ECON 180 - Regulation and Antitrust Policy Drake University, Spring 2015 William M. Boal Course page: www.cbpa.drake.edu/econ/boal/180 Blackboard: bb.drake.edu Email: william.boal@drake.edu

ANSWER KEY: REGULATION OF ELECTRIC POWER

### Quiz 11 Version A

(1)d. (2)c. (3)d. (4)d. (5)c. (6)c. (7)c. (8)d. (9)d. (10)d.

### Quiz 11 Version B

(1)a. (2)d. (3)b. (4)d. (5)a. (6)a. (7)a. (8)a. (9)b. (10)b.

### Test 11 Version A

(1) [Traditional ROR regulation: 15 pts]

1. \$50,000.
2. \$10,000.
3. \$25. (Set revenue requirement = P×Q = P 2000 P-1/2 and solve for P.)

1. 80 thousand kilowatt hours is the capacity of the generating system.
2. \$0.12 per kWh.
3. 80 million kWh.
4. \$0.04 per kWh.
5. 60 million kWh.
6. 90 million kWh.
7. 30 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 30 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.

(3) [Wholesale power markets: 20 pts]

1. Demand and supply should be stairsteps, intersecting at price=\$30 and quantity = 120 mWh.
2. Generator A: 60 mWh, Generator B: 30 mWh, Generator C: 30 mWh, Generator D: 0.
3. \$30 per mWh.
4. Generator B.

(4) [Sources of market power: 20 pts]

1. 3.00 .
2. 0.333 .
3. SDF .
4. decreases (because as more generators join the market, this individual generator's market share decreases).
5. DF| increases.
6. Price-cost margin decreases (because it is the reciprocal of |εDF|).
7. εM .
8. 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).
9. DF| increases.
10. Price cost margin decreases (because it is the reciprocal of |εDF|).

Critical thinking [15 pts]

1. Bridges are a joint cost. The size of bridge required depends on the maximum (not the total) of weekday and weekend traffic. For a given size bridge the production-possibility curve for weekday traffic and weekend traffic is rectangular.
2. Because bridges are only lightly used on weekends, there is excess capacity. The marginal cost of weekend traffic does not include the construction cost. By contrast, bridges are intensively used on weekdays (to capacity) so the marginal cost of weekday traffic includes the cost of bridge construction. So the cost of bridge construction should be included in weekday tolls only.

### Test 11 Version B

(1) [Traditional ROR regulation: 15 pts]

1. \$300,000.
2. \$30,000.
3. \$9. (Set revenue requirement = P×Q = P 10,000 P-1/2 and solve for P.)

1. 90 thousand kilowatt hours is the capacity of the generating system.
2. \$0.10 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 kWh.
11. \$0.5 million, total area of the two triangles.

(3) [Wholesale power markets: 20 pts]

1. Demand and supply should be stairsteps, intersecting at price=\$40 and quantity = 130 mWh.
2. Generator A: 50 mWh, Generator B: 30 mWh, Generator C: 30 mWh, Generator D: 20.
3. \$40 per mWh.
4. Generator B.

(4) [Sources of market power: 20 pts]

1. 4.00 .
2. 0.25 .
3. εM .
4. 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).
5. DF| increases.
6. Price cost margin decreases (because it is the reciprocal of |εDF|).
7. SDF .
8. decreases (because as more generators join the market, this individual generator's market share decreases).
9. DF| increases.
10. Price-cost margin decreases (because it is the reciprocal of |εDF|).

Critical thinking [15 pts]

• Same as Version A.