Did You Know

New State of the Market Report Confirms Competitiveness, Continued Downward Pressure on Prices in PJM’s Power Markets

Wholesale electricity markets operated by PJM Interconnection (PJM) generated competitive results for consumers in 2004, according to the 2004 State of the Market report, released on March 8 by PJM’s independent Market Monitoring Unit (MMU). PJM is the regional transmission organization (RTO) that serves more than 45 million people in all or parts of 13 Midwest and Mid-Atlantic states.

Of particular significance was the mitigating effect of the competitive process in minimizing the significant fuel cost increases for power generation in 2004. After accounting for increased fuel costs, the average load-weighted energy price in the RTO’s geographic footprint was 4.2 percent lower than 2003, confirming the long-term trend toward lower spot market prices in PJM. Even with the mitigating forces of competitive pressures on prices, however, PJM’s nominal average energy market prices increased 10.8 percent in 2004, due to record increases in fuel costs, according to the MMU.

The report evaluates the competitiveness of the seven wholesale product markets managed by PJM – Day-Ahead and Real-Time Energy, Daily and Monthly Capacity, Regulation, Spinning Reserves and Financial Transmission Rights. Each market was evaluated across three dimensions: market structure: market participant behavior; and market performance.

According to PJM Market Monitor Joseph Bowring, PJM’s markets grew substantially in 2004 and remained competitive. “Continued enhancements to market rules and design will guard against the exercise of market power and will help maintain competitive results,” he said. In addition, the report said high levels of supply, moderate demand and market participants’ competitive behavior offset market structure issues in the PJM Energy Market.

The MMU concluded there was no exercise of market power in the PJM Capacity Market during 2004, although market structure remains a concern. The report recommends enhancing the Capacity Market design to stimulate competition, to provide locational price signals and to incorporate explicit market power mitigation rules.

The MMU recommends the retention of key market rules and the enhancement of those rules for continued competitive results in PJM markets and for continued improvement in the functioning of the markets.

A copy of the State of the Market Report can be found on PJM’s Web site at www.pjm.com by clicking on Markets, Market Monitoring, State of the Market.