Does inappropriate market power explain the increase during late 2005?
Howard Spinner is director – Division of Economics and Finance, at the Virginia State Corp. Commission. Contact him at Howard. Spinner@scc.virginia.gov. Mr. Spinner’s views are his own. They do not necessarily reflect the views of the Virginia State Corp. Commission or its staff.
Beginning around June 2005, prices in the PJM day-ahead locational market pricing (DA LMP) energy markets and real-time pricing (RT LMP) markets rose precipitously. During most of 2004 and the first five months of 2005, the PJM monthly average unweighted energy prices generally did not stray too far from $40/MWh. However, prices finished 2005 in the $60/MWh to $80/MWh range. Nevertheless, in its recently released 450-page State of the Market Report for 2005, the PJM Market Monitoring Unit (MMU) found that “Energy market results were competitive.”1 The MMU found that fuel-price increases almost completely explain the increase in LMP.
Parsing the Standard Explanations
What explains the PJM 2004/ 2005 price patterns and the run-up in the latter part of 2005? Was the run-up caused by market forces consistent with a well functioning competitive process, or is there evidence that market power inappropriately influenced market results? Does the PJM energy market, working in conjunction with other PJM markets, result in prices that are just and reasonable to both consumers and producers?