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RTOs: Facts, Not Fiction

The benefits and future challenges of regional transmission organizations.

Fortnightly Magazine - July 2005

more confidence to conduct transactions, which leads to competitive results, which spurs more activity in other bilateral transactions. PJM’s more than 350 members transacting at one time or another is a testament to the benefits of independent market administration.

Optimizing a Large Network : The electric grid can be thought of as conforming to a law of ecology: One action affects the rest of the whole. Because few would argue that each of the three interconnections in the United States works as one vast machine, it is curious that having a few large independent organizations operating over large regions is not more accepted. PJM has found that optimizing its large network of almost 160,000 MW of installed capacity has significant benefits. Prior to market operation, PJM had a required reserve margin of 18 percent. Because of the diversity of generation resources and load over such a broad area, the required reserve margin has been lowered to 15 percent. This reduction represents a significant savings to customers who have to pay for reserves, not to mention the benefits in terms of externalities, such as an environment where fewer reserves are needed to operate. Were the utilities in the PJM area to operate independently, none of these benefits could be realized.

Economies of Scale : The size of a market is not an end in itself. However, size, when applied with the right market rules such as locational pricing, can be a powerful force for innovation and investment for the benefit of customers—innovation and investment not evident in single-utility systems. For example, PJM recently invested in an improved unit commitment program that resulted in an estimated savings to customers of $56 million annually. This application of technology was possible and justifiable only because PJM operates with locational prices over such a large area containing so many resources. The end result is increased efficiency that results in lower wholesale prices than otherwise would exist.

PJM Costs in Perspective

Some customers assert that RTO costs are out of control and bear little relation to benefits. In large part, PJM’s costs reflects investments in information technology needed to implement services requested by our members. As services increased, so did PJM’s bundled rate, at least until recently. As PJM grew, the rate any individual member paid began to decline because the costs were spread over more members. Figure 1 ( see p. 18 ) puts the issue of costs into better perspective.

PJM’s costs have grown at a slower pace than its: 1) load growth; 2) terabytes of data available; 3) total energy market transactions; or 4) total market billing. By almost any measure it is clear that PJM is doing amazing things with relatively small investments.

Through careful management, PJM is driving its bundled rate from a high of just under 50 cents/MWh in 2003 to 40 cents/MWh today, a 23 percent decline. Today, PJM’s service cost to the average retail customer is no more than $3 on an annual bill of $833—less than one-third of 1 percent. Nevertheless, PJM is proposing to its members and FERC to hold a rate flat