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JDS ---------------------- Forwarded by James D Steffes/HOU/EES on 11/22/99 10:42 AM --------------------------- UC Energy <ucenergy@socrates.berkeley.edu< on 11/16/99 03:17:50 PM To: cc: (bcc: James D Steffes/HOU/EES) Subject: Welcome to The University of California Energy Institute's POWER Working Paper Email Notification Service (PWPENS) The University of California Energy Institute's Program on Workable Energy Regulation (POWER) has distributed working papers since 1992. With this email, we are launching a service to notify interested researchers, regulators, and practitioners when new POWER working papers become available. All POWER working papers can be downloaded free of charge from the UCEI website: http://www.ucei.berkeley.edu/ucei Just follow the link to "POWER Research". Below are the titles and abstracts of the POWER working papers that have been released so far in 1999, along with links that allow you to go straight to the full working paper text (available in Adobe Acrobat format). As new POWER working papers are released, PWPENS will automatically notify you by email. If you would like to be removed from this list, please send an email to Mailto:ucenergy@socrates.berkeley.edu and include UNSUBSCRIBE in the subject heading. If you received this email indirectly and would like to be added to this emailing list, please send an email to Mailto:ucenergy@socrates.berkeley.edu and include SUBSCRIBE in the subject heading. _________________________________________________________________ N E W P O W E R W O R K I N G P A P E R S Working Paper Series of UCEI _________________________________________________________________ T I T L E S _________________________________________________________________ "Regulation and the Leverage of Local Market Power in the California Electricity Market" (September 1999) PWP-070 by James B. Bushnell and Frank A. Wolak "Electricity Markets: Should the Rest of the World Adopt the UK Reforms?" (September 1999) PWP-069 by Catherine Wolfram "Does Incentive Regulation Provide the Correct Incentives?: Stochastic Frontier Evidence from the US Electricity Industry" (September 1999) PWP-068 by Christopher R. Knittel "Understanding Competitive Pricing and Market Power in Wholesale Electricity Markets" (August 1999) PWP-067 by Severin Borenstein "Pricing Electricity for Default Customers: Pass Through or Performance-Based Rates?" (August 1999) PWP-066 by Carl Blumstein "Regulatory Imperfections in the Electricity and Natural Gas Industries: Evidence from the Pricing and Investment Decisions of Single and Multi-Product Electricity Firms" (July 1999) PWP-065 by Christopher R. Knittel "Diagnosing Market Power in California's Deregulated Wholesale Electricity Market" (July 1999) PWP-064 by Severin Borenstein, James Bushnell, and Frank Wolak "Zonal Pricing and Demand-Side Bidding in the Norwegian Electricity Market" (June 1999) PWP-063 by Tor Arnt Johnsen, Shashi Kant Verma, and Catherine Wolfram "Transmission Rights and Market Power" (November 1998) PWP-062 by James Bushnell "Power-Grid Decentralization" (March 1999) PWP-061 by Bart McGuire A B S T R A C T S _________________________________________________________________ "Regulation and the Leverage of Local Market Power in the California Electricity Market" (September 1999) PWP-070 by James B. Bushnell and Frank A. Wolak Regulators of electricity markets around the world continue to struggle with the problem of incentivizing generators whose output, due to their location in the grid, has no viable substitutes. Such generators possess 'local' market power. Since these generators also compete in broader regional markets, the actions taken to exploit their local market power can also effect market outcomes over larger areas. In California, a contract structure known as the reliability must-run (RMR) contract was developed to address the problem of local market power. However, the contract form that was in place during 1998 created serious incentive problems. We find that, during the months of June through September 1998, RMR contracts had the effect of raising overall supply bid prices from most producers, thereby leading to higher energy prices in the California regional market. Download this paper in Adobe Acrobat format: http://www.ucei.berkeley.edu/ucei/PDF/pwp070.pdf ________________________________________ "Electricity Markets: Should the Rest of the World Adopt the UK Reforms?" (July 1999) PWP-069 by Catherine Wolfram Policy makers everywhere have analyzed and tried to learn from the UK electricity restructuring, adopting some of the same market features but modifying others. Now the British government has embarked on a radical reform of their electricity industry, called the Programme to Reform the Electricity Trading Arrangements or "RETA." The changes to the electricity market are slated for September 2000. Some of the changes will bring the UK