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Dynamic Efficiency and the Regulated Firm: Evidence from Interfirm Trade in Electricity Markets (1995)
| Citations: | 1 - 0 self |
BibTeX
@MISC{White95dynamicefficiency,
author = {Matthew W. White and Matthew W. White and Alvin Klevorick and Daniel Mcfadden and Ariel Pakes},
title = {Dynamic Efficiency and the Regulated Firm: Evidence from Interfirm Trade in Electricity Markets},
year = {1995}
}
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Abstract
This paper presents an empirical analysis of the value of a coordinated market exchange mechanism. I present a model of efficient trading mechanisms under uncertainty, and develop a measure of the value of an interfirm trade agreement in the context of sequential `buy-versus-produce' decisionmaking by firms. The theory is applied to estimate the value of a formal trading institution in the California electricity market, where an interutility power pool has been proposed to restructure the electric power industry. I develop an empirical model of the optimal production and trading decisions for a firm in such a pool, and estimate state-contingent willingness-to-trade functions for each of the four major utilities in this market. With this information, I estimate the distribution of future costs that would obtain if an efficient exchange mechanism arbitraged away observed differences between willingness-to-buy and willingness-to-sell among the sample firms. The principal finding is that with the simple, relatively state-independent bilateral contracts observed in this market, the sample firms achieve within 4% of the theoretical minimum expected costs available with a complete statecontingent exchange mechanism. This difference represents an opportunity cost of approximately $250 million per year. I conclude with regulatory and managerial explanations for the absence of a more efficient state-contingent trading mechanism, and implications for deregulating electric power markets.
Keyphrases
dynamic efficiency regulated firm interfirm trade electricity market sample firm complete statecontingent exchange mechanism opportunity cost empirical model optimal production electric power industry principal finding observed difference trading decision theoretical minimum empirical analysis efficient trading mechanism state-independent bilateral contract electric power market efficient exchange mechanism state-contingent willingness-to-trade function formal trading institution interfirm trade agreement efficient state-contingent trading mechanism major utility interutility power pool managerial explanation california electricity market coordinated market exchange mechanism future cost
