The Fundamentals of Locational Marginal Pricing - LMP - Examples of Pricing Outcomes On The PJM System

The Fundamentals of Locational Marginal
Pricing (LMP): Examples of Pricing

Outcomes on the PJM System
Technical Report
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The Fundamentals of Locational
Marginal Pricing (LMP): Examples of
Pricing Outcomes on the PJM
1002213
Final Report, December 2003
EPRI Project Manager

E.V. Niemeyer
EPRI • 3412 Hillview Avenue, Palo Alto, California 94304 • PO Box 10412, Palo Alto, California 94303 • USA
800.313.3774 • 650.855.2121 • askepri@epri.com • www.epri.com
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CITATIONS
This report was prepared by
Laurits R. Christensen Associates, Inc.

4610 University Avenue, Suite 700
Madison, Wisconsin 53705-2164
Principal Investigator
L. Kirsch
Co-Authors
L. Kirsch
B. Borissov
B. Eakin
This report describes research sponsored by EPRI.
The report is a corporate document that should be cited in the literature in the following manner:
The Fundamentals of Locational Marginal Pricing (LMP): Examples of Pricing Outcomes on the
PJM System, EPRI, Palo Alto, CA: 2003. 1002213.
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REPORT SUMMARY
As power industry restructuring continues, more and more industry participants will be exposed
to financial uncertainties created by locational marginal pricing. These uncertainties differ from
those experienced under traditional regulation as well as from the resource adequacy-related
price spikes experienced in the Midwest in 1998 and in the West during 2000-2001. Instead,
locational marginal pricing systems create uncertainty in the cost of transporting power from
resources to loads. This report will help EPRI members understand and manage such uncertainty.
The report explains how locational marginal prices (LMPs) depend on the costs of transmission
losses and congestion, how LMPs create financial risks for market participants, and how market
participants might use transmission rights and other tools to mitigate LMP-related financial risks.
Background
Efficient electricity prices vary by location because the cost of delivering electricity varies by
location. LMPs reflect these locational cost differences. An LMP system has been used in the
restructured New York power market since its creation. Other restructured markets regulated by
the Federal Energy Regulatory Commission (FERC) all adopted either zonal pricing or uniform
(postage stamp) pricing when they first restructured. However, because non-locational pricing
fosters transmission congestion problems, these other markets have all either adopted locational
marginal pricing or intend to do so soon. Furthermore, FERC, in its efforts to standardize
electricity market designs, has clearly signaled its intention to have power systems throughout
the nation implement locational marginal pricing.
The problem with locational pricing is that it creates uncertainty in the prices that generators
receive for their products, in the prices that load-serving entities (LSEs) pay to serve their loads,
and in the price of transporting power from resources to loads. Even an LSE that is fully
resourced faces transmission price uncertainty. While the underlying uncertainties in fuel prices,
generator availability, and so on have muted price impacts under traditional regulation, they can
have large price impacts under locational marginal pricing. These price uncertainties can create
significant financial risks that market participants must learn to manage.
Objectives
To provide a comprehensive discussion of locational marginal pricing by explaining how costs
determine LMPs, how LMPs add to financial risks, and how risks can be mitigated.
Approach
The report begins by explaining the LMP concept, using several numerical examples and
diagrams that show how power system physics cause efficient prices to vary by location because
of transmission losses and congestion. It then explains how transmission rights can serve as a
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tool for reducing the financial risks associated with transmission price uncertainty, and presents
additional examples that show how the value of transmission rights depends upon LMPs. To
show how locational marginal pricing works in practice, the report describes how transmission
constraints affected locational prices in the Pennsylvania–New Jersey–Maryland Interconnection
(PJM) on four recent days, including peak summer and winter days of the sample period. It also
quantifies the value of transmission rights on one day during this period. It concludes by
discussing ways market participants can attempt to deal with the financial risks that arise from
locational marginal pricing.
Results
This report looks at the actual LMP experience of PJM on four recent days. The report finds that
1) nodal prices are often negative; 2) nodal prices can be extreme; 3) congestion prices can be
extreme; 4) price relationships can suddenly reverse, so that locations that have the highest prices
in one hour can suddenly have the lowest prices in the next hour; 5) many transmission facilities
can be constrained simultaneously; 6) the magnitude of locational price differences does not
depend upon the number of constraints; and 7) LMPs can be explained by congestion.
To deal with uncertainty, a market participant needs forecasts of future prices at the resource and
load locations, including the likely ranges of future prices. Based on these forecasts, the
participant must engage in long-term commitments that avoid some or most of the financial risks
associated with price uncertainty. The first and most obvious approach is to obtain a quantity of
long-term resources that approximately equals the participant’s long-term obligations (e.g.,
loads). In the absence of transmission price risk, the participant’s only remaining exposure to
LMPs would be for the quantity differences between their resources and obligations. For
example, if resources exceed obligations, the participant might sell power at the LMP; if
resources fall short of obligations, the participant might buy power at the LMP. In normal
circumstances when there is transmission price risk, however, the problem is more difficult
because the LMPs that must be paid by loads may exceed those that are paid to resources. The
available tools for mitigating such transmission price risk are all imperfect.
EPRI Perspective
Locational marginal pricing creates uncertainty in the costs of transporting power from resources
to load. Such uncertainty creates financial risks that EPRI members can learn to manage. This
report will help EPRI members understand the available tools for mitigating these financial risks.
Keywords
Marginal Costs
Market Prices
Market Structure
Transmission Rights
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ABSTRACT
This report explains how locational marginal prices (LMPs) depend upon the costs of
transmission losses and congestion, how LMPs create financial risks for market participants, and
how market participants might use transmission rights and other tools to mitigate LMP-related
financial risks. It begins with conceptual discussions of LMP and transmission rights, and then
presents recent LMP examples from the Pennsylvania–New Jersey–Maryland Interconnection
(PJM) power system. It concludes with a discussion of various means by which market
participants can attempt to deal with the financial uncertainties that arise from LMP.
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ACKNOWLEDGMENTS
The authors would like to thank Andy Ott of PJM for comments on the section directly
pertaining to PJM. We would also wish to thank Vic Niemeyer and Dan Hansen for their very
helpful comments on early drafts of this report.
The authors are solely responsible for this report’s opinions and errors.
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CONTENTS
1 BACKGROUND AND PURPOSE............................................................................. 1-1
2 THE PHYSICAL CAUSES OF LOCATIONAL PRICE VARIATION ......................... 2-1

2.1 An Example With No Transmission Losses or Constraints ............................... 2-1
2.2 An Example with Transmission Losses............................................................. 2-2
2.3 Examples with Transmission Constraints.......................................................... 2-4
2.4 Some Remarks ................................................................................................. 2-8
3 TRANSMISSION RIGHTS AS A HEDGING TOOL .................................................. 3-1
4 EXAMPLES OF PRICING OUTCOMES ON THE PJM SYSTEM............................. 4-1

4.1 Description of PJM’s Pricing System................................................................. 4-2
4.2 Examples of Pricing Outcomes on the PJM System ......................................... 4-4
4.2.1 The Peak Summer Day (August 14, 2002) ................................................ 4-5
4.2.2 The Peak Winter Day (January 23, 2003)................................................ 4-10
4.2.3 A Cool Spring Weekday (March 24, 2003) .............................................. 4-12
4.2.4 A Warm Spring Saturday (May 31, 2003) ................................................ 4-16
4.3 Example of Locational Risks on the PJM System ........................................... 4-17
4.4 Implications of the PJM Examples .................................................................. 4-20
5 MANAGING LMP PRICE RISK ................................................................................ 5-1

5.1 Forecasting LMPs ............................................................................................. 5-1
5.2 Hedging Against Price Uncertainty ................................................................... 5-2
5.2.1 Generation Ownership............................................................................... 5-3
5.2.2 Forward Contracts ..................................................................................... 5-4
5.2.3 Transmission Rights .................................................................................. 5-4
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6 SUMMARY AND CONCLUSIONS............................................................................ 6-1
A PJM PRICE TABLES .............................................................................................. A-1
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LIST OF FIGURES
Figure 2-1 Efficient Price Determination Without Transmission Losses or Constraints ............ 2-2
Figure 2-2 Efficient Price Determination with Transmission Losses......................................... 2-3
Figure 2-3 Efficient Price Determination with Transmission Losses......................................... 2-4
Figure 2-4 Flows in the Sample 3-Bus System........................................................................ 2-5
Figure 2-5 The Sample 3-Bus System with No Constraints ..................................................... 2-6
Figure 2-6 The Sample 3-Bus System with 45 MW Constraints .............................................. 2-7
Figure 3-1 FTR Example: Congestion in the Direction of the FTR .......................................... 3-2
Figure 3-2 FTR Example: Congestion Opposite the Direction of the FTR............................... 3-3
Figure 4-1 PJM Zones............................................................................................................. 4-1
Figure 4-2 Selected Constraints on 8/14/02 ............................................................................ 4-5
Figure 4-3 Highest and Lowest Forecast Zonal Day-Ahead LMPS for 8/14/02 ........................ 4-6
Figure 4-4 LMPS and Congestion Prices for the Black Oak and Bedington Nodes on
8/14/02 ............................................................................................................................ 4-7
Figure 4-5 LMPS and Congestion Prices for the Middletown Junction and Yorkana
Nodes on 8/14/02 ............................................................................................................ 4-8
Figure 4-6 LMPS and Congestion Prices for the Trappet and Talbot Nodes on 8/14/02.......... 4-9
Figure 4-7 LMPS and Congestion Prices for the Fairlawn and Athenia Nodes on 8/14/02 ...... 4-9
Figure 4-8 Selected Constraints on 1/23/03 ...........................................................................4-10
Figure 4-9 LMPS for the Black Oak and Bedington Nodes on 1/23/03 ...................................4-11
Figure 4-10 Highest and Lowest Forecast Zonal Day-Ahead LMPS for 1/23/03 .....................4-11
Figure 4-11 Selected Constraints on 3/24/03 .........................................................................4-12
Figure 4-13 LMPS and Congestion Prices for the Homer City and Quemahoning Nodes
on 3/24/03 ......................................................................................................................4-13
Figure 4-14 LMPS and Congestion Prices for the Laurel and Woodstow Nodes on
3/24/03 ...........................................................................................................................4-14
Figure 4-15 LMPS and Congestion Prices for the Black Oak and Bedington Nodes on
3/24/03 ...........................................................................................................................4-15
Figure 4-16 LMPS and Congestion Prices for the Middletown Junction and
Hummelstown Nodes on 3/24/03....................................................................................4-15
Figure 4-17 Selected Constraints on 5/31/03 .........................................................................4-16
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Figure 4-19 LMPS and Congestion Prices for the Siegfried and Martins Creek Nodes on
5/31/03 ...........................................................................................................................4-18
Figure 4-20 Distribution of Congestion Prices Between the Keystone and Limerick
Nodes, June 2002–May 2003.........................................................................................4-19
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LIST OF TABLES
Table 4-1 Summary of LMPS and Congestion Prices for the Keystone and Limerick
Buses, June 2002–May 2003 ($/MWh)...........................................................................4-18
Table 4-3A Forecast Zonald Day-Ahead LMPS for 8/14/02 ($/MWh) ...................................... A-2
Table 4-3B Forecast Zonald Day-Ahead LMPS for 8/14/02 ($/MWh) ...................................... A-3
Table 4-4 LMPS and Congestion Prices for the Black Oak and Bedington Nodes on
8/14/02 ($/MWh).............................................................................................................. A-4
Table 4-5 LMPS and Congestion Prices for the Middletown Junction and Yorkana Nodes
on 8/14/02 ($/MWh)......................................................................................................... A-5
Table 4-6 LMPS and Congestion Prices for the Talbot and Trappet Nodes on 8/14/02
($/MWh) .......................................................................................................................... A-6
Table 4-7 LMPS and Congestion Prices for the Athenia and Fairlawn Nodes on 8/14/02
($/MWh) .......................................................................................................................... A-7
Table 4-9 LMPS for the Blck Oak and Bedington Nodes on 1/23/03 ($/MWh) ......................... A-8
Table 4-10A Forecast Zonal Day-Ahead LMPS for 1/23/03 ($/MWh) ...................................... A-9
Table 4-10B Forecast Zonal Day-Ahead LMPS for 1/23/03 ($/MWh) .................................... A-10
Table 4-12A Forecast Zonal Day-Ahead LMPS for 3/24/03 ($/MWh) .................................... A-11
Table 4-13 LMPS and Congestion Prices for the Homer City and Quemahoning Nodes
on 3/24/03 ($/MWh)....................................................................................................... A-13
Table 4-14 LMPS and Congestion Prices for the Laurel and Woodstow Nodes on
3/24/03 ($/MWh)............................................................................................................ A-14
Table 4-15 LMPS and Congestion Prices for the Black Oak and Bedington Nodes on
3/24/03 ($/MWh)............................................................................................................ A-15
Table 4-16 LMPS and Congestion Prices for the Middletown Junction and Hummelstown
Nodes on 3/24/03 ($/MWh)............................................................................................ A-16
Table 4-18A Forecast Zonal Day-Ahead LMPS for 5/31/03 ($/MWh) .................................... A-17
Table 4-19 LMPS and Congestion Prices for the Siegfried and Martins Creek Nodes on
5/31/03 ($/MWh)............................................................................................................ A-19
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1
BACKGROUND AND PURPOSE
Efficient electricity prices vary by location because the cost of delivering electricity varies by
location. Just as it is usually cheaper to deliver apples to a stand next to an orchard than to a store
in a faraway city, so it is often cheaper to deliver electricity to a customer near a generator than
one who is far away. Locational marginal pricing (LMP) reflects these locational cost
differences.
LMP has been used in the New York power market since the outset of its restructuring. The other
FERC-regulated ISO markets all adopted either zonal pricing (California) or uniform pricing (the
Pennsylvania–New Jersey–Maryland Interconnection (PJM) and New England) when they were
first restructured; but in all three cases it eventually became apparent that non-locational pricing
enabled market participants to profitably increase transmission congestion and thus increase the
overall cost of electricity to consumers. Consequently, PJM adopted locational pricing in 1998 as
did New England in 2003; and the California ISO has a pending proposal to adopt locational
pricing in the near future. The Midwest ISO, which is still in the formative stage, intends to
eventually have locational pricing. The Texas power market, which is not regulated by FERC,
has zonal pricing. Although locational pricing is under consideration in Texas, there has not yet
been a decision in favor of its adoption.
receive for their products, in the prices that load-serving entities (LSEs) pay to serve their loads,
and in the price of transporting power from resources to loads. Even an LSE that is fully
resourced faces the transmission price uncertainty. In any power system, there are uncertainties
in fuel prices, generator availability, and so on; but these uncertainties have relatively small price
impacts under traditional regulation because its rolled-in pricing averages generation and
transmission costs over time and customers. Under LMP, the price signals, at least at the
wholesale level, are bare.
The purpose of this report is to explain the challenges of dealing with the financial uncertainties
that arise from LMP. Section 2 describes how power system physics causes efficient prices to
vary by location. It presents examples and diagrams that illustrate the pricing effects of
transmission losses and of transmission congestion. Section 3 explains how transmission rights
can serve as a tool for reducing the financial risks associated with LMP’s transmission price
uncertainty. While the general background presented in Sections 2 and 3 are essential to
understanding locational pricing, readers already cognizant of these aspects of power system
physics and economics may wish to skip directly to Section 4.
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Background and Purpose
Section 4 shows how LMP works in practice. It describes how transmission constraints affected
locational prices in PJM on four recent days, including the peak summer and winter days of the
sample period. It also presents an example of how transmission price risk can be evaluated.
Finally, Section 5 discusses ways by which market participants can attempt to deal with the
financial uncertainties that arise from LMP.
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2
THE PHYSICAL CAUSES OF LOCATIONAL PRICE
VARIATION
This section introduces the concepts underlying the impact of transmission losses and constraints
on locational prices, while Section 3 explains the fundamentals of how transmission rights can be
used as a hedging tool. While understanding the general background presented here is essential
to understanding this report, readers already cognizant of these aspects of power system physics
and economics may wish to skip directly to Section 4.
Under LMP, the locational price at each location depends upon the cost of delivering an extra
MWh of power to that location. The cost differences among locations depend entirely on the
costs of transmission losses and transmission constraints, which are related to the geographic
distribution of generators and loads as well as to generators’ power production costs.
Transmission losses occur because some power is converted to waste heat as electricity travels
through wires and other transmission facilities. Losses become greater—both absolutely and as a
percentage of flows—as the flows through a wire increases, or as the distance that the power
travels becomes greater, or if the wire operates at a lower voltage level instead of a higher
voltage level, or if the wire is a relatively poor conductor of electricity.1 Transmission constraints
become binding when the flow through a transmission facility (like a wire or transformer)
approaches the capacity limit of that facility. If the flow exceeds the limit, the facility may be
damaged or destroyed; so automatic mechanisms will shut the facility down in the event that
flows get too high. To avoid such damage or shutdowns, system operators will redispatch
generating units at different locations (with some additional generating cost) so as to reduce the
flow on the stressed facilities.
2.1 An Example With No Transmission Losses or Constraints
In a power system without losses or binding constraints, the efficient price of power would be
the same everywhere. In such a case, you could find the efficient price of power simply by
finding the incremental cost of the generator that serves load at the margin. This is illustrated by
Figure 2-1, which depicts the costs of a simple power system with six generators. The marginal
cost curve MC shows how the marginal cost of supply rises as demand increases. Each generator
is represented by a horizontal segment of the marginal cost curve: the height of the segment
1
As a very rough guide, losses through high-voltage facilities might be 1% per 100 miles: that is, 3% of the power
might be lost as it travels 300 miles. Note that this figure may be very different for different facilities and systems.
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The Physical Causes of Locational Price Variation
indicates the generator’s incremental cost, while the length of the segment indicates its available
capacity.
$/MWh
MC
$55
$35
MW
100 200
Figure 2-1
Efficient Price Determination Without Transmission Losses or Constraints
If load were 100 MW, marginal cost would be $35 because load could be fully served by
generators with incremental costs of $35 or less. The efficient market price would also be $35
because this is the price that would: a) induce all price-taking generators with incremental costs
below $35 to operate at full capacity; b) induce all price-taking generators with incremental costs
above $35 to operate at minimum output (which is zero in this simple example); and c) induce a
price-taking marginal generator (with the $35 incremental cost) to be indifferent to how much it
produces. Similarly, if load were 200 MW, marginal cost and the efficient market price would be
$55. Without transmission losses or constraints, this would be the price everywhere.
2.2 An Example with Transmission Losses
In a power system with losses, prices will tend to be higher at those locations that are importing
power than at those that are exporting power. Figure 2-2 shows how this can happen.
In Figure 2-2, there is a western bus (i.e., location or node) that has two 100 MW generators
(denoted by circles) and a 140 MW load (denoted by an arrow), and an eastern bus that also has
two 100 MW generators and a 140 MW load. The generators have the various incremental costs
indicated in the figure. The western and eastern buses are connected by a transmission line.
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G1: $20; 100 MW G3: $26; 100 MW