in line with what other countries have done, but other changes will be unique. Is the UK poised to leapfrog the rest of the world, adopting every market feature that has proved successful and modifying those that have not? Should the rest of the world be following the UK's lead on some of these changes? This paper argues that the answer is a decisive "no" to both questions. While proposed reforms to introduce demand-side bidding and encourage financial innovation make sense, the government's proposal to pay suppliers their bids rather than the market clearing price will not help achieve the stated goals of fostering competition and lowering prices. Download this paper in Adobe Acrobat format: http://www.ucei.berkeley.edu/ucei/PDF/pwp069.pdf ________________________________________ "Does Incentive Regulation Provide the Correct Incentives?: Stochastic Frontier Evidence from the US Electricity Industry" (September 1999) PWP-068 by Christopher R. Knittel Many policy-makers are currently weighing the advantages of deregulating electricity markets over more traditional regulatory methods. However, within this traditional regulatory environment many options exist. In particular, the use of incentive regulation programs in US electricity markets has grown during the past two decades. These programs differ in both their goals and how they attempt to meet these goals. In this paper, I discuss the wide array of programs that have been utilized, and investigate the impact of individual programs on the technical efficiency of a large set of coal and natural gas generator units. Within a stochastic frontier framework, I allow the distribution of inefficient production to be a function of the regulatory environment the plant operates under. The results suggest that while certain incentive regulations increase observed technical efficiency, others have either no effect or even lead to a reduction in efficiency. Download this paper in Adobe Acrobat format: http://www.ucei.berkeley.edu/ucei/PDF/pwp068.pdf ________________________________________ "Understanding Competitive Pricing and Market Power in Wholesale Electricity Markets" (August 1999) PWP-067 by Severin Borenstein Discussions of competition in restructured electricity markets have revealed many misunderstandings about the definition, diagnosis, and implications of market power. In this paper, I attempt to clarify the meaning of market power and show how it can be distinguished from competitive pricing in markets with significant short-run supply constraints. I also address two common myths about market power: (a) that it is present in all markets and (b) that it must be present in order for firms to remain profitable in markets with significant fixed costs. I conclude by arguing that, while a finding of market power in an industry does not necessarily indicate that government intervention is warranted, such analysis is an important part of creating sound public policy. Download this paper in Adobe Acrobat format: http://www.ucei.berkeley.edu/ucei/PDF/pwp067.pdf ________________________________________ "Pricing Electricity for Default Customers: Pass Through or Performance-Based Rates?" (August 1999) PWP-066 by Carl Blumstein California electricity consumers can choose a retail electricity service provider, but most have not done so. These consumers remain, by default, customers of the utility distribution companies (UDCs). Pricing electricity for these default customers is now an issue before the California Public Utilities Commission. In California this issue is framed largely in terms of two alternatives: pass through of the wholesale electricity price or a performance-based rate (PBR). Under the first alternative, purchase from the California Power Exchange (PX) would be mandatory; under the second, each UDC would determine where to purchase supply and each UDC's performance would be gauged by comparing its costs to the PX price. This paper identifies issues that should be addressed in choosing between the two alternatives. First the paper examines the effects of the two alternatives on electricity prices. The analysis suggests that, at least in the near term, the choice will not have much effect on prices. Next the paper looks at possible perverse incentives. A central concern here is that, if providing default service becomes profitable, UDCs might use their distribution assets to stifle competition in the retail market. Finally, the paper examines regulatory costs associated with the alternatives and concludes that regulatory costs are likely to be higher under a PBR. Download this paper in Adobe Acrobat format: http://www.ucei.berkeley.edu/ucei/PDF/pwp066.pdf ________________________________________ "Regulatory Imperfections in the Electricity and Natural Gas Industries: Evidence from the Pricing and Investment Decisions of Single and Multi-Product Electricity Firms" (July 1999) PWP-065 by Christopher R. Knittel Electricity and