Competitive Assessment of the
Energy Market in New England
Presented to:
Restructuring Roundtable
David B. Patton, Ph.D.
Independent Market Advisor
May 10, 2002
Purposes and Objectives
• The report is a companion to the Peak Pricing Report issued last fall, and
responds to concerns raised by NECPUC and the New England Board.
• The analysis in this report complements the analysis in the report produced
by Bushnell and Saravia.
• The Report provides an assessment of competition in the New England
energy market, which includes analysis of:
 Economic Withholding;
 Physical Withholding;
 Other factors that may have artificially raised prices.
• The analysis includes a detailed evaluation of the high priced hours during
Summer 2001, focused primarily on the 15 hours priced at $1000 per
MWh.
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Competitive Incentives and Load Levels
• Based on economic theory, the most critical factors affecting incentives to
withhold resources are:
 The sensitivity of prices to withholding (i.e., In absence of demand elasticity,
the slope of the supply curve).
 The size of the participant.
• The following figure shows why the demand level is critical.
 Because the sensitivity of prices rises dramatically under the highest demand,
the analysis focuses more heavily on these conditions.
 A workably competitive market where suppliers seek to sell more (i.e.,
withhold less) in higher demand periods when prices are highest;
 A market with significant market power issues where suppliers’ incentives to
withhold rises in higher demand periods;
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Figure 2
Impacts of Withholding Under High and Low Demand Conditions
1000 MW Withheld from Illustrative Supply Curve
1000 MW
Withheld
Clearing Price / Bid Prices ($/MWh)
$500
Total Energy
Demand
$400
$300
$200
Price Impact Under High Demand
$100
Price Impact Under Low Demand
$0
-$100
0
5000
10000
15000
Megawatts
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20000
25000
Summary of Withholding Analysis
• The analysis in the report seeks to determine whether strategic withholding
has occurred by examining the correlation of participants’ actions with the
market factors that can create the incentive to withhold.
 This assessment is necessarily an on-going examination that is not limited to
the analysis presented in this report.
• The report also examines the importance of other factors on potential
withholding, including:
 Participant size,
 Out-of-merit dispatch,
 Unit types, and
 Changes in market rules.
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Economic Withholding:
Output Gap Analysis
Output Gap Analysis
• Economic withholding is evaluated by calculating an “output gap” for each
hour.
• The output gap is the difference in each hour between the actual output of a
unit and the output that would occur under competitive bids.
• Reference prices are the competitive benchmark used to estimate the output
gap.
 Price-takers in a competitive clearing-price market will bid their
marginal cost.
 A proxy for generators’ marginal costs can be estimated by averaging
the accepted bids for the resource over the previous 90 days.
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Output Gap Analysis
• The following chart examines 2001 results for small participants (< 1200
MW) and large participants (> 1200 MW) under increasing demand levels.
• These results show:
 The output gap falls as demand rises to super-peak levels – supports workable
competition hypothesis.
 The output gap quantities detected in the peak demand periods are relatively
small – less than 1 percent of the market capacity.
 These results show that the output gap for large participants is generally smaller
at each of the load levels and close to zero in the super-peak periods.
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Figure 7
Average Output Gap by Size of Participant During 2001
Fossil Units with Low Out-of-Merit Frequency
% of Participants' In-Merit Fossil Portfolio
2.0%
Small Participants
Large Participants
1.6%
1.2%
0.8%
0.4%
0.0%
< 16
16 to 18
18 to 20
20 to 22
Load Levels (1000s of MW)
22 to 24
Source: ISO New England Operations and Market Settlements Databases. Potomac Economics analysis.
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> 24
Other Output Gap Findings
• The output gap values in 2001 after the implementation of three-part
bidding are lower than those in 2000 when some bidders may have
reflected start-up and no-load costs in their bids.
• The average output gap for units generally dispatched in-merit is
substantially lower than for other units – resources dispatched out-of-merit
face different incentives than in-merit resources.
• The output gap for non-fossil resources is higher than for fossil resources –
primarily due to the opportunity costs facing hydro resources.
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Physical Withholding Analysis
Analysis of Physical Withholding
• The report analyzes potential physical withholding by examining patterns
of forced outages and other deratings (excluding long-term outages and
planned outages).
• The following figure summarizes this analysis, showing that:
 Total outages and deratings are smallest under the highest demand conditions,
which is consistent with a workably competitive hypothesis.
 The forced outages rise under peak conditions, which may be explained by the
higher stress placed on units during high demand periods.
•
The deratings are also evaluated at the participant portfolio level by size of
participant – shown in the following figure.
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Figure 9
Forced Outages and Other Deratings by Load Level
January to December 2001
10%
Other Deratings
Multi-Day Forced Outages
Intraday Forced Outages
Percent of Market Capacity
8%
6%
4%
2%
0%
< 16
16 to 18
18 to 20
20 to 22
Load Levels (1000s of MW)
22 to 24
Source: ISO New England Operations and Market Settlements Databases. Potomac Economics Analysis.
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> 24
Outages and Deratings by Participant Size
• The deratings are also evaluated at the participant portfolio level by size of
participant in the following figure, showing that:
 The level of deratings is lower for large participants at all load levels, which
may indicate an efficiency advantage of managing a large portfolio.
 The total deratings for large participants decrease in the highest demand hours,
which is consistent with workable competition.
 Forced outages rise under peak conditions for both small and large participants,
but more slowly for the large participants.
• There is little significant evidence that capacity was strategically withheld,
but it is possible that some of the increase in forced outages under peak
conditions could be strategic – physical audits of the forced outages
remains warranted.
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Figure 12
Total Deratings by Participant Size
January to December 2001
18%
Small Participants
Percent of Participants' Portfolio
15%
Large Participants
12%
9%
6%
3%
0%
< 16
16 to 18
18 to 20
20 to 22
Load Levels (1000s of MW)
22 to 24
Source: ISO New England Operations and Market Settlements Databases. Potomac Economics Analysis.
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> 24
Regression Analysis
• Regression analysis allows an analyst to determine whether statistically
significant relationships exist between a number of factors, isolating the
individual effects of each one given the others.
• This allows a more meaningful assessment of the various factors and their
relationship to the size of the output gap and deratings.
• The regression analysis performed on the output gap and derating quantities
yields results that are consistent with the descriptive results presented
above.
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