Perspective

The benefits and future challenges of regional transmission organizations.

If Compaq owned FedEx, would Dell be certain to get the same terms and conditions for overnight delivery as Compaq? Similarly, if a municipal utility wanted to contract with a supplier within the service territory of an incumbent utility that owned the transmission system and generation, how hard would it be to get transmission service to access the power?

With the passage of the Energy Policy Act of 1992, Congress endorsed the idea that competition among generation suppliers is in the public interest. A natural corollary to the notion of competition among suppliers requires that they not control the transportation of generation to a customer.

As a consequence of this understandable circumstance, the Federal Energy Regulatory Commission (FERC) decided to urge independent operation of the grid. Market administration to better facilitate trade was a natural evolution for this independent entity with no economic stake in market results.

Ten years after the initial Notice of Proposed Rulemaking that set in motion the establishment of RTOs, it is hard to dispute that the mature organized markets with independent management of the grid have achieved tangible benefits for all customers. It is important to remind ourselves of these accomplishments. At PJM we believe that the challenges ahead also need to be discussed. But let's start with the accomplishments.

What RTOs Achieved

: Perhaps one of the great accomplishments of RTOs has been the opening of the "black box" of transmission operation and generation dispatch. Until the advent of independent grid operators, no one outside the utility control room knew what was going on with regard to the transmission system and how dispatch of generation was affected. Independent generators, transmission- dependent utilities, even regulators were (pardon the pun) in the dark about how transmission was allocated. The transparency of both operation of the grid and administration of a market provided new confidence to transact electricity sales that did not exist under the old approach.

Importantly, in an RTO with locational prices, like PJM, the transparent operation of the grid and the market are interdependent, as prices bid into the market are linked with information about the state of the grid to produce prices for dispatch that reflect the needs of the system. In other words, RTOs such as PJM use the market to make grid resources more responsive to the grid's needs.

Prices experienced by customers in a competitive market should not be the measure of success of the market, as what constitutes a "high" price or a "low" price tends to be subjective. Nevertheless, on a fuel-adjusted basis, PJM markets produced prices that were more than 4 percent lower in 2004 than 2003, and 2003 was 9.5 percent lower on a fuel-adjusted basis over 2002. This performance seems to be in contrast to non-RTO areas. According to the Energy Information Agency of the Department of Energy, prices between 1995 and 2003 in regions with RTOs declined for all customer classes, while prices rose in the same time period in non-RTO areas.

: RTOs provide