A COMPETITIVE ELECTRICITY INDUSTRY · prices above competitive levels in three key regions: England and Wales, the Nordic countries, and California. Transmission Pricing Policy Electric

EMF Report 15Volume 1

April 1998

A COMPETITIVE ELECTRICITY INDUSTRY

Energy Modeling ForumStanford University

Stanford, California 94305-4023

Preface

The Energy Modeling Forum (EMF) was established in 1976 at Stanford University toprovide a structural framework within which energy experts, analysts, and policymakerscould meet to improve their understanding of critical energy and environmental prob-lems. The fifteenth EMF study, “A Competitive Electricity Industry,” was conducted bya working group comprised of leading international energy analysts and decisionmakersfrom government, private companies, universities, and research and consulting organiza-tions. The EMF 15 working group met four times between September 1995 to September1997 to discuss key issues and analyze a competitive electricity industry.

This report summarizes the discussions of the working group study. Inquiries about thestudy should be directed to the Energy Modeling Forum, 406 Terman Engineering Cen-ter, Stanford University, Stanford, California 94305, USA (telephone: (650) 723-0645;Fax: (650) 723-4107). Our web site address is: http://www-leland.stanford.edu/group/EMF.

Funding for this study was generously provided by the U.S. Department of Energy, theU.S. Environmental Protection Agency, and member organizations of the EMF AffiliatesProgram. Within the Department of Energy, the EMF received support from the follow-ing offices: the Energy Information Administration, the Office of Policy and Interna-tional Affairs, the Office of Planning and Environment and the Office of Petroleum Re-serves within the Office of the Assistant Secretary for Fossil Energy, and the Office ofthe Assistant Secretary for Conservation and Renewable Energy. Affiliate organizationsinclude: BP America, Central Research of Institute of Electric Power Industry (Japan),Electricity Corporation of New Zealand, Electric Power Research Institute, EnvironmentCanada, Exxon, Ford Motor, Mitsubishi Corporation, Natural Resources Canada, NewEnergy and Industrial Technology Development Organization (Japan), Pacific Gas andElectric, Shell International, and the United Kingdom Department of Trade and Industry.Additional support for this study from AMOCO is also gratefully acknowledged.

EMF’s Senior Advisory Panel continues to offer valuable advice on topics as well ascomments and suggestions for improving EMF reports. We would also like to acknowl-edge Michael Hsu, Edith Leni, and Susan Sweeney for their assistance in providingbackground information and in producing this report.

This volume reports the findings of the EMF working group. It does not necessarily rep-resent the views of Stanford University, members of the Senior Advisory Panel, or anyorganizations providing financial support.

iii

Table of Contents

PREFACE ............................................................................................................. I

WORKING GROUP MEMBERS .......................................................................... V

EXECUTIVE SUMMARY ................................................................................... VII

PRICES, MARKETS AND GOVERNMENT......................................................... 1

A New Regulatory Regime....................................................................................................................... 1

MARKET POWER AND STRATEGIC BEHAVIOR ............................................. 3

Defining Market Control ......................................................................................................................... 3

Measuring Market Control ...................................................................................................................... 4

Influences on Market Control ................................................................................................................. 5

Modeling Market Control ........................................................................................................................ 6

English and Welsh Electricity.................................................................................................................. 7

Nordic Power Markets............................................................................................................................. 8

California’s Industry ............................................................................................................................... 8

TRANSMISSION PRICING POLICY.................................................................... 9

Promoting Daily System Operation........................................................................................................ 10

Signaling Investment in Generation and Loads..................................................................................... 12

Expanding Transmission....................................................................................................................... 12

Compensating the Owners of Existing Transmission Assets .................................................................. 13

Simplicity and Transparency ................................................................................................................. 13

Political Implementation ....................................................................................................................... 13

ENERGY SECTOR AND ENVIRONMENTAL IMPACTS .................................. 13

Existing Estimates of Changes in Pollution........................................................................................... 14

Restructuring and Environmental Protection ........................................................................................ 15

iv Contents

Expanding Coal Use in Existing Plants................................................................................................. 16

Access to Transmission Capacity ........................................................................................................... 17

New Entrants and More Natural Gas Use ............................................................................................. 18

Operating Efficiency and Electricity Demand ....................................................................................... 18

Renewables and Energy Efficiency........................................................................................................ 19

Environmental Policy ............................................................................................................................ 20

Modeling Electricity Markets................................................................................................................. 22

SUMMARY......................................................................................................... 22

NOTES............................................................................................................... 23

PARTICIPATING MODELING ORGANIZATIONS ............................................ 25

v

Working Group Members

Jasmin Ansar Pacific Gas & Electric CompanyHiroshi Asano Central Research Inst for Electric Power Industry (Japan)Martin L. Baughman University of Texas at AustinNormand Beaudoin Environment CanadaJan Braten ECON, Centre for Economic Analysis (Norway)Derek Bunn London Business SchoolJames Bushnell University of California, BerkeleyHung-po Chao Electric Power Research InstituteJohn J. Conti U.S. Department of EnergyRajat Deb LCG Consulting (California)Michael Einhorn U.S. Department of JusticeA. Denny Ellerman Massachusetts Institute of TechnologyRobert Entriken Stanford UniversityNigel L. Evans Caminus Energy Limited (UK)Robert Eynon U.S. Department of EnergyDon Garber San Diego Gas & Electric CompanyKenneth Gordon National Economic Research AssociatesTom Grahame U.S. Department of EnergyFrank C. Graves Brattle/IRI (Massachusetts)Richard Green University of CambridgeGeorge Gross University of IllinoisArve Halseth ECON, Centre for Economic Analysis (Norway)Ned Helme Center for Clean Air PolicyBruce Humphrey Cambridge Energy Research AssociatesHillard Huntington Stanford UniversityMarija Ilic Massachusetts Institute of TechnologyHenry Lee Harvard UniversityWilliam Meroney Federal Energy Regulatory CommissionRoger F. Naill The AES CorporationSam Napolitano U.S. Environmental Protection AgencyDale Nesbitt Altos Management Partners (California)Shmuel S. Oren University of California, BerkeleyKaren Palmer Resources for the FutureStephen Peck Electric Power Research InstituteRicardo Raineri Universidad Catolica de ChileE. Grant Read University of Canterbury (New Zealand)Scott Rogers University of TorontoKjell Roland ECON, Centre for Economic Analysis (Norway)Geoffrey Rothwell Stanford UniversityHugh Rudnick Universidad Catolica de ChileRam K. Sahi Natural Resources CanadaYves Smeers Universite Catholique de Louvain (Belgium)Charles Stalon Private ConsultantJames L. Sweeney Stanford UniversityJames Turnure Environmental Protection AgencyJohn P. Weyant Stanford UniversityRay Williams Pacific Gas & Electric CompanyNick Winter Electricity Corporation of New ZealandFrank Wolak Stanford UniversityFrances Wood OnLocation (Virginia)

Executive Summary

Prices, Markets and Govern-ment

Governments worldwide are restructur-ing their electric power industry to pro-mote competition, facilitate investment,and improve economic efficiency. Al-though these policies may lead to sub-stantial improvements in the operation ofthe electric power system, reforming thissector may also present some key chal-lenges as well.

Electricity modelers have been devel-oping analysis and estimates to help un-derstand and anticipate problems thatmay arise in a more decentralized elec-tricity market. Together with key po-tential model users, they have discussedsome of their preliminary findings atworking group meetings organized byStanford University’s Energy ModelingForum over the last 18 months. Thisreport presents some of the more impor-tant conclusions concerning several keyproblems in electricity restructuring.

Restructuring involves deregulating thegeneration sector—where the decisionsabout how much power to produce andwhat type of fuel to burn are made.Similarly, there are plans in many coun-tries to include retail sales—where cus-tomers’ use is measured and billed.However, these policies are not openingup the operation of the transmission anddistribution wires to competitors becauseit is not economic to have more than onefirm own and operate these functionswithin a region.

Market Power and Strategic Be-havior

Definition and DetectionRestructuring has the potential to createsignificant economic gains if it producesmore than a few large producers in anyparticular market.

Market power exists when a firm hasboth the incentive and ability to sustainmarket prices above competitive levelsby changing its own output. Ownershipof the marginal unit that sets the price,by itself, does not indicate marketpower. A firm needs to own sufficientother production to benefit from theprice increase before it can have marketpower. Cooperation among large firmsmay also create opportunities for marketpower.

Market power can have an importanttime dimension. It may be prevalent inthe short run and within certain locali-ties. Over time and with expandedinterregional linkages, market powershould diminish. In the long run, mar-ket power is more likely to be a functionof how well incumbents can preventcompetition from new entrants throughits pricing or merger strategy.

The detection and enforcement of mar-ket power, particularly when electricityprices are volatile, can be quite vexing.• A rapid increase in prices could re-

flect market power, but it could alsoreflect a temporary physical shortageof capacity that needs to be cor-rected.

viii Executive Summary

• Some competitors can impose mar-ket power by expanding rather thancontracting output along a transmis-sion system with congestion prob-lems.

Influences on Market Power The size of the largest firms may nottruly reflect market power opportunities.Behavioral characteristics and institu-tions are important and often need to bemodeled in a consistent framework tounderstand their likely impact. Theseconditions include:• The availability of contracts that fix

prices on some existing units;• Companies owning both generation

and retail supply when price in-creases can be passed through tocustomers;

• Consumers’ ability to substituteaway from electric power;

• The behavior of other large produc-ers already in the market;

• The existence of a ‘competitivefringe’ or of must-run plants;

• The availability of new entrants as aform of competition.