42 MW Ö 40 MW
G2: $30; 100 MW G4: $38; 100 MW
LW: 140 MW LE: 140 MW
West East
Figure 2-2
Efficient Price Determination with Transmission Losses
Suppose that there is a 5% average loss rate in transporting power from West to East. To get 40
MW to the eastern bus from the western bus, it would therefore be necessary to inject 42 MW at
2
the western bus to cover 2 MW of losses. For a single line as shown in Figure 2-2, marginal
losses will be almost exactly double of average losses.3 Marginal losses will therefore be 10%,
which means that to get an extra 1.00 MW of power to the eastern bus it would be necessary to
inject an extra 1.10 MW of power at the western bus.
We can determine locational marginal costs and efficient locational prices by figuring out the
cheapest way to serve a 1 MW load increase at each bus. We begin by noting that the 280 MW
of load can be most cheaply served by 100 MW each from G1 and G3, and 82 MW from G2
(where the extra 2 MW are generated to cover losses).
• The marginal cost and efficient price in the west will be $30, since an extra MW of western
load would be met by increasing the output of G2 by 1 MW.
• The marginal cost and efficient price in the east will be $33, since the cheapest way of
serving an extra MW of eastern load would be by increasing the output of G2 by 1.10 MW:
1.00 MW to cover the extra load and 0.10 MW to cover the losses. Note that it is cheaper to
have G2 produce the power and cover the marginal losses than it would be to have G4
produce the power even without any extra losses.
Computer programs are capable of quickly calculating marginal losses and efficient prices even
in very large power systems. To operate systems efficiently, power engineers need to create input
data on how the marginal losses on each line depend upon flows through that line; and these
data, needed for operational purposes, can be used to calculate efficient locational prices.
2
2 MW = 5% * 40 MW.
As a general law of physics, Losses = K * Flow , where K is a constant. Average Losses ≡ Losses / Flow = K *
3 2
Flow. Marginal Losses ≡ δLosses/δFlow = 2K * Flow. Therefore, Marginal Losses = 2 * Average Losses. These
relationships apply to transmission lines, but not to other equipment such as transformers.
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2.3 Examples with Transmission Constraints
Transmission constraints have the effect of dividing power systems into markets that are partly
or wholly separated. Using the same 2-bus system presented in Figure 2-2, Figure 2-3 illustrates
how prices can be determined when there is a transmission constraint. In Figure 2-3, we assume
that there are no losses, but that there is a 25 MW limit on the amount of power that can be
transported across the transmission line that connects the western and eastern buses.
G1: $20; 100 MW G3: $26; 100 MW

