The wholesale electric energy markets operated by PJM Interconnection produced competitive results, according to the 2006 State of the Market Report, released today by the independent Market Monitoring Unit for PJM. In addition, average wholesale electricity prices declined in 2006.

The PJM markets serve 13 states and the District of Columbia. The report is the Market Monitoring Unit's annual assessment of the competitiveness of the markets managed by PJM. It analyzes market structure, participant behavior and market performance. PJM Market Monitor Joseph Bowring discussed findings of the report today during a briefing in Washington, D.C.

"The data show that the PJM electricity markets were competitive in 2006," Bowring said. "In addition, with implementation of our recommended structural changes and mitigation procedures, competitive outcomes can continue to be ensured."

The State of the Market Report says that average wholesale electricity prices declined 15.9 percent in 2006 compared to 2005. The report says that fuel-cost reductions were a substantial cause of that reduction but that "prices would have been lower in the absence of the lower fuel costs."

The report notes that the structure of the Reliability Pricing Model will address competitive concerns about the PJM Capacity Market. The Reliability Pricing Model is expected to replace the capacity market this year. Capacity markets ensure that sufficient generation is in place to meet consumers' highest demand for electricity.

Bowring said that, although no determination could be made about the Regulation Market, performance improved in this market and competition increased. "Regulation" responds to the minute-to-minute changes in electricity use. Electric generation and consumption must always be balanced.

The Market Monitoring Unit also observes that: 

• During the period 1999 to 2006, average net revenues to generators did  not cover the fixed costs of new generation because of lower prices. 
• In 2006, coal-fired units accounted for 70 percent of marginal units  and natural gas-fired units accounted for 25 percent of all marginal  units. (Marginal units set the price of electricity.) 
• There were 6703 MW in total demand response resources in the summer of 2006, 4.6 percent of PJM's peak demand. (Demand response is a reduction in use of electricity from the grid in response to a power  system need or power prices.) 
• Total congestion costs decreased by $489 million or 23 percent in calendar year 2006. And, for the 2005 to 2006 planning period, 99  percent of the congestion costs were hedged.

The Market Monitoring Unit evaluates the operation of PJM's wholesale markets to identify ineffective market rules and tariff provisions, identifies potential anticompetitive behavior by market participants and provides the comprehensive market analysis critical for informed policy decision making. Bowring, the market monitor, ensures the independence and objectivity of the monitoring program. The Market Monitoring Unit submits the State of the Market report to the PJM Board and to the Federal Energy Regulatory Commission.

The markets that the report assesses are the: Day-Ahead Energy Market; Real-Time Energy Market; Daily Capacity Market; the Interval, Monthly and Multi-Monthly Capacity Markets; the Regulation Market; the Synchronized Reserve Market; and the Annual and Monthly Financial Transmission Rights Auction Markets.