Electricity market integration offers significant potential for gains from trade. However it requires that enough transfer capacity is supplied by the transmission system operators (TSOs) that manage local networks. The incentive for TSOs to allocate international interconnection capacity has long been a concern for competition authorities. For example, the European Commission has in several cases argued that withholding of interconnection capacity by TSOs may have represented abuse of dominant position. This paper formally examines TSO incentives in a setting that captures salient features of the current European electricity market. It demonstrates that under the existing market design, TSOs have an incentive to withhold transmission capacity to increase congestion rents. By implication, it is impossible to implement full price equalization in equilibrium. The analysis then explores various market reforms aimed at mitigating exercise of TSO market power. A minimum capacity requirement improves efficiency, but faces significant informational challenges that may render it impractical. Another possibility is to introduce a forward market, as advocated by the European Commission. Doing so requires no information, but only increases trade in equilibrium if forward market participation is mandatory for TSOs. We demonstrate how a small change to how congestion rents are distributed can implement efficient trade without imposing excessive informational burdens on regulators. Lastly, the paper cautions that TSOs might benefit from restricting domestic capacity allocations in order to manipulate spot prices even if regulation prevents exploitation of market power on international connections.