The news is full of stories about Calpine and the difficulty merchant generation players face from the uncertainty and volatility of power markets. Now is a good time to review key measures of...
Wholesale Competition: The Big-Bang Effect
Consider the opening of the PJM market, and its effect on prices.
Wholesale competition is working, and the best evidence to date is the savings produced from the opening of the PJM market to competitive power generation from the Midwest. A real-time case study unfolded before our eyes in May and October 2004.
In a major study of the benefits of wholesale competition released in July 2005, 1 Global Energy quantified the production cost savings associated with the elimination of seams among and between Commonwealth Edison, American Electric Power, and Dayton Power & Light, each now operating within the PJM energy market. The analysis found savings of approximately $29.5 million for PJM in 2004 and $36.4 million for the Eastern Interconnect. Because these savings are based on the actual integration schedule for ComEd (May 2004) and AEP/DPL (October 2004), they represent savings for a partial year of integration in 2004. Global Energy estimated annualized savings for PJM and the Eastern Interconnect were $69.8 million and $85.4 million, respectively, on an annualized basis as if ComEd, AEP, and DPL joined PJM on Jan. 1, 2004.
The Federal Energy Regulatory Commission (FERC) remains committed to creating a wholesale electric system that is more efficient, reliable, and competitive. The vision of a seamless transmission grid made up of so-called regional transmission organizations (RTOs) has not changed, though the vehicle for getting there continues to evolve. The original vehicle, standard market design (SMD), was replaced by a gentler approach that gave states more say and yielded to regional differences.
FERC is using its authority to regulate wholesale electric rates and merger clearance. In its December 2004 proposal, FERC placed the burden of proof on companies that control more than 20 percent of the wholesale generation market to show that competition is not restricted. If the companies prove unable to make such assurances, they could have their wholesale electric rates regulated by FERC.
Utilities with market-based rates (MBR) must reapply to FERC every three years and demonstrate that they do not have market power. To be eligible for MBR authority, FERC must first determine that an applicant passes the four prongs of its MBR test: that it lacks both generation and transmission market power, and has not erected any barriers to entry, or engaged in affiliate abuse. The generation market-power screens have been especially controversial, as FERC considers whether and to what extent it should modify them.
As with mergers and acquisitions that may harm competition, the best insurance for passing an MBR test is for the entity in question to join an RTO. This approach affects some of the biggest energy players, including Duke Energy, Entergy Corp., and Southern Co., which control 72 percent, 35 percent, and 49 percent of their generation markets, respectively.
RTOs remain unattractive to utilities in the South and Northwest that have an abundant supply of cheap power and fear they would lose that