Post on 20-Jan-2016
Increasing Electricity Prices: Are Fuel Costs the Only Explanation?Preliminary FindingsKen RoseIndependent Consultant
Assessing RestructuredElectricity Markets
An APPA SymposiumWashington, D.C.February 5, 2007
The 2006 Retail Price Increases
Maryland (BGE): 72% increase for residential customers beginning July 1, 2006 -- phased-in
Pennsylvania (Pike County Light & Power): 70% increaseDelaware (Delmarva): 59% increase for residential customers, 47% to 118% increase for business class customers beginning in May of 2006 -- to be phased-in
D.C.: 12 percent increase for residential customers effective June 1, 2006
New Jersey: 12% to 14% in June 2006Illinois: 22% for ComEd, 40% to 55% for the three Ameren companies
What explains the significant increases?
The standard explanation:fuel cost increases particularly natural gas prices
after Hurricanes Katrina and Rita are to blameThis increased wholesale prices, which in turn increased retail prices
Are fuel prices the only or the primary explanation?What other factors are involved?Does this say anything about the competitiveness of the current industry structure?
From a PJM presentation*
*Craig Glazer, "Developing the 21st Century Grid … A Look Back and a Look Forward,"Modernizing the Grid Midwest Regional Summit, November 16, 2006.
What Does the Graph Tell Us?What is the graph measuring?
holding fuel costs constant, power prices have not changed much for several years–power prices were adjusted to reflect changes in fuel prices used by marginal units
–to make the adjustment, spot market prices were used for natural gas, fuel oil, and emission credits
This does not saying anything about the exercise of market power (even though some think it does)
–for example, withholding strategies would not change bid prices of marginal units
–it just means suppliers didn't raise the price of marginal units beyond what could be explained by fuel costs
What Does the Graph Tell Us? (continued)
It could be asked: why didn't the adjusted price decrease?if it is true that power plants are more efficient today
than during the bygone era of regulationThe adjusted prices are irreproducible -- since the data will likely not be made available for independent analysiscannot do any sensitivity analysis or see what impact
using actual costs incurred would have on the resultsOthers have noted this PJM finding as well:
"Recent rate increases have been driven primarily by fuel prices" -- conclusion of The Brattle Group, Nov. 2006
What do the numbers show?
MonthlyAnnual
Cost of Fossil Fuels for Electric Generation
Data Source: DOE/EIA
Data Source: DOE/EIA
Natural Gas Prices Back to 1976
Data Source: DOE/EIA data
Power Sector Natural Gas Costs
Data Source: PJM
Monthly and Daily PJM Prices
Monthly and Daily PJM and Natural Gas Prices
Data Sources: PJM and EIA
Data Sources: PJM and EIA
Monthly PJM and Natural Gas Prices
Weighted Average Cost of Fossil Fuel for Electric Generation
Data Source: DOE/EIA
Auction/Bidding Price Results for Generation in Mid-Atlantic States*
*Weighted-average price for state (Maryland and New Jersey) or for utility.Data Sources: various state sources.
Auction/Bidding Results and PJM Market Prices
Data Sources: PJM and various state sources
ConclusionsFuel costs are important (-- what an insight!)
however, not all the power price variations can be explained by fuel cost changes -- load clearly matters also
Saying power price changes are mostly attributable to fuel cost increases provides no added insight on whether there is market power or not consider: if fuel costs remained the same or even
decreased and power prices didn't change much either, would that mean there is no market power?–of course not, it doesn't say anything about it
Market structure is what matters -- and what should be analyzed -- not just input price changes