25 MW
G2: $30; 100 MW G4: $38; 100 MW
LW: 140 MW LE: 140 MW
West East
Figure 2-3
Efficient Price Determination with Transmission Losses
Without the constraint, we would want G1 and G3 to each produce 100 MW, and would want G2
to produce the remaining 80 MW. If that occurred, however, 40 MW would flow from west to
east, which would violate the 25 MW constraint. Consequently, G2 must produce only 65 MW
while G4 produces 15 MW. The western bus is in balance because the 100 MW being produced
by G1 plus the 65 MW being produced by G2 just equals the 140 MW being consumed at that
bus plus the 25 MW being exported eastward. The eastern bus is in balance because the 100 MW
being produced by G3 plus the 15 MW being produced by G4 plus the 25 MW being imported
just equals the 140 MW being consumed at that bus. So the constraint is honored and flows are
in balance at each bus.
To determine locational marginal costs and efficient locational prices, we need to find the
cheapest way of serving a 1 MW load increase at each bus. At the western bus, a 1 MW load
increase would be met by a 1 MW increase in the output of G2, which would cost $30; so the
marginal cost and efficient price at the western bus is $30. At the eastern bus, a 1 MW load
increase would be met by a 1 MW increase in the output of G4, which would cost $38; so the
marginal cost and efficient price at the eastern bus is $38. The congestion cost on the constrained
line is $8 per MWh, which equals the $38 price in the east minus the $30 price in the west.
The situation becomes more complex in a system in which power has multiple routes by which it
can flow between two points. A “simple” way of illustrating such “loop flows” is with a 3-bus
“triangle” example in which all of the lines are identical and there are (again) no losses. What
makes the example “simple” is that, when all lines are identical, power flows are proportional to
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the inverse of the distance traveled.4 In Figure 2-4, if 30 MW is injected at node A and 30 MW is
consumed at node C, 20 MW will flow directly from A to C while 10 MW will flow the long
way, from A to B to C. The reason that twice as many MWs flow by the direct route as by the
long route is that the long route is exactly twice as long as the direct route. Since we are
assuming that lines A-B, B-C, and A-C are all identical, the long route has twice the resistance of
the direct route. The laws of physics have power flow over the path of least resistance, which
results in the flows shown in Figure 2-4.
30 MW
10 MW 20 MW
B C
10 MW 30 MW
Figure 2-4
Flows in the Sample 3-Bus System
Understanding the power flows of Figure 2-4 is essential to being able to determine the
locational marginal costs and prices of the triangle system. As with the earlier 2-bus example, we
will determine marginal costs by asking how a 1 MW load increase changes costs. With loop
flows, as in Figure 2-4, the reasoning is more complex than in the 2-bus example.
Suppose that bus A has a 90 MW generator with a $20 per MWh incremental cost, bus B has a
120 MW generator with a $35 per MWh incremental cost, and buses B and C respectively have
loads of 60 MW and 75 MW. If there are no constraints, then the least-cost way of meeting the
135 MW of load would be with 90 MW of output by the generator at A and 45 MW of output by
the generator at B. Figure 2-5 shows the resulting flows and prices. The flows may be calculated
4
When power has multiple (“parallel”) paths by which it can travel between two points, the flow on each path will
be proportional to the inverse of the resistance of each path. That is, every path j will share with every other path a
common product of its flow Fj and its resistance Rj: if there are n parallel paths, F1 * R1 = F2 * R2 = … = Fn * Rn.
When power flows over two lines in series, such as (in Figure 2-4) from A to B and then B to C, the resistance on
that path will equal the sum of the resistances of each of the lines that compose the series: in this example, RABC =
RAB + RBC. Because we assume that the resistances of all three lines in Figure 2-4 are identical, the resistance over
the path A to B to C must be exactly twice the resistance on the path A to C, and the flow over path A to B to C
must be exactly half the flow on the path A to C.
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as described by Figure 2-4.5 The prices are $35 at all buses because, without constraints, the
generator at B would be the marginal source of power for a load increment at all three buses.
Now make all of the same assumptions as in Figure 2-5, but assume that there is a 45 MW flow
limit on each of the lines. The solution of Figure 2-5 would no longer be feasible because the
flow on line A-C exceeds this limit. Consequently, the generators need to be redispatched to
relieve this constraint, which will result in the prices being different at each of the buses.
90 MW GA: $20;
90 MW
A
$35
35 MW 55 MW
GB: $35;
120 MW
$35 $35
B C
45 MW
60 MW 20 MW 75 MW
Figure 2-5
The Sample 3-Bus System with No Constraints
Figure 2-6 shows that, to avoid an overload on line A-C, generator A would reduce its output by
30 MW while generator B increased its output by 30 MW. The effect of this output change is the
same as a 30 MW injection at B serving a 30 MW load at A: 20 MW (two-thirds of 30 MW)
will flow on the direct route from B to A; while 10 MW (one-third of 30 MW) will flow over the
longer route of B to C to A. Consequently, a comparison of Figures 2-5 and 2-6 shows that the
effects of the redispatch are to reduce the flow on line A-B by 20 MW, to increase the flow on
line B-C by 10 MW, and to reduce the flow on line A-C by 10 MW.
5
One way of calculating the flows in Figure 2-5 is as follows. First, note that the end result is that 75 MW of power
will flow from A to C and 15 MW of power will flow from A to B. Of the 75 MW flowing from A to C, 50 MW
will flow over the direct route A-C while 25 MW will flow from A-B and then B-C. Of the 15 MW flowing from A
to B, 10 MW flows on the direct route A-B while 5 MW flows from A-C then C-B. Therefore, the flow on A-B is 35
MW (= 25 MW + 10 MW), on B-C is 20 MW (= 25 MW – 5 MW), and on A-C is 55 MW (= 50 MW + 5 MW). As
a double-check on the arithmetic, you may note that the quantity of power flowing into each bus exactly equals the
quantity flowing out of it.
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60 MW GA: $20;
90 MW
A
$20
15 MW 45 MW
GB: $35;
120 MW
$35 $50
B C
75 MW
60 MW 30 MW 75 MW
Figure 2-6
The Sample 3-Bus System with 45 MW Constraints
In Figure 2-6, the marginal cost and efficient price at A is $20 because a 1 MW load increase at
A would be most cheaply served by a 1 MW increase in the output of generator A. Similarly, the
marginal cost and efficient price at B is $35 because a 1 MW load increase at B would be most
cheaply served by a 1 MW increase in the output of generator B: although generator A has a
lower incremental cost, it cannot serve a load increase at B without increasing flows over the
constrained line A-C.
Determining the marginal cost at bus C is a bit trickier. It turns out that the cheapest way of
serving a 1 MW load increase at C is by increasing the output of generator B by 2 MW and
reducing the output of generator A by 1 MW. The net generator output change adds up to 1 MW,
so the power balance is maintained. As for respecting the transmission constraint, consider the
marginal flow changes associated with a 1 MW output reduction at A, a 2 MW output increase at
B, and a 1 MW load increase at C. Such changes are equivalent to generator B sending 1 MW of
power to A and another 1 MW of power to C. The 1 MW of power from B to A leads to a flow
of one-third MW over the long route B to C to A, which means that it creates a one-third MW
flow from C to A. The 1 MW of power from B to C leads to a flow of one-third MW over the
long route B to A to C, which means that it creates a one-third MW flow from A to C. The one-
third MW from C to A exactly cancels the one-third MW from A to C. The conclusion is that a 1
MW output reduction at A, a 2 MW output increase at B, and a 1 MW load increase at C together
create no net flow over the constrained line A-C. Hence, a 1 MW load increase at C can be met
by a 2 MW output increase at B plus a 1 MW output reduction at A without violating the
constraint on line A-C. The cost of meeting a 1 MW load increase at C is therefore $50, which
equals 2 MW times $35 minus 1 MW times $20.
There are some general rules that hold not only in this example but also in real power systems:
• A transmission constraint can change marginal costs and efficient prices at many locations
throughout the power system. Marginal costs and efficient prices will always change at the
nodes located immediately by a constraint, but they will generally change at many other
locations as well.
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• The number of marginal generators—that is, the generators that respond to small load
changes—always equals the number of transmission constraints plus one. If there are no
transmission constraints in a power system, there is only one marginal generator in the
system. If there is one transmission constraint, as in Figure 2-6, there are two marginal
generators. If there were ten transmission constraints, there would be eleven marginal
generators.
• When identifying the redispatch that is necessary to determine marginal costs, the power
balance must be maintained and transmission constraints must be respected. This means
that, to maintain power balance while meeting a load increment, the total change in the
generators’ outputs of generators must add up to the load increment; and it also means that
the incremental flows over the constrained facilities must be zero.
This last rule has the strange implication that the marginal cost and efficient price at some buses
might lie outside of the range of the incremental costs of generators. For example, in Figure 2-6,
the highest generator incremental cost is $35, yet the marginal cost at C is $50. In real power
systems, this can lead to seemingly odd results, including negative prices. It is possible, for
example, that transmission constraints could create a situation in which a 1 MW load increase at
one bus would be most cheaply satisfied by a 3 MW generation increase at a second bus
accompanied by a 2 MW generation reduction at a third bus. If the generator at the second bus
has a $20 incremental cost while that at the third bus third has a $35 incremental cost, the
marginal cost at the first bus would be negative $10: 3 MW times $20, minus 2 MW times $35.
Indeed, in Section 4 we will see many examples of negative prices in PJM caused by precisely
such phenomenon.
2.4 Some Remarks
Although the foregoing examples might make the computations of marginal costs and efficient
prices look tedious, computer programs can quickly perform these computations even for large
power systems with thousands of buses. Furthermore, such programs can consider transmission
losses and constraints simultaneously. These computer programs can determine both the efficient
MW dispatch (output) of each generator and the efficient price at each bus.
In practice, however, only New York considers losses and constraints simultaneously. PJM looks
only at constraints in its simultaneous calculations, and then afterward makes approximate
adjustments for losses. PJM recognizes the virtue of including losses in its simultaneous
calculation, but has not yet undertaken the necessary programming. ISO-New England has
adopted PJM’s existing pricing system, and the Midwest ISO intends to do the same.
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3
TRANSMISSION RIGHTS AS A HEDGING TOOL
A “transmission right” allows a market participant to transport power from its resources to its
loads at a price that is known in advance with a great degree of certainty. Under traditional
regulation, market participants could obtain transmission rights through contracts or tariffs. In
either case, the prices of transmission service were based upon transmission providers’ costs as
established by regulatory procedures. Although the resulting prices were not knowable in
advance with 100% certainty, they were fairly stable over time.
In an LMP system, congestion can cause the price of transmission between any two locations to
fluctuate widely from one hour to the next. In such a system, a transmission right manages this
price fluctuation by giving the right owner either a physical right to use specified transmission
facilities at a known price or a financial right to compensation for the price fluctuations. Because
physical rights can interfere with power system operation and because financial rights provide
the rights owner with all of the financial security of physical rights, the ISO markets offer
financial rights rather than physical rights (except to the extent that old physical rights have been
grandfathered).
Financial rights to transmission service can be created in two ways. First, they can be created
through purely financial contracts by which the rights seller more or less guarantees the
transmission price that will be paid by the rights buyer. Any responsible party (such as a bank)
could be a seller of such rights. In this case, the seller is speculating that its upfront revenue
received on the sale of the transmission rights will exceed its LMP-based congestion payments to
the rights owner. Second, financial rights can be backed up by the physical transmission assets
that would provide the transmission service. In this case, the seller is protected against the
financial risk of large differences in the LMPs at different locations because the seller would
have the ability to move physical power among locations. The seller’s profit will equal its
upfront revenue received on the sale of the transmission rights minus its fairly predictable capital
and operating costs of transmission facility ownership.
In existing and proposed LMP markets, financial transmission rights (FTRs) guarantee that,
when the transmission system is physically capable of meeting all FTR obligations, the FTR
holder will receive payment for congestion rents between specified locations. Suppose that, as in
Figure 3-1, a market participant owns a 50 MW right to transport power from Point A to Point B,
and that in Hour 1 the prices at those points are $20 and $30 per MWh, respectively. In this case,
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Transmission Rights as a Hedging Tool
the congestion price is $10 per MWh (= $30 – $20). The value of the FTR in this hour is $500
(= 50 MW * $10), so the participant would receive $500.6
50 MW
PA=$20 PB=$30
A B
Figure 3-1
FTR Example: Congestion in the Direction of the FTR
Note that the FTR owner gets $500 regardless of its resources or loads. If the FTR owner
happened to produce 50 MW of power at A to serve a 50 MW load at B, then the FTR would be
a perfect hedge: the FTR owner would receive $500 of FTR revenues but would be required to
pay $500 of congestion costs, and so would neither pay nor receive money for transmission
service in this hour. If the FTR owner happened to produce 35 MW of power at A to serve a 35
MW load at B, then the FTR owner would receive $500 of FTR revenues, would pay $350 of
congestion costs (= 35 MW * $10), and so would receive $150 net (= $500 – $350) for
transmission services. The FTR owner pays for the congestion costs of its actual transactions just
like everybody else; but unlike everybody else, it receives a $500 payment by virtue of owning
the 50 MW FTR.
The value of an FTR thus depends upon the differences between the LMPs at the FTR’s source
and sink locations over the life of the FTR. But the way that the FTR depends upon LMPs is
determined by whether the FTR is an obligation or an option.
An FTR obligation has the FTR owner receive money for congestion in one direction and pay
money for congestion in the other direction. Figure 3-1 shows an hour in which congestion is in
the direction of the FTR. Figure 3-2 shows an hour in which congestion is in the direction
opposite the FTR. In Figure 3-2, the direction of the FTR is still from A to B (as indicated by the
arrow); but because the price at A is higher than the price at B, it is apparent that congestion is
the opposite direction.
6
The $500 comes out of the settlement process, in which payments by loads will exceed receipts by generators
because LMPs at load locations are inevitably higher (on average) than LMPs at generator locations. Because
congestion raises the prices paid by loads and reduces the prices paid to generators, the costs of congestion are
shared by generators and loads; but there is no meaningful way to identify the relative shares paid by these two
groups of market participants. The payments to FTR owners can therefore be said to partly come from generators
and partly from loads, though the relative shares are not identifiable.
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Transmission Rights as a Hedging Tool
50 MW
PA=$45 PB=$30
A B
Figure 3-2
FTR Example: Congestion Opposite the Direction of the FTR
In the hour illustrated by Figure 3-2, the holder of a 50 MW FTR obligation from A to B will
pay $750: the $15 congestion price (= $30 – $45) times the 50 MW FTR quantity. If the FTR
owner were using the FTR as a pure hedge, this would be a satisfactory outcome. That is, if the
FTR owner were producing 50 MW of power at A to serve a 50 MW load at B, then the FTR
would still be a perfect hedge: the FTR owner would pay $750 for the FTR obligation but would
receive $750 of negative congestion costs (because the power produced at A is more valuable
than the power consumed at B); so the FTR holder would neither pay nor receive money for
transmission service in this hour.
In the hour illustrated by Figure 3-2, the holder of an FTR option would pay nothing because an
FTR option, by definition, never requires the FTR owner to pay for reverse congestion. In this
case, if the FTR owner were producing 50 MW of power at A to serve a 50 MW load at B, then
the FTR owner would simply receive the $750 by which the value of the power at A exceeds the
value of the consumption at B. An FTR option is thus more valuable than an FTR obligation
because the former allows the owner to escape payment when congestion is in the opposite
direction from the obligation; but FTR owner must pay for this extra value because the charge
for buying an FTR option will be higher than the charge for buying a similar FTR obligation.
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4
EXAMPLES OF PRICING OUTCOMES ON THE PJM
SYSTEM
PJM is the largest control area in the U.S. and the third largest control area in the world. The
control area includes all of Delaware, the District of Columbia, Maryland, and New Jersey,
almost all of Pennsylvania, and parts of Ohio, Virginia, and West Virginia. As shown in Figure
4-1, it is divided into twelve zones that are defined by the service territories of the twelve major
utilities that comprise the control area.
Figure 4-1
PJM Zones
The backbone of PJM’s transmission system consists of several 500 kV lines that generally carry
power from west to east. The particular days that we examined indicate that constraints
sometimes cause the western part of the system (the Allegheny Power and Pennsylvania Electric
service territories) or the south-central part of the system (the Baltimore Gas & Electric and
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Examples of Pricing Outcomes on the PJM System
Potomac Electric service territories) to have very different prices than the other parts of the
system.
This section begins with a description of PJM’s pricing system. The second part then provides
examples of how PJM’s pricing system worked on four “interesting” days during the period June
2002 through May 2003. The third part shows how locational price risks might have been
managed for a particular pair of locations within PJM on one of those “interesting” days. The
section concludes by listing several important implications of the pricing results seen on the four
“interesting” days.
4.1 Description of PJM’s Pricing System
PJM’s restructured market began in 1997 with non-locational pricing. The advocates of non-
locational pricing asserted that this pricing system would be simpler than locational pricing; but
instead, non-locational pricing made it very profitable for some market participants to create
congestion and to add to congestion at the expense of other market participants. Because of the
demonstrated bad incentive effects of non-locational pricing, PJM switched to locational pricing
in 1998.
PJM’s market operates in two timeframes, and is thus called a “two-settlement” market. The day-
ahead market determines the next day’s hourly locational prices for each generator bus. This is a
financially binding market in which sellers promise to provide real-time power to the market—
through real-time production or real-time purchase—at the applicable day-ahead locational price.
This day-ahead market thus provides price guarantees that enable generators to commit
themselves (i.e., startup) to produce power without facing real-time price risk. The real-time
market determines the spot price used to settle differences between day-ahead schedules and
real-time transactions. For example, if a generator sells 100 MW in the day-ahead market but
only produces 95 MW in real-time, the generator would receive the applicable day-ahead
locational price for the 100 MW and would pay the applicable real-time locational price for the 5
MW deficiency.7
PJM’s generators can bid into the ISO’s markets or can self-schedule. Generators that bid into
the day-ahead market can submit three-part bids that indicate their startup and shutdown costs,
no-load costs, and incremental energy costs. As part of their bids, generators inform the ISO
about their intertemporal operating constraints such as startup times, shutdown times, and
ramping rates. Energy bids are subject to a $1,000 per MWh cap, except that generators that
relieve transmission constraints are subject to a lower cap based upon the higher of historical
LMPs or 110% of cost. Generators that self-schedule are price-takers in the day-ahead market:
they accept the applicable LMP without any prior limits.
7
Subsequent to the day-ahead Market, PJM also has a day-ahead reliability-based unit commitment analysis that
allows the ISO to commit additional generation when the ISO believes that the day-ahead market has failed to
induce a sufficient number of generators to be available to produce power. Generators thus committed by the ISO
are guaranteed recovery of their as-bid costs.
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PJM’s market participants can also specify what they are or are not willing to pay for the
transmission congestion associated with their particular transactions. They have three options.
First, a participant can be a price-taker, paying whatever the congestion price happens to be.
Second, a participant can submit an up-to bid that indicates the maximum price that it will pay
for congestion. Third, a participant can indicate that it is not willing to pay for congestion. In the
latter two cases, the participant’s transaction will be cut if the congestion price exceeds the bid
price (which is zero in the case of not willing to pay for congestion).
PJM produces three sets of price information. Nodal prices are the LMPs at which wholesale
transactions actually settle. Zonal prices are calculated for each of the twelve utility service
territories shown in Figure 4-1. These prices are load-weighted averages of the LMPs within
each zone and are therefore useful for setting retail prices. Hub prices are price indexes for
various regions of PJM and are designed to facilitate trading among market participants and
hedging of price uncertainty. PJM has a Western Interface Hub (3 buses), an Eastern Hub (237
8
buses), and a Western Hub (111 buses). The hub prices are simple arithmetic averages of the
LMPs of the buses that comprise the hub.
PJM determines locational prices through an optimization that minimizes system costs,
considering transmission congestion, transmission and generation contingencies, external
transactions, firm bilateral transactions, fixed and price-sensitive demands, and reserve
requirements. The optimization considers average losses, so that demand plus losses are included
in the total generation requirement; but it does not include marginal losses in the dispatch at this
time. The resulting differences among locational prices thus reflect transmission congestion but
not transmission losses. PJM intends to incorporate marginal cost-based pricing of losses into its
LMP calculation at some future date.
Because locational pricing creates transmission pricing risk—you never know in advance the
real-time price for transporting power from your resource at one location to your load at another
location—PJM inaugurated a system of Fixed Transmission Rights (FTRs) in 1999. FTRs
provide a financial hedge against the risk of transmission congestion. The owner of an FTR
receives a payment for the congestion price (if any) between a specified power source and power
sink and for a specified number of MWs over a specified time period. The amount of this
payment does not depend upon the actual MWs that the FTR owner injects into or takes from the
power system, but instead depends only on the MW rights specified by the FTR. A participant
who wants to hedge transmission risk between a generator and a load will ordinarily seek to own
a volume of MW rights that approximates their expected power flows.
In PJM, market participants usually obtain FTRs by purchasing Network Integration

