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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

PJM's, though the CalPX has not yet developed adequate trading volume in its block forward market.

Prices are signals. They must arrive in a timely fashion. The signal sent to Admiral Kimmel that the Japanese might attack Pearl Harbor was correct, but was either misplaced or it arrived too late.

In electricity markets, with their high transaction and information costs, there is a fundamental tradeoff that must take place. Should pricing be based on an imperfect signal that arrives in adequate time for buyers and sellers to adjust, or should the information be delayed until there is perfect knowledge of transmission costs but quite possibly inadequate time to react? The dilemma can be resolved by understanding that, at a minimum, the situation demands separate markets and settlement systems for forward trading and real-time operations.

1 From Ezra Beeman, resident of Paris.

2 On June 1, 2000, PJM plans to implement a day-ahead prescheduled market with a two-settlement system of accounting. In a very recent article, John Hanger acknowledged PJM's concern with high prices and volatility, , May 1, 2000, pp. 34-35.

3 Many factors other than market structure explain regional differences in prices, and the following statistics should be reviewed in that light. For example, the summer of 1999 was unusually hot and humid on the Atlantic Coast and relatively cool in California. In addition to the prices analyzed in this paper, both systems levy transmission charges and other fees, which include additional revenue to generators for a variety of uplift payments, ancillary services, etc.

4 California's SP15 zone will be redefined into several zones in the near future.

5 Hogan, William W., "Getting the Prices Right in PJM, Analysis Summary, April 1998 through March 1999, The First Anniversary of Full Locational Pricing," p. 7, www.harvard.edu/people/whogan.

6 PJM website, www.pjm.com, PJM Manuals.

7 See "California's PX: Monopoly No More," , July 1, 2000, p. 16. Nevertheless, at press time, it appeared that the California legislature was considering a measure that would postpone the effect of the PUC order until July 1, 2001.

8 In the initial round of bidding, participants do not have to identify specific locations for load or generation. Instead, bids are aggregated into a statewide "portfolio."

9 The principal alternative to a daily auction would be the continuous bidding model adopted by the Automated Power Exchange (APX) and used in many stock and commodity exchanges. The optimum design depends on expected volume, the length of time between contract execution and delivery, and the maturity of the market. Nordpool experimented with both designs and determined that for the day-ahead market a single auction was more reliable. CalPX uses a continuous bidding model for its longer-term block forward market.

10 With physicals, the trade involves a change of title and possession. Financials, on the other hand, are trade in future or forward rights to possession of the commodity.

11 The heat rate for a representative gas turbine is assumed to be 9,140 Btu per kilowatt-hour and diesel generation is assumed to be 10,000 Btu per kilowatt-hour. O&M expenses are

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