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ELECTRICITY ECONOMICS

Regulation and Deregulation

GEOFFREY ROTHWELLTOMASG6MEZ

IEEE Power Engineering Society, Sponsor

JSEEIII_·1PRESS -aWl(

IERIES !!WON poWERENGINEERING

IEEE Press Power Engineering SeriesMohamed E. El-Hawary, Series Editor

+IEEEIEEE PRESS

rnWILEY-~INTERSCIENCE

A JOHN WILEY &SONS PUBLICATION

Permissionto use material in Exercises4.2 and 4.3 and Table 4.1 from Viscusi, W. Kip, J. Vernon, andJ. Harrington.2000. Economics ofregular_ andantitrust. 3rd ed. Cambridge:MIT Press (pages 360,363, and 394) has been granted by the MIT Press.

Cover design adapted from Shmuel Oren (2000). Capacitypayments and supply adequacy incompetitiveelectricitymarkets. Presented at the VII Symposiumof Specialists in Electric Operationaland ExpansionPlanning (SEPOPE),May 21-26, Curitiba,Brazil. .

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LibraryofCongress Cataloging in Publication Datais available.

Rothwell,Geoffrey.ElectricityEconomics:Regulationand deregulation!Geoffrey Rothwell and Tomas Gomez

p.cm.Includes bibliographicalreferences and index.ISBN0-471-23437-0(cloth: alk. paper)

Printed in the United States of America.

10 9 8 7 6 5 4 3 2

We dedicate this book to our familiesfor all their sacrifices

while we were working or drinking coffee.

CONTENTS

Preface xv

Nomenclature XIX

1 Electricity Regulation and Deregulation 1

1.1. The Electricity Industry: Restructuring and Deregulation 11.2. From Monopolies to Markets 21.3. Why Restructuring and Deregulation Now? 31.4. Regulation is Still Required 41.5. What Lessons Can Be Learned from International Experiences? 6

1.5.1. Starting Points and Motivations for Deregulation 91.5.2. Structural Changes and System Operation 101.5.3. Design of Wholesale Markets and Market Institutions 111.5.4. Retail Competition and Customer Choice 12

1.6. Conclusions 12

2 Electricity Economics 15

2.1. What is a Market? 152.1.1. Competitive versus Noncompetitive Markets 152.1.2. The Market Mechanism 162.1.3. Elasticity 18

2.2. Cost and Supply 202.2.1. Economic Cost versus Accounting Cost 202.2.2. Total, Average, and Marginal Costs 212.2.3. Economies and Diseconomies of Scale and Scope 24

2.3. Profit Maximization 252.3.1. What is Profit? 252.3.2. What is Economic Efficiency? 29

2.4. Social Surplus: Consumer and Producer Surplus 292.5. Market Power and Monopoly 30

2.5.1. Maximizing Profit under Monopoly 302.5.2. Deadweight Loss from Monopoly Power 31

vii

viii CONTENTS

2.5.3. Response to the Exercise of Monopoly Power: 32Regulation and Antitrust

Exercise 2.1. Linear and Logarithmic Demand Functions 34Exercise 2.2. A Shift in Demand and a New Equilibrium Price 35

(a Cobweb Model)Exercise 2.3. Returns to Scale in Production and Cost 37Exercise 2.4. Calculating a Regulated Tariff 40Exercise 2.5. Calculating Social Surplus under Competition 41

and RegulationExercise 2.6. Calculating Deadweight Loss under Monopoly 42

3 The Cost of Capital 43

3.1. What is the Cost of Capital? 433.2. Net Present Value 45

3.2.1. Discounting to the Present 463.2.2. Net Present Value 483.2.3. Assessing Cash Flows under the Net Present Value Rule 49

3.3. Alternative Methods of Project Evaluation 513.3.1. Payback Analysis 513.3.2. Average Return on Book Value 523.3.3. Internal Rate of Return 52

3.4. Risk and Return 533.4.1. Financial Instruments 553.4.2. Capital Structure and the Cost ofCapital 58

Exercise 3.1. Risk and Diversification 58Exercise 3.2. Risk Aversion 62Exercise 3.3. The Capital Asset Pricing Model 68Exercise 3.4. Certainty Equivalent Discount Rates 70Exercise 3.5. Calculating the Internal Rate of Return 74

