PJM Overcharges Rate-payers by $12 Billion

$12 billion is a lot of money. That’s how much PJM rate-payers will over pay during the next three years. Maryland’s share amounts to $2 billion.

These over-charges result from the way that PJM administered its new, three-years-ahead capacity market, known as the Reliability Pricing Model (RPM) during the transitional, phase-in period.

PJM manages the wholesale power market in the 13-state region that includes Maryland and Washington, D.C. To ensure that generators have the right incentives to supply capacity to meet peak demand, restructured markets like PJM have to set up a separate sub-market called a capacity market.  (Under the old, regulated monopoly system that about half of states still have, this was handled through planned investments.)

Capacity markets are complicated, relying on assumptions about future demand, future generation capacity and so on. Administration of the market depends in part on proprietary information.  For the years in questions, matters were made murkier by that fact that PJM was phasing in a new system so it applied special transitional rules.

The result, according to a complaint filed last year on May 30 with the Federal Energy Regulatory Commission, was $12 billion in unjustified costs that will be passed through to rate-payers in PJM states.

Under the Reliability Pricing Model, auctions were conducted in 2007 and 2008 to establish the price and supply of electricity capacity for the years June 2008 through May 2011.  The complaint alleges that these auctions were not competitive, were subject to price increases by incumbent generators, yielded excessive prices, and did not accomplish the intended purpose of stimulating new generation for the periods in question.  [Maryland press release.]

The complaint was filed by a coalition (RPB Buyers) that included the utility commissions from the following states: Maryland, Delaware, Pennsylvania, and New Jersey. If you add up the populations of those four states, it amounts to more than half of the total population in the PJM region.  The entire complaint can be found on the FERC website here.

The RPM Buyers group also includes the state consumer advocate for these states: Maryland, District of Columbia, Ohio, Pennsylvania and New Jersey.

That’s not all.  A few utilities signed on, including Duquesne Light. Major industrial groups like the American Forest and Paper Association and the Portland Cement Association.

Wait, we’re not done. The complaint was also signed by an attorney with the U.S. Department of Defense acting on behalf of all affected federal agencies.

Underscoring the seriousness of the complaint, the Government Accountability Office referenced it in the report they issued last year raising serious questions about FERC’s supervision (or lack thereof) over administered wholesale power markets.  (See page 43.)

On September 19, 2008, FERC dismissed the complaint.

This brief post cannot begin to delve into the complex questions raised by the RPM Buyers complaint.  However, the simple fact of the complaint raises a red flag over the credibility of both FERC and PJM.  

Voters and decision-makers in Maryland cannot take PJM’s conclusions about important questions like wholesale power rates or the need for new transmission lines like PATH and MAPP at face value.

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