Should market power still be a concern in the U.S. electric power industry? (original) (raw)

The Difficult Transition to Competitive Electricity Markets in the U.S

2003

This paper provides a comprehensive discussion of the causes and consequences of state and federal initiatives to introduce wholesale and retail competition into the U.S. electricity sector between 1995 and the present. Information about the development of wholesale market institutions, the expansion of wholesale power trade, the performance of wholesale market institutions, the entry of merchant generating capacity, and the financial collapse of the trading and merchant generating sector is presented and discussed. Issues regarding the ability of evolving spot wholesale energy market institutions and market power mitigation mechanisms to provide adequate incentives for investment in new generating capacity in the absence of some form of peak capacity obligation are discussed theoretically and evaluated empirically. The diffusion of retail competition and the performance of retail competition programs in eight states is examined empirically. Imperfections in transmission governance arrangements and barriers to efficient expansion of the transmission network are identified. The analysis leads to the overall conclusion that the development of efficient competitive wholesale and retail electricity markets continues to be a work in progress and faces many technical, institutional and political challenges in the U.S.

Market structure in the US electricity industry: A long-term perspective

Energy Economics, 2005

We estimate changes in market structure in the US electric power industry during the last three decades using two independent approaches. First, we estimate an industry-wide conjectural-variations parameter. We find that industry concentration was generally rising during the 1970s, but has been gradually and consistently falling since the early 1980s. To check the robustness of these results, we then use a translog production function to estimate the Lerner Index. The results confirm that the industry was becoming less concentrated during the 1980s, though the Lerner Index tended to fluctuate during the late 1980s and early 1990s. Our results suggest that the current state of the electricity industry may have more to do with long-term changes in market structure than recent attempts to establish competitive wholesale electricity markets.

Markets for Power in the United States: An Interim Assessment

2006

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.

COMPETITIVE ELECTRICITY MARKETS AND INVESTMENT IN NEW GENERATING CAPACITY

2006

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.

Deregulating and regulatory reform in the U.S. electric power sector

2000

This paper discusses the evolution of wholesale and retail competition in the U.S. electricity sector and associated industry restructuring and regulatory reforms. It begins with a discussion of the industry structure and regulatory framework that characterized the U.S. electric power industry during most of the 20 th century and reviews the initial efforts to open the electricity industry to competitive suppliers of generating services during the 1980s and early 1990s. The economic and political pressures that emerged in the early 1990s for more fundamental reforms are discussed, including the stranded cost issue and its resolution. The architecture of the basic reform model that supports both wholesale and retail competition in the supply of generation services adopted by a number of pioneer states is developed. Recent trends in generation divestiture, mergers between electric utilities, and between electric and gas pipeline and distribution companies, and entry of unregulated merchant generating plants are then reviewed. The new institutional arrangements necessary to govern access to and the operations of electric transmission networks to support competition among competing decentralized generators of electricity are examined. Transmission pricing, market organization, congestion management and market power issues are included in this analysis. The structure and performance of California's competitive electricity markets are discussed in detail as an example of the applications of these principles and the challenges that electricity sector restructuring must confront. Early experience with retail competition in California, Massachusetts, and Pennsylvania is reviewed. The paper concludes with an initial assessment of the benefits and costs of electricity sector restructuring to date in the U.S. and some thoughts regarding future challenges and trends.

Generation and Transmission Adequacy in a Restructuring U.S. Electricity Industry

2000

* Voltage reductions, as well as automatic underfrequency and undervoltage load shedding, could be considered a form of security that substitutes for resource adequacy. We do not include such customer-interruption and degradationof-service measures in our discussion of substitution between adequacy and security. 2 * This system of specifying a minimum planning reserve is quite different from the integrated resource planning process that many states required of their electric utilities. While IRP dealt with the technologies, fuels, and costs of generating capacity, minimum reserve margins determine only how much capacity must be installed. * Prices spiked, in part, because almost all retail customers paid only traditional, embedded-cost rates and did not face these very high wholesale prices. * Seiple (1999) concludes that "The move to an asset-based management philosophy will induce companies to improve forced outage rates and reactivate assets that can generate additional profits, thus increasing the overall supply." * These societal benefits might include avoidance of the looting and violence that can erupt during a major blackout and the maintenance of electrical service to vital societal functions, such as hospitals, police and fire stations, traffic lights, and airport traffic-control systems. * In a project for the U.S. Environmental Protection Agency, we are conducting additional ORCED analyses of generation adequacy. These analyses, under way at Oak Ridge National Laboratory, are examining the effects of higher natural gas prices, lower system load factors, and overall time-of-use demand elasticities on mandated reserve requirements vs reliance on market decisions concerning construction of new generating capacity. # An unserved-energy elasticity of 0.05 (0.05, to be precise) means that a 1% increase in the price of electricity cuts demand by 0.05%. Doubling electricity price cuts demand by 3.5%. This elasticity determines how high the spot price of electricity must rise to reduce demand so that demand equals online supply. § Alternatively, we could have run the model to minimize the price of electricity or to maximize generator profitability. These alternative optimization criteria led to results that were, in our view, unreasonable. For example, minimizing the price of electricity led to the construction of many baseload units, which, in turn, led to major earnings losses for the owners of these units. † This no-loss constraint is essential in competitive electricity markets. Were a unit to lose money continuously, it would go out of business, which would reduce the amount of installed capacity below the minimum specified. This problem is not solved by a change of ownership because it is a function only of operating, not capital, costs. * Vertically integrated utilities operated a portfolio of generation resources and were concerned about its overall profitability. In competitive generation markets, each unit must stand on its own as a profit-making enterprise.