Modeling Market Power Economic models of market behaviorattempt to incorporate these differentbehavioral as well as structural factors.When their assumptions and results aremonitored carefully, they can provideinsights on• How much higher prices would be if

market power is exercised?• What is the relative magnitude of

lost economic efficiency?• How effective are policies for di-

vesting assets, extending the cover-age of fixed-price contracts, or ex-panding transmission links in miti-gating potential market power prob-lems?

• How should geographical boundariesbe defined in studies seeking tomeasure market power in terms offirm size?

The report shows how modeling revealsthe potential for market power to sustainprices above competitive levels in threekey regions: England and Wales, theNordic countries, and California.

Transmission Pricing Policy Electric transmission is a network wherethe costs at one location depend uponwhat is happening elsewhere. This fea-ture requires the system to have well-developed rules for locating where gen-eration and loads are placed as well asfor accounting for transmission lossesand congestion. Comparisons of models for existingtransmission systems are difficult be-cause the economic and technologicalcharacteristics of regional systems candiffer significantly from each other. Forthis reason, the group focused attentionon comparing different regional ap-proaches for setting transmission pricingrather than on existing transmissionmodels. The group focused on six prin-ciples for guiding the design of transmis-sion policy in different countries andstates:

• Promoting the efficient day-to-dayoperation of the bulk power market;

• Signaling locational advantages forinvestment in generation and de-mand;

• Signaling the need for investment inthe transmission system;

• Compensating the owners of existingtransmission assets;

• Simplicity and transparency;

Executive Summary ix

• Political implementation or feasibil-ity.

The first principle is concerned withshort-run economic efficiency, the sec-ond through fourth with long-term effi-ciency, and the last two with implemen-tation. Promoting Daily System Operation Countries have adopted different ap-proaches for incorporating transmissionlosses and congestion in the day-to-dayoperation of the bulk power market.These approaches include:• Essentially ignoring these costs and

viewing all generation as being at asingle point (England and Wales);

• Essentially pretending that all gen-eration is at one point but imposetransmission charges that approxi-mate the costs of transmission losses(Norway and Sweden);

• Choosing generation based upon anexplicit system model that includesthese losses and constraints (NewZealand).

The first two approaches have the ad-vantage of being relatively simple in de-sign but they may result in inferior out-comes if conditions change quickly. Thethird approach avoids these problems aslosses and congestion are resolved di-rectly by the pricing system but assumesthat the system is well known. How-ever, it requires a pricing system thatcreates clear winners and losers from therestructuring process. Signaling Investment in Generationand Loads In the longer run, it may be possible toreduce transmission costs by influencingthe location of plants and loads on thesystem. Most electrical systems do not

allow their electricity prices to vary withthe cost of congestion and losses. Nev-ertheless, they frequently have somepricing mechanisms that encourage pro-duction to locate closer to anticipatedgrowth in electricity demand. Expanding Transmission Prices by location can also signal theneed for investment to expand thetransmission system, although mostcountries do not use such prices to guideinvestment. A significant price differ-ential between nearby locations indicatesthat it is costly to transport electricitybetween these two points, perhaps due tocongestion along the line linking them.A new line will reduce these costs andimprove the efficient allocation of elec-tricity. However, investment that re-lieves congestion will change prices anderode the price differentials. The inves-tor will be unable to receive the fundsonce the investment is made. Long-terminvestment will also require new institu-tions that establish clear ownership ordecision rights over expanding the sys-tem or that identify the right user coali-tion that will benefit from an expansion. Compensating the Owners of ExistingTransmission Assets Owners of existing transmission assetsneed to be compensated. Transmissioncharges are usually set to recover his-toric costs. Use of ‘signaling’ priceswould recover only a fraction of the al-lowed revenues. If a system uses ‘sig-naling’ prices, it must impose a largeadditional charge on each location’sprice to raise sufficient revenues. Insome cases, this additional charge can besufficiently large as to hide the incen-tives provided by ‘nodal’ prices.

x Executive Summary

Simplicity and Transparency Transmission prices should be under-standable if they are to provide usefulsignals. This need may or may not re-quire that pricing be simple. Users maynot understand complex approaches forcalculating price differentials but mayneed to know only the few prices thataffect them. At the same time, usersmay not have much faith in simple ap-proaches that do not represent actualcosts accurately. Political Implementation Some proposed pricing systems can notbe implemented because too many influ-ential interests are likely to lose. Forexample, existing transmission pricingoften suppresses regional differences incosts, a practice that may have to con-tinue to avoid creating winners and los-ers.

Energy Sector and Environ-mental Impacts The restructuring of the electric powerindustry should significantly change theindustry’s regulation and the way gen-erators dispatch, operate, add and re-move capacity, price and market electricpower. These changes could funda-mentally change electricity prices anddemand and alter the eventual fuel mixof electric generation, which could eitherincrease or reduce environmental emis-sions. The analysis discussed by thegroup focused primarily upon the UnitedStates. Existing Estimates of Pollution Several earlier studies for the UnitedStates estimated the resulting changes innitrogen oxides (NOx), carbon dioxide(CO2), and other potential pollutants thatmight result from having more competi-

tive electric power markets. Manystudies indicated an increase in pollutionlevels, principally from increased coaluse, that frequently resulted in emissionlevels that were several percentagepoints higher than their baseline valuesby the year 2000. However, there areother factors that could help restructur-ing reduce pollution emissions. No studies estimate increases in sulfurdioxide (SO2) because these emissionsfall under a national cap regardless ofshifts in fuel use by electric power com-panies. However, increased coal usecould increase the demand for, andhence the costs of meeting, these SO2

emissions targets. Estimated increases in national CO2

emissions range from minimal to almost50% of the reductions needed by theyear 2000 under the Climate ChangeAction Plan. The higher estimates as-sume greater growth in transmission ca-pacity, more replacement of nuclearplants, and higher pollution emissionrates than the lower ones. A similar range exists for the effect onnational NOx emissions levels by theyear 2000. However, even the higherestimates are relatively minor comparedto the approximate 2 million ton reduc-tion in national NOx emissions that areanticipated from the Clean Air ActAmendments. Restructuring and Environmental Pro-tection In the past, policymakers have fearedseveral possible sources for increasedpollution from restructuring:• Competitive pressures may favor an

increased use of existing coal plants,especially older more polluting ones.

Executive Summary xi

• Nuclear plants may be retired morequickly with greater competition.

• Total electricity demand could in-crease, particularly if electricity costsand prices should fall with restruc-turing.

• Some higher-cost but less-pollutinggeneration sources (e.g., renewablesand energy efficiency programs) maybecome more difficult to introduceinto the electric system when com-petitive suppliers must cover theircapital costs in their bidding.

While each of these factors may contrib-ute to greater pollution, there are otherfactors that may help to offset and evenreverse these effects. Such factors in-clude:• Competition may encourage new

entry of producers using gas-firedgeneration, which is significantlyless polluting in sulfur dioxide andcarbon dioxide than existing coalplants.

• There are very real limits on howrapidly the electricity transmissionsystem connecting regions can ex-pand and hence on how much exist-ing coal can replace existing cleanergeneration.

• Some increased electricity consump-tion may simply replace fuel use inother sectors and thus could even re-duce pollution in certain circum-stances.

• Improvements in the energy effi-ciency (heat rates) of plants will re-duce the pollution per unit of deliv-ered power.

• Some renewables, especially distrib-uted resources, may be more profit-able to sell if a more open transmis-sion system removes subsidies to ar-eas that are expensive to reach.

Some of the impacts favoring greaterpollution appear more pronounced in theearlier years while other impacts con-tributing to pollution reductions aremore important in later years. This un-certainty associated with a diverse set offactors makes it quite difficult to developprecise estimates for the environmentalimpacts of restructuring. Moreover, amajor difficulty in comparing existingestimates of the net emissions impacts isthat the definition of what would happenin the absence of restructuring can oftenvary from one source to another. Markets and Environmental Policy In general, restructuring is likely to im-prove the performance of incentive-based environmental policies, such asemissions allowance trading, throughbetter incentives for cost minimization.Conversely, the costs and environmentalconsequences of less efficient environ-mental policies are magnified. To the extent that negative environ-mental impacts occur as restructuring ofthe electric power industry takes place,these impacts are not the result of re-structuring per se. Instead, the problemarises from the failure to require elec-tricity generators to account for the ex-ternal costs associated with pollution,whether it comes from current plant op-erations or changes in operations undercompetition. Governments can designpolicies that would protect the environ-ment without hindering the increasedcompetition created by the restructuringprocess. The environmental impacts of amarket dominated by a few large pro-ducers may require additional policies.The pollution effects when imperfectcompetition is more pervasive have notbeen studied as much and deserve addi-tional analysis.

A COMPETITIVE ELECTRICITY INDUSTRY*

* Readers should look in the endnotes section for key references.