4 Electricity Regulation 75

4.1. Introduction to Economic Regulation 754.1.1. Regulatory Policy Variables 764.1.2. The Regulatory Process 78

4.2. Rate-of-Return Regulation 804.3. Performance-Based Ratemaking 83

4.3.1. Sliding Scale 844.3.2. Revenue Caps 854.3.3. Price Caps 864.3.4. Some Problems with Incentive Regulation 87

4.4. Rate Structure 884.4.1. Introduction to Tariff Regulation 884.4.2. Marginal Cost Pricing, Multipart Tariffs, 89

and Peak-Load Pricing

CONTENTS ix

4.5. Overviewof the UniformSystemof Accounts 91Exercise4.1. A Profit-Sharing Mechanism under PBR Regulation 92Exercise4.2. OptimalTwo-PartTariffs 93Exercise4.3. The Peak-LoadPricingProblem 94Exercise. 4.4. The Averch-Johnson Model 95Exercise4.5. A Real OptionsPricingModel of Cogeneration 97

5 Competitive Electricity Markets 101

5.1. Overview 1015.2. .Wholesale Power Markets 102

5.2.1. The PoolcoMarket 1035.2.2. Contracts for Differences 1055.2.3. PhysicalBilateralTrading 1065.2.4. Transmission Ownership and SystemOperation 1075.2.5. AncillaryServices 109

5.3. MarketPerformance and Investment 1105.3.1. Generation Expansionand Monitoring 111

Generation Competition5.3.2. Nodal and Zonal Transmission Pricing 1145.3.3. Transmission Planningand Investment 115

5.4. CustomerChoiceand Distribution Regulation 1175.4.1. CustomerChoiceand Retail Competition 1185.4.2. Real-Time Prices and Retail Services 1205.4.3. RetailAccess Tariffs 1205.4.4. Distribution CompanyRegulation 122

Exercise5.1. Determining Dispatchin a PoolcoMarket 123Exercise5.2. Determining DispatchBased on Physical 123

BilateralContractsExercise5.3. GeneratorRevenues and Long-RunCapacity 124Exercise5.4. GeneratorProfits with and without a Contract 125

for DifferencesExercise5.5. The Value of Transmission Expansionbetween 125

Two ZonesExercise5.6. CalculateNodal Prices in a Three-Bus 127

Transmission System

6 The Californian Power Sector 129Ryan Wiser, StevenPickle, andAfzal S. Siddiqui

6.1. GeneralDescriptionof the CaliforniaPower System 1306.1.1. Generation 1316.1.2. Transmission and Interconnections 1316.1.3. Distribution 1326.1.4. Consumption 1326.1.5. Concentration Levels 133

X CONTENTS

6.1.6. Plant Investment 1336.1.7. Electricity Prices 1336.1.8. Economic and Energy Indices 134

6.2. The New Regulatory Framework 1356.2.1. U.S. Federal Legislation and Regulation 1356.2.2. California State Regulation and Legislation 137

6.3. The Wholesale Electricity Market and Institutions in California 1406.3.1. The Power Exchange 1406.3.2. The Independent System Operator 1446.3.3. Bilateral Trading 145

6.4. Transmission Access, Pricing, and Investment 1466.4.1. Access Charges 1476.4.2. Transmission Congestion Charges 1476.4.3. Transmission Losses 1496.4.4. Investment and Planning 149

6.5. Distribution Network Regulation and Retail Competition 1496.5.1. Regulation of the Distribution Network 1506.5.2. Remuneration for Regulated Distribution Activities 1506.5.3. Retail Competition 151

6.6. Particular Aspects of the Regulatory Process in California 1536.6.1. Stranded Costs 1536.6.2. Market Power 1546.6.3. Public Purpose Programs 1556.6.4. Customer Protection and Small Customer Interests 156

6.7. Market Experience and the Energy Crisis 1566.7.1. Market Operations: 1998 and 1999 1576.7.2. The Electricity Crisis 1576.7.3. The Causes of the Electricity Crisis 1586.7.4. Solutions and Conclusions 159

7 The Norwegian and Nordic Power Sectors 161Helle Grenli

7.1. General Description of the Norwegian Power System 1617.1.1. Generation 1617.1.2. Transmission 1627.1.3. Distribution 1637.1.4. Consumption 1647.1.5. Economic Indices 1647.1.6. General Economic and Energy Indices 166

