Joskow, Paul, and Jean Tirole. “Retail Electricity Competition.” In, 2005. Publisher's VersionAbstract

    We analyze a number of unstudied aspects of retail electricity competition. We first explore the implications of load profiling of consumers whose traditional meters do not allow for measurement of their real time consumption, when consumers are homogeneous up to a scaling factor. In general, the combination of retail competition and load profiling does not yield the second best prices given the non price responsiveness of consumers. Specifically, the competitive equilibrium does not support the Ramsey two-part tariff. By contrast, when consumers have real time meters and are billed based on real time prices and consumption, retail competition yields the Ramsey prices even when consumers can only partially respond to variations in real time prices. More complex consumer heterogeneity does not lead to adverse se1ection and competitive screening behavior unless consumers have real time meters and are not rational. We then examine the incentives competitive retailers have to install one of two types of advanced metering equipment. Competing retailers overinvest in real time meters compared to the Ramsey optimum, but the investment incentives are constrained optimal given load-profiling and retail competition. Finally, we consider the effects of physical limitations on the ability of system operators to cut off individual customers. Competing retailers have no incentive to determine the aggregate value of non-interruption of consumers in the zones they serve, preferring instead to free ride on other retailers serving consumers in the same zones. 


    Anderson, Steven. “Analyzing Strategic Interaction in Multi-Settlement Electricity Markets: A Closed-Loop Supply Function Equilibrium Model.” In, 2004.Abstract

    Multi-settlement electricity markets typically permit firms to bid increasing supply functions (SFs) in each market, rather than only a fixed price or quantity. Klemperer and Meyer’s (1989) single-market supply function equilibrium (SFE) model extends to a computable SFE model of a multi-settlement market, that is, a single forward market and a spot market. Spot and forward market supply and demand functions arise endogenously under a closed-loop information structure with rational expectations. The closed-loop assumption implies that in choosing their spot market SFs, firms observe and respond optimally to the forward market outcome. Moreover, firms take the corresponding expected spot market equilibrium into account in constructing their forward market SFs. Subgame-perfect Nash equilibria of the model are characterized analytically via backward induction. Assuming affine functional forms for the spot market and an equilibrium selection mechanism in the forward market provides for numerical solutions that, using simple empirical benchmarks, select a single subgame- perfect Nash equilibrium.

    Incentives for a supplier in the forward market decompose into three distinct effects: a direct effect attributable solely to the forward market, a settlement effect due to forward contract settlement at the expected spot market price, and a strategic effect arising due to the effect of a firm’s forward market activity on the anticipated response of the firm’s rival. Comparative statics analysis examines the effect of small parameter shocks on the forward market SFs. Shocks that increase the elasticities of equilibrium supply and demand functions tend to make firms more aggressive in the forward market, in that they bid higher quantities at most prices. Expected aggregate welfare for the multi-settlement SFE model is intermediate between that of the single-market SFE model and that of the perfectly competitive case.

    Markiewicz, Kira, Nancy Rose, and Catherine Wolfram. “Does Competition Reduce Costs? Assessing the Impact of Regulatory Restructuring on US Electric Generation Efficiency.” In, 2004. Publisher's VersionAbstract
    Although the allocative efficiency benefits of competition are a tenet of microeconomic theory, the relation between competition and technical efficiency is less well understood. Neoclassical models of profit-maximization subsume static cost-minimizing behavior regardless of market competitiveness, but agency models of managerial behavior suggest possible scope for competition to influence cost-reducing effort choices. This paper explores the empirical effects of competition on technical efficiency in the context of electricity industry restructuring. Restructuring programs adopted by many U.S. states made utilities residual claimants to cost savings and increased their exposure to competitive markets. We estimate the impact of these changes on annual generating plant-level input demand for non-fuel operating expenses, the number of employees and fuel use. We find that municipally-owned plants, whose owners were for the most part unaffected by restructuring, experienced the smallest efficiency gains over the past decade. Investor-owned utility plants in states that restructured their wholesale electricity markets had the largest reductions in nonfuel operating expenses and employment, while investor-owned plants in nonrestructuring states fell between these extremes. The analysis also highlights the substantive importance of treating the simultaneity of input and output decisions, which we do through an instrumental variables approach.
    Bessembinder, Hendrik, and Michael Lemmon. “Gains From Trade Under Uncertainty: The Case of Electric Power Markets.” In, 2004.Abstract

    The rapid growth in energy trading and movement towards deregulation of electricity markets have come to a halt in the wake of assertions that western U.S. energy markets were manipulated. This paper refocuses attention on the potential efficiency gains from competitive wholesale power trading, showing that for any given level of average demand, retail electricity prices will be lower if electricity is traded in competitive wholesale markets than if electricity is delivered by integrated producer-retailers. Wholesale power trading allows for the diversification of demand risk, and the greatest efficiency gains accrue when power demand is least correlated across markets and when there is substantial geographic variation in expected demand. Simulation evidence indicates that real time power trading could reduce retail prices by conservative estimates of 3 to 4% on average in the U.S., and that the combination of forward and real time trading could reduce prices by 6 to 10% or more. This analysis indicates that economic efficiency would be best served by policy aimed at ensuring that power markets are indeed competitive, and that sufficient transmission capacity exists for profitable power trades to be completed.

    Baldick, Ross, and William W. Hogan. “Polynomial Approximations and Supply Function Equilibrium Stability.” In, 2004. Publisher's VersionAbstract

    Organized electricity markets often require submission of supply functions ahead of the realization of uncertain demand. As a model of oligopoly behavior, the Nash condition of supply function equilibrium has a natural appeal. Typically this produces a continuum of possible equilibria, presenting an equilibrium selection problem. Beyond existence, stability of an equilibrium would be an obvious criterion for selection. For affine demand and marginal costs, polynomial approximation provides an approach for analyzing the stability of unconstrained supply function equilibria. The set of stable approximation equilibria is small and its properties suggest that the set of stable exact supply function equilibria is empty.