Transmission Service. Roughly 90% of FTRs are acquired in this manner. The other ways of
obtaining FTRs are by purchasing Point-to-Point Transmission Service, by making winning bids
in the ISO’s monthly FTR auctions, or through purchases in the secondary market.
8
The Western Hub has historically had the highest volume of trade.
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4.2 Examples of Pricing Outcomes on the PJM System
To illustrate how transmission congestion can affect price in an LMP market, we selected for
examination the following four “interesting” days from the period June 2002 through May 2003:
• The Peak Summer Day–August 14, 2002: This was a hot summer Wednesday, the fifth
hottest day of the 12-month sample period. Its peak load, at 64,127 MW, was the highest load
of calendar 2002 and of the June 2002 through May 2003period. It had very high price
variation among nodes and hours in both relative and absolute terms.
• The Peak Winter Day–January 23, 2003: Falling on a Thursday, this day set the winter peak
load record at 54,851 MW. It was also the coldest day of the 12-month sample period. It had
high price variation among nodes and hours.
• A Cool Spring Weekday–March 24, 2003: This was a cool Spring Monday with high price
variation.
• A Warm Spring Saturday–May 31, 2003: This day happened to have the highest relative
(percentage) price variation of the year, though its absolute price variation was low because
prices were low.
Our choice of days was thus biased toward those with relatively high price variation. They also
include extremes of heat and cold.
The data we used in analyzing these four days are available from the PJM website. We use day-
ahead hourly prices that are published on a daily basis, including nodal LMPs, zonal prices, and
hub prices. We also use PJM’s forecasts of the transmission facilities that it expects will be
constrained the next day.
In examining the four days, our analysis was limited by the publicly available data. As implied
by the discussion of Section 2, an explanation of locational price differences would ideally
employ data on transmission constraints, loads by location, and generator output and costs by
location. Unfortunately, among the explanatory information, only the transmission constraint
data are publicly available.
Accurately identifying the causation of LMPs ideally requires data that are not available to the
public, including data on generator outages, dispatch, and incremental costs. Unfortunately,
generator bid and incremental cost information are generally confidential and thus available from
PJM only after a six-month lag. Furthermore, even these data are masked to hide the names of
generators, so it is not possible to match the six-month old generator output and cost data to
particular locations within PJM.
It may nonetheless be possible to develop generator output and cost information from various
non-PJM sources. Generator output capacity and primary fuel type are available through public
sources such as the Energy Information Agency (EIA). FERC Form 1 can be used to determine
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the generator’s average incremental cost based on heat rate content and annual consumption of
fuel. The North American Electric Reliability Council offers the Generating Availability Data
System, which provides the generator availability as recorded in the last five years. Finally,
commercial vendors like the Utility Data Institute (UDI) and Research Data Institute (RDI)
estimate generators’ incremental costs based on heat rate and fuel type.
Because we did not develop generator output and cost information, we are not able to explain the
magnitudes of locational price differences nor to identify the particular load and generation
events that created transmission constraints. Nonetheless, we are generally able to explain how
the transmission constraints led to the price differences.
In the following subsections, we examine pricing outcomes for the day-ahead market rather than
the real-time market. The day-ahead market is the one that has the greater volume of trade. It is
also the market that serves as the basis for settlements of FTRs and in which risk-averse market
participants are more likely to trade.
4.2.1 The Peak Summer Day (August 14, 2002)
August 14, the peak day of calendar 2002, was a hot summer weekday with very high price
variation among locations and hours in both relative and absolute terms. For this day, thirty
facilities (lines and transformers) were forecast day-ahead to have constraints. The constraints of
most interest are those marked in Figure 4-2.
Fairlawn
Atheni
Middle, Jct
Yorkana
Black Bedington
Oak
Trappet
Talbot
Figure 4-2
Selected Constraints on 8/14/02
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Figure 4-3 presents average hourly LMPs for six of PJM’s twelve zones.9 There were no
significant constraints for the first seven hours of the day, so all locations (and all zones) had
virtually identical prices for these seven hours. Locational prices then diverged beginning in hour
8 as multiple constraints kicked in. The two westernmost zones (Allegheny Power and
Pennsylvania Electric) together had lowest average LMPs in all hours beginning with hour 8.
The Delmarva Power & Light zone had the highest average LMPs in all but two of the hours
beginning with hour 8; and it had far and away the highest average prices for the day. The Public
Service Electric & Gas zone had the distinction of having the highest average hourly LMP, an
extraordinary $420 per MWh in hour 16.
450
400
350
300
Price ($/MWh)
250
200
150
100
50
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Hour
Allegheny Power Baltimore Gas & Electric Delmarva P&L