7.2. The New Regulatory Framework 1677.2.1. The Energy Act of 1990: Objectives and Consequences 1687.2.2. The Energy Act of 1990: Specifics 169

7.3. The Wholesale Electricity Market 1707.3.1. The Energy Markets 171

CONTENTS xi

7.3.2. Zonal Pricing 1727.3.3. Ancillary Services 1737.3.4. Bilateral Trading 173

7.4. Transmission/Distribution Access, Pricing, and Investment 1747.4.1. Overall Principles: The Point of Connection Tariff 1747.4.2. Transmission Tariffs 1767.4.3. Distribution Tariffs 177

7.5. Distribution Network Regulation and Retail Competition 1787.5.1. Rate of Return Regulation, 1991-1997 1787.5.2. Incentive-Based Regulation Starting January 1, 1997 1787.5.3. Retail Competition-Important Developments 182

7.6. Aspects of the Regulatory Process in Norway 1847.6.1. The Inter Nordic Exchange 1847.6.2. Congestion Management in the Scandinavian Area 185

8 The Spanish Power Sector 187

8.1. General Description of the Spanish Power System 1878.1.1. Structure of the Industry 1878.1.2. Generation 1878.1.3. Transmission 1888.1.4. Distribution 1898.1.5. Consumption 1898.1.6. Concentration Levels and Economic Indices 1908.1.7. General Economic and Energy Indices for Spain 194

8.2. The New Regulatory Framework 1948.2.1. Background 1948.2.2. The 1997 Electricity Law 1988.2.3. Further Regulations 199

8.3. The Wholesale Electricity Market 2008.3.1. General Market Institutions 2008.3.2. Structure of the Wholesale Market 2018.3.3. The Daily Market 2018.3.4. The Intraday Markets 2028.3.5. Network Constraint Management Procedures 2028.3.6. The Ancillary Service Markets 2038.3.7. Capacity Payments 2038.3.8. Bilateral Trading 2038.3.9. International Exchanges and External Agents 204

8.4. Transmission Access, Pricing, and Investment 2048.4.1. Remuneration of Transmission Activities 2048.4.2. Transmission Network Charges 2058.4.3. Transmission Losses 2058.4.4. Investment and Planning 206

8.5. Distribution Network Regulation and Retail Competition 206

xii CONTENTS

8.5.1. Remuneration of Regulated Distribution Activities 2068.5.2. Distribution Losses 2078.5.3. Distribution Network Charges 2088.5.4. Power Quality Regulation 208

8.6. Particular Aspects of the Regulatory Process in Spain 2108.6.1. Estimated Stranded Costs 2108.6.2. The Stranded Costs: Methodology for Recovery 2118.6.3. The General Settlement Procedure: Regulated Tariffs 212

and Revenues

9 The Argentine Power Sector 217

9.1. General Description of the Argentine Power System 2179.1.1. Generation and Current Structure of the Industry 2179.1.2. Transmission 2189.1.3. Distribution 2199.1.4. Consumption 2209.1.5. Electricity Tariffs 2219.1.6. Economic and Energy Indices 221

9.2. The Regulatory Framework 2219.2.1. Background 2219.2.2. The New Electricity Law 2229.2.3. Regulatory Authorities 2239.2.4. The Privatization Process in Argentina 224

9.3. The -Wholesale Electricity Market 2249.3.1. Market Participants 2269.3.2. Energy Market and Economic Dispatch 2269.3.3. Capacity Payments 2279.3.4. Cold Reserve and Ancillary Services 2279.3.5. Generator Revenues 2289.3.6. Scheduling, Dispatch, and Settlement 2289.3.7. Bilateral Contracts 228

9.4. Transmission Access, Pricing, and Investments 2299.4.1. Transmission Charges 2299.4.2. Penalties for Unavailability of the Transmission Assets 2309.4.3. Transmission Concessions 2319.4.4. Transmission Expansion 231

9.5. Distribution Regulation 2329.5.1. Distribution Concessions 2339.5.2. Evaluation ofDistribution Costs 2349.5.3. Regulated Tariff Customer Categories 2359.5.4. Cost Allocation in Regulated Tariffs-An Example 236

of a User Tariff9.6. Particular Aspects of the Regulatory Process in Argentina 238

9.6.1. Regulation of PowerQualityafter PrivatizationofDistribution

Glossary

References

AuthorIndex

SubjectIndex

Aboutthe Authors

CONTENTS xiii

238

243

251

261

263

277

PREFACE

We have written this book for the thousands ofprofessionals working in the electricutility industries around the world who need to understand the economics underly-ing changes in electricity regulation and emerging electricity markets. Electric utili-ties are undergoing profound transformations: nationally owned systems are be-coming privatized, privately owned systems that were regulated are becomingderegulated, and national systems are becoming international.

