Opportunity Cost Pass-through from Fossil Fuel Market Prices to Procurement Costs of the U.S. Power Producers

This paper investigates the transmission of fossil fuel commodity spot market price changes to procurement costs of U.S. power producers. We measure and compare the speed and magnitude with which spot prices predict procurement costs using restricted access fuel price data. While natural gas spot prices are quickly reflected in procurement costs, coal spot prices offer very little predictive power to coal procurement costs. Although not causal, the empirical results also show differences across regulatory status and, for natural gas, price adjustment given positive and negative cost shocks. These findings may have implications for the electricity market deregulation literature that creates marginal cost curves as a competitive benchmark as there are significant differences in marginal cost curves constructed using spot versus the restricted receipt prices.