The wholesale electricity markets operated by PJM Interconnection, Valley Forge, Pennsylvania, U.S., produced competitive results in 2004, according to the 2004 State of the Market Report, released Tuesday by the independent Market Monitoring Unit (MMU) of PJM.

The report assesses the competitiveness of the markets managed by PJM during 2004, including market structure, participant behavior and market performance. PJM Market Monitor Joseph Bowring discussed findings of the report during a March 8 briefing in Washington, D.C.

"PJM's markets grew substantially in 2004 and remained competitive," Bowring said. "Continued enhancements to market rules and design will guard against the exercise of market power and will help maintain competitive results."

High levels of supply, moderate demand and market participants' competitive behavior have offset market structure issues in the PJM Energy Market, the report said.

The MMU concluded there was no exercise of market power in the PJM Capacity Market during 2004. The State of the Market Report notes that the structure of the cCapacity Market remains a concern. The report recommends enhancing the Capacity Market design to stimulate competition, to provide locational price signals and to incorporate explicit market power mitigation rules.

The report concludes that, with one exception, PJM's ancillary service markets should continue operating on a cost basis. The exception is the Regulation Market in the PJM Mid-Atlantic Region, which operates on the basis of market-clearing price offers. PJM operates regional ancillary service markets in regulation and spinning reserves.

The MMU also observed that:

-- PJM average energy market prices increased 10.8 percent in 2004 over 2003 largely as a result of increased fuel costs.
-- After accounting for increased fuel costs, the fuel-cost-adjusted, load-weighted average price was 4.2 percent lower in 2004 than in 2003.
-- In 2004, net revenues from all PJM markets would not have covered the first year fixed costs of a new natural gas-fired combustion turbine, combined-cycle generator or coal-fired generator.
-- Real-time spot market activity averaged 35 percent of electricity usage for all hours.

The MMU 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.

The MMU assesses the state of competition in each of the markets operated by PJM, identifies specific market issues and recommends potential enhancements to improve the competitiveness and efficiency of the markets. In particular, the MMU is responsible for monitoring the compliance of members with PJM's market rules and for monitoring PJM's policies to ensure those rules remain consistent with the operation of a competitive market.

The 2004 State of the Market Report is the seventh such annual report. The MMU submits the report to the PJM Board of Managers and to the Federal Energy Regulatory Commission. The seven markets that the MMU assesses are the: Day-Ahead Energy Market, Real-Time Energy Market, Daily Capacity Market, the Monthly and Multi-Monthly Capacity Markets, Regulation Market, Spinning Reserve Market and the Financial Transmission Rights Auction Markets.

For a copy of the State of the Market Report, visit PJM's Web site at www.pjm.com > Markets > Market Monitoring > State of the Market.