Transcript Cramton Presentation 5.19.06

Why the high prices?
And what (not) to do about it?
Peter Cramton, University of Maryland
Steven Stoft, Independent Consultant
19 May 2006
Myth 1: Restructuring!
• 72% average increase in Baltimore
Solution 1: Impeach Governor
• Fire the Public Service Commission
PJM Market Results 1998-2005
Comparison of Load Weighted Energy Prices to
Fuel-cost Adjusted Load Weighted Energy Prices
$70
$60
Spot energy price
$50
$40
$30
Fuel-cost adjusted energy price
$20
$10
$0
1998
1999
2000
2001
2002
2003
2004
2005
Note: Fuel-cost adjustment based on 1998 reference period and hourly marginal fuel type. All years are
power years from April 1 to March 31, except 2005, which is through January 31. Source: PJM.
Myth 2: Uniform Price Auction
All bids below p0 win and get paid p0
Price
Demand
Supply
(as bid)
p0
(clearing price)
q0
Quantity
Solution 2: Pay-as-Bid Auction
All bids below P0 win and are paid what they bid
Price
Demand
Supply
(Bids)
P0
(clearing price)
Q0
Quantity
3
Does pay-as-bid save money?
Price
Demand
Supply
(Bids)
clearing price P0
$ saved
QD
Quantity
Pay-as-bid Auction 
“Guess the Clearing Price”
• Pay-as-bid rewards those that can best
guess the clearing price
– Favors larger companies
• Spend more on forecasting
• More likely setting the clearing price
• Uniform price favors those with lowest costs
– Favors smaller companies
• Big guys make room for smaller rivals
• Small guys free-ride on big guys exercise of market
power
Cornell experimental results
(Bob Thomas)
•
•
•
•
•
•
30 Bus Network
Human subjects represent six generators
Pay real money proportional to profits
Compare pay-as-bid with uniform pricing
Stochastic load
Standby charges for being available
Average Prices for Uniform Price
Source: Bob Thomas, Cornell
Average Prices for Pay-as-Bid
Source: Bob Thomas, Cornell
Why the high prices?
•
•
•
•
•
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Fuel prices increasing sharply
Removal of retail price caps
Changes in relative fuel prices, resulting
in short-run disequilibrium
Insufficient long-term forward contracting
Law of one price
Uniform-price auction used in the spot
market
Conclusion
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•
•
Stick with uniform pricing
Don’t attempt a regulatory taking of
windfall profits
Do encourage long-term forward
contracts that hedge fuel-price shifts