Market clearing mechanisms in incomplete markets: excluding importers from competitive electricity pricing

Increased access to low cost power from neighboring regions is one of the presumed benefits of industry restructuring, yet with competitive prices, dependence upon such power for meeting local demand has come to be a disadvantage of deregulation for a number of regions. In designing their electricity markets, these regions with inadequate local supply increasingly rely upon regulatory rules rather than market incentives to guide participants´ actions in the supposed competitive markets. This presentation discusses two requirements for actually achieving competitive market clearing prices -first, a complete market definition and second, reliance upon market forces to establish the market price. This talk draws upon examples of market participant behavior during the California energy crisis to illustrate the point that market clearing mechanisms must include all participants in the market and also allow market forces to determine the prices-whatever those prices may be. Though the industry remains hopeful of securing both the benefits of competition and the protection of government regulation, we are instead designing self-defeating market mechanisms that are not likely to achieve either objective.