A report issued yesterday by ISO New England Inc. concludes the region's wholesale electricity markets continued to perform efficiently in 2006 and supported the reliable operation of the bulk power system, despite multiple days of record-breaking electricity use. In addition, according to the 2006 Annual Markets Report, ISO New England and the region's energy stakeholders took cooperative action last year to substantially enhance the wholesale electricity marketplace.

Each year, ISO New England, the operator of the region's bulk power system and wholesale electricity markets, issues this "state-of-the-markets" report, which provides an annual performance assessment of the New England wholesale electricity markets and addresses challenges to the continued enhancement of these markets.

"Efficient wholesale electricity markets should produce competitive prices that reflect underlying economic conditions in the context of regional energy and environmental policies," said Gordon van Welie, president and CEO of ISO New England. "In addition, efficient markets should support reliable operation of the regional power system, encourage needed investments in electricity production facilities, and stimulate greater energy efficiency. In each of these areas, New England's wholesale electricity markets continued to perform well under challenging circumstances in 2006."

van Welie added, "Going forward, greater demand participation in wholesale markets and tighter connections between retail electricity rates and wholesale costs would enable consumers to respond more efficiently to the dynamic nature of electricity prices, thereby minimizing the need to build additional, costly energy infrastructure. Action on this and other energy issues would have a positive impact on New England's long-term energy outlook."

Responding to the need to increase investment in both electricity supply resources and measures to reduce electricity use, ISO New England and its stakeholders reached an agreement in 2006 to implement a new Forward Capacity Market (FCM).

In addition, significant enhancements were made to the markets for operating reserves, which seeks to ensure that fast-response resources, such as demand response or "peaking" power plants, are available to cushion the sudden loss of power plants or transmission lines. The addition of locational and real-time reserve markets better reflect the locational value of reserves, thereby providing a more efficient signal for investing in fast-response resources in those areas.

Initial investor response to these market enhancements is encouraging, further demonstrating the potential for wholesale electricity markets to help satisfy New England's energy needs.

Other important findings of the 2006 Annual Markets Report include:

-- A decline in the average price of natural gas, which fuels nearly 40% of the region's power plants, combined with a decrease in annual electricity consumption, resulted in lower wholesale electricity prices in 2006 compared with 2005. After adjusting for fuel costs, the average wholesale price of electricity fell approximately 5% between 2005 and 2006, from $44.99 per megawatt hour (MWh), or 4.99 cents per kilowatt hour (kWh), in 2005 to $42.64 per MWh (4.26 cents per kWh) in 2006.

-- The average actual (not fuel-adjusted) wholesale price of electricity fell 21% in 2006, from $79.96 per MWh to $62.74 per MWh.

-- A drop in annual electricity consumption--3.2% between 2005 and 2006--due to generally mild weather and the effects of personal income, conservation programs, and other demand-resource responses.

-- Despite a decrease in average electricity consumption in 2006, peak summer electricity consumption grew by 4.6%, requiring the availability of more generation resources to support the peak demand, but operate in fewer hours overall.

-- Enrollment in the ISO's demand-response programs grew from 460 megawatts (MW) in 2005 to 675 MW in 2006, a 47% increase. These resources were important for maintaining power grid reliability and controlling wholesale costs during periods of record-breaking peak electricity use in 2006 and will be increasingly vital in the future.

-- Again in 2006, the cost to operate power plants under non-market-based cost-of-service reliability agreements increased across the region. However, the new FCM and major transmission system improvements are designed to reduce reliability costs.

-- While average wholesale electricity price separation across the six New England states was less pronounced in 2006 than in 2005, wholesale prices were again highest in Connecticut and lowest in Maine.

-- Power plant availability has remained at approximately 89% since 2002, compared with 81% in 1999, when wholesale markets were first implemented. This trend, attributable to the effects of competitive markets, contributes to the reliable operation of the power grid under high-stress conditions and results in tangible benefits for consumers.