The underlying theme of these changes is one of replacing monopoly with com-petition. Changes in electricity generation technology have prompted the realizationthat generation need not be a regulated monopoly to be socially efficient. Unliketransmission and distribution, which are best served by regulated monopolies undercurrent technology, the regulation of generation and retail sales might be best donethrough market discipline.

Professionals in the power sector who were trained to work for electricity mo-nopolies must now work in a new world, one in which economic efficiency is re-placing technical efficiency as the cornerstone of decision making. This book is aunique attempt to provide the tools to face this new world.

We originally wrote this book as a training manual for the,Federal Energy Com-mission of the Russian Federation to educate regional regulators. The governmentof Spain financed our work and the World Bank managed the project and is pub-lishing the manual with other materials in Russian. We thank those who read andreviewed the training manual. We tried to respond to their comments. We have ex-panded and updated the manual to produce this book.

We assume that readers have a technical background and are not familiar witheconomics beyond an introductory level. So, the body of the text is presented with aminimum of mathematics. On the other hand, exercises in the chapters of the firsthalf of the book rely on the reader's understanding of mathematics, particularly cal-culus. Although we suggest that the reader work through these exercises (the solu-tions are on our web site http://www.iit.upco.es/wiit/Electricity_Economics). theremainder of the text does not rely on the reader's understanding of the exercises.We suggest that you try the exercises. We believe that after studying this book, seri-

xv

xvi PREFACE

ous readers will understand the economic forces that are changing the internationalelectricity industry.

Although some readers could fully understand the material through independentstudy, education is sometimes best accomplished in a social setting. Therefore, wehave organized this book within a continuing-education context. The material canbe the basis of a week-long intensive workshop in which Chapters 1-5 are coveredduring the first four days and one or two of the case studies (Chapters 6-9) are cov-ered on the last day. (For this type of workshop we suggest that students read thefirst five chapters before the workshop.) The material could be presented in a 10-week quarter with one week on each chapter. Or the material could be presented ina IS-week semester with (1) two weeks on each of the early chapters (2-5), (2) aweek on each case study, (3) the assignment ofa paper applying our case study out-line to a particular electricity system, and (4) presentation of these papers in the lastweeks of the semester. Whether the material is studied independently or in a moreformal context, we wish you luck and encourage you to email us with your com-ments.

ACKNOWLEDGMENTS

We extend our gratitude to Gary Stuggins of the World Bank for his support in pro-ducing the first draft of this book as a training manual for the Federal Energy Com-mission of the Russian Federation and for his assistance in seeking permission topublish an expanded and updated version. We thank Prof. J. Ignacio Perez-Arriagaof the Universidad Pontificia Comillas, Prof. Shmuel Oren of the University of Cal-ifomia, Berkeley, and anonymous reviewers for their insightful comments on thecontents and organization of the book. Ram6n Sanz from Mercados Energeticos inArgentina kindly reviewed Chapter 9 and Fernando Peran from Comillas helpedcollect data for the Argentine case study. We would like to acknowledge the helpreceived from Prof. Hugh Rudnick, Pontificia Universidad Catolica de Chile, whosuggested that we publish this with IEEE press. We thank colleagues at Instituto deInvestigaci6n Tecnol6gica, especially Carlos Vazquez and Michel Rivier; at Uni-versity of California, Berkeley, including Richard Gilbert and Severin. Borenstein;and at Stanford University, including Tim Bresnahan, Roger Noll, and FrankWolak, for interesting discussions and work on electricity deregulation. Finally, wethank all of those at the IEEE press who made this publication possible, particularlyRobert Bedford and Anthony VenGraitis.

Geoffrey Rothwell thanks the authors for their patience with his editing, the au-thors ofother textbooks and educational materials for their guidance and comments,including Darwin Hall, Joseph Harrington, Dan Rubinfeld, Bob Pindyck, StevenStoft, John Vernon, and Kip Viscusi. Also, he thanks the participants (particularly,Lucille Langlois) of the International Atomic Energy Agency's "Eastern EuropeanTraining Workshop on Analysis of Economic and Financial Aspects of NuclearPower Programmes," Zagreb, Croatia (May 11-14, 1998), who provided an implic-it audience.

