Three essays on market power in Chile's electricity industry

This thesis examines the incentives to exercise market power that generators would face and the different strategies that they would follow if all electricity supplies in Chile were traded in an hourly-unregulated spot market. The industry is modeled as a Cournot duopoly with a competitive fringe; particular care is given to the hydro scheduling decision. Quantitative simulations of the strategic behavior of generators indicate that the largest generator (" Endesa") would have the incentive and ability to exercise market power unilaterally. It would schedule its hydro resources, which are shown to be the real source of its market power, in order to take advantage of differences in price elasticity: too little supply to high demand periods and too much to low demand periods. In the second Chapter the following mitigation measures are analyzed: (a) requiring Endesa to divest some of its generating capacity to create more competitors and (b) requiring the dominant generators to enter into fixed price forward contracts for power covering a large share of their generating capacity. Splitting the largest producer in two or more smaller firms turns the market equilibrium closer to the competitive equilibrium as divested plants are more intensely used. Contracting practices proved to be an effective tool to prevent large producers from exercising market power in the spot market.

Department dc:contributor.department

Massachusetts Institute of Technology. Dept. of Economics.

Grantor dc:publisher

Massachusetts Institute of Technology

Year dc:date.issued

2003

Author dc:creator

• Arellano, María Soledad, 1971-

Advisor dc:contributor.advisor

• Paul L. Joskow and Franklin M. Fisher.

• Economics.

Statement dc:rights

• M.I.T. theses are protected by copyright. They may be viewed from this source for any purpose, but reproduction or distribution in any format is prohibited without written permission. See provided URL for inquiries about permission.

Licence dc:rights.uri

• http://dspace.mit.edu/handle/1721.1/7582

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/1721.1/17556

OAI identifier oai:identifier

oai:dspace.mit.edu:1721.1/17556