Market Structure Issues in the Philippine Generation Sector

Abstract

The recent literature on market power experiences in wholesale electricity markets is quite informative on the issue of the relationship between structure and firm behavior, in particular the exercise of market power by supplier firms.  Given the nature of electricity markets, traditional concentration measures do not capture the aspects of market structure that provide incentives for players to unilaterally keep prices above competitive levels.   This finding is of particular relevance to the Philippines, given that the country has embarked on a comprehensive restructuring of its power sector and had begun the operations of a wholesale electricity spot market in Luzon in 2006, with plans to implement the same in the Visayas in the near future.  Analysis of supply (capacity) margins reveals market power potential in Visayas and Mindanao that are not flagged by concentration-based market power screens embodied in present regulations.  Further analysis and modeling of spatial competition that can lead to local market power as suggested by the dominant firm-fringe competition model is recommended to be undertaken urgently by the regulator.