Electricity economics : regulation and deregulation

Library	Item Barcode	Call Number	Material Type	Item Category 1	Status
Searching... PSZ JB	30000010099648	HD9685.A2 E43 2003	Open Access Book	Book	Searching... Unknown
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Summary

A lucid and up-to-date introduction to understanding electrical power utilities in an era of change

Electric utilities worldwide are undergoing profound transformations: nationally owned systems are becoming privatized, privately owned systems that were previously regulated are becoming deregulated, and national systems are becoming international.

Professionals in the power sector must now work in a new world in which an understanding of the principles of markets and how to evaluate investment projects under competition are essential.

This text was written as a manual for the Russian Federal Energy Commission to train regional electricity rate regulators in the principles of economics and finance involved in regulating electricity markets and deregulating electricity generation. Requiring no familiarity with economics and using a minimum of mathematics, this book provides professionals in the power sector with the tools to face the new realities of electric utility operation.

Designed both as a reference for practicing professionals and as a textbook for university and continuing education programs, Electricity Economics: Regulation and Deregulation discusses:

The lessons learned from international experiences Competitive versus noncompetitive markets Cost and supply, profit, and economic efficiency The cost of capital, including net present value, discounting, and risk and return Wholesale power markets, generation expansion, and customer choice Specific international examples including the Californian, Norwegian, Spanish, and Argentine power sectors Plus numerous exercises to help clarify and support absorption of the concepts

Author Notes

Geoffrey Rothwell is a senior lecturer in the Department of Economics at Stanford University and a senior research associate at the Stanford Institute for Economic Policy Research
Tomas Gomez is a professor of electrical engineering at Universidad Pontificia Comillas, Madrid, Spain

