Transmission capacity and market power: the effect on a dominant generation firm

We examine the effect of transmission on a firmʹs market power by analyzing the optimal dispatch for a dominant firm in a short-run regional electricity generation market. Application of our research to Colorado shows that the dominant firm can strategically congest transmission into the region to receive a maximum price 54.9% of the time. When it does not get the maximum price, the dominant firm can receive an 11.6% average markup over the competitive price. We show how the threat of entry across an enhanced transmission grid can increase competition and limit market power in Colorado.