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Economic Regulation and Its ReformWhat Have We Learned?$
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Nancy L. Rose

Print publication date: 2014

Print ISBN-13: 9780226138022

Published to Chicago Scholarship Online: January 2015

DOI: 10.7208/chicago/9780226138169.001.0001

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Regulating Competition in Wholesale Electricity Supply

Regulating Competition in Wholesale Electricity Supply

(p.195) 4 Regulating Competition in Wholesale Electricity Supply
Economic Regulation and Its Reform

Nancy L. Rose

University of Chicago Press

Experience of the past twenty years suggests that potential benefits from electricity industry restructuring are small relative to those from introducing competition into other network industries. Also, the probability of costly market failure in the electricity supply industry, often due to the exercise of unilateral market power, seems higher than in other network industries. This chapter shows that electricity industry restructuring is an evolving process that requires market designers to choose between an imperfectly competitive market and an imperfect regulatory process to provide incentives for least-cost supply at all stages of the production process. A goal of that process is to limit suppliers’ ability to exercise unilateral market power in wholesale generation markets, explicitly through market price-setting mechanisms, or implicitly through the regulatory price-setting process. Regulators can limit suppliers’ ability to exercise unilateral market power by altering the market structure, changing market rules, imposing penalties and sanctions on market participants, and explicitly setting the prices that market participants receive for their production. This chapter provides a theoretical framework for understanding how to make these choices in designing a wholesale electricity generation market that provides consumers with greater benefits relative to those under the former vertically-integrated regulated monopoly regime.

Keywords:   electricity industry, economic regulation, regulatory restructuring, deregulation, competition, market design, wholesale electricity markets, vertically-integrated monopoly

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