The wholesale electricity markets operated by PJM Interconnection produced competitive results in 2005, according to the 2005 State of the Market Report, released yesterday by the independent Market Monitoring Unit of PJM. 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 during a briefing in Washington, D.C.

"Our analysis showed that in 2005 the PJM markets produced results that are consistent with a competitive outcome," Bowring said. "In most but not all cases, structural design of the markets limits incentives to exercise market power. At the same time, we've made recommendations to ensure continued competitive results."

The Market Monitoring Unit recommends the retention of key market rules and the enhancement of those rules for continued competitive results in PJM markets and for continued improvement in the functioning of the markets.

Among the recommendations are enhancements to the PJM Capacity Market design to stimulate competition, provide direct incentives for performance, provide locational price signals, provide forward auctions to permit competition from new entrants and to incorporate explicit market power mitigation rules. The report notes that the recommendations are generally consistent with the Reliability Pricing Model, which PJM has proposed to replace the current capacity market.

The Market Monitoring Unit also observed that:

• The Energy Market concentration levels remained moderate, relatively few hours had one generation owner that could increase the market prices above the competitive level and markups remained low.
• The fuel-cost-adjusted, load-weighted, average price was 1.5 percent higher in 2005 than in 2004, influenced in part by hotter summer weather. The higher prices are consistent with a competitive outcome.
• From 1999 to 2005, generators' net revenue was less than the fixed costs of generation because of lower prices. (Revenue adequacy is a measure of the incentive to invest in new generation.)

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 Spinning Reserve Market; and the Annual and Monthly Financial Transmission Rights Auction Markets.