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The Most Effective Way

Market prices send investors clear signals to invest in the most efficient means for producing electricity.

Fortnightly Magazine - October 2006

purposes, if we assume that all of the new generation was natural-gas-fired combined-cycle (most of i t was), under traditional regulation, the aggregate of wholesale rate increases to support the revenue requirements for these new units can be estimated to be at least $1.5 billion per year for wholesale power.

Illusions and Proven Realities

In short, the uniform-clearing-price market, used by PJM Interconnection and nearly the entire world’s other organized wholesale electricity markets, provides a built-in mechanism to produce the lowest competitive prices. At best, a pay-as-offered system would produce only similar prices. In the process, uniform-clearing markets shift the burden of performance risks off the ratepayers’ shoulders, and onto investors’.

The appeal of a pay-as-offered system is illusionary and based on false assumptions. Traditional regulation can force prices lower artificially in the short term only, and at the expense of higher longer-term prices, because of inherent inefficiencies in the regulatory system. Wholesale competition works; it produces fair, efficient prices that send appropriate signals to market participants.