Still Waters Run Deep by HR323X

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									    Still Waters Run Deep

Research on price volatility in short-term electricity markets
    and the implications of that research for the FERC’s
                 Standard Market Design



                           Prepared for:
                  Electric Power Supply Association
                1401 New York Avenue, NW, 11th Floor
                       Washington, DC 20005
                          Tel: (202) 628-8200
                     Web site: www.epsa.org

                            Prepared by:
                    Boston Pacific Company, Inc.
              1100 New York Avenue, NW, Suite 490 East
                      Washington, DC 20005
                        Tel: (202) 296-5520
                Web site: www.bostonpacific.com


                                                         BOSTON PACIFIC COMPANY, INC.
CONTEXT IS FERC’S STANDARD MARKET DESIGN


     FERC suggests three mitigation measures:


        1) Locational Offer Cap

        2) Maximum Offer Cap

        3) Limits on Bid Flexibility




                             2            BOSTON PACIFIC COMPANY, INC.
SIGNIFICANT PRICE VOLATITLITY IS NORMAL IN WELL-FUNCTIONING,
              SHORT TERM ELECTRICITY MARKETS




                All 9 markets analyzed, both regulated and
                 unregulated, show significant price volatility as
                 measured by standard deviations and
                 coefficient of variation.



                All time periods (Peak, Off-Peak) and seasons
                 (Summer, Winter, Spring, and Fall) show
                 significant price volatility.




                                       3             BOSTON PACIFIC COMPANY, INC.
                PRICE VOLATITLITY OCCURS IN ALL TIME
           PERIODS IN REGULATED AND UNREGULATED MARKETS


                                PJM Real-Time Market, Yearly Volatility, All Time Periods
Year   Average Price   Standard            Standard Deviation as a         Maximum Price     Maximum Price as a Percentage
                       Deviation         Percentage of Average Price                              of Average Price

1998       23.28        36.60                       157%                          999.00                4292%

1999       28.32        72.41                       256%                          999.00                3528%

2000       28.14        25.68                       91%                           801.55                2848%

2001       32.38        45.04                       139%                          932.44                2879%



                                         Cinergy Market, Yearly Peak Volatility
Year   Average Price   Standard            Standard Deviation as a         Maximum Price    Maximum Price as a Percentage
                       Deviation         Percentage of Average Price                             of Average Price
1998      56.35         207.60                      368%                       2,461.11                 4368%
1999      49.70         159.74                      321%                       1,720.71                 3462%
2000      36.75          19.35                      53%                           129.62                353%
2001      38.31          21.54                      56%                           250.00                652%




                                                                 4                    BOSTON PACIFIC COMPANY, INC.
HYPOTHETICAL PRICE SCREEN PROPOSAL EVALUATION




           Threshold Price: Prices above a
            $150/MWh.

           Reference Price: Lower of the mean or the
            median of the peak price over the
            previous 90 days.

           Ceiling Price: 300% or $100/MWh more
            than the Reference Price.




                               5              BOSTON PACIFIC COMPANY, INC.
                     PRICE SCREENS ARE JUST ANOTHER PRICE CAP
                                 CINERGY MARKET
                                                      CINERGY PEAK DAILY MARKET, YEAR 2001
                                                           BASE PRICE SCREEN PROPOSAL
        275


        250


        225


        200
                       Threshold Price
                     (De Facto Price Cap)
        175


        150


        125
$/MWh




        100                                                Reference Price

         75


         50


         25


          0
        January-01                                                                                                                     December-01
                                                                          Delivery Date

                                    Daily Volume-Weighted Average Price       Threshold Price (De Facto Price Cap)   Reference Price



                                                                                          6                          BOSTON PACIFIC COMPANY, INC.
                     PRICE SCREENS ARE JUST ANOTHER PRICE CAP
                              PJM DAY-AHEAD MARKET

                                            PJM DAY-AHEAD PEAK ENERGY MARKET, YEAR 2001
                                                     BASE PRICE SCREEN PROPOSAL
        750



        675



        600


        525



        450

                       Threshold Price
$/MWh




        375          (De Facto Price Cap)
                                                            Reference Price

        300



        225


        150



         75



          0
        January-01                                                                                                        December-01
                                                                     Time

                                             Energy Price         Threshold (De Facto Price Cap)   Reference Price




                                                                                      7                       BOSTON PACIFIC COMPANY, INC.
VARIATIONS ON PRICE SCREENS DON’T SOLVE THE PROBLEM




             Removing the Threshold Price does not solve
              the price cap problem.

             Changing the reference period from 90 days to
              30 days does not solve the price cap problem.

             Changing the reference period to 90 hours
              does not solve the price cap problem.




