Power industry restructuring and privatization is under progress in Korea. This is a necessary step to acquire resources for the construction of power supply facilities as well as to enhance efficiency of the industry. Competition is introduced in generation and distribution/supply sector and market mechanism substitutes top-down decision making process that were often subject to government intervention and inefficiency.

To keep the reformative momentum of power industry, the separation of distribution/supply business from KEPCO and subsequent split-up should be progressed along the due schedule. Privatization process of generation and distribution/supply sector needs be in schedule also. on the other hand, any distortion in fuel market and its price system needs to be corrected to maximize the effect of competition in electricity industry. With all these, we have to build sound and competitive business environment in power market by protecting fair competition and preventing strategic behavior or collusion among market participants through market monitoring and regulation.

To enhance the effect of competition, however, one has to pay special attention to the design of market in which electricity is traded. After reviewing the market rule of two-way bidding pool designed by KEMA Consulting for the Korea Power Exchange we provide two recommendations. First, with all the technical and other constraints that lead to the adoption of uniform pricing model, the final market rule should consider the failure of market clearing due to uniform price that could distort the incentive of market participants. Other remedies such as differentiated transmission tariff or loss factor should be considered too. Second, the punishment mechanism against the strategic behavior needs to be amended as it has to be a credible threat to the potential violators and incentive-compatible from the view point of market and system operator.