Watching watts to prevent abuse of power

To successfully monitor power market operations and anticipate how market changes could affect the exercise of market power, indices of market power that are grounded in theory, reliable and easily calculated are needed. In this article, we present an index that we have found particularly useful in California: the Residual Supply Index (RSI). We demonstrate the empirical relationship between RSI and the mark-up of prices above competitive levels. We also describe two applications of this new index: using RSI to assess the overall competitiveness of the market during three years of dramatic changes in underlying structure, and estimating the benefits of increasing market competitiveness by upgrading Path 15. We also present some questions that market designers must consider when deciding how to mitigate market power when it is detected.