The Organizational Economics of Power Brokers and Centrally Dispatched Power Pools

Abstract

INTRODUCTION economic and the or normative components of pool structure. Power pools are partnerships among corporately unaffiliated electric utility companSUBSIDY-FREE COST ALLOCATION ies, formed to realize cost savings through mutual cooperation. There are many ways in Solutions to the first organizational probwhich cooperation can reduce the collective lem are described as tight or loose (Fedcosts of the utilities in a region, including joint eral Energy Regulatory Commission 1981; system planning and emergency exCramer and Tschirhart 1983). In some rechange, but one aspect of cooperation is comgions of the United States, particularly in the mon to all power pools. Within a geographiNortheast, individual firms have yielded subcal region and at any given time, some utilities stantial amounts of authority over their own typically experience higher short-run margeneration facilities, establishing computerginal costs than others owing to differences of controlled dispatching of the region's plants plant mix or instantaneous loads. When the regardless of ownership to realize the greatest firms with low marginal costs increase their reduction in costs. In other regions, production and sell this to notably Florida, utilities have chosen to retain the higher cost firms, the poolwide cost of their autonomy and institute an information generation is decreased. ertclearinghouse or energy broker to facilitate Owing to this opportunity for cost savings, short-run power transactions that reduce the the firms in a region are confronted with an pool's costs (Cohen 1982). No matter organizational problem having two compowhat organizational form is used, a pool must nents: (1) what should the firms do to realize also agree on a method to allocate the costs of the opportunity for savings? and (2) how pooled production, and experience has should the savings be allocated among the shown that the matter of determining an pool members? The first question is technical, equitable allocation of system costs can be solved by accounting for the costs of producone of the principal impediments to the fortion and the costs of transaction under altermation and maintenance of power pooling native organizational arrangements (Cramer agreements (Uri 1976; Federal Energy Reguand Tschirhart 1983; Gegax and Tschirhart latory Commission 1981). 1984). The second is normative and must be Recently, economists have taken an interanswered in terms of the notions of justice or est in the equity properties of alternative cost fairness held in common by pool members. allocation mechanisms. The equity concept The solution of the organizational problem employed in most studies is the notion of therefore requires a political economy freedom (Faulhaber 1975) taken framework for organizational analysis (Zald from cooperative game theory. An allocation 1970) in which attention is given to both the of a power pool's generation costs is subsidy free if no individual or subgroup of pool mem-