Electricity and Market Power: Current Issues for Restructuring Markets (A Survey)

Abstract

This paper surveys the legal economic literature on market power in electricity over the last 15 years. Many of the market power issues in electricity fit within the broader, long-familiar rubric of antitrust analysis. But electricity also displays special characteristics and complexities that may require a more tailored approach--or even special guidelinesâ014for competition analysis. Most of the current research regarding market power in electricity focuses on five major areas: (1) withholding; (2) measuring market power; (3) market definition; (4) vertical issues; and (5) remedies. Numerous forms of withholding pose novel and serious policy issues, which are confounded by a virtually nonexistent role for antitrust and various impediments to effective regulatory enforcement. Much research has also been devoted to measuring market power, particularly in the aftermath of the California energy crisis. While empirical studies that diagnose and quantify market power are useful, they may also deflect attention from the broader issue of structural reforms that would address market power better than behavioral fixes. Market definition has been a key issue in merger and market-based rate policyâ014revealing the importance of transmission constraints and demand conditions in defining relevant markets. Current modeling approaches are limited in their usefulness, however, thus introducing the debate about the usefulness of simulation models. New vertical issues have also emerged over the last 15 years. New forms of ability to foreclose rivals (e.g., transmission rights and reliability) and incentive (e.g., increased concentration and M&A activity) pose policy challenges in light of renewed interest in the benefits of vertical rebundling. Finally, the research on remedies exposes the tension between structural and behavioral that has polarized antitrust and regulatory approaches to dealing with market power. But outside the realm of merger review, antitrust will likely continue to play a very limited role in electricity, leaving the burden largely on the shoulders of regulators.