Effective monitoring and mitigation in the organized wholesale electric power markets

The organized wholesale electric power markets in the United States are characterized by structural market power, and would not produce competitive results absent administrative intervention. Market power mitigation is a fundamental and permanent part of the market design for the organized wholesale electricity markets. Market power mitigation is essential to FERC’s policy of relying on competition to regulate electric wholesale power prices, consistent with its mandate under the Federal Power Act. Controversy has arisen about how to ensure that the markets clear on the basis of offers that have been determined to be competitive. Specifically, the issue is what institution and function is best situated to provide the initial critical determination about whether a participant’s offer is competitive. Despite recent clarification of FERC policies on the market monitoring function, the roles of market administrators and market monitors are a potential source of confusion and counterproductive institutional conflict. The FERC should refine and clarify its policy in this area by according exclusive responsibility to institutional, independent market monitors to monitor participants’ conduct and the potential for the exercise of market power through ex ante review of cost-based offers used in market power mitigation, subject to review by FERC.     

Trouble in Market Paradise: Development of the Regional Transmission Operator

Regional transmission organizations (RTOs) have evolved from “power pool” arrangements between utilities to complex organizations that operate a region’s transmission system and power markets. These RTOs are administered with only peripheral public input. This paper reflects on how RTOs, as a result, have developed very complex market structures that few can or do understand. An RTO’s capacity construct is used to illustrate the point of this complexity and ad hoc nature. The paper also discusses reforms that are needed to align the RTOs behavior with Harry M. Trebing’s public interest regulatory philosophy.     

Fuel inventory and price relationships in the U.S. electric power sector under regulatory and market change

Long-run relationships among coal inventories at U.S. electric power plants, corporate bond rates and coal, natural gas, and electricity prices are estimated over the period July 1976 to October 2014. Tests for constancy of the long-run relationships show periods of instability which coincide with major regulatory events in the electric power sector. Deregulation of the natural gas and electricity markets are likely sources of instability for the period mid-1994 to mid-2001. Additionally, inventory behavior may have had a smoothing effect over instability caused by natural gas prices during the recent U.S. shale boom. Policy makers should be aware that altering the regulatory environment can result in considerable fluctuations in how firms’ inventory decisions interact with input and output markets and opportunity costs in the long run.     

An econometric assessment of telecommunications prices and consumer surplus in Mexico using panel data

We analyze telecommunications prices in Mexico by using a panel data of countries similar to Mexico to estimate demand models for mobile and fixed-line telecommunications. We find that Mexico’s actual mobile and fixed-line prices are below the predicted prices based on similar countries’ prices. Mexican consumers are paying lower prices than what one would expect based on comparisons of comparable countries. We calculate that in 2011 Mexican consumers received at least $4–$5 billion (USD) in consumer surplus from these lower mobile prices and in 2010 they received over $1 billion (USD) in consumer surplus from these lower fixed-line prices. These findings are in contrast to the general perception that concentrated telecommunications markets in Mexico are resulting in high prices and harming consumers.     

Can capacity markets be designed by democracy?

In the United States, Regional Transmission Organizations (RTOs) operate the power grid serving nearly 70% of electricity customers and are critical organizations for ensuring reliable system operations and facilitating the integration of new technologies and market participants. RTOs are designed to be stakeholder-driven organizations, with rules and policies crafted through a highly participatory process. While the decisions that RTOs make have implications for industry, society and the environment, their decision processes have not been modeled in any systematic way. In this paper, we develop a modeling framework for the stakeholder process of PJM, an RTO serving thirteen states plus the District of Columbia, adapting some of the seminal literature from political science and political economy on the theory of voting systems. This modeling framework can generate predictions of stakeholder process outcomes, identify strong coalitions among stakeholders and identify shifts in political power in the formulation of RTO market rules. We illustrate this analysis framework using a detailed data set from stakeholder deliberations of capacity market reform in PJM. Our model predicts that the current structure of the stakeholder process in PJM makes the passage of capacity market reforms through the stakeholder process virtually impossible because it creates strong coalitions that would favor or oppose changes to capacity market rules. In the capacity market case, we also identify a small subset of voters that act as swing voters and confirm that political power is shifted to these voters by deviations from otherwise strong coalitions and abstentions from the voting process altogether. Our framework represents the first attempt to model the decision-making behavior of RTOs in any systematic way, and points towards emerging research needs in evaluating the governance structure of RTOs.     

