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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

nice to be able to reconcile these two results.

We suggest that net cash flows to all existing generators have increased in a large and systematic way beginning in June of 2005. Corresponding price increases are thought to affect supplier offers of electricity (both price and quantity) into default service auctions and, as such, are effectively passed on to retail customers. It is far from clear the degree to which market power is exerted in default service auctions themselves or the PJM energy markets on which the default service auctions are based. Whether or not market power is being exerted inappropriately, generators’ increased cash flows should not be ignored by FERC, other policy-makers, and stakeholders. F



1. 2005 PJM State of the Market Report at p. 23; released March 8, 2006.

2. For example:

a) Delaware: For customers of Delmarva Power; RFP issued in August 2005 with bids opened in January 2006 resulting in a reported 59 percent increase for residential customers on May 1, 2006.

b) New Jersey conducted an auction in early February 2006 for one-third of its retail default service obligation. The results of the auction are expected to result in about a 13 percent increase for retail customers.

c) The District of Columbia is about to conduct an auction, results of which will be reflected in retail rates beginning on June 1, 2006.

d) Maryland issued an RFP in December 2005 with bids due in February 2006. Retail prices, if not mitigated, are expected to result in retail rate increases of between 50 percent and 80 percent depending on service class and distribution utility.

e) Pike County (PA) Light & Power raised rates approximately 70 percent on Jan. 1, 2006, as a result of an auction process that began in May 2005 and concluded in October 2005. Note: As Pike County L&P is an Orange and Rockland (NY) affiliate, its service territory is in the NY-ISO.

3. Just as this paper was being finalized, PJM responded to an informal request for the heat rate of the marginal unit by stating that it does not collect such data. As such, it is not available according to PJM’s initial response. As misunderstandings and miscommunications are always possible, this data request will be pursued.

4. Fuel prices used were Intercontinental Exchange Transco Zone 6 (NY) for natural gas, NYMEX spot coal, and Intercontinental Exchange No. 2 fuel oil.

5. For hours where oil, coal, and natural gas did not represent 100 percent of the hour, the estimated LMP for the hour was “grossed-up.” For example, if oil, coal, and natural gas represented 90 percent of a particular hour’s marginal fuel, the result calculated for 90 percent of that hour was multiplied by 1/.9 or 1.11. Since estimated LMP is calculated as a weighted-average, the gross-up procedure ensures that hourly weights sum to unity.

It also should be noted that July through October 2005 had a relatively large incidence of “miscellaneous” appearing on the data set. Further investigation revealed that “miscellaneous” tended to occur during relatively lower-load hours. As such,