Market power and transmission congestion in a longitudinal system

Worldwide market organization of the power industry presents a wide range of arrangements, which may be classified into three basic categories: pool market; market based on physical bilateral contracts; and market based on financial bilateral contracts. Real markets throughout the countries correspond to a mix of these categories. This paper focuses on markets based on physical bilateral contracts and a power exchange market, which include daily and intradaily markets. The government of Chile is presently proposing a change in the regulatory framework, which consists of a migration from the actual mandatory pool structure, with audited costs, to a new market based on physical bilateral contracts and a power exchange. In Chile, due to its longitudinal geography, there are several isolated networks along the country, the most important being the interconnected systems in the north and central parts. In this paper, the authors study the Central Interconnected System (CIS) which covers an area of more than 2000 km long. Inside the CIS grid there are a number of transmission lines that operate near the operational limits in some periods of the year. Under these conditions, the companies involved in the bidding process of the power exchange may exert market power in order to rise the prices. In addition, there are only three major players in the generation business, which render a Herfindahl-Hirschman Index (HHI) above 3000. Thus, the market is highly concentrated. Therefore, the existence of market power is a key issue under investigation in the proposed regulatory framework and it is the main motivation of this paper. Specifically, the paper focuses on market power, which could arise as a consequence of congestion in the transmission system.