Venezuelan restructured electricity market analysis of a dominant firm's market power

Venezuela is currently restructuring its electric power industry in order to create competition for the generation of electricity, while the transmission and distribution of electricity remain regulated monopolies. The restructuring plan was designed to offer large customers ( 5 MW, initially) a choice regarding the source of their electricity, stimulate required investments, improve system reliability and reduce the price of electricity. This paper deals with the ability of a dominant firm to exercise market power in Venezuelan electricity market. Results will show that given current and currently forecast market and system conditions, one hydro electric generating company would have the ability to set prices above marginal costs. Among the options to create effective competition, and mitigate dominant firm's market power are measures to encourage the entry of new firms, and the imposition of price caps and/or cost plus for hydro plants based on the cost of opportunity of the water.