Power Plants Don t Fly And Other Non-Artificial Barriers to Competition in Wholesale Power Markets

Transcription

1 Power Plants Don t Fly And Other Non-Artificial Barriers to Competition in Wholesale Power Markets By John Kelly Director, Economics & Research American Public Power Association Presented at 26 th USAEE/IAEE North American Conference Plenary Session September 25, 2006

2 Questions Posed: 1. Regulatory or Market Economics: Which Really Maximizes Electric Utility Consumer Benefits? 2. If market pricing allocates food, clothing, shelter, and airline flights, why not electricity? More Precisely: Are there technical factors that defy competitive economics in wholesale power markets? 2

3 Underlying Questions 1. What Standard or Definition of Competition? 2. Regulation or Markets v. Competition or Monopoly? 3. Given basic economic characteristics of industry, is it reasonable to expect markets to work? 3

4 Competition Textbook Definition: numerous buyers and sellers, no barriers to entry, price flexibility, perfect information and foresight by buyers and sellers Efficiency Benefits & Investment decisions, prices, reliability take care of themselves little interference Effectively Competitive Rarely Defined We have standards, we just don t know what they are? 4

5 Workable Competition Rivalry in selling goods that includes price competition because the prices each seller can charge are effectively limited by the free option of the buyer to buy from a rival or rival sellers (Clark) 5

6 or more simply stated: Rivalry among firms to supply the needs of consumers and producers at the lowest price with the highest qualities. (Stiglitz) 6

7 Potential Non-Artificial Barriers to Competition To decide whether to stay the course on deregulation or return to some traditional aspects of traditional regulation one would have to: Take into account, above all, the extraordinary and in some respects literally unique characteristics of electric power industry. (Kahn) 7

8 Characteristics Include: Number of Sellers and Buyers Product Durability Capital-Intensiveness Scale Economies Vertical integration Location of facilities Network features Sunk Costs Method of Purchase Length of Time to Enter Industry Mobility of resources Asset Specificity Product heterogeneity Substitutes Foreign competition Cost Structures Lumpiness of Investment Technology Financial Capital Requirements 8

9 Potential Non-Artificial Barriers to Competition Capital-Intensiveness Significantly large sums of money Average 600 MW plant = $900 million Average 250 MW plant = $156 million 9

10 Potential Non-Artificial Barriers to Competition Number of Competitors Half a Dozen or 20 or 30? Merchant generators? Many important ones not new simply deregulated arms of former vertically integrated companies 10

11 Potential Non-Artificial Barriers to Competition Location of Facilities Incumbent generators have significant absolute cost advantage with existing sites Already located near population centers Existing infrastructure (i.e., access to transmission lines, transport facilities, etc) 11

12 Potential Non-Artificial Barriers to Competition Location of Facilities Example: TXU 11 new plants built on existing sites TXU can take advantage of its scale, existing sites, rail facilities, water rights, and other infrastructure to build the units at three-quarters the cost of a typical power developer. This is cost efficiency, but is there price efficiency? Incumbent firms not likely to be dislodged, nor engage in serious price competition 12

13 Potential Non-Artificial Barriers to Competition Mobility of Resources/Asset Specificity Asset specificity Assets specific to product or service provided May not be easily adaptable imposes a high cost if entry fail Airline industry comparison Competitive because of mobility planes can be relocated to other, more profitable markets or sold Power plants don t fly -- cannot be relocated at 13 reasonable cost

14 Potential Non-Artificial Barriers to Competition Product Heterogeneity In oligopolistic markets, the degree of product heterogeneity is especially important. If total lack of heterogeneity products are homogeneous, essentially perfect substitutes -- firms can only compete on price Easy for oligopolists to coordinate behavior 14

15 Can Competition be Made to Work? Disregards basic, economic characteristics of industry Concerns about investment, reliability, and market power: Consequence of: Faulty market design or faulty assumptions? 15

16 Policy Prescriptions: Economic Analysis or Value Judgments? Frustration w/ Inefficiencies of Traditional Regulation and Despair of Improving Schumpeterian competition A succession of temporary monopolies, creative destruction But: Unlikely that incumbent oligopolies will fall victim to this Once a firm becomes established, it will pay to maintain a monopoly position. (Stiglitz) 16

17 Policy Prescriptions: Economic Analysis or Value Judgments? Operating efficiency is only one part of economic efficiency Price efficiency Considerable evidence that consumers have not and will not benefit from price deregulation If Deregulation policies of recent years not wrong than seem imprudent. 17

18 Conclusion Threshold question is not one of regulation vs. markets rather competition or monopoly. The natural characteristics of electric power markets are such that price deregulation is unlikely to lead to economic efficiency in both the production and pricing of electricity and benefit consumers. 18

19 Conclusion (cont.) Imperfect information, imperfect capital markets, imperfect competition: These are the realities of market economics aspects that must be taken into account. (Stiglitz) 19

20 Conclusion (cont.) The advocates of deregulation say it was not done perfectly. They would have us compare an imperfect regulated economy with an idealized free market, rather than imperfect regulated economy with an even more imperfect unregulated one. (Stiglitz) 20