Prices, Markets and Govern-ment If frost ruins the Florida orange crop orgeopolitics in the Middle East disruptsoil markets, people expect to pay moreto relieve the shortage. But if similarconditions affect the supply and demandfor electricity, Americans do not expectto suddenly pay more during the short-age, and policymakers may not allow it.These circumstances could prevail evenif deregulation is causing the industry’scosts and prices to decline over the longrun. How producers, consumers andpoliticians adjust to the new realities ofcompetitive electricity markets willstrongly influence how successful effortsto restructure that industry will be. Al-though many consumers and producersmay be protected from price volatilitythrough longer-term contracts, fluctuat-ing system prices may generate signifi-cant concern and may also influence thepremium that people pay for insuringagainst sharp price movements. Policies promoting decentralized gen-eration decisions are likely to inducewidely fluctuating prices in systems thatare not dependent on hydroelectricpower. Electricity’s value changes dra-matically with the time of day it is beingused. Moreover, it cannot be easilystored for future use. Under such condi-tions, how will one know whether fluc-tuating prices reflect real physical scar-cities or attempts to manipulate prices?Regulators may intervene at the wrongtime to prevent volatile prices that are

actually helping the electric system tooperate more efficiently. This situationrepresents one kind of problem that mayarise in electricity markets as restruc-turing proceeds. Electricity modelers have been devel-oping analysis and estimates to help un-derstand and anticipate problems thatmay arise in a more decentralized elec-tricity market. Together with key po-tential model users, they have discussedsome of their preliminary findings atworking group meetings organized byStanford University’s Energy ModelingForum over the last 18 months. Thisreport presents some of the more impor-tant conclusions concerning three poten-tial problems in electricity restructuring.First, some generating firms may exer-cise market power and hold prices artifi-cially higher than the least-cost dispatchlevel for a sustained period. Second,governments may adopt rules that distortincentives, especially in governing ac-cess to transmission. And third, theremay be more polluting emissions undercertain conditions as a result of the typeof electric generation that may be morecost effective to operate in more com-petitive markets. The report discusseseach of these issues, after a few briefcomments about the pending changes inelectricity regulation. A New Regulatory Regime Governments worldwide are restructur-ing their electric power industry to pro-mote competition, facilitate investment,and improve economic efficiency. An

2 Energy Modeling Forum

important motivation has been that pub-lic ownership or traditional cost-of-service regulation of privately ownedutilities has failed to provide adequateincentives for containing costs as effi-ciently as in more competitive industries.Within the United States, differences inregulatory environments have led to amarked price disparity among states.The wholesale electricity prices inneighboring franchise areas have beenonly one-half or less than the prices inCalifornia, New York and New England.Industries dependent on electricity andlocated in these high-price states arguethat they are operating at a significantcost disadvantage. Outside the UnitedStates, restructuring has been combinedwith privatization of publicly ownedutilities, partly to find new sources ofinvestment funding. Restructuring involves making the deci-sions about generating and selling powermore decentralized. It also involves un-bundling the separate functions in theindustry:• producing the power from fossil

fuels or some other energy source(generation),

• moving power along high-voltagewires (transmission),

• moving power along lower-voltagewires (distribution), and

• selling to and billing customers (re-tail sales).

As a result, the combined forces of sup-ply and demand conditions rather thanthe historic costs of the underlying assetswill determine electricity prices. Thischange requires new approaches forthinking about how electricity prices willbe set in the future. Restructuring involves deregulating thegeneration sector—where the decisions

about how much power to produce andwhat type of fuel to burn are made.Similarly, there are plans in many coun-tries to deregulate retail sales—wherecustomers’ use is measured and billed.However, the operation of the transmis-sion and distribution wires are likely toremain regulated because it is not eco-nomic to have more than one firm ownand operate these functions within a re-gion. This fact complicates the task of re-structuring this industry because deci-sions about generating and transmittingpower are closely intertwined. The dailyoperation of the transmission system de-pends critically upon where and when togenerate power. Longer-run decisionsabout investing in generation or loadsare closely linked to those concernedwith expanding the transmission system.The existence of these interrelationships,or complementarities, between functionspresents opportunities to operate and ex-pand both systems more efficiently or ata lower cost when done jointly ratherthan separately. A fundamental issue inrestructuring concerns how to decen-tralize decisions about generation andloads and still acknowledge the com-plementarities between generation andtransmission. An important development in restruc-tured power markets is how to providefor the system reliability and other an-cillary services provided previously bythe integrated utility. Power systems arecomplex and require that someone pro-vide a set of ancillary services when andwhere they are needed. It is possible toestablish a second set of markets andprices for handling reactive power andother services needed for a reliable elec-trical system. In a market-oriented sys-

A Competitive Electricity Industry 3

tem, opportunities exist to shift reliabil-ity from a supply-side and engineeringphenomenon to one based more on in-corporating economic demand-side con-siderations through the pricing system.

Market Power and Strategic Be-havior In perfectly competitive markets, thecost of the most expensive unit that isstill being sold at a particular hour andlocation—its marginal cost—sets themarket price. Consumers who remain inthe market value their electricity at thisprice or above. Similarly, producers re-maining in the market have costs equalto or below this price. However, pricesalso compensate owners and workers.Compensation, then, may work againstan efficient allocation of resources be-cause it provides incentives for someparticipants to distort prices in their fa-vor if they can. Whether they are suffi-ciently large to distort prices remains thecritical problem of market power. Restructuring has the potential to createsignificant economic gains. As long asincentives for expanding interregionalelectricity trade are not thwarted, high-cost regions will import lower-costpower, while low-cost regions will earnmore by selling to high-cost markets.Investment risks will shift to those whoare willing to bear them in return forhigher possible returns. In addition,consumers may value electricity differ-entiated by time of use and reliabilitymore than the homogenous productavailable under traditional regulation.And finally, electricity generators willhave stronger incentives to lower costsand increase availability than under cost-of-service regulation.

Defining Market Control Large generating firms controlling pricescould erase much of these potentialgains. Market power exists when a firmhas both the incentive and ability tosustain market prices above competitivelevels by changing its own output. Mar-kets are never perfect but instead haveimperfections such as lumpy capacityincrements, a finite number of players,regulatory threat, and imperfect capitalmarkets among other factors. These im-perfections will raise prices above “per-fect” purely competitive levels. The keyquestion is whether they more accuratelyreflect the marginal costs of providingelectric power than does cost-of-serviceregulation. Ownership of the marginal unit that setsthe price, by itself, does not indicatemarket power. A generating firm needsto own sufficient other production tobenefit from the price increase before itcan have market power. Market power has an important time di-mension. It may be prevalent in theshort run before new investments can bemade to expand the system. Over timeand with expanded interregional link-ages, market power should diminish. Inthe long run, market power is morelikely to be a function of how well in-cumbents can prevent competition fromnew entrants through their pricing ormerger strategies. Market power can arise when one or afew firms own a significant share of aregion’s productive capacity in the ab-sence of competition from interregionalpower flows, competing energy sources,or new entrants. This potential increaseswhen such a firm owns a critical (“must-run”) plant that has important strategic


or locational significance. Transmissionconstraints can create serious marketpower problems. Competitive generatoraccess to transmission or competitivetransmission investment is critical forreducing such market power. The previous discussion focuses on theprospects for exercising market power inelectricity generation. However, similarconcerns may arise in the metering andretail marketing business, too. (Distri-bution wires will remain regulated.)Legislation in some states like Massa-chusetts appears to be providing existingutilities with a head start and protectingthem from new competition in the retailsupply business over the next severalyears. Most existing utilities are sellingtheir generation and focusing on the re-tail. They have managed to move theirstranded cost subsidy reimbursementsacross time and across customer classesin a way that diminishes the opportunityfor new entrants to compete for the retailand marketing business. Measuring Market Control The detection and enforcement of mar-ket power, particularly when electricityprices are volatile, can be quite vexing.A significant price rise could indicatephysical scarcities induced by con-straints operating at certain times or lo-cations that are not the result of directprice manipulation. The price increaseunder these conditions provides the in-centives for competitors to find ways toovercome the bottleneck, making thesystem operate more efficiently. It isdifficult to discern these conditions frombehavior that manipulates prices. Another problem in detecting marketpower is that firms, under certain condi-tions, can raise prices and their profits by

expanding rather than holding back onoutput. Congested transmission linescan create a situation where a firm mayhave incentives to increase output toprevent other generators from providingpower along certain links. This situationwill prevail when there are significantinteractions between links, known as“loop flows,” that arise because electric-ity cannot be channeled along a directline between two points but flows alongall possible paths in the system. Most firms considering price manipula-tion offer output at prices above theirmarginal costs. In pursuing this objec-tive, a firm must balance the incomegain from higher prices on the units itcontinues to operate with the incomeloss from units that it removes from themarket. The firm’s net financial positionwill depend upon several key impacts:• How much higher can prices be sus-

tained?• Over how many units?• What would be the price level with-

out manipulation?• How expensive would it be to oper-

ate the units removed from the mar-ket?

Figure 1 shows the factors that influencethe firm’s net position when there existsa single firm in the industry. The up-ward-sloping curve extending from thebottom left to the upper right shows thecost of the last unit added (on the verti-cal axis) at each total level of output (onthe horizontal axis). When the firm re-duces its output from Q0 to Q1, consum-ers will bid against each other for thefewer units and push prices upwardalong the industry demand curve (la-beled as dashes) from P0 to P1. The firmgains P1-P0 on each of the Q1 units itcontinues to produce. The rectangle


filled with this large plus sign indicatesthis increased revenue. Meanwhile, thefirm loses an amount (P0 – the cost ofthe unit) on each unit it removes from

the market. The triangle filled with thelarge negative sign indicates these lostrevenues. The relative size of thesechanges in income determines the in-centives for the firm to withhold output. Influences on Market Control A number of factors will affect thefirm’s potential to profit from withhold-ing production. First, in many electricitymarkets, retail suppliers (companies thatsell power to the final customer) signcontracts with generators or financialinstitutions that hold prices fixed over acertain period. Generators that enterinto such contracts will have fewer unitswhose price can rise when they try toremove some production. Thus, theyhave fewer incentives to curtail output tosustain higher prices. Second, when allowed, ownership mayalso affect market power, as when a

company owns both generation and re-tail supply. In these situations, the retailsupplier may have incentives to accepthigher prices from generation units that

it owns, if it can pass through that priceincrease to its customers. This situationassumes little competition in supply.Most state proposals within the UnitedStates forbid the same company fromholding both generation and retail busi-nesses that transact with each other. Third, consumers’ ability to substituteaway from electric power can limit priceincreases, thereby dramatically reducingmarket power. Real-time pricing ofelectricity will allow consumers to re-spond to shifts in the cost of electricityover the course of day or year. Policiesthat promote the responsiveness of con-sumers to price changes will help tomitigate the ability of firms to raiseprices. The exercise of market powerwill cause greater price increases whenthe price elasticity of demand for elec-tricity is smaller, although curtailed out-put per unit of price increase will be less.

