East vs. West: Comparing Electric Markets in California and PJM

 

While neither is perfect, the former has done better than its critics would admit.

In France, analysts admit that markets work in practice, but question if they work in theory.¹ Now this Gallic flavor has taken hold in the New World, but with a different twist. Today, as electricity restructuring proceeds in North America, the regulators and analysts there seem enraptured with theories of ideal market structures, but they largely ignore the practical results.

In the real world, commodities with immediate spoilage, such as transportation, sports, and theater—and yes, electricity—require a transparent and robust forward market. Yet in power markets, this reality often has been sidestepped—lost in the debate of the structure of independent system operators (ISOs) and regional transmission organizations (RTOs). The idea is not such a mystery in other industries. It is obvious to any business traveler that a reserved seat on a scheduled airline flight is preferable to relying on the uncertainties of a spot market. Travelers (and airlines) need to plan ahead if supply and demand functions are to be matched.

In fact, when it has been allowed to do so, the wholesale power market has acknowledged the importance of forward markets by dividing itself into three segments.