1 / 21

SPP-Entergy Market Power Analysis

SPP-Entergy Market Power Analysis. Presented By: David B. Patton, Ph.D. President, Potomac Economics December 1, 2008. Potomac Economics has been engaged to: Perform an evaluation of market power related to ETI joining the SPP; and

chen
Download Presentation

SPP-Entergy Market Power Analysis

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. SPP-Entergy Market Power Analysis Presented By: David B. Patton, Ph.D. President, Potomac Economics December 1, 2008

  2. Potomac Economics has been engaged to: Perform an evaluation of market power related to ETI joining the SPP; and Identify mitigation options that would address any market power issues found. The study addresses: The market power requirements of the Public Utility Regulatory Act (PURA) for the SPP to be a Qualified Power Region (QPR); as well as Local market power issues associated with serving load in the ETI Area. It is the local market power analysis that is most likely to generate the need for some form of market power mitigation. Market Power Study - 2 -

  3. For the prospective QPR region as a whole, PURA requires only that suppliers’ market shares be less than 20 percent. Hence, we will focus on this test for the SPP-wide analysis. However, PURA and subsequent PUCT precedent do not provide specific guidance or requirements for the evaluation of local market power. Therefore, we produce a number of market power indicators for the ETI Area. Because there are significant transmission constraints that bind into the ETI Area and within the ETI Area, we define two relevant markets for these analyses: The entire ETI Area; and The Western Subregion of the ETI Area (which is defined as the load and resources west of the Jacinto and Cypress substations). Accordingly, we generally conducted our local market analyses for both ETI and the Western Subregion of ETI. Market Power Study - 3 -

  4. Market Power Study To evaluate the SPP/ETI Area as a QPR, we perform a market share analysis to determine whether any suppliers have a market share greater than 20 percent. To evaluate local market power, we conduct the following analyses: Market concentration based on installed capacity (i.e., capacity shares and HHI statistics); Market concentration based on uncommitted capacity; Pivotal supplier test for the ETI Area and Western Subregion, which seeks to determine whether the load can be served if the largest supplier withholds its resources. Load obligations have a significant effect on market power findings because a supplier will not have an incentive to withhold resources it needs to serve its load. Hence, we generally consider three alternative assumptions regarding the portion of a utility’s load it is obligated to serve (0 percent, 50 percent, and 100 percent.) - 4 -

  5. Capacity Share in Combined SPP/ETI Area In the first analysis, we calculate simple installed capacity market shares for the combined SPP/ETI Area. To calculate the market shares, we use the maximum ratings from the SPP summer power flow base case; Imports from outside the SPP/ETI Area are not counted (hence, capacity shares are likely slightly understated); The company totals represent a simple “steel in ground” figure. They do not reflect contract sales, transmission limitations, or other complications. The following slide shows our analysis. ETI has a capacity share of 4.4 percent and no supplier has a market share greater than 20 percent. - 5 -

  6. Capacity Shares in Combined SPP and ETI Area - 6 -

  7. Analysis of Local Market Power in ETI Area - 7 -

  8. Market Concentration in the ETI Area We use the Herfindahl-Hirschman Index (HHI) to measure market concentration. The HHI is a measure of market concentration and is calculated as the sum of the squares of the market shares of each individual firm. The index ranges from 0 to 10,000, increasing as suppliers’ market shares increase and the number of suppliers serving the market falls. Economists use the HHI index because there is evidence in some markets that the competitive performance improves as the HHI decreases. The antitrust agencies consider a market with HHI greater than 1800 as highly concentrated, but HHIs in the range of 2,000 to 2,500 have been considered workably competitive in electricity markets. We calculate the HHI using two capacity metrics: Installed Capacity: calculated based on the summer ratings of all supply in the market and import capability into the market (with no offset for load obligations). Uncommitted Capacity: calculated based on the installed capacity minus load obligations of each supplier – this metric better addresses the effect on incentives of being obligated to serve load at a fixed price. - 8 -

  9. Market Concentration in the ETI Area: Installed Capacity The table on the next slide shows the HHI calculation in the ETI Area for the installed capacity measure. The table shows: The HHI in the ETI Area is under 2,100; ETI has a market share of 42.3 percent; and There are over 900 MW of capacity purchases, most of which are imports from Entergy in Louisiana to ETI load. However, some imports serve municipal entities. Due to the potential that Cottonwood may disconnect from the Eastern Interconnect, we calculated an HHI assuming Cottonwood has 0 MW in ETI. The HHI in this case was 2,292. This is in the higher end of the market concentration range for electricity markets that would typically be deemed workably competitive. This analysis does not account for the effects of load obligations, excess capacity and other factors that improve the competitiveness of the market. It is below the 2,500 benchmark used in the prior study. - 9 -