Figure 1: Electricity Market

Output

+ -

Q0Q1

P0

P1

Marginal cost per unit of output

MarginalValue

Consumers' response to price


And fourth, the behavior of other pro-ducers in the market often affects themarket price after the firm removes pro-duction. In the opposite extreme of thesituation depicted in Figure 1, therecould be multiple firms, each onefiercely competing against the others.Under these conditions, the price re-mains at P0 when the firm reduces outputfrom Q0 to Q1, because other firms ex-pand output to meet the demand at thatprice. The firm that initiates the actionsees no increased revenue on the amountQ1 it continues to supply. In fact, itloses income because it is simply relin-quishing sales to other firms rather thanaffecting the market price. Many electricity markets may be char-acterized by a more intermediate situa-tion, where several large firms, eachwith some ability to influence the marketprice, operate. Under these conditions,the strategic behavior by the other largefirms significantly influences how mucha firm constrains output. There exists awide range of possible results dependingupon the strategies that the firm expectsthe other firms to adopt. In general, afirm opts for a higher-price, lower-volume path--one further from the com-petitive outcome--when it expects thatthe other large firms will not react totheir withholding and change their out-put. Most electricity markets with severallarge firms also include smaller produc-ers, sometimes referred to as the “com-petitive fringe.” These smaller produc-ers have no incentive to curtail outputbecause they individually own too fewplants to benefit from influencing prices.When the market price rises due to ac-tions by the larger firms, these producerswill supply additional electricity that is

cost effective at the new higher price.For this reason, availability of supplyfrom these “fringe” producers will de-crease the market power of a large firm.Abundant hydroelectric generation dur-ing “wet” years reduces the ability oflarger firms to increase prices in regionslike California. Alternatively, hydro-electricity capacity may be constrainedduring high-peak periods, resulting inopportunities for larger firms to exercisemore market power. Modeling Market Control Traditional measures of market powerare based upon the market shares of thefirms and how the product and regionare defined. However, as the precedingdiscussion emphasizes, the presence oflarge firms is only one dimension ofmarket power. Behavior of all partici-pants on both the demand and supplysides is not incorporated in these tradi-tional measures. Moreover, new entrycan provide competition in markets thatare dominated currently by relativelylarge firms. The degree of entry willdepend not only upon the cost structureof existing and new firms but also uponready access to the transmission system,which must be continually expanded andupgraded. Economic models of market behaviorattempt to incorporate these differentbehavioral as well as structural factors.They can provide insights on• How much higher prices would be if

market power is exercised?• What is the relative magnitude of

lost economic efficiency?• How effective are policies for di-

vesting assets, extending the cover-age of fixed-price contracts, or ex-panding transmission links in miti-


gating potential market power prob-lems?

• How should geographical boundariesbe defined in studies seeking tomeasure market power in terms offirm size?

At the same time, results from theseeconomic models need to be interpretedcarefully. They indicate the potential forprice manipulation, but firms may bemotivated by other factors to refrainfrom restricting output. In addition, re-sults from these models may change sig-nificantly with different assumptionsabout consumers’ response to price, howother firms react, and the cost structureof the asset base owned by a firm withmarket power. Different estimates ofmarket power could reflect differencesin methodologies rather than differencesin market structure and behavior, thuscomplicating comparisons across studiesand making interregional comparisonsdifficult.

Analysts have applied models to meas-ure the extent of market power and theeffects of different policies in a range ofcountries and regions. We considerstudies on three different countries:England and Wales, the Nordic coun-tries, and California.

English and Welsh ElectricityTwo large producing companies, Na-tional Power and PowerGen, havetended to set market prices most of thetime in the English and Welsh electricitymarkets. Such control over the markethas given these firms the ability tocharge prices well above their marginalcosts and to earn substantial income.Estimates by Green (please see theendnotes) for the early 1990s indicatethat the larger firms might be able to

push prices a little less than 40% abovecompetitive levels. However, pressurefrom a regulator, the potential for entry,and the generators' high share of pro-duction under fixed-price contractsmeant that they did not actually raiseprices to this extent.

In early 1994 the regulator within Britainsuccessfully pressured these two firms todivest some of their coal- or oil-firedplants that tend to set the prices. Simu-lations of the English market suggestthat a small reduction in these firms’ ca-pacity could significantly help consum-ers at relatively low costs. Moreover,more aggressive policies to increase thenumber of firms could substantially im-prove the industry’s operation. If theindustry could be revamped into five ap-proximately equal-sized firms, most ofthe price disparity and lost economicwelfare due to imperfect competitioncould be eliminated. In designing moreliberalized markets, it is important in theinitial stages to establish enough firmsfor effective competition.

Simulations also reveal that acceleratingnew entry into a market dominated by afew producers may have mixed effects ifnew capacity is not justified on costgrounds at the time. Economic welfareimproves slightly with small amounts ofentry but deteriorates at higher levels ofentry. These policies provide benefitsby pushing prices downward and in-creasing output toward their competitivelevels. However, if the costs of buildingand operating a new plant are greaterthan the avoided costs of an existingplant owned by one of the large firms,these additional investment costs mustbe subtracted from the benefits beforedetermining the net outcome of the pol-icy. Such a condition may arise because


prior to the investment, the longer-termmarket price will exceed the cost of themost expensive unit that remains pro-ducing (the marginal unit) when imper-fect competition prevails. Entry deci-sions are based on prices, but welfaredepends on costs.

Nordic Power MarketsOne Swedish producer, Vattenfall, ownsapproximately 50 percent of Swedishproduction and about 20 percent of Nor-dic generation from Norway, Sweden,Finland, and Denmark. Under currentconditions, this firm has some incentivesto reduce their nuclear-generation ca-pacity to influence prices. Simulationsby Halseth suggest that a reduction of25% in its generation could raise pricesby 15% above competitive levels. Theincome earned on the production it con-tinues to produce are sufficient to offsetthe income lost of the nuclear generationthat is removed. In addition, while inte-gration of these markets will move Nor-wegian and Swedish prices closer toeach other, the analysis suggests thatSwedish prices will fall only modestly,as Vattenfall seeks to protect its profitsfrom sharp price reductions.

These estimates show the potential forprice manipulation, but firms may bemotivated by other factors in determin-ing their output levels. Given the politi-cal debate about the desirability of nu-clear power in Sweden, owners of theseplants would be reluctant to sharply re-duce their operations to seek higherrevenues.

The main Norwegian generator,Statkraft, does not possess similar in-centives to reduce output. It costs thisfirm very little to produce additionalpower from their existing hydroelectric

plants; thus, their extra or additional(marginal) costs on these units are verylow. Thus, it requires a more steeplyrising price from controlling output tojustify the removal of some of its gen-eration,

California’s IndustryA potential exists for market power inhigh-demand hours within California.The fall and early winter months presentthe most severe problem due to the rela-tive scarcity of hydroelectric powerwithin California and the Pacific North-west. Native demand within the north-west absorbs most of the available hy-droelectric power during these keyhours, allowing little of it to be availablefor export to meet California demandunder these conditions.

In one set of estimates by Borenstein andBushnell with a moderate demand re-sponse to price, peak prices are about65% higher than competitive levels inMarch while other prices range from 1 to5 percent more. In September, peakprices are 31% higher while the otherprices range widely from 3% to 73%more.

A key transmission bottleneck createscongestion along Path 15 that sometimesdisconnects northern and southern Cali-fornia. The Borenstein-Bushnell simu-lations indicate that in high-demandhours of the fall and early wintermonths, competitive firms within north-ern California provide insufficient ca-pacity relative to total demand in thisregion to prevent large producers therefrom raising prices.

Market power in California is most se-vere when the consumers’ response toprice is relatively low. In certain critical


hours, prices can rise sharply in thesimulations and can be several timeshigher than their competitive levels.Uncertainty exists about how responsiveconsumers are and whether firms areseeking to maximize their income overthe short or long run. In addition, poli-cymakers can influence this response.Offering real-time price information andimproving the availability of certain end-use technologies can make consumersmore responsive to price, thereby help-ing to mitigate market power problems.

California’s largest producers are di-vesting most of their plants and increas-ing the number of firms competing in thenew market. This divestiture signifi-cantly lowers the potential for marketpower in the simulations. The availabil-ity of hydroelectric power and the re-sponse of demand to price may also havea significant influence on market prices.

Transmission Pricing Policy

Workably competitive power marketsdepend on ready access to transmissionand distribution lines that connect re-gionally dispersed end-users with gen-erators. A country or state will benefitmost if governments adopt rules that al-low many market participants to com-pete, thereby fostering economic effi-ciency. Instead, strong political interestsare setting rules in some regions, therebysculpting rules in their own interests andat the expense of overall economic effi-ciency. An example may be the recentpricing rules adopted within Texas thatdiscourage long-distance competitionfrom generators located far away fromimportant demand centers. Here, regu-lators have explicitly raised the costs of

long distance transmission, but not localusers, although actual economic costswill not rise with distance if electricity issent against the prevailing flow. Thetraditional approach for recovering costsin a declining-cost industry like electric-ity transmission has been through post-age stamp adders applied relativelyequally to each user.

