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Pondering PJM's Energy Price Run-Up

Does inappropriate market power explain the increase during late 2005?

Fortnightly Magazine - June 2006

the gross-up procedure is thought to be conservative in those months since it is thought that the underlying marginal unit would tend to have lower marginal cost than the cost being grossed up. November and December 2005 had relatively few “miscellaneous” entries.

6. As noted in the text, the biggest single deficiency in this analysis is that the heat rates of marginal units, while held constant through the 24-month study, are not known with certainty. Another deficiency in this work is that emissions costs are ignored, but they are ignored for the entire two-year period.

7. DA LMP was chosen as the primary price indicator for this study. It was thought that, although highly correlated, DA LMP would have significantly less variability than RT LMP. Nevertheless, regression modeling included a variable calculated as the difference between these two price measures. Early results indicate that the difference between DA and RT LMP do not greatly explain the variability in the difference between DA LMP and its calculated estimate.

8. 2004 PJM State of the Market Report at p. 20.

9. 2004 PJM State of the Market Report at p. 22.

10. 2004 PJM State of the Market Report at p. 46.

11. 2005 PJM State of the Market Report at p. 23.

12. The price-cost markup index is defined by the PJM MMU as the difference between price (P) and marginal cost (MC), divided by price, where price and marginal cost are determined by the offers of the marginal unit [The markup index = (P – MC)/P]. The marginal unit is the unit that sets LMP in the five-minute interval. The markup of each marginal unit is load-weighted. The markup index is normalized and can vary from -1.00, when the offer price is less than marginal cost, to 1.00, when the offer price is higher than marginal cost. See 2005 PJM State of the Market Report at p. 83.

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