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An East Coast View: The Right Price for PJM

Fortnightly Magazine - October 1 1997

power in PJM. However, if the critics are wrong (em if congestion does cause price differences (em then only LMP will accurately reflect those differences, particularly within zones. In 1996 alone, 32 different thermal overload transmission limits occurred on facilities within PJM. Moreover, most of these facilities do not lie at interface boundaries (separating zones) proposed by CCEM. Consequently, prices would have varied within the zones defined by CCEM. Zonal approaches like CCEM's ignore the difficult and judgmental decisions necessary to draw or change zones and the controversies between winners and losers that inevitably will result.

Advantages of LMP

Contrary to some claims, LMP does not bundle energy and transmission. It does not require anyone to buy energy from the transmission provider to get service. Instead, LMP simply recognizes the cost of transmission congestion as the difference between spot prices on two sides of a transmission constraint. CCEM's own expert, Dr. Richard Tabors, expressly acknowledged at the FERC Technical Conference that this is the correct way to price transmission. Correspondingly, if no transmission constraints exist on the system, the spot price of energy will be uniform throughout the pool and the cost of transmission congestion will equal zero. Recognizing the inherent pricing relationship between energy prices in two locations and the value of transmission service between those locations is in no meaningful sense "bundling."

LMP is the only system that sends accurate price signals, prices which accurately reflect the cost of power at any location in PJM. By contrast, proposals like PECO's that are based on price averaging inherently will distort price signals. If prices are averaged, by definition, some will pay too much and others too little. These defects have lead PJM to ask the FERC for authority to modify the PJM Open Access Tariff. The PJM finding indicated that when constraints require the system operator to back down low-cost generation, the faulty price signals given by the PECO proposal encourage those generators to bypass PJM's dispatch instructions and self-schedule, thus limiting the operator's ability to maintain system control.

LMP does not discriminate. Generators are paid and users are charged comparably, based on the true cost of transmission congestion between the injection and delivery points used. If those costs vary by location and use, and they do, then charging everyone the same price, as PECO and CCEM urge, would be discriminatory. Under LMP, a user of firm transmission service will never be worse off than if it served its load with the resources for which it acquired that transmission service, wherever those resources are located. If, as suggested in the editorials, resources close to load do not receive rebates of congestion costs, that is only because those resources were not affected by congestion.

Independent auditors (Price Waterhouse) for PJM unequivocally informed the FERC at its Technical Conference on May 9 that the LMP proposal could be fully audited. That endorsement by Price Waterhouse confirms that LMP does not operate out of a "black box," as some critics have emotionally suggested.

Central Dispatch: Still Competitive

Some interested parties have asserted that if