Contract Parameters’ Impacts on Coal Prices

The use of long-term contracts in the procurement of coal for electricity generation iscommon. The data that is observed from contracts and their transactions are fromdifferent levels of the pricing process. Contracts contain the parameters by which allfuture deliveries are structured, specifying the length of the agreement and acceptablecoal attributes. Based on these parameters, a price is later determined for successive coaldeliveries and the transaction occurs. This data structure fits well into multi-levelmodels, where each level of the process is empirically estimated. A random interceptmodel is estimated where the first level is a hedonic model of coal prices. The contractthat initiates the delivery is used to connect the two levels of the model. In the secondlevel, contract coefficients from the first level are regressed on contract parameters todetermine their impact on how coal is priced. Results find that many contract parametersare statistically significant in the price of coal.