Electric transmission is a network wherethe costs at one location depend uponwhat is happening elsewhere. The loca-tion of generation & loads affects theamount of lost power. Transmissionconstraints can prevent cheaper plantsfrom operating. Prices that ignore theseinteractions will result in higher operat-ing costs and poorly located generationand loads. Some regions have recentlyadopted prices that reflect these costs butmost have not. Prices that vary by loca-tion are known as nodal pricing. A nodeexists on the system where power can beeither injected or used.

Comparisons of models for existingtransmission systems are difficult be-cause the economic and technologicalcharacteristics of regional systems candiffer significantly from each other. Forthis reason, the group focused attentionon comparing different regional ap-proaches for setting transmission pricingrather than on existing transmissionmodels. The group focused on six prin-ciples (Table 1) for guiding the design oftransmission policy in different countriesand states. The first principle listed inTable 1 is concerned with short-run eco-nomic efficiency, the second throughfourth with long-term efficiency, and thelast two with implementation.


Promoting Daily System OperationA power system would quickly breakdown if some entity does not coordinateall the generators. Outside of hydroe-lectricity, electric power cannot bestored. The coordinator must ensure thattotal generation equals total demand atevery instant for reliability purposes. Inpromoting efficient daily operation, acoordinator tries to meet the system de-mand at the lowest possible cost. If allgeneration and loads occurred at thesame location, a coordinator wouldschedule the lowest-cost units first.Scheduling must be done in a way thatmaintains system reliability, includinghaving sufficient excess generation tomeet surge demands and sudden poweroutages.

Once generation is dispersed, efficientsystem coordination requires the inclu-

sion of the cost of transmitting powerfrom one location to another. Thesecosts include not only the actual cost ofsystem losses but also the opportunitycosts imposed by transmission con-straints. Transmission losses are an ac-tual cost in that someone must pay forthe generated power that is lost as heatwhen it is transmitted through the wires.On the other hand, transmission con-straints represent an opportunity ratherthan an explicit cost or expenditure out-lay. Constraints force a more-expensivegenerator to replace a less-expensiveone. In the process, the system foregoesopportunities to provide more power lessexpensively. Whatever happens, theactual dispatch must be feasible, takingaccount of the transmission constraints.

Countries have adopted different ap-proaches for incorporating these trans-

Opportunity costs are the forgone opportunities of a particular ac-tion. For example, a student attending a college must pay direct ex-penses for tuition and books. In addition, the student often incurs anopportunity cost because he or she yields the opportunity to earn awage at a full-time job. Although not a direct expenditure by thestudent, these costs are real and must be included in the full costs ofattending college. In a similar manner, the full costs of using anelectric transmission line should include the lost opportunities ofproducing and carrying power more cheaply, even though a usermay not pay these charges in some pricing systems.

Table 1: Principles for Transmission Pricing

• Promoting the efficient day-to-day operation of the bulk power market• Signaling locational advantages for investment in generation and demand• Signaling the need for investment in the transmission system• Compensating the owners of existing transmission assets• Simplicity and transparency• Political implementation (feasibility)


mission costs. In determining the spotprice of electrical energy in the day andhour preceding the delivery of power,the markets in England and Wales es-sentially ignore these costs and view allgeneration as being at a single point.When actual delivery occurs and con-straints are realized, the coordinator mayneed to change the dispatch to relievethe constraints. It is a relatively simplesystem, but it can cause the real-timedispatch (at the time of delivery) to bebadly inferior if the losses and con-straints are significant.

Representing a second approach, powermarkets in Norway and Texas essentiallypretend that all generation is at one pointbut administratively impose charges fortransmission losses. Generators mustbid prices that include these transmissionlosses as well as their additional or mar-ginal generation costs. In Norway, thesecharges for transmission losses are ad-ministratively imposed by node and sea-son. If congestion becomes a problem inNorway, this system price becomes areference price. Price zones are definedadministratively and regional prices aredetermined to clear these markets ac-cording to the constraints. This generalapproach for these systems appears toreduce administrative costs by simplify-ing transmission prices but it may lead tosome problems in real-time dispatch insystems where losses and constraintschange quickly or significantly.

Finally, one can choose generation basedupon an explicit system model that in-cludes these losses and constraints, ashas been introduced in New Zealand.Generators provide the coordinator withtheir price bids, which should cover their

marginal (or incremental) generationcosts. The coordinator runs the systemmodel to produce a schedule for whenand where to operate plants and at whatspot prices. Generators receive the spotprice at their location on the system (ornode), which includes the losses andconstraint costs. The system automati-cally incorporates losses and constraintsin determining the best schedule forplant operation and the best set of prices.

The possibility of market power amonggenerators can influence the efficiencyof any of these three approaches forcharging for transmission losses andcongestion. Some generators may bidtheir plant prices sufficiently higher thantheir marginal costs during certain timesto attract additional revenue. The inter-action between market power and trans-mission pricing and access is an impor-tant issue that requires additional futureanalyses.

Most market designs have focused onrewarding lower-cost over higher-costgeneration. They have not paid the sameattention to discouraging lower-valuedend uses that may constrain the systemat critical times and in key regions.Systems that simplify consumer prices(e.g., uniform prices across large zones)are politically popular but may sacrificeconsiderable economic efficiency.When rules allow consumers to pay arelatively uniform price across locations,they will demand too much power inhigh-cost locations and too little powerin low-cost locations. In this respect,economically efficient generation sched-ules depend upon both consumers re-vealing their preferred prices and pro-ducers revealing their actual costs.


Signaling Investment in Generationand LoadsAlthough these short-run operations ofexisting plants and transmission are im-portant to incorporate properly, thereexist longer-run gains in economic effi-ciency that must also be reflected. Overtime, it may be possible to reduce trans-mission costs by influencing the locationof plants and loads on the system. Insome cases, moving generation and salescloser to each other may reduce costs.In other cases, locating plants and loadsin a way that relieves the use of con-gested transmission lines may be moreeconomically efficient.

A system that allows transmission coststo influence the prices paid by consum-ers and received by producers may allowsufficient incentives for locating theseinvestments properly. Firms and cus-tomers will locate in a way to reducetheir transmission costs if their expan-sions are small relative to the overallsystem. When they are sufficiently big-ger, prices will change throughout thesystem, causing the current spot prices tobe a poor guide for economically effi-cient decisions.

Most electrical systems do not allowtheir electricity prices to vary with thecost of congestion and losses. Never-theless, they frequently have some pric-ing mechanisms that encourage produc-tion to locate closer to anticipatedgrowth in electricity demand. In Eng-land and Wales, for example, transmis-sion access charges favor the injection ofnew plants in the south near London orthey favor expanding electrical loads innorthern England. However, the incen-tives may not be large enough to incor-porate the full costs of locating genera-

tion and consumption in these differentregions.

Expanding TransmissionPrices by location can also signal theneed for investment to expand thetransmission system, although mostcountries do not use such prices to guideinvestment. A significant price differ-ential between nearby locations indicatesthat it is costly to transport electricitybetween these two points, perhaps due tocongestion along the line linking them.A new line will reduce these costs andimprove the efficient allocation of elec-tricity. However, investment that re-lieves congestion will change prices anderode the price differentials. The inves-tor will be unable to receive the incomefrom these large price differences alongthe system, once the investment is made.Under these conditions, firms will notinvest in transmission capacity unlessthey receive some type of capacity orfixed payment contract in advance.

Transmission congestion contracts arefinancial instruments that hedge theprice differentials between nodes. Whensuch contracts are in place, they allowparticipants to base their decisions onrelatively stable prices by location. Akey issue here is the length (number ofmonths or years) of these contracts; in-vestors require relatively long periods toachieve their returns.

Long-term investment will also requirenew institutions that establish clear own-ership or decision rights over expandingthe system or that identify the right usercoalition that will benefit from an expan-sion. The entity responsible for operat-ing the system on a daily basis need notnecessarily be the one that invests in itsexpansion.


Compensating the Owners of ExistingTransmission AssetsOwners of existing transmission assetsneed to be compensated. Transmissioncharges are usually set to recover his-toric costs. Use of ‘signaling’ priceswould recover only a fraction of the al-lowed revenues. If a system uses ‘sig-naling’ prices, it must impose a largeadditional charge on each location’sprice to raise sufficient revenues. Insome cases, this additional charge can besufficiently large as to hide the incen-tives provided by ‘nodal’ prices.

Simplicity and TransparencyTransmission prices should be under-standable if they are to provide usefulsignals. This need may or may not re-quire that pricing be simple. Users maynot understand complex approaches forcalculating price differentials but mayneed to know only the few prices thataffect them. At the same time, usersmay not have much faith in simple ap-proaches that do not represent actualcosts accurately.

The ‘contract-path’ pricing used in NewEngland and in other systems until therecent past underscores simplicity. Eachtransmission-owning utility has a post-age stamp wheeling charge per unit ofpower (kilowatt-year). This chargemight be computed by dividing its costof transmission by its peak demand. Inarranging power exchanges across re-gions, any individual utility would needto negotiate a contract path across inter-vening systems and pay each its wheel-ing charge. In practice, such transac-tions affect power flows on other sys-tems, but these additional effects wouldneither receive nor make payments (de-pending upon whether their costs wereincreased or reduced by the transaction).

Political ImplementationSome proposed pricing systems can notbe implemented because too many influ-ential interests are likely to lose. Forexample, existing transmission pricingoften suppresses regional differences incosts, a practice that may have to con-tinue to avoid creating winners and los-ers.

