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Perspective

Emotions have run high in the SMD/RTO debate. It's time for cooler heads to prevail.
Fortnightly Magazine - June 1 2003

rate base, subject to occasional prudence reviews, can be used to ensure utilities are meeting the state ratepayer or customers' needs in a manner consistent with those costs. Thus the utility can meet the needs of the load either through its traditional resources or through a combination of bilateral contracts and its own resources-but it must justify its actions on demand to the state regulators. Since PJM is a wholesale market, there is nothing in our tariff, agreements, or procedures that precludes this state control over retail pricing. 5

RTOs Mean Centralized Markets

Since the difficulties experienced in the California market of 2000-2001, centralized, or spot, markets have been viewed with much suspicion. The experience in PJM indicates that spot markets, properly defined and used, can greatly benefit competition and assist state regulators. The key is to provide flexible, transparent access to all options to procure power: spot markets, self-supply, bilateral contracts, etc.

PJM does operate an organized spot market; 6 however, this market represents a fraction of the total energy market in PJM. Bidding into this market, which is essentially meant as a balancing market for energy, is entirely voluntary. Historically, PJM's voluntary spot market has involved approximately 10 to 15 percent of energy consumed, the rest occurring either through self-supply or bilateral transactions. Indeed, the PJM West pricing point has been the most liquid bilateral trading hub for power in the United States almost since its inception in 1998. As a consequence, average wholesale prices in PJM have been remarkably stable considering weather and changes in demand.

In fact, the establishment of the PJM voluntary spot market is viewed by many as making bilateral transactions more feasible. Suppose a marketer or an affiliate of a utility from another area is interested in selling to a large customer in an area dominated by a vertically integrated utility. At the time of delivery this new supplier finds itself short through the tripping of a unit, etc. The new supplier now has an option for procuring replacement power rather than merely being a price taker from the vertically integrated utility in the area. Such optionality reduces risks associated with selling and having to rely on a monopoly provider. Consequently, not only is the spot market voluntary, it has served to make the bilateral market more robust.

Additionally, the existence of a robust, yet voluntary, spot market can help states that choose to bid out provider of last resort responsibilities, as the state of New Jersey has discovered. The transparent prices in this case have facilitated an auction process that not only has provided real alternatives to traditional utilities in serving customers but has netted the state considerable revenue. And there are other benefits as well from spot markets that help states. The use of the spot market and prices bid into it are key components to manage congestion in a transparent fashion while encouraging suppliers to make generation as available as possible. Several positive benefits have occurred since the beginning of PJM's market in April of 1998 that are directly related to this