Competitive Performance of New England's Wholesale Electricity Market Compares Favorably with Other U.S. Wholesale Markets.

Business/Utility Editors

HOLYOKE, Mass.--(BUSINESS WIRE)--Feb. 14, 2002

An independent review of the competitive performance of New England's deregulated wholesale electricity market found that it compares favorably with other U.S. wholesale electricity markets, with relatively low levels of "market power." However, ISO New England Inc. officials emphasized the need to continue rigorous market monitoring efforts to ensure that the region's wholesale electricity marketplace continues to be competitive and fair.

The study, commissioned by the Massachusetts Attorney General's Office, the Maine Public Utilities Commission and ISO New England, which oversees the region's electric power system and wholesale power exchange, concluded that prices were only somewhat above the level that, in theory, could be achieved by a perfectly competitive market. The differences could result from market power or other market or operational factors, such as transmission constraints that force utilities to purchase more costly power.

During 2001, ISO New England launched a three-part initiative to enhance its ability to identify and deter efforts to manipulate the electricity markets. These steps include increasing the size of its internal Market Monitoring and Mitigation Section, hiring an independent market advisor to the Board of Directors, and retaining independent experts to provide extended market analysis capabilities. To this end, ISO New England cooperated with the study's authors and provided partial funding for the study. Officials said that the analytical tools used in the study would become part of ISO New England's ongoing monitoring of the region's power markets.

"This study demonstrates that New England's wholesale markets are relatively competitive," said Gordon van Welie, President and CEO of ISO New England Inc. "However, there is always room for improvement and, as the market monitor, ISO New England will continue to use these types of tools to gauge whether market power is being exercised. It's important to have multiple ways of monitoring to ensure that the markets are fair and competitive for all market participants."

The study was conducted by Dr. James Bushnell and Celeste Saravia, researchers at the University of California Energy Institute. Dr. Bushnell was a member of the California Power Exchange's Market Monitoring Committee and independently co-authored a similar study of California's electricity markets. The study compared the cost of producing power with the price charged in the wholesale market.

Bushnell and Saravia's evaluation shows that New England's market compares favorably with the results of similar studies of California and the PJM Interconnection's market in the Mid-Atlantic. During the period between May and December 1999, PJM Interconnection's markets showed the largest discrepancy between actual market prices and an estimate of what prices would have been in a perfectly competitive environment. California's showed a smaller discrepancy and New England's the least, making it the most competitive of the three markets by this measure.

Bushnell and Saravia cautioned that the study's results can not be directly applied to the consumer market because the study evaluated only wholesale, not retail, prices. Moreover, only about a fifth of New England power is sold through wholesale markets; the rest is sold through long-term contracts, which were not evaluated.

The Bushnell and Saravia study evaluated New England's markets over a two-year period beginning in May 1999, when the current deregulated wholesale power markets started operation. The study was based on a sophisticated analytical tool called "competitive benchmark analysis," which Dr. Bushnell and his colleagues had used in their 2000 study of California's market and which another researcher used in 2001 in an evaluation of PJM Interconnection's markets. Competitive benchmark analysis estimates the price that would result from a perfectly competitive market, and then compares it to actual prices to determine whether there is any discrepancy.

According to van Welie, changes are being made to New England's wholesale electricity marketplace to make it even more robust and competitive. In addition, transmission system bottlenecks that decrease marketplace efficiency have been identified. "We must take steps to enhance the markets themselves and improve the power grid's infrastructure. This is why we are implementing a Standard Market Design to increase the efficiency of our markets and a Regional Transmission Expansion Plan, issued in October 2001, to identify and eliminate bottlenecks on the bulk power grid."

The Bushnell/Saravia study can be found on the ISO New England Web site at www.iso-ne.com.

ISO New England Inc. is the not-for-profit corporation responsible for the day-to-day reliable operation of New England's bulk generation and transmission systems with an installed capacity of more than 28,000 megawatts. In addition to operating the bulk power grid, ISO New England is the administrator of the region's wholesale electricity marketplace and the Open Access Transmission Tariff on behalf of the New England Power Pool.