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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

price transparency. Generator availability has increased significantly, as seen in Figure 1. This data suggests that the economic incentives that are obvious in an open market have increased the availability of generation.

The spot market also has assisted PJM in attracting investment by signaling through open prices where power is most valued. Also, generators are sited appropriately to avoid high costs for transmission construction required for reliability and deliverability.

While spot prices are not, by themselves, an adequate basis for large capital investments such as power plants, they are a key component along with the forward market represented in bilateral contracts. Figure 2 is a fairly dramatic demonstration of the success of the PJM market in attracting new investment.

As can be seen, despite having increased load in 2002, the point at which peak load meets the supply curve is significantly lower than in 2001. 7 This is almost entirely accomplished through increased supply entering the market, and it represents decisions made by market participants on investments in the PJM area based on previous experience with prices both in the bilateral and spot markets. Taken from a public policy perspective, however, it would seem to represent a significant validation of a well-established wholesale market delivering pricing benefits for customers in a reliable fashion.

So what would my father say about the acrimonious debate we find ourselves in regarding electricity policy? Despite being a Republican, he often liked to quote Lyndon Johnson when beginning a conversation on a controversial subject: "Come, let us reason together." While state regulators and others who have concerns about the development of competitive wholesale markets need to have their issues addressed, it is important that such concerns be based on accurate assumptions. If we can set aside emotion and deal with the facts available, the ensuing national debate can yield a policy whereby states' prerogatives are protected while developing RTOs that work in cooperation with states to ensure competitive wholesale markets.

I believe PJM's experience of the last six years would be useful in such a discussion. Let us reason together.

  1. The PJM region includes all or parts of Delaware, the District of Columbia, Maryland, New Jersey, Pennsylvania, Virginia and West Virginia, representing a load of approximately 65,000 MW.
  2. "Installed Capacity" or ICAP is a resource that may be used by load-serving entities to meet reliability obligations relative to their load. Generators receive a payment for being ICAP resources and adhering to the rules applied to such resources.
  3. FTRs have been allocated to those who request them. We have had members who entered the PJM market "naked" or without requesting FTRs, but the vast majority have used them to offset nearly all costs. PJM also has had members who have designated FTRs from specific resources to load and then procured energy from other areas to load which effectively negates the value of the FTRs. PJM views this as unfortunate but can not make market decisions for market participants.
  4. See SEARUC study, prepared by Charles River Associates, January 2003.
  5. PJM does, however, try to facilitate demand response where appropriate.