Chapter 9 Market Power in the Electric and Natural Gas Industries

Chapter 9 Market Power in the
Electric and Natural Gas
9.1 Introduction
• That a firm has market power simply means:
it has the ability to affect market prices.
• Many ISOs have full-time market monitors.
• PUHCA in 2005 led to a new wave of proposed utility
• On federal level, FERC has a legal mandate to ensure
that rates are “just and reasonable”; that mergers and
acquisitions are consistent with the public interest.
• On state level, regulators concerns with market power
and allocation of benefits in mergers involving out-ofstate firms.
9.2 Defining Market Power
• --a firm is able to affect market prices, that is, the firm is
not a price taker.
• Market power does not necessarily means abnormal
profits. Firms have to recover investment costs, not
possible to set prices at MC. (especially in energy
• So some degree of market power lets developers to be
able to stay in business.
• Market power can also exist w/o legal violations.
(differences b/w definitions of regulators and
• Workable Competition:
---whether the results from the market process would
improve welfare relative to the regulated status quo;
whether the allocation of resources is reasonably
whether profits are sufficient to reward to investments
In other words, can a deregulated market realistically
provide sustainable benefits for both consumers and
• Why care about market power?
---distributional consequence of market power: transfers
wealth from consumers to suppliers.
---market inefficiency.
• Market power can not exist w/o barriers to entry.
• In markets where entry is relatively easy, market power
is less of a concern.
Figure: Diagram of Market Power in
the Electric Industry
Forms of cross-subsidization:
Inappropriately shifts costs from unregulated
operations to regulated captive customers.
More subtle ways: incorporate unregulated affiliate into
the rate base, etc.
When a utility uses a common pool of generation
resources to serve captive customers and wholesale
Detecting Horizontal Market
• “Structure-conduct-performance” (SCP) paradigm
• Concentration prices
C1, C4
pivotal supplier test
delivered price test (DPT)
Detecting Vertical Market Power
Difficult to address:
Many beneficial reasons to participate in vertically
related markets
Requires the regulation to evaluate both upstream and
Vertical market power is harder to measure.
Consequence of vertical market power:
Foreclosure of competitors in vertically related markets or
costs from unregulated affiliates to regulated ones, or
upstream affects downstream markets.
• Plus, vertical market power is not “self-correcting”.
• Structural characteristics of a market are important
considerations in assessing vertical market power.
9.6 The Essential Facilities
Both in electric and NG markets, transmission facilities
can be thought of as “essential facilities”.
The Essential Facility Doctrine (EFD), 1912, US
Supreme Court
The facility must be controlled by a dominant firm.
Competing firms must lack a realistic ability to
reproduce the facility
Access to the facility is necessary in order to compete
in the related market
It must be feasible to provide access to the facility

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