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 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.
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 2004 period, PJM energy markets received a maximum of 109,600 MW in supply offers (net of real-time imports or exports). The 2004 net supply offers represented an increase of approximately 29,800 MW compared with the same 2003 summer period.
On the demand side, the PJM system peak load in 2004 was 77,887 MW, a coincident summer peak load reflecting the Mid-Atlantic region, the APS control zone, and the ComEd control area. The PJM peak load in 2003 of 61,499 MW occurred prior to the integration of the ComEd control area.
For this case study, Global Energy performed a simulation analysis of Eastern Interconnect market fundamentals to test PJM's conclusions, account for all price determinants not directly related to integration, and quantify the impacts associated with the integration of ComEd, AEP, and DPL supply and demand with that of PJM. Global Energy analyzed and quantified the impact of eliminating the seams, in the form of pancaked wheeling charges, between and among the ComEd, AEP, and DPL territories, and the PJM energy market. By isolating pancaked wheeling charges in its analysis, Global Energy captured the primary structural change to the energy market supply and demand of ComEd, AEP, DPL, and PJM.
The study employed a production cost-savings method, using Global Energy's PROSYM-based EnerPrise Market Analytics software, which measures production costs. The study also compared the production costs of a "competition case" that simulated PJM as it was in 2004 with a "no competition case" in the 2004 market, wherein ComEd, AEP, and DPL never had joined PJM. The study included the entire Eastern Interconnect.
In the "no competition case," the market topology is similar to the "competition case," except that ComEd (represented by the CE_NI zone) and AEP and DPL (both represented by the AEP zone) are modeled outside the PJM RTO where pancaked wheeling between the zones is not eliminated.
In addition to the integration of supply and demand in the wholesale energy market, brought about by the elimination of seams between market areas, other significant benefits to RTO membership and the integration of energy markets and services in general were not considered in this study. For example, AEP and DPL now are integrated with APS in a single spinning reserve market. For regulated services, ComEd, AEP, DPL, and APS are all members of PJM's integrated Western Zone. PJM also coordinates generation and transmission maintenance, as well as available transmission capacity (ATC), for the entire RTO. These and other potential benefits are not captured in this analysis.
It turns out that competition produced lower wholesale costs in PJM. The results of our study confirmed PJM's conclusions that, in 2004, changes in supply and demand fundamentals resulted in lower PJM prices in 2003 than 2004. In addition, our study quantified the production cost savings associated with the elimination of seams involving ComEd, AEP, and DPL at 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. To quantify the benefits associated with a full year of integration, we performed the analysis as if ComEd, AEP, and DPL had joined PJM on Jan. 1, 2004. The estimated annualized savings for PJM and the Eastern Interconnect were $69.8 million and $85.4 million, respectively.
While the debate rages on over whether to continue to open wholesale power markets to competition through the promotion of FERC-proposed RTOs, the markets have voted. The clearly demonstrable savings produced in PJM by adding more competitive merchant generating resources from ComEd, AEP, and DPL, plus the elimination of the pancaked transmission costs with the expansion of the market, shows results. Wholesale competition is working to lower costs and expand market opportunities for all customers.