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NAME:________________________
EXAM(200 points total)
Tansey-December 6, 2000
I (80 pts.) SIGN YOUR NAME ON FIRST THREE PAGES OF TEST. THEN TEAR THE TOP
TWO SHEETS OFF. MAKE SURE YOU HAND THEM IN AT THE END OF THE
INDIVIDUAL PART OF THE EXAM. Read the Following article from the Wall Street Journal
(“Cisco Opposes Plan for New Power Plant” Sep. 18, 2000, p. A2) then answer the questions on the test. i.
Power-plant builder Calpine Corp. thought it had the killer application that Silicon valley needed: a big, new power plant. After all, California is desperately short of electricity on hot days and America’s technology heartland is particularly vulnerable to power disruptions because it lacks even a single major power plant. Nearly all of San Jose’s electricity comes from elsewhere. ii.
Though the 136-acre, rural site picked by Calpine wasn’t zoned for heavy industry, its suitability seemed obvious and fortuitous to the San Jose company… It is close to a naturalgas pipeline that could provide fuel, and it is slap-dab next to 500,000-volt power lines needed to get power to San Jose and beyond. iii.
That is more important than it may sound because in today’s deregulated energy markets, utilities no longer can be ordered to build power plants on the fringes of civilization.
Competitive suppliers like Calpine, which has 45 plants in operation and nine under construction, pick where they want to build. Proximity to the right infrastructure can make or break a project financially. iv.
When opposition arose to the Metcalf Energy Center, as it is known, it knocked the wind out of Calpine… It wasn’t environmentalists… v.
It was Cisco systems Inc., creator of network wizardry that makes the Internet run and whose customers need abundant amounts of electricity to stay in business. In Calpine’s view, Cisco’s opposition to its electric plant would be akin to General Motors fighting an oil refinery or General Mills snubbing wheat farmers… vi.
…Advances in power technology mean new plants aren’t the Big-foot that their predecessors were. Today’s modern, gas-fired plants are smaller and generate less than half the pollution of plants built 30 years ago, when 60% of California’s fleet was built. vii.
…Cisco … doesn’t want the 680-megawatt plant built…, it says, because there are better locations-ones far removed from the $1.3 billion office park it hopes to build on an undeveloped site adjoining Calpine’s property and where it hopes to put 20,000 people to work. Cisco says it needs the 688-acre site because it is hiring 1,000 workers a month and can’t accommodate them at its north San Jose campus.

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NAME:________________________ viii.
Ec.440a-Tansey-December 6, 2000
An energy consultant hired by Cisco to study the Calpine proposal concluded that California has more proposals for power plants than it needs…Cisco has since hosted meetings to explain its opposition and has filed its objections with the California Energy Commission, the agency with ultimate siting authority… ix.
San Jose has no responsibility “to solve what is essentially a regional issue” says San Jose
Council-woman Pat Dando. Adds David Marcus, a Berkeley-based energy consultant hired by Cisco: “what I see is a boom-and-bust cycle. There’s every reason to believe there will be overbuilding of power plants.” x.
Calpine thinks Cisco’s position ignores the fact that Internet growth lies at the very heart of why we need more power,” says Mr. Cartwright. xi.
…Jonathan Koomey, a scientist at the Lawrence Berkeley National Laboratory, …doesn’t believe that the Digital Economy’s principal impact on the power industry is quantitative but, rather, is qualitative. More and more companies demand “digital quality electricity,” he says. They want clean electricity, minus voltage and frequency disturbances or the muddying effect of “harmonics” often caused by motors switching on and off. xii.
Sensitivity to momentary outages and even miniscule fluctuations in voltage or frequency is the “Achilles’ heel of the digital economy” says Craig Stahlkopf, a scientist at the Electric
Power Research Institute in Palo Alto, calif. Historically, he says, companies were satisfied, with power that was 99.9% reliable. “Now we talk about industry needing six 9s,” he says, or power that’s 99.9999% reliable. It’s not just computer rooms that demand clean power, where frequencies are steady and the supply certain. Electronic controllers are present in most modern manufacturing facilities.
1.
In the article underline an example of structure of the utility industry.
2.
Circle evidence of conduct in the utility industry.
3.
Bracket evidence of performance in the utility industry.
4.
Which of the following relationships mentioned in paragraph v between the underlined goods would be a vertical relationship?
(a) “It was Cisco systems Inc., creator of network wizardry … whose customers need abundant amounts of electricity to stay in business”
(b)
“General Motors [ cars ] fighting an oil refinery”
(c)
“General Mills [ processed grain ] snubbing wheat farmers…”

