Posts Tagged ‘New York’

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Legislators from wealthy Fairfield County, Connecticut hope a zone pricing ban will save constituents money

May 26, 2009

Michael Giberson

From the website of Livvy Floren, Greenwich state representative and Assistant Republican Leader in the Connecticut House of Representatives, “Greenwich Delegation Calls for Ban on Zone Pricing of Gas“:

HARTFORD- Greenwich State Reps. Livvy Floren (R-149), Lile Gibbons (R-150) and Fred Camillo (R-151) are dismayed the state legislature refuses to address the issue of gasoline zone pricing which forces Greenwich to pay the highest gas prices in Connecticut.

“Zone pricing comes down to equity across the state. Once the gas is in the pipe, prices should be equal since there is no marginal or incremental delivery cost. That is all we are asking for with this ban,” said Rep. Floren….

Rep. Fred Camillo who is a freshman legislator from Cos Cob said he wonders why the legislature refuses to debate this bill. “It’s an issue of fairness, Fairfield County legislators, both Republican and Democrat, stand united against this un-American practice. Our local businesses bear the tough burden of selling the most expensive gas in the state with out any choice and it hurts their bottom line selling other products as drivers gas up out of town.”

An “un-American practice”? What is un-American about allowing private companies to set their own prices?

In any case, if I were a legislator from elsewhere in the state, I’d be leery about a bill that likely tend to raise average gasoline prices in my district.

(At least that is the implication of this economic study of a related proposal in California, conducted by Michael Keeley and Kenneth Elzinga. Other analyses have tended to find the effects of a zone pricing ban to be either harmful or at best ambiguous.  See related posts and especially this one at Knowledge Problem for discussion.

Do you know of zone pricing analyses not yet mentioned in these posts? Let me know in the comments.)

Meanwhile, in neighboring New York, a newspaper story from suburban Rochester suggests that the state’s new zone pricing ban is helping to equalize prices between formerly high priced and formerly low priced stations. (The story doesn’t report whether prices have been equalized mostly or entirely by reductions in prices in the formerly high-priced areas or by increases in prices in formerly low priced areas.)

Posted in Economics, Energy markets | Tagged , , | 1 Comment »

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Congressman to Western New York gasoline retailers: We will be watching you

May 18, 2009

Michael Giberson

From the Buffalo, New York, BusinessFirst:

In a letter sent May 13 by FTC Chairman Jon Leibowitz to Higgins, the agency said after a careful and extensive investigation, regulators could not find any evidence of illegal activity in gasoline markets in any of the affected cities. The agency monitored prices in Buffalo, Jamestown, Rochester and Burlington, Vt.

“To the contrary, staff found evidence suggesting that it is unlikely that illegal conduct caused those price levels, although staff was unable to identify precise reasons why retail gas prices in Western New York did not fall as quickly as prices in other Northeast cities,” Leibowitz wrote.

What the agency did note was that after Higgins released an Oil Price Information Service (OPIS) report on Dec. 4, 2008 citing Jamestown and the Buffalo-Niagara regions among the top 5 most “profitable” for gasoline retailers, the prices for unleaded gas decreased from an average of $2.25 to $1.85 by the end of 2009.

Does this last paragraph suggest that a servile and pandering attitude on the behalf of the FTC toward the congressman? I don’t find the FTC letter online at either the FTC’s website or that of the Congressman, so I’m just raising the question based on the news article.

The congressman’s press release suggests, surprise!, that he is quite willing to encourage the view that his actions had something to do with prices falling back in line with state averages:

“Western New York consumers were getting ripped off and we sounded the alarm, which caused WNY gas prices to fall in line with state averages, again proving that when we stand up for ourselves we can get things done,” Higgins added.  After Congressman Higgins publicly released an Oil Price Information Service (OPIS) report naming Jamestown & the Buffalo-Niagara regions among the top 5 most “Profitable” for gasoline retailers on December 4th, 2008, the prices of unleaded gas decreased from an average to $2.25 in Buffalo to $1.85 by the year’s end.

To the congressman, absence of evidence is no barrier to action:

“While we might not have proof of illegal activity or a clear definition of why our prices were so high, what is clear is retailers were acting in bad faith trough some type of implicit collusion and retailers and consumers should know that we were watching then and are watching now and will continue to work to make sure this doesn’t happen again,” said Higgins.

