Estimating the Opportunities for Market Power in a Deregulated Wisconsin Electricity Market

To date, a number of electricity markets have deregulated, relying on market forces to set prices. The results thus far are mixed. Therefore, policy makers must rely on ex ante analyses of the market power potential for generation owners. Recently, policy makers in the Wisconsin and Upper Michigan (WUMS) electricity market have contemplated deregulation. In this paper, we examine the ability of electric generation firms to exercise market power in a restructured WUMS market. We employ three different approaches to the analysis of market power in a restructured Wisconsin electricity market: traditional measures of market concentration, a measure of how frequently a given firm is a ‘pivotal’ supplier to the market, and a simulation of oligopoly competition between the largest firms. All three approaches indicate that, under its current structure, the Wisconsin electricity market is extremely vulnerable to the exercise of market power by generation owners. We next analyze a number of alternative scenarios that would mitigate the level of market power, such as transmission line capacity and increasing the responsiveness of demand to price changes.