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Market Power in Electricity Markets: Beyond Concentration Measures

Severin Borenstein, James Bushnell and Christopher R. Knittel

Year: 1999
Volume: Volume20
Number: Number 4
DOI: 10.5547/ISSN0195-6574-EJ-Vol20-No4-3
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Abstract:
The wave of electricity market restructuring both within the United States and abroad has brought the issue of horizontal market power to the forefront of energy policy. Traditionally, estimation and prediction of market power has relied heavily on concentration measures. In this paper, we discuss the weaknesses of concentration measures as a viable measure of market power in the electricity industry, and we propose an alternative method based oil market simulations that take advantage of existing plant level data. We discuss results from previous studies the authors have performed, and present new results that allow for the detection of threshold demand levels where market power is likely to be a problem. In addition, we analyze the impact of that recent divestitures in the California electricity market will have on estimated market power. We close with a discussion of the policy implications of the results.



The Long-Run Efficiency of Real-Time Electricity Pricing

Severin Borenstein

Year: 2005
Volume: Volume 26
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol26-No3-5
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Abstract:
Retail real-time pricing (RTP) of electricity � retail pricing that changes hourly to reflect the changing supply/demand balance � is very appealing to economists because it �sends the right price signals.� Economic efficiency gains from RTP, however, are often confused with the short-term wealth transfers from producers to consumers that RTP can create. Abstracting from transfers, I focus on the long-run efficiency gains from adopting RTP in a competitive electricity market. Using simple simulations with realistic parameters, I demonstrate that the magnitude of efficiency gains from RTP is likely to be significant even if demand shows very little elasticity. I also show that �time-of-use� pricing, a simple peak and off-peak pricing system, is likely to capture a very small share of the efficiency gains that RTP offers.



Customer Risk from Real-Time Retail Electricity Pricing: Bill Volatility and Hedgability

Severin Borenstein

Year: 2007
Volume: Volume 28
Number: Number 2
DOI: 10.5547/ISSN0195-6574-EJ-Vol28-No2-5
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Abstract:
One of the most critical concerns that customers have voiced in the debate over real-time retail electricity pricing is that they would be exposed to risk from fluctuations in their electricity cost. The concern seems to be that a customer could find itself consuming a large quantity of power on the day that prices skyrocket, resulting in a high monthly bill. I analyze the magnitude of this risk, using demand data from 1142 large industrial customers, and then ask how much of this risk can be eliminated through various straightforward financial instruments. I find that very simple hedging strategies�forward purchase contracts that are already used with many RTP programs�can eliminate more than 80% of the bill volatility that would otherwise occur. I then show that a slightly more sophisticated application of these forward power purchases can significantly enhance their effect on reducing bill volatility.



Wealth Transfers Among Large Customers from Implementing Real-Time Retail Electricity Pricing

Severin Borenstein

Year: 2007
Volume: Volume 28
Number: Number 2
DOI: 10.5547/ISSN0195-6574-EJ-Vol28-No2-6
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Abstract:
Adoption of real-time electricity pricing�retail prices that vary hourly to reflect changing wholesale prices removes existing cross-subsidies to those customers that consume disproportionately more when wholesale prices are highest. If their losses are substantial, these customers are likely to oppose RTP initiatives unless there is a supplemental program to offset their loss. Using data on a sample of 1142 large industrial and commercial customers in northern California, I show that RTP adoption would result in significant transfers compared to a flat-rate tariff. When compared to the time-of-use rates (simple peak/offpeak tariffs) that these customers already face, however, the transfers drop by up to 45%; even under the more extreme price volatility scenario that I examine, 90% of customers would see changes of between a 4% bill reduction and an 8% bill increase. Though customer price responsiveness reduces the loss incurred by those with high-cost demand profiles, I also demonstrate that this offsetting effect is unlikely to be large enough for most customers with costly demand patterns to completely offset their lost cross-subsidy. The analysis suggests that adoption of real-time pricing may be difficult without a supplemental program that compensates the customers who are made worse off by the change. I examine possible �two-part RTP� programs, which allow customers to purchase a baseline quantity at regulated TOU rates, and show they can be used to greatly reduce the transfers associated with adoption of RTP.



The Incidence of an Oil Glut: Who Benefits from Cheap Crude Oil in the Midwest?

Severin Borenstein and Ryan Kellogg

Year: 2014
Volume: Volume 35
Number: Number 1
DOI: 10.5547/01956574.35.1.2
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Abstract:
Beginning in early 2011, crude oil production in the U.S. Midwest and Canada surpassed the pipeline capacity to transport it to the Gulf Coast where it could access the world oil market. As a result, the U.S. "benchmark" crude oil price in Cushing, Oklahoma, declined substantially relative to internationally traded oil. In this paper, we study how this development affected prices for refined products, focusing on the markets for motor gasoline and diesel. We find that the relative decrease in Midwest crude oil prices did not pass through to wholesale gasoline and diesel prices. This result is consistent with evidence that the marginal gallon of fuel in the Midwest is still imported from coastal locations. Our findings imply that investments in new pipeline infrastructure between the Midwest and the Gulf Coast, such as the southern segment of the controversial Keystone XL pipeline, will not raise gasoline prices in the Midwest.



A Microeconomic Framework for Evaluating Energy Efficiency Rebound and Some Implications

Severin Borenstein

Year: 2015
Volume: Volume 36
Number: Number 1
DOI: 10.5547/01956574.36.1.1
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Abstract:
Improving energy efficiency can lower the cost of using energy-intensive goods and may create wealth from the energy savings, both of which lead to increased energy use, a "rebound" effect. I present a theoretical framework that parses rebound into economic income and substitution effects. The framework leads to new insights about the magnitude of rebound when goods are not priced at marginal cost and when consumers are imperfect optimizers, as well as the role of technological progress in rebound. I then explore the implications of this framework with illustrative calculations for improved auto fuel economy and lighting efficiency. These suggest that rebound is unlikely to more than offset the savings from energy efficiency investments (known as "backfire"), but rebound likely reduces the net savings by roughly 10% to 40% from these energy efficiency improvements.





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