Incumbent vertical market power, experimentation, and institutional design in the deregulating electricity industry

Vertical market power has been an essential characteristic of the regulated electricity industry for the past century. A vertically integrated, regulated utility has complete downstream market power; this vertical monopoly power is subsumed within the business model because regulation erects legal entry barriers and regulated electric utilities have been vertically integrated. Incumbent vertical market power in deregulating markets can be anticompetitive, as seen in the current process of retail electricity restructuring. The incumbent default-service contract violates the Bell Doctrine's policy recommendation to quarantine the monopoly when a failure to exit a downstream market has anticompetitive effects. An entrepreneurial theory of competition based on experimentation reinforces that recommendation. The general failure to quarantine the monopoly wires segment and its regulated monopolist from the potentially competitive downstream retail market contributes to the slow pace and boring performance of retail electricity markets for residential customers.