Chi-Keung Woo

Costs of service disruptions to electricity consumers

After reviewing 16 recent studies, we 1.(i) identify the general approaches used to estimate customer outage costs,2.(ii) ascertain the relative merits of each approach, and3.(iii) determine the extent to which existing studies can provide accurate and meaningful estimates. We present cost estimates on a common denominator, explain variations in the results, and suggest areas for future research.

What went wrong in California's electricity market?

The California electricity market reform promised to deliver reliable service at low and stable prices. Frequent capacity shortages and the ensuing rolling black-outs, price spikes, and large price volatility since Summer 2000 raise a simple but substantive question: what went wrong? The answer to this question will help countries contemplating electricity market reform not to commit similar mistakes. We find the answer by identifying the major factors that have turned the California dream into a nightmare. Such factors include poor market design, market power, sustained demand growth not matched by new capacity, rising marginal cost, and financial insolvency. Proposed remedies include an alternative market settlement process, long-term contract, fast licensing and siting process for new generation and transmission, conservation and energy-efficiency, distributed resources, rate options, and debt restructuring. The California experience suggests that a reversible regulatory reform is a safe alternative to an irreversible market reform.

Efficient electricity pricing with self-rationing

Random rationing of generation capacity is inefficient because of the externality caused by an unpriced shortage. We eliminate the inefficiency by introducing a market for capacity via a self-rationing scheme that reflects a consumers willingness-to-pay for electricity service. This scheme defines the notion of service reliability. We derive the optimal pricing and capacity planning rules under asymmetric information and demand uncertainty. The major findings are: (1) marginal cost pricing is ex ante efficient; (2) an electric utilitys installed capacity should equal the total subscription for capacity; (3) the electric utility breaks even with certainty; and (4) partial service curtailment is ex post efficient if consumer preference is weakly separable.

Cross hedging and forward-contract pricing of electricity

We consider the problem of an electric-power marketer offering a fixed-price forward contract to provide electricity that it purchases from a potentially volatile and unpredictable fledgling spot energy market. One option for the risk-averse marketer who wants to hedge against the spot-price volatility is to engage in cross hedging to reduce the contracts profit variance, and to determine the forward-contract price as a risk-adjusted price — the sum of a baseline price and a risk premium. We show how the marketer can estimate the spot-price relationship between two wholesale energy markets for the purpose of cross hedging, as well as the optimal hedge and the forward contracts baseline price and risk premium.

The Impact of Wind Generation on Wholesale Electricity Prices in the Hydro-Rich Pacific Northwest

Extant literature documents that wind generation can reduce wholesale electricity market prices by displacing conventional generation. But how large is the wholesale price effect of wind generation in an electricity market dominated by hydroelectric generation? We explore this question by analyzing the impact of wind generation on wholesale electricity prices in the Pacific Northwest region of the United States. This hydro-rich system tends to be energy-limited, rather than capacity-constrained, with its marginal generation during the hydro runoff season often a hydro unit, instead of a natural-gas-fired unit. We find that increased wind generation reduces wholesale market prices by a small, but statistically-significant, amount. While a hydro-rich system can integrate wind generation at a lower cost than a thermal-dominated region, the direct economic benefits to end-users from greater investment in wind power may be negligible.

Reliability Differentiation of Electricity Transmission

In many jurisdictions, electric utility restructuring has included the creation of an independent system operator (ISO) to dispatch generation, establish the market-clearing price, and allocate limited transmission capacity among users. This paper differentiates reliability through rate unbundling. We propose a capacity reservation tariff (CRT) to induce the users to self-select their preferred levels of reliability. Based on these self-selected reliability levels, the ISO can efficiently allocate limited transmission capacity. Our proposed CRT can be a practical solution to the transmission congestion problem faced by the California ISO in the implementation of retail access.

Variations in area- and time-specific marginal capacity costs of electricity distribution

Marginal costs of electricity vary by time and location. Past researchers attributed these variations to factors related to electricity generation and transmission. Those authors, however, did not fully analyze the large variations in marginal distribution capacity costs (MDCC) by area and time. Thus, the objectives of this paper are: (1) to propose a method to estimate MDCC; (2) to demonstrate the significant intra- and inter-utility variations in MDCC; and (3) to discuss the usefulness of these cost estimations in integrated resource planning.

Status quo bias in the measurement of value of service

Abstract Notions of customer value of service have become increasingly important in utility resource planning, capacity expansion and rate making. In order to design and implement value of service policies, utilities have come to rely upon a variety of customer surveys. Unfortunately, theoretical and empirical analysis suggests that responses to such surveys may be seriously distorted by ‘status quo’ effects. Using both regression and choice-theoretic frameworks, we empirically investigate whether status quo effects arise in a contingent valuation survey addressing the value of service reliability for residential customers. We find substantial status quo effects, which must be explicitly understood and addressed.

Optimal electricity rates and consumption externality

Abstract Despite the strong empirical evidence of heterogeneous customer outage costs and the recent theoretical arguments for unbundling service reliability, retail electric service remains homogeneous and causes an externality in electricity consumption. This paper, by integrating this peculiar aspect of the retail electric service market into a traditional second-best pricing analysis, derives a set of optimal pricing rules for retail electric rate designs. Such rules are sufficiently general that they encompass Ramsey pricing and peak load pricing under demand uncertainty and consumption externality. We apply these rules to analyze the economic inefficiency due to a fully distributed cost pricing method adopted in 1983 by the California Public Utilities Commission. This economic inefficiency is likely to be over-consumption by customers with relatively low outage costs and small price responsiveness.