John Nash — the well-known mathematician made famous by the movie A Beautiful Mind — is the father of modern game theory. Game theory explains the dynamics of multiple players making decisions governed by rules. In many games, all are better off when cooperating rather than all acting in their own self-interest. Unfortunately, individual players will try to improve their situation by acting selfishly. Selfish behavior leads to a locally optimal Nash Equilibrium: players cannot improve their situations by acting alone, but could improve everyone's situation and “jump out” of the local minimum by cooperating.

In the past, most decisions impacting power systems were made by vertically integrated utilities that owned generation, transmission, distribution and customer service within a well-defined service territory. Since there are no game-theory conflicts when a single utility makes self-contained decisions, there was little to gain by acting selfishly towards other utilities. The result was an industry environment of information sharing, collaborative research, general cooperation, and power system planning designed in the best interest of customers (at least from the perspective of a self-contained service territory).

A large percentage of electric power generation is now in the competitive free market. Competition generally has done a good job at supplying proper price signals for bidding strategies and generation expansion. However, power has to flow from generation facilities through the transmission grid, which suffers the curse of John Nash. States with inexpensive generation will be hesitant to approve transmission projects that ship cheap megawatts out of state. Just look at Connecticut's vigorous attempts a few years ago, including legal injunctions to prevent the commissioning of an underwater cross-sound transmission cable to Long Island.

Utilities today, as game theory predicts, view transmission planning in terms of their own interests, making it impossible for utility-driven planning to address broader regional needs. For this reason, many utilities have ceded transmission planning to regional transmission organizations (RTOs). Even in these cases, game theory is in full force. Utilities are in perpetual conflict with RTOs. Utilities within RTOs often have spats. Utilities also can use the threat of an RTO switch.

The rules and regulations of energy markets result in many benefits but also inject game-theory issues into expanded transmission grid planning. A natural question to ask is, “Can't we change the rules to minimize undesirable behaviors motivated by self-interest?” Yes and no. Most regulation happens at the state level, limiting the ability of state regulators to address regional and national issues. More importantly, states are also subject game theory. State regulators may be tempted to act in the self-interest of their state, precluding optimal interstate transmission decisions.

In theory, FERC could unilaterally make all transmission project decisions and eliminate the negative aspects of selfish behavior. In reality, utilities and RTOs have far better knowledge of their regional grid, forcing a choice between well-informed RTO decisions subject to member voting influenced by self-interest and less-informed decisions made by a theoretically neutral federal agency. To date, FERC has wisely limited its role to mostly oversight, with the threat of intervention if regional stakeholders refuse to get along. FERC is like a parent hollering to kids fighting in the basement, “Don't make me come down there!” From the kids' perspective, it is better to get along if the threat of intervention is credible and the consequences are sufficiently severe.

Nowhere is game theory more evident than in wind power. Consider the grid expansion required to move power from the windy Midwest to the load centers of the Northeast. Midwestern states will not benefit much from the transmission upgrades but will be saddled with their costs. Presently, there is not a good mechanism to have ratepayers in New York pay for new transmission lines in South Dakota. Merchant transmission with long-term capacity contracts could partially solve this problem, but Midwesterners will still not wish to build unsightly transmission lines for the benefit of others.

Can the curse of John Nash on our transmission grid be lifted? Perhaps, but this would require several rule changes. First, FERC Order 890 needs to be pushed forward, requiring interregional planning through a transparent process where all stakeholders can participate. Second, the FERC should intensify its efforts to develop an agreed upon cost of recovery for facilities used for regional and interregional transmission. Last, the FERC must leverage its “backstop” transmission siting authority so that needed inter-state projects can move forward. If these things are done, selfish behavior will become less beneficial, moving us towards a beautiful grid.

Richard E. Brown (rbrown@quanta-technology.com) is the senior vice president of Operations for Quanta Technology. He is author the books Electric Power Distribution Reliability and Business Essentials for Utility Engineers. Brown is an IEEE Fellow and a professional engineer.