James Bushnell

Measuring Market Inefficiencies in California's Restructured Wholesale Electricity Market

We present a method for decomposing wholesale electricity payments into production costs, inframarginal competitive rents, and payments resulting from the exercise of market power. Using data from June 1998 to October 2000 in California, we find significant departures from competitive pricing during the high-demand summer months and near-competitive pricing during the lower-demand months of the first two years. In summer 2000, wholesale electricity expenditures were

An Empirical Analysis of the Potential for Market Power in California’s Electricity Industry

8.98 billion up from

A Mixed Complementarity Model of Hydrothermal Electricity Competition in the Western United States

2.04 billion in summer 1999. We find that 21 percent of this increase was due to production costs, 20 percent to competitive rents, and 59 percent to market power.

Market power in California electricity markets

We use demand and plant-level cost data to simulate competition in a restructured California electricity market. This approach recognizes that firms might have an incentive to restrict output in order to raise price and enables us to explicitly analyze each firms ability to do so. We find that, under the current structure of generation ownership, there is potential for significant market power in high demand hours. During some months, congestion over Path 15, the primary in-state north-south transmission line, exacerbates the market power potential in northern California. While these results make deregulation of generation less attractive than if there were no market power, they do not suggest that deregulation would be a mistake. Nearly all markets exhibit some degree of market power. We find that the levels of hydroelectric production and the elasticity of demand are two of the most important factors in determining the severity of market power, having greater impact on equilibrium prices than the proposed divestitures of Californias largest producers. These results indicate that policies promoting the responsiveness of both consumers and producers to price fluctuations can have a significant effect on reducing the market power problem.

Improving Private Incentives for Electric Grid Investment

This paper presents a modeling framework for analyzing competition between multiple firms that each possess a mixture of hydroelectric and thermal generation resources. Based upon the concept of a Cournot oligopoly with a competitive fringe, the model characterizes the Cournot equilibrium conditions of a multiperiod hydrothermal scheduling problem. Using data from the western United States electricity market, this framework is implemented as a mixed linear complementarity model. The results show that some firms may find it profitable to allocate considerably more hydro production to off-peak periods then they would under perfect competition. This strategy is a marked contrast to the optimal hydroschedules that would arise if no firms were acting strategically. These results highlight the need to explicitly consider profit-maximizing behavior when examining the impact of regulatory and environmental policies on electricity market outcomes.

Transmission Rights and Market Power

Abstract As the electricity industry in California undergoes a process of fundamental restructuring, important new products and markets will be created while others will lose significance. In this paper, we undertake an initial survey of the products and markets that will be prominent in the emerging new electricity industry. We describe approaches to analyzing the prospects for, and the impacts of, market power abuse in these various product markets. The key product markets that are discussed include those for spot electrical energy, for pool-based and physical power contracts, and for reliability services such as load balancing and spinning reserve. Structural measures of market power, such as the Hirschman-Herfindahl Index (HHI), have certain general shortcomings that are exacerbated when applied to restructured electricity markets. Fortunately, the direct estimation of competitive equilibria, such as a Cournot oligopoly equilibrium, appears to be more feasible for this industry than is generally the case.

Bidder Cost Revelation in Electric Power Auctions

Abstract One of the most disputed issues of the electricity industry restructuring process has been the organization of the transmission sector of this industry. It has been widely held that this sector must remain tightly regulated due to the external costs and benefits that arise from the operation and construction of transmission resources. In this paper we discuss the traditional approaches to managing these network externalities and examine the potential for a system of tradeable transmission rights, such as transmission congestion contracts, to successfully manage these externalities in a lightly regulated environment.

Transmission pricing in California's proposed electricity market

Abstract In some cases, transmission rights owners can profit by reducing transmission capacity made available to the competitive market during hours in which there would otherwise be no congestion. Under the California congestion management process, this can be accomplished through the submission of extreme price bids.

Profiting from Regulation: An Event Study of the EU Carbon Market

Competitive auctions for electric power sources whose operation will be based upon economic dispatch raise new challenges for auction designers. The efficient selection and operation of such generation sources requires revelation of bidder types over two-dimensions, fixed and variable costs. The way in which fixed and variable prices are combined into a net score, which determines the winning bids, plays a key role in influencing bidders behavior. This paper analyzes bidder strategies and develops necessary conditions of bid scoring systems for the existence of equilibrium strategies that will result in efficient operations. Existing and proposed bid scoring systems are examined using our results.

Grid investment: can a market do the job?

Abstract The California electricity industry is scheduled to undergo a transition into a less-regulated, competitive market starting on January 1, 1998. This article provides an overview of the organization of this market and its general approach for managing transmission access and pricing. Much of this approach has been developed through a process of negotiation and compromise. The exact implementation of this approach may therefore end up producing an electricity marketplace that is quite different than the one envisioned by those privy to the negotiation process.