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Identifying Market Power in Electric Generation

Fortnightly Magazine - February 15 1996

must be foregone if output is restricted (em i.e., the difference between price and marginal cost for each unit of output restricted. In our example, with no difference between the two measures for unit 5, owning that unit alone would confer significant market power. The difference between price and marginal cost is quite large for unit 1, however, so owning unit 1 alone might not confer significant market power.

Defining Relevant Markets

Antitrust principles supply a well-developed theory with which to delineate markets within which to identify competitors.2

A group of products and geographic areas constitute a market if, and only if, a monopolist could exercise significant market power over them. The market power of a monopolist would be largely determined by the elasticity of demand it faces; thus, market delineation is largely a process of measuring (em or intuiting (em the elasticity of demand for groups of products and areas. The process is applied to groups of products and areas of increasing scope until one is found in which a monopolist would have significant market power.3

Product Dimensions. In the wholesale electric power industry, a host of different products are traded; competitive conditions might differ significantly from one product to the next. Potentially important product distinctions include (a) energy vs. capacity, (b) firm vs. nonfirm, (c) peak vs. offpeak, (d) long-term vs. short-term, and (e) present time vs. future time.

Since electricity is not stored to any great extent, it is theoretically appropriate to delineate at least 8,760 separate hourly markets for short-term power within a year. From a practical perspective, however, competitive conditions are not likely to vary systematically from one hour to the next, although they might vary significantly seasonally, or from on- to offpeak.

In light of current market institutions and the possibilities for substitution among various types of supply arrangements, it might be reasonable to delineate three major products: 1) short-term energy or capacity, 2) intermediate-term capacity, and 3) long-term capacity. The distinction between the latter two comes from the lead time for the transaction (em the long run entails sufficient lead time so that newly constructed capacity can compete. The distinction between the former two lies in the duration of the transaction; and, hence, its role in system planning.

The process of market delineation naturally depends on existing market institutions. A PoolCo would vastly reduce the number of products that must be considered, leaving only short-term energy.

Geographic Dimensions. If markets are large enough geographically, they will likely include a large number of competitors; markets that are very small will include very few. In principle, the geographic scope of a market depends upon the sources of available supply, the likely prices at those sources, and the transmission costs that a wholesale

customer would likely pay. Unfortunately, transmission pricing now appears in a state of flux, making it difficult to readily determine what transmission costs might be.

The examination of existing trading patterns and the identification of significant transmission bottlenecks should provide a rough approximation of geographic market boundaries. However, such an approximation would likely understate the