Ryan Wiser and Steven Pickle and Afzal S. SiddiquiHelle Gronli

Preface	p. xv
Nomenclature	p. xix
1 Electricity Regulation and Deregulation	p. 1
1.1. The Electricity Industry: Restructuring and Deregulation	p. 1
1.2. From Monopolies to Markets	p. 2
1.3. Why Restructuring and Deregulation Now?	p. 3
1.4. Regulation is Still Required	p. 4
1.5. What Lessons Can Be Learned from International Experiences?	p. 6
1.5.1. Starting Points and Motivations for Deregulation	p. 9
1.5.2. Structural Changes and System Operation	p. 10
1.5.3. Design of Wholesale Markets and Market Institutions	p. 11
1.5.4. Retail Competition and Customer Choice	p. 12
1.6. Conclusions	p. 12
2 Electricity Economics	p. 15
2.1. What is a Market?	p. 15
2.1. What is a Market?	p. 15
2.1.1. Competitive versus Noncompetitive Markets	p. 15
2.1.2. The Market Mechanism	p. 16
2.1.3. Elasticity	p. 18
2.2. Cost and Supply	p. 20
2.2.1. Economic Cost versus Accounting Cost	p. 20
2.2.2. Total, Average, and Marginal Costs	p. 21
2.2.3. Economies and Diseconomies of Scale and Scope	p. 24
2.3. Profit Maximization	p. 25
2.3.1. What is Profit?	p. 25
2.3.2. What is Economic Efficiency?	p. 29
2.4. Social Surplus: Consumer and Producer Surplus	p. 29
2.5. Market Power and Monopoly	p. 30
2.5.1. Maximizing Profit under Monopoly	p. 30
2.5.2. Deadweight Loss from Monopoly Power	p. 31
2.5.3. Response to the Exercise of Monopoly Power: Regulation and Antitrust	p. 32
Exercise 2.1. Linear and Logarithmic Demand Functions	p. 34
Exercise 2.2. A Shift in Demand and a New Equilibrium Price (a Cobweb Model)	p. 35
Exercise 2.3. Returns to Scale in Production and Cost	p. 37
Exercise 2.4. Calculating a Regulated Tariff	p. 40
Exercise 2.5. Calculating Social Surplus under Competition and Regulation	p. 41
Exercise 2.6. Calculating Deadweight Loss under Monopoly	p. 42
3 The Cost of Capital	p. 43
3.1. What is the Cost of Capital?	p. 43
3.2. Net Present Value	p. 45
3.2.1. Discounting to the Present	p. 46
3.2.2. Net Present Value	p. 48
3.2.3. Assessing Cash Flows under the Net Present Value Rule	p. 49
3.3. Alternative Methods of Project Evaluation	p. 51
3.3.1. Payback Analysis	p. 51
3.3.2. Average Return on Book Value	p. 52
3.3.3. Internal Rate of Return	p. 52
3.4. Risk and Return	p. 53
3.4.1. Financial Instruments	p. 55
3.4.2. Capital Structure and the Cost of Capital	p. 58
Exercise 3.1. Risk and Diversification	p. 58
Exercise 3.2. Risk Aversion	p. 62
Exercise 3.3. The Capital Asset Pricing Model	p. 68
Exercise 3.4. Certainty Equivalent Discount Rates	p. 70
Exercise 3.5. Calculating the Internal Rate of Return	p. 74
4 Electricity Regulation	p. 75
4.1. Introduction to Economic Regulation	p. 75
4.1.1. Regulatory Policy Variables	p. 76
4.1.2. The Regulatory Process	p. 78
4.2. Rate-of-Return Regulation	p. 80
4.3. Performance-Based Ratemaking	p. 83
4.3.1. Sliding Scale	p. 84
4.3.2. Revenue Caps	p. 85
4.3.3. Price Caps	p. 86
4.3.4. Some Problems with Incentive Regulation	p. 87
4.4. Rate Structure	p. 88
4.4.1. Introduction to Tariff Regulation	p. 88
4.4.2. Marginal Cost Pricing, Multipart Tariffs, and Peak-Load Pricing	p. 89
4.5. Overview of the Uniform System of Accounts	p. 91
Exercise 4.1. A Profit-Sharing Mechanism under PBR Regulation	p. 92
Exercise 4.2. Optimal Two-Part Tariffs	p. 93
Exercise 4.3. The Peak-Load Pricing Problem	p. 94
Exercise 4.4. The Averch-Johnson Model	p. 95
Exercise 4.5. A Real Options Pricing Model of Cogeneration	p. 97
5 Competitive Electricity Markets	p. 101
5.1. Overview	p. 101
5.2. Wholesale Power Markets	p. 102
5.2.1. The Poolco Market	p. 103
5.2.2. Contracts for Differences	p. 105
5.2.3. Physical Bilateral Trading	p. 106
5.2.4. Transmission Ownership and System Operation	p. 107
5.2.5. Ancillary Services	p. 109
5.3. Market Performance and Investment	p. 110
5.3.1. Generation Expansion and Monitoring Generation Competition	p. 111
5.3.2. Nodal and Zonal Transmission Pricing	p. 114
5.3.3. Transmission Planning and Investment	p. 115
5.4. Customer Choice and Distribution Regulation	p. 117
5.4.1. Customer Choice and Retail Competition	p. 118
5.4.2. Real-Time Prices and Retail Services	p. 120
5.4.3. Retail Access Tariffs	p. 120
5.4.4. Distribution Company Regulation	p. 122
Exercise 5.1. Determining Dispatch in a Poolco Market	p. 123
Exercise 5.2. Determining Dispatch Based on Physical Bilateral Contracts	p. 123
Exercise 5.3. Generator Revenues and Long-Run Capacity	p. 124
Exercise 5.4. Generator Profits with and without a Contract for Differences	p. 125
Exercise 5.5. The Value of Transmission Expansion between Two Zones	p. 125
Exercise 5.6. Calculate Nodal Prices in a Three-Bus Transmission System	p. 127
6 The Californian Power Sector	p. 129
6.1. General Description of the California Power System	p. 130
6.1.1. Generation	p. 131
6.1.2. Transmission and Interconnections	p. 131
6.1.3. Distribution	p. 132
6.1.4. Consumption	p. 132
6.1.5. Concentration Levels	p. 133
6.1.6. Plant Investment	p. 133
6.1.7. Electricity Prices	p. 133
6.1.8. Economic and Energy Indices	p. 134
6.2. The New Regulatory Framework	p. 135
6.2.1. U.S. Federal Legislation and Regulation	p. 135
6.2.2. California State Regulation and Legislation	p. 137
6.3. The Wholesale Electricity Market and Institutions in California	p. 140
6.3.1. The Power Exchange	p. 140
6.3.2. The Independent System Operator	p. 144
6.3.3. Bilateral Trading	p. 145
