The Effect of Transmission on a Dominant Firm's Ability to Exert Market Power in the Electricity Generation Industry

Download or read book The Effect of Transmission on a Dominant Firm's Ability to Exert Market Power in the Electricity Generation Industry written by David M. Quick and published by . This book was released on 2000-08-01 with total page 158 pages. Available in PDF, EPUB and Kindle. Book excerpt: This research addresses the effect that transmission capacity between regions has on a dominant firm's ability to exert horizontal market power in a restructured electricity generation market. An algorithm that determines a dominant firm's optimal dispatch strategy is developed to analyze the effect of transmission. This algorithm iteratively solves a linear programming model to approximate the nonlinear profit maximization problem for a dominant firm. The algorithm is applied to Colorado to test previous theoretical research on the effect of transmission on market power and to provide estimates of potential market power in a restructured Colorado electricity industry. Potential mitigation strategies such as expanding the transmission grid, divesting generation assets of the dominant firm, promoting entry into the market, and limiting capacity withholding by the dominant firm are also examined. Using the year 2005, this research shows that Public Service Company of Colorado (PSCo), the dominant generation firm in Colorado, could act as a monopolist facing an inelastic demand and dictate a maximum price 54.9% of the time in a restructured electricity generation market. For the remaining periods of demand, PSCo could force an 11.6% average markup over the perfect competition price. The research demonstrates that without changes to the structure of the industry, PSCo will have significant market power in the short-run dispatch of generation. With the right action by policy makers, the potential for market power in Colorado can be reduced significantly, if not eliminated. Adding 1,000 megawatts (MW) of transmission capacity into eastern Colorado reduces the percentage of time PSCo gets a maximum markup from 54.9% to 11.7% and lowers the average markup for other periods from 11.6% to 6.4%. Similarly, a scenario divesting 25% of PSCo's generation assets lowers the percentage of time with the maximum markup to 11.7% and the average markup for other periods to