David M Newbery

Competition, Contracts, and Entry in the Electricity Spot Market

The supply function model of the English electricity spot market is extended to include a contract market and contestable entry, both of which have dramatic effects on the determination of equilibrium. I present an analytically tractable model that can be solved with contracts, variable numbers of competitors, and capacity constraints. In the case of constant marginal costs and linear demand, two outcomes are possible: if new plant is the same as existing plant and incumbents have insufficient capacity, entry will occur, but if new plant has lower variable costs then incumbents can invest to deter entry.

Pareto Inferior Trade

The paper shows that between two competitive but risky economies with no insurance markets, free trade may be Pareto inferior to no trade. The model is simple enough to show clearly the role prices play in transferring and sharing risk when there is an incomplete set of markets, but rich enough to exhibit the resulting inefficiencies dramatically.

Road User Charges in Britain

At present the Department of Transport allocates road use costs according to concepts of fair attribution, and road user charges for commercial vehicles are intended to cover these costs. The paper calculates the efficient road user charge - the marginal social cost of highway use - and compares these figures with the cost allocation results. Recent research suggests that the efficient road damage charge is only about 40 percent of the total damage, but that congestion costs may more than compensate for this shortfall. This is confirmed for the United Kingdom, where the efficient charge for cars is shown to be higher than their allocated cost, but for heavy goods vehicles is about the same. Accident costs may substantially raise these figures.

Problems of liberalising the electricity industry

Abstract The European Commissions attempt to update the Electricity and Gas Directives to underwrite unbundling and full liberalisation coincides with the California electricity crisis. The paper argues that compared to the US, much of the EU lacks the necessary legislative and regulatory power to mitigate generator market power. Unless markets are made more contestable, transmission capacity expanded and adequate generation capacity ensured, liberalisation may lead to higher prices. Ending the domestic franchise could remove the counterparty for the contracts required for adequate investment to sustain competitive pricing.

ROAD DAMAGE EXTERNALITIES AND ROAD USER CHARGES

Vehicles damage roads and, thus, increase road repair costs and create a road damage externality by raising the operating costs of subsequent vehicles. The main result is that if periodic road maintenance is condition responsive and if all road damage is attributable to traffic, then, in steady state with zero traffic growth, the average road damage externality is zero a nd the appropriate road damage charge is the average maintenance cost. Where weather accounts for some road damage, the road damage externality is no longer identically zero, but is quantitatively negligible. Road charges now recover a fraction of road costs. Copyright 1988 by The Econometric Society.

The Dynamic Efficiency of Regulatory Constitutions

In this article, we model regulation as a repeated game between a utility facing a random sequence of demands and a regulator tempted to underreward past investment. Rate-of-return regulation designed with a constitutional commitment to an adequate rate of return on capital prudently invested is able to support an efficient investment program as a subgame-perfect Nash equilibrium for a larger set of parameter values than rate-of-return regulation without such a commitment. Furthermore, rate-of-return regulation is superior to price regulation according to the same criterion, assuming that the regulator is unable to make state-contingent transfer payments.

Electricity sector reform in developing countries : a survey of empirical evidence on determinants and performance

Driven by ideology, economic reasoning, and early success stories, vast amounts of financial resources and effort have been spent on reforming infrastructure industries in developing countries. It is therefore important to examine whether evidence supports the logic of reforms. The authors review the empirical evidence on electricity reform in developing countries. They find that country institutions and sector governance play an important role in the success and failure of reform. And reforms also appear to have increased operating efficiency and expanded access to urban customers. However, the reforms have to a lesser degree passed on efficiency gains to customers, tackled distributional effects, and improved rural access. Moreover, some of the literature is not methodologically robust and on par with general development economics literature. Further, findings on some issues are limited and inconclusive, while other important areas are yet to be addressed. Until we know more, implementation of reforms will be more based on ideology and economic theory rather than solid economic evidence.

Allocating Transmission to Mitigate Market Power in Electricity Networks

We ask what conditions transmission contracts increase or mitigate market power. We show that the allocation process of transmission rights is crucial. In an efficient arbitraged uniform price auction, generators will only obtain contracts that mitigate their market power. However, if generators inherit transmission contracts or buy them in a ‘pay-as-bid’ auction, then these contracts can enhance market power. In the two-node network case, banning generators from holding transmission contracts that do not correspond to delivery of their own energy mitigates market power. Meshed networks differ in important ways as constrained links no longer isolate prices in competitive markets from market manipulation. The paper suggests ways of minimising market power considerations when designing transmission contracts.

Privatisation and liberalisation of network utilities

Privatisation of utilities is about ownership rather than control. Liberalisation can induce greather improvements in performance than privatisation alone. Regulation id inevitably inefficient, and adequately competitive network services may improve efficiency. History indicates that regulated vertical integration is durable so that liberalisation may be hard to sustain. Theory and evidence suggest that pricing network access and use is difficult., risking foreclosure without regulation. Progress in modelling competitioon over, for and between networks is reported. the English electricity industry demonstrates the importance of entry conditions and contracts, and the gains from restructuring are estimated.

THE THEORY OF FOOD PRICE STABILISATION

Food price instability has important effects on consumers, which have been largely ignored in the literature on commodity price instability. This paper discusses these differences, and argues that distribution issues are central and that futures markets are not well designed to provide consumer insurance. The competitive market will undertake too little price stabilization, but a universal ration entitlement, which would act as a substitute for futures markets, would provide more cost-effective insurance. If the coverage of ration entitlements is incomplete, however, providing increased price stabilization by additional buffer stocks may be more cost effective than rations. Copyright 1989 by Royal Economic Society.