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A Comparitive Analysis of Market Power Mitigation Measures. The Case of Chile´s Electricity Industry

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  • María Soledad Arelllano

Abstract

In a previous paper I found that the implementation of an unregulated wholesale electricity spot market in Chile would result in prices far above competitive levels as a consequence of the unilateral exercise of market power by the largest generators. In this paper I examine whether and how much market power could be mitigated by (a) requiring the largest producer to divest some of its generating capacity to create more competitors and (b) requiring the dominant generators to enter into fixed price forward contracts for power covering a large share of their generating capacity. Splitting the largest producer in two or more smaller firms turns the market equilibrium closer to the competitive equilibrium as divested plants are more intensely used. Contracting practices proved to be an effective tool to prevent large producers from exercising market power in the spot market. In addition, a more efficient hydro scheduling resulted. Conditions for the development of a voluntary contract market are analyzed, as it is not practical to rely permanently on vesting contracts imposed for the transition period. Regulatory mechanisms to provide incentives for producers and consumers voluntary to engage in contracting practices are discussed.

Suggested Citation

  • María Soledad Arelllano, 2003. "A Comparitive Analysis of Market Power Mitigation Measures. The Case of Chile´s Electricity Industry," Documentos de Trabajo 156, Centro de Economía Aplicada, Universidad de Chile.
    • Handle: RePEc:edj:ceauch:156
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    1. Frank A. Wolak & Robert H. Patrick, 2001. "The Impact of Market Rules and Market Structure on the Price Determination Process in the England and Wales Electricity Market," NBER Working Papers 8248, National Bureau of Economic Research, Inc.
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