natural gas markets have traditionally been serviced by one of two market structures. In some markets, electricity and natural gas are sold by a dual-product regulated monopolist, while in other markets, electricity and natural gas are sold by separate single-product regulated monopolies. This paper analyzes the relative pricing and investment decisions of electricity firms operating in the two market structures. The unique relationship between these two products, namely that electricity and natural gas are substitutes in consumption and natural gas is an input into the generation of electricity, allows me to gain inferences regarding the efficacy of regulation in both the electricity and natural gas industries. The results imply that both electricity prices and reliance on natural gas generation are higher in a dual-product setting, both suggestive that regulators respond to the relative incentives of electricity and natural gas firms. Download this paper in Adobe Acrobat format: http://www.ucei.berkeley.edu/ucei/PDF/pwp065.pdf ________________________________________ "Diagnosing Market Power in California's Deregulated Wholesale Electricity Market" (July 1999) PWP-064 by Severin Borenstein, James Bushnell, and Frank Wolak Effective competition in wholesale electricity markets is the cornerstone of the deregulation of the electricity generation industry. We examine the degree of competition in the California wholesale electricity market during June-November 1998 by comparing the market prices with estimates of the prices that would have resulted if all firms were price takers. We find that there were significant departures from competitive pricing and that it was most pronounced during the highest demand periods. Overall, this raised the cost of power purchases by about 22% above the competitive level. We also explain why the prices observed cannot be attributed to competitive peak-load pricing. Download this paper in Adobe Acrobat format: http://www.ucei.berkeley.edu/ucei/PDF/pwp064.pdf ________________________________________ "Zonal Pricing and Demand-Side Bidding in the Norwegian Electricity Market" (June 1999) PWP-063 by Tor Arnt Johnsen, Shashi Kant Verma, and Catherine Wolfram PWP-063 analyzes prices in the day-ahead electricity market in Norway. We consider the hypothesis that generators are better able to exercise market power when transmission constraints bind, resulting in smaller, more-concentrated markets. We test this hypothesis by comparing equilibrium prices across periods with different demand elasticity and with and without binding transmission constraints. We find some empirical evidence that prices in local markets are higher during constrained periods when demand is less elastic. Download this paper in Adobe Acrobat format: http://www.ucei.berkeley.edu/ucei/PDF/pwp063.pdf ________________________________________ "Transmission Rights and Market Power" (November 1998) PWP-062 by James Bushnell Stakeholders throughout the United States are currently working to reach a consensus on the structure and protocols that will define tradable transmission rights in the context of the various wholesale electricity markets, and their associated Independent System Operators (ISOs), now forming in different regions of the U.S. Much of the discussion has focused on the relative merits of physical transmission rights in comparison with financial transmission rights. To the extent that transmission rights provide their owners with an added level of influence or control over transmission markets, some of the historical industry concerns over vertical market power may need to be revisited. In this paper, I discuss some of the potential concerns over transmission rights and their use for the exercise of various forms of market power. Download this paper in Adobe Acrobat format: http://www.ucei.berkeley.edu/ucei/PDF/pwp062.pdf ________________________________________ "Power-Grid Decentralization" (March 1999) PWP-061 by Bart McGuire Most of the literature concerned with decentralized operations in power grids has focussed on partitioning systems initially into two main parts, the transmission system and the market of users (the "ISO" and the "PX"), and asking how the actions of these two subgroups can be properly coordinated. While a number of studies have gone on to examine decentralized operations in the user market of producers and consumers, little attention has been given to how the operation of the transmission system itself might be decentralized. In this paper we propose an organizational procedure for coordinating the actions of the managers of given subgrids of a larger system. Non-invasive price-quantity dialogs are defined that, under fairly general circumstances, bring about perfect short-run coordination of the aggregate grid. Download this paper in Adobe Acrobat format: http://www.ucei.berkeley.edu/ucei/PDF/pwp061.pdf
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