FERC’s new rule on compensation for demand resources tips the market balance toward negawatts. Arguably the commission’s economic analysis is flawed, and the rule represents a covert policy...
The Most Effective Way
Market prices send investors clear signals to invest in the most efficient means for producing electricity.
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.