A news release recently put out by the New York ISO – the organization that manages the electric transmission grid and the integrated wholesale power market in the state – observes that electric power prices are dropping along with fuel prices. The statement noted that power prices had increased as natural gas prices increased earlier this year, too.
“The analysis shows that wholesale prices appropriately reflect the cost of fuel in the production of power,” said Stephen G. Whitley, NYISO President and CEO. “Earlier this year, when gas prices went up, power prices went up. As the cost of natural gas has come down, the cost of power has come down with it.”
“This illustrates one of our concerns about fuel diversity. An overdependence on one fuel source can have negative impacts on reliability, price, and environmental sustainability.”
Okay, we’ll just ignore the non sequitur regarding “our concerns about fuel diversity,” and focus on the fuel and power prices. This relationship isn’t exactly news by the way, I’d expect you would find the same fundamental relationship in every other RTO- or ISO-managed power market. In fact, the same relationship would prevail in regulated markets, as well, since law and policy provide that regulated utilities can recover their costs through their rates. (For example, this recently published study of power prices in the Western United States finds a strong relationship between wholesale prices and natural gas prices.)
The more interesting issue concerns how quickly input costs become reflected in power prices seen by retail consumers. After all, price signals can best facilitate economical use of resources if they can reflect current, not past, levels of scarcity. If a regulated utility rate gets bumped up next year because fuel prices were high last year, consumers are not getting the right information.
Also interesting in the NYISO’s news release are the reports of power prices net of fuel price changes. NYISO said, “Since 2000, fuel adjusted wholesale electricity costs have decreased at least 11%, as of August 2008. This amounts to annual cost reductions of approximately $1.2 billion in today’s dollars.” Estimating the “fuel adjusted wholesale electricity cost” can be a tricky business, and I’d want to examine the methods used before accepting their report at face value. But that said, it isn’t particularly hard to believe that power costs in New York are down by at least 11 percent. The system has seen a number of transmission expansions, particularly into Long Island, and generation additions in New York City among other places. Both of these developments contribute greatly to a more efficient use of resources, since the alternative to new generation or importing cheaper power from elsewhere is to rely on older, less-efficient generation in these highly populated parts of the state. The NYISO market design has undergone a number of improvements — scheduling and using reserves better, for instance — over the last eight years as well.
Of course, the NYISO is talking about wholesale prices, but the ultimate test are the price signals received by consumers. A year ago, David Cay Johnston at the New York Times reported a couple of times (Sept 4, Nov 6) on reports by Power in the Public Interest comparing prices in restructured and regulated markets. My view at the time is that the trend of rising fuel costs put restructured markets at a disadvantage in such comparisons, since I believed that restructured markets should be quicker than regulated markets to reflect input cost changes in retail prices. I wrote, “An interesting comparison will emerge when fuel costs fall, my expectation is that deregulated states should see prices fall faster while regulated states will continue to increase before they, too, begin to fall.”
The most recent reports on the Power in the Public Interest site are from February, and they rely on EIA data through October 2007. Now that fuel prices have dropped, I wonder what the next update by Power in the Public Interest will show?