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The Perfect RTO? Even at PJM, Pulling It Off Is No Cinch

1. High Prices and Volatility
Fortnightly Magazine - May 1 2000

that the uncertainties that LMP creates would harm trading and the development of the forward market.

Potential Solution. Any RTO should have a duty to operate or facilitate power exchanges and visible forward markets. Participation in these markets must be voluntary, but the poor liquidity and price transparency in the PJM forward market threaten to undermine both wholesale and retail competition.

4. Lack of Demand-Side Participation.

The PJM market has no demand-side participation, though some may begin in June. Until consumers have mechanisms to adjust demand, neither wholesale nor retail markets can genuinely be competitive.

Potential Solution. Any RTO must have a strong duty to facilitate demand-side participation in the market. Until retail customers and their load-serving entities can adjust their demand in response to prices, the electricity market will not be competitive in any real sense. It also will not be as beneficial to the environment as it could be until demand actively responds to price.

5. High Emissions of Hydrocarbons.

This industry pollutes a great deal and is a leading cause of environmental problems. Power plants in Pennsylvania, for instance, have the second-highest emissions of SO2 and the eighth-highest of NOx. Indeed, some old, highly polluting plants that have been grandfathered from the requirements of our nation's clean air laws rightfully should be retired.

Potential Solution. It is easy to forget that part of an ISO's role should be to improve environmental performance. Any RTO should be responsible for operating or facilitating a green power exchange - a mechanism to encourage the wholesale buying and selling of renewable energy from certified plants. Ignoring legitimate public concerns about the environmental impact of our industry is done at our own peril.

6. Charges of Unfair Interconnection Rules.

Some companies seeking to build new generation have claimed that they have encountered discrimination when attempting to connect to the grid.

Potential Solution. Any RTO must have rules and processes for the interconnection of new generation that prevent new generators from having to negotiate terms and conditions of interconnection with transmission owners, which often also own generation that may be threatened. Streamlined processes for interconnection should be established for small projects of less than 10 megawatts of capacity.

7. Reliability Concerns.

The risks of brownouts and blackouts are increasing in the PJM area as in other regions.

Potential Solution. Operating reserve requirements, rather than ICAP charges, protect reliability and are indispensable. Any RTO continuing to charge consumers for installed capacity, or ICAP, should fix a date-certain for ending all ICAP charges. ICAP is a useless but expensive "product" that acts as a barrier to entering retail markets and merely increases incumbent generators' profitability. Facilitating demand-side response would help preserve reliability.

The RTO's role - in line with the industry's role - is to facilitate the provision of reasonable prices, attractive products and services, and to operate in a way that does not foul our air and water or catastrophically change the world's climate. A genuinely competitive market can serve the interests of the environment and consumers. We must finish expeditiously the task of creating that