Analytic and experimentally derived estimates of market power in deregulated electricity systems: policy implications for the management and institutional evolution of the industry

Previous experimental and game-theoretic analyses of deregulated electricit y markets suggest that communities having four or less effective suppliers, either because of transmission constraints or load characteristics, or ret ail customers facing suppliers or marketing agents having more than 70% of the region's market, are likely to experience prices well above competitive levels. While state regulatory bodies may be able to forestall the onset of retail wheeling and non-regulated retail energy pricing until a single supplier do es not dominate initial market shares, it is more difficult to mute the exe rcise of market power by generators serving electrically isolated load pock ets. In both instances, if the accrual of some excess profits by initial, n on-regulated suppliers are not tolerated, then little incentive will have b een provided for competitors to enter the market and for more efficient tec hnologies to evolve. Estimates are provided in this analysis of the circumstances for and the ex tent and duration of the exercise of market power. When combined with the p resent absence of incentives to build transmission lines that would reduce bottlenecks and the existing utilities' insistence upon full recovery of st randed costs through line charges and access fees, the powerful incentives to develop distributed generation are highlighted. (C) 2001 Elsevier Scienc e B.V. All rights reserved.