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NAME:________________________ Ec.440a-Tansey-December 6, 2000
5. If all of the relationships in the previous problem were horizontal the cross-price elasticity would most likely be:
(a) positive
(b) zero
(c) negative
(d) impossible to tell given their context in the article.
6. List the barriers-to-entry in the electric power market according to the article (you may not be able to fill all of the following blanks.
Barrier to entry #1:____________________________________
Barrier to entry #2:____________________________________
Barrier to entry #3:____________________________________
Barrier to entry #4:____________________________________
7. For which paragraph is there evidence of a cost benefit study needing to be done? i ii iii iv v vi vii viii ix x xi xii
8. Name and describe two market failures that are in evidence in the article:
Market Failure #1:
9. What kind of study would Cisco most likely have performed in order to provide the information found in paragraph vii ?
(a) demand (marketing) studies
(b) production studies
(c) cost effectiveness studies
(d) income analysis
(e) capital budgeting
(f) cost benefit analysis
10. What kind of study would best characterize the
“proposals” (Paragraph viii)
that the
California Energy Commission would use in its siting decisions?
(a) demand (marketing) studies
(b) production studies
(c) cost effectiveness studies
(d) income analysis
(e) capital budgeting
(f) cost benefit analysis
11. Based on the Power Company simulation we did in class, describe what most likely occurred in California as a result of the deregulation mentioned in paragraph iii with respect to each of the following variables: (Use of graphs to compare different theories of the firm are

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.


 recommended but not required for your explanation).

PRICE:

OUTPUT:


EFFICIENCY OF PRODUCTION:
RELIABILITY (QUALITY) OF ELECTRIC POWER AS DEFINED IN THE
LAST TWO PARAGRAPHS OF THE ABOVE ARTICLE:
EXIT OF POWER COMPANIES:
ENTRY OF POWER COMPANIES:
MARKET BOUNDARY CHANGES:

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II. (60 pts. )Answer the following four questions.
1.
Taking the Standard Oil, U.S. Steel, Alcoa, and Cellophane cases together, is the Supreme court defining monopolizing consistently? What are the differences between the precedents in defining a workable, legal definition of competition? Of monopolization?
2.
What are the three basic ways we have studied to value property? Which way is being used by the courts in Smyth vs. Ames? What problems are there in using such a cost concept for the purpose of regulating rates? For example, in the Hope Natural Gas case, it is stated
“rates cannot be made to depend upon 'fair value' when the value of the going enterprise depends on earnings under whatever rates may be anticipated.” Why can’t they depend upon “fair value”?
3.
Decide whether the majority or the dissenting minority in the Munn and Nebbia cases makes the best case for efficient, competitive markets as well as economically desirable outcomes.
4.
Why might it be profitable for a utility to use meters that would determine the time and quantity of use, rather than just the quantity of use? On the other hand, why might a utility decide that it is unprofitable to install meters that determine the time and quantity of use?
III. (60 pts.) Read the attached case and place your answer either on the back of this test (if there is room) or upon additional pages.
1.
What are the legal facts of the case. For example, how was the case decided at the district level? Who appealed the case? What happened in the appellate court? Who appealed from there? How did the Supreme court decide the case?
2.
Describe the two market failures that provides an economic basis for the government to intervene in this market.
3.
What two kinds of intervention has been used here by the government?
4.
What kind of government failure is involved from interfering in the market?
5.
Is the government failure less than the ill effects of the market failures you indicated above? In other words, does it make sense for the government to intervene?
6.
Is the Supreme Court dealing with the merits of this issue? How do you know?
7.
Why would treble damages be justified from an economic point of view?
8.
Does the outcome of the case make economic sense?