Another example may be the penaltiesrecently imposed upon long-distancetransmission in Texas. The state gov-ernment will recover 70% of the trans-mission costs through a postage stampand 30% through a technique that com-bines the change in electricity flow anddistance. A long-distance transactionwhich increases the flows on a largenumber of lines will have to pay a largefee (which is economically efficient).The problem is that a transaction in theopposite direction, which would actuallyreduce flows and costs, would have topay the same large fee, creating an un-justified deterrent for distant generatorswishing to enter local markets.

Energy Sector and Environ-mental Impacts

The restructuring of the electric powerindustry should significantly change theindustry’s regulation and the way gen-erators dispatch, operate, add and re-move capacity, price and market electricpower. These changes could funda-mentally change electricity prices anddemand and alter the eventual fuel mixof electric generation, which could eitherincrease or reduce environmental emis-sions. This section discusses some ofthe basic fundamental factors determin-ing the broader impacts of restructuringon energy markets and on the environ-ment.


Existing Estimates of Changes in Pol-lutionSeveral earlier studies for the UnitedStates estimated the resulting changes innitrogen oxides (NOx), carbon dioxide(CO2), and other potential pollutants thatmight result from having more competi-tive electric power markets. All studiesindicated increased pollution levels,principally from increased coal use, thatfrequently were several percentagepoints higher than their baseline valuesover the next 5 to 10 years. During thisperiod, many owners of existing Mid-western coal plants find that they canrefurbish their existing plants and oper-ate them more cheaply than those whoseek to finance and operate new gas-fired plants. Over time, however, totalelectricity demand grows, eventuallycreating the need for new capacity. Inthis latter period, new gas-fired plantsare likely to enjoy advantageous capitaland operating costs in many regions.

The major problem with mid-west coalin this transitional period is carbon di-oxide. Stringent carbon standards willmake it uneconomic to retrofit existingcoal facilities. If carbon standards arenot implemented during this period,coal-fired generation should competefavorably in this region, even whenmeeting other new environmental stan-dards.

No studies estimate increases in sulfurdioxide (SO2) because these emissionsfall under a national cap regardless ofshifts in fuel use by electric power com-panies. However, increased coal usecould increase the demand for, andhence the costs of meeting, these SO2emissions targets.

The range of increased CO2 emissionsvaries substantially by study. Someprojections anticipate relatively smallincreases in national CO2 emissions. Asan example, the 1996 environmental im-pact statement from the US Federal En-ergy Regulatory Commission expectednational emissions in the year 2000 torange from about 3 to 28 million tons ofcarbon higher than their baseline sce-nario. These increases are relativelysmall compared to the level of commit-ment that the United States might makeunder many international proposals.However, Palmer and Burtraw provideother estimates that assumed greatergrowth in transmission capacity and ac-celerated retirement of nuclear plants.Their projections estimate national CO2

levels that were several times larger,ranging between 75-134 million tons.The higher end of these latter estimatescould equal 50% of the reductionsneeded by the year 2000 under the Cli-mate Change Action Plan. Estimatesvary with key assumptions not onlyacross studies but also across scenarioswithin a particular study.

A similar range exists for the effect onnational NOx emissions levels by theyear 2000. Once again, the FERC esti-mates remain relatively low, varyingbetween 71 and 128 thousand tons. ThePalmer-Burtraw study places this esti-mate at a higher range of 112 to 479thousand tons, and several other studiesestimate an even greater increase. Al-though these changes may appear large,they are relatively minor compared tothe approximate 2 million ton reductionin national NOx emissions that are an-ticipated from the Clean Air ActAmendments.


The environmental impacts of electricityrestructuring in other countries may bevery different and depend upon the typesof reform policies under consideration aswell as on the underlying energy marketconditions. In 1996 and 1997 Japaneseintegrated utilities contracted with inde-pendent power producers for 6 gigawatts(GW) of electric production to begin op-eration between 1999 and 2004. TheEnvironment Agency of Japan estimatesthat this additional production will in-crease annual CO2 emissions by 3 to 4million tons of carbon, which equalsabout 1% of total CO2 emissions in1990. Current IPP plans for units thatwill begin operating by 2004 include45% coal-fired and 43% residual oil-burned plants. However, gas-fired unitsshould become more important as utili-ties and MITI, the regulator, pursue en-vironmental regulation more aggres-sively.

Privatization and regulatory reform inEngland and Wales exposed that coun-try’s high-cost domestic coal resourcesto intense competitive pressure, substan-tially reducing both the use and price ofthat fuel. The English and Wales re-structuring improved the efficiency ofexisting plants and replaced high-costdomestic coal by natural gas. During thetransition toward privatization between1990 and the 1994-95 period, the emis-sion levels of the major pollutants de-clined. CO2 levels fell by 28%, SO2 lev-els declined by 35%, and NOx pollutiontumbled by 38% (Newbery and Pollitt).

Environmental issues will attract consid-erably more attention in the future. Evenfor a single country or region, many ex-isting projections differ noticeably de-pending upon their methodologies andassumptions. In addition, there may be

conditions that cause a restructuredelectricity market to improve the envi-ronment. Structured analysis based uponlarge-scale models of electricity and fuelmarkets will help to discern the relativeimpact of the interactions between theseseparate effects.

Restructuring and Environmental Pro-tectionIf further analyses continue to find in-creased pollution from the sweepingchanges expected in the electric powermarkets, it should be understood that theissue of environmental protection can beseparated from the issue of restructuringelectricity markets. Restructuring is notthe source of possible increased pollu-tion. Rather, the problem arises fromfailing to force generators to account forthe external costs associated with addi-tional generation from older plants.Governments can design policies thatwould protect the environment withouthindering the restructuring process.Moreover, economic measures likeemissions trading may be a more attrac-tive policy alternative under conditionsof competitive power markets than underthe previous rules for allocating costsand setting prices with cost-of-serviceregulation.

If a few large producers dominate anelectricity market, they may be able tosustain prices above competitive levels.Higher prices should reduce electricitydemand and its associated pollution lev-els. The net effect on the environment,however, must also incorporate how theexercise of market power influences thegeneration mix. An important area forfuture research will be to estimate theenvironmental effects of restructuredelectricity markets that are dominated bya few large producers.


In the past, policymakers have fearedseveral possible sources for increasedpollution from restructuring:• Competitive pressures may favor an

increased use of existing coal plants,especially older more polluting units.

• Total electricity demand could in-crease, particularly if electricity costsand prices should fall with restruc-turing.

• Some higher cost but less pollutinggeneration sources (e.g., renewablesand energy efficiency programs) maybecome more difficult to introduceinto the electric system when unitsare bidding on the basis of costs.

While each of these factors may contrib-ute to greater pollution, there are otherfactors that may help to offset and evenreverse these effects. Some of the im-pacts favoring greater pollution appearmore pronounced in the earlier yearswhile other impacts contributing to pol-lution reductions are more important inlater years. This uncertainty associatedwith a diverse set of factors makes itquite difficult to develop precise esti-mates for the environmental impacts ofrestructuring. Moreover, a major diffi-culty in comparing existing estimates ofthe net emissions impacts is that ana-lyst’s definitions of what would happenin the absence of restructuring (or theirbaseline assumptions) can often be quitedifferent. For example, some analystsalready include in their baseline scenariowholesale trade (or wheeling) betweenlarge electrical systems.

These complications may mean that it iseasier to discuss the major conceptualissues than to provide precise empiricalestimates. Table 2 contains a set of fac-tors that could either increase or de-crease the expected environmental emis-

sions resulting from electricity restruc-turing efforts. This list serves as a usefulbackground for the more indepth discus-sion below.

Expanding Coal Use in Existing PlantsWhen generation plants compete againsteach other and the transmission systemallows a freer flow of electricity tradebetween systems, there will be pressuresto switch electric production towards theavailable plants that are relatively inex-pensive to operate. This redispatch ofelectric generation will favor the ex-panded use of coal-fired plants built inthe 1957-77 period. These are the plantswith available capacity and apparentlylow operating costs relative to otherunits. (This effect is already happeningto some extent and can be mainly attrib-uted to the wholesale competition be-tween large electrical systems. It cantherefore be partly taken into account asa baseline assumption in analyses whichare restricted to the effects of competi-tion in retail power markets.)

Although a more competitive industry isexpected to increase utilization of exist-ing coal plants in the near term, there arelimits on this expansion. An importantfactor is that coal use is already growingunder the baseline assumptions, therebyconstraining the amount of excess coalplant capacity in the future. Addition-ally, although the accounting costs ofoperating coal plants more intensivelyappear modest, the actual economiccosts of expanding production could besubstantially higher in units that have notbeen well maintained and continuouslyupgraded over time. For example, heatrates and reliability in some such plantsmay not be that good, and for smallerplants, the manpower costs or environ-mental expenditure per kWh may be


higher than for larger, newer units. Thisissue requires careful future monitoring.

Access to Transmission CapacityAnother constraint on expanded coal useis the availability of interregional trans-mission capacity between high-producing and high-consuming areas.Much of the low-cost coal generationcannot be dispatched to other regions ifcritical transmission links are not inplace.

Measuring existing transmission capac-ity and estimating the potential expan-sion of that capacity will influence esti-mates of projected environmental emis-sions. National-level analyses that ex-clude regional transmission constraintsshow more substitution of higher pol-luting generation sources for lower-polluting ones. (The results also dependupon other assumptions, such as NOx

emission rates and nuclear displacement.

For example, the regionally-basedPalmer and Burtraw study assume amuch lower NOx emission rate for oldercoal plants than does the previous na-tionally-based study by Lee and Darani.Please see the notes at the end of thispaper.) Conversely, regional analyseswhich assume little or no growth intransmission capacity could understatethis substitution.

