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The Transformation of American Energy Markets and the Problem of Market Power


David B. Spence


University of Texas at Austin - Department of Business, Government and Society; University of Texas at Austin - School of Law

Robert A. Prentice


University of Texas at Austin - McCombs School of Business

February 15, 2011

University of Texas Law, Law and Economics Research Paper No. 202
McCombs Research Paper Series No. BGS-01-11

Abstract:     
Traditionally, American energy markets have been regulated using a combination of antitrust law and public utility law: the former has predominated in oil markets and the latter in markets for natural gas and electricity. Over time, energy markets have grown increasingly complex and competitive, due partly to changing market conditions (for example, in oil markets) and partly to the regulation (in natural gas and electricity markets). Increasingly competitive energy markets meant increased risk for energy companies, who turned to energy derivatives as a way to hedge that risk. High energy prices and charges of manipulation in 21st-century energy markets have led regulators to a new approach, one that borrows from securities regulation and focuses attention and "manipulation and deceit" by energy market participants. However, the securities model may be a bad fit for energy markets, because reliance on this new approach exposes consumers to price risks associated with the exercise of market power by sellers, risks to which they were not subject under traditional approaches to regulation. Specifically, the securities regulation model overlooks important ways in which sellers can exert market power at the expense of consumers in the absence of fraud or deceit, partly because of the way securities case law interprets "manipulation," and partly because some of the common assumptions regulators employ about the ways in which market participants respond to price changes do not apply, or apply only weakly, in some energy markets. We explore the origins of these "bad fit" problems, and their implications, in this article.

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Date posted: February 16, 2011 ; Last revised: June 17, 2011

Suggested Citation

Spence, David B. and Prentice, Robert A., The Transformation of American Energy Markets and the Problem of Market Power (February 15, 2011). University of Texas Law, Law and Economics Research Paper No. 202; McCombs Research Paper Series No. BGS-01-11. Available at SSRN: http://ssrn.com/abstract=1762134 or http://dx.doi.org/10.2139/ssrn.1762134

Contact Information

David B. Spence (Contact Author)
University of Texas at Austin - Department of Business, Government and Society ( email )
CBA 5.202
Austin, TX 78712
United States
512-471-0778 (Phone)
512-343-0535 (Fax)
University of Texas at Austin - School of Law ( email )
727 East Dean Keeton Street
Austin, TX 78705
United States
Robert A. Prentice
University of Texas at Austin - McCombs School of Business ( email )
Austin, TX 78712
United States
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