By Lyle Rawlings, P.E. and Andy Wall
Part One – Who is the real villain?
Starting this June, across a region of all or parts of 14 states, including Mid-Atlantic states from New Jersey to North Carolina and stretching west to Illinois and Wisconsin, electric bills started arriving with 20 percent to 30 percent increases in price. This is the territory of a powerful organization most people have never heard of: PJM Interchange LLC, commonly known as PJM. There are easy places to look for answers that can explain how the increases happened, but those answers mostly just cover up the real causes.
PJM Uncovered
The electric price increases have the makings of a crisis with no near-term solutions. They have gotten state legislators and government officials in a state of near panic, and blame is flying in all directions.
The burden of price increases falls disproportionately on low-income households. RAND Corp., a research firm, reported, “In Baltimore County, low-income households spend one-third of their income on energy bills—nearly five times the U.S. average of 6.5 percent”. That was in March of 2024, before the current increases (it also includes gas in addition to electric costs). One New Jersey legislator said at a hearing on the crisis, “when vulnerable people can’t afford to run their air conditioners on a hot summer day, people could die.”
Some of the blame is rightly landing on PJM. Nine governors of PJM states – Democrats and Republicans – wrote a letter to PJM demanding reforms, and were granted a rare meeting with top PJM officials. But states do not have jurisdiction over PJM. The Federal Energy Regulatory Commission (FERC) does. PJM operating decisions are made by vote of its members, so 80 percent of the voting is controlled by the energy companies themselves. These members are literally voting for their own profits; the fox is guarding the henhouse.
Even among energy industry experts, though, the real root causes of the increases are not well understood. Very few understand the fact that the primary root causes were artificially created by PJM. The increases, which will cost consumers an added $26.4 billion across PJM’s territory over the next two years, are unnecessary.
The wholesale electricity market goes nuts
PJM is a “regional transmission organization” or RTO, which means it operates and controls the transmission system which brings power from power plants in the region to the various utility companies that deliver the power to customers. But RTO’s do much more than that. They also control the wholesale electricity markets, an incredibly complex jumble of markets and rules that determine the wholesale price of power in the region. PJM is the largest RTO in the country; it serves 20 percent of the U.S. population.
Your electric bill comes from your local utility company, which owns and operates the local grid (the “distribution” system). Utilities bill you to deliver the power. The power itself primarily comes from the wholesale market controlled by PJM.
The main cause of the sudden 20 percent to 30 percent increases in electric bills in June was an increase in the wholesale market price. On the surface, that was seen to be due to a huge price increase in something called the PJM Capacity Auction. The capacity component of wholesale electric costs is set each year by an auction designed and run by PJM. Usually, capacity charges are a minor component of wholesale prices. But in the October 2024 capacity auction, which covers the “delivery year” that started this June, the price shot up to a level 9.3 times higher than 2023’s auction price. BG&E was saddled with much higher capacity prices than the rest of PJM.
PJM’s explanation of the cause of the huge increase in capacity prices is that there suddenly is not enough electric generating capacity to meet demand. That narrative has driven nearly all discussion of the problem, as well as nearly all discussion regarding what to do to solve it.
In Part 2, we’ll dive into why this narrative is false, trace how PJM constructed the real root causes of the crisis; and explain how insane profits result. In Part 3 we’ll discuss solutions to the problem.
The opinions expressed in this commentary are those of the writer and not necessarily those of the AFRO.