Market Design: Some Relevant Antitrust Fundamentals Comments of Mark S. Hegedus 9 th Annual Energy Roundtable American Antitrust Institute March 3, 2009

Disclaimer These views are my own and do not necessarily reflect the views of the FTC, any FTC commissioner or other FTC employees.

Some Fundamentals Market Structure Entry/Exit Demand Elasticity Transparency Enhancing consumer welfare

Market Structure Concentration –Concentrated markets more conducive to coordination. –Concentration risks acute in electricity markets because of: Entry/exit barriers. Historical market structure Repeated games. Locational pricing.

Entry/exit Coordinated interaction less likely in markets with easy entry/exit. –Entry tied to concentration: easier entry = more entry = more competitors = more difficult to coordinate = more competition. Entry also helps to defeat unilateral market power exercise. Market design should facilitate entry/exit. Transmission policy –Physical transmission to promote entry. –FTRs to support long-term investment.

Demand Elasticity Makes market power exercise less profitable. –Lowers incentive to coordinate. –Lowers incentive to withhold. Holds potential to lessen need for market power mitigation.

Transparency Can facilitate coordination but should not assume that it will: –What information does or does not facilitate? –What information can competitors obtain anyway? –Which competitors can obtain the information? –Could putting information in the hands of more competitors increase competition? –How quickly does information become stale?

Enhancing consumer welfare Structurally competitive markets Protect consumers from market power exercise Empowering consumers

Structurally competitive markets FTC supports regulatory reform that brings structurally competitive markets; skeptical of behavioral approaches. Structurally competitive markets more likely to bring about competitive outcomes at a lower cost. Structurally competitive markets reduce need for market power mitigation.

Protect consumers from market power exercise FTC advocates assessment of market power using the principles underlying the Horizontal Merger Guidelines – market definition, concentration, competitive effects, and entry. When FERC examines whether to permit market-based rates, authorize mergers or relax market power mitigation based upon presence of demand response, its analysis should be based on these principles. RTOs should likewise rely upon them.

Empower consumers Demand resources alleviate need for generation investments Enable consumers to have greater control over their costs – use electricity when it is less expensive. Defeat anticompetitive price increases.

Conclusion Policymakers and market designers should incorporate antitrust principles to a greater extent.