Penn Electric Potomac Electric Public Service Electric & Gas
Figure 4-3
Highest and Lowest Forecast Zonal Day-Ahead LMPS for 8/14/02
The relatively low prices in the western zones were due to constraints on eastward power flows.
Figure 4-4, for example, shows the prices associated with the constraint on the Black Oak–
Bedington 500 kV line, which is an east-west line through eastern Maryland. The figure shows
hourly nodal prices at each end of the line, with the difference in the prices representing the
congestion price on the line. Hours when the constraint was binding are shaded gray. When the
constraint was not binding during the first seven hours of the day, the price of congestion was
virtually zero. When the constraint was binding for the rest of the day, the price at Black Oak
was often zero or even negative, while the price at Bedington was often over $100 per MWh; and
9
The appendix has tables that present hourly price data corresponding to all of the price lines in all of the figures of
this section, as well as hourly price data for all twelve regions for all four “interesting days.”
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the price of congestion (that is, the difference in the prices between the two nodes) ranged as
high as $187 per MWh. The western zones are generally located “upstream” from the constraint
(i.e., on the Black Oak side) while the eastern zones are generally located “downstream” from
the constraint (i.e., on the Bedington side). Consequently, this constraint had a downward
influence on prices at many locations in the western zones and an upward influence on prices at
many locations in the eastern zones.
200
150
100
Price ($/MWh)
50
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
-50
Hour
Black Oak Bedington Congestion
Figure 4-4
LMPS and Congestion Prices for the Black Oak and Bedington Nodes on 8/14/02
Figure 4-5 shows prices related to another constraint that contributed to the relatively high prices
in the Baltimore Gas & Electric, Delmarva, and Potomac Electric zones. This constrained facility
was the Middletown Junction–Yorkana 115 kV line, which is a north-south line located near
Harrisburg, Pennsylvania. This line had no congestion (and no congestion costs) for the first
seven hours of the day, and then was constrained for all but the last hour of the day. Based upon
the differences in the prices at the two nodes, it appears that the line’s congestion costs rose as
10
high as $61 per MWh.
The Delmarva zone had particularly high prices because the Delmarva Peninsula had constraints
on twelve facilities for much of the day. Figure 4-6 shows the prices associated with one of these
facilities, the Trappet–Talbot 69 kV line, which is located in the Maryland portion of the
peninsula. For the first seven hours of the day there was no congestion, hence no congestion
10
PJM Staff inform us that, according to non-public data, the posted constraint shadow price for this line rose as
high as $672 per MWh on this day.
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costs. For hours 8 through 19 there was very expensive congestion, with congestion prices
ranging between $331 and $1,611 per MWh. When this line was no longer constrained beginning
at hour 20, the congestion costs on this line fell dramatically; but they did not promptly reach
zero because of the price effects of congestion on other facilities elsewhere.
The publicly available data do not permit a satisfactory explanation for the extraordinarily high
prices seen in the Public Service Electric & Gas zone in hour 16. The most likely candidate
might seem to be the constraint on the Fairlawn–Athenia 138 kV line, which is a north-south line
located in the northeastern corner of New Jersey. This line’s constraint was binding only in hour
16. Figure 4-7 indicates, however, that locational prices at both ends of this line were over
$2,000 per MWh and the congestion price on this line was only $103 per MWh. It therefore
appears that it is not possible that this line, by itself, could explain the high prices in the Public
Service Electric & Gas zone in hour 16. Because PJM had thirteen other facilities with binding
constraints in this hour, it must be the case that the high prices in this zone were due to a
complex combination of these constraints.11
250
200
150
Price ($/MWh)
100
50
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Hour
Middletown Junction Yorkana Congestion
Figure 4-5
LMPS and Congestion Prices for the Middletown Junction and Yorkana Nodes on 8/14/02
11
Contrary to the text, however, PJM Staff informs us that non-public information indicates that this line’s shadow
price was $3,434 per MWh, which would explain the high prices in PSEG during this hour.
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2000
1800
1600
1400
1200
Price ($/MWh)
1000
800
600
400
200
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Hour
Trappet Talbot Congestion
Figure 4-6
LMPS and Congestion Prices for the Trappet and Talbot Nodes on 8/14/02
2500
2000
1500
Price ($/MWh)
1000
500
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Hour
Fairlawn Athenia Congestion
Figure 4-7
LMPS and Congestion Prices for the Fairlawn and Athenia Nodes on 8/14/02
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4.2.2 The Peak Winter Day (January 23, 2003)
January 23 set the winter peak load record at 54,851 MW. It was also the coldest day of the 12-
month sample period.
Although only six facilities were forecast day-ahead to have constraints, there were large price
differences among nodes because one of the constrained facilities was the Black Oak–Bedington
500 kV line, the east-west line in eastern Maryland previously mentioned. This line, which is
shown in Figure 4-8, was constrained all 24 hours of the day, limiting the power that could be
transported from the western part of PJM to the eastern part.
Black Bedington
Oak
Figure 4-8
Figure 4-9 presents the hourly LMPs for the Black Oak and Bedington nodes. Because power
was flowing eastward from Black Oak to Bedington and because the line that connects these
nodes was constrained every hour of the day, prices were always higher at Bedington. The price
difference was substantial in every hour, ranging up to nearly $260 per MWh. The prices at
Black Oak were negative in most hours. This means that a 1 MW load increase at Black Oak
would allow the system to increase the output of an inexpensive generator by 1 MW more than
an expensive generator is turned down. The difference in these generators’ incremental costs was
apparently so great that the cost of the inexpensive generator was more than offset by the cost
reduction of the expensive generator.
Figure 4-10 shows the effect of the Black Oak–Bedington constraint on the hourly LMPs for four
of PJM’s zones. One effect of the constraint was to create high LMPs downstream from the
constraint: the Potomac Electric and Baltimore Gas & Electric zones, which are located just
downstream, had the first and second highest average LMPs throughout the day. Another effect
of the constraint is to create low LMPs upstream from the constraint: the Pennsylvania Electric
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and Allegheny Power zones, which are located just upstream, are generally the two lowest-priced
zones throughout the day.
300
250
200
150
Price ($/MWh)
100
50
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
-50
-100
Hour
Figure 4-9
LMPS for the Black Oak and Bedington Nodes on 1/23/03
140
120
100
Price ($/MWh)
80
60
40
20
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Hour
Allegheny Power Baltimore G&E Penn Electric Potomac Electric
Figure 4-10
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4.2.3 A Cool Spring Weekday (March 24, 2003)
March 24 was a cool Spring weekday with moderately high price variation. For this day, thirteen
facilities were forecast day-ahead to have constraints. Figure 4-11 shows the locations of the
most important of these constraints.
Hummelstow
Homer City
Middle, Jct
Quemahoning
Laurel
Black Bedington
Oak Woodstow
Figure 4-11
Figure 4-12 presents the average LMPs for five PJM zones. This day is remarkable for the
sudden reversal of the relative LMPs of the different zones. Specifically, in hours 1 through 6,
the Pennsylvania Electric zone had the highest average LMPs while the Potomac Electric zone
had the lowest average LMPs; but in hours 8, 9, 19, 20, and 21, these two zones switched their
positions as highest and lowest. This switch occurred because of changes in the binding
transmission constraints for these hours.
The relative prices of the first seven hours of the day were significantly influenced by the
forecast constraint of the Homer City–Quemahoning 230 kV line, a northwest-southeast line
located in western Pennsylvania. Figure 4-13 shows that the LMPs at Quemahoning were
moderately higher than those at Homer City during these hours, plus a few subsequent hours.
Because much of the Pennsylvania Electric zone lies immediately downstream from that line, it
had significantly higher average LMPs than all other zones during hours 1 through 6, and a
significantly higher average LMP than all but one other zone in hour 7.
In hour 7, the Atlantic Electric zone suddenly had significantly higher LMPs than all other zones.
This occurred because much of this zone is located downstream from the Laurel–Woodstow 69
kV line, located in south-central New Jersey. As indicated by Figure 4-14, this line was
congested beginning hour 7, with congestion costs ranging up to $195 per MWh. In all hours
when the congestion cost on this line exceeded $90, the Atlantic Electric zone had the highest
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average LMPs of all of the zones; and in all hours 7 through 23, this line constraint contributed
to the Atlantic Electric zone having relatively high LMPs.
200
180
160
140
120
Price ($/MWh)
100
80
60
40
20
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Hour
Penn Electric Potomac Electric Atlantic Electric Allegheny Power Baltimore G&E
Figure 4-12
120
100
80
Price ($/MWh)
60
40
20
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Hour
Homer City Quemahoning Congestion
Figure 4-13
LMPS and Congestion Prices for the Homer City and Quemahoning Nodes on 3/24/03
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250
200
150
Price ($/MWh)
100
50
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
-50
Hour
Woodstow Laurel Congestion
Figure 4-14
LMPS and Congestion Prices for the Laurel and Woodstow Nodes on 3/24/03
In hour 8, the average LMPs for the Potomac Electric and Baltimore Gas & Electric zones
suddenly rocketed upward, while those of Pennsylvania Electric and Allegheny Power suddenly
fell to roughly half of the LMPs of all the other zones. This occurred because the Black Oak–
Bedington 500 kV line was forecast to become binding in hour 8 and remain binding for the rest
of the day. As shown in Figure 4-15, the congestion price in hour 7 was a whopping $701 per
MWh, which reflected an astonishing LMP of negative $350 at the Black Oak node and an
impressive positive $351 LMP at the Bedington node. This LMP at Black Oak means that,
because of the effects of congestion on generation dispatch, a 1 MWh load increase would have
allowed the power system to reduce costs by $350. Although the congestion price subsided to an
average level of $57 in hours 9 through 24, it continued to contribute to relatively high prices in
eastern PJM and low prices in western PJM throughout the remainder of the day.
The PPL zone had the second highest average LMPs in hour 10 and the highest average LMPs in
hours 11 and 12 because of a constraint in the Middletown Junction 230/115 kV transformers.
Figure 4-16 shows that this constraint led to moderate congestion costs between the Middletown
Junction node and the Hummelstown node during these hours. The PPL zone is partly located
immediately on the Hummelstown side of the constraint.
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800
600
400
Price ($/MWh)
200
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
-200
-400
-600
Hour
Figure 4-15
120
100
80
Price ($/MWh)
60
40
20
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
-20
Hour
Middletown Junction Hummelstown Congestion
Figure 4-16
LMPS and Congestion Prices for the Middletown Junction and Hummelstown Nodes on
3/24/03
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4.2.4 A Warm Spring Saturday (May 31, 2003)
May 31 was a warm Spring Saturday that had eleven facilities that were forecast day-ahead to
have constraints, the most significant of which is shown in Figure 4-17. These constraints led to
the highest relative price variation of the study period: price differences among hours and
locations were higher in percentage terms than during any other day of the 12-month sample
period. The absolute price variation for that day was not extraordinary, however, because prices
were low: they never exceeded $31 per MWh, and in a few hours they were less than $10 at all
nodes.
Martins
Creek
Siegfried
Figure 4-17
Figure 4-18 presents the average hourly LMPs for five of PJM’s zones. As the figure indicates,
the Pennsylvania Power & Light zone had the lowest average LMPs in all 24 hours of the day.
The figure also shows that Pennsylvania Electric had the highest average LMPs during the first
seven hours of the day, while utilities to the east of Pennsylvania Power & Light–Jersey Central
Power & Light and Rockland Electric–had the highest average LMPs for fifteen of the remaining
seventeen hours.
The foregoing results were primarily due to two constraints.
First, during hours 1-7, the North Meshoppen transformer was constrained. This transformer is
located in the Pennsylvania Electric zone in northeastern Pennsylvania, close to the state line
with New York. Other nearby facilities (the Mansfield–South Troy 115 kV line, and east
Towanda 115 kV transformer) were also constrained during some of these hours. While these
constraints were binding, the Pennsylvania Electric zone had the highest average LMPs. When
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these constraints were no longer binding, that zone’s prices moved much closer to the PJM
system average.
45
40
35
30
Price ($/MWh)
25
20
15
10
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Hour
Metropolitan Edison Jersey Central Rockland Electric Penn P&L Penn Electric
Figure 4-18
Second, during all hours of the day, the Siegfried–Martins Creek 230 kV line was constrained.
This is a southwest–northeast line located near Allentown, Pennsylvania, that basically transports
power from the Pennsylvania Power & Light zone toward New Jersey. Figure 4-19 shows the
hourly nodal prices at each end of this line, along with associated congestion costs. This
constraint is responsible for giving the Pennsylvania Power & Light zone (upstream from the
constraint) the lowest average LMPs the whole day, for giving Jersey Central Power & Light
(immediately downstream from the constraint) the highest average LMPs for fourteen hours of
the day, and for giving the Metropolitan Edison and Rockland Electric zones (also both
downstream from the constraint) relatively high LMPs throughout the day.
4.3 Example of Locational Risks on the PJM System
To illustrate how an LSE might hedge against the locational risks that are inherent in LMP
pricing, consider the prices of the Keystone and Limerick buses during the 12-month period June
2002 through May 2003. Keystone is located amidst major generators in western Pennsylvania,
while Limerick is located in eastern Pennsylvania, near the major load centers of Philadelphia.
An LSE that has resources in western Pennsylvania and loads in eastern Pennsylvania might
want to hedge its locational risks through ownership of FTRs between Keystone and Limerick.
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140
120
100
80
60
Price ($/MWh)
40
20
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
-20
-40
-60
Hour
Siegfried Martins Cr Congestion
Figure 4-19
LMPS and Congestion Prices for the Siegfried and Martins Creek Nodes on 5/31/03
Table 4–1 summarizes the LMPs and congestion prices for these two buses. During the 12-
month period, average LMPs in Limerick were $37.15 per MWh, about 12% higher than the
average LMPs at Keystone. Such higher prices in the east are as expected because a predominant
direction of power flow in PJM is from west to east. LMPs at Limerick similarly reach a higher
peak than at Keystone. While Keystone’s prices never fall below zero, Limerick has negative
prices for 18 hours out of the 8,760 hours of the year, with the lowest of those prices being
negative $29.09 per MWh.
Table 4-1
Summary of LMPS and Congestion Prices for the Keystone and Limerick Buses, June
2002–May 2003 ($/MWh)
Keystone LMPs Limerick LMPs Congestion Prices
Average 33.19 37.15 3.96
Maximum 175.44 248.80 179.07
Minimum 0.00 –29.09 –49.19
The congestion costs between the two buses have an average value of $3.96 per MWh, which
simply equals the difference of the average LMPs between two buses (i.e., $3.96 = $37.15 –
$33.19). Congestion ranges between a maximum of $179.07 in the direction from Keystone to
Limerick to a maximum of $49.19 in the direction of Limerick to Keystone.
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Figure 4-20 presents the distribution of congestion prices between the two nodes during the 12-
month period. There was no congestion at all in 1,454 hours (17% of the 8,760 hours of the
year). There was congestion in the direction from Keystone to Limerick—hence positive
congestion prices in Figure 4-20—in 5,851 hours (67% of the year). There was congestion in the
direction from Limerick to Keystone—hence negative congestion prices in Figure 4-20—in
1,455 hours (17% of the year).
2000
1800
1600
1400
1200
No of Hours
1000
800
600
400
200
0 0
5 5
0 0
5 5
00
+
-4 -40
-3 -30
-2 -20
-1 -15
-1 0
5
1
-0
0
-1
-2
-3
-4
-5
10 0
15 5
20 0
30 0
40 0
50 0
75 75
12 12
15 15
17 17
--
-1
-1
-2
-3
-4
-5
10 0
--
--
--
--
1
0
-2
--
-1
-
20
-1
4
-
0
-5
-4
-3
-2
-
5
0
5
-5
Congestion Cost Bins ($/MWh)
Figure 4-20
Distribution of Congestion Prices Between the Keystone and Limerick Nodes, June 2002–
May 2003
Even in those hours with congestion, congestion prices were usually trivial. In more than half of
the hours with positive congestion prices, this price was less than $3 per MWh. In more than half
of the hours with negative congestion, this price was greater than negative $1 per MWh.
Nonetheless, the extreme prices could cause considerable financial harm to an LSE. Indeed, half
of the congestion costs in the direction of Keystone to Limerick occur in the 542 hours with the
highest congestion prices—that is, during just 6% of the hours of the year. It is against these
extremes that LSEs may wish to use FTRs to hedge themselves.
Consider the value of a 50 MW FTR from Keystone to Limerick over the 12-month period. The
price per MW of congestion in the direction of Keystone to Limerick summed to $37,702, while
12
the per-MW price in the opposite direction summed to $2,988. Over the course of the year, the
12
Each of these sums is derived by simply adding up the hourly congestion prices.
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owner of a 50 MW FTR obligation would have received $1,885,094 (= 50 x $37,702) for

congestion in the direction of the FTR, and would have paid $149,409 (= 50 x $2,988) for
congestion in the opposite direction. The net value of the FTR obligation over this period would
be $1,735,686 (= $1,885,094 – $149,409). The value of an FTR option, by contrast, would be
$1,885,094 because the FTR option owner would not need to pay for congestion in the direction
opposite to that of the FTR.
4.4 Implications of the PJM Examples
The transmission constraint and pricing information from PJM for the four sample days have
several interesting implications.
Nodal prices are often negative. This occurs when transmission constraints create a situation in
which the cheapest way of serving a load increment at a particular location involves increasing
the output of a cheap generator while reducing the output of an expensive generator. A negative
nodal price means that, extraordinary though it may seem, a load increase at that location would
actually allow the power system to reduce costs while a generation increase at that location
would force the power system to increase costs.
Nodal prices can be extreme. In our small non-random sample of days, we saw nodal prices
ranging from negative $350 all the way up to $2,276 per MWh. Such a wide range occurs even
though generators in PJM must submit bids no lower than $0 per MWh and no higher than
$1,000 per MWh. These extreme prices occur because, as shown in the example of Figure 2-6,
transmission constraints can create situations in which a load increase at a particular location is
most cheaply served by increasing the output of some generators while reducing the output of
other generators.
Congestion prices can be extreme. Our small sample of days included a congestion price of
$1,611 per MWh. Such high congestion prices reflect how congestion leads to large differences
in nodal prices.
Price relationships can suddenly reverse. Our small sample included instances in which the zone
that had the highest prices in one hour suddenly had the lowest prices in the next hour, and other
instances in which low prices suddenly gave way to high prices. This can occur because of large
sudden contingencies like generator outages, or because gradual increases in load lead to a new
transmission constraint that suddenly changes prices throughout the power system.
Many transmission facilities can be constrained simultaneously. In one of our sample days, there
were thirty constrained facilities, with fourteen constraints being simultaneously binding for
three hours.
Prices can be explained by congestion. Even with our limited information, it has been possible to
explain important price differences among nodal prices and zonal prices. For a complete
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explanation when there are many simultaneous constraints, it is necessary to use a power flow
model (with adequate generator and load data) to untangle the simultaneous impacts.
The magnitude of locational price differences does not depend upon the number of constraints. If
a single constraint blocks very cheap generation from replacing very expensive generation, that
constraint can have larger price impacts than the aggregate impact of many constraints with
smaller cost effects.
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5
MANAGING LMP PRICE RISK
LMPs are uncertain because they depend upon uncertain transmission, generation, and load
conditions. Some of these conditions (like generator availability) can change rapidly from hour
to hour, while other conditions (like fuel costs) change relatively slowly over time.
To deal with uncertainty, a market participant first requires a forecast of future prices at the
locations of their resources and loads, including the likely ranges of future prices. It must then
undertake actions that promise to mitigate the financial risks associated with uncertainty.
5.1 Forecasting LMPs
There are at least two kinds of approaches for trying to forecast future LMPs.
First, one could forecast the underlying uncertainties in transmission availability, generation
availability, generation costs, and load levels. A power flow model would then combine the
information on these underlying uncertainties into ranges of possible price outcomes. This is a
feasible approach that replicates, in a forecast mode, how locational prices are actually calculated
day-ahead and in real-time.
The main difficulty with this approach is in developing forecasts of transmission and generation
availability. Transmission availability is usually very high; but the occasional outages of
transmission facilities can have major price impacts. It is very difficult to forecast transmission
outage events, and would require information that is not publicly available as well as a
sophisticated understanding of power engineering.
A lesser difficulty with this approach is in developing forecasts of generators’ costs, which are
proprietary. In the absence of market power, the bid price of a generator will be slightly above its
marginal cost. For a nuclear or fossil-fuel generator, marginal cost will equal the generator’s
incremental heat rate (fuel input requirements per MWh of energy output) times its fuel price.
Even without proprietary data, it is usually possible to make a reasonable ballpark estimate of the
generator’s incremental heat rate from its technology, size, and other public information. Fuel
price forecasting is a well known, if inexact, art. For hydro generators, marginal costs are more
difficult to guess as they depend upon water inflows, environmental restrictions, forecasts of
electricity prices over each generator’s water cycle, and other factors. Nonetheless, reasonable
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Managing LMP Price Risk
ballpark estimates should be attainable. FERC Form 1 provides estimates of generator heat rate
content. New York Mercantile Exchange data can be used to obtain forecasted fuel prices.13
As a second approach toward estimating LMPs, one could use the past history of locational
prices to forecast price expectations and volatilities. If the history covers a large range of
different system conditions, it can give a reasonable idea of the average and the range of future
LMPs if: a) future loads will be similar to past loads; b) the future power system, including both
transmission and generation facilities, will be nearly identical to the past power system; and c)
prices for all significant fossil and nuclear fuels will change proportionally to each other over
time. These conditions might characterize a stable power system or a power system over a short
future time horizon, but not one that is undergoing significant growth over the relevant future
time horizon.
Nonetheless, there may be situations in which a reasonable forecast of future transmission

