Legally Separated Joint Ownership of Bidder and Auctioneer: Illustrated by the Partial Deregulation of the EU Electricity Markets
In the EU electricity industry, many Vertically Integrated Utilities (VIUs) have ownership both of electricity generators and of transmission, hence VIU-owned or allied generators often are bidders in auctions for VIU-owned transmission. In Van Koten (2006) I show that welfare suffers and the holding company benefits – through increased auction revenue – from more aggressive bidding by the allied bidder and that it does not make a difference whether transmission is legally separated from the VIU or not. Here I analyze the regulatory measure of also legally separating the allied generator from the VIU; this measure effectively transforms the VIU into a holding company and prevents the “VIU” from influencing day-to-day decision-making of the “VIU”-owned generator and bans cross-subsidization between divisions. I show that such a measure may not improve welfare; the holding company can formulate a simple compensation scheme that does not violate the restrictions imposed by legal separation but induces the manager of the allied generator to bid more aggressively, thereby increasing the profits of the holding company and decreasing welfare, as in Van Koten (2006).
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- Silvester van Koten, 2006. "Bidding Behavior when One Bidder and the Auctioneer Are Vertically Integrated Implications for the Partial Deregulation of EU Electricity Markets," CERGE-EI Working Papers wp313, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
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- Katz, Michael L., 1991. "Game-Playing Agents: Unobservable Contracts as Precommitments," Department of Economics, Working Paper Series qt79b870w0, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
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