Deregulation of Electric Utilities

352 Pages·1998·23.05 MB·English

by  Ross Baldick (auth.), Georges Zaccour (eds.)

Deregulation of Electric Utilities
Topics in Regulatory Economics and Policy Series
Michael A. Crew, Editor
Graduate School of Management, Rutgers University
Newark, New Jersey, U.S.A.
Previously published books in the series:
Crew,M.:
Competition and the Regulation of Utilities
Crew, M., and P. Kleindorfer:
Competition and Innovation in Postal Services
Thompson, H.:
Regulatory Finance: Financial Foundations of Rate of Return Regulation
Crew,M.:
Economic Innovations in Public Utility Regulation
Crew, M., and P. Kleindorfer:
The Economics of Postal Service
Crew, M., and P. Kleindorfer:
Regulation and the Nature of Postal and Delivery Services
Oren, S. and S. Smith.:
Service Opportunities for Electric Utilities: Creating Differentiated Products
Kolbe, A L., W. B. Tye, and S. C. Myers:
Regulatory Risk: Economic Principles and Applications to Natural Gas Pipelines
Pechman, c.:
Regulating Power: The Economics of Electricity in the Information Age
Gordon, R. L.:
Regulation and Economic Analysis: A Critique Over Two Centuries
Blackmon, G.:
Incentive Regulation and the Regulations of Incentives
Crew,M.:
Incentive Regulation for Public Utilities
Crew,M.:
Commercialization of Postal and Delivery Services
Abbott, T. A:
Health Care Policy and Regulation
Goff, B.:
Regulation and Macroeconomic Performance
Coate, M.B. and AN. Kleit:
The Economics of the Antitrust Process
Franz, R. S.:
X-Efficiency: Theory, Evidence and Applications (Second Edition)
Crew,M.:
Pricing and Regulatory Innovations Under Increasing Comptetition
Crew, M., and P. Kleindorfer:
Managing Change in the Postal Delivery Industries
Awerbuch, S. and A Preston:
The Virtual Utility
Gabel, D. and D. Weiman:
Opening Networks to Competition: The Regulation and Pricing ofA ccess
Deregulation of Electric U tilities
edited by
Georges Zaccour
GERAD and CETA I
Ecole des Hautes Etudes Commerciales
Montreal, Canada
.
.,
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Springer Science+Business Media, LLC
ISBN 978-1-4613-7624-8 ISBN 978-1-4615-5729-6 (eBook)
DOI 10.1007/978-1-4615-5729-6
Library of Congress Cataloging-in-Publication Data
A C.I.P. Catalogue record for this book is available from
the Library of Congress.
Copyright © 1998 by Springer Science+Business Media New York
Originally published by Kluwer Academic Publishers in 1998
Softcover reprint ofthe hardcover lst edition 1998
All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system or transmitted in any form or by any means, mechanical, photo
copying, recording, or otherwise, without the prior written permission of the
publisher, Springer Science+Business Media, LLC
Printed on acid-free paper.
Contents
Preface IX
Acknowledgments xiii
Contributing Authors xv
1
IPPs get VAMMoed in Texas 1
Ross Baldick
1.1 Introduction 1
1.2 Background 2
1.3 Transmission Tariffs 9
1.4 The ERCOT Transmission Tariff 14
1.5 Conclusion 21
References 22
2
Competition and Direct Access in New Zealand's Electricity Market 25
Mario E. Bergara, Pablo T. Spiller
2.1 Introduction 25
2.2 A Simple Model for the Electricity Market 28
2.3 The Electricity Distribution Market 32
2.4 Some Preliminary Econometric Results 35
2.5 Conclusions 43
References 45
3
Competition and Access in Electricity Markets: ECPR, Global Price Cap, and 47
Auctions
Marcel Boyer, Jacques Robert
3.1 Introduction 47
3.2 Basic Principles and Fundamental Issues 50
3.3 Access Pricing Rules 54
3.4 Price Caps and Global Price Caps 59
3.5 Market Based Regulation or Managed Competition 61
3.6 Conclusion: Some Neglected Issues 70
References 72
4
Periodic Regulatory Review in UK Electricity Markets; Developments Within a 75
Deregulated System
Philip Bums, Thomas Weyman-Jones
4.1 Introduction 75
4.2 The Structure of the Price Controls in Electricity 77
vi DEREGULATION OF ELECTRIC UTILITIES
4.3 Yardstick Comparisons 80
4.4 The Choice of X Factor 81
4.5 Regulation in Practice 85
4.6 The RECs' Productivity 1971-96 89
4.7 Privatised Utility Profits in the RECs 90
4.8 Competitive Supply, Access, and Settlement 91
4.9 The Debate on Regulatory Mechanisms 96
References 98
5
Challenges for Effective Competition in Large-Hydro Dominated Markets: The 101
Case of Quebec
Philippe Dunsky, Philip Raphals
5.1 Introduction 101
5.2 Obstacles to Competition 102
5.3 Standard Solutions 106
5.4 A Made-in-Quebec Solution: The LGMC Contract 108
5.5 Other Obstacles and Imperatives to Competition 111
5.6 Other Considerations 112
5.7 Conclusion 112
References 116
6
Hydroelectricity and the State in Quebec and Ontario: Two Different Historical 119
Paths
Ruth Dupre, Michel Patry
6.1 Introduction 119
6.2 A Historical Survey of Electricity Regulatory Regimes in Canada 121
6.3 The Different Paths of Regulation in Central Canada: A Political Economy
Approach 132
6.4 Conclusion 142
References 145
7
Restructuring and Competitive Arrangements in the Electricity Supply Industry 149
Towards a Better Efficiency?
