The experience of the first 3 months with a consistent pricing system in the Pennsylvania-New Jersey-Maryland Interconnection (PJM) provides empirical heat to help dispel the fog of confusion covering one of the central problems in electricity markets: pricing to allocate the use of scarce transmission capacity.
William W. Hogan he connection between prices and operating decisions often receives cursory treatment in the electricity restructuring process. Market participants want flexibility and choice, but they object to consistent pricing as too complex. This is a mistake, and lack of consistent pricing produces only an illusion of simplicity. If customers have flexibility in the choice of generation, spot purchases, bilateral transactions, and so on, then prices do matter and competitive prices should reflect marginal costs. In large part, the control of operating decisions is moving from engineers motivated by principles of technical efficiency, to market participants motivated by prices and profits. This is a major purpose of electricity restructuring-to change the locus of such key decisions. If we want the market to be guided by prices, and if we expect and intend for people to take these prices seriously, it becomes important to follow the usual advice to "get the prices right." The experience of the first 3 months with a consistent market pricing system in the Pennsylvania-New Jersey-Maryland Interconnection (PJM) underscores the point and provides empirical heat to help dispel the fog of confusion covering one of the central problems in electricity markets: pricing to allocate the use of scarce transmission capacity. 1