Rosenberg's 'Leap' Not Warranted on LMP Issue
20 August 2004
By Carlos Pabon-Agudelo with Dr. Sarah Voll
In a Letter to the Editor in the August/September 2004 issue of The Electricity Journal, NERA Vice President Carlos Pabon-Agudelo and former Special Consultant Dr. Sarah Voll comment on a recent article by Dr. Alan Rosenberg titled "A Proposed Alternative to Locational Marginal Pricing."
In their Letter, Mr. Pabon-Agudelo and Dr. Voll take issue with Dr. Rosenberg's perpetuation of his erroneous belief that Locational Marginal Pricing (LMP) is somehow conducive to market power and his intellectual leap that, therefore, it should be replaced as the means for revealing the prices of energy in separated markets when transmission capacity is constrained.
The authors agree that if transmission congestion creates "load pockets" that allow the exercise of market power, the sub-market is no longer sufficiently competitive and should be regulated, as Dr. Rosenberg suggests and the Federal Energy Regulatory Commission has required, based upon the cost of service. In those limited circumstances, Dr. Rosenberg's administrative pricing construct may indeed be an acceptable cost-of-service mechanism (which is in fact what it is). But if currently constrained markets are sufficiently (or in the long term potentially) competitive, there is no justification to eliminate LMP and institute a non-market methodology to socialize the costs of re-dispatching the system to resolve the congestion, particularly under the guise of protecting consumers from market power abuses. In reality, Dr. Rosenberg ends up sheltering customers from efficient market price signals.
