Mediating Market Power in Electricity Networks
UC Berkeley, Center for Competition Policy Working Paper No. CPC02-32
37 Pages Posted: 17 Feb 2004
Date Written: August 7, 2002
We ask under what conditions transmission contracts increase or mitigate market power. We show that the allocation process of transmission rights is crucial. In an efficiently arbitraged uniform price auction generators will only obtain contracts that mitigate their market power. However, if generators inherit transmission contracts or buy them in a 'pay-as-bid' auction, then these contracts can enhance market power. In the two-node network case banning generators from holding transmission contracts that do not correspond to delivery of their own energy mitigates market power. Meshed networks differ in important ways as constrained links no longer isolate prices in competitive markets from market manipulation. The paper suggests ways of minimizing market power considerations when designing transmission contracts.
Keywords: Electricity, market power, transmission rights, nodal pricing
JEL Classification: L1, L12, L94
Suggested Citation: Suggested Citation