[BETA] Fortnightly

Locational marginal pricing, even if "complex," is well worth the benefits.

In two recent issues, PUBLIC UTILITIES FORTNIGHTLY featured editorials %n1%n on restructuring of the PJM Pool. Those two articles described proposals by the so-called supporting companies, %n2%n seven members of the Pennsylvania-New Jersey-Maryland Interconnection, to use a "locational marginal pricing" model for congestion pricing for electric transmission and to continue PJM as a "tight" power pool. The FORTNIGHTLY compared the LMP model with a zonal pricing idea proposed by PECO Energy and the Coalition for a Competitive Electric Market, an ad hoc group including power marketers. Contrary to the impression conveyed by those editorials, however, the facts and the public interest strongly favor the supporting companies and their LMP proposal.

Locational pricing for transmission congestion has been used successfully in one form or another in certain foreign countries for some time now. Many believe, in those countries and in the U.S., that LMP provides the most accurate, efficient and equitable way to price transmission congestion. Indeed, while the Federal Energy Regulatory Commission has not yet formally approved the LMP model as proposed by the supporting companies, it has spoken favorably of the idea: "Ultimately, [it] will promote competitive market mechanisms we are encouraging." %n3%n The FERC repeated that view in its just-issued order in the California restructuring case: "While the Commission recognizes that congestion pricing is complex, we believe that the gains in efficiency outweigh the burden of such complexity." %n4%n

Congestion: A Fact of Life

Transmission congestion, after all, is a fact of life on interconnected networks. There is not always enough transmission capability to meet all of the demands to move power. When congestion occurs, it becomes impossible to deliver energy from the cheapest sources in one location to users in another location that are served by the congested facilities. As a result, the cost of serving the marginal increment of demand varies among locations. Locational marginal pricing simply recognizes this reality; it does not create it. By contrast, transmission congestion pricing schemes that disregard locational price differences are inefficient and promote attempts by market participants to shift costs to others. This defect, inherent in the PECO pricing proposal, has been made plain by the system operator for PJM. Already, the system operator has determined that interim implementation of the PECO averaging approach has encouraged generators to bypass the operator's dispatch instructions, thus undermining the operator's control.

LMP is not overly complex as some contend. As noted above, the FERC has recognized that any "complexity" is well worth the benefits. Of course, as the editorials noted, some critics disagree. Rather than look at marginal energy prices at different locations on the network, they believe an approach based on zones is simpler and sufficient. If these critics were correct in their premise (em that little or no congestion exists PJM-wide or within the specified zones (em then LMP prices would be the same across PJM or within the specified zones. The two methods, LMP and zonal pricing, would produce equal results and prove equally convenient for those buying or selling