PREFACE xvii

Tomas Gomez thanks Chris Marnay, Joe Eto, and Ryan Wiser for their friend-ship and support during his sabbatical stay at the Ernest Orlando Lawrence Berke-ley National Laboratory (LBNL) in California. Also, he thanks the Spanish Min-istry of Education and Culture for its financial support and the UniversidadPontificia Comillas that made possible the sabbatical leave to write this book.

GEOFFREY ROTHWELL

ToMAs G6MEZStanford, CaliforniaMadrid, SpainJanuary2003

NOMENCLATURE

ACRONYMS AND ABBREVIATIONS

ABAGCbblBBOEBtuCAPMCCCCGTCDcmCFRCO2

COSCTCCTTCCO.DASRDCDEADISCODKKDSMENSEPActESPEUROEWGFDCFIM

AssemblyBill (California)AutomaticGeneration ControlBarrelsBillionsBoletin Oficialdel Estado (Spain)British thermalunitCapitalAsset PricingModelCapacityChargeCombined-Cycle Gas TurbineCost DriversContractfor DifferencesCode of FederalRegulations (U.S.)Carbon DioxideCost-of-Service (regulation)Competition TransitionCharge(e.g., California)Costs of Transitionto Competition (Spain)CompanyDirectAccess ServiceRequestDirect CurrentData Envelopment AnalysisDistribution CompanyDenmarkKrone (Danishcurrency)DemandSide ManagementEnergyNot Servedor EnergyNot SuppliedEnergyPolicyAct of 1992 (U.S.)Energy ServiceProviderEuropeanUnion currencyExemptWholesale GeneratorsFully DistributedCostsFinish Mark (currency)

xix

xx NOMENCLATURE

FTRGDPGWGWhHVIOUIPPISOIVAkkVkWkWhLOLPLOSENLVMMBtuMCPMDMAMLEMOMSPMVMWMWhNOPRNETANIEPINOKNOPRNUGO&MOASISOTCpaRpoolcoPUCHAPURPAPtaQFRD&DRFRMRROR

Firm Transmission RightsGross Domestic ProductGigawattGigawatt-hourHigh VoltageInvestor-OwnedUtilityIndependent Power ProducersIndependent System OperatorIndependentVerificationAgentKilo (thousand)Kilovolts (thousands of volts)Kilowatts (thousands of watts)Kilowatt-hours (thousands of watts per hour)Loss of Load ProbabilityLey Organica del Sistema Electrico Nacional (Spain)Low VoltageMillionsMillions of BtusMarket Clearing PriceMeter Demand ManagementAgentMarco Legal Estable (Spain)Market OperatorMeter Service ProvidersMedium VoltageMegawattMegawatt-hourNotice ofProposed Rulemaking(U.S.)New Electricity Trading Arrangements (UK)Average System InterruptionFrequency Index (Spain)Norwegian Krone (currency)Notice of Proposed Rulemaking(U.S.)Non-Utility GeneratorOperation and Maintenance (costs)Open Access Same-timeInformation SystemOver-the-Counter(market)Performance-BasedRatemakingA pool structure in which all generators must sell to the poolPublic Utility Holding Company Act (U.S.)Public Utilities Regulatory Policy Act (U.S.)Peseta (Spanish currency)QualifyingFacilitiesResearch, Development,and DemonstrationRetribuci6nFija (stranded cost recovery payment in Spain)Reliability Must RunRate-of-Retum (regulation)

SA

SALEXSEKSOTIEPITRANSCOTWhTcfUDCVOLL

NOMENCLATURE xxi

Societe Anonyme (a publicly held company, similar toincorporated)Funds to finance Argentina transmissionsystemSwedish Krona (currency)System OperatorAverage System InterruptionDuration Index (Spain)Transmission CompanyTerawatt-hourTrillions of cubic feet (of natural gas)Utility DistributionCompanyValue of Loss of Load

ORGANIZATIONS AND ENTITIES (Also see Table 3.2)

ADEERAAGEERAATEERAAlicuraAyEECAM

CAMMESA

CECCENELECCNSECPUCCentral CostaneraCentral PuertoChevronChoc6nCitigroupDetroit EdisonDISGRUP

