Empirical Methods for Measuring Market Performance in Network Industries

Stanford University, Stanford CA

Investigators

Abstract

This research will devise and implement techniques for measuring market performance in the electricity and postal delivery services industries. I will undertake four lines of inquiry measuring performance in wholesale electricity markets. First, I plan to apply the methodologies for measuring market performance in the electricity supply industry presented in Borenstein, Bushnell and Wolak (2002) and Wolak (2003b) to provide a comprehensive diagnosis of the causes and solution to the California electricity crisis. I have collected a number of new data sets that will allow me to perform a more comprehensive analysis of the causes and remedy for the California electricity crisis. The second project will adapt these two methodologies for measuring market-wide and firm-level market power (or market inefficiencies) to wholesale markets that use locational marginal pricing procedures to price electricity. The third topic is how to value the net benefits of transmission network upgrades in a wholesale market regime. Transmission network expansions have the potential to increase the competitiveness of a wholesale electricity market because they can increase the number of independent suppliers able to compete with each local supplier. I am not aware of an internally consistent methodology for valuing transmission upgrades that accounts for these market power mitigation benefits. The power outage in the eastern U.S. on August 14 and 15, 2003, suggests that such a methodology is far overdue. The fourth line of inquiry will study the extent integration of day-ahead forward markets with the real-time market. In all U.S. wholesale markets, electricity is traded in a number of forward markets in advance of delivery. There are a number of arbitrage relationships that should hold between these markets if energy traders are risk-neutral, and a different set of relationships that should hold if energy traders are risk-averse. This research will derive these relationships and examine their empirical relevance. The US Postal Service (USPS) has experienced considerable financial turmoil over the past two years. For the first time in the post World War II period, the demand for single piece First-Class mail, the largest volume category of mail that the USPS delivers, has experienced a decade of decline. This has caused the USPS to implement a number of rate increases to recover lost revenue from these volume decreases. The USPS also has nationwide uniform wage policy for workers in its mail sorting facilities. This has resulted in substantial differences in worker productivity across mail sorting facilities. This using a dataset obtained from the United States Postal Rate Commission, I will first document the extent of across-facility differences in worker productivity and quantify the cost to the USPS of its nationwide wage policy. This analysis should provide useful input into the USPS decision-making process for reducing postal operating costs. I also plan to extend my previous research on the impact of electronic alternatives to postal delivery services and postal price increases on the household-level demand for postal delivery services in a number of directions.