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An East Coast View: The Right Price for PJM

Fortnightly Magazine - October 1 1997

the restructured PJM should continue to operate as a tight power pool (em as proposed by the supporting companies (em then it will harm competitive markets. This assertion is unfounded. The FERC, the industry and state regulatory commissions have long recognized the efficiencies that can be achieved through central dispatch, reserve sharing and collaborative operations that preserve reliability. There is nothing inconsistent between a competitive energy market and coordinated planning and operation designed to achieve these efficiency objectives of pooling. After all, efficiency is one of the reasons we value competition.

Equally unfounded are criticisms of the operation of a spot energy market by the PJM independent system operator. As proposed, the ISO will be truly independent, with no role in the spot energy market other than as an administrator. It will neither engage in trades for its own account nor benefit from trades by others. But having the ISO operate a spot energy market is the best way that customers in PJM, and their suppliers, can be assured of competitive prices for balancing and other services necessary for the operation of the PJM control area.

Rather than comment on the proposals of the supporting companies, observers should ask: Why are PECO and CCEM so bent on preventing the ISO from operating a bid-based, day-ahead pool dispatch? Also: Why isn't day-ahead bidding the efficient way for the ISO to acquire the resources it needs for balancing? And: Why not charge or award the locational market-clearing price when generators offer their power for balancing, or when users rely on that balancing? The answers given by PECO and CCEM are not convincing. They suggest a greater concern for the interests of power marketers and other middlemen than they do for consumers.

The supporting companies and their backers have charted the far better course for PJM as it sails toward the future.

Dispelling Myths: A Response to Common Objections

The FORTNIGHTLY'S June 1 editorial, summarizing complaints by critics, listed a dozen so-called "common objections" to LMP. These objections are not well-founded. To the contrary, there are compelling responses to each of the "common objections" to LMP:

Is LMP too complicated for the real world? No. Many assume that hundreds of different prices will be calculated, one for each node. However, when there is no congestion, the LMP will be the same at every bus. When there is congestion, LMP will accurately reflect differences in the marginal costs of meeting loads at each location. Hence, LMP neither exaggerates the complexity of the real world nor sweeps it under the rug. Any other system would sweep these real differences under the rug.

A different LMP at two busses means that the market price of power is different at the two locations. If these locational differences are commercially significant, then they should be made evident so buyers and sellers can respond. If they are not significant, then traders will ignore them or trade based on averages or other approaches. For example, if there are no LMP differences within a "zone," then traders can conduct "congestion-free" trading in that