Market Power in Deregulated Wholesale Electricity Markets: Issues in Measurement and the Cost of Mitigation

An analysis of three recently deregulated markets—California, PJM, and New York—finds that none of them can be regarded as highly competitive, contrary to what conventional measures of market power indicate. Auctions for generation are unlikely to be competitive and costly steps will be needed to mitigate market power, likely eroding any benefits from increased operating efficiency in deregulated markets. Thus, FERC and state legislators need to reexamine the desirability of deregulating the generation portion of the industry.