A quick trip to the price charts at www.buffalogasprices.com tells some of the story (start here at the default Buffalo price chart for one month, then add two more upstate New York cities to the chart – Rochester, Albany, or Syracuse are options – and expand to at least 18 months).  Up until the 2008 mid-July gasoline price peak, retail prices in Buffalo tracked prices elsewhere in upstate New York pretty closely. When prices started falling, they fell more slowly in Buffalo than in the rest of the state.  By the time retail prices hit bottom at the end of the year, prices in Buffalo were back in line with prices elsewhere in New York, and since the beginning of the year prices in Buffalo have moved in line with other gasoline prices in the state.

So, yes, prices did fall more slowly in Buffalo. Presumably, a good economic study could uncover likely causes. Those causes may not turn out to be politically useful to local politicians. In any case, of the congressman’s agenda intended to “prevent price disparity in [the Western New York] region” — raise public awareness, push for passage of a federal price gouging bill, push for passage of a bill to prevent excess speculation in the oil market, and invest in renewable energy — only the first is likely to have any real impact on local “price disparity.”

Posted in Energy markets, Politics | Tagged , , , | Comments Off

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Hartford Courant editorializes against zone pricing ban in Connecticut

May 12, 2009

Michael Giberson

From the Hartford Courant (May 11, 2009):

A bill in the General Assembly that would force gasoline wholesalers to charge the same price to retail dealers across Connecticut would likely raise the price of fuel for most motorists and make the market less responsive to competition.

Legislation to ban so-called zone pricing has been tried a number of times. The ban’s drawbacks are far outweighed by the advantages of allowing the market to continue working as it already does.

“Zone pricing” is the practice of gasoline wholesalers setting prices for sale to gasoline retailers by area, based upon a projected ability of the area to support higher or lower prices. While specific practices vary by wholesaler, typically incomes in the area and the level of competition between retailers would be taken into account as wholesales select the price it wishes to charge.  It is asserted that zone pricing harms retail station competitiveness and leads to higher retail prices.

Over the past several years zone pricing bans have been often debated in Connecticut and elsewhere. Numerous points have been made by both proponents and opponents of zone pricing bans. Until recently the evidence for and against zone pricing has been primarily theoretical, or experimental, or based on inferences from similar practices in other industry.

But last November neighboring New York implemented a law (partially) banning zone pricing.  So my advice to the people of Connecticut is that they continue without a zone pricing ban a little longer, and commission a few economic studies of the effects of New York’s zone pricing ban instead. Why not find out how this idea actually plays out in the real world?

Better to spend thousands of dollars on economic studies than make a million dollar mistake.

Previous zone pricing posts on Knowledge Problem:

Posted in Energy markets, Politics, Regulation | Tagged , , , | Comments Off

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Power market seams and the role of arbitragers in market design

March 9, 2009

Michael Giberson

For class tomorrow I’m reading up on things Enron and California power market melt-down related.

I’m a fan, for example, of Jonathan Falk’s 2002 article in the Electricity Journal on the infamous “Smoking Gun” memo which detailed Enron’s colorfully-named trading strategies like “get shorty” and “death star.” Among other things, Falk points out the several of the strategies provided arbitrage services between the many power markets in and around California, and at least some of the strategies likely helped the California market work more efficiently.

Richard J. Pierce, Jr. has what might be seen as a follow-up article in 2003, also in the Electricity Journal.  Pierce agrees with Falk that many of Enron’s strategies could be fairly described as  arbitraging the California market, but he also asserts that many of the strategies also could be fairly described a manipulative.  As a kind of aside, Pierce said, “If the California debacle has taught us nothing else, it should persuade us that arbitragers should never be given a role in structuring a market. They have a powerful incentive to maximize the flaws in the market design in order to maximize potential arbitrage profits.” (p. 40, emphasis added)

Pierce exaggerates a bit; it is unlikely that maximizing flaws will maximize potential profits.  Rather, some optimum amount of relatively minor flaws probably promises the most overall profit for arbitragers. But Pierce reminded me of the role that arbitragers have played on seams issues between the New York ISO and ISO New England markets.

