What everybody missed in setting up the regional grids.
While the electric utility...
The Perfect RTO? Even at PJM, Pulling It Off Is No Cinch
A former state regulator notes serious problems in Northeast power markets, and offers remedies.
As the electric industry copes with the Federal Energy Regulatory Commission's Order 2000, the final rule on regional transmission organizations, let's reconsider the role of the RTO. How does it facilitate transmission? How does it ensure reliability? What changes are needed for today's independent system operator (ISO)?
And to gauge performance so far, why not take a look at PJM Interconnection, and the control area that it runs as an ISO? After all, few would argue that PJM has built the most successful track record of existing ISOs.
But not all is well with the wholesale pricing market within PJM. It's true that PJM has accomplished a great deal. It has become almost un-Pennsylvanian or even un-American not to praise the organization. PJM has been accessible to all participants, including environmental and consumer organizations whose opinions have not always been sought or taken seriously. But its past accomplishments will not solve emerging challenges. PJM must move aggressively to resolve these serious problems that undermine wholesale competition and reliability and threaten to harm retail competition.
Seven problems require PJM's immediate attention. For each challenge, I propose a corrective response.
1. High Prices and Volatility
From the consumer's perspective, wholesale market prices are too high in the PJM control area. They seem to be well above short-run marginal cost and perhaps the long-run marginal cost as well. In addition, the wholesale market exhibits substantial volatility and price spikes that probably harm trading and certainly harm consumers.
Potential Solution. The PJM is testing a market-monitoring unit. Will it illuminate some troubling trends that are emerging? To do so, the unit must have full access to all necessary information, and must report its findings to the public. The public's confidence in the integrity of PJM's market will hinge on the market-monitoring unit's performance.
2. A Weak Market in FTRs.
There is a large and growing imbalance between bidders seeking to purchase fixed transmission rights, or FTRs, and offers to sell them. The number of FTRs coming onto the market remains low and may even be declining slightly. The sluggish FTR market casts a serious cloud over locational marginal pricing and whether LMP serves the public interest.
Potential Solution. Any RTO, including PJM, that uses LMP for transmission must investigate whether LMP is contributing to weak forward markets and raising wholesale prices. The huge imbalance between FTR sellers and buyers is especially troubling in PJM. PJM may have to replace LMP by a form of zonal pricing that gives market participants transmission price certainty prior to transactions, unless the forward market and the market for FTRs improve. LMP cannot function without market participants having full access to a healthy FTR market, because FTRs secure price certainty in the event of transmission congestion within LMP markets.
3. Poor Liquidity in Forward Markets.
The NYMEX futures contract has seen very little trading. Wholesale and retail competition cannot be robust unless there is a transparent, liquid, and robust forward market. Again, critics of LMP have stated