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Fortnightly Magazine - June 1 1997

LMP that includes separate capacity rights in transmission sold by auction, plus market-based energy pricing. The point: to create separate unbundled commodity markets in energy and transmission. At this writing, it was anticipated that all parties would file a new set of documents at the FERC on or before May 31, to reconcile or defend their various proposals.

Ironically, while PJM's LMP plan follows directly on the work of Schweppe, so does the CCEM model, which was developed primarily by Schweppe's co-author Richard Tabors, of Tabors, Caramanis & Associates, also of Cambridge. CCEM claims its model is better adapted to the real world. Indeed, Tabors would boil down the problem to some five zones, each containing groups of hundreds of nodes with similar prices characteristics.

"PJM intends to replace the market with computers," complains John Hughes, director of technical affairs at the Electric Consumers Resource Council.

Don't be fooled, however, this no academic debate. Some investor-owned utilities see themselves as winners. Other don't. And then there's the power marketers, who do not own generation, and will receive no FTR allocation.

"[We] would have no role to play," says Enron's Eric Van Der Wilde.

"As [PJM] added more detail, I became more pessimistic," adds Robert A. Levin, v.p., New York Mercantile Exchange. "I think it will discourage a lot of parties from getting into this market."

Kathy Patton, regulatory counsel for Electric Clearinghouse, agrees: "Locational pricing might ultimately make sense, but only if there was no market power. It will give a monopoly to the ISO and the rest of us will be restricted to buying and selling paper."

David J. Pratzon, of PECO Energy, pulls no punches. At a technical conference held at the FERC on May 9, Pratzon likened PJM's LMP plan as not much more than a "a slush fund"--a rebate program offering windfalls to a lucky few.

"Hung Out" on Transmission

From what I see, the critics don't begrudge LMP as theory. Instead, they cringe at the thought of a market they can't see: 1,600 different prices and delivery points, with final prices held hostage to an after-the-fact cost settlement engineered by computer software. Here's a short list of a dozen common objections:

• Too complicated for real world;

• Costs more than a physical redispatch;

• Bundles energy with transmission;

• Hinders forward and secondary markets;

• Misallocates transmission rights;

• Discriminates against utilities with plants close to load (FTRs hold little value);

• Bad for power marketer (won't receive FTRs);

• Discriminates against municipal utilities (who can't designate plants to earn FTRs under purchased power contracts);

• Price signal is ineffective (after the fact);

• Impossible to audit;

• Won't encourage new transmission; and

• Violates FERC policy against "and" pricing for transmission.

PECO's Pratzon claims that redispatch in PJM (to accommodate constraints) only costs $4 million annually, while PECO's computer modeling runs indicate that LMP would involve $100-150 million annually in collections and congestion rebates.

Randall J. Falkenberg, an Atlanta consultant with J. Kennedy & Associates, Inc., suggests that this high cost may actually make transmission constraints appear too important, giving false incentives to encourage transmission improvements where