Diagnosing and Mitigating Market Power in Chile’s Electricity Industry

M. Soledad Arellano

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: This paper examines generators’ incentives to exercise market power and the strategies they would follow if all electricity supplies were traded in an hourly-unregulated spot market. The industry is modelled as a Cournot duopoly with a competitive fringe; particular care is given to the hydro scheduling decision. Quantitative simulations of generators’ strategic behaviour indicate that the largest (Endesa) would have the incentive and power to act unilaterally. It would schedule its hydro resources to take advantage of differences in price electricity: too little supply in high demand periods and too much in low demand periods. Two market power mitigation measures are analysed: requiring Endesa to divest some of its generating capacity, and fixed price forward contracts for dominant generators. Conditions for the development of a voluntary contract market are analysed, as it is not practical to rely permanently on vesting contracts imposed for the transition period.

Keywords: electricity utilities; market power; scheduling hydro-reservoirs; contracts; Chile’s electricity industry (search for similar items in EconPapers)
JEL-codes: D43 L11 L13 L94 (search for similar items in EconPapers)
Pages: 82
Date: 2003-05
New Economics Papers: this item is included in nep-ind
Note: CMI27, IO
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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