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East vs. West: Comparing Electric Markets in California and PJM

While neither is perfect, the former has done better than its critics would admit.
Fortnightly Magazine - July 15 2000

than many of its critics have suggested. In short, there is much to be learned from both approaches.

Market Structure: Differences and Similarities

PJM has over 2,000 buses or nodes, and the price of power at each one could vary under the LMP system. In practice, however, the system is much simpler. For example, there are no price differences between nodes unless the grid is congested. PJM has created a large "hub" in order to ensure an adequate number of participants and competitive trading, even in the presence of congestion. Prices for purpose of settlement in PJM's Western hub are calculated as the average of 111 buses, a grouping chosen to be the least likely to experience congestion difficulties.

California chose a zonal, rather than a nodal approach. Twenty-four separate zones were created, but again, that overstates the complexity of actual operations. In practice, there are two dead zones (Humbolt and San Francisco) and two active zones (Southern and Northern California). 4 The remaining 20 zones are points of intertie with the remainder of the Western System Coordinating Council (WSCC) grid. The two large active zones are referred to as SP15 (south of the state's principal transmission line, Path 15) and NP15 (north of Path 15). Important interconnections between California and the other states are NW3 and NW1 (the California-Oregon border and Nevada-Oregon border) and AZ3 (Palo Verde, which connects to Arizona).

Although there is trade between PJM and surrounding pools, PJM is generally a self-contained system. In contrast, California is clearly a net importer of power. This circumstance reflects the seasonal surplus of hydroelectric energy available from the Pacific Northwest and ownership by California utilities of nuclear and coal generation facilities outside the state. Both PJM and California are largely thermal systems and depend on a variety of generation resources. Findings presented later suggest that gas-fired generators as a class represent the best indicator of marginal generating costs in both systems, although the correlations between electricity and gas prices are not high.

The PJM market combines bilateral trading with a spot market operated by the pool. In April 1998, PJM implemented a market-based bidding system for determining spot prices. The system is very short-term, analogous to the real-time market in California. PJM chose to implement its real-time spot market before adding a forward market because of the complexities of implementing both at the same time. Initially generators within the pool faced bidding constraints out of concern for the exercise of market power; these restrictions were removed in April 1999. 5 In the event of congestion, an engineering model, combined with the bids at each node, is used to determine LMPs. Electricity scheduled by bilateral traders is charged a flat transmission fee when there is no congestion. In the presence of congestion, differences between LMPs calculated by the pool are used to determine the transmission charges.

PJM does not separate market operations from grid operations. Spot-market bids for each node, submitted a day in advance, include offer price curves for generation. If there are no transmission constraints, the LMP is equal to