Measuring Welfare in Restructured Electricity Markets

Erin T. Mansur

Review of Economics and Statistics, Volume 90, Issue 2, May 2008, pages 369-386.
Working Paper, March 2007.
NBER Working Paper 13509, October 2007.
Related working paper: UCEI CSEM-117

Abstract:

Restructuring electricity markets has enabled wholesalers to exercise market power. Using a common method of measuring competitive behavior in these markets, several studies have found substantial inefficiencies. This method overstates actual welfare loss by ignoring production constraints that result in non-convex costs. I develop an alternative method that accounts for these constraints and apply it to the Pennsylvania, New Jersey, and Maryland market. For the summer following restructuring, the common method implies that market imperfections resulted in considerable welfare loss, with actual production costs exceeding the competitive model’s estimates by 13 to 21 percent. In contrast, my method finds that actual costs were only between three and eight percent above the competitive levels. In particular, it is the fringe firms whose costs increase, while strategic firms reduce production and costs.

RELATED OLD WORKING PAPER:

“Vertical Integration in Restructured Electricity Markets: Measuring Market Efficiency and Firm Conduct”
UCEI CSEM Working Paper-117, October 2003.
SSRN Yale SOM Working Paper No. ES-32 (abstract number 459593), October 2003.
This paper has been split into two papers:
“Upstream Competition and Vertical Integration in Electricity Markets” and
“Measuring Welfare in Restructured Electricity Markets”