Upstream Competition and Vertical Integration in Electricity Markets

Erin T. Mansur

Journal of Law and Economics, Volume 50, Issue 1, February 2007, pages 125-156.
Working Paper, November 2005.
Related working papers: UCEI CSEM-117, PWP-083

Abstract:

Many studies have found substantial market failures in electricity markets that have been restructured to allow wholesalers to set prices. Vertical integration of firms may partially mitigate market power, since integrated firms have a reduced interest in setting high prices. These producers sell electricity and also are required to buy power, which they provide to their retail customers at set rates. This paper examines the importance of vertical integration in explaining firm behavior during the first summer following the restructuring of the Pennsylvania, New Jersey, and Maryland wholesale market. I compare the behavior of two producers that, due to variation in state policy, had relatively few retail customers with the behavior of other firms. I conclude that restructuring led to an increase in anti-competitive behavior by large net sellers but that, overall, vertical integration both mitigates market power and diminishes its distributional impacts.

RELATED OLD WORKING PAPERS:

“Vertical Integration in Restructured Electricity Markets: Measuring Market Efficiency and Firm Conduct”
UCEI CSEM Working Paper-117, October 2003.
SSRN Yale SOM Working Paper No. ES-32 (abstract number 459593), October 2003.
This paper has been split into two papers:
“Upstream Competition and Vertical Integration in Electricity Markets” and
“Measuring Welfare in Restructured Electricity Markets”

“Pricing Behavior in the Initial Summer of the Restructured PJM Wholesale Electricity Market”
UC Energy Institute POWER Working Paper-083, April 2001.
This paper has been incorporated into the following paper:
“Upstream Competition and Vertical Integration in Electricity Markets”