Market Power in the Deregulation of Electicity

Market power, which is at the heart of the debate over ownership and control of the electricity transmission network, has been identified by the FERC (Federal Energy Regulatory Commission) as a potential impediment to the development of an unencumbered competitive market for electricity. Market power exists when a producer or consumer is able to influence prices for their benefit. The ability to influence prices may result from a small number of producers or consumers, a significantly high share of the market (on either the production or demand side), physical factors that influence transactions (such as the presence of transmission constraints that make some generators "must run" units), or control of access to a product\'s distribution channels (such as control of the transmission system so that some producers of electricity can get their product to market while access is denied to others).

The question is whether TOUs (Transmission Owning Utilities) should be allowed to maintain control over the access to electricity markets in their geographically defined territories through control of the transmission system, or whether control of the network should be turned over to an ISO (Independent System Operator) in order to ensure fair competition and unbiased access to markets. These proposals are mutually exclusive, but it is possible that the industry may evolve through a system in which utilities maintain control of the transmission network for a while, then control is assumed by an ISO.

If utilities maintain control of their own networks, then they must "wheel" power into or through their systems....that is, provide third-party access to the transmission system, if other generating companies are to have access to competitive markets. In a "wheeling" model of a restructured electric power industry, TOUs maintain control of the network and allow access to third-party generators for a fee. The alternative is a power pool model, in which a third party (the ISO) assumes control of the network.

Work Cited: Electricity Prices in a Competitive Environment by: Robert Eynon

Economics and Contemporary Issues by: Edgmand, Moomaw, Olson