Market Design: Some Relevant Antitrust Fundamentals

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

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

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

4. 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.

5. 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.

6. 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.

7. 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?

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

9. 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.

10. 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.

11. 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.

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