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1
Market Structure and Competition:
A Cross Market Analysis of the U.S. Electricity Industry
Jim Bushnell, University of California Energy Inst,
Erin Mansur, Yale University, and Celeste Saravia, University of California at
Berkeley
2
3
Market Comparisons• Markets have experienced very
different levels of market power– Counter-factual competitive prices can tell
us the degree of market power
• But why have they performed differently?
• Market Structure vs. Market Design– Markets have important differences in both
structure and design
(cont.)
4
Market Comparisons• Market Structure vs. Market Design (cont)
– Much more policy emphasis on design• FERC “standard market design” (SMD) based upon
perception of a superior PJM design• FERC is willing to concede intervention in market
structure if firms are willing to submit to a SMD-like market design
• Role of Vertical Arrangements– Almost no policy discussion of impact of retail
policies on vertical arrangements – How much do spot market rules impact prices in
markets with significant forward arrangements?
5
Green and Newbery (1992)
60
$
Q
Dmax
Dmin
Cournot
competitive
Green and Newbery (1992)
7
0
$Dmax
DminBound on NCEquilibriumoutcomes
Cournot
competitive
Bounds on Non-Cooperative Outcomes
Qsupplied
8
0
$
Qsupplied
Dmax
DminBound on NCEquilibriumoutcomes
Cournot
competitive
Contracts Reduce Bounds
Contract Q
9
0
Dmax
Dmin Bound on NCEquilibriumoutcomes
Cournot
competitive
Contract QQsupplied
$
“Over-Contracting’ can drive prices below competitive
levels
10
Table 1: Panel A, California
Firm Characteristics Output Output Load Load Firm Fossil Water Nuclear Other Max Share Max Share PG&E 570 3,878 2,160 793 7,400 17% 17,676 39% AES/Williams 3,921 - - - 3,921 9% - - Reliant 3,698 - - - 3,698 8% - - Duke 3,343 - - - 3,343 8% - - SCE - 1,164 2,150 - 3,314 8% 19,122 42% Mirant 3,130 - - - 3,130 7% - - Dynegy/NRG 2,871 - - - 2,871 6% - - Other 6,617 5,620 - 4,267 16,504 37% 9,059 20% Total 24,150 10,662 4,310 5,060 44,181 45,857
11
Table 1: Panel B, New England
Firm Characteristics Output Output Load Load Firm Fossil Water Nuclear Other Max Share Max Share Northeast Util. 3,884 1,406 - 175 5,465 21% 7,560 34% PG&E N.E.G. 3,264 1,152 - 165 4,581 18% 4,440 20% Mirant 1,310 - - 16 1,943 8% - - Sithe 1,904 - - - 1,904 7% - - FP&L Energy 970 365 - - 1,335 5% - - Wisvest 980 - - - 980 4% 1,200 5% Duke Energy 474 - - 13 487 2% - - Other 2,291 1,663 4,359 819 9,132 35% 9,281 41% Total 17,276 3,180 4,359 1,013 25,828 22,481
12
Table 1: Panel C, PJM
Firm Characteristics Output Output Load Load Firm Fossil Water Nuclear Max Share Max Share Public Service 6,760 - 3,510 10,270 18% 8,947 17% PECO 3,682 1,274 4,534 9,490 17% 4,551 9% GPU, Inc. 7,478 454 1,513 9,445 17% 7,602 15% PP&L Inc. 6,102 148 2,304 8,554 15% 5,120 10% Potomac Electric 6,507 - - 6,507 11% 5,378 10% Baltimore G & E 3,945 - 1,829 5,774 10% 5,792 11% Delmarva P & L 2,458 - - 2,458 4% 3,103 6% Edison 2,012 - - 2,012 4% 0 0% Atlantic City 1,309 - - 1,309 2% 2,224 4% Other 428 439 - 867 2% 8,998 17% Total 40,681 2,316 13,690 56,685 51,714
13
Methodology
• Simulate prices under:– Price taking behavior– Cournot behavior– Cournot with vertical arraignments
, c tt i,t -i,t i,t i,t i,t i,t
, i,t
p=p (q ,q )+[q -q ]· -C (q ) 0
qi t
i tq
ci,tq
• Data on spot price, market demand and costs.
• The first order condition is:
14
Modeling Imports and Fringe
• Source of elasticity in model• We observe import quantities, market price,
and weather conditions in neighboring states• Estimate the following regression using 2SLS
(load as instrument)9
6 1
7 24
2 2
ln( )S
fringet i it t s st
i s
j jt h ht tj h
q Month p Temp
Day Hour
• Estimates of price responsiveness are greatest
in California (>5000) relative to New England (1250) and PJM (850)
15
16
17
18
19
20
Price comparison on peak
PriceCaliforni
a
New England PJM
Actual 43 55 97
Competitive 35 41 37
Cournot 45 59 115
Cournot (“n.v.a.”)
Same 303 999
21
Price comparison off peak
PriceCaliforni
a
New England PJM
Actual 24 29 24
Competitive 26 32 28
Cournot 30 30 37
Cournot (“n.v.a.”)
Same 85 711
22
Policy and Research Implications
• Monitoring/Policy-making overly emphasizes spot market design and regulation– More focus on the contracting process is needed– This does not mean we should mandate contracting– We need to better understand how contract markets
can/do work in various markets– How do contract forms (futures, two-way “contracts
for differences”, options, etc.) matter?
• Prospective market power analysis needs to think about how vertical arrangements and contracting will effect outcomes
23
Caveats• Market structure during this period is exogenous• We measure only one aspect of market performance• We do not observe all contracts
– Have data on most long-term retail arrangements– Any ‘missing’ contracts likely to cause Eastern markets to
look worse relative to Cournot than California
• Prices and costs do not reflect transmission congestion– Not a real big issue in 1999
• Production costs ignore non-convexities– Start-up costs, ramp rates, etc.– Will bias costs upward off-peak, downward on-peak– Competitive estimates much more sensitive to cost bias than
Cournot.