1. Increasing Electricity Prices: Are Fuel Costs the Only Explanation? Preliminary Findings Ken Rose Independent Consultant Assessing Restructured Electricity Markets An APPA Symposium Washington, D.C. February 5, 2007

2. The 2006 Retail Price Increases  Maryland (BGE): 72% increase for residential customers beginning July 1, 2006 -- phased-in  Pennsylvania (Pike County Light & Power): 70% increase  Delaware (Delmarva): 59% increase for residential customers, 47% to 118% increase for business class customers beginning in May of 2006 -- to be phased-in  D.C.: 12 percent increase for residential customers effective June 1, 2006  New Jersey: 12% to 14% in June 2006  Illinois: 22% for ComEd, 40% to 55% for the three Ameren companies

3. What explains the significant increases?  The standard explanation:  fuel cost increases particularly natural gas prices after Hurricanes Katrina and Rita are to blame  This increased wholesale prices, which in turn increased retail prices  Are fuel prices the only or the primary explanation?  What other factors are involved?  Does this say anything about the competitiveness of the current industry structure?

4. From a PJM presentation* *Craig Glazer, "Developing the 21st Century Grid … A Look Back and a Look Forward," Modernizing the Grid Midwest Regional Summit, November 16, 2006.

5. What Does the Graph Tell Us?  What is the graph measuring?  holding fuel costs constant, power prices have not changed much for several years –power prices were adjusted to reflect changes in fuel prices used by marginal units –to make the adjustment, spot market prices were used for natural gas, fuel oil, and emission credits  This does not saying anything about the exercise of market power (even though some think it does) –for example, withholding strategies would not change bid prices of marginal units –it just means suppliers didn't raise the price of marginal units beyond what could be explained by fuel costs

6. What Does the Graph Tell Us? (continued)  It could be asked: why didn't the adjusted price decrease?  if it is true that power plants are more efficient today than during the bygone era of regulation  The adjusted prices are irreproducible -- since the data will likely not be made available for independent analysis  cannot do any sensitivity analysis or see what impact using actual costs incurred would have on the results  Others have noted this PJM finding as well:  "Recent rate increases have been driven primarily by fuel prices" -- conclusion of The Brattle Group, Nov. 2006  What do the numbers show?

7. MonthlyAnnual Cost of Fossil Fuels for Electric Generation Data Source: DOE/EIA

8. Natural Gas Prices Back to 1976

9. Data Source: DOE/EIA data Power Sector Natural Gas Costs

10. Data Source: PJM Monthly and Daily PJM Prices

11. Monthly and Daily PJM and Natural Gas Prices Data Sources: PJM and EIA

12. Monthly PJM and Natural Gas Prices

13. Weighted Average Cost of Fossil Fuel for Electric Generation Data Source: DOE/EIA

14. Auction/Bidding Price Results for Generation in Mid-Atlantic States* *Weighted-average price for state (Maryland and New Jersey) or for utility. Data Sources: various state sources.

15. Auction/Bidding Results and PJM Market Prices Data Sources: PJM and various state sources

16. Conclusions  Fuel costs are important (-- what an insight!)  however, not all the power price variations can be explained by fuel cost changes -- load clearly matters also  Saying power price changes are mostly attributable to fuel cost increases provides no added insight on whether there is market power or not  consider: if fuel costs remained the same or even decreased and power prices didn't change much either, would that mean there is no market power? –of course not, it doesn't say anything about it  Market structure is what matters -- and what should be analyzed -- not just input price changes