Market Power in Electricity Markets: Beyond Concentration Measures

• Published in: The Energy journal (Cambridge, Mass.) Vol. 20; no. 4; pp. 65 - 88
• Main Authors: Borenstein, Severin, Bushnell, James, Knittel, Christopher R.
• Format: Journal Article
• Language: English
• Published: Los Angeles, CA Energy Economics Education Foundation, Inc 01.10.1999; SAGE Publications; International Association for Energy Economics; Sage Publications Ltd. (UK); Oelgeschlager, Gunn & Hain, Publishers
• Series: The Energy Journal
• Subjects: Applied sciences; CALIFORNIA; COMPETITION; Costs; Demand curves; Economic data; ECONOMIC IMPACT; Economic models; ECONOMIC POLICY; Economic theory; Elasticity of demand; Electric energy; ELECTRIC POWER INDUSTRY; Electric utilities; Electricity; Electricity (Physics); Energy; Energy economics; Energy industry; ENERGY PLANNING, POLICY AND ECONOMY; Energy policy; Evaluation; Exact sciences and technology; Fringe; General, economic and professional studies; HORIZONTAL INTEGRATION; Industrial market; Marginal costs; MARKET; Market power; Market prices; Market shares; Marketing; Marketing management; Methods; Prices; SIMULATION; Studies; Supply; Supply & demand; United States; North America; America; United States > US; electricity policy; liberalization; restructuring; regulation; market power; Electricity markets; Economic analysis; Economic model; Economic concentration; Supply; Oligopolistic market; Open market; Simulation model; Algorithm; Electric power industry; Demand(contract)
• ISSN: 0195-6574; 1944-9089
• DOI: 10.5547/issn0195-6574-ej-vol20-no4-3

The wave of electricity market restructuring both within the United States and abroad has brought the issue of horizontal market power to the forefront of energy policy. Traditionally, estimation and prediction of market power has relied heavily on concentration measures. In this paper, we discuss the weaknesses of concentration measures as a viable measure of market power in the electricity industry, and we propose an alternative method based on market simulations that take advantage of existing plant level data. We discuss results from previous studies the authors have performed, and present new results that allow for the detection of threshold demand levels where market power is likely to be a problem. In addition, we analyze the impact of that recent divestitures in the California electricity market will have on estimated market power. We close with a discussion of the policy implications of the results.