ABSTRACT
The belief that opening retail electricity markets will lead to lower prices and better service for households, offices, and industrial users is predicated on the belief that such markets will be competitive. Such markets may fail to be competitive if only one or a small number of firms supply power to a particular area, or if the power producers agree among themselves not to compete. As we observe an industry in flux, with numerous mergers, divestitures, entrants, and volatile prices, how to ensure competition becomes an ever more pressing question.
The antitrust laws are the main legal means of ensuring that competitive markets remain that way. Because those laws are not designed to control markets, such as electric power, where monopolies arose as a matter of prior regulation, a first policy step in some states could be to require divestiture of power plants to increase the number of independent competitors.
One concern, suggested by the California electricity crisis, is that generators may unilaterally find it profitable to withhold output to raise prices, even when the markets appear competitive by conventional structural indicators. Such concerns have been behind calls for temporary federal caps on wholesale prices. Evidence supporting assertions that market power is being exercised needs to be handled with care. Modifying the operations of electricity markets, or programs to make consumers more sensitive to prices (e.g., installing real-time meters) may reduce the incentive for anticompetitive withholding. If not, then wholesale price caps, particularly during peak periods, could become a permanent feature of “nominally deregulated” wholesale electricity markets.
Mergers among firms that compete could give the firms the ability to raise prices on their own, facilitate collusion among all competitors, or make competition less intense. Deciding whether to block a merger requires understanding which firm competes with which, how competitive the market might be, and which firm might enter the market if the price goes up. In some cases, mergers between a generation company and gas companies could cause problems if the gas company is a primary supplier to the generation company’s competitors. Finally, although the industry is in transition, merger evaluation could be so speculative that antitrust authorities may have too hard a time proving that a merger may be harmful.
