Paul L. Joskow

Transmission rights and market power on electric power networks

We analyze whether and how the allocation of transmission rights associated with the use of electric power networks affects the behavior of electricity generators and consumers with market power. We also examine how the allocation of transmission rights is affected by the microstructure of the markets for these rights. Both financial and physical transmission rights are considered. The analysis focuses on a two-node network where there are cheap generating supplies in an exporting region and expensive generating supplies in an importing region. Extensions to a network with loop flow are developed. Regulatory mechanisms for detecting and mitigating the market-powerenhancing effects of transmission rights holdings are discussed. n There has been considerable controversy over whether competitive electricity systems should be organized around bid-based pools with financial transmission rights or bilateral contracting systems organized with tradeable physical transmission rights (Joskow, 1996). We focus here on one set of issues that have arisen in this controversy. We analyze whether and how the allocation of transmission rights associated with the use of an electric power network affects the behavior of electricity generators and purchasers that have market power. We examine the similarities and differences in this regard between financial and physical rights and compare the welfare properties of each. We also examine how transmission-rights markets with different microstructures allocate rights among generators and consumers and determine rights prices, and we demonstrate that the allocation of rights through the market is endogenous. Our analysis is limited to these issues, and it is not our objective to discuss here the full set of reasons why a physical rights mechanism might be preferred to a financial rights mechanism or vice versa.

Cartels, Competition and Regulation in the Property-Liability Insurance Industry

This paper provides a detailed study of the structure, behavior, and performance of the property and liability insurance industry in the United States. The property insurance industry is shown to possess all of the structural characteristics normally associated with competitive markets. Despite a competitive market structure, however, the property-liability insurance industry has traditionally set prices through cartel-like rating bureaus and has been subjected to pervasive state rate regulation. The study concludes that the combination of state regulation, cartel pricing, and other legal peculiarities has resulted in the use of an inefficient sales technique, supply shortages, and overcapitalization. Free entry, however, tends to drive profits toward the cost of capital. Based on recent experience in states where the competitive market is used to determine insurance rates, the study suggests a movement away from rate regulation and cartel pricing to open competition, as a means of eliminating prevailing performance problems.

The effects of competition and regulation on hospital bed supply and the reservation quality of the hospital

This article uses a simple queuing model to examine several factors that affect hospital bed supply decisions and the reservation quality of the hospital. The model takes account of demand uncertainty, the internal organization of the hospital, nonprice competition among hospitals, and hospital regulation. The empirical work indicates that hospital reserve margins vary directly with the extent of interhospital competition and inversely with the intensity of hospital regulation. Estimates of the reservation quality of the hospital are shown to depend critically on assumptions about internal organization of hospitals and the ways in which hospital utilization varies over the year.

Markets for Power in the United States: An Interim Assessment

The transition to competitive wholesale and retail markets for electricity in the U.S. has been a difficult and contentious process. This paper examines the progress that has been made in the evolution of wholesale and retail electricity market institutions. Various indicia of the performance of these market institutions are presented and discussed. Significant progress has been made on the wholesale competition front but major challenges must still be confronted. The framework for supporting retail competition has been less successful, especially for small customers. Empirical evidence suggests that well-designed competitive market reforms have led to performance improvements in a number of dimensions and benefited customers through lower retail prices.

The effects of economic regulation

Publisher Summary This chapter discusses alternative approaches to measure the effects of economic regulation and reviews the empirical literature employing these approaches. Economic regulation refers to both the direct legislation and administrative regulation of prices and entry into specific industries or markets. It follows conventional treatment in distinguishing economic regulation from a host of other forms of government intervention in markets, including the social regulation of environmental, health and safety practices, antitrust policy, and tax and tariff policies. The measurement issues that discusses arise in the empirical analysis of all types of government regulation; therefore, it have structured the methodological discussion so that it has broad applicability. While the present study is by no means an exhaustive survey of the literature, it includes numerous examples of the use of different types of data and measurement techniques. These are selected to cover a range of industries and time periods sufficient to give the reader a good feeling for what is known, not known, or in dispute. The chapter examines the way alternative theoretical frameworks and empirical methodologies have been applied to study the effects of price and entry regulation on each of: prices, costs, technological change, product quality, and the distribution of income and rents.

Competitive Electricity Markets and Investment in New Generating Capacity

Evidence from the U.S. and some other countries indicates that organized wholesale markets for electrical energy and operating reserves do not provide adequate incentives to stimulate the proper quantity or mix of generating capacity consistent with mandatory reliability criteria. A large part of the problem can be associated with the failure of wholesale spot market prices for energy and operating reserves to rise to high enough levels during periods when generating capacity is fully utilized. Reforms to wholesale energy markets, the introduction of well-design forward capacity markets, and symmetrical treatment of demand response and generating capacity resources to respond to market and institutional imperfections are discussed. This policy reform program is compatible with improving the efficiency of spot wholesale electricity markets, the continued evolution of competitive retail markets, and restores incentives for efficient investment in generating capacity consistent with operating reliability criteria applied by system operators. It also responds to investment disincentives that have been associated with volatility in wholesale energy prices, limited hedging opportunities and to concerns about regulatory opportunism.

Incentive Regulation in Theory and Practice: Electricity Distribution and Transmission Networks

Modern theoretical principles to govern the design of incentive regulation mechanisms are reviewed and discussed. General issues associated with applying these principles in practice are identified. Examples of the actual application of incentive regulation mechanisms to the regulation of prices and service quality for “unbundled” transmission and distribution networks are presented and discussed. Evidence regarding the performance of incentive regulation in practice for electric distribution and transmission networks is reviewed. Issues for future research are identified.

The Political Economy of Market-Based Environmental Policy: The U.S. Acid Rain Program

The U.S. acid rain program enacted in 1990 gave valuable tradable sulfur dioxide emissions permits—called “allowances”—to electric utilities. We examine the political economy of this allocation. Though no Senate or House votes were ever taken, hypothetical votes suggest that the actual allocation would have beaten plausible alternatives. While rent‐seeking behavior is apparent, statistical analysis of differences between actual and benchmark allocations indicates that the legislative process was more complex than simple models suggest. The coalition of states that produced and burned high‐sulfur coal both failed to block acid rain legislation in 1990 and received fewer allowances than in plausible benchmark allocations. Some of these states may have received additional allowances to cover 1995—99 emissions by giving up allowances in later years, and some major coal‐producing states seem to have focused on benefits for miners and on sustaining demand for high‐sulfur coal.

The Effects of Technological Change, Experience, and Environmental Regulation on the Construction Cost of Coal-Burning Generating Units

This paper provides an empirical analysis of the technological, regulatory and organizational factors that have influenced the costs of building coal-burning steam-electric generating units over the past twenty year. We obtain empirical estimates of economies of scale in construction costs, learning effects associated with utilities and architect-engineers, the costs of environmental regulation, patterns of construction productivity, and cost differences between generating technologies. The analysis is based on a sample of over 400 generating units placed in operation between 1960 and 1980. Information on generating unit availability is integrated with the construction cost evidence to suggest that the abandonment of supercritical technology in the early 1980s is likely to be a consequence of poor operating performance as well as sharply reduced demand expectations rather than a consequence of high construction costs for this technology at large scale. 29 references, 1 figure, 10 tables.

Regulatory Constraints on CEO Compensation

No abstract is available for this paper.