  10. HHI for Installed Capacity in ETI Area - 10 -

  11. HHI Calculations for ETI AreaMitigation Results We analyzed two market power mitigation measures that would reduce the market concentration in the ETI area: Expansion of the transmission capacity into ETI, which would allow increased competition from external suppliers; and Capacity sales by ETI, which would reduce ETI’s market share. We start at 500 MW because it is 15 percent of ETI’s capacity in the area (the floor in PURA). The following table shows the mitigation results in cases including and excluding the Cottonwood plant. Both approaches reduce market concentration, but capacity sales generally have larger effects because they reduce the market share of the largest supplier more. With Cottonwood out of the market, 500 MW of capacity sales reduces the HHI to 1,712 while the same amount of new transmission reduces it to 1,976. These approaches may also be combined. As explained later in the study, however, we do not find that mitigation is necessary in either the ETI Area or the Western Subregion. HHI analyses ignore the effects of load obligations, excess capacity, and RMR obligations that are better captured in the other analyses discussed below. - 11 -

  12. Summary of HHI Impact of Mitigation Measures - 12 -

  13. The next analysis of uncommitted capacity shares accounts for load obligations by subtracting the peak load obligation from the LSE’s total resources. This measure is typically a more accurate indicator of market power because it reflects the mitigating effects of load obligations (i.e., there is no incentive to withhold resources needed to serve load). The move toward retail competition complicates assumptions regarding the load obligations. Hence, we consider multiple scenarios: 100 percent load obligation case (no retail load switching). 50 percent load obligation (reflective of the load switching experience in ERCOT with ~40 percent switching); 0 percent load obligation (same as installed capacity analysis presented above); The 100 percent case indicates an HHI of less than 900. The 50 percent case is shown on the next slide -- It also shows an HHI of less than 1,000. These results do not raise any competitive concerns or indicate the need for market power mitigation. Market Concentration in the ETI Area:Uncommitted Capacity - 13 -

  14. Market Concentration in ETI: Uncommitted Capacity50 Percent Load Obligation Case - 14 -

  15. Pivotal Supplier in ETI Area Our next analysis sought to determine if and under what conditions there is a “Pivotal Supplier” in the ETI Area. A supplier is pivotal if the load and reserves within the area (ETI Area) cannot be satisfied without the resources of the supplier (ETI). Pivotal supplier analyses provide a more reliable indicator of market power than HHI analyses in electricity markets because they capture the effects of excess capacity and other factors that affect the competitiveness of the market. We examine six cases: We determine whether ETI is pivotal when it must serve 100%, 50%, or 0% of its load. We perform the analysis with and without the Cottonwood facility. - 15 -

  16. Pivotal Supplier in ETI Area The results of our analysis show that ETI is only pivotal in the 0% load case. Although this result raises potential competitive concerns, we do not find that market power mitigation is necessary for the following reasons: A significant portion of ETI’s capacity is reliability-must-run, which means that resources must be operated to support the transmission system. ETI is not pivotal if it cannot withhold such capacity. ETI will likely continue to be obligated to serve load as a provider-of-last-resort (POLR). POLR prices in ERCOT are capped relative to prevailing wholesale prices. It is unclear what price-to-beat or POLR provisions would be applied in ETI. Given the quantity that ETI would have to withhold to be pivotal, withholding to receive the price-to-beat or POLR price from the remaining retail customers would not likely be economic. The SPP market monitor could easily detect the magnitude withholding that would be necessary for ETI to take advantage of its pivotal supplier status. Lastly, the peak load assumed in the pivotal supplier test is substantially higher than the average load. ETI would not be pivotal in most hours. - 16 -

  17. Pivotal Supplier Analysis -- ETI Area - 17 -

  18. Analysis of Local Market Power in Western Subregion of ETI - 18 -

  19. Market Concentration in the Western Region:Installed Capacity We cannot show specific results for the Western Subregion of the ETI Area because these results would allow one to calculate the import capability into the area, which is confidential information. Rights to the import capability (which can be used to serve a large share of the load in the area) can only be held by entities serving load in the area. Hence, we assume the rights cannot be hoarded. Our analysis of the Western Subregion shows: Installed capacity (0 percent load obligation): the HHI in the Western region was well below 1,000 due in part to the mitigating effects of the import capability. Uncommitted capacity, 50 percent case: HHI is close to 1,500. Uncommitted capacity, 100 percent case: HHI is high, but all load serving entities have sufficient capacity to serve their own load so competitive concerns are limited. These results raise no significant market power concerns. - 19 -

  20. Pivotal Supplier in Western Subregion We also performed a pivotal supplier analysis for the Western Subregion for the 0 percent, 50 percent load obligation case, and the 100 percent load obligation case. We found that ETI is not pivotal in any of the cases; This result is due primarily to the import capability into the Western Subregion, which we assume cannot be withheld by ETI to the extent that it is not serving load in the area; Our analysis contains confidential information that prevent us from showing more detailed results. - 20 -

  21. Conclusions The SPP/ETI Area satisfies the QPR standards. We performed an array of local market power analyses for both the ETI Area and the Western Subregion (within the ETI Area). The cases that are reflective of the future retail competition in the area are the 0 percent and 50 percent load obligation cases, which indicate the following: The market concentration results raise no competitive concerns. ETI is not a pivotal supplier in the Western Subregion. In the ETI Area, ETI is only pivotal in the 0 percent load obligation case. We find that this does not raise significant competitive concerns due to: ETI’s reliability-must-run obligations; ETI’s load obligations as a provider-of-last-resort. The ease with which the SPP market monitor could detect the withholding that would be needed for ETI to take advantage of its pivotal supplier status. - 21 -

More Related