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Wholesale Competition: The Big-Bang Effect

Consider the opening of the PJM market, and its effect on prices.

Fortnightly Magazine - September 2005

energy. They argue that they need to serve their native loads, and they fear losing access to systems that their customers have paid for and built.

RTOs: Slow and Steady Progress

Progress on building independent transmission organizations, the linchpin in competitive power markets, is moving ahead. As indicated in Figure 1, although development neither is complete nor even across North America, the direction is clear and coverage is growing. What is less clear is what the right independent transmission organization should look like in terms of services provided, organizational structure, and governance.

Despite having abandoned its SMD rulemaking, FERC in 2004 still saw opportunities to improve reliability and ensure equal access to the grid by putting control of transmission under independent operators. Under FERC's direction, the PJM Interconnection became a "super" market, as its footprint expanded to 12 states and the District of Columbia. Since April 2004, PJM has added four large new utility members, creating a link between PJM's Mid-Atlantic and Midwest grid areas. Its capacity has doubled to 160,000 MW in the last year, with the addition of Dominion Energy as a new member.

Global Energy's PJM case study was developed as part of a study of competitive power markets in the Eastern Interconnect. It sought to identify a recent example of markets integrating into a single RTO, and to assess whether or not the market integration provided consumer benefits.

The PJM Interconnection in 2004 proved an excellent subject for this case study for several reasons:

1. Commonwealth Edison (ComEd), American Electric Power (AEP), and Dayton Power & Light (DPL) joined PJM in 2004, making PJM the largest centrally dispatched, competitive wholesale electricity market in the world.

    2. According to an internal analysis performed by PJM, changes in supply and demand fundamentals from 2003 to 2004 translated into lower power prices for PJM with the integration of ComEd, AEP, and DPL into PJM.

      PJM's Internal Analysis. The integration of ComEd, AEP, and DPL resulted in significant growth in the PJM market. In 2003, PJM comprised 76,000 MW of installed generating capacity and a peak load of 63,000 MW. By October 2004, PJM comprised 144,000 MW of installed capacity and approximately 107,800 MW of peak load.

      According to an internal analysis performed by PJM, changes in supply and demand fundamentals from 2003 to 2004 translated into lower power prices for PJM. While average PJM power prices actually increased by 7.5 percent from 2003 to 2004, PJM showed that the increase primarily was a result of higher fuel prices. 2 By backing out the effect of fuel costs, PJM determined that its power prices actually had declined by 4.2 percent from 2003 to 2004.

      PJM's Assessment of Supply & Demand. PJM attributed the lower fuel-adjusted power prices to an energy market relatively long on supply combined with moderate demand, a condition driven primarily by the integration of ComEd into PJM. AEP and DPL joined PJM after the critical peak summer months, and their impact on supply and demand was less significant in 2004.

      On the supply side, during the June to September