Understanding which factors determinenew investment in transmission capacityis not well understood at this point.Profitability, ownership of the transmis-sion entity, and other institutional con-straints will help to shape this response.It will also make a difference whetherthe new investment occurs as a new setof transmission wires or as enhance-ments of capacity on existing lines. Itshould be acknowledged that the eco-nomics of transmission expansion are

• Table 2: Influences of Restructuring on Environmental Impacts Key factors that might increase emissions due to restructuring include:• Increased utilization of more pollution-intensive (primarily coal-fired) power plants

due to economic redispatch, lower operation and maintenance costs, and increasingbaseload production in response to demand shifting from peak to offpeak periods;

• Economic retirement of nuclear plants prior to their scheduled license expirations;and

• Greater overall sales of electricity due to lower prices without offsetting declines innonelectric fuel use.

Key factors that might reduce emissions due to restructuring include:• Faster penetration of more efficient supply technologies (primarily natural gas-fired

combined cycle plants);• Economic retirement of the most costly fossil-fired plants;• Successful marketing of ‘green power’ and end-use efficiency services as part of a

differentiated, high-value electricity product;• Improved efficiencies at existing plants; and• Legislative requirements for new renewable energy sources and/or conservation in-

vestments.


poorly represented in current large-scalemodels.

Increased competition should lead to theretirement of uneconomic units and theaddition of new, more efficient capacity.Owners will retire those plants with highoperating costs or whose expansionswould be too risky to assume. In thisway, capital will be replaced differentlythan under baseline planned retirementschedules. What happens to emissionsdepends on what types of units are re-tired. If nuclear units are replaced byfossil-based systems recently built orlocated in another region, total CO2 andNOx emissions will increase because thenuclear systems do not emit these pollut-ants. If economically inefficient fossil-fueled units are retired, the impact onemissions will be less and can even be anet environmental gain in certain cir-cumstances.

New Entrants and More Natural GasUseRestructuring is also spurring the addi-tion of new gas combined-cycle unitsthat should reduce emissions. Rapidlyimproving efficiencies and decliningcosts are fostering this new entry.Smaller-sized units are more flexible tobuild and use during uncertain times.

Although natural gas transmission ca-pacity appears adequate to support in-creased gas sales for power generation,higher demand for this fuel could raisenatural gas prices. Offsetting this pres-sure, however, competition betweenelectricity and natural gas at the end-uselevel may prevent gas prices from risingmuch. If electricity prices fall with re-structuring, some industrial and com-mercial users will shift away from natu-ral gas toward electrically based tech-

nologies. This shift will partially offsetthe increased gas use for power genera-tion, thus dampening the upward pres-sure on natural gas prices.

Operating Efficiency and ElectricityDemand

The ability of firms to retain profits willchange incentive structures, possiblyleading to changes in plant operations,cost and performance. Operating costscould be reduced through workforce re-duction, contracting, or adoption of cost-cutting methods from other firms. Plantoperations could become more efficient,and plant availabilities could be in-creased, with both performance indica-tors tending toward a ‘best practicefrontier’. The effects of such changes onnet emissions depend on the relative ad-vantage for specific types of plants. Thisfactor is usually incorporated as a set ofexogenous assumptions in modeling.

Restructuring is likely to lead to lowerelectricity costs and prices, although twofactors could operate in the opposingdirection. First, large producers may beable to sustain prices above competitive-cost levels if they own and exercise amonopoly power advantage, as dis-cussed previously. And second, manyrestructuring programs within the UnitedStates allow owners of existing plants tocollect a special unavoidable paymentfrom all users of the electric system forrecovering the difference between theirhistorical asset costs determined underthe old regulatory structure and the newmarket-determined prices. These addi-tional costs, known as “stranded” costs,are added to the costs of supplying elec-tric power under the new conditions todetermine the prices paid by consumers.


If the electricity price should decline,one would expect an increase in con-sumer demand for electricity. Stranded-cost recovery is scheduled to decreaseover time, which increases the chancesof lower electricity prices and greaterelectricity consumption after a fewyears. In addition, prices may fall fur-ther with declining market power as newcompanies over time enter previouslyregulated utility areas, although mergersmay dampen this competition in certaininstances. Growth in electricity demand,stimulated by lower electricity prices,will increase pollution if it representsnew demand for energy. On the otherhand, substitution from other fuels toelectricity, stimulated by lower electric-ity prices, need not involve increases inpollution. Analyses that do not includethe reduction of fuels outside the elec-tricity sector will overstate the environ-mental impacts of restructuring.

Current knowledge about the price re-sponses of different types of consumersat different times is extremely uncertain.This is one of the most important em-pirical questions for ongoing research.Emissions changes due to demandgrowth will moderate over time becausethe mix of available capacity to meet thenew demand will shift toward high-efficiency natural gas plants. If consum-ers switch to electricity from othersources of energy, the growth in pollu-tion will not be as large and may even benegative, depending upon the emissionscharacteristics of the replaced fuels.

New pricing regimes under restructuringwill also provide price signals reflectingthe cost of producing and consumingelectricity at different times. Time-differentiated (or real-time) pricingcould also lead to a short-term increase

in emissions but the case is more com-plex than for a simple decrease in overallprices. There will be more use of realtime pricing in the future, especiallywhen the cost of metering falls and datacollection and processing technologiesimprove. These conditions will lead tohigher peak-period prices and lower off-peak-period prices than under traditionalutility pricing. Consumers may respondto these new conditions by replacingsome peak demand with use at othertimes. The system’s load profile willflatten, requiring greater use of baseloadplants relative to peak-load plants. Inthe near term, the available baseload ca-pacity would be existing coal plantscompared to peak-period gas-fired gen-eration. These conditions will lead to anincrease in emissions. However, naturalgas combined cycle plants will competefor baseload demand over the longerterm, thereby diminishing this impact.

Renewables and Energy EfficiencyAlthough the cost of renewable energyproduction remains above market levels,it has declined in recent years. A morecompetitive industry is expected to in-crease the pressure on these costs. Inaddition, some renewable technologiescan be located closer to the eventualend-use location, thereby eliminatingsome or all of the transmission and dis-tribution costs. Opportunities to sellsuch generation, referred to as distrib-uted resources, could grow if marketforces begin to shape electricity prices.

Increased risk associated with a move-ment away from cost-of-service regula-tion will increase the cost of capital forpower suppliers and will make capital-intensive renewable energy technologiesmore expensive than natural gas com-bined cycle sources. The future of re-


newable energy will depend on contin-ued government support unless a greatdemand for ‘green power’ develops (asdiscussed below). Many proposals at thestate and federal level contain some typeof renewable supply mandate such as aRenewable Portfolio Standard. To theextent that these programs result inhigher penetration of renewables such assolar, wind and biomass than otherwisewould have occurred, environmentalemissions will fall. The extent of thispotential effect requires further analysis,including several key design issues forrenewables support programs. Theseinclude evaluation of supply mandatesversus financial or tax subsidies; inclu-sion of existing versus new capacity;definition of qualifying technologies;and mechanisms to locate capacitywhere it will have the most beneficialenvironmental effect.

End-use efficiency and conservation in-vestment, which have been supported bypublic programs such as demand-sidemanagement (DSM), have been in-creasingly turned over to private marketsduring the transition to competition. In acompetitive power market, some newfirms selling electric power to consum-ers could obtain exclusive rights to aparticular end-use equipment. Offeringthe customer exclusive use of thisequipment to reduce his energy costsmay be an effective way to differentiatea firm’s product in the marketplace.Such programs may provide critical in-centives to develop better technologythat is also cost effective.

At the same time, however, these tech-nologies and programs will not do wellwhen their costs exceed the market ratefor power. Some regions or states mayopt to include these programs as addi-

tional unavoidable costs for consumers,as is done currently for the “stranded-cost” recovery, but the higher costs ofthese programs will become more visiblethan in the past. Assumptions about de-mand reductions from public programsor market-driven activities will probablyremain as exogenous assumptions in cur-rent and future analysis.

Retail competition will allow consumersto vote with their wallets about how theywant their electricity to be produced. Asproducers seek to differentiate theirproduct offerings, many are consideringoffering electricity from environmentallyfriendly sources, or “green power”.Consumer preferences will thus play adirect role in determining the electricitysupply mix for the first time. To the ex-tent that demand for green power leadsto greater penetration of renewable en-ergy sources, emissions will fall. Theextent of this demand is extremely un-certain, as is the ability or desire of con-sumers to distinguish between types ofpower supply and whether these suppliesare new or existing (i.e. a repackaging ofresources which does not alter the sys-tem profile). The effects of green powermarketing programs on air emissions arethus highly uncertain and depend on anumber of factors, including the baselinemarket penetration of such services, thetypes of renewables which comprise agreen power offering, and the locationand timing of any new resource addi-tions.

Environmental PolicyThe impact of competition on the envi-ronment is likely to be closely guardedby a number of environmental regula-tions. The nature of environmentalregulation varies among pollutants andthis has important implications for the


expected impact of industry restructur-ing.

Sulfur dioxide (SO2) is subject to a na-tionwide cap, implemented through aprogram of tradable emissions permits(the Acid Rain Program). Restructuringin the electric power sector thus will notresult in a higher level of total emissionsthan allowed under the program. How-ever, it could increase the costs of SO2

control and the market-clearing price ofpermits if it were to increase the demandfor SO2 emissions. It could also affectchanges in the timing of emissions, re-sulting from the flexibility allowedthrough banking of excess emissions re-ductions.

