Analyzing the Impact of Electricity Market Structure Changes and Mergers: The Importance of Forward Commitments

32 Pages Posted: 13 Jul 2016

See all articles by David Brown

David Brown

University of Alberta - Department of Economics

Andrew Eckert

University of Alberta - Department of Economics

Date Written: July 12, 2016

Abstract

We investigate how the effects of market structure changes and mergers in restructured electricity markets depend on the level of forward contracting. Following Bushnell, Mansur, and Saravia (2008), we develop a Cournot model of Alberta’s wholesale electricity market that incorporates firms’ forward positions. Using data from 2013-2014, we estimate the monthly forward positions of the five largest firms in the market, and simulate the effects of different market structure changes, including variations of a hypothetical merger with asset divestitures. We examine the sensitivity of the simulated effects of mergers and other market structure changes to assumptions regarding firms’ forward commitments. We demonstrate that the wholesale market impacts of mergers and market structure changes depend critically on firms’ forward commitments in the post market structure change equilibrium. Our paper demonstrates the importance of establishing a clear understanding of the size and nature of forward commitments in forecasting the effects of mergers and other market structure changes in wholesale electricity markets.

Keywords: Electricity, Mergers, Forward Contracts, Market Power

JEL Classification: D43, L40, L51, L94, Q40

Suggested Citation

Brown, David and Eckert, Andrew, Analyzing the Impact of Electricity Market Structure Changes and Mergers: The Importance of Forward Commitments (July 12, 2016). USAEE Working Paper No. 16-263, Available at SSRN: https://ssrn.com/abstract=2808650 or http://dx.doi.org/10.2139/ssrn.2808650

David Brown (Contact Author)

University of Alberta - Department of Economics ( email )

8-14 Tory Building
Edmonton, Alberta T6G 2H4
Canada

Andrew Eckert

University of Alberta - Department of Economics ( email )

8-14 Tory Building
Edmonton, Alberta T6G 2H4
Canada

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