1. APPENDIX Price Suppression In Economic Theory
Supply vs. Efficiency Resource Allocation
Vertical Integration (Slides 2 through 7)
Wholesale Competition (Slides 8 through 12)
Supply Expansion Under Wholesale Competition (Slides 13 and 14)

2. Energy Supply Cost FunctionMC MC
MCsupply
MC1 Q S1
Figure 1

3. Energy Efficiency Cost Function (right origin)MC MC
MCdemand Q D1
Max
Achievable
Figure 2

4. Energy Supply and Efficiency Initial Resource Allocation: Vertical IntegrationMC MC
MCsupply
MCdemand
(S1 , D1)
MC1 Q S1 D1
Max
Achievable
Figure 3

5. Energy Supply and Energy Efficiency Least-Cost Resource Reallocation Vertical IntegrationMC MC
MCsupply
MCdemand
(S1 , D1)
MC1
(S2 , D2)
MC2 Q S1 D1
Max
Achievable S2 D2
Figure 4

6. Benefits From Least-Cost Resource Reallocation Vertical IntegrationMC MC
MCsupply
MCdemand
(S1 , D1)
MC1
(S2 , D2)
MC2 A Q S1 D1
Max
Achievable S2 D2
Figure 5

7. Benefits of Resource Reallocation
Vertical integration
Net benefits = A
= total cost savings from substituting
D2 – D1 of efficiency at Mcdemand
for S1-S2 of supply at Mcsupply

8. Energy Supply and Efficiency Initial Resource Allocation: Wholesale Supply CompetitionMC MC
MCsupply
MCdemand
(S1 , D1)
MC1
(S2 , D2)
MC2 Q S1 D1
Max
Achievable S2 D2
Figure 6

9. Energy Supply and Energy Efficiency Least-Cost Resource Reallocation Wholesale Supply CompetitionMC MC
MCsupply
MCdemand
(S1 , D1)
MC1
(S2 , D2)
MC2 Q S1 D1
Max
Achievable S2 D2
Figure 7

10. Benefits From Least-Cost Resource Reallocation Wholesale Supply CompetitionMC MC
MCsupply
MCdemand
(S1 , D1)
MC1 C B
(S2 , D2)
MC2 A R Q S1 D1
Max
Achievable S2 D2
Figure 8

11. Benefits of Resource Reallocation
2. Wholesale competition Net benefits = A + B + C B = producer surplus lost to consumers from reduction in sales of S1 – S2 at MC1 C = producer surplus lost to consumers on sales of S2 at MC2 instead of at MC1

12. Benefits of Resource Reallocation
Wholesale competition (continued)
DRIPE = demand reduction induced price effect
= price suppression
= C / (D2 – D1)
= (MC1 – MC2) S2 / (D2 – D1)
R = producer surplus from remaining sales of S at MC2

13. Price Suppression from Additional SupplyMC MC
Old MCsupply
MCdemand
MC1
New MCsupply C
(S2 , D2)
MC2
(S1 , D1)
(S3 , D3 R Q S1 D1
Max
Achievable S2 D2 S3 D3
Figure 9

14. Benefits of Supply Expansion
Wholesale competition (continued)
SEIPE = supply expansion induced price effect
= price suppression
= C
= (MC1 – MC2) S1
R = remaining producer surplus from sales of S1 @ MC2
S3D3 New least-cost resource allocation
S3>S2,, D3<D2