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An East Coast View: The Right Price for PJM

Fortnightly Magazine - October 1 1997

that LMP is calculated after the fact? Yes. LMP is a spot price, determined from the marginal costs of the generators used in actual dispatch by the ISO. Hence, it is calculated after dispatch. Spot prices will vary over time and by location, depending on congestion, demand and the mix and costs of generators available in each area for dispatch. Expected LMPs will be calculated and published day-ahead by the ISO. Final LMPs also will be published. Given this price transparency, over time market participants will be able to anticipate LMP changes and locational differences and respond efficiently.

Can LMP be audited? Yes.

Will LMP encourage new transmission? Yes, when it is economic. Traders will pay congestion charges based on differences in LMP between the load and source locations. When the congestion charges exceed the costs of expanding the system to relieve the congestion, expansions will become economic. Those who would otherwise pay the charges (or pay higher LMPs) (em such as loads in constrained areas (em will have an incentive to pay for expansions to avoid the charges and get cheaper energy. Generators in unconstrained areas will have an incentive to pay for expansions to sell power into constrained areas with higher prices without paying the congestion charges. LMP creates efficient incentives for suppliers, users and investors.

Does basing congestion charges on LMP differences violate FERC's policy against "and" pricing? No. FERC recently ruled (in the California case) that LMP-based congestion pricing is acceptable and not a violation of "and" pricing principles.

Does LMP create or exacerbate market power? No. LMP makes market power easier to detect and thus harder to exercise. LMP reveals the higher prices that a generator with market power might charge in constrained areas. This allows demand responses in the constrained area to dilute the price and mitigate the market power. Other approaches that average prices hide the generator's higher price in the average and dilute the demand responses, obscuring market power.

Should the ISO "abstain from taking bids" for its balancing service? No. A voluntary, day-ahead bidding process is an efficient, competitive way for the ISO to acquire the resources it needs to balance the system, an essential service. The proposal would allow generators the option of submitting bids to the ISO each day. The ISO would then select the least-cost mix of day-ahead bids as the resources for real-time dispatch needed for system balancing. This ensures the lowest cost for this essential service.

PECO's proposal requires that the ISO "abstain from taking bids in any energy market, such as a pool-based power exchange." PECO's ISO would acquire the flexible resource it needs for system balancing and congestion management by asking some generators to sign "call contracts" weeks or months in advance. If a generator that was not under a "call contract" offered a cheaper resource to the ISO the day before the dispatch, then PECO's ISO would refuse to consider it. Or would it? If the ISO turned these offers down, then it would be rejecting lower-cost generation and needlessly raising the cost of the