Taken to the Cleaners
East vs. West: Comparing Electric Markets in California and PJM
and PJMbuyers and sellers have access to futures contracts with nearby points of delivery. Thus, the New York Mercantile Exchange (NYMEX) has established futures markets based in the Western Hub of PJM, and on the Oregon and Arizona borders with California. Further, the "over-the-counter" market provides options and swaps, but not with the transparency of the other markets.
While the PJM and California markets have very different histories and are geographically separate, they have much in common...both seek to integrate the transmission systems of a number of utilities and create a broad competitive market with diverse buyers and sellers. Moreover, in recent years, natural gas prices have converged across the nation. As a consequence, generation costs for many marginal units are similar in both California and the Mid-Atlantic (the PJM region). That makes a comparison of results (i.e., the levels and variability of prices) in the two markets a useful, if not conclusive, exercise. 3 Following is a summary of the performance in the largest trading zone of California and PJM:
- Averages. Since April 1998, average prices in PJM and California have been nearly identical. From April 1999 to April 2000, California's power was cheaper$33.46 per megawatt-hour, as compared to $36.08 per megawatt-hour in PJM, due to the typically sharp price spikes that occur in PJM during the summer months. Since April 2000, however, the Western power market (including California) has seen unusually high prices. In the two-month period (April/May 2000), California averaged $52.29 per megawatt-hour, compared to $32.04 per megawatt-hour (average) in PJM.
- Volatility. Prices in PJM have been more volatile than in California, particularly in the second year after bidding restrictions were removed from generators within the pool. During the 12 months from April 1, 1999 to March 31, 2000, the standard deviation in PJM was six times higher$60.17 per megawatt-hour compared to $10.33 per megawatt-hour. However, in the two most recent months (April/May 2000), volatility has been lower in PJM, yet higher in California. n Gas Correlation. Over the 26-month period ending May 31, 2000, California's prices averaged $11.41 per megawatt-hour above local gas turbine marginal costs. PJM prices averaged $10.50 per megawatt-hour above that gas benchmark. (In neither system were electricity prices correlated to oil prices.)
- Congestion Differentials. The stability of congestion differentials in the two systems was similar. For the 26 months included in this study, the standard deviation of congestion differentials from the Nevada Oregon Border (NOB) to Southern California (SP15) was $3.00 per megawatt-hour, compared to $3.36 per megawatt-hour for differentials across the Palo Verde (AZ3)-to-SP15 path. In PJM, the standard deviation of congestion differentials was $4.19 per megawatt-hour from the Western hub to the New York Power Pool (NYPPE), and $0.49 per megawatt-hour from that same hub to Virginia Electric & Power (VAP).
These findings should give pause to the many analysts and regulators advocating that other regions adopt the PJM pricing structure without critical review. While neither system adequately has developed forward markets, California was first to integrate such trading into its system and appears to have performed much better