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Vertical separation of transmission control and market efficiency in the wholesale electricity market

Yin Chu and Chun-Ping Chang

The North American Journal of Economics and Finance, 2020, vol. 51, issue C

Abstract: This study examines how vertical separation of transmission control affects the wholesale market efficiency in the electric power industry. We analyze a unique regional electricity wholesale market in the U.S. where initially restructuring only occurred in the transmission sector. Following a commonly-used best dispatch model (Wolfram, 1999; Borenstein et al., 2002), we simulate competitive benchmark prices and compare with the best estimates available for actual prices to measure price-cost markups of the wholesale market. Empirical results demonstrate that the vertical separation of transmission control led to a significant increase in market markups in peak-load hours, documenting evidence of enhanced market power. Although we also find a reduction in the price-cost margin in low-demand hours, we reserve caution for this finding.

Keywords: Electricity industry; Deregulation; Vertical separation; Transmission control; Market power (search for similar items in EconPapers)
JEL-codes: D4 L1 L42 L43 L94 L98 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.najef.2019.101091

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