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Price Behavior in Electricity Futures: The Story So Far

Fortnightly Magazine - January 1 1997

knows its own costs and that can compare them with the market price revealed in futures prices stands to make a significant profit. The cost of carry relationship is more complicated to specify in the electricity industry, but more valuable to whose who get it right.

2. The Expected Spot Price Formula

Economists have long wondered whether the futures price serves as a good predictor of the eventual spot price for the commodity, E(PT). Because the futures price paid is fixed and without risk, while the spot price paid remains risky, buyers and sellers may require a risk premium to do business in the spot price:

FT = E(~PT) - x

where x is the risk premium built into the spot price. In the cost-of-carry formula the spot price shown is for immediate delivery, at t = 0. In the expected spot price formula, the spot price shown is the eventual price quoted at the time delivery is due on the futures contract, T. The subscript on P denotes that it is the spot price on date T, while the tilde denotes that from the perspective of today it is a random variable.

One of the most important pieces of data one can learn from watching futures prices is the value of x, the risk premium paid in the market for a fixed price. This risk premium is the key to valuing fixed-price contracts as well as baseload versus peak-load capacity.



N.Y. Dairy Farmers Ask for Choice

By Lori A. Burkhart

Independent power marketer Wheeled Electric Power Co. (WEP) has joined with Dairylea Cooperative Inc., an organization of 3,500 New York dairy farmers, to petition the New York Public Service Commission (PSC) for a pilot program allowing farmers and food processors to choose their electricity suppliers. Rick Smith, Dairylea's chief executive officer, says "Dairylea plans to aggregate the electricity buying of its over 3,500 dairy farmer members and affiliates located in New York to secure lower electricity rates. As the [New York] PSC has observed, aggregation is the way in which consumers (em particularly smaller customers (em can obtain favorable prices and services options."

The retail pilot is being proposed for the service territories of Niagara Mohawk Power Corp., New York State Electric and Gas Corp., Rochester Gas and Electric Corp., Central Hudson Gas and Electric Corp., and Orange and Rockland Utilities (O&R). In contrast to O&R's Power Pick, currently the only pilot running in New York in late 1996, the Dairylea program would be New York's first multi-utility retail competition pilot. t

Lori A. Burkhart is an associate legal editor of PUBLIC UTILITIES FORTNIGHTLY.

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Independent power marketer Wheeled Electric Power Co. (WEP) has joined with Dairylea Cooperative Inc., an organization of 3,500 New York dairy farmers, to petition the New York Public Service Commission (PSC) for a pilot program allowing farmers and food processors to choose their electricity suppliers. Rick Smith, Dairylea's chief