Tim Mount is a Professor of Resource Economics at Cornell University and former Director of the Cornell Institute for Social and Economic Research. He has done extensive research on a wide range of issues relating to energy and the environment. He is a pioneer in the use of econometric analysis for energy demand.
For 30 years, Dr. Mount has conducted theoretical and applied research on the use of econometric methods to explain and simulate behavior in the utility industry. These methods include the development of complex utility simulation models as well as the integration of environmental models with energy models. More recently, he has studied price volatility in competitive markets. Dr. Mount holds a Ph.D. from the University of California at Berkeley.
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Publication year: 2000
In the first part of the paper, daily price data for the past three summer seasons in the PJM wholesale market are used to estimate a stochastic regime switching model. These data show that the average price in 1999, when market-based offers were allowed, was twice as high as it was in the previous two seasons when offers had to be cost-based. The primary cause was that the price spikes in 1999 were much higher than they were in 1997-98, but not more frequent. The second part of the paper derives an optimum set of offers for individual suppliers endowed with different levels of market power. A supplier controlling generation equivalent to 20% of the expected load in the market is shown to submit offers that are up to 80% higher than the true cost. Nevertheless, these offers are still much lower than the offers that set the high prices in the PJM market. The explanation is that suppliers with sufficient market power are indifferent to whether or not marginal units are dispatched, and they can set high offers on these units without forfeiting expected profits.
The author wishes to thank Yumei Ning for research assistance in estimating the price models in Section 2, and Jonell Blakeley and Dan Chapman for help preparing the manuscript. All remaining errors are the responsibility of the author.
In the first part of the paper, daily price data for the past three summer seasons in the PJM wholesale market are used to estimate a stochastic regime switching model. These data show that the average price in 1999, when market-based offers were allowed, was twice as high as it was in the previous two seasons when offers had to be cost-based. The primary cause was that the price spikes in 1999 were much higher than they were in 1997-98, but not more frequent. The second part of the paper derives an optimum set of offers for individual suppliers endowed with different levels of market power. A supplier controlling generation equivalent to 20% of the expected load in the market is shown to submit offers that are up to 80% higher than the true cost. Nevertheless, these offers are still much lower than the offers that set the high prices in the PJM market. The explanation is that suppliers with sufficient market power are indifferent to whether or not marginal units are dispatched, and they can set high offers on these units without forfeiting expected profits.
The author wishes to thank Yumei Ning for research assistance in estimating the price models in Section 2, and Jonell Blakeley and Dan Chapman for help preparing the manuscript. All remaining errors are the responsibility of the author.