investment, generation investment, and load growth will lead to price outcomes similar to those
of the past. For example, an area that has historically been a load pocket might be expected to
remain a load pocket if environmental or other restrictions make investment difficult or if load
growth is expected to outpace likely investment. In such situations, it might be possible to
identify a fairly stable differential (congestion price) between the prices within and outside of the
load pocket; though it might be more difficult to predict the frequency of congestion.
The advantage of the second approach is its simplicity and its limited information requirements.
Its disadvantage, however, is that it offers no consistent way to account for many power system
conditions that can materially affect locational prices as opposed to average system prices.
5.2 Hedging Against Price Uncertainty
Given that the LMP price uncertainties can be large, most market participants will engage in
long-term commitments that avoid most of the financial risks associated with these uncertainties.
The first and most obvious approach is for a market participant to obtain a quantity of long-term
resources that approximately equals the participant’s long-term obligations (e.g., loads). In the
absence of transmission price risk, the participant’s only remaining exposure to LMPs would be
for whatever the differences are between their resources and obligations: if resources exceeded
obligations, the participant might sell power at LMP; and if resources fell short of obligations,
the participant might buy power at LMP.
In the presence of transmission price risk, the problem is more difficult. Not only does the
participant need to have resources adequate to meet obligations, those resources also need to be
Market participants with large portfolios of generators and load have a forecasting advantage because they have
13
relatively large quantities of proprietary information about market conditions. Large firms also have an economy-of-
scale advantage because the costs of modeling power systems and predicting prices are the same for large firms as
for small firms.
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in the right locations. Transmission rights are tools for putting resources into the right locations
in a financial sense even if they are not in the right location in a physical sense.
5.2.1 Generation Ownership
In the absence of transmission price risk, generation ownership (through construction or

purchase) can provide an excellent hedge against electricity price uncertainty. If a market
participant owns generation that matches its obligations, its costs of meeting its obligations will
not depend upon LMP but will instead depend upon generation costs. Among the costs, the
greatest uncertainties are generally those of fuel prices, which can be largely mitigated by
purchasing fuel under long-term supply contract. Although forced outages are by nature
unpredictable in the short-run, they are usually fairly predictable in the long run. Other expenses,
like labor costs, tend to change relatively slowly over time.
Even if a market participant owns generation that exactly matches its obligations, it cannot
profitably ignore LMPs. The reason is that the market offers opportunities for cost savings and
additional profits. When LMP is lower than a generator’s incremental costs, it is cheaper for the
participant to purchase power from the market than to generate that power; so LMP allows the
generation owner to save money. When LMP is higher than a generator’s incremental costs, any
output that is not needed to serve the participant’s load can be sold to the market at a profit.
Consequently, it is profitable for a market participant to commit and dispatch its resources in
response to LMPs regardless of its need to serve load. With or without such a response to LMPs,
however, generation ownership hedges against price uncertainty.
In the presence of transmission price risk, generation ownership can provide a nearly perfect
hedge against LMP uncertainty only if the generator is located very close to the load it serves. In
such a case, the LMP applicable to the generator would be essentially the same as the LMP
applicable to the load. More generally, however, generators are located at some distance to load,
with transmission price risk usually increasing with distance. Dealing with transmission price
risk requires acquisition of transmission rights, as described below.
LMPs are important (among other things) for valuing generation. This value depends not on the
average future LMP of electricity at the generator’s location over the generator’s life but upon
the frequency and extent to which LMP will exceed the generator’s incremental energy cost. For
example, if the relevant LMP is $20 per MWh half the time and $50 the other half of the time,
the average price is $35. If the generator’s incremental energy cost is $40 per MWh, it will be
able to make a $10 per MWh gross profit half of the time, which might make generation
ownership profitable. A simple comparison of the generator’s $40 cost to the $35 average price
would lead to the wrong conclusion that the generation investment could not possibly be
profitable.
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5.2.2 Forward Contracts
Because a market participant will rarely be able to exactly match its generation resources to its
obligations, it may want to enter into forward contracts that give it rights to buy or sell power at
prices that are specified in advance. For power purchased under contract, the cost to the
purchaser depends upon the contract price rather than on the cost of the underlying generation.
Otherwise, however, the contract has the same hedging characteristics as generation ownership.
If the contract calls for delivery at the locations where the purchaser has its loads, then the
contract can provide a nearly perfect hedge against LMP uncertainty. If the contract delivery
locations are different than the purchaser’s load locations, then the purchaser faces transmission
price risk that can be hedged only through ownership of transmission rights.
For contracts that require the purchase or sale of specified quantities of power, a simple
comparison of the forward price over the life of the contract with the average expected future
LMPs might suffice to judge the desirability of the contract. Contracts that give the right but not
the obligation to buy or sell forward power, however, can be exercised by the option holder when
LMPs make it profitable to do so. As with generation investment decisions, such contracts have
an option value that depends upon price volatility, not merely upon price expectations.
5.2.3 Transmission Rights
A “transmission right” allows a market participant to transport power from its resources to its
loads at a known price. Such a right was the established norm under traditional regulation. An
LSE would build a generator to serve a load, and it would either build transmission or buy
transmission service to make sure that the power could get from the generator to the load. If the
LSE built transmission, it would know in advance that its costs were the capital costs of building
the transmission, plus the relatively small on-going costs of maintaining the transmission. If it
bought the transmission service from somebody else, it would know in advance that its costs
would be based upon the transmission provider’s costs as established by regulatory procedures.
The certainty of the transmission cost would not be 100% absolute, but it would be within
narrow bounds.
Under LMP, the only such certainty is provided by the financial transmission rights (FTRs) that
are offered by ISOs under a variety of names. These FTRs are limited in two major ways. First,
they have short durations of never more than five years. This is inadequate to support a decision
to build a generator that has a forty-year life, especially when it takes at least three years to build
the generator. So if a market participant in 2005 decides to build a generator that will be in
service from 2008 through 2048, that market participant in 2005 will be able to obtain FTRs no
farther in the future than 2010. Generation investment would surely be inhibited by thirty-eight
years of extreme uncertainty over a major cost.
The second limitation of FTRs in LMP systems is that their quantities are not guaranteed. All
existing and proposed FTR schemes are subject to “simultaneous feasibility tests” that reduce
market participants’ transmission rights whenever the volume of FTRs exceeds the physical
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ability of the power system to serve those FTRs. So, for example, a market participant with 100
MW of rights from point A to point B might suddenly find that it has only 78 MW of rights
during a certain hour, unexpectedly exposing it to 22 MW of locational price differences. If this
sort of thing happens in enough hours, in enough years, it can become very expensive.
This second limitation is muted under traditional regulation. Although the overall risks of
reduced system capabilities are identical in a traditional market as in an LMP market, the relative
risks to any single market participant can be much greater in an LMP market. Traditionally, a
market participant who built transmission would generally have what was in effect a more
diversified portfolio of transmission rights, generators, and loads than characterizes the situation
of market participants in LMP markets. A market participant who purchased transmission service
would purchase a fixed quantity of service, regardless of power system conditions. In such a
case, the transmission owner would have the benefit of a diversified portfolio of physical assets,
and would presumably recover, within the transmission service charge, the redispatch costs
associated with managing the risk that the transmission system might sometimes be unable to
physically transport the full quantity of power promised to customers.
LMP market designs, by contrast, have thus far failed to provide market participants with
transmission rights of a quality similar to that of traditional regulation, nor with alternative tools
for adequately dealing with transmission price risk. The presently available alternatives are
fraught with difficulties:
• Locating generation resources near loads is one way to substantially reduce or avoid
transmission risk. This can often be infeasible due to a variety of siting restrictions. Even
where it is feasible, the high costs of land or environmental remediation near loads may make
such generation investments very expensive.
• “Participant funding” of transmission investments might facilitate construction of the
transmission facilities that would allow a market participant to transport power from its
resources to its loads. The main problem with this approach is “free-ridership”: the benefits
of transmission investments go to many market participants, not just the ones making the
investments; so there is an incentive for everyone to hope that somebody else will pay for the
new facilities. Participant funding can only work where a coalition of beneficiaries can be
created, either voluntarily or by mandate. A lesser problem is that any new facilities would
be subject to a simultaneous feasibility test that can get different results in different hours; so
the quantity of transmission service that is created by participant funding is subject to
substantial fluctuation over time and to substantial uncertainty.
• Load curtailment programs might reduce loads when LMPs signal that the cost of
transporting power has become high. Experience indicates that it is difficult to get customers
to participate in such programs. On the other hand, when LMPs become high enough, it can
become profitable for LSEs to offer customers lucrative incentives for their participation.
There is a credible solution to the transmission rights problem that has received little
consideration by the ISOs and regulators. That solution is to create long-term FTRs that are
founded on promises to build transmission. Like transmission rights under traditional regulation,
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these FTRs would not have prices that are 100% guaranteed in advance. Instead, their prices can
be based upon the costs of incremental transmission investments, subject to some price
limitations and to some guarantees of cost recovery for the transmission investor. The idea is to
replicate, in an LMP framework, the successful transmission investment, and pricing policies of
traditional regulation.
Until the long-term transmission rights problem is solved, however, market participants in LMP
markets will be exposed to what can sometimes be substantial transmission costs.
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6
SUMMARY AND CONCLUSIONS
receive for their products, in the prices that LSEs pay to serve their loads, and particularly in the
price of transporting power from resources to loads. Even an LSE that is fully resourced faces
transmission price uncertainty. While these uncertainties have small price impacts under
traditional regulation because of its rolled-in pricing, they can expose market participants to
substantial financial risk under an LMP system.
To deal with LMP-related uncertainty, a market participant needs forecasts of future prices at the
locations of its resources and loads, including the likely ranges of future prices. Based upon these
forecasts, it must engage in long-term commitments that avoid most of the financial risks
associated with price uncertainty. The first and most obvious approach for mitigating risk is for
the participant to procure a quantity of long-term resources that approximately matches its
quantity of long-term obligations (e.g., loads). In the absence of transmission price risk, the
participant’s only remaining exposure to LMPs would be for the quantity differences between
their resources and obligations: if resources exceed obligations, the participant might sell power
at LMP; and if resources fall short of obligations, the participant might buy power at LMP.
In the normal circumstance when there is transmission price risk, however, the problem is more
difficult. The available alternatives for mitigating this risk are: a) locating generation resources
near loads; b) participant funding of transmission investments; c) load curtailment programs; and
d) obtaining short-term (up to 5-year) transmission rights. Each of these alternatives is fraught
with difficulties or limitations. A better alternative, which has received little consideration by the
ISOs and regulators, is to create truly long-term (e.g., 20-year) transmission rights that are
founded on promises to build transmission. Until such long-term transmission right programs are
created, however, participants in LMP markets will be exposed to what can sometimes be
substantial transmission price risk.
6-1
13460327
13460327
A
PJM PRICE TABLES
The following tables present the data that underlie the figures of Section 4. For example, Tables
4-3A and 4-3B present the data pertinent to Figure 4-3, while Table 4-7 presents the data
pertinent to Figure 4-7.
In the tables that present LMPs for particular nodes, rows of data are shaded gray for those hours
in which the transmission lines between the nodes are congested.
A-1
13460327
PJM Price Tables
Table 4–3A
Forecast Zonal Day-Ahead LMPS for 8/14/02
($/MWh)
Atlantic Allegheny Baltimore Delmarva Jersey Metropol’n

Hour
Electric Power G&E P&L Central Edison
1 25.47 25.00 25.00 25.00 25.00 25.00

2 20.00 19.12 19.12 19.12 19.12 19.12
3 18.61 18.61 18.60 18.61 18.61 18.61
4 17.51 17.51 17.51 17.51 17.51 17.51
5 17.75 17.75 17.75 17.75 17.75 17.75
6 18.19 18.18 18.18 18.19 18.19 18.19
7 19.79 19.79 19.79 19.79 19.79 19.79
8 32.73 29.06 34.92 63.80 30.85 59.48
9 40.37 37.71 42.52 79.68 39.20 67.04
10 52.13 47.39 54.41 103.77 49.43 76.56
11 69.77 49.10 56.44 126.71 65.55 83.44
12 78.28 60.32 71.14 150.40 73.77 91.62
13 85.02 75.04 93.53 150.00 81.40 106.65
14 112.66 100.15 130.93 200.00 110.76 134.06
15 150.00 105.29 148.14 200.00 161.17 165.26
16 152.14 102.73 164.78 238.81 138.91 159.77
17 150.00 111.71 176.25 238.89 160.35 171.30
18 123.64 106.94 155.80 235.47 128.28 145.33
19 96.07 83.36 118.74 150.00 92.76 119.08
20 74.86 58.61 79.44 108.53 69.58 90.89
21 78.65 56.54 75.06 123.17 73.99 90.22
22 86.09 53.83 67.63 123.60 82.03 99.78
23 54.44 42.58 49.20 63.85 51.93 49.23
24 38.68 38.51 38.96 38.69 38.63 38.68
min 17.51 17.51 17.51 17.51 17.51 17.51
max 152.14 111.71 176.25 238.89 161.17 171.30
Avg 67.20 53.95 70.58 105.47 66.02 78.52
A-2
13460327
PJM Price Tables
Table 4–3B
($/MWh)
Peco Penn. Potomac Public Rockland

