1 Market Structure and Competition: A Cross Market Analysis of the U.S. Electricity Industry Jim Bushnell, University of California Energy Inst, Erin Mansur, Yale University, and Celeste Saravia, University of California at Berkeley

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3 Market Comparisons Markets have experienced very different levels of market power –Counter-factual competitive prices can tell us the degree of market power But why have they performed differently? Market Structure vs. Market Design –Markets have important differences in both structure and design (cont.)

4 Market Comparisons Market Structure vs. Market Design (cont) –Much more policy emphasis on design FERC “standard market design” (SMD) based upon perception of a superior PJM design FERC is willing to concede intervention in market structure if firms are willing to submit to a SMD-like market design Role of Vertical Arrangements –Almost no policy discussion of impact of retail policies on vertical arrangements –How much do spot market rules impact prices in markets with significant forward arrangements?

5 Green and Newbery (1992)

6 0 $ Q D max D min Cournot competitive Green and Newbery (1992)

7 0 $ D max D min Bound on NC Equilibrium outcomes Cournot competitive Bounds on Non-Cooperative Outcomes Q supplied

8 0 $ D max D min Bound on NC Equilibrium outcomes Cournot competitive Contracts Reduce Bounds Contract Q

9 0 D max D min Bound on NC Equilibrium outcomes Cournot competitive Contract Q Q supplied $ “Over-Contracting’ can drive prices below competitive levels

10 Table 1: Panel A, California Firm Characteristics

11 Table 1: Panel B, New England Firm Characteristics

12 Table 1: Panel C, PJM Firm Characteristics

13 Methodology Simulate prices under: –Price taking behavior –Cournot behavior –Cournot with vertical arraignments Data on spot price, market demand and costs. The first order condition is:

14 Modeling Imports and Fringe Source of elasticity in model We observe import quantities, market price, and weather conditions in neighboring states Estimate the following regression using 2SLS (load as instrument) Estimates of price responsiveness are greatest in California (  >5000) relative to New England (  1250) and PJM (  850)

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20 Price comparison on peak Price California New England PJM Actual Competitive Cournot Cournot (“n.v.a.”) Same303999

21 Price comparison off peak Price California New England PJM Actual Competitive Cournot30 37 Cournot (“n.v.a.”) Same85711

22 Policy and Research Implications Monitoring/Policy-making overly emphasizes spot market design and regulation –More focus on the contracting process is needed –This does not mean we should mandate contracting –We need to better understand how contract markets can/do work in various markets –How do contract forms (futures, two-way “contracts for differences”, options, etc.) matter? Prospective market power analysis needs to think about how vertical arrangements and contracting will effect outcomes

23 Caveats Market structure during this period is exogenous We measure only one aspect of market performance We do not observe all contracts –Have data on most long-term retail arrangements –Any ‘missing’ contracts likely to cause Eastern markets to look worse relative to Cournot than California Prices and costs do not reflect transmission congestion –Not a real big issue in 1999 Production costs ignore non-convexities –Start-up costs, ramp rates, etc. –Will bias costs upward off-peak, downward on-peak –Competitive estimates much more sensitive to cost bias than Cournot.