PJM Market Monitor Sees Exelon/PHI Merger as Threat to Power Markets

A recent story in industry journal SNL (subscription only) describes objections made by Joe Bowring, PJM Interconnection’s Market Monitor, to the Federal Energy Regulatory Commission about Exelon’s proposed purchase of PEPCO Holdings, Inc.

He said the move would eliminate a large independent transmission owner in PJM and place PHI’s assets under the control of a vertically integrated company. While the applicants said that should not be a concern since all the transmission assets involved will continue to be under PJM’s control after the transaction is consummated, Bowring said that alleged protection is “overstated.”

The monitor explained that PJM’s control over its members’ transmission facilities, while significant, is limited. Noting that participation in any RTO is voluntary, Bowring insisted that a large transmission owner can have significant leverage over the RTO in which it is a member because “like any organization, RTOs are concerned with protecting their size, scope and importance.”

“The greater the proportion of the RTO’s assets represented by the transmission owner, the greater the threat of exit to the RTO and the greater the potential influence of the transmission owner over the RTO governance and processes,” Bowring said.

In this case, Bowring said, a merged Exelon/PHI would account for 23.4% of transmission service credits collected from the PJM market. That much control would give the combined company “substantial and increased influence over decisions that directly relate to competition in PJM among developers of transmission projects.”

Specifically, Bowring predicted that a post-merger Exelon could use its responsibility to perform interconnection studies for generation to exert vertical market power to block potential wholesale competitors. He also said the consolidation of the ownership of transmission assets could create horizontal market power concerns because it “reduces the pool of companies that have the expertise to compete to build competitive transmission projects.”

Bowring’s objections all revolve around the point I have made many times on The Power Line – that PJM, and all other regional transmission organizations, is essentially a cartel designed to set prices and limit access to markets.

Power companies supported the so-called deregulation of US electricity in the 1980s and 1990s not to promote “free markets” but to shed themselves of unprofitable business structures and state regulation.  The growing number of mergers in the US electricity system today is focused on creating large, multi-state holding companies that once again control distribution, transmission and generation subsidiaries.  These holding companies, like AEP, FirstEnergy and Exelon, can now play off one market against another to exercise market power and maximize their profits.

Largely as a result of removing control of the bulk transmission system from state control, these holding companies used their leverage in the Cheney Administration to create a massive subsidy system based on radically expanded federal control of the planning and construction of high voltage transmission lines.  It is not surprising that transmission is the new gold mine for power company profits.  All of these subsidies are paid for by rate payers.

As Bowring points out, it is the control of both transmission and generation that gives the new holding companies their real market power in PJM.  PJM controls what new power plants are allowed to “interconnect” with the regional transmission system.  The RTO determines who wins and who loses, because without interconnection, a plant can’t sell its electricity.  And who controls PJM?  Its big holding company members who also own lots of obsolete and expensive generation.

Exelon has a particular problem.  It is one of the largest owners of nuclear power plants in the US.  It is even more difficult for nuclear power plants to ramp production up and down than it is for coal-fired plants.  Essentially, the nuclear dinosaurs must run all the time.  That means that they have to take whatever prices are available on the wholesale markets.  Increasingly, particularly with the growth of renewable power, which has zero fuel costs, there are times of day, particularly when wind farms are putting a lot of energy into the grid, when Exelon’s nuclear plants have to operate at a loss, because their operating costs are higher than the prices available to them in the market.

Stagnant demand, the growth of demand resources and the expansion of competition from solar, wind and more flexible natural gas plants force Exelon’s nuke plants to take major hits to their bottom lines.  PJM is on the verge of making big interconnection decisions for offshore wind farms.  If Exelon is allowed to merge with PHI and become a giant at the PJM cartel table, how enthusiastic do you think Exelon/PHI will be about letting large new offshore wind farms into its cozy PJM market?

Neither Exelon nor PEPCO Holdings controls any electric companies in WV, but their merger’s impact would raise WV rates through PJM’s cost recovery mechanisms.

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