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January - March 1998 


Electric Power Transmission: Rationing a Limited Resouce 
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Assessing the Effectiveness of Competition in the Electricity Generation Industry 
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Electric Power Transmission: Rationing a Limited Resources

In the redesigned electric power industry, electricity-generating companies compete for customers and then transmit their electricity using the existing transmission system. But at times the transmission system connecting  generators and customers may not be capable of handling all sales. Who gets to transmit their electricity and who doesn't during those times is an important technical and legal question. A plan proposed by researchers at MIT and McGill University lets market forces decide. Under their plan, electricity generators and their customers make deals with one another and then submit their transmission needs to a central coordinator that oversees operation of the transmission system. The coordinator responds with a transmission price for each proposed transaction. If a given transaction will move the transmission system toward technical problems, the price is higher. The more serious and more imminent the problem, the higher the price. The market should thus self-adjust: higher prices will cause customers to get off the transmission system, so impending problems should rarely be realized. Money collected by the central coordinator can be used to maintain and upgrade the transmission  system. The researchers have already developed software that can produce appropriate transmission price signals, and they are investigating other services provided by the electric power industry that could become competitive and thus more efficient.

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Assessing the Effectiveness of Competition in the Electricity Generation Industry

Key to the restructuring of the US electricity industry is allowing  generators of electricity to compete for residential, commercial, and  industrial customers. But in certain regions or at certain times, might the  number of electricity providers be so small that competition is limited,  enabling a few providers to exercise "market power," raising their prices  above their costs without losing sales? One means of examining that  question is to consider the geographic area over which providers can  compete. A broad geographic market suggests more competitors and less  opportunity for market power. To explore the extent of the geographic  market for electricity-generation services, an Energy Laboratory researcher  studied trading between providers in the already-operating "wholesale"  electricity market, where utilities sell electricity to one another at  competitive prices and transmit it using today's transmission system. Using  new econometric techniques, the researcher analyzed data on daily wholesale  electricity prices to determine the extent to which utilities in the five  subregions of the western United States traded with one another during an  18-month period. She found that fully 80% of the time the wholesale market  included potential competitors throughout the entire western area. The rest  of the time the market was considerably smaller, largely due to congestion  on the transmission system. While these findings cannot be directly applied  to the emerging retail market, they do suggest conditions under which the  number of effective competitors may dwindle and market power may be an issue.

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