Increasing Electricity Prices: Are Fuel Costs the Only Explanation?

1
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
2
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

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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?

4
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.
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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

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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?

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Cost of Fossil Fuels for Electric Generation
Monthly
Annual
Data Source DOE/EIA
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Natural Gas Prices Back to 1976
Data Source DOE/EIA
9
Power Sector Natural Gas Costs
Data Source DOE/EIA data
10
Monthly and Daily PJM Prices
Data Source PJM
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Monthly and Daily PJM and Natural Gas Prices
Data Sources PJM and EIA
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Monthly PJM and Natural Gas Prices
Data Sources PJM and EIA
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Weighted Average Cost of Fossil Fuel for Electric
Generation
Data Source DOE/EIA
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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.
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Auction/Bidding Results and PJM Market Prices
Data Sources PJM and various state sources
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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