barriers to entry.” $ ^{17} $ Even then, the authority to sell at market-determined prices can be withdrawn and replaced by regulated prices if there is “any change in status that would reflect a departure from the characteristics the Commission has relied upon in approving market-based pricing.” $ ^{18} $

FERC therefore assumes that market pricing is “just and reasonable” so long as it is competitive. The reason for its concern to ensure that prices remain competitive is that any FERC-approved form of pricing greatly restricts the competition authorities from intervening. At the same time, existing antitrust laws are relatively powerless to enforce competitive outcomes in the energy industry as “the antitrust laws do not outlaw the mere possession of monopoly power that is the result of skill, accident, or a previous regulatory regime. … Antitrust remedies are thus not well-suited to address problems of market power in the electric power industry that result from existing high levels of concentration in generation.” (DOE, 2000, cited by Bogorad and Penn, 2001). This last point is particularly telling, and suggests that structural remedies may be difficult to secure.

If competition policy lacks the power to restructure (except in egregious cases of abuse), the next recourse would seem to be a regulatory solution. Britain provides an example, where the Director General imposed a price cap on wholesale prices until the companies divested some plant to improve competitiveness. Price caps on markets where prices are supposed to be determined by supply and demand only work if there is substantial market power, and the ability to moderate the supply price in the face of effectively a perfectly elastic demand schedule. However, the Californian electricity debacle of 1999-2000 demonstrates that poorly designed price caps can make matters far worse when there is genuine shortage combined with market power (Joskow and Kahn, 2002). There are also problems where trading takes place in multiple markets (e.g. bilateral, OTC and balancing markets as well as power exchanges), and where the power exchange only handles a few percent of total production. Capping one market when there are uncapped close substitutes is likely to have perverse effects. The English Pool price cap applied to the annual average price, so some of these problems were avoided, and the fact that all electricity had to be traded through the Pool made the prices capped representative, avoiding the bypass problem. Regulators, mindful of the Californian lessons and the limited coverage of electricity wholesale markets in most countries, are likely to be wary of simple price caps.

The Latin approach to market power is to require bids into wholesale markets to be cost-justified (i.e. subject to audit), and to be maintained for lengthy periods (possibly indexed to relevant fuel prices). That is the approach followed in Chile, where generation is relatively concentrated (Bitran and Serra, 1998; Heller and McCubbins, 1996). System operators in some US power pools reserve the right to substitute cost-based bids for market bids if the latter lead to an inefficient dispatch, or clear signs of market power. There are several problems with this approach. The market design has to find a method of paying for, and