                                  8           BOSTON PACIFIC COMPANY, INC.
VARIATIONS ON PRICE SCREENS DON’T SOLVE THE PROBLEM-
           REMOVING THE THRESHOLD PRICE
                                            PJM DAY-AHEAD PEAK ENERGY MARKET YEAR 2001
                                               PRICE SCREEN WITHOUT THRESHOLD PRICE
        750



        675



        600



        525



        450              Ceiling Price
                     (De Facto Price Cap)
$/MWh




        375
                                                            Reference Price


        300



        225



        150



         75



          0
        January-01                                                        Time                                                December-01
                                             Energy Price         Ceiling Price (De Facto Price Cap)   Reference Price


                                                                                         9                         BOSTON PACIFIC COMPANY, INC.
        VARIATIONS ON PRICE SCREENS DON’T SOLVE THE PROBLEM-
             CHANGING THE REFERENCE PERIOD TO 30 DAYS

                                           CINERGY PEAK DAILY MARKET, YEAR 2001
                          PRICE SCREEN WITH 30-DAY REFERENCE PERIOD AND WITHOUT THRESHOLD PRICE
        275


        250


        225


        200              Ceiling Price
                     (De Facto Price Cap)
        175


        150
$/MWh




        125


        100


                                                    Reference Price
         75


         50


         25


          0
        January-01                                                    Delivery Date                                                 December-01

                                Daily Volume-Weighted Average Price       Ceiling Price (De Facto Price Cap)      Reference Price




                                                                             10                                BOSTON PACIFIC COMPANY, INC.
        VARIATIONS ON PRICE SCREENS DON’T SOLVE THE PROBLEM-
             CHANGING THE REFERENCE PERIOD TO 90 HOURS

                                           PJM REAL-TIME PEAK ENERGY MARKET, JULY TO SEPTEMBER 2001
                                                  PRICE SCREEN WITH 90-HOUR REFERENCE PERIOD

        1,000


         900


         800


         700


         600

                                                                  Price Spike Ends
$/MWh




         500          Price Spike Begins                                                                                              Ceiling Price
                                                                                                                                  (De Facto Price Cap)

         400
                                                                                                                                              Reference Price
         300                                                                                     De Facto Price Cap Reaches Maximum



         200


         100


            -
            July-01                                                                                                                              September-01
                                                                                  Time

                                                   Energy Price            Ceiling Price (De Facto Price Cap)       Reference Price


                                                                                          11                           BOSTON PACIFIC COMPANY, INC.
ACCESS TO MULTIPLE MARKETS IS THE ANSWER


      Offer consumers and suppliers alike the opportunity to build a
      portfolio of purchases or sales to match their appetite for price
      volatility.


       Day-ahead markets are less volatile than real-time
        markets.

       Block forward markets are less volatile than day-ahead
        markets.

       Long-term contracts and risk mitigation products offer
        even more protection.




                               12             BOSTON PACIFIC COMPANY, INC.
        MULTIPLE MARKETS ARE THE ANSWER
DAY-AHEAD MARKETS ARE LESS VOLATILE THAN REAL-TIME


  Comparison of Volatility Between PJM Day-Ahead and Real-Time Markets in Peak Period



Year        Season               Standard Deviation As a Percentage of Average Price

                              Day-Ahead Market                     Real-Time Market

2000         Fall                    38%                                  55%

2000       Summer                    49%                                  73%

2000        Winter                   42%                                  74%

2001         Fall                    23%                                  45%

2001        Spring                   30%                                  46%

2001       Summer                   122%                                 171%

2001        Winter                   45%                                  63%

2002        Winter                   25%                                  35%




                                              13                BOSTON PACIFIC COMPANY, INC.
          MULTIPLE MARKETS ARE THE ANSWER
BLOCK FORWARD MARKETS ARE LESS VOLATILE THAN DAY-AHEAD

 Comparison of Volatility Between Daily Block Markets and PJM Day-Ahead Market in Peak Period


                                                                   Average of Four   PJM Day-
Year    Season      ECAR       TVA       CINERGY         MAIN       Daily Block       Ahead
                                                                      Markets


2000    Summer       40%       38%          45%          41%            41%             49%

2000      Fall       30%       34%          35%          33%            33%             38%

2000    Winter       28%       32%          29%          NA            30%*             42%

2001    Spring       26%       28%          28%          25%            27%             30%

2001    Summer       45%       45%          71%          51%            53%            122%

2001      Fall       15%       16%          16%          13%            15%             23%

2001    Winter       41%       47%          45%          37%            42%             45%

2002    Winter       18%       19%          17%          17%            18%             25%



                                                    14               BOSTON PACIFIC COMPANY, INC.
                       CONCLUSION




All agree that most consumers should not face the volatility inherent in a
spot market.


     Two ways out:
     1) Intervene to artificially constrain the spot market.
     2) Assure consumers access to multiple markets.




                                      15             BOSTON PACIFIC COMPANY, INC.

								
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