DISTRELECDOJDow JonesECECONEDELAPEDENOREDESUREDF

Argentine DistributorsAssociationArgentine Generators AssociationArgentine TransmittersAssociationA hydroelectricplant in ArgentinaA utility in ArgentinaComite de Agentes del Mercado (Market Agents Committee,Spain)Compafiia Administradoradel Mercado Electrico MayoristaSA (Argentina)California Energy CommissionEuropean Committee for ElectrotechnicalStandardizationComisi6nNacional del Sistema Electrico (Spain)California Public Utilities CommissionA power plant in ArgentinaA power plant in ArgentinaA U.S. corporationA hydroelectricpower plant in ArgentinaA U.S. corporationA U.S. electric utilityGrupo de Trabajo de Distribuciony Comercializacion(Spain)A distribution company in ArgentinaDepartmentof Justice (U.S.)A U.S. corporationEuropean CommunityCenter for Economic Analysis (Norway)A distribution company in ArgentinaA distribution company in ArgentinaA distributioncompany in ArgentinaElectricite de France

xxii NOMENCLATURE

EIAEL-EXELBASENELENREERZESEBAEUElkraftElspotElterminEltraEndesaEnherEuro CableFERCFPCFTCFecsaFingridGUMAGUMEGUPAGesaHecsaHidronorIEEEIberdrolaLADWPLBNLMEMMEOSP

Moody'sNARUC

NERANGCNORDELNVENYMEXNYSENorNedNord PoolOED

Energy Information Administration (U.S.)Finnish Electricity Exchange MarketJoint Swedish/Finnish Adjustment MarketEnte Nacional de l'Energia (Italy)Ente Nacional Regulador de la Electricidad (Argentina)A generating company in SpainA power plant in ArgentinaEuropean UnionA transmission system operator in Eastern DenmarkNorwegian Electricity Spot MarketNorwegian Futures and Forwards MarketA transmission system operator in Western DenmarkA generation holding company in SpainA generating company in SpainA transmission line between Norway and GermanyFederal Energy Regulatory Commission (U.S.)Federal Power Commission (precursor to FERC)Federal Trade Commission (U.S.)A generating company in SpainNational grid operator of FinlandLarge Users Association (Argentina)Minor Large Users of Electricity (Argentina)Particular Large Users of Electricity (Argentina)A generating company in Endesa Holding (Spain)A generating company in Endesa Holding (Spain)A former state-owned utility (Argentina)Institute of Electrical and Electronic EngineersA generating company in SpainLos Angeles Department of Water and Power, a public utilityErnest Orlando Lawrence Berkeley National LaboratoryMercado Electrico Mayorista (Argentina)Ministerio de Economia y Obras y Servicios Publicos(Argentina)Moody's Investors Service, a U.S. corporationNational Association of Regulatory Utility Commissioners(U.S.)National Economic Research Associates (U.S.)National Grid Company (UK)Nordic Organization for Electric CooperationNorwegian Water Resources and Energy DirectorateNew York Mercantile ExchangeNew York Stock ExchangeA cable connecting Norway and the NetherlandsNorwegian electricity market operatorNorwegian Ministry of Petroleum and Energy

OMEL

OPECPAFTTPG&EPJMPXP. del AguilaPalo VerdeREESADISCESDG&ESECSEGBASKSMUD

SaItoGrandeSamkjeringenSevillanaSmestadSSBStatkraftStatnett SFStorebaeltSwePoiTRANSENERSA (Argentina)UCTE

UnelcoUnion FenosaViesgoViking CableWEPEXYacilecYacyreta

NOMENCLATURE xxiii

Compafila Operadorade! Mercado Espafiol de Electricidad(Spain)Organizationof Petroleum ExportingCountriesTechnical TransmissionFunction Providers (Argentina)Pacific Gas & Electric, U.S. corporationPennsylvania-New Jersey-Maryland, an electricitypool (U.S.)Power Exchange (California)A hydroelectricplant in ArgentinaAn interchange on the Arizona-CaliforniaborderRed Electrica de Espana SA (Spain)InterconnectedTransmission System of ArgentinaSouthern CaliforniaEdison, U.S. corporationSan Diego Gas & Electric, a U.S. corporationSecurities Exchange Commission(U.S.)Servicios Electricos del Gran Buenos Aires, SASvenska Kraftnat, Swedishnational power gridSacramentoMunicipal Utilities District, a public utility inCaliforniaA power plant in ArgentinaAn early Norwegian power poolA generating company in SpainAn Oslo area bilateral forward contracts reference priceStatisticsNorwayA large state-ownedgenerator in NorwayNorwegian National Grid CompanyA Danish interconnectionAn interconnectionbetween Sweden and PolandCompafiia de Transporte de Energia Electrica en Alta Tension

