The Impact of the Transparency of Wholesale Markets on Market Participation: The Case of the U.S. Electricity Industry

Abstract

Coordination costs in a wholesale market are the need to determine the price and other parameters of the transaction, make the existence of buyers and sellers known to one another, and bring buyers and sellers together. The mitigation of coordination costs, all else equal, should increase participation in the marketplace. Since Federal Energy Regulatory Commission (FERC) Order 888 was issued in 1996, the trade in bulk electricity markets has increased significantly. In 1999 FERC issued Order 2000 to explore the role of regional transmission organizations in the restructured electricity marketplace. RTOs can reduce the coordination costs