rights (FTRs) in electricity markets. The FTR is a natural antidote to congestion price volatility in an LMP-based market. Such markets have thus far taken root mainly in North America, where they are in varying stages of operation, development, and planning. The authors point out that the FTR's primary purpose is to offset a transmission user's LMP congestion charges, which are typically quite volatile. However, in today's open FTR auctions and secondary markets, FTRs can also be arbitraged by any accredited transmission nonuser. The transmission user who is vulnerable to congestion price volatility can hedge (insure) against it by buying a suitable FTR. This FTR then generates payments to the holder that in effect refund some of, all of, or more than the user's congestion expenses. At the same time, to combat market power and to promote liquidity, the market also allows FTRs to be bought and sold by nontransmission users (arbitragers), who pit their congestion expertise against the rest of the FTR players. The article further argues that every ISO would encourage competitive participation in its FTR market. A challenge, then, for the ISO is to provide its participants with enough data and feedback to allow them to make fully informed FTR buy, sell, and hold decisions. However, with the current fear of market power, the rules of the game prohibit competitors from knowing each other's FTR auction bids (at least until this data has become too old to be immediately useful). The article concludes that FTR market products and flexibilities are likely to evolve much further in the future and more advanced online technologies could permit FTR auctions to evolve in different, more open, directions.

Dr. Ben Hobbs and his coauthors provide a detailed discussion on electricity market monitoring. The authors point out that the competition in electric power generation has resulted in innovation and efficiency in investment and, in many places, lower consumer prices. The task of market monitors would be to help ensure that these benefits are as widespread as possible by improving market designs, and by anticipating, detecting, and restraining the exercise of harmful market power. The authors refer to the argument that market power in electricity markets is inescapable and indeed desirable so that prices are high enough to attract new generation investment. The argument is that unless generators can push the price above their marginal operating costs, they will never recover fixed costs. The authors also point out that while some degree of market power is inevitable, they entirely disagree that it is desirable for market manipulation to raise prices above competitive levels. In a well-designed market, there are a host of sources of revenues for fixed cost recovery including revenues from providing operating reserves, capacity markets from a resource adequacy requirement, long-term contracts, and market revenues for inframarginal units in the market. In addition, a well-designed market under competitive conditions will result in high energy and ancillary service prices during times of tight supply, and these prices can reflect the value of those commodities to consumers and the system operator. The article concludes that researchers, regulators, and market participants ought to work together to devise workable and effective diagnostics of market power, and mitigation systems that eliminate its most harmful effects while still providing needed investment incentives.

Dr. Alex Papalexopoulos' contribution describes the various options available for ensuring adequate generation supply. It argues that energy-only markets are not sufficient to provide correct price signals to ensure adequate generation supply. The origins of the current capacity markets have evolved from historic utility practices of planning for adequate installed generation reserves. These practices can be unstable and adversely affect the reliability of the system. The article refers to capacity markets in PJM, NYISO, and NE-ISO and reviews a market-based approach that can play the role of ensuring adequacy. Based on this approach, an LSE provides evidence that it has long-term call options for supplying sufficient energy to meet its peak load and reserves. These options are one-sided CFDs, in which the LSE is hedged against market prices that are higher than the strike price. The article provides a comparison of the capacity market structure and rules of the three Eastern ISOs, which are transformed from tight power pools into markets.