Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

MAPP, MISO & PJM: Three Regions Fight Over Wires, Prices and Profits

Fortnightly Magazine - February 1 1999

terms are "locational marginal pricing" and the so-called "price cap."

In truth, however, locational marginal pricing is not an energy pricing formula. Instead, it operates as a method for setting prices for transmission congestion. Technically speaking, LMP-based transmission prices respond to energy prices - not the other way around. In fact, no congestion pricing was seen in PJM at the times of high energy prices cited by ODEC. These observations came in an affidavit filed by PJM pricing architect William W. Hogan, the Harvard University professor, and Dr. Scott M. Harvey, a director in the economic consulting firm of Putnam, Hayes & Bartlett Inc. Hogan and Harvey also explained how the FERC had not imposed a cap on energy prices, but only a cap on bids by resource owners, designed to prevent power producers from gaming the market by withholding capacity:

"Cost-based bid caps do not necessarily cap prices. ¼ The purpose of a bidding cap is not to cap prices but to avoid the possible exercise of market power through [a] de facto limitation of the output of generators."

Nevertheless, there remains the problem of the PJM internal memo that appears to admit the possibility of the type of gaming of which ODEC complains.

That memo, "Operation of the PJM Market Such That No Member Has Undue Influence," was sent to members of the PJM energy markets committee in preparation for a conference call set for Aug. 10. In it, Kenneth W. Laughlin raises the possibility that PJM members might manipulate capacity to boost prices:

"FERC may not have fully considered the possibility of a PJM participant creating a scarcity situation, and possibly exercising market power, by permitting off-system sales of internal [PJM] resources, while simultaneously allowing market-based bids to set the PJM price. FERC probably assumed that market-based bids would be called upon [only] after all 'cost-capped' internal PJM resources were loaded."

Laughlin suggested a fix: Allow PJM to recall sales of internal PJM capacity to outside buyers, so as to bid such resources at cost within PJM, before loading any market-priced supply bids from outside the area. The committee rejected that proposal, but questions persist.

Most intervenors oppose any new bidding restrictions. Sithe Energies notes that ODEC's worries, whether valid or not, will soon disappear, "as vertically integrated utilities sell off generating assets [and the] acquirers ¼ obtain market-based pricing authority." Says PECO Energy: "ODEC completely distorts the ¼ letter circulated by Kenneth Laughlin."

Nevertheless, some intervenors believe that ODEC might be on to something. Electric Clearinghouse, the PJM industrial customer coalition, and Public Service Electric and Gas appear to favor at least a FERC investigation, even if ODEC has failed to identify the precise cause for high prices.

Have any PJM companies engaged in price manipulation? Laughlin remained circumspect in his now-notorious memo:

"Situations could arise on PJM (although PJM is not suggesting that the situations have arisen), that are similar to the ¼ oil industry when loopholes in the regulations permitted 'old oil' to be sold at 'new oil' prices. PJM is not suggesting that this is