50 Pages Posted: 16 Feb 2011 Last revised: 7 Nov 2014
Date Written: February 15, 2011
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.
Suggested Citation: 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: https://ssrn.com/abstract=1762134 or http://dx.doi.org/10.2139/ssrn.1762134