Determinants of the premium in forward contracts

Whilst the benefits of forward contracting for goods and services have been extensively researched in terms of mitigating market power effects in spot markets, we analyse how the risk in spot price formation induces a counteracting premium in the contract prices. We consider and test a wide-ranging set of propositions, involving fundamental, behavioural, dynamic, market conduct and shock components, on a long data set from the most liquid of European electricity forward markets, the EEX. We show that part of what is conventionally regarded as the market price of risk in electricity is actually that of its underlying fuel commodity, gas; that market power has a double effect on prices, insofar as it increases spot prices and induces a forward premium; that oil price sentiment spills over and that the premium reacts to scarcity and the higher moments of spot price uncertainty. We observe that considerations of the scale and determinants of the forward premium are at least as important as the market power effects in spot market price formation when evaluating the efficiency of wholesale power trading.     

Market concentration and competition in OECD mobile telecommunications markets

This study analyses the progress of market concentration in OECD member states’ mobile telecommunications markets and evaluates the relationship between market concentration and performance. Using annual panel data from 24 OECD member states for the 1998–2011 period, the study estimates regression equations for market concentration, mobile prices and profits. The empirical results indicate that the more concentrated the mobile market, the higher the prices and profits, providing support for the market power hypothesis. If this hypothesis holds, then market concentration can be a useful indicator of market performance. On the other hand, the applicability of the hypothesis is unclear for the second half of the sample period. The results provide evidence that regulatory policies influence the structure and performance of mobile markets.     

The Impact of the EU ETS on Prices,Profits and Emissions in the Power Sector: Simulation Results with the COMPETES EU20 Model

This paper analyses the impact of the EU Emissions Trading Scheme (ETS) on electricity prices, in particular on wholesale power markets across the EU. To study this impact, this paper discusses the major results of a bottom-up modelling analysis of the implications of emissions trading for the performance of the wholesale power market in 20 European countries. The analyses show that a significant part of the costs of (freely allocated) CO₂ emission allowances is passed through to power prices, resulting in higher electricity prices for consumers and additional (‘windfall’) profits for power producers, even in cases of full auctioning. In addition, they show that the ETS-induced increases in power prices depend not only on the level of CO₂ prices but also on the structure of the power market, i.e., the incidence of market power, and the price responsiveness of power demand. Finally, the analyses show that the internalization and pass-through of carbon costs are crucial elements in a policy regime to reduce CO₂ emissions by both changing the mix of power generation technologies and lowering total electricity demand.     

The Market Response to Restructuring: A Behavioral Model

In this paper, I model the behavior of producers, consumers, and regulators in deciding to restructure the electricity sector and estimate their equilibrium response to the newly restructured market. The empirical model consists of simultaneous price and restructuring equations with endogenous switching and cross-equation correlation in the errors. This approach allow me to account for the influence of special interest groups and potential selection bias in which countries choose to restructure. I estimate distinct shifts from restructuring in both industrial and residential prices, and for English speaking, Scandinavian, and South American countries. I find that in all countries, it is industrial consumers that experience the price effects of restructuring, while residential consumers remain largely unaffected. In English speaking and Scandinavian countries, industrial prices decrease while in South American countries they increase. This is consistent with the political–economic environment in which these countries have considered restructuring.     

Do regional house prices converge or diverge in China?

This paper aims to test whether the regional house prices are convergent or divergent in China using a monthly panel data set of China’s 70 large and medium-sized cities from July 2005 to December 2010. This issue is closely related to understanding the efficiency of the country-level housing policies made by China’s central government. The test results suggest that the regional house prices in China are generally divergent, and thereby the country-level policies may be inefficient since they do not explicitly take the strong heterogeneity of China’s regional housing markets into consideration. As a consequence, it may be better for China’s central government to further decentralize and devolve its governance toward the housing market to the local governments.     

Renewable electricity supply,infrastructure, and gains from international trade in electric current

113 countries report producing electricity from renewable sources and participate in the global energy transition. On the one hand more cables have been built recently; but on the other hand some countries are blocking electricity shocks technologically as supply shocks undermine the insurance function of their markets. This paper shows through a dynamic panel data analysis that the higher share of renewables in electricity production has increased imports and decreased exports of electric currents. This shows that trade currently helps dealing with fluctuations of supply, but temporary losses for recipients of shocks may require payments to keep the borders open. Keywords: Gains from trade, electric current, gravity, infrastructure.     

General equilibrium, wariness and efficient bubbles

Wary consumers overlook gains but not losses in remote sets of dates or states. As preferences are upper but not lower Mackey semi-continuous, Bewley?s (1972) [4] result on existence of equilibrium whose prices are not necessarily countably additive holds. Wariness is related to lack of myopia and to ambiguity aversion (and, therefore, to Bewley?s (1986) [6] work on Knightian uncertainty). Wary infinite lived agents have weaker transversality conditions allowing them to be creditors at infinity and for bubbles to occur in positive net supply assets completing the markets. There are efficient allocations that can only be implemented with asset bubbles.     

