An Analysis of the Oligopolistic Effects of the Integration between Electricity and Gas Suppliers in the Spanish Market

The recent proposals for the acquisition of Endesa by Gas Natural and E.On has raised a considerable debate. One of the interesting issues under discussion is whether the resulting entity will be too large for the market or not, in terms of its potential exercise of market power and, in this context, whether the integration of the gas and electricity activities will have an impact on this dominant position. We want to investigate if the regulator should consider separately the electricity and gas markets when analyzing the size (or market share) of the conglomerate - and in this case the proposed acquisition would change very little the existing situation - or if some kind of electricity-gas analysis would be relevant. We construct a joint equilibrium model of both markets to explain system behavior, which is in itself a description of the ability of the players to influence the electricity price using their gas decisions. We obtain mathematical expressions that characterize the market power effects due to this vertical integration, and they provide us with some description of the kind of new oligopolistic strategies that may be expected after the merger. At the same time, we find out that results depend very much on regulatory details. The degree in which access to the international gas markets is granted shifts dramatically the results. This suggests that there may be regulatory measures that would mitigate to some extent the market-power effects of vertical integration