Market power in electricity markets: Beyond concentration measures

The wave of electricity marker restructuring both within the United States and abroad has brought the issue of horizontal market power to the forefron t of energy policy. Traditionally, estimation and prediction of marker powe r has relied heavily on concentration measures. In this paper, we discuss t he 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 di scuss 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 implica tions of the results.