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Auction Design for the Colombian Electricity Market

Colombia deregulated its electricity sector and created a new market for electricty in July 1995. The spot market price is determined by a daily auction among the producers. Though the auction is designed to foment price competition, water scarcity constraints and the relatively high utilization of production capacity at peak demand hours produce situations where the larger producers can exercise some market power. In extreme condi- tions, like those during the drought of 1997, prices can increase sharply well above marginal costs.