Your editorial in the June 1, 1997 issue ("PJM's Brave New World," p. 4) provided a perceptive analysis of the Pennsylvania transmission pricing debate. As you point out, standard economics defines the value of a transmission constraint as the difference between the price of electricity on one side of the constraint and price on the other side. There can be no dispute over this statement; however, this straightforward theory is not always correctly applied.
In the case of electricity, the marginal running cost (or energy price) cannot be used to determine the value of a constraint. The price of energy is not the price of electricity. It is only a part of the price of electricity. The price of electricity must include a time-varying capacity-related element, such as the expected value of lost load used in England and Wales, and in most marginal cost studies performed in the United States.
Using an energy price to value transmission constraints will undervalue the constraints, causing inefficiency at best and, at worst, system unreliability and possible market failure.
Miles O. Bidwell Jr. Ph.D., President
Bidwell Associates Inc.
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