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2009 State of the Market Report

VI.

Competitive Assessment

This section assesses the competitive structure and performance of the Midwest ISO markets in 2009. The competitive assessment seeks to determine whether market power exists and, if so, whether it has been exercised. This type of assessment is particularly important for LMP markets because LMP markets can provide opportunities for the exercise of local market power in congested areas.

A.

Market Structure

This first subsection provides three structural analyses of the market. The first is an overview of the concentration of both the Midwest ISO as a whole and the various regions within it. The remaining two analyses address the frequency with which suppliers in the Midwest ISO are “pivotal” and needed to serve load reliably or resolve transmission congestion. In general, the latter analyses provide much more reliable indicators of potential market power than the structural market concentration analysis does.

1.

Market Concentration

The first analysis of market structure evaluates the market’s concentration using the Herfindahl- Hirschman Index. The HHI is a standard measure of market concentration calculated by summing the square of each participant’s market share. Antitrust agencies generally characterize markets with HHIs greater than 1,800 as highly concentrated while markets with HHIs less than 1,000 are not considered to be concentrated. The HHI is only a general indicator of market concentration, not a definitive measure of market power. The most significant shortcomings of the HHI for identifying market power concerns are that it does not account for demand, network constraints, or load obligations. In wholesale electricity markets, these factors can have a profound effect on the competitiveness of the market. Figure 72 shows market shares and HHI calculations for the Midwest ISO as a whole and within each region.

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