ECON 180 - Regulation and Antitrust Policy Drake University, Spring 2013 William M. Boal Course page: www.cbpa.drake.edu/econ/boal/180 Blackboard: bb.drake.edu Email: william.boal@drake.edu

Regulation of Electric Power

### Version A

I. Multiple choice [2 pts each: 28 pts total]

(1)c. (2)b. (3)b. (4)c. (5)c. (6)c. (7)c. (8)b. (9)b. (10)e. (11)c. (12)c. (13)c. (14)a.

II. Problems

1. 70 thousand kilowatt hours is the capacity of the generating system.
2. \$0.14 per kWh.
3. 70 million kWh.
4. \$0.02 per kWh.
5. 60 million kWh.
6. 80 million kWh.
7. 40 million kWh.
8. increase.
9. 10 million kWh.
10. DWL is represented by two areas: a triangle bounded by SRMC, off-peak demand, and a vertical line at 40 million kWh; and another "upside down" triangle bounded by LRMC, peak demand, and a vertical line at 80 million kWh.
11. \$1 million, total area of the two triangles.

(2) [Wholesale power markets: 20 pts]

1. Demand and supply should be stairsteps, intersecting at price=\$50 and quantity = 110 mWh.
2. Generator A: 70 mWh, Generator B: 10 mWh, Generator C: 30 mWh, Generator D: 0.
3. \$40 per mWh.
4. Generator B.

(3) [Sources of market power: 16 pts]

1. 6.8
2. 0.147 .
3. εM (increases in absolute value, because changes in wholesale prices are now passed through to retail customers, who are the decision-makers on the demand side).
4. DF| increases.
5. Price cost margin decreases (because it is the reciprocal of |εDF|) decreases.
6. SDF (increases because as more generators join the market, this individual generator's market share decreases).
7. DF| increases.
8. Price-cost margin decreases (because it is the reciprocal of |εDF|)

III. Critical thinking [3 pts]

A non-vertically-integrated utility is subject to more wholesale power price risk. If wholesale power prices rise, then a non-vertically-integrated utility will see its profit decrease or become negative, because its most important input has become more expensive. However, a vertically-integrated utility produces its own wholesale power instead of buying it in a market, so it will not see a change in its profit.

### Version B

I. Multiple choice [2 pts each: 28 pts total]

(1)d. (2)c. (3)d. (4)d. (5)a. (6)d. (7)a. (8)c. (9)d. (10)e. (11)c. (12)d. (13)a. (14)c.

II. Problems

1. 90 thousand kilowatt hours is the capacity of the generating system.
2. \$0.16 per kWh.
3. 90 million kWh.
4. \$0.04 per kWh.
5. 70 million kWh.
6. 100 million kWh.
7. 50 million kWh.
8. increase.
9. 10 million kWh.
10. DWL is represented by two areas: a triangle bounded by SRMC, off-peak demand, and a vertical line at 50 million kWh; and another "upside down" triangle bounded by LRMC, peak demand, and a vertical line at 100 million kWh.
11. \$1 million, total area of the two triangles.

(2) [Wholesale power markets: 20 pts]

1. Demand and supply should be stairsteps, intersecting at price=\$40 and quantity = 90 mWh.
2. Generator A: zero, Generator B: 50 mWh, Generator C: 20 mWh, Generator D: 20 mWh.
3. \$40 per mWh.
4. Generator C.

(3) [Sources of market power: 16 pts]

1. 5.2
2. 0.192 .
3. SDF (increases because as more generators join the market, this individual generator's market share decreases).
4. DF| increases.
5. Price cost margin decreases (because it is the reciprocal of |εDF|)
6. εM (increases in absolute value, because changes in wholesale prices are now passed through to retail customers, who are the decision-makers on the demand side).
7. DF| increases.
8. Price-cost margin decreases (because it is the reciprocal of |εDF|) decreases.

III. Critical thinking [3 pts]

Same as Version A.