Technology Choices in the U.S. Electricity Industry before and after Market Restructuring

SSRN Electronic Journal

We study the drivers of the adoption of electricity generation technologies between 1970 and 2014 in the lower 48 U.S. states. Since the 1990s, major electricity market restructuring took place in some parts of the United States. We explore the implications of changing from a regulated "cost-of-service" or rate of return system to a partly and fully deregulated market on technology and fuel choices. We find that electricity market deregulation resulted in significant immediate investment in various natural gas technologies, and a reduction in coal investments. However, market deregulation impacted less negatively on high efficiency coal technologies. In states that adopted wholesale electricity markets, high natural gas prices resulted in more investment in coal and renewable technologies.

Does Disruptive Competition Mean a Death Spiral for Electric Utilities?

2014

A surge in rooftop solar installations leads a wave of innovation in energy markets that manifests as disruptive competition for electric utilities. These innovations are emerging not only in technology but in public policy, social preferences, and business practices as well. Risks to the stability of current arrangements in the power sector are real, but regulatory protections cannot entirely insulate utilities from all such challenges. Legal protections should not be interpreted as an absolute right to reclaim value lost to competition. Electricity is central to social, economic, security, and environmental necessities. The institutional forms through which power is provided and utilized reflects historical factors and policy goals that can change over time. Leaders in the emerging environment will succeed by focusing on strategies that create new value for customers and that demonstrate nimble responsiveness to the broader contextual demands on energy systems, perhaps particularly during a time of rapid change.

Restructuring, Competition and Regulatory Reform in the U.S. Electricity Sector

Journal of Economic Perspectives, 1997

conomical and reliable supplies of electricity make possible many of the services that we associate with modern life. From electric lights and microwave ovens to television, telephones and computers, electricity is a critical input supporting a wide range of consumption, transportation and production activities. The electricity sector is also a major manufacturing sector, accounting for about 210billionofannualsales,about210 billion of annual sales, about 210billionofannualsales,about40 billion in annual investment and 35 percent of U.S. primary energy use. For nearly a century, the electricity sector in all countries has been thought of as a "natural" monopoly industry, where efficient production of electricity required reliance on public or private monopoly suppliers subject to government regulation of prices, entry, investment, service quality and other aspects of firm behavior. But dramatic changes are now taking place in the structure of electric power sectors around the world. The changes are designed to foster competition in the generating segment of the industry and to reform the regulation of the transmission and distribution functions, which continue to be viewed as natural monopolies. In the United States, reforms are being introduced most quickly in California and the Northeast, but many other states are moving quickly to introduce competition and reform regulation. Pilot programs that unbundle retail prices into separate generation, transmission, distribution and transition cost charges and that allow retail consumers to choose among a large number of competing generation service suppliers are already underway in New Hampshire, Massachusetts and Illinois. California, Rhode Island, Massachusetts, New Hampshire and perhaps other states are expected to give large numbers of retail consumers the opportunity to choose among competing electricity suppliers as early as 1998.

Strategic Adaptations : Lessons from U . S . Electricity Industry in the 20 th Century May 14 , 2012

2012

Several patterns emerge from a review of historical developments in the electricity industry: (1) conflicts arise from a number of sources; (2) responses to events and perceived crises tend to involve national (and state) legislation; (3) a lack of broad public (and political) consensus regarding the appropriate role of market mechanisms vs. government regulations; (4) absence of significant changes in response to events—changes appear to be incremental rather than transformational. The article provides an overview of developments in the past half century—placing current debates in a broader context. JEL Codes: K23, L12, L51, L94 1 The author is Distinguished Service Professor, Department of Economics, Warrington College of Business Administration. He is also Director of Water Studies, Public Utility Research Center, University of Florida. He would like to thank Lynne Holt, Mark Jamison, and Colin Knapp, for comments. Ted Kury added helpful examples in Section V. The author is solel...