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PJM a Successful Model for Competitive Electricity Markets; Competition Saved Consumers $3.2 Billion in 2002, says CAEM study

A recent study from the Center for the Advancement of Energy Markets (CAEM) shows that the market restructuring in the PJM Interconnection that began in 1997 has saved the region’s energy consumers billions of dollars — with an even greater payback expected in the future.

Estimating the Benefits From Restructuring Electricity Markets: An Application to the PJM Region found all three customer classes (residential, commercial and industrial) were better off under the combination of bilateral contract and new auction-based markets for spot energy sales than under traditional utility cost-of-service regulation for generation and wholesale electricity supply.

PJM is short for Pennsylvania – (New) Jersey – Maryland and is a power pool in the Mid-Atlantic that encompasses these three states, plus Delaware and the District of Columbia. It is currently expanding its operations to Midwest states as far away as Illinois. PJM is one of the nation’s first regional transmission organizations, which are leading the way in regional wholesale market development and bulk power system operations.

“The benefits to consumers from restructuring efforts, particularly in the wholesale electricity market, in the PJM region are substantial,” the report said. “By most measures, the PJM model is successful and would be appropriate for other regions in the United States.” The report explained that consumer benefits stem from four sources — wholesale market competition that encompasses auction-based spot markets working in tandem with contract-based bilateral markets, retail market competition, auction-based capacity markets, and price-demand response mechanisms — noting that the restructured wholesale market was the main source of benefits, in part because it was the furthest developed.

Consumers across the PJM region saved $3.256 billion, or about 15 percent, during 2002 from restructuring efforts, “over and above” the decline in electricity prices also enjoyed by neighboring states and the country at large. New Jersey consumers saved $1.4 billion, while those in Pennsylvania and Maryland enjoyed savings of $993 million and $622 million, respectively. Several factors were credited in the report for that success:

• The region applies a well-specified auction market model based on real-time and day-ahead prices;
• The PJM region is large enough so that the auction market model is well-functioning;
• Spot prices from the auction market model provide an incentive to attract sufficient investment in generating capacity; and,
• Authority over wholesale restructuring is with the PJM Interconnection and with FERC, who are strongly committed to developing competitive markets.

Consumers Will Gain Regardless of Region

The report also found that consumers can save with restructuring no matter which state or region they live in or the prevailing cost of electricity.

“The benefits from restructuring in the PJM region result from improving market efficiency and removing some of the inefficiencies associated with the traditional regulation of electric utilities,” said the report. “The benefit estimates are not associated with the level of electricity prices. Hence, the benefits estimated here should apply to other states regardless of electricity prices.”

The report also found that PJM’s restructuring efforts are giving the region a growing competitive economic advantage over neighboring states that have not introduced competition. “As further restructuring is implemented — and payments for stranded costs reduced — the PJM region will realize very large economic benefits, especially relative to other regions which have not restructured their markets,” the report said.

Finally, PJM has achieved these gains while also boosting reliability. The report noted that under PJM’s auction system, reliability has improved in the region. For example, from 1994 to 1997, the region’s forced outage rate averaged about 10 percent, but decreased to about 4.5 percent during 2001 and 2002.

“The incentives inherent in the PJM wholesale market encourage reliability in capacity and penalize unreliability,” the report said. “The forced outage rate and increased availability are expected efficiency improvements resulting from the design features of the restructured PJM market.”

The authors conclude, “The PJM region is highly touted for its successful restructuring. This analysis of the PJM wholesale market concurs that such acclaim is warranted.”

For more information, contact EPSA’s Douglas Austin at daustin@epsa.org, or call (202) 628-8200.