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 electricity markets suggest that communities having four or less effective suppliers, either because of transmission constraints or load characteristics, or retail customers facing suppliers or marketing agents having more than seventy percent 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 does not dominate initial market shares, it is more difficult to mute the exercise of market power by generators serving electrically isolated load pockets. And in both instances, if the accrual of some excess profits by initial, non-regulated suppliers are not tolerated, then little incentive will have been provided for competitors to enter the market and for more efficient technologies to evolve. Estimates are provided in this analysis of the circumstances for and the extent and duration of the exercise of market power. When combined with the present absence of incentives to build transmission lines that would reduce bottlenecks and the existing utilities’ insistence upon full recovery of stranded costs through line charges and access fees, the powerful incentives to develop distributed generation are highlighted.