For years, market monitors for the regions and some market participants have encouraged the New York and New England markets to exchange real-time market information and coordinate power flows as necessary to eliminate price distortions along the border between the markets. For years, other market participants (primarily traders participating in both markets) have continued to support alternative market changes that have the effect of continuing the special role played by traders in determining power flows between the markets. The Federal Energy Regulatory Commission has directed the markets to fix the seams issue in cooperation with market participants, but for years the ISOs have decided that other market changes were higher priority. For years, FERC has accepted that answer from the ISOs.

An estimate by Potomac Economics, external market monitor for the New York ISO, suggested that the net cost of power to New York consumers would have been $177 million lower in 2007 had the two markets better coordinated the power flows between the regions.* Still, the issue is not a priority at the ISOs or the FERC. Maybe when someone notices that efficient market-to-market coordination of power flows between regions would make better use of renewable power and demand-side resources participating in New York and New England markets, then we will see FERC make resolving this seams issue a higher priority. Until then, FERC and the ISOs continue implicitly to support the arbitragers’ favored approach to managing the seams.

(*See Table 1 on page 28 of Potomac’s “2007 State of the Market Report: New York ISO.”

DISCLOSURE: I contributed to the drafting of the 2007 market report as an employee of Potomac Economics last year before taking my current position at Texas Tech University. Of course, nothing I post here should be taken as expressing the views of either my former or current employer.)

Posted in Electricity, Energy markets | Tagged , , , | 4 Comments »

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Wind power is dispatchable, down

March 9, 2009

Michael Giberson

Last week the New York ISO filed proposed tariff changes with the Federal Energy Regulatory Commission to revise how it treats wind power generation in its markets.  Under the NYISO’s current rules, wind power generators are not treated as flexible resources.  When the transmission system is overloaded, other generators can be asked to back down but wind power would not be reduced under most circumstances.  (Under current rules wind power can be backed down in extraordinary cases, via a cumbersome process, and sometimes generators back down voluntarily due to low prices.)

Under the proposed rules, wind power generators would be treated as flexible resources by the real time market system for output levels from zero up to the forecasted wind power output level.  The practical effect would be to allow the system to back down wind and non-wind generation in comparable fashion as needed to resolve congestion on the transmission grid.  Wind power generators would submit energy bids into the market like most generators and the ISO market would use the bids to work out the least cost method for resolving congestion.

While the change could result in wind power generators being directed to reduce output more frequently than under current rules, the NYISO said the change would likely increase the overall amount of wind power taken by the system. Under the current, manual procedures for directing reductions in wind power output, it is hard to get just the right amount of power off the system. The NYISO indicated that sometimes more power has been taken off the system for a longer period than was strictly necessary. In addition, even under voluntary curtailment by wind power generators due to low (and sometimes negative) prices, sometimes more power has been taken off the system longer than was needed to resolve the problem.

Both symptoms of the cumbersome approach now used have resulted in more work for the system operator and a less efficient supply of power.  The proposed changes should serve to more finely target any needed reductions in output, allowing a more efficient use of wind power when it is available.

Even with the proposed tariff changes, the NYISO expects that most of the time it will take all of the wind power available to the system. Of course, whether this remains true will depend on the pace of further wind power additions relative to the transmission improvements, if any, needed to support those additions.

The changes represent another step in the direction of the normalization of wind power resources in integrated regional power markets. The rules for wind power will never exactly be the same as the rules for, say, a combined-cycle combustion gas turbine, but then the treatment of that very flexible natural gas unit isn’t exactly the same as the treatment of a less flexible coal-fired steam turbine.

The market design goal should be to maximize the gains from trade produced through the regional power market. The process of adapting rules to the diversity inherent in the generation and demand-side resources available to the system should be undertaken with that goal in mind.

(ASIDE: Elsewhere I have been critical of the way that production tax credits available to wind power generators can distort the efficient operation of power markets. There was some talk about this issue in the recent FERC technical conference on integration of renewable resources, and I suspect I’ll have more to say on the issue in a few days when the transcript is online.

Some critics of current wind power subsidies may object to any normalization of the treatment of wind power so long as the subsidies continue, but I don’t think it desirable to try to fix market rules to compensate for the harmful effects of federal tax policy. Rather, market design should aim to maximize gains from trade given the larger legal and policy framework which the markets must operate in, and opposition to wasteful subsidies in the tax code should be directed to the legislative bodies responsible.)

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