Transcript Document
Nodes to You: Transmission’s market test in PJM Robert J. Michaels California State University, Fullerton and Econ One Research and Consulting, Inc. “Achieving Optimal Transmission Pricing” Risk Publications Houston, Texas Nov. 8, 1999 The lessons so far from PJM Few noticeable improvements in short-run efficiency Increased risk inhibits growth of bilateral transactions Inadequacy of official transmission congestion contracts [FTRs] Unresolved market power issues Unclear long-run signals Questionable usefulness of economics professors PJM: One kind of perfection Economists and the “perfectly competitive” ideal Time-varying energy prices, market based PX bids after 4/1/99 PX and ISO operate as a unit, bilaterals possible Ancillary services bundled, cannot be self-provided LMP calculated from PX price at 1744 nodes, applies to all transactions Fixed Transmission Rights [FTR] allocated by load to servers, remainder auctioned How perfect is it? Why aren’t other goods priced this way? Ideal pricing at wholesale, few usable signals at retail Differential risk exposures of utilities and nonutilities Knowing the nodal price only after it happens The invalid “market order” analogy Negative prices LMP overcollections, FTR allocations, and barriers to entry Costs, benefits, and transfers Foregone opportunities: setup and operating charges v. bilaterals and competing exchanges Imposition of institutions rather than letting market decide Move from the complex to the simple? Costs of redispatch and costs of capital 1,744 thin markets or a handful of liquid ones? Costs of increased uncertainty Overcollections: their size and redistribution What about congestion? 1998: some congestion 17 percent of hours Not all peak Average east-west differentials $46 to $75 “East-West”???? Hogan said there weren’t zones Changes in price averages cannot be linked to LMP, result from expected causes Old Dominion’s complaint 1998 monthly spot sales $440 M, congestion charges $18.4 M, excess congestion rents $4.1 M “Gettting the Prices Right” Why reject a simpler zone system? The 1997 zonal “experiment” One zone and obvious arbitrage No way to create other zones or tariffs then One zone, two zones, or “more like a hundred”? The uneasy case for a hundred zones The Constellation merger application “Fixed Transmission Rights” I Blunting the impact of LMP on utilities Point-to-point and network service Load servers get allocations by noncoincident peak, monthly auction of remainder FTRs are specific to receipt and delivery points Hard to aggregate for transactions using multiple generators PJM requirement for source identification Pricing reversals require two-way FTRs for complete hedge Fixed Transmission Rights II If monopoly power matters, the most competent would-be monopolist will win the bidding Generation ownership increases potential market power With retail competition, rights follow service to retail loads Differential effects on utilities and non-utilities? What rights for marketers? The future shape of the auction Hubs and risk Because it rebundles, nodal pricing makes separation of commodity and transport risk impossible Deaths of the Eastern Hub and Seller’s Choice Can we be sure nodal prices are at fault? Western Hub volumes and liquidity The forlorn NYMEX contract A comparison with Cinergy The hubs according to Professor Hogan LMP and market power I The non-story of seller concentration Relevance of the HHI statistic Question of geographic boundaries The transmission owner’s interest -- not expanding constrained capacity Particularly if it has not divested generation Market power harder to exercise where there are futures, forwards, and easy bilaterals LMP and Market Power II Easier to exercise if transmission pricing facilitates de facto load pockets If risk of capacity withdrawal gives physical rights holders market power, deal with it directly Will near-term [adjustment] markets for unused transmission allow an adequate window for trade? The power of the central market Or is it “denial of the right to trade through the ISO?” [Hogan] Is it sufficient that everyone else trades mostly paper? The pattern of cross-subsidies The long run Nodal prices increase uncertainty, cut transaction horizons Why rely on them for long-run signals and capital recovery? If they are 50 percent randomness, what do they mean? And are they better than prices for physical rights? Signals to build transmission or generation? Are 7,000 MW really coming by 2002? “I have seen the future... Hoecker: “and the future is PJM” Hogan [not really]: and it’s efficient like I said By a short-term static standard? Bailey [close]: and 7 of the 8 PJM utilities support it Supporting Companies [not really]: and we were the ones who designed it Michaels: What kind of competition did you expect incumbent monopolists to design?