MARKET STRUCTURE IN ITALIAN ELECTRICITY MARKETS

Following Directive 96/92/EC for energy sector liberalization, Italian legislation (Law 79/99) envisaged a breakdown of the vertically integrated monopolist system, the Italian State Company ENEL, with complete unbundling of an Independent System Operator and the creation of three GENCO to be sold to the private market. The Italian electricity market (IPEX), which is the most recent Pool market to be created in Europe, is now organized as a Pool system, managed by a market operator (GME) that collects the bids, determines the merit order for the dispatch of electricity and is responsible for all auxiliary services; demand-side bidding was introduced in January 2005. The key features of these changes were: i) the privatization and restructuring of the existing vertically integrated monopolistic supplier; ii) exchange organization of physical electricity in competitive wholesale spot markets through auctions. Competition was introduced at the retail level while transmission/distribution, which were still considered natural monopolies, remained under government regulation. This reorganization of the industry led to a separation of potentially competitive elements from natural monopolies. This new form of regulation has raised concerns about the ability of electricity producers to exercise market power and its effects on the efficiency of the market. A lot of studies have focused on the unilateral exercise of market power, but little attention has been devoted to analyze collusive attempts to exercise market power in a dynamic context (seminal paper are: Borenstein and Bushnell, 1999; Borenstein et al., 2002; Joskow and Kahn, 2002;Wolak, 2000, 2003; Wolfram, 1998, 1999). Finalli, only few studies have been devoted to analyze collusive attempts to exercise market power in a dynamic context (e.g. Puller, 2000; Fabra and Toro 2005; Bushnell et al. 2008). In this paper we analyze a time series of hourly prices in the Italian electricity markets from the beginning of the market, April 2004 until, 2009. This is the first comprehensive empirical study of the Italian market, using availability of detailed data on price changes, firms’ market shares and cost fluctuations, which analyzes potential attempts to exercise market power in a dynamic context, identifying Cournot competition and collusion behavior.