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Power Markets Disconnected? How to Reconcile Retail with Wholesale

Fortnightly Magazine - September 15 1999

has only been willing to consider load shedding from the largest load sources, depriving many smaller customers of cost savings and requiring suppliers to purchase unnecessary generation resources.

Learning from PJM

As wholesale and retail competition heats up throughout the mid-Atlantic region, PJM has assumed the task of providing for a reliable system "in a manner consistent with the development of a robust competitive marketplace." So far, the results are mixed. On the good side, the system has remained reliable. On the down side, the market has not lived up to its potential. Two of the factors that have retarded this development are the installed capacity requirement and implementation of locational marginal pricing.

Installed capacity, or ICAP, is rooted in the days when being an electric company meant building generation, transmission and distribution systems for a captive group of customers. Don't have enough generation? Just pay your fellow pool member to use his extra, or so the reasoning went.

This approach has little relevance in a deregulated market, however, as marketers search the country to bring their customers the greatest savings. In an effort to make a more vibrant installed capacity market, a series of monthly auctions was held and a daily clearing market instituted. These markets have done much to lessen the burden of installed capacity, but they have not resolved the overarching issue: Installed capacity is no longer needed. More recently, PJM has formed a committee to explore alternatives to an installed capacity obligation.

LMP was introduced in PJM on April 1, 1998. Immediately, there was a sharp curtailment in wholesale transactions, with volumes dropping from 20,000 megawatt-hours to less then 5,000 MWh. The change initially had minimal effect on electric generation suppliers (EGSs), as they were not required to provide transmission service under the Pennsylvania pilot program.

However, as of January 1999, EGSs were required to provide transmission service and were exposed to the price fluctuations associated with congestion. Fixed transmission rights are the main instrument used to protect companies from the price fluctuations associated with congestion. Unfortunately for new EGSs, by the time they arrived on the scene, incumbent utilities already had been given the ability to select the FTRs for free. That virtually eliminated the opportunity for an EGS to protect itself from the congestion risk of LMP. The disconnects in the wholesale and the retail market still can be seen clearly in the lackluster interest in New York Mercantile Exchange futures contracts and the lack of choice for many customers in Pennsylvania.

The market responded by adjusting the way LMP was implemented in Pennsylvania and elsewhere in PJM. For instance, there was a consolidation around the one price seen at the Western Hub. Likewise, in the retail market, the 1,600-plus bus prices have been aggregated into several zonal prices that are more manageable from a risk-management perspective.

These modifications within PJM, namely the pooling of buses and the elimination of ICAP, bode well for all parties doing business in the region. In particular, customers will benefit from lower prices that follow from vibrant competition.

Solving the