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Measuring Welfare in Restructured Electricity Markets

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  • Erin T. Mansur

Abstract

Restructuring electricity markets has enabled wholesalers to exercise market power. Using a common method of measuring competitive behavior in these markets, several studies have found substantial inefficiencies. This method overstates actual welfare loss by ignoring production constraints that result in non-convex costs. I develop an alternative method that accounts for these constraints and apply it to the Pennsylvania, New Jersey, and Maryland market. For the summer following restructuring, the common method implies that market imperfections resulted in considerable welfare loss, with actual production costs exceeding the competitive model's estimates by 13 to 21 percent. In contrast, my method finds that actual costs were only between three and eight percent above the competitive levels. In particular, it is the fringe firms whose costs increase, while strategic firms reduce production and costs.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13509.

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Date of creation: Oct 2007
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Publication status: published as Erin T. Mansur, 2008. "Measuring Welfare in Restructured Electricity Markets," The Review of Economics and Statistics, MIT Press, vol. 90(2), pages 369-386, 02.
Handle: RePEc:nbr:nberwo:13509

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  1. Stephen P. Holland & Erin T. Mansur, 2008. "Is Real-Time Pricing Green? The Environmental Impacts of Electricity Demand Variance," The Review of Economics and Statistics, MIT Press, vol. 90(3), pages 550-561, August.
  2. Fabra, Natalia & Toro, Juan, 2005. "Price wars and collusion in the Spanish electricity market," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 23(3-4), pages 155-181, April.
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  4. Bushnell, James & Wolfram, Catherine, 2008. "Electricity Markets," Staff General Research Papers 31547, Iowa State University, Department of Economics.
  5. repec:reg:wpaper:73 is not listed on IDEAS
  6. James B. Bushnell & Erin T. Mansur & Celeste Saravia, 2008. "Vertical Arrangements, Market Structure, and Competition: An Analysis of Restructured US Electricity Markets," American Economic Review, American Economic Association, American Economic Association, vol. 98(1), pages 237-66, March.
  7. Levin, Dan, 1985. "Taxation within Cournot oligopoly," Journal of Public Economics, Elsevier, Elsevier, vol. 27(3), pages 281-290, August.
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  10. Mansur, Erin T, 2007. "Upstream Competition and Vertical Integration in Electricity Markets," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 50(1), pages 125-56, February.
  11. Severin Borenstein & James B. Bushnell & Frank A. Wolak, 2002. "Measuring Market Inefficiencies in California's Restructured Wholesale Electricity Market," American Economic Review, American Economic Association, American Economic Association, vol. 92(5), pages 1376-1405, December.
  12. Murphy, Kevin M & Topel, Robert H, 2002. "Estimation and Inference in Two-Step Econometric Models," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 20(1), pages 88-97, January.
  13. Joseph Farrell & Severin Borenstein, 2000. "Is Cost-Cutting Evidence of X-Inefficiency?," American Economic Review, American Economic Association, American Economic Association, vol. 90(2), pages 224-227, May.
  14. Catherine D. Wolfram, 1998. "Strategic Bidding in a Multiunit Auction: An Empirical Analysis of Bids to Supply Electricity in England and Wales," RAND Journal of Economics, The RAND Corporation, vol. 29(4), pages 703-725, Winter.
  15. Catherine D. Wolfram, 1999. "Measuring Duopoly Power in the British Electricity Spot Market," American Economic Review, American Economic Association, American Economic Association, vol. 89(4), pages 805-826, September.
  16. Steven L. Puller, 2007. "Pricing and Firm Conduct in California's Deregulated Electricity Market," The Review of Economics and Statistics, MIT Press, vol. 89(1), pages 75-87, February.
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Cited by:
  1. Bushnell, James & Mansur, Erin T. & Saravia, Celeste, 2008. "Vertical Arrangements, Market Structure and Competition: An Analysis of Restructured U.S. Electricity Markets," Staff General Research Papers 13130, Iowa State University, Department of Economics.
  2. Meredith Fowlie, 2008. "Incomplete Environmental Regulation, Imperfect Competition, and Emissions Leakage," NBER Working Papers 14421, National Bureau of Economic Research, Inc.
  3. Erin Mansur, 2013. "Prices versus quantities: environmental regulation and imperfect competition," Journal of Regulatory Economics, Springer, Springer, vol. 44(1), pages 80-102, August.
  4. Wolf-Peter, Schill, 2011. "Electric vehicles in imperfect electricity markets: The case of Germany," Energy Policy, Elsevier, Elsevier, vol. 39(10), pages 6178-6189, October.
  5. Milan Vondráček & Tomáš Skuček, 2010. "Unbundling costs in the energy sector: competitive environment for the customers´ benefits or too costly experiment?," Ekonomika a Management, University of Economics, Prague, University of Economics, Prague, vol. 2010(3).
  6. Mar Reguant, 2014. "Complementary Bidding Mechanisms and Startup Costs in Electricity Markets," CESifo Working Paper Series 4811, CESifo Group Munich.
  7. Ali Hortacsu & Steven L. Puller, 2005. "Understanding Strategic Bidding in Restructured Electricity Markets: A Case Study of ERCOT," NBER Working Papers 11123, National Bureau of Economic Research, Inc.
  8. Graf, Christoph & Wozabal, David, 2013. "Measuring competitiveness of the EPEX spot market for electricity," Energy Policy, Elsevier, Elsevier, vol. 62(C), pages 948-958.
  9. Fridolfsson, Sven-Olof & Tangerås, Thomas P., 2009. "Market power in the Nordic electricity wholesale market: A survey of the empirical evidence," Energy Policy, Elsevier, Elsevier, vol. 37(9), pages 3681-3692, September.
  10. Rubin, Ofir D. & Babcock, Bruce A., 2011. "A novel approach for modeling deregulated electricity markets," Energy Policy, Elsevier, Elsevier, vol. 39(5), pages 2711-2721, May.
  11. Erin T. Mansur, 2007. "Do Oligopolists Pollute Less? Evidence from a Restructured Electricity Market," NBER Working Papers 13511, National Bureau of Economic Research, Inc.
  12. Fell, Harrison & Linn, Joshua, 2013. "Renewable electricity policies, heterogeneity, and cost effectiveness," Journal of Environmental Economics and Management, Elsevier, vol. 66(3), pages 688-707.
  13. Hesamzadeh, Mohammad R. & Biggar, Darryl R. & Hosseinzadeh, Nasser, 2011. "The TC-PSI indicator for forecasting the potential for market power in wholesale electricity markets," Energy Policy, Elsevier, Elsevier, vol. 39(10), pages 5988-5998, October.
  14. Erin T. Mansur, 2007. "Prices vs. Quantities: Environmental Regulation and Imperfect Competition," NBER Working Papers 13510, National Bureau of Economic Research, Inc.

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