MorganEnergy

Energy Legal Blog has an interesting post up about Commissioner Jon Wellinghoff, the new acting FERC Chairman.

Here’s another new paper from the UCEI Berkeley Center for the Study of Energy Markets. This one is by Meredith Fowlie, Christopher R. Knittel and Catherine Wolfram and compares differences in pollution abatement policies between industry (e.g. generation) and individuals (e.g. cars). Here’s the abstract:

Sacred Cars? Optimal Regulation of Stationary and Non-stationary Pollution Sources

For political and practical reasons, environmental regulations sometimes treat point source polluters, such as power plants, differently from mobile source polluters, such as vehicles. This paper measures the extent of this regulatory asymmetry in the case of nitrogen oxides (NOx), the criteria air pollutant that has proven to be the most recalcitrant in the United States. We find significant differences in marginal abatement costs across source types with the marginal cost of reducing NOx from cars less than half of the marginal cost of reducing NOx from power plants. Our findings have important implications for the efficiency of NOx emissions reductions and, more broadly, the benefits from increasing the sectoral scope of environmental regulation. We estimate that the costs of achieving the desired emissions reductions could have been reduced by nearly $2 billion, or 9 percent of program costs, had marginal abatement costs been equated across source types.

The full paper is available here.

October has been a busy month for FERC, with a lot of major rulings on electricity market operation being issued. Part of the activity has been regarding the role of the demand side, and Michael Giberson at Knowledge Problem has a long post addressing the various issues. Other rules, summarized by Tracy Davis at Energy Legal Blog, touch more directly on market power issues.

Something that is likely to result in a good deal of head scratching around California is that FERC now believes that long term contracts are a good thing. If only someone had been able to explain that to California legislators before things got ugly.

FERC has also insisted that market monitoring departments be responsible directly to RTO/ISO boards, not to management. Hopefully that will put an end to any silliness about market monitors being muzzled because their findings reflect badly on the market they are monitoring. FERC has even given market monitors the power to report directly to them if they believe that an RTO or ISO is guilty of misconduct.

EU Energy Policy has a long post summarizing the results of the CESSA research program looking into security of supply. Most of it can be boiled down to “markets are good, and bigger markets are better than small ones.” How that will go down in the wake of the financial market meltdown is unclear. In particular the report warns governments against removing price signals by capping prices so as to avoid upsetting consumers by exposing them to short term price spikes. There are, of course, other ways to protect consumers from price spikes, but that would involve *gasp* derivatives!

Most of us who work in energy economics have had dealings with government regulators at some point or other during our careers. Mostly, in my experience, such people have taken their jobs very seriously. Obviously I have led a very sheltered existence.

Over at the EU Energy Policy blog Bert Willems and Emmanuel De Corte of Tilburg University suggest that the EU should regulate market power in the generation sector by setting limits on capital adequacy as well as looking at market concentration. Being aware of capital adequacy issues is generally a good thing for regulators, if only because most of the major disasters in energy markets have been caused by melt-downs in trading. Also such an awareness might dissuade them from encouraging very small companies to enter retail markets, with predictable results. On the other hand, getting a reliable measure of capital adequacy is not easy. The authors say:

we would allow firms to use their own risk analysis, and base the regulation on a general ‘Value at Risk’- measure, similarly to what is used in the banking sector

While VaR is a well known and commonly accepted methodology, its implementation is very complex. That’s particularly the case in the energy industry where price distributions have such extreme kurtosis. Consequently such a regulation could easily lead to endless disputes about whether the VaR numbers coming out of companies were in any way comparable; and indeed whether the regulation provided an incentive for companies to distort their risk reporting, thereby putting their financial security in danger. Possibly the authors have addressed these issues in their paper, but it is behind a pay wall.