erc/metu
INTERNATIONAL CONFERENCE IN ECONOMICS  IV
September 13-16, 2000, Ankara

Competition between Public and Private Generators on Electric Power Networks

Ayşe Mumcu Serdar (Boğaziçi University)
Sehan Oğur (Northwestern University, USA)
Ünal Zengizobuz (Boğaziçi University)

Abstract

The electricity sectors all over the world are going through a thorough restructuring process. The vertically integrated franchise utilities are being disintegrated. The generation segment and the retail segment are being totally deregulated and opened to competition whereas the natural monopoly network segments (the high-voltage transmission and distribution segments) are kept under public regulation. In some countries the public sector ownership of generation assets and capacity is still the predominant type ownership. And in many other countries the public sector is not very large but is still a significant player in the wholesale generation market. The policy challenge for the public authorities in these countries with newly restructured electricity sectors is to what extent should the public generating assets be privatized and what the objective function of any remaining public generation companies should be. In a standard industry structure without externalities, if a public firm engages in a simultaneous quantity setting game in an oligopoly with private firms (i.e. in a mixed oligopoly) social welfare is higher when the public firm is instructed to maximize profits instead of maximizing social welfare. Only in a sequential quantity setting game where the public firm is the Stackelberg leader, instructing the public firm to maximize social welfare indeed leads to higher social welfare. However, this result does not cover the electricity industry since externalities are present due to the network nature of it and loop flows in electricity transmission. When different nodes are connected over a transmission network, a trade between two parties can affect a non-participating third party (positively or negatively) by congesting or de-congesting his line and thus altering the price he faces or the quantity he sells at his node.

This paper examines whether and under what circumstances the results mentioned above for mixed oligopolies in standard industry structures extend to the wholesale power markets. Both two-node and three-node network configurations are studied as alternative power market structures. The findings will have very important public policy consequences. Along with many countries, Turkey is about to partly privatize and totally restructure its electricity industry. It is evident that it will take a long time, if it will ever happen, for Turkey to sell all of her public generation assets. Therefore, like almost all European countries, the wholesale generation segment of the Turkish electricity industry will remain a mixed oligopoly for many years, with public and private firms operating together.

Economic Research Center
Middle East Technical University
06531 Ankara Turkey
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e-mail: metuerc@metu.edu.tr