Hour
Energy Electric Electric Penn. P&L Service Electric
1 25.00 25.00 25.00 25.00 25.00 25.00

2 19.11 19.13 19.12 19.12 19.12 19.12
3 18.61 18.70 18.60 18.61 18.61 18.61
4 17.51 17.51 17.51 17.51 17.51 17.51
5 17.75 17.75 17.75 17.75 17.75 17.75
6 18.19 18.35 18.18 18.19 18.19 18.19
7 19.79 19.79 19.79 19.79 19.79 19.79
8 33.03 27.81 35.93 30.84 30.88 30.37
9 41.49 39.32 43.32 39.23 39.21 38.79
10 52.70 45.97 55.64 49.47 49.46 48.85
11 70.51 69.16 57.33 54.99 66.24 63.92
12 78.26 59.49 73.02 64.61 73.75 71.91
13 84.92 91.63 99.21 81.32 81.11 79.56
14 114.68 120.30 143.02 110.16 109.87 107.21
15 147.94 127.98 153.69 145.74 152.35 144.18
16 149.32 103.87 167.15 138.63 419.92 135.09
17 148.55 105.59 184.31 148.80 151.13 141.82
18 123.01 100.88 170.49 121.23 123.40 118.14
19 97.11 89.34 129.17 93.53 92.49 90.05
20 78.94 56.54 80.22 68.71 69.76 66.57
21 79.38 55.65 75.83 67.09 74.36 71.67
22 86.65 58.01 68.92 79.28 81.68 78.53
23 53.57 42.18 50.24 46.03 52.27 50.86
24 38.67 38.42 39.03 38.64 38.63 38.60
min 17.51 17.51 17.51 17.51 17.51 17.51
max 149.32 127.98 184.31 148.80 419.92 144.18
avg 67.28 57.02 73.44 63.09 76.77 63.00
A-3
13460327
PJM Price Tables
Table 4–4
($/MWh)
Congestion
Hour Black Oak Bedington
Prices
1 25.00 25.00 0.00

2 19.12 19.12 0.00
3 18.60 18.60 0.00
4 17.51 17.51 0.00
5 17.75 17.75 0.00
6 18.17 18.18 -0.01
7 19.79 19.79 0.00
8 6.54 45.56 39.02
9 19.00 51.23 32.23
10 21.00 66.85 45.85
11 18.00 69.90 51.90
12 18.00 91.06 73.06
13 17.37 114.48 97.11
14 19.00 154.11 135.11
15 17.37 161.45 144.08
16 0.10 152.86 152.76
17 -20.69 146.27 166.96
18 -5.00 182.41 187.41
19 0.10 139.10 139.00
20 0.10 100.98 100.88
21 0.87 96.48 95.61
22 0.10 91.23 91.13
23 16.74 61.27 44.53
24 36.80 39.76 2.96
A-4
13460327
PJM Price Tables
Table 4–5
LMPS and Congestion Prices for the Middletown Junction and Yorkana Nodes on 8/14/02
($/MWh)
Middletown Congestion
Hour Yorkana
Junction Prices
1 25.00 25.00 0.00

2 19.12 19.12 0.00
3 18.61 18.61 0.00
4 17.51 17.51 0.00
5 17.75 17.75 0.00
6 18.19 18.19 0.00
7 19.79 19.79 0.00
8 31.22 92.28 61.06
9 39.59 99.01 59.42
10 49.98 107.51 57.53
11 54.07 110.79 56.72
12 64.67 119.54 54.87
13 82.72 134.53 51.81
14 112.44 159.17 46.73
15 145.86 185.02 39.16
16 144.59 184.72 40.13
17 152.68 192.46 39.78
18 123.79 169.02 45.23
19 96.11 146.06 49.95
20 68.60 106.87 38.27
21 65.78 104.37 38.59
22 78.44 114.30 35.86
23 45.60 48.87 3.27
24 38.67 38.7 0.03
A-5
13460327
PJM Price Tables
Table 4–6
LMPS and Congestion Prices for the Talbot and Trappet Nodes on 8/14/02
($/MWh)
Congestion
Hour Trappet Talbot
Prices
1 25.00 25.00 0.00

2 19.12 19.12 0.00
3 18.61 18.61 0.00
4 17.51 17.51 0.00
5 17.75 17.75 0.00
6 18.19 18.19 0.00
7 19.79 19.79 0.00
8 50.31 435.41 385.10
9 55.29 596.26 540.97
10 70.51 962.96 892.45
11 97.13 596.60 499.47
12 114.40 592.07 477.67
13 121.44 584.32 462.88
14 148.78 1,760.52 1,611.74
15 183.45 596.00 412.55
16 215.69 546.80 331.11
17 212.59 547.20 334.61
18 195.88 935.40 739.52
19 129.21 586.47 457.26
20 102.36 113.34 10.98
21 109.62 113.47 3.85
22 112.31 115.25 2.94
23 62.43 64.83 2.40
24 38.69 38.69 0.00
A-6
13460327
PJM Price Tables
Table 4–7
LMPS and Congestion Prices for the Athenia and Fairlawn Nodes on 8/14/02
($/MWh)
Congestion
Hour Fairlawn Athenia
Prices
1 25.00 25.00 0.00

2 19.12 19.12 0.00
3 18.61 18.61 0.00
4 17.51 17.51 0.00
5 17.75 17.75 0.00
6 18.19 18.19 0.00
7 19.79 19.79 0.00
8 30.50 30.51 0.01
9 38.90 38.91 0.01
10 49.01 49.02 0.01
11 64.22 64.22 0.00
12 72.59 72.62 0.03
13 80.09 80.12 0.03
14 108.25 108.31 0.06
15 149.26 149.58 0.32
16 2,172.96 2,276.68 103.72
17 147.39 147.74 0.35
18 121.15 121.34 0.19
19 90.85 90.89 0.04
20 67.32 67.35 0.03
21 72.23 72.25 0.02
22 79.57 79.62 0.05
23 51.08 51.08 0.00
24 38.61 38.61 0.00
A-7
13460327
PJM Price Tables
Table 4–9
LMPS for the Black Oak and Bedington Nodes on 1/23/03
($/MWh)
Congestion
Prices
1 -51.18 126.63 177.81

2 -65.75 131.75 197.50
3 -68.87 128.01 196.88
4 -62.66 129.10 191.76
5 -54.81 130.83 185.64
6 -65.38 156.09 221.47
7 -75.07 184.73 259.80
8 7.47 150.73 143.26
9 7.47 122.96 115.49
10 17.01 112.67 95.66
11 18.47 117.12 98.65
12 7.47 117.28 109.81
13 -2.56 113.06 115.62
14 -2.51 110.47 112.98
15 -6.22 110.81 117.03
16 -6.52 110.19 116.71
17 10.59 105.40 94.81
18 18.35 145.00 126.65
19 38.56 127.44 88.88
20 60.27 106.59 46.32
21 35.00 109.73 74.73
22 5.00 114.59 109.59
23 -20.00 107.06 127.06
24 -74.13 135.00 209.13
A-8
13460327
PJM Price Tables
Table 4–10A
($/MWh)

Hour
1 60.91 52.98 77.90 61.79 58.20 61.68

2 58.55 49.86 77.56 59.53 55.54 59.40
3 55.00 46.35 73.97 55.97 51.99 55.85
4 57.94 49.55 76.45 58.89 55.01 58.77
5 61.98 53.82 79.87 62.90 59.08 62.75
6 73.91 64.20 95.28 75.00 70.45 74.82
7 88.57 77.04 113.48 89.85 84.50 89.63
8 98.12 91.43 111.23 98.67 96.62 99.10
9 80.68 75.10 91.35 81.20 79.07 81.98
10 77.96 73.16 86.51 78.36 76.77 79.02
11 81.42 76.37 90.27 81.87 80.05 82.71
12 77.52 71.98 87.35 79.58 76.04 78.69
13 71.39 65.48 81.63 75.00 69.78 72.40
14 70.00 64.16 79.61 73.87 68.81 70.69
15 68.15 62.57 78.93 68.73 66.33 68.63
16 67.58 62.04 78.38 68.15 65.77 68.06
17 71.03 66.60 79.24 71.34 70.16 70.55
18 98.52 92.99 109.78 98.90 97.51 97.67
19 95.00 91.10 102.63 95.19 94.58 93.98
20 89.55 87.32 93.94 89.77 88.84 90.17
21 82.29 78.85 89.14 82.57 81.48 82.57
22 74.29 69.21 84.67 74.83 72.64 75.01
23 60.48 54.57 72.42 67.95 58.54 61.01
24 58.12 48.52 77.91 59.16 54.93 58.98
min 55.00 46.35 72.42 55.97 51.99 55.85
max 98.52 92.99 113.48 98.90 97.51 99.10
avg 74.12 67.72 87.06 75.38 72.20 74.76
A-9
13460327
PJM Price Tables
Table 4–10B
($/MWh)

Hour
1 60.59 47.97 82.61 58.40 58.00 56.06

2 58.19 42.24 82.82 55.76 55.32 53.16
3 54.64 38.34 79.23 52.21 51.77 49.62
4 57.59 41.23 81.58 55.22 54.80 52.70
5 61.65 46.01 84.83 59.31 58.88 56.81
6 73.51 54.41 101.21 70.73 70.21 67.74
7 88.09 67.96 120.39 84.83 84.22 81.33
8 98.02 85.58 115.14 97.08 96.17 94.59
9 80.53 72.34 94.40 78.63 78.85 77.55
10 77.88 73.18 89.03 76.61 76.54 75.49
11 81.30 77.83 92.81 79.47 79.85 78.73
12 77.39 73.83 90.20 75.74 75.82 74.59
13 71.24 70.23 84.59 69.63 69.58 68.29
14 69.96 69.69 82.56 69.50 68.49 67.30
15 67.94 65.13 81.95 66.47 66.20 64.90
16 67.37 63.69 81.40 65.90 65.65 64.36
17 71.02 68.99 81.82 72.05 69.88 68.97
18 98.55 90.16 113.34 100.45 97.10 95.91
19 95.09 89.89 105.19 97.47 94.20 93.44
20 89.47 85.28 95.17 88.45 88.77 88.23
21 82.24 76.19 91.19 82.06 81.27 80.42
22 74.10 66.99 87.57 72.51 72.50 71.29
23 60.25 54.38 75.75 58.68 58.40 57.01
24 57.74 46.09 83.43 55.16 54.70 52.41
min 54.64 38.34 75.75 52.21 51.77 49.62
max 98.55 90.16 120.39 100.45 97.10 95.91
avg 73.93 65.32 90.76 72.60 71.97 70.45
A-10
13460327
PJM Price Tables
Table 4–12A
($/MWh)

Hour
1 18.95 18.03 18.09 18.87 19.27 18.99

2 17.33 16.54 16.57 17.27 17.60 17.37
3 18.14 17.40 17.41 18.08 18.39 18.19
4 18.21 17.44 17.44 18.14 18.48 18.27
5 20.25 19.33 19.35 20.15 20.73 20.38
6 26.08 25.19 25.22 26.01 26.44 26.15
7 62.99 46.29 45.81 46.01 46.02 46.26
8 93.28 56.18 158.17 95.17 80.77 92.04
9 71.61 67.34 80.34 66.92 65.89 75.10
10 63.39 59.23 64.46 56.84 58.22 59.28
11 63.30 57.60 62.33 56.61 58.59 58.28
12 56.98 50.72 53.23 49.26 51.18 49.55
13 49.15 41.68 41.86 40.39 41.35 40.26
14 45.94 36.39 39.51 36.78 38.08 39.28
15 51.60 33.71 36.74 33.93 36.87 37.11
16 48.51 31.11 33.46 31.91 32.74 33.57
17 49.22 30.21 32.33 31.14 31.47 32.39
18 48.71 41.16 42.59 40.12 39.79 41.35
19 70.18 66.50 73.21 64.84 65.98 68.06
20 71.40 67.66 79.14 66.69 65.63 73.81
21 71.42 68.08 81.60 66.74 65.59 74.99
22 50.57 42.14 44.88 42.21 42.23 44.06
23 51.76 32.51 34.54 33.50 34.03 34.90
24 27.61 28.42 29.00 27.64 27.53 28.44
min 17.33 16.54 16.57 17.27 17.60 17.37
max 93.28 68.08 158.17 95.17 80.77 92.04
avg 48.61 40.45 47.80 41.88 41.79 43.67
A-11
13460327
PJM Price Tables
Table 4–12B
($/MWh)

