Did You Know

Synapse Study Shows Reduced Wholesale Electricity Costs in PJM

On Nov. 10, the PJM Interconnection released a study that shows a significant decline in wholesale electricity costs for three of the utilities in the regional transmission organization’s eastern geographic footprint, since the inception of PJM as an independent transmission system operator. The study, titled Electricity Prices in PJM: A Comparison of Wholesale Power Costs in the PJM Market to Indexed Generation Service Costs, clearly illustrates the benefits to consumers that accompany competition in a well-functioning, transparent wholesale market, in contrast to the traditional integrated monopoly utility regulatory model.

The study, prepared by Synapse Energy Economics Inc., concludes that wholesale power costs in the competitive PJM markets from 1999-2003 were lower than the utilities’ generation service costs (GSCs), which represent the unbundled generation portion of the pre-competition cost-of-service rates for Delmarva Power & Light (a unit of Conectiv), Jersey Central Power & Light (a subsidiary of FirstEnergy) and Pennsylvania Electric (also owned by FirstEnergy). The three utilities selected by Synapse were chosen to represent a range geographically and in terms of price.

In 2002, the PJM wholesale power costs were 16 percent to 44 percent lower for the three utilities than the GSCs that would have prevailed had there been no restructuring of PJM and no competitive wholesale markets. Despite several factors putting upward pressure on prices in 2003, including fuel costs, increased risks from reduced market liquidity, the expiration of rate freezes, etc., the wholesale costs for the utilities were still 3 percent to 21 percent lower than the GSCs would have been. For each of the five years surveyed, the study found that PJM market supply costs were only equal to or above the GSCs in two instances (Penelec & Delmarva – 2001), but that in every other instance were less.

In formulating its report, Synapse determined that “a simple comparison of pre-deregulation prices with post-deregulation prices could be misleading … for this reason, we “indexed” the pre-deregulation generation service costs, effectively projecting them forward in time to the present.” The PJM-commissioned study unbundled the pre-deregulation prices using primary information from the utilities’ Federal Energy Regulatory Commission Forms 1. Synapse also indexed prices for various adjustments, including fuel costs.

The comparisons put forth in this study demonstrate the benefits that can be realized when a competitive, transparent and independently administered market is well-structured and allowed to succeed, and that consumers in this part of the PJM region have benefited greatly from competition.

For more information, contact EPSA’s Nancy Bagot at nbagot@epsa.org.