The effectiveness of FERC’s transmission policy: is transmission used efficiently and when is it scarce?

We investigate the impact of FERC’s policy to create Independent System Operators (ISOs) that independently manage regional electricity transmission resources and institute regional electricity exchange markets. Our analysis examines how the formation of the PJM ISO affected inter-regional electricity trading costs during the period from March 1997 to June 2002. We also examine how ISO formation affected the likelihood of encountering “congestion” in trading electricity between PJM and adjoining regions (particularly the New York ISO and the more loosely organized East Central Area of Reliability (ECAR)). In addition, our analysis estimates the marginal economic value of increased inter-regional transfer capability.      

The impact of the market transparency unit for fuels on gasoline prices in Germany

Increasing horizontal as well as vertical transparency in oligopolistic markets can be advantageous for consumers, due to reduced search costs. However, market transparency can also affect incentives to deviate from collusive agreements and the punishment by rival firms in the market. Using a panel of 27 European countries, we analyse the impact of increased market transparency via the introduction of a market transparency unit for fuels in Germany. Applying a difference-in-differences approach, we find evidence that both gasoline and diesel prices have increased. While consumers may be better off using a retail price app for fuels, gas stations are also able to compare prices at almost no cost.     

Do German renewable energy resources affect prices and mitigate market power in the French electricity market ?

Several empirical studies show that renewable energy sources such as wind and solar power, typically supplied at low marginal cost, can cause electricity market prices to fall. Recent theoretical research and simulations also highlight the link between the integration of renewable energy and market performance in an oligopolistic energy market. This article looks at these dynamics in the context of cross-border effects between two highly interconnected electricity markets, France and Germany. Using a rich panel dataset for hourly data from November 2009 to July 2015, I estimate the impact of German wind and solar power production on both prices and market power in the French wholesale market. The findings highlight the importance of coordinating energy policies via joint renewable energy support schemes among interconnected European electricity markets.     

Do changes in the fundamentals have symmetric or asymmetric effects on house prices? Evidence from 52 states of the United States of America

Time-series studies that have tried to establish the long-run relationship between house prices and economic fundamentals have been criticized due to low power of their cointegration tests. On the other hand, those who have used panel data and panel tests to increase the power have found mixed results. Both groups have assumed that changes in the fundamentals have symmetric effects on house prices. In this article, we use nonlinear ARDL approach to cointegration and error-correction modelling and quarterly data from each of the states in the US to show that changes in the fundamentals have asymmetric effects on house prices, in the short run as well as in the long run. Cointegration between house prices and fundamentals is established in 30 states and in District of Columbia.     

ELECTRIC POWER DEREGULATION: BACKGROUND AND PROSPECTS

The incentive failures of rate-of-return regulation are well known and thus raise the question of whether to deregulate electric power. The development of long-distance transmission and of alternative power sources in networks has spawned several institutions that would or could allow markets to substitute for such regulation. These include long-term contract sales, spot power exchange, contract power pooling, shared facility ownership, and economic dispatch. Because of the current surplus of power, the existence of such institutions has caused increasing competition in the electric power market and has catalyzed the movement to deregulate generators from state authority and to restructure utility assets. By encouraging this movement, regulators can further the discipline that markets already exert on prices and costs. By making counterproposals to the utilities, regulators can influence asset restructuring so that some of the capital gains inherent in such restructuring can be shared with consumers in the form of rate relief. Finally, for the future, the cotenancy agreement—which is antitrust supervised and competitively ruled—has promising possibilities for deregulating transmission and distribution.     

Price Discrimination, Regulation and Entry in the UK Residential Electricity Market

The residential electricity market in Great Britain has recently been opened to competition and is served by 14 regional incumbents, and up to 15 entrants in each area. This study finds that the incumbents' regulated prices are discriminatory between consumers using different payment methods, and that firms are practising third‐degree price discrimination between areas. The authors discuss the implications for regulatory policy both in the UK and in other countries where electricity markets are being deregulated.     

The Effects of Rivalry with Price Regulation of Electric Power Generation

This article examines how rivalry between an electric utility and nonutility generators (NUGs) affects electricity prices, market structure and welfare. If a utility cannot break even financially when outputs are priced at marginal cost, then the Ramsey optimal price paid by a utility purchasing electricity from a NUG should be below avoided cost, in contrast to the requirements of PURPA. The analysis also compares FDC, Residual and Ramsey prices for a utilitys electricity sales. It illustrates how FDC prices may force a utility to exit relatively competitive business markets, eliminating any benefits of economies of scope from serving both business and residential customers.