Research Update

June 2014

The listing below illustrates the range of topics addressed in the new working papers and publications posted since the last Research Update.

Tap into our Research:
How Changing Technology Impacts Regulation and Markets


Challenges in Quantifying Optimal CO2 Emissions Policy: The Case of Electricity Generation in Florida

Implementing public policy without understanding its economic impacts can be costly and unproductive. On June 2, the EPA issued its proposed rule for CO2 abatement at existing power plants. In typical fashion, the reduction rhymed, 30% reduction by 2030. Volumes of economic analyses will be drafted over the next year examining the costs of this proposal. But is it optimal? Could we achieve greater reductions at slightly greater cost? Could we cut costs in half with a 28% reduction. This is a complicated, and in my view, much more important question. This paper utilizes a model that simulates the dispatch of electric generating units in the state of Florida under various prices for CO2 emissions, and analyzes the challenges that may arise in the determination of optimal emissions abatement policy. At relatively low CO2 prices, utilities may not have adequate incentive to switch fuels, and emissions are not reduced significantly. However, once a ‘critical point’ has been achieved and more coal generation is displaced by natural gas, emissions are reduced fairly easily. This paper demonstrates how the incremental cost of abatement curves may intersect with a CO2 tax at many levels of abatement, allowing for different characterizations of the ‘optimum’. Therefore, agreement on the marginal costs and the marginal benefits of CO2 abatement can be seen as necessary for the determination of an optimal level of abatement, but more work still needs to be done on the policy aspects.


A review of electricity product differentiation

Product differentiation to electricity can greatly induce end-users to more effectively and efficiently satisfy their demands upon the system, and to do so in an environmentally friendly way. This paper shows this by weaving the academic literature with examples from the real world to address two substantive questions. First, is product differentiation a meaningful concept for electricity? Second, can product differentiation improve grid operations and planning, thereby lowering the cost of delivering electricity services? Based on the analysis and comprehensive review of the extant literature, our answer is “yes” to both questions. From a customer’s perspective, electricity has several distinct attributes: quality, reliability, time of use, consumption (kW h) volume, maximum demand (kW), and environmental impact. A differentiated product can be formed by packaging its non-price attributes at a commensurate price.


The Impact of Wind Generation on Wholesale Electricity Prices in the Hydro-Rich Pacific Northwest

Can wind energy reduce wholesale prices of electricity? Yes, according to this research. Past studies have shown that wind generation can reduce wholesale electricity market prices by displacing conventional generation. But how large is the wholesale price effect of wind generation in an electricity market dominated by hydroelectric generation? This paper explores this question by analyzing the impact of wind generation on wholesale electricity prices in the Pacific Northwest region of the United States and finds that increased wind generation reduces wholesale market prices by a small, but statistically-significant, amount. While a hydro-rich system can integrate wind generation at a lower cost than a thermal-dominated region, the direct economic benefits to end-users from greater investment in wind power may be negligible.


Trends in Alternative Fuel Cards, Solar Panels, and Internet Access and Use

Floridians' use of renewable fuels has been flat over the past year, while use of new communications technologies continue to grow. A monthly survey by UF's Bureau of Business and Economic Research of about 500 consumers found that about 5% of Florida households used solar panels and about 8% claimed to have at least one alternative fuel automobile in April 2013, about the same percentages as one year earlier. Internet usage was up 2 percentage points over the same time period -- from 83% to 85% -- and cable modems are proving more popular than DSL -- a ratio of 3.4:1 in July 2013 compared to 1.6:1 twelve months earlier.


Strategic Adaptations: Lessons from U.S. Electricity Industry in the 20th Century

Several patterns emerge from a review of historical developments in the electricity industry: (1) conflicts arise from a number of sources; (2) responses to events and perceived crises tend to involve national (and state) legislation; (3) a lack of broad public (and political) consensus regarding the appropriate role of market mechanisms vs. government regulations; (4) absence of significant changes in response to events—changes appear to be incremental rather than transformational. The article provides an overview of developments in the past half century—placing current debates in a broader context.


Do Common Carriage, Special Infrastructure, and General Purpose Technology Rationales Justify Regulating Communications Networks?

This paper finds that traditional justifications for common carrier regulation for communications networks, plus some new justifications that have emerged, do not apply to today’s communications networks. The paper examines the historical development of the public utility and common carrier concepts and finds that the essential features of these constructs largely do not fit communications networks today and for the foreseeable future. More recent frameworks for economic regulation also do not fit. Communications networks are not special infrastructure because they do not exhibit zero marginal costs over an appreciable range of demand and do not exhibit a differentiating amount of social demand. Communications networks appear to satisfy the conditions for general purpose technologies, but the features of these technologies that would compel economic regulation, primarily the presence of significant externalities, are lacking.


The Effect of Subsidized Entry in Multi-Unit Capacity Auctions with Allocation Externalities

This technical paper examines the effect of subsidized entry of electricity generation capacity on the outcome of centralized capacity auctions. Subsidized entry suppresses capacity prices and induces an inefficient allocation of capacity. Subsidized entry also alters the generation portfolio determined by the capacity auction, leading to lower expected electricity prices in subsequent market interactions. These effects reduce total industry profit, but may increase consumer surplus. Consequently, the effect of subsidized entry on the overall level of short-term expected social welfare is ambiguous. Subsidized entry has long- term adverse impacts. The suppressed capacity and electricity prices reduce unsubsidized firms’ incentives to undertake generation capacity investments. The long-term resource adequacy issues associated with insufficient capacity investment may dominate the potential short-term benefits of subsidized entry.


Who Do Start-up Firms Imitate? A Study of New Market Entries in the CLEC Industry

Do telecom firms imitate other telecom firms, or create new strategies and ideas? This paper addresses this debate by studying 1067 market entries by founder managed start-ups in the US Competitive Local Exchange Carrier (CLEC) industry from 1996-2004. In support of the strategic groups literature, start-ups imitate entry decisions of and gravitate toward markets that are densely populated by other start-ups. While start-ups avoid markets already densely populated by corporate ventures, they imitate the market entries of corporate ventures.


Electricity, Gas, Google? Why Google Is Not a Utility

Should Google be regulated in a manner similar to public utilities? Some people think so, but the arguments misconstrue the concept of public utility. Every month, most of us receive a bill for the public utilities that serve our home — the water company, the electric utility and the gas company. These companies provide vital services, and we tend not to think about these utilities too much until something goes wrong. And while social networks and search engines also serve a useful service, few people would mistake them for public utilities, which are characterized by enduring natural monopoly, by unique contributions to the economy, and government franchises.


The Net Neutrality Debate – Who’s right? It depends...

Research discussion by Dr. Mark Jamison.


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