Diagnosing and Mitigating Market Power in Chile's Electricity Industry

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 rel