6.4. Transmission Access, Pricing, and Investment	p. 146
6.4.1. Access Charges	p. 147
6.4.2. Transmission Congestion Charges	p. 147
6.4.3. Transmission Losses	p. 149
6.4.4. Investment and Planning	p. 149
6.5. Distribution Network Regulation and Retail Competition	p. 149
6.5.1. Regulation of the Distribution Network	p. 150
6.5.2. Remuneration for Regulated Distribution Activities	p. 150
6.5.3. Retail Competition	p. 151
6.6. Particular Aspects of the Regulatory Process in California	p. 153
6.6.1. Stranded Costs	p. 153
6.6.2. Market Power	p. 154
6.6.3. Public Purpose Programs	p. 155
6.6.4. Customer Protection and Small Customer Interests	p. 156
6.7. Market Experience and the Energy Crisis	p. 156
6.7.1. Market Operations: 1998 and 1999	p. 157
6.7.2. The Electricity Crisis	p. 157
6.7.3. The Causes of the Electricity Crisis	p. 158
6.7.4. Solutions and Conclusions	p. 159
7 The Norwegian and Nordic Power Sectors	p. 161
7.1. General Description of the Norwegian Power System	p. 161
7.1.1. Generation	p. 161
7.1.2. Transmission	p. 162
7.1.3. Distribution	p. 163
7.1.4. Consumption	p. 164
7.1.5. Economic Indices	p. 164
7.1.6. General Economic and Energy Indices	p. 166
7.2. The New Regulatory Framework	p. 167
7.2.1. The Energy Act of 1990: Objectives and Consequences	p. 168
7.2.2. The Energy Act of 1990: Specifics	p. 169
7.3. The Wholesale Electricity Market	p. 170
7.3.1. The Energy Markets	p. 171
7.3.2. Zonal Pricing	p. 172
7.3.3. Ancillary Services	p. 173
7.3.4. Bilateral Trading	p. 173
7.4. Transmission/Distribution Access, Pricing, and Investment	p. 174
7.4.1. Overall Principles: The Point of Connection Tariff	p. 174
7.4.2. Transmission Tariffs	p. 176
7.4.3. Distribution Tariffs	p. 177
7.5. Distribution Network Regulation and Retail Competition	p. 178
7.5.1. Rate of Return Regulation, 1991-1997	p. 178
7.5.2. Incentive-Based Regulation Starting January 1, 1997	p. 178
7.5.3. Retail Competition--Important Developments	p. 182
7.6. Aspects of the Regulatory Process in Norway	p. 184
7.6.1. The Inter Nordic Exchange	p. 184
7.6.2. Congestion Management in the Scandinavian Area	p. 185
8 The Spanish Power Sector	p. 187
8.1. General Description of the Spanish Power System	p. 187
8.1.1. Structure of the Industry	p. 187
8.1.2. Generation	p. 187
8.1.3. Transmission	p. 188
8.1.4. Distribution	p. 189
8.1.5. Consumption	p. 189
8.1.6. Concentration Levels and Economic Indices	p. 190
8.1.7. General Economic and Energy Indices for Spain	p. 194
8.2. The New Regulatory Framework	p. 194
8.2.1. Background	p. 194
8.2.2. The 1997 Electricity Law	p. 198
8.2.3. Further Regulations	p. 199
8.3. The Wholesale Electricity Market	p. 200
8.3.1. General Market Institutions	p. 200
8.3.2. Structure of the Wholesale Market	p. 201
8.3.3. The Daily Market	p. 201
8.3.4. The Intraday Markets	p. 202
8.3.5. Network Constraint Management Procedures	p. 202
8.3.6. The Ancillary Service Markets	p. 203
8.3.7. Capacity Payments	p. 203
8.3.8. Bilateral Trading	p. 203
8.3.9. International Exchanges and External Agents	p. 204
8.4. Transmission Access, Pricing, and Investment	p. 204
8.4.1. Remuneration of Transmission Activities	p. 204
8.4.2. Transmission Network Charges	p. 205
8.4.3. Transmission Losses	p. 205
8.4.4. Investment and Planning	p. 206
8.5. Distribution Network Regulation and Retail Competition	p. 206
8.5.1. Remuneration of Regulated Distribution Activities	p. 206
8.5.2. Distribution Losses	p. 207
8.5.3. Distribution Network Charges	p. 208
8.5.4. Power Quality Regulation	p. 208
8.6. Particular Aspects of the Regulatory Process in Spain	p. 210
8.6.1. Estimated Stranded Costs	p. 210
8.6.2. The Stranded Costs: Methodology for Recovery	p. 211
8.6.3. The General Settlement Procedure: Regulated Tariffs and Revenues	p. 212
9 The Argentine Power Sector	p. 217
9.1. General Description of the Argentine Power System	p. 217
9.1.1. Generation and Current Structure of the Industry	p. 217
9.1.2. Transmission	p. 218
9.1.3. Distribution	p. 219
9.1.4. Consumption	p. 220
9.1.5. Electricity Tariffs	p. 221
9.1.6. Economic and Energy Indices	p. 221
9.2. The Regulatory Framework	p. 221
9.2.1. Background	p. 221
9.2.2. The New Electricity Law	p. 222
9.2.3. Regulatory Authorities	p. 223
9.2.4. The Privatization Process in Argentina	p. 224
9.3. The Wholesale Electricity Market	p. 224
9.3.1. Market Participants	p. 226
9.3.2. Energy Market and Economic Dispatch	p. 226
9.3.3. Capacity Payments	p. 227
9.3.4. Cold Reserve and Ancillary Services	p. 227
9.3.5. Generator Revenues	p. 228
9.3.6. Scheduling, Dispatch, and Settlement	p. 228
9.3.7. Bilateral Contracts	p. 228
9.4. Transmission Access, Pricing, and Investments	p. 229
9.4.1. Transmission Charges	p. 229
9.4.2. Penalties for Unavailability of the Transmission Assets	p. 230
9.4.3. Transmission Concessions	p. 231
9.4.4. Transmission Expansion	p. 231
9.5. Distribution Regulation	p. 232
9.5.1. Distribution Concessions	p. 233
9.5.2. Evaluation of Distribution Costs	p. 234
9.5.3. Regulated Tariff Customer Categories	p. 235
9.5.4. Cost Allocation in Regulated Tariffs--An Example of a User Tariff	p. 236
9.6. Particular Aspects of the Regulatory Process in Argentina	p. 238
9.6.1. Regulation of Power Quality after Privatization of Distribution	p. 238
Glossary	p. 243
References	p. 251
Author Index	p. 261
Subject Index	p. 263
About the Authors	p. 277

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