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Power Prices Today: Growing More Unpredictable

Even the volatility is volatile. And that can play havoc with hedging.
Fortnightly Magazine - October 1 2002

design ill-equipped to handle live traders trying to make money, a shortage of cheap sources for generating power, incompatible legislative compromises, and the California habit of wanting to have its cake and eat it too. 1

Things were much different in summer 2002 in western markets, but still extreme. Wholesale power prices at Mid-Columbia were as low as $0.25/MWh in July 2002 or 0.1 percent of the $250/MWh they had often been in July 2001. That offers evidence that inexpensive hydropower was in excess supply, not in shortage.

By early 2002 there was really no difference in the price in these two western markets. Then, during the spring and early summer of 2002, prices began to move in different directions. By July 2002, the difference in price had grown to more than $30.00/MWh, a significant amount, especially for markets that were considered at one time commercially connectable.

Interestingly enough, when we treat markets near California as the outliers they are and delete them from the picture, it is clear that most major markets were often very similar in terms of their price behavior during the period ( 2).

The exception is the Into Entergy market in summer 2000, where constrained systems could have set the stage for some exercise of market power.

#2-Price Behavior Grows Similar in Several Markets

The behavior of daily price levels over time has proved generally very similar for Into ComEd, Into Cinergy, and PJM since 1999, and for Into Entergy since the fall of 2000. The similarity of the price levels indicates that these markets are well connected much of the time. This similarity is most striking for Into Cinergy and Into Com Ed. The correlation between price in these two markets has been near perfect in the last several years. In 1999 the correlation was equal to 0.96. Since the turn of the new century the correlation has been near 0.99 from one month to the next, only 0.01 from a perfect correlation.

Thus, it is not surprising that in early May 2002 Into ComEd announced it planned to join PJM, noting its major trading partners and suppliers were to the East. On July 1, 2002 Into ComEd also announced it was withdrawing from the Mid-America Interconnected Network (MAIN) in December 2003 (18 months' notice is required to exit regional reliability councils). Interestingly enough, despite recent problems in the marketing and merchant generation parts of the power business, markets are continuing to evolve and grow and in ways consistent with the FERC goal of developing large, increasingly interconnected RTOs.

Since August 2002, all major eastern markets have been better connected when compared to earlier periods. Nonetheless, PJM prices were often at a significant premium over price in other markets. This observation can be seen by noting the difference in price in this market relative to the other markets. ()

#3-How Does the Power Price Compare with Gas?

As systems become even better connected, bases may get smaller, and large values for the basis will persist for shorter time periods. Nonetheless, significant profit opportunities will continue to