Utilities in the United States are heading into uncharted territories, and the regulatory landscape is changing accordingly. To learn what it takes to tame this new territory, we spoke with three...
Why Applicants Should Use Computer Stimulation Models to Comply With the FERC's New Merger Policy
the geographic scope of competition and for computing market shares and concentration indexes?
One approach would simply carry out the computations as the FERC has described them. Given the data, the task would be straightforward: Write a computer program to execute the delivered price test and compute the shares and concentration indexes required for the FERC's analytic screen.
However, given those same data, applicants and intervenors can and should perform a more refined analysis (em one that makes use of additional data that are available in the electric power industry.
To determine whether a generator that is not exercising market power would be able and willing to supply a particular group of customers at a specific price, it is not enough merely to check that generator's variable costs of production and delivery and the availability of transmission capacity. One must also consider whether sales of energy to the customers in question would require the generator to forego profitable sales of energy to customers located elsewhere. That is, one must consider the generator's opportunity costs. For example, a generator in Ohio that could pass the delivered price test for supply of energy to Maryland at a competitive price of $25/MWh would not in fact be willing to sell energy in Maryland if the energy could instead be sold in Michigan for $30/MWh. Therefore, it makes sense to ask whether there is a way to integrate the geographic pattern of loads into the analysis of competition required by FERC.
In fact, merger applicants should and can do precisely that by using computer simulation models similar to those used in the electric power industry to analyze generation dispatch. These models incorporate data of the type required by the FERC, as well as publicly available data on the geographic pattern of forecast loads. Adaptations of these models that are designed to analyze market power are not only available, but are already in use to analyze mergers, industry restructuring, and market-based pricing. We caution, however, that some of these models are poorly designed and hense produce misleading results.
The Choice of Models
Broadly speaking, four types of computer simulation models that are widely used in the electric power industry might be considered as tools for analyzing market power issues.
1. Dispatch/Transportation Models. This category, which includes the National Power Model that we use at our company, can incorporate data on loads, transmission constraints between control areas, transmission losses and pricing, and the determinants of generator costs (em heat rates, fuel prices, and variable operating and maintenance costs that account for environmental compliance costs.
This class of model retains a major advantage compared to the three other model types described below. Dispatch/transportation models are already available in a form that can be used to analyze market power. They are used in connection with restructuring, merger, and market-based pricing proposals.
These models enable one to analyze, on an hour-by-hour basis and under alternative assumptions, the ability of a utility or set of utilities profitably to raise prices above competitive levels by reducing output, the magnitude of any