APPA's Competitive Market Plan - American Public Power Association

egulations is likely to constrain supply and result in the dispatch of more
expensive power plants, increasing both energy and capacity prices. 25
Transitory price decreases should not affect conclusions about the overall
costs and benefits of the RTO-operated electricity markets. Evaluating costs
and benefits requires a determination of whether prices produced in the
RTO-operated markets are what one would expect to see from a truly
competitive market, as indicated by prices being equal to (or at least close to)
the actual costs of production, accounting for a contribution to fixed costs. In
contrast, two APPA analyses showed that high profits continued in 2009 and
2010 for the largest owners of unregulated generation in PJM, as measured by
net operating income and returns on equity. These high profits indicate that
rates remain substantially above the costs of production of electricity incurred
by these merchant generators. 26
The impact of RTO markets on generator profits, and in turn on the
consumer, varies depending upon whether the state regulatory regime
employs retail choice or vertical integration with an obligation to serve
customers. For example, in the Midwest region almost all LSEs fall into this
second category. For these generation-owning utilities with an obligation to
serve, the excess profits recovered by baseload generators in the RTOoperated
markets are passed back to the consumer, not retained by
shareholders as profit. Two companies owning merchant generation located
within the Midwest ISO, First Energy and Duke Energy, are in the process of
moving their transmission and generation assets from MISO to PJM. 27 The
greater capacity prices in PJM’s market will provide a more lucrative earnings
opportunity for these companies. In an apparent attempt to avoid future
departures, and support the entrance of the Entergy operating companies,
MISO is in the process of developing a proposal for a centralized forward
25
Credit Suisse projects that the likely supply constraints resulting from the coal plant closures
would increase power prices by at least $5 per MWh in PJM-West and MISO, as well as putting
upward pressure on capacity prices. Growth From Subtraction: Impact of EPA Rules on Power
Markets, Credit Suisse Equity Research, September 23, 2010, pp. 47-48,
http://op.bna.com/env.nsf/id/jstn-8actja/$File/suisse.pdf
26
2009 Financial Performance of Owners of Unregulated Generation: High Profits Earned in
Restructured Wholesale Electricity Markets During the Recession, APPA, May 2010,
http://www.publicpower.org/files/PDFs/2009FinancialPerformanceMay2010.pdf; and Financial
Performance of Owners of Unregulated Generation in PJM: 2010 Update, www.publicpower.org/files/PDFs/FinancialPerformance2010UpdateMay2011.pdf
27
FirstEnergy Service Company’s move into PJM is planned to be completed by June 1, 2011,
and will include the American Transmission Systems, Inc. (ATSI) transmission assets, the regulated
distribution utilities (The Cleveland Electric Illuminating Company, Ohio Edison
Company, The Toledo Edison Company, and Pennsylvania Power Company) and the merchant
generation owner, FirstEnergy Solutions. Duke Energy’s move is planned for January 1,
2012, and includes the transmission assets of Duke Energy Ohio, Inc. and Duke Energy Kentucky,
Inc., as well as the Duke Energy generation assets. See the Market Integration section
of PJM’s web site at http://www.pjm.com/markets-and-operations/market-integration.aspx
4 APPA’s Competitive Market Plan: 2011 Update www.PublicPower.org