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Monopoly Power After Reform? A Time for Soul-Searching

The Present Laws Are Unequipped
Fortnightly Magazine - May 1 2000

competition. These policies are controversial and evolving, e.g., with regard to how flow congestion and access rights should be managed. In any event, the current policies are only the first step.

The Present Laws Are Unequipped

Many states that have proceeded with deregulation have studied market power carefully and taken steps to monitor and limit its impacts.

California, which DOE cites in its report, has known about this problem from the start. In addition to creating a transparent, cost-based power exchange for its large generators, California initially placed 80 percent of its power plants under special contracts designed to limit their profitability, hence their market power. The DOE report notes that California has set up its own in-house committee of "market monitors," a highly skilled group whose sole function is to monitor California's new power markets for signs of adverse impacts. Other states and independent system operators have taken similar measures, such as imposing bidding price caps and authorizing rapid changes in market participation rules. Yet all is not well. As DOE observes in its report, "In both the United Kingdom and California, where data from competitive electricity generation markets are now available, researchers have found that wholesale power prices have been as much as 75 percent above competitive levels at times."

Another tool in the market power toolbox that has been used to some degree is divestiture. Generating plants in one area can be sold off to several different owners, and generation owners also can be discouraged from owning both generation and transmission. One concern with these solutions is that electric utilities long have been recognized as having substantial economies of scale and vertical integration. To some degree, we will raise costs and sacrifice efficiency for the sake of creating competition, the benefits of which must overcome this loss of scale and coordination economies. For example, we already have seen that it is not cheap to set up an ISO or a power exchange, but this infrastructure is essential if competition is to succeed.

While it is true that we do not lack awareness or tools, DOE does have an important point to make. The present laws that address market power and electricity regulation - primarily the antitrust statutes and the Federal Power Act - are singularly unequipped to answer market power questions surrounding electric restructuring.

And Merger Review Won't Fix All Problems

The antitrust statutes prohibit the creation of monopoly power by merger or by engaging in certain forms of anticompetitive

conduct. However, these laws were never designed to deal with an industry that tries to jump immediately from regulated monopoly to competition and can't manage to get there right away. Principal Deputy Assistant Attorney General A. Douglas Melamed said as much directly to Congress last May in a hearing before the House Subcommittee on Energy and Power. On that occasion, Melamed testified on how the Justice Department lacked obvious legal authority to address the monopoly power that wasn't created by a recent merger, but which was there all along, almost from day one:

"The authority of the Department of