The Brattle Group report: PJM's power auctions work, but could be

The region's new power auctions essentially work, according to a study commissioned by the area's grid monitor, but some modifications could make the process better.

A report released Monday by The Brattle Group, a consulting firm specializing in economics, finance and regulations, said the reliability pricing model imposed by grid operator PJM Interconnection in 2007 has been "successful." PJM monitors the power grid for the District of Columbia and 13 states, including Maryland.

Under the reliability pricing model, or RPM, introduced last year, PJM procures capacity three years in advance through annual auctions that are designed to create competition between new and existing generators.

The system requires areas with inadequate electricity supply and transmission lines -- such as Maryland -- to pay more for power as a financial incentive for companies to develop new generation. Electricity suppliers like Baltimore Gas & Electric Co. and Potomac Electric Power Co. essentially pay to reserve power -- "capacity" -- that is readily available in times of high demand.

The report's authors suggested tweaking aspects of the base auctions while maintaining the integrity of their basic design.

"Despite the success of RPM in attracting resources and achieving reliability targets, the report offers several recommendations that, if more fully developed and implemented, could enhance the effectiveness of the RPM market design," the report's executive summary said.

The Brattle Group recommended that PJM find a quicker way to implement energy efficiency into the auctions.

The report praised the auctions for retaining 4,600 megawatts of capacity that may have been retired without the pressure of higher prices in place. It also found procuring capacity three years in advance to be more effective than longer-term commitments.

Last year, three auctions were held to cover 2008, 2009 and 2010 to smoothly transition into the new system, but no new generation came onto the market.

Under PJM's old pricing model, capacity cost about $7.60 per megawatt per day in 2006. The new pricing model catapulted capacity charges to $188.50 in 2007, and they will reach $237.33 per megawatt per day in June 2009 in the BGE and Pepco service areas. A megawatt can power about 1,000 homes for one day.

Prices will drop to $174.30 in 2010 in almost all PJM territories because of new generation recently brought online and higher reserves of electricity. PJM has said it expects capacity prices to fall in the future.

"The release of the Brattle report launches an important examination of the RPM through stakeholders' assessment and review of the report's findings, including their discussion of its recommenda[not]tions for changes to RPM," said Terry Boston, PJM president and CEO, in a news release.

"In the meantime, PJM will continue to reach out to all interested parties to better understand their resource adequacy needs and issues," Boston said.

Last month, the Maryland Public Service Commission joined a group of regional regulators to challenge RPM pricing. The coalition filed a complaint with the Federal Energy Regulatory Commission that said customers in the PJM region will overpay by $12 billion in the next few years because the system is flawed.

The Brattle Group will present an explanation of its report to PJM stakeholders on July 11. PJM will hold a stakeholder meeting at the end of July to discuss the report's recommendations.

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