Legal and Economic Perspectives
New Horizons in Competition Law and Economics series
Edited by François Lévêque and Howard Shelanski
Richard Gilbert and David Newbery* INTRODUCTION Analysis of electricity market power can be a daunting task because electricity sales affect prices in many different markets. Electricity demand is inelastic and the product is not easily stored, hence generators can have market power at a moment in time even if markets are competitive at other times. Furthermore, separate geographic markets can exist at locations that are not distant from each other if transmission constraints limit the ability of a consumer to substitute electricity from a different region. Several wholesale electricity power pools, such as the Pennsylvania-New Jersey-Maryland (PJM) pool, operate markets for electricity in which generators submit day-ahead bids for electricity supplies for each hour of the next day. The PJM also solicits real-time bids to balance supply and demand in each hour of the day.1 Market power concerns can arise in any of these hourly markets. A thorough analysis of the competitive effects of market power in the PJM region should consider price impacts in 8,760 day-ahead markets and another 8,760 real-time markets for each year. Changes in supply and demand conditions can affect prices in any of these markets. In addition to these 17,520 annual product markets, transmission constraints can create separate geographic markets, each of which can have 17,520 separate product markets per year. If transmission capacity limits the flow of electricity into a region, or if transmission losses impose significant costs on electricity flows, then the existence of competitive electricity producers in one...
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