Frank Graves

Opportunities for Electricity Storage in Deregulating Markets

Abstract Deregulating electricity markets are providing energy arbitrage opportunities for storage. As a result, storage values in the U.S. grew significantly from 1997 to 1998, and in many markets are approaching the cost of replacement capacity. The data suggest that hourly prices allow a storage device to capture up to twice as much value as blocked prices.

Computerized and High-Frequency Trading

The use of computers to execute trades, often with very low latency, has increased over time, resulting in a variety of computer algorithms executing electronically targeted trading strategies at high speed. We describe the evolution of increasingly fast automated trading over the past decade and some key features of its associated practices, strategies, and apparent profitability. We also survey and contrast several studies on the impacts of such high-speed trading on the performance of securities markets. Finally, we examine some of the regulatory questions surrounding the need, if any, for safeguards over the fairness and risks of high-speed, computerized trading.

A framework for operations in the competitive open access environment

Abstract A pragmatic framework is available for maintaining reliable system operations in the context of an unbundled open access environment, while fostering a competitive supply/demand market. The proposed framework shows how incentives will meld a decentralized, competitive profit-driven market and a centrally directed services market together into a reliable free market.

One-Part Markets for Electric Power: Ensuring the Benefits of Competition

In order to ensure adequacy of generation supply, the utility industry has traditionally been required to carry two to three years of planning reserves, e.g., 20 percent over projected peak demand. Closely related, they have often used two-part (capacity/energy) pricing to buy and sell generation (real power) output. This paper argues that continued use of this approach, especially continuing to require planning reserves under power pool or NERC or other mandate, will undermine the benefits of power industry restructuring. In contrast, a market with no administered capacity requirement, but a one-part commodity price reflecting both marginal operating costs and capacity scarcity, will have many benefits. In particular, it will induce efficient capacity planning—which has been the real problem in the past (not inefficient dispatch) and which is where the real opportunities for future efficiency gains lie. It will also encourage demand-side participation in peaking “reserves”, and forward contracting for risk protection and expansion financing, both of which also reduce generation market power. Independent system operator (ISO) planners and regulatory agencies should concentrate more attention on encouraging demand-side participation and forward contracting, and less on the sufficiency of physical reserves or on customer protection against possible high market prices.

Stranded cost recovery and competition on equal terms

Abstract The weak competitive neutrality issue, which has heretofore been the centerpiece of the debate, should now be put aside. It is time to focus on getting the stranded cost number right, so that the transition to competition may truly begin on equal terms.

Price Caps for Standard Offer Service: A Hidden Stranded Cost

Abstract The use of call option techniques demonstrates that the flexibility offered by standard offer service can be a non-trivial fraction of total stranded costs. The right price cap structure can ameliorate this cost.

Capacity Prices in a Competitive Power Market

The traditional practice of pricing capacity and energy separately will diminish as a consequence of restructuring the electric power industry. To the extent that capacity continues to be priced explicitly, those prices will be based not on the book value of investments in generating facilities but rather on the market value. We elucidate the determinants of market value by exploiting the observation that rights to capacity are equivalent to holding options on energy. Capacity values depend on the level, volatility, and correlation of energy and fuel prices. They also depend on the type and efficiency of the associated capacity.

Risk-Adjusted Damages Calculation in Breach of Contract Disputes: A Case Study

Risk-adjusted valuation is well established in both theory and business practice. However, its implications are not always immediately apparent or intuitive in legal disputes such as breach of contract lawsuits. In particular, damages are often calculated by discounting the differences in cash flows between but-for (no breach) and actual (breach) worlds by a single discount rate. While widely used, this approach can produce incorrect valuation results. This paper provides a case study of a breach of an electricity tolling agreement to illustrate the more general valuation principle of discounting but-for and actual cash flows using two discount rates.

Means of Mitigating Rate Shock

While there is no “silver bullet” for solving the rate shock problem, sound ratemaking and planning approaches can provide near-term relief and reduce the possibility of rate shocks occurring in the future. For instance, various ratemaking methods can be used to change the timing and pattern of capital recovery in a way that reduces the near-term rate impacts while preserving cost-of-service principles.