1. Comments on Evans & Green, “Why did British electricity prices fall after 1998?” by Catherine Wolfram Haas School of Business and UCEI

2. March 14, 2003POWER Conference Page 1 The shotgun approach. Dissatisfied with high wholesale prices, regulators in England and Wales have tried several things: 1.“Encouraged” entry (ended moratorium on gas plants). 2.“Encouraged” divestitures. 3.Change the market rules (New Electricity Trading Arrangements, NETA, implemented at the end of March 2001). Market Structure Market Design

3. March 14, 2003POWER Conference Page 2 Evans & Green’s analysis. Analyze average Lerner indices for 78 months from April 1996 to September 2002. Correlate with changes in: Inverse reserve margin, Herfindahl index, Dummy variables to measure impact of NETA.

4. March 14, 2003POWER Conference Page 3 First interpretation–the static view. Controlling for changes in market structure, NETA had little perceptible effect on prices. We have to be a little bit careful interpreting this result since their time period includes 17 post-NETA months, i.e. two summers but only one winter.  Changes in market structure likely drove prices down.

5. March 14, 2003POWER Conference Page 4 Second interpretation–the dynamic view. If we are comfortable believing: that the generators were tacitly colluding before NETA, and that they anticipated that NETA would hamper their ability to collude, then: prices may have declined in anticipation of NETA.

6. March 14, 2003POWER Conference Page 5 How comfortable are we with those assumptions? Why would the generators anticipate NETA would lead to lower prices? They believed the policymakers. They weren’t listening to the economists.

7. March 14, 2003POWER Conference Page 6 Other effects of NETA? –This paper focuses on the short-run impact on prices. –Will the long-run impact be different? Capacity payments abolished. Transparency lost.