THE LIST OF COMPANIES STUNG BY RECENT ELECTRICITY. price spikes in he Midwest continues to expand, as cries for price caps grow loader. Much has been said of the dollar amounts lost and who has incurred those losses; yet few have questioned the fundamentals driving this market. Understanding what's behind the recent market uproar is the first step in deciding how well the market functions.
Regulators should be careful not to slow the restructuring process simply because of this price volatility, but they should pay very close attention to its causes.
In many ways, the market appears to be functioning properly. Electricity is unique in that it cannot be stored economically and its difficult to transport over long distances. These characteristics contribute to electricity's status as the most volatile commodity (five times more volatile than gas, the next most volatile commodity).
Marginal-cost pricing provides another indication of a properly functioning market. Pricing is no longer based on average utility costs. Instead, each individual plant must become its own profit center or shut down. With the exception of peak periods, the market faces excess generating capacity with prices based on variable costs. Since revenues based on variable generation costs are normally not enough for a plant to earn back its total costs, it must capture the higher revenues resulting from any peaks in market prices.