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Letters to the Editor

Fortnightly Magazine - January 2007

To the Editor:

In the October 2006 issue of PUF, I read two articles related to two RTOs—ERCOT and PJM. In their article, “ Don’t Mess with Texas ,” Hind Farag and Gary L. Hunt, based on Figure 6, conclude that there are some winners and losers with LMP. Could they point out any winner whose power costs have decreased after the implementation of LMP? I can bet they won’t find even one single (real) entity.

In his article, “ The Most Effective Way ,” Thomas L. Welch states that “a uniform clearing-price market encourages generators to offer electricity at their margins.” Setting aside the theory, could Mr. Welch also provide any actual instances when a generator bid into PJM at its marginal cost? Again, based on my actual experience with PJM, he won't be able to provide many examples, if any, of such instances.

Finally, you referred to the Energy-Only Market in MISO (interview with T. Graham Edwards, “ The Nation’s Grid Chiefs: On The Future of Markets ”). The protesters to such a market forget that the original basis for LMP was the Energy-Only Market, which was first implemented in PJM. I was one of the most active participants in the discussions in the stakeholder process, which led to the formation of PJM, and the Guru of LMP, Professor William Hogan, stated very clearly and loudly that there should be an Energy-Only Market based on LMP, and LMP would attract new generation. Later on, in every filing with FERC (e.g., FERC Docket No. PA03-12-000) , prior to proposing RPM, PJM stated that the LMP-based market design was working well and was able to attract a lot of new generation capacity into PJM.

I am glad that MISO is sticking to the original basis of a supposedly competitive market.

Jay Kumar, President, Economic & Technical Consultants Inc.


To the Editor:

The Fallacy of High Prices ,” by Howard J. Axelrod, David W. DeRamus, and Collin Cain (November 2006) purports to show that restructuring of wholesale power markets has resulted in significant benefits. However, the analysis it offers in support of this proposition—particularly in regard to the supposedly shrinking rate gap between restructured states and traditional, cost- of-service states—is not credible.

The article compares rate levels between 1998 and 2005, as reported by the Energy Information Administration (EIA), for a sample of Southeastern states and a sample of PJM states. The article finds that average rates in the five Southeastern states in its sample rose by 23.7 percent from 1998 to 2005, while rates in the four PJM states rose by only 7.8 percent. The article notes that the PJM states include rate caps for some customers, but cites New Jersey’s 9.6 percent rate increase as an example of a relatively small increase in a state that no longer has rate caps.

These comparisons reflect nothing more than a carefully selected choice of restructured vs. cost-of-service states. Other Southern states achieved much lower rate increases than the 23.7 percent average for the five states chosen by Axelrod: For example, EIA