The movement towards deregulating electricity markets has recently been called into question as generating firms have exercised substantial market power in a number of these markets, most notably in California. Strategic behavior of electricity generating firms can lead to wealth transfers and welfare consequences. This dissertation examines several issues of restructuring electricity markets. These include testing for the presence of market power, the impact of vertical integration on mitigating horizontal market power, and the welfare effects of oligopoly-induced production inefficiencies. In addition, I examine the effects of these production inefficiencies on pollution levels and environmental regulation. A final chapter measures demand response to restructuring retail markets.; I find that in the Pennsylvania, New Jersey, and Maryland (PJM) wholesale electricity market, firms exercised market power in the first summer of the market's deregulation, leading to just under a billion dollars in wealth transfers and deadweight loss of approximately eight percent of the total production costs. Furthermore, it was only the two firms that were net sellers into the wholesale market that exercised market power. In addition, I find that between 15 and 40% of the substantial pollution reductions in the PJM region from 1998 to 1999 resulted from firms behaving strategically, not from higher pollution costs. I also discuss why policy makers should place more emphasis on tradable permit systems over pollution taxes as a result of strategic behavior in product markets. The last section of this dissertation finds evidence suggesting that the likely form of restructuring retail electricity markets results in limited price responsiveness and will be unlikely to mitigate market power in wholesale markets.
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