Mitigating price spikes in wholesale markets through market-based pricing in retail markets

Electricity Journal

Volumn 13, Issue 3, 2000, Pages 13-23

  Caves, Douglas ^a   Eakin, Kelly ^a   Faruqui, Ahmad ^b  

^a Christensen Associates   (United States)

^b ELECTRIC POWER RESEARCH INSTITUTE   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

COMMERCE; SALES;

COST EFFECTIVE; PRICE RELIEF; PRICE SPIKE; PRICE STABILITY; RETAIL MARKET; WHOLESALE MARKETS;

COST EFFECTIVENESS;

EID: 0034164836     PISSN: 10406190     EISSN: None     Source Type: Journal    
DOI: 10.1016/S1040-6190(00)00092-0     Document Type: Article

References (7)

1. 1. FERC, The Causes of the Wholesale Electricity Pricing Abnormalities in the Midwest during June 1998 (Sept. 22, 1998).
2. 2. Block That Spike: Deflecting Wholesale Price Volatility with a Diversified Retail Portfolio, Inside Pricing, vol. 2, no. 1 (1999), TR-110271-V1-P2, Electric Power Research Institute, Palo Alto, CA.
3. 3. The cost of the guaranteed price insurance is customer-specific. The cost depends upon the volatility in wholesale price, the volatility in the customer's usage, and how these uncertainties are correlated. EPRI's Product Mix Model is a retail product and pricing design tool that can be used to calculate the actuarially fair price of a guaranteed price contract. More detail on the costing of guaranteed price contracts and other retail energy products can be found in Pricing Energy Using the Product Mix Model: A Primer for Retail Energy Companies (Electric Power Research Institute, Sept. 1999).
4. 4. Addition of capacity and improving transmission capabilities and rules may indeed be warranted. Our point here is that a first step is to get a dysfunctional market functioning and then make rational market-based decisions on generation and transmission capacities, and market rules and regulations.
5. 5. See S. D. Braithwait, Residential TOU Price Response in the Presence of Interactive Communication Equipment, in Pricing in Competitive Electricity Markets (A. Faruqui and K. Eakin, eds., Amsterdam: Kluwer Academic Press, in press).
6. 6. The 8,760 hours are distributed as follows: 1 hour at $10,000, 1 hour at $7,500, 2 hours at $5,000, 6 hours at $2,500, 21 hours at $1,000, 29 hours at $500, 100 hours at $100, 400 hours at $50, 1,500 hours at $30, 2,260 hours at $20, 4,040 hours at $15, and 400 hours at $10.
7. 7. The 50 percent split-the-difference approach may not attain the profit-maximizing sharing rule. The profit-maximizing markup and markdown would also have to consider the participation rate of the customers offered this alternative. A larger markup/markdown would decrease adoption of this product. To find the optimal profit-sharing arrangement, one can use a tool such as the Product Mix Model that integrates a price response model with a customer choice model.