Assessing Restructured
Electricity Markets
An APPA Symposium
Washington, D.C.
February 5, 2007
Increasing Electricity Prices: Are Fuel Costs the
Only Explanation?
Preliminary Findings
Ken Rose
Independent Consultant
The 2006 Retail Price Increases
Maryland (BGE): 72% increase for residential customers
beginning July 1, 2006 -- phased-in
Pennsylvania (Pike County Light & Power): 70% increase
Delaware (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 2006
Illinois: 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 blame
This 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 regulation
The adjusted prices are irreproducible -- since the data
will likely not be made available for independent analysis
cannot do any sensitivity analysis or see what impact
using actual costs incurred would have on the results
Others 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?
Cost of Fossil Fuels for Electric Generation
Annual
Monthly
Data Source: DOE/EIA
Natural Gas Prices Back to 1976
Data Source: DOE/EIA
Power Sector Natural Gas Costs
Data Source: DOE/EIA data
Monthly and Daily PJM Prices
Data Source: PJM
Monthly and Daily PJM and Natural Gas Prices
Data Sources: PJM and EIA
Monthly PJM and Natural Gas Prices
Data Sources: PJM and EIA
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
Conclusions
Fuel 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