A Comparison of Ex Ante versus Ex Post Vertical Market Supply: Evidence from the Electricity Supply Industry

Abstract

This paper provides a prospective and retrospective quantitative assessment of the impact of a passive vertical integration between a large electricity retailer and a large electricity generator in the Australian National Electricity Market (NEM). We adapt a standard model of fixed-price forward contracting behavior by an electricity retailer before and after the acquisition of a share of a baseload electricity generation plant to determine the likely change in its contracting behavior. Using bid and market outcome data during the three years leading up to the acquisition, we estimate the change in bidding behavior of the generation unit owner from the change in its fixed-price forward contract obligations brought about by the acquisition. This change in bidding behavior is used to compute a prospective change in each half-hourly wholesale price during the pre-acquisition period. Because this acquisition was allowed to take place, we also use market-clearing prices of wholesale electricity in the four states of Australia in NEM at that time and the price of the marginal input fuel during the pre-acquisition and postacquisition time periods to compute a variety of treatment effects estimates of the impact of this acquisition. We find fairly close agreement between the prospective and retrospective quantitative impact of the acquisition on wholesale prices. In both methodologies find a significant increase in wholesale electricity prices associated with the acquisition, which emphasizes the importance of taking into account the extreme susceptibility of short-term wholesale electricity markets to the exercise of unilateral market in any competition analysis in this industry.