Hour
1 18.95 27.72 17.90 19.21 19.37 19.76

2 17.34 25.58 16.39 17.56 17.68 18.01
3 18.14 26.41 17.24 18.37 18.48 18.79
4 18.22 26.86 17.27 18.45 18.57 18.90
5 20.25 30.00 19.13 20.66 20.84 21.38
6 26.08 35.27 25.03 26.38 26.53 26.94
7 46.01 55.22 45.77 46.21 46.02 46.02
8 91.42 31.74 177.69 83.74 80.26 72.53
9 66.67 57.75 85.17 66.77 65.87 65.40
10 57.40 60.09 68.18 65.72 57.65 57.24
11 57.29 61.81 65.40 65.84 58.09 58.12
12 49.93 52.73 55.68 58.14 50.66 50.59
13 40.67 45.16 42.91 44.16 41.32 41.40
14 36.86 41.31 40.45 37.86 39.61 40.43
15 34.12 40.94 37.61 36.08 40.42 42.02
16 31.99 35.90 34.00 32.65 33.53 34.06
17 31.18 34.47 32.78 31.53 31.58 31.93
18 40.02 40.89 43.55 39.94 39.81 39.70
19 65.17 61.79 77.01 72.13 65.45 65.00
20 66.42 57.08 83.50 66.83 65.59 65.04
21 66.40 55.74 86.80 66.96 65.52 64.94
22 42.18 44.54 45.91 42.40 42.30 42.48
23 33.59 40.93 34.95 34.10 34.27 34.85
24 27.59 32.82 29.62 27.52 27.57 27.66
min 17.34 25.58 16.39 17.56 17.68 18.01
max 91.42 61.81 177.69 83.74 80.26 72.53
avg 41.83 42.61 50.00 43.30 41.96 41.80
A-12
13460327
PJM Price Tables
Table 4–13
LMPS and Congestion Prices for the Homer City and Quemahoning Nodes on 3/24/03
($/MWh)
Congestion
Hour Homer City Quemahoning
Prices
1 17.39 24.98 7.59

2 15.81 23.88 8.07
3 16.29 24.98 8.69
4 16.17 24.98 8.81
5 16.28 35.98 19.70
6 23.96 35.87 11.91
7 38.77 96.30 57.53
8 16.84 17.92 1.08
9 49.96 50.35 0.39
10 44.02 88.65 44.63
11 49.26 61.94 12.68
12 45.94 46.77 0.83
13 38.18 38.75 0.57
14 33.07 33.48 0.41
15 31.59 32.01 0.42
16 29.36 29.70 0.34
17 28.61 28.92 0.31
18 36.23 36.41 0.18
19 56.40 57.06 0.66
20 51.63 51.90 0.27
21 48.82 49.17 0.35
22 37.51 37.88 0.37
23 28.44 46.41 17.97
24 24.39 24.68 0.29
A-13
13460327
PJM Price Tables
Table 4–14
LMPS and Congestion Prices for the Laurel and Woodstow Nodes on 3/24/03
($/MWh)
Congestion
Hour Woodstow Laurel
Prices
1 18.93 18.93 0.00

2 17.32 17.32 0.00
3 18.13 18.13 0.00
4 18.20 18.20 0.00
5 20.23 20.23 0.00
6 26.07 26.07 0.00
7 -16.89 165.98 182.87
8 87.89 101.31 13.42
9 48.64 101.31 52.67
10 33.93 101.31 67.38
11 33.73 101.31 67.58
12 22.51 101.31 78.80
13 8.66 101.31 92.65
14 2.99 101.31 98.32
15 -31.19 158.32 189.51
16 -29.35 148.88 178.23
17 -35.62 158.61 194.23
18 7.94 101.31 93.37
19 45.99 101.31 55.32
20 48.28 101.31 53.03
21 48.34 101.31 52.97
22 11.24 101.31 90.07
23 -33.60 161.83 195.43
24 27.60 27.60 0.00
A-14
13460327
PJM Price Tables
Table 4–15
($/MWh)
Congestion
Prices
1 17.46 17.66 0.20

2 16.01 16.18 0.17
3 16.87 17.04 0.17
4 16.88 17.06 0.18
5 18.64 18.87 0.23
6 24.58 24.79 0.21
7 45.68 45.72 0.04
8 -350.35 351.24 701.59
9 -27.28 87.67 114.95
10 -5.18 85.80 90.98
11 4.10 69.09 64.99
12 10.52 67.37 56.85
13 20.48 78.15 57.67
14 14.48 38.88 24.40
15 14.32 25.00 10.68
16 17.81 25.00 7.19
17 18.70 25.00 6.30
18 18.62 78.73 60.11
19 -0.30 87.01 87.31
20 -17.49 87.67 105.16
21 -32.50 87.67 120.17
22 17.74 62.07 44.33
23 19.91 29.81 9.90
24 10.45 69.20 58.75
A-15
13460327
PJM Price Tables
Table 4–16
LMPS and Congestion Prices for the Middletown Junction and Hummelstown Nodes on
3/24/03
($/MWh)
Middletown Congestion
Hour Hummelstown
Junction Prices
1 18.97 19.03 0.06

2 17.36 17.42 0.06
3 18.20 18.27 0.07
4 18.28 18.35 0.07
5 20.42 20.56 0.14
6 26.15 26.23 0.08
7 46.57 46.74 0.17
8 84.49 112.20 27.71
9 71.60 67.10 -4.50
10 48.56 112.78 64.22
11 47.49 112.72 65.23
12 39.29 104.05 64.76
13 35.83 63.61 27.78
14 38.30 38.04 -0.26
15 35.93 35.73 -0.20
16 32.93 32.78 -0.15
17 31.90 31.76 -0.14
18 40.74 40.49 -0.25
19 58.49 111.25 52.76
20 70.86 69.66 -1.20
21 71.40 70.05 -1.35
22 43.24 42.96 -0.28
23 34.45 34.38 -0.07
24 27.92 27.77 -0.15
A-16
13460327
PJM Price Tables
Table 4–18A
($/MWh)

Hour
1 15.01 14.08 14.03 14.53 21.29 18.54

2 10.01 9.88 9.65 9.78 12.93 11.48
3 6.79 7.07 6.75 6.69 7.92 7.19
4 4.85 5.04 4.84 4.79 5.53 5.06
5 6.56 6.87 6.60 6.51 7.11 6.66
6 9.57 9.88 9.55 9.48 10.62 9.90
7 14.06 12.87 13.06 13.66 19.36 17.14
8 21.68 18.10 18.98 20.64 35.98 30.56
9 24.54 22.10 22.62 23.94 32.35 29.33
10 29.85 26.64 27.90 29.24 37.69 34.58
11 31.40 27.85 29.14 32.15 39.66 36.27
12 31.38 27.91 29.20 31.58 39.77 36.38
13 30.09 26.68 28.01 30.04 38.13 34.88
14 27.12 24.76 25.06 32.21 34.90 31.07
15 26.16 23.18 23.54 32.36 31.91 29.02
16 25.75 23.29 23.59 31.26 30.34 28.19
17 25.64 23.33 23.64 30.13 30.37 28.23
18 25.01 23.20 23.53 26.77 30.21 28.09
19 23.95 22.25 22.60 24.62 28.53 26.65
20 23.81 22.34 22.70 23.46 28.42 26.63
21 29.23 26.10 27.20 33.05 35.43 32.83
22 26.61 24.68 25.58 26.17 32.51 30.32
23 23.73 21.42 21.97 23.05 32.99 29.56
24 17.02 14.82 15.27 16.31 26.68 22.94
min 4.85 5.04 4.84 4.79 5.53 5.06
max 31.40 27.91 29.20 33.05 39.77 36.38
avg 21.24 19.35 19.79 22.18 27.11 24.65
A-17
13460327
PJM Price Tables
Table 4–18B
($/MWh)

Hour
1 14.84 22.43 14.00 6.82 18.75 19.96

2 9.90 17.66 9.67 5.26 12.01 13.09
3 6.72 14.13 6.80 3.94 7.83 8.80
4 4.81 10.27 4.87 2.92 5.50 6.23
5 6.51 12.63 6.65 4.63 7.23 8.00
6 9.50 17.27 9.61 6.76 10.59 11.59
7 13.95 21.07 12.97 6.82 16.86 18.15
8 21.43 18.63 18.72 7.69 28.91 29.08
9 24.42 29.09 22.36 17.30 28.66 29.05
10 29.73 32.30 27.64 22.58 34.02 34.45
11 31.35 31.90 28.87 23.29 35.71 36.11
12 31.29 31.94 28.94 23.28 35.78 36.19
13 30.00 31.05 27.75 22.44 34.34 34.78
14 27.36 32.23 24.87 21.35 34.01 35.84
15 26.50 29.57 23.30 20.25 30.00 30.82
16 26.05 25.48 23.43 19.90 27.87 27.89
17 25.87 25.70 23.48 19.91 27.88 27.93
18 25.06 24.80 23.40 19.46 27.57 27.64
19 23.94 25.75 22.44 19.44 26.34 26.57
20 23.74 24.97 22.55 19.42 26.29 26.78
21 29.39 26.37 27.06 21.96 32.26 32.66
22 26.50 24.87 25.50 20.71 29.65 30.07
23 23.56 22.13 21.81 14.48 28.50 29.15
24 16.83 17.70 15.13 6.66 22.20 23.25
min 4.81 10.27 4.87 2.92 5.50 6.23
max 31.35 32.30 28.94 23.29 35.78 36.19
avg 21.22 23.75 19.66 14.89 24.53 25.17
A-18
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PJM Price Tables
Table 4–19
LMPS and Congestion Prices for the Siegfried and Martins Creek Nodes on 5/31/03
($/MWh)
Congestion
Hour Siegfried Martins Cr
Prices
1 -12.12 43.45 55.57

2 -3.58 22.79 26.37
3 0.50 11.25 10.75
4 0.89 7.38 6.49
5 2.93 8.48 5.55
6 3.58 13.61 10.03
7 -9.25 37.82 47.07
8 -35.30 88.63 123.93
9 -5.52 60.34 65.86
10 -0.19 65.65 65.84
11 -1.25 69.84 71.09
12 -1.50 70.22 71.72
13 -1.12 67.08 68.20
14 2.82 57.94 55.12
15 3.62 52.57 48.95
16 4.38 49.50 45.12
17 4.31 49.61 45.30
18 3.24 50.12 46.88
19 5.79 45.32 39.53
20 5.76 45.17 39.41
21 1.58 60.46 58.88
22 2.64 54.60 51.96
23 -13.91 67.70 81.61
24 -22.90 62.47 85.37
A-19
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13460327
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The Fundamentals of Locational Marginal Pricing - LMP - Examples of Pricing Outcomes On The PJM System

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The Fundamentals of Locational Marginal

Pricing (LMP): Examples of Pricing

Final Report, December 2003

EPRI Project Manager

(A) MAKES ANY WARRANTY OR REPRESENTATION WHATSOEVER, EXPRESS OR IMPLIED, (I)

(B) ASSUMES RESPONSIBILITY FOR ANY DAMAGES OR OTHER LIABILITY WHATSOEVER

ORGANIZATION(S) THAT PREPARED THIS DOCUMENT

Laurits R. Christensen Associates, Inc.

This report was prepared by

Laurits R. Christensen Associates, Inc.

This report describes research sponsored by EPRI.

1 BACKGROUND AND PURPOSE............................................................................. 1-1

2 THE PHYSICAL CAUSES OF LOCATIONAL PRICE VARIATION ......................... 2-1

3 TRANSMISSION RIGHTS AS A HEDGING TOOL .................................................. 3-1

4 EXAMPLES OF PRICING OUTCOMES ON THE PJM SYSTEM............................. 4-1

5 MANAGING LMP PRICE RISK ................................................................................ 5-1

A PJM PRICE TABLES .............................................................................................. A-1

2.1 An Example With No Transmission Losses or Constraints

2.2 An Example with Transmission Losses

G1: $20; 100 MW G3: $26; 100 MW

LW: 140 MW LE: 140 MW

2.3 Examples with Transmission Constraints

G1: $20; 100 MW G3: $26; 100 MW

LW: 140 MW LE: 140 MW

2.4 Some Remarks

4.1 Description of PJM’s Pricing System

In PJM, market participants usually obtain FTRs by purchasing Network Integration

4.2 Examples of Pricing Outcomes on the PJM System

4.2.1 The Peak Summer Day (August 14, 2002)

Allegheny Power Baltimore Gas & Electric Delmarva P&L

4.2.2 The Peak Winter Day (January 23, 2003)

Allegheny Power Baltimore G&E Penn Electric Potomac Electric

4.2.3 A Cool Spring Weekday (March 24, 2003)

4.2.4 A Warm Spring Saturday (May 31, 2003)

The foregoing results were primarily due to two constraints.

4.3 Example of Locational Risks on the PJM System

Keystone LMPs Limerick LMPs Congestion Prices

Average 33.19 37.15 3.96

Maximum 175.44 248.80 179.07

Minimum 0.00 –29.09 –49.19

Congestion Cost Bins ($/MWh)

owner of a 50 MW FTR obligation would have received $1,885,094 (= 50 x $37,702) for

4.4 Implications of the PJM Examples

5.1 Forecasting LMPs

Nonetheless, there may be situations in which a reasonable forecast of future transmission

5.2 Hedging Against Price Uncertainty

5.2.1 Generation Ownership

In the absence of transmission price risk, generation ownership (through construction or

5.2.2 Forward Contracts

5.2.3 Transmission Rights

Atlantic Allegheny Baltimore Delmarva Jersey Metropol’n

1 25.47 25.00 25.00 25.00 25.00 25.00

Peco Penn. Potomac Public Rockland

1 25.00 25.00 25.00 25.00 25.00 25.00

1 25.00 25.00 0.00

1 25.00 25.00 0.00

1 25.00 25.00 0.00