Benchmark analysis and competition policy in the electricity industry

Competitive benchmark analyses are an increasingly popular tool for studying and regulating restructured electricity markets. The benchmark is established as the price that would result if no firm attempted to exercise market power. These estimates are then compared to actual market prices to determine the extent to which market power has driven prices above perfectly competitive levels. The key to prudent application of competitiveness estimates is the proper consideration of the potential costs and benefits of the proposed intervention. With FERCs recent notice of proposed rule making on standard market design, it appears that structural tests for the granting of market-based rates will be largely abandoned in favor of "monitoring" of producer behavior once they have been granted market-based rates. Such monitoring includes the automated review and regulation of prices submitted by participating suppliers to markets overseen by regional independent transmission providers (ITPs) or independent system operators (ISOs).