Energy: Industrial Organization and Political Economy

Paper Session

Saturday, Jan. 7, 2017 2:30 PM – 4:30 PM

Swissotel Chicago, Zurich G
Hosted By: Association of Environmental and Resource Economists
  • Chair: Erich Muehlegger, University of California-Davis

Energy Prices, Pass-Through, and Incidence in U.S. Manufacturing

Joseph Shapiro
,
Yale University
Sharat Ganapati
,
Yale University
Reed Walker
,
University of California-Berkeley

Abstract

This paper studies how increases in energy input costs for production are split between consumers and producers via changes in product prices (i.e., pass-through). We show that in markets characterized by imperfect competition, marginal cost pass-through, a demand elasticity, and a price-cost markup are sufficient to characterize the relative change in welfare between producers and consumers due to a change in input costs. We find that increases in energy prices lead to higher plant-level marginal costs and output prices but lower markups. This suggests that marginal cost pass-through is incomplete, with estimates centered around 0.7. Our confidence intervals reject both zero pass-through and complete pass-through. We find heterogeneous incidence of changes in input prices across industries, with consumers bearing a smaller share of the burden than standards methods suggest.

Raising Rivals' Costs: Vertical Market Power in Natural Gas Pipelines and Wholesale Electricity Markets

Matthew Zaragoza-Watkins
,
Environmental Defense Fund
Kristina Mohlin
,
Environmental Defense Fund
Levi Marks
,
University of California-Santa Barbara

Abstract

In recent years, New England has experienced severe, contemporaneous price spikes in its natural gas and wholesale electricity markets. Although these spikes are commonly attributed to limited pipeline capacity serving the region, we demonstrate that they have been exacerbated by firms with long-term contracts for pipeline capacity scheduling for deliveries without actually flowing gas. We analyze firms' scheduling patterns on the Algonquin pipeline and identify the institutional conditions that enable and incentivize this capacity-withholding behavior. We find that some firms are able to offset the opportunity cost of unused capacity by increasing the price of the gas they do sell in the spot market and by increasing the interconnected wholesale electricity price, which increases the revenues of infra-marginal generation resources owned by their parent energy companies. Finally, we employ an economic dispatch model to estimate the welfare losses, emissions consequences, and distributional impacts of capacity withholding over the period from 2014-2016.

Price Regulation and Environmental Externalities: Evidence From Methane Leaks

Catie Hausman
,
University of Michigan
Lucija Muehlenbachs
,
University of Calgary

Abstract

Economic regulation have long been used as a policy solution for natural monopolies. In the process, inefficiencies are introduced, largely stemming from the regulator's inability to perfectly observe firm effort. We test whether firms in the natural gas distribution industry minimize costs along an important dimension: the leakage of their primary input, natural gas.<br />
<br />
A portion of commodity inputs – over one percent in the US – escapes from the natural gas supply chain, through leaks coming from imperfect maintenance, decaying infrastructure, or intentional venting. We focus on the distribution stage of the supply chain; over 1,300 local distribution companies are responsible for delivering natural gas to end users in residences and businesses.<br />
<br />
We find that cost-effective opportunities to mitigate leaks exist, but utilities do not fully take advantage of them. These results are consistent with a setting where price regulations weaken the incentive to cost-minimize, and we document institutional details to explain the mechanisms underlying our finding.<br />
<br />
The distortions induced by price regulations in this setting are more costly than in many other settings, because the leaked commodity imposes outsized external costs. The primary component of the leaked gas is methane, a powerful greenhouse gas with a global warming potential 34 times that of carbon dioxide. Moreover, if the gas accumulates (for instance, in a<br />
building), it can combust – resulting in property damage and loss of life. A 2011 explosion in Allentown, Pennsylvania, caused by a leaking cast iron pipeline, killed five people.<br />
<br />
While leaked gas cost 1 billion dollars in 2015 in commodity value in the US, it cost 8 billion dollars in climate change impacts. Thus in a second-best setting without a carbon tax, reducing distortions stemming from economic regulations could have substantial environmental benefits.

The Political Economy of Prolonging Coal’s Sunset: Local Coal Demand in Coal Mining Regions

Jonathan Eyer
,
University of Southern California
Matthew E. Kahn
,
University of Southern California

Abstract

In many rural communities, coal mining provides the backbone of the local economy, and decreases in coal demand due to environmental regulations and low natural gas prices threaten these local economies. Power plants, however, can ensure some degree of demand for local coal -- and therefore local labor – by purchasing coal from nearby mines. Energy production can produce substantial local economic benefits, as has been widely discussed in the case of natural gas (Feyrer, Mansur, and Sacerdote, 2015). If power plants ignore these externalities, we would expect that the distance between a coal mine and a power plant would perfectly inform a power plant’s purchase decision and pricing. If, on the other hand, power plants act as local Pareto planners (or are induced to act as Pareto planners), then these plants should internalize the full local costs and benefits of their purchase decision, and purchase local coal (See, for example, Henderson and Mitra, 1996 and Pashigan and Gould, 1998). We exploit spatial variation in the distance between power plants and both in-state mines and out-of-state mines, and estimate the likelihood of a coal purchase between each coal plant and coal mine in the United States while controlling for the distance between a mine and a power plant. We find that, even after controlling for distance, power plants are more likely to buy from in-state mines, and even more likely to buy from in-county mines, suggesting that power plants are internalizing at least some of the positive local economic externality associated with their decisions. While this suggests that utilities internalize their economic externalities, this internalization in turn results in local and global environmental externalities, as utilities over-consume coal at the expense of natural gas and renewables in response to local economies or political pressure.
Discussant(s)
Glen Weyl
,
Microsoft Research
Erin Mansur
,
Dartmouth College
Erich Muehlegger
,
University of California-Davis
Steve Cicala
,
University of Chicago
JEL Classifications
  • Q4 - Energy