Union for the Coordinationof the Transmissionof Electricity(Europe)A generating company in Endesa Holding (Spain)A generating company in SpainA generating company in Endesa Holding (Spain)A cable connecting Norway and GermanyWestern Power Exchange (U.S.)A transmissioncompany in ArgentinaA hydroelectricpower plant in Argentina

MATHEMATICAL SYMBOLS (Also seeTable 9.10)

(Note $ is used to represent values that take currency as a unit.)a A parametera Capital Asset Pricing Model parameter

xxiv

AACAFCAleARARAAVCb

~eCCCH

CCL

CEQCFCGACORRCOVCPICRFCSCedd~.

DDRDeeEdEs

EEFKEff

fFFCFVFegGCGNH

IlIN

NOMENCLATURE

Annuity ($)Average Cost ($)Average Fixed Cost ($)Average Incremental Cost ($)Average Revenue ($)Absolute Risk AversionAverage Variable Cost ($)A parameterCapital Asset Pricing Model parameterA parameterCash flow ($)Capacity Charge in Highly congested zone ($, Norway)Capacity Charge in Lowly congested zone ($, Norway)Certainty Equivalent ($)Capacity Factor (%)Customer Growth Adjustment factor ($)Correlation (statistics)Covariance (statistics)Consumer Price Index (%)Capital Recovery Factor (%)Consumer Surplus ($)Consumption of energy (kWh)A parameterDerivative (calculus)Rate.of change..Demand function or curveDistribution Company Revenue ($)Distribution costs ($)Exponential function (mathematics)Elasticity of demandElasticity of supplyExpectation operator (statistics)Efficiency improvement factor (%, Norway)Efficiency factor (%, Spain)Price of fuel (e.g., $/MBtu)Fuel (e.g., in MBtu)Fixed Cost ($)Future Value ($)Fixed Charge ($)A parameterCommercial costs per user ($)GeneratorTrigger value to invest ($)Inflation (%)Investment ($)New transmission investments ($, Spain)

fPCIRRITjkKKPIKRInLLEminMCMRMRTSnNPVOLSPPRPSPVQr

rdebt

requity

rfrmR

IYRBRPRPCRPIRRRRAsSDtTTCTRUUOP

NOMENCLATURE XXV

Retail price index (%, Spain)Internal Rate of Return (%)Revenue cap ($)Index indicatorIndex indicatorCapital ($)Consumer price index (%, Norway)User demand responsibility factor (Argentina)Natural logarithmLabor (e.g., in hours)Growth factor (Norway)Minimization function (mathematics)Marginal Cost ($)Marginal Revenue ($)Marginal Rate ofTechnical SubstitutionTotal numberNet Present Value ($)Ordinary Least Squares (statistics)Price ($)Profit ($)Producer Surplus ($)Present Value ($)Quantity (e.g., MWh)Realrateofinterest(%)Real rate of interest on debt (%)Real rate ofretum on equity (%)Real risk-free rate of interest (%)Rate ofretum on a market portfolio (%)Nominal rate of interest (%)Nominal.risk-free rate of interest (%)Rate Base ($)Risk Premium ($)Revenue Per Customer ($)Retail Price Index (%)Required Revenues ($)Relative Risk AversionAllowed rate of return (%)Standard Deviation (statistics)Time index (e.g., year)Final period in a sequenceTotal Cost ($)Total Revenues ($)Utility function or level of utilityAnnualized operating cost per unit ofpower capacity($, Argentina)Value of Waiting ($)

xxvi

VVARVcVCwWWACCxX

yzZ

NOMENCLATURE

Value of a project ($)Variance (statistics)Variable Charge ($)Variable Cost ($)Wage rate (e.g., $lhour)Wealth ($)Weighted Average Cost of Capital (%)A variableProductivity or efficiency offset factor in incentive regulation(%)A variableA variableExogenous influences on utility unuer PBR ($)