Dominique Finon
7.1 Introduction 149
7.2 The Incompatibility of Vertical Integration and Competition in the Supply:
The Unsound Route of Third Party Access to the Network 152
7.3 Competitive De-integration through the Interlocking of Complex Arrange-
ments 156
7.4 An Appraisal of Competitive De-integration 163
7.5 Conclusion 169
References 175
Contents vii
8
Electricity Deregulation in England and Wales 179
Richard Green
8.1 Introduction 179
8.2 Competition in Generation 182
8.3 Competition in Supply 188
8.4 The Natural Monopolies 192
8.5 The Overall Effect of the Reforms 194
8.6 Conclusions 198
References 201
9
Improving the Performance of Electricity Industries in Developing Countries: Is 203
World Bank Policy on Deregulation the Way Forward?
David Hawdon
9.1 Introduction 203
9.2 International Policy Towards Power Sector Development 204
9.3 Some Models to Follow 208
9.4 Performance and Efficiency Measurement 210
9.5 The Data 213
9.6 The Efficiency of Developing Countries' Power Generation 214
9.7 Which Example to Follow? 219
9.8 Lending to Sub Saharan Africa (SSA) 220
9.9 An Alternative Approach Using DEA Results 221
9.10 Conclusions and Limitations of the Analysis 223
References 224
Appendix: 1. Efficiencies of Power Sectors in Developing Countries 226
Appendix: 2 227
10
Demand-Side Management Expenditures and the Market Value of U.s. Electric 229
Utilities: Strategic Investment or Disinvestment?
Douglas A. Houston
10.1 Introduction 229
10.2 Previous Studies of Market Value/ Performance of Electric Utilities 230
10.3 "Radical" Deregulation of the U.S. Electric Power Market 231
10.4 Methodology 234
10.5 Empirical Estimation of Utility Market Value 241
10.6 DSM's Role: Strategic Disinvestment by Utilities? 249
10.7 Summary 255
References 257
viii DEREGULATION OF ELECTRIC UTILITIES
11
Introducing Competition to the Electricity Industry in Spain: The Role of Initial 259
Conditions
Edward Kahn
11.1 Introduction 259
11.2 The MLE and the Definition of Stranded Costs 260
11.3 Vertical Relations in the Domestic Coal Industry 263
11.4 Industry Structure 266
11.5 Prospects for Competition 268
11.6 Conclusion 270
References 272
12
Peak Load Problem, Deregulation and Reliability Pricing 275
Pierre-Olivier Pineau
12.1 Introduction 275
12.2 Peak Load Problem and Reliability Problem 277
12.3 Peak Load Reduction Mechanisms in a Deregulated Environment 279
12.4 Reliability Pricing Propositions 281
12.5 Research Avenues 290
References 294
13
An Integrated Energy and Reserve Market for New Zealand 297
E. Grant Read, Glenn R. Drayton-Bright and Brendan J. Ring
13.1 Introduction 297
13.2 Principles of a Reserve Market 301
13.3 Modelling Instantaneous Reserve 305
13.4 Experience 314
References 318
14
Transmission Contracts May also Hinder Detrimental Network Investments in 321
Oligopolistic Electricity Markets
Yves Smeers, Wei Jing-Yuan
14.1 Introduction 321
14.2 A Three Node Example with Market Power 322
14.3 Some Reinterpretation 325
14.4 The Conjecture 330
14.5 Conclusion 333
References 333
Appendix: 1 334
Appendix: 2 338
Preface
This volume contains a selection of papers that were presented at the Interna
tional Workshop on Deregulation of Electric Utilities, held at Ecole des Hautes
Etudes Commerciales de Montreal (HEC), Canada, September 8-9, 1997. The
papers in this volume are revised versions which have benefited from discussions
and comments during the Workshop and formal comments made afterwards by
fellow contributors.
