would make adjustments to ensure that the transmission system is not overburdened and would achieve relief of congestion through redispatch. The PJM process takes a similar approach but has the added benefit of including generation assets from a broader regional area to solve the bottlenecks.
What is different, however, is the way in which congestion costs are allocated. Congestion charges are directly assigned to those who cause or require power from areas that result in congestion. These prices, which are the heart of LMP, do three things: 1) reveal the true value of power in a certain area in a transparent manner; 2) incent investment in higher-priced areas; and 3) provide market participants with information to manage their costs appropriately.
These costs are currently the subject of tremendous political controversy, but there are several facts that have been missing from the discussion. Many who raise this issue cite congestion cost numbers of a seemingly alarming amount. It is important to distinguish the gross congestion number that is often cited from the net congestion costs after the use of protective or hedging tools such as firm transmission rights (FTRs). In PJM, approximately 80 percent of all load is hedged or served locally. Those that are hedged receive revenues from FTRs that eliminate or offset the vast majority of congestion costs. Those entities that still experience congestion costs because there are not enough feasible FTRs to cover all loads have the opportunity to contract with generation within their area to provide price certainty.
While this latter approach may not provide the lowest prices in the entire RTO area, the combination of FTRs, properly used, along with contracts for nearby generation, produces a financial outcome that is predictable and has marginal net congestion charges. 3 For the whole PJM area, while gross congestion has increased over time, the net costs to load have been approximately 1 percent, or about $115 million in 2002 in a 65,000 MW system.
Loss of Lower-Cost Generation
While much of PJM now incorporates retail access areas, this is not the case throughout the entire area. Consequently, PJM has emphasized to companies that contemplate adding their systems to PJM that there is no need to change traditional supply arrangements and pricing of the contract to load as a consequence of participation in the PJM market.
At the outset, it is important for regulators to know the costs in an area over time, and how they relate to costs in adjoining areas, before it can be determined that ratepayers are truly experiencing low costs expressed in their rates. Various cost-benefit or cost production models have revealed that some parts of the country where low-cost power was thought to exist often do, in fact, have significant opportunities to import less expensive power during peak periods. 4 Nevertheless, there is no reason states with bundled rates cannot continue to require utilities in their jurisdictions to keep prices at a certain fixed level.
As state regulators have historic cost data on their utilities, a fixed rate based on information of the generation in traditional utility