Power and Mitigation in Deregulated Electricity Markets
Carnegie Mellon University, Engineering and Public Policy and Electrical and Computer
Conventional measures of market
structure used by economists, such as the Herfindahl Hirschman Index (HHI),
give a misleading picture of the competitiveness of electric power
markets, since these metrics do not consider the special properties of
electricity as a commodity. This paper uses an alternative metric, based
on the interplay between the system capacity as a whole, the capacity of
individual suppliers, and the level of demand, to evaluate the
competitiveness of three recently-deregulated electric power systems.
Since it is possible for sufficiently large suppliers to set prices
arbitrarily high by threatening to withhold generation, it is possible
to see the exercise of market power even in times of surplus capacity.
An analysis of California, PJM, and New York between June 2000 and June
2001 finds that none of them can be regarded as highly competitive,
contrary to what conventional measures of market power would suggest.
Five candidate market-power mitigation measures are discussed within the
context of the California, PJM, and New York electric power systems. All
five options will raise electricity costs, though the benefits from
deregulation in some cases may outweigh the costs of mitigation. More
importantly, different mitigation options will be less costly in
different power systems. The likely success rate of each mitigation
scheme also varies depending on the properties of the system to which it
is applied. For example, building additional transmission to stifle
market power through increased imports is likely to be more successful
in California, whose neighbors experience noncoincident peak demands,
and less successful in New York and PJM. The lessons for regulators is
that decisions on deregulation of electric power markets and
market-power mitigation should be made on a system-by-system basis, and
that applying one set of rules to all systems will increase costs and
decrease operating efficiency.