Chapter 7: Market Power and Market Monitoring

This chapter provides an overview of how market power can be exercised and how effective market monitoring can prevent abusing practices. It elaborates what market power means in the particular context of wholesale electricity markets. It provides a review of the reasons why antitrust law is not always applicable to restructured electricity markets and why it cannot effectively address some of the market power problems encountered in those markets. The different types of market power and the different ways a monopolist can withhold production to affect market prices are described, and the tools available to market monitors to detect market power abuses and mitigate their impact are discussed. It provides a description of the role and function of market monitoring units (MMUs) that have been created in the United States and elsewhere. Market power is a fundamental problem that affects most electricity markets in transition from a regime of regulated monopolies to competition. Left unaddressed, restructuring will leave consumers at the mercy of unregulated monopolists. The problem is best addressed when legislators and regulators require structural changes and the large vertically integrated power companies inherited from the past divest their generation assets. Competitive electricity markets are prone to abuse of market power by dominant generators or firms with strategic assets under a number of circumstances. Experience suggests that when these conditions are present and a vigilant watchdog is absent, firms may be tempted to exercise their market power to manipulate prices in a number of ways, harming consumers and other market participants in the process.