The main issues raised in the intense debate about deregulation of electric
utilities (e.g. compensation for stranded costs, efficiency gains, institutional
design, pricing, economics of scale, network externalities) are covered in depth
in this volume. Many papers also assess the pioneering experiences in deregu
lation of electric utilities. The case of New Zealand is covered in two papers.
England and Wales experiences are analyzed in two others. North American
cases are analyzed (or at least referred to) in number of papers. Finally, one
paper takes a look at the Spanish industry and another one analyzes the restruc
turing movement in developing countries. A brief account of each contribution
follows.
In Texas, the capital component of transmission access is to be priced using
a hybrid of postage stamp prices and a methodology known as vector-absolute
megawatt-mile (VAMM) pricing. Ross Baldick examines the incentives pro
vided by VAMM pricing for future generation development. He finds that there
are serious deficiencies in the VAMM technique that are likely to hinder efficient
generator capital planning by independent power producers in Texas.
Direct access has been in operation for two years in New Zealand, without
imposing operational standards on direct access suppliers. Mario E. Bergara
and Pablo T. Spiller analyze some of the preliminary effects of the imple
mentation of direct access in the New Zealand's electricity market, and in par
ticular, explore the extent to which customer choice has produced the effects
predicted by economic theory. They conclude that direct access is having, at
least qualitatively, the expected effects.
Marcel Boyer and Jacques Robert cover some general principles and
fundamental facts and issues which remain at the heart of the movement to
ward deregulation, restructuring and privatization in network industries. They
compare the efficient component pricing rule with the Ramsey-Boiteux one.
They also discuss the global price cap rule and how it could be an answer to
many of the questions raised in the search for an efficient way to introduce com
petition in electricity markets. They also discuss the UK and some Canadian
experiences.
x DEREGULATION OF ELECTRIC UTILITIES
Philip Burns and Thomas Weyman-Jones analyze the content of the
regulatory review in UK electricity markets and relate them to recent empirical
research on costs and productivity and to analytical developments in regulatory
mechanisms. They analyze the way in which the basis of the price control
is determined, the empirical evidence relating to the choice of X factor, the
impact of informational deficiencies on the process and finally the possibility
of contest ability and competition in supply where access pricing issues arise.
Philippe Dunsky and Philip Raphals argue that the creation of effective
competition in Quebec's electricity market is seriously hampered by number
of factors, including Hydro-Quebec's vertical integration, its near-total dom
ination of the electricity market and control over natural gas distribution in
Quebec, its limited interconnection capacity with neighboring grids, its multi
annual reservoirs and the size of many its generation facilities. The authors
discussed how these obstacles can be removed in order to introduce real com
petition.
Ruth Dupre and Michel Patry take a historical perspective and look
into the radically different initial choices of electricity regimes made by Ontario
and Quebec. Ontario, and Ontario alone in North America, adopted a public
system almost right from the beginning. The authors identify the physical
and institutional factors behind the different strengths of supply for public
ownership in the two provinces.
Dominique Finon examines the different ways of introducing competition
in the electricity supply and its interest in terms of improvement of the struc
ture of incentives in reference to the recent experiences of liberalization. The
author addresses three key-points: the organization of the vertical and hori
zontal ownership arrangements, the rules structuring the arrangement in order
to combine efficient short term coordination and the incentives of competition
and the crucial role of a strong regulation to reach efficiency and price decrease.
Richard Green identifies the problems encountered in the process of elec
tricity deregulation in England and Wales and analyzes its impact, notably in
terms of price to consumer and efficiency gains. His general conclusion is that,
despite the problems, the industry seems to be performing better than before
its privatization. Although the deregulation in England and Wales have pro
vided a model for electricity reforms in many parts of the world, the author
advises that the model should not be applied unthinkingly.
A substantial proportion of investment in the electric power sectors of de
veloping countries has historically consisted of World Bank loans. David
Hawdon uses data envelopment analysis to construct performance measures
for 82 developing countries power sectors in order to evaluate World Bank pol
icy. The paper examines the effectiveness of World Bank lending activity in
relation to technical and scale efficiencies. Policies promoting the privatization