Nitrous oxides (NOX) are currently sub-ject to regulation based on emissions perunit of fuel input. Thus, sources can in-crease their emissions as their output in-creases. Restructuring could lead to in-creased emissions of NOX, and in theshort to medium term these could besignificant in certain parts of the US.However, it is possible that a partial capon NOX emissions could be developedprior to 2005, and such a cap is alreadyin place in the Ozone Transport Region(OTR) covering 13 Northeastern statesand the District of Columbia. The EPAhas recently issued a proposal whichwould set 5-month summer NOX caps, orbudgets, for 24 states covering more ofthe Eastern US. The future of this pro-posal depends on the actions of the statesand the EPA under the Clean Air Actand is not certain. (The Acid Rain pro-gram is specifically authorized by Con-gress; no such statute exists for NOX

trading).

Greenhouse gas emissions (GHGs) arecurrently unregulated and any increases

due to restructuring would not be miti-gated by federal or state law. Dependingon the timing and magnitude of potentialGHG emissions increases, efforts tomeet current voluntary goals and poten-tial future commitments could becomemore difficult and costly. Conversely,GHG emissions decreases through com-petitive effects or policy interventionswould make control efforts less difficultand costly.

Mercury emissions are usually not con-sidered in analyses of restructuring. Asa hazardous air pollutant (HAP), mer-cury is regulated under Section 112 ofthe Clean Air Act. At present there is nodirect regulation of mercury emissionsfrom power plants, so any increase re-sulting from restructuring (which couldonly occur if more coal is used) wouldnot be mitigated. Pilot programs formercury control, and banking of emis-sions reductions, are underway in theGreat Lakes region.

In general, restructuring is likely to im-prove the performance of incentive-based environmental policies such asemissions allowance trading, throughbetter incentives for cost minimization.Conversely, the costs and environmentalconsequences of less efficient environ-mental policies are magnified.

To the extent that negative environ-mental impacts occur as restructuring ofthe electric power industry takes place,these impacts are not the result of re-structuring per se. Instead, the problemarises from the failure to require elec-tricity generators to account for the ex-ternal costs associated with pollution,whether it comes from current plant op-erations or changes in operations undercompetition. Governments can design


policies that would protect the environ-ment without hindering the restructuringprocess. Examples include such priceinstruments as tradable permits or morequantity-oriented policies as the NationalAmbient Air Quality Standards(NAAQS), which place an absolute capon emissions in non-attainment areas. Inmost cases these policies would beequally applicable to other sectors of theeconomy.

Modeling Electricity MarketsModels of electricity and fuel marketsare extremely helpful in determining therange of possible outcomes for electric-ity prices, the fuels used for generation,and the associated environmental im-pacts. They provide an importantframework for allowing analysts to un-derstand how supply and demand condi-tions develop over time and how theycombine to set market-based prices. Themodels useful for understanding devel-opments in a market-based electricityindustry are fundamentally differentfrom those that served people well undera cost-of-service regulatory regime.

At the core of each model is a set of ex-isting generation plants with varyingcost and engineering characteristics.Much of the model depends upon how itincorporates improvements in opera-tional and maintenance costs, the factorsdetermining the retirement of existingplants, and the addition of new entrantsemploying advanced technologies. De-mand characteristics that link electricity

consumption to electricity and compet-ing fuel prices, economic growth, andpopulation are also very important. Andfinally, transmission linkages betweenproducing and consuming areas and thesetting of transmission and distributioncharges form the all-important networkchanneling electricity supply to the rele-vant consumers.

Summary

The emerging competition in the electricpower sector raises a number of impor-tant policy and strategic issues. Alter-native market designs will create differ-ent opportunities for both incumbent andnew firms. Some designs will promoteeconomic efficiency more than otherswill.

While economic modeling focuses ononly a subset of issues, it can improvebasic understanding of different impli-cations for both strategic and policy de-cisions. In this report, we have dis-cussed three such problems: (1) the in-centives for and the impact of exercisingcontrol over electricity prices by largeproducers, (2) the effect of differenttransmission and wholesale market ruleson electricity prices, and (3) the broaderimpacts of restructuring on energy mar-kets and on the environment. Applica-tion of models to these and other prob-lems will require constant monitoring ofassumptions and understanding of dif-ferent general approaches.


Notes

This report focuses on the primary dis-cussion among the Energy Modeling Fo-rum working group on electricity com-petition and therefore excludes a numberof other important issues under the re-structuring topic. Where appropriate, webriefly mention here a few importantsources on some of these topics.

A well-written background book on re-structuring within the United States canbe found in T.J. Brennan, K.L. Palmer,R.J. Kopp, A.J. Krupnick, V. Stagliano,and D. Burtraw, A Shock to the System:Restructuring America’s Electricity In-dustry, Washington, DC: Resources forthe Future, 1996.

Paul L. Joskow, “Restructuring, Compe-tition, and Regulatory Reform in theU.S. Electricity Sector,” Journal of Eco-nomic Perspectives, 1997, 11(3): 119-138, emphasizes the importance of gen-eration and transmission complemen-tarities in designing the cost-of-serviceregulatory approach that the currentcompetitive model is trying to replace.He emphasizes the key issues that needto be addressed in the near, mid, andlong term in improving economic effi-ciency.

David M. Newbery, “Power Markets andMarket Power,” Energy Journal, 1995,16(3): 39-66, discusses the emergence ofmarket power as England and Wales pri-vatized its electricity industry.

William W. Hogan, “A Market PowerModel with Strategic Interaction inElectricity Networks,” Energy Journal,1997, 18(4):107-141, discusses theproblem of market power along a con-

gested transmission system and howsuch behavior can result in expansionsrather than reductions in the firm’s pro-duction level.

The estimates of market power for dif-ferent countries are drawn from severalsources, including papers discussed atthe Energy Modeling Forum workinggroup meetings. For the English andWelsh markets, the estimates are drawnfrom Richard Green, “Increasing Com-petition in the British Electricity SpotMarket, Journal of Industrial Econom-ics, 1996, 44(2): 205-216. See also,Richard J. Green and David M. New-bery, “Competition in the British Elec-tricity Spot Market,” Journal of PoliticalEconomy, 1992, 100 (5): 929-953. Forthe Nordic markets, the findings are ex-tracted from Arve Halseth, “MarketPower in the Nordic Electricity Market,”January 1997, ECON Centre for Eco-nomic Analysis, Oslo, Norway. See alsoEirik S. Amundsen, Lars Bergman, andBo Andersson, “Competition and Priceson the Emerging Nordic ElectricityMarket,” in International Energy Mar-kets, Competition and Policy, Proceed-ings, 18th Annual North American Con-ference, San Francisco, September 7-10,1997, pp. 30-39. And finally, the Cali-fornia results are based upon those dis-cussed by Severin Borenstein and JamesBushnell, “An Empirical Analysis of thePotential for Market Power in Califor-nia’s Electricity Industry,” January 1997,University of California Energy Insti-tute, Berkeley, California.

The discussion in the section, “Trans-mission Pricing Policy”, draws veryheavily from the useful paper by Richard


Green, “Electricity Transmission Pric-ing: An International Comparison”Utilities Policy, 1997, 6(3): 177-184.This special issue of that journal carriesa number of papers by other EMF par-ticipants conducted as part of the currentEMF study that describe a particularcountry’s experiences with transmissionpricing and emphasizing the six princi-ples identified in this report.

Karen Palmer and Dallas Burtraw,“Electricity Restructuring and RegionalAir Pollution,” Resource and EnergyEconomics, 1997, 19: 139-174, provide auseful discussion of their own modelingwork on the environmental impacts andcompare their results with previousstudies on that topic. The other studieson national impacts reviewed by Palmerand Burtraw include: (1) US Federal En-ergy Regulator Commission, 1996, Envi-ronmental Impact Statement, PromotingWholesale Competition through OpenAccess Non-discriminatory Transmission

Services by Public Utilities and Recov-ery of Stranded Cost by Public Utilitiesand Transmitting Utilities, April; (2)Rosen, R., Woolf, T., Dougherty, B.,Biewald, B., Bernow, S., Regulatory As-sistance Project, 1995, Promoting Envi-ronmental Quality in a RestructuredElectricity Industry, prepared for theNational Association of RegulatoryUtility Commissioners, Tellus Institute,Boston, December 15; and (3) Lee, H.and Darani, N., 1995, Electricity Re-structuring and the Environment, CSIADiscussion Paper 95-13, KennedySchool of Government, Harvard Univer-sity, December.

The discussion of the environmental im-pacts of privatization and restructuringin England and Wales is drawn fromDavid M. Newbery and Michael G. Pol-litt, “The Restructuring and Privatisationof the CEGB: Was It Worth It?” Jour-nal of Industrial Economics, 1997, 45(3): 269-303.


Participating Modeling Organizations

A number of modeling organizations reported on their approach and results in analyzingelectricity restructuring and its impact on market power, transmission pricing, and theenergy market and environmental impacts. We would like to particularly acknowledgethe significant contributions of individuals from the following organizations:

• AES Corporation (Virginia)• Altos Management Partners (CA)• UC Berkeley• U. Cambridge (UK)• Caminus (UK)• U. Canterbury (NZ)• Catholic U. (Chile)• Center for Clean Air Policy• CORE (Belgium)• CRIEPI (Japan)• Data Resources Inc.• ECON (Norway)• Electric Power Research Inst.

• Harvard• U. Illinois• LCG Consulting (CA)• London Business School• Mass. Inst. of Technology• OnLocation (Virginia)• Resources for the Future• Stanford• U. Texas• U. Toronto• US Department of Energy, Policy• US Energy Information Admin.• US Environmental Protection Agency

Documents

A COMPETITIVE ELECTRICITY INDUSTRY · prices above competitive levels in three key regions: England and Wales, the Nordic countries, and California. Transmission Pricing Policy Electric