The treatment of “local market power” is but one of the many remaining contentious issues in the restructuring of the US electric power industry. In this May 2004 Electricity Journal article, NERA Vice President Jonathan Falk endeavors to sort out local market power issues and create a framework for the analysis of local market power mitigation proposals. He maintains that much of the controversy over this issue can at least be put on a common footing by adopting an explicit view of the problem as one of rent allocation.

Mr. Falk makes two central points. The first is that an undue focus on local market power can undermine the benefits that we expect competition to provide. The second point is that, even if we had a generic framework for the diagnosis of “undue” market power (and we don’t), administrative procedures to mitigate market power should be avoided whenever feasible. Rent-seeking behavior by participants in those proceedings will chew up even more resources, further reducing social welfare by converting social costs to private gain.

Mr. Falk argues that the “no market power - no-way and no-how” paradigm caps too often and caps too stringently. It does this out of a mistaken notion that market power is a great evil out of which no benefit can come. It is not merely nomenclatural to point out that locational rents are an important part of the electrical system and that an understanding of, and optimal reaction to, locational rents are a big part of the promise of deregulated generation markets. Excessive regulation of these rents simply denies grist to the mill of competition.

This article was published in the Electricity Journal, Volume 17, Issue 4, May 2004, Copyright (c) 2004 Elsevier Science, Inc., http://www.elsevier.com/locate/tej. All rights reserved.