NCPA - National Center for Policy Analysis

Unique Pricing Method Will Cost Northeast Electricity Consumers

March 20, 2000

Due to the spike in oil prices and a peculiarity in how electricity prices are set, consumers of electricity in northeastern states may be socked with substantial hikes in their bills this summer.

  • New Englanders are particularly vulnerable, since one-third of their electricity comes from oil-fired plants -- compared to 0.2 percent for residents of, for example, West South Central states.
  • Electricity markets deregulated in the past two years use what's called a "uniform price" method to set prices.
  • That means that central dispatchers first tap generators offering to sell electricity at the lowest prices, and then ever-more-costly generating plants are added in until enough plants are operating to satisfy demand.
  • Power purchasers pay all bidders the price charged by the last, clunkiest oil-fired plant called into service.

So efficient plants will reap substantial profits because they will be paid as though they were burning high-priced oil -- even though most will be using cheaper coal or natural gas.

Some economists believe uniform pricing encourages generators to bid their lowest prices, hoping to be picked from a field of competitors. In the long run that should help consumers. But in the near term oil's disproportionate influence can be painful.

Source: Rebecca Smith, "Oil Spike May Spark Power-Price Surge," Wall Street Journal, March 20, 2000.


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