1% despite a huge price spike caused by the loss of a nuclear station at the time the French decided to import 2,000 MW instead of, as normal, exporting 2,000 MW to England.

The period following the end of the price cap until 1998 was a period in which each of the three firms appeared to be individually profit maximising, without any need for collusion (given their considerable individual market power). Finally, the last period for which Sweeting had data covers the period of rapid sales of generation plant by the incumbents, as they traded horizontal market power for permission (granted by the relevant Government minister) to vertically integrate into supply. During this period concentration fell rapidly, spare capacity increased, and bidding behaviour was consistent with tacit collusion to reduce supply at each level of price. There was a strong motive for this, as the generators wished to sell their plant for the highest price, and to do that they needed to convince prospective buyers that margins would remain high despite the excess capacity and falling market concentration. Once the sales had been made, the new owners, less familiar with the previous market game, bid more aggressively and competitively, thus undermining collusion and causing the price-cost margin to collapse.

## Addressing cases of collective dominance

Electricity wholesale markets thus exhibit characteristics that are likely to support collective dominance, and specifically allow prices to remain well above competitive levels, even when the market does not appear to be particularly concentrated. In some cases (1996-8 in Britain) high price-cost margins can be sustained even without tacit collusion, given the technical characteristics of electricity. These include the very low demand elasticity, the inability to store electricity, and the effect of transmission constraints in fragmenting the market. If the capacity is not instantly available to deliver into a constrained region, then the generators operating in that region can demand extremely high prices. Even relatively unconcentrated markets can exhibit collective dominance, as the English Pool demonstrated for a brief period after 1998.

Competition authorities ought therefore to be able to establish collective dominance for many electricity markets. On the Telecommunications Directive model, it would then be open to argue that regulation were required to address the problem, if there were no better solution. The obvious competition policy remedy would be to require companies to divest generation capacity in order to reduce market concentration. There are difficulties with this structural solution, and attractions in retaining licence conditions for generation and supply. The obvious difficulty with structural remedies is that the burden of proof must be set reasonably high, if competition law is not to chill the very driving force of competition, which is the pursuit of profit. It is one thing to deny a merger that might increase concentration to the point that there were real concerns about future collective dominance, and quite another to move in the opposite direction, and argue that an existing industrial structure is suddenly inappropriate. There is good evidence that on average mergers destroy total shareholder value, and since they rarely increase competition, that must mean that they typically reduce social value. The burden of proof is then on the merging partners to demonstrate otherwise. In the present case, the burden of proof would lie squarely with the competition authorities, and might be difficult to establish.

The main problem of establishing an abuse of a collectively dominant position is to define the counterfactual of normally competitive behaviour. In electricity, variable costs are