Study Downplays Market Power in Western Price Run-up

Market power "is unlikely to be the dominant factor and may not even be significant" in the run-up of power prices in the California market, according to a study prepared by Harvard Professor William Hogan and Scott Harvey, with LECG, LLC, an economic and management consulting company based in Cambridge, MA.

"On balance, to date the publicly available data provides no reason for the Federal Energy Regulatory Commission to change its conclusion that there is no evidence of strategic withholding, nor any proof that strategic withholding has occurred," the report said.

"There is general agreement that the California electricity market design is seriously flawed," and evidence "that the policy responses that have been adopted in California have accelerated an already serious market collapse."

Much more information relating to a broad range of detailed market transactions and the market environment when the transactions were made would be necessary for any finding that generators withheld power in order to profit from higher prices. Currently the Cal-ISO is the only party that has that information, it continued. Hogan is professor of public policy at the John F. Kennedy School of Government at Harvard. Both Hogan and Harvey have been consultants on electricity market design and transmission pricing, market power or generation valuation issues for a number of corporate and government clients. The study was supported by Mirant.

The 80-page study notes that simply charging high prices during periods of scarcity is not classified as exercising market power. Likewise, refusing to supply without being paid is not an exercise of market power.

While critics have focused the public debate on market power, "the principal policy focus should be on fashioning workable solutions for the other more serious problems in market design that relate to the underlying causes of the market meltdown.

"Separate from market power mitigation, California should pay its bills, raise incremental prices to retail customers, and move as quickly as possible to operating a coordinated and efficient market with consistent pricing for all, that includes unit commitment, day-ahead scheduling and real-time balancing" to address immediate problems. Longer-term initiatives should focus on expanding generation capacity, transmission infrastructure, and the reach of an efficient market to the western interconnected grid.

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