Committee, The Belmont Electricity Supply Study. “Retail Choice Study. Issues and Options for Electric Generation Service: A Report for Public Comment.” In, 2004.Abstract

    Excerpt from the Extecutive Summary:

    The Committee presents this study to the community for consideration and comment. The attached report and associated appendices and reference materials provide additional information and context. These materials are available at Belmont Municipal Lighting Department's (“BMLD”) offices, on BMLD’s web site, at the Town Clerk’s Office, and at the Belmont Library. The Committee invites any and all comments and specifically seeks input and comment on the following questions for its consideration in forming recommendations.

    1. Should the Town of Belmont pursue retail choice?

    2. If Belmont does pursue a retail choice approach, what benefits to the Town or consumers in the Town are most important to obtain in a retail choice program?

    3. If Belmont does pursue a retail choice approach, what timeframe should be considered?

    4. If Belmont does pursue a retail choice approach, what approach should be pursued?

    5. If Belmont does not pursue a retail choice approach, are there alternative power supply approaches or services, to be provided by BMLD, that are of interest?

    American Public Power Association,Restructuring at the Crossroads.” In, 2004.Abstract

    Excerpt from the Executive Summary:

    It is time to take stock of the Federal Energy Regulatory Commission’s (“FERC”) electric restructuring policies. APPA believes substantial “mid-course corrections” to FERC’s policies are needed to fix existing Regional Transmission Organizations (“RTOs”) and to encourage non- RTO alternatives in those regions where RTOs are not likely to form.

    To protect electric consumers, as the Federal Power Act (“FPA”) requires, FERC should reorient its policies to make sure electric consumers in fact— not just in economic theory—benefit from electric restructuring.

    FERC should:

    •  Ensure appropriate investment in transmission and generation infrastructure;

    •  Recognize and respect regional industry differences and preferences;

    •  Encourage cost-effective and not overly complex regional solutions;

    •  Support rational long-term generation resource arrangements that are in turn supported by long-term transmission service provided at just and reasonable rates;

    •  Foster well-functioning wholesale electric markets; and

    •  Ensure that public utility sellers of power at market-based rates

      charge “just and reasonable” prices.

    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.
    of PIRGs, National Association State. “Toward a Consumer-Oriented Electric System: Assuring Affordability, Reliability, Accountability and Balance After a Decade of Restructuring.” In, 2004. Publisher's VersionAbstract

    Excerpt from the Executive Summary:

    In this paper, we present a consumers-eye view of the current regulatory structure of the electric in- dustry, the experience of the past decade of restructuring, and the critical prob- lems facing the industry today. We also propose a series of guiding principles and policy options for protecting the in- terests of electricity consumers, and map out a long-term vision in which a shift to a more balanced mix of cleaner en- ergy options leads to long-term cost sav- ings for consumers.

    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.

    Rosenberg, William. Financing IGCC - 3 Party Covenant, 2004. Publisher's VersionAbstract
    This paper describes a 3 Party Covenant financing and regulatory program aimed at reducing financing costs and providing a risk-tolerant investment structure to stimulate initial deployment of five to ten Integrated Gasification Combined Cycle (IGCC) coal generation power plants during this decade. The 3 Party Covenant is an arrangement between the federal government, state Public Utility Commission (PUC), and equity investor that serves to lower IGCC cost of capital by reducing the cost of debt, raising the debt/equity ratio, and minimizing construction financing costs. The 3 Party Covenant would reduce the cost of capital component of energy costs from new IGCC facilities by 34 percent and the overall cost of energy about 20 percent, making the technology cost competitive with pulverized coal (PC) and natural gas combined cycle (NGCC) generation.
    Rosenberg, William. “Workshop on Integrated Gasification Combined Cycle: Financing and Deploying IGCC Technology in this Decade,” 2004. Publisher's VersionAbstract

    Concerns about high natural gas prices, environmental emissions, economic growth and future coal production have catalyzed a growing interest in developing and deploying advanced coal gasification technologies both in the United States and abroad. On February 11, 2004, two of the Kennedy School’s centers, the Belfer Center for Science and International Affairs and the Center for Business and Government, sponsored a workshop on the political and financial challenges to the deployment and commercialization of these technologies. The purpose of the workshop was to identify issues that require additional scrutiny and to build a policy foundation for the commercialization of Integrated Gasification Combined Cycle (IGCC) technologies for power production. Additional sponsors included the Environmental Protection Agency, the U.S. Department of Energy’s National Energy Technology Laboratory, the Center for Clean Air Policy, and the National Commission on Energy Policy.

    Attendees included senior officials from the energy industries, state regulators, federal officials, senior members of the NGO community and several experts from academia. This report summarizes the major issues and arguments put forth in each of the three panel discussions, a keynote presentation, and a luncheon speech. Since all statements made at the workshop are off-the-record, none of the remarks are directly attributed to any participant. This report is a general summary and does not cover all the issues discussed, but rather focuses on those of the greatest significance or greatest controversy. The arguments and positions described in this report do not necessarily reflect those of the John F. Kennedy School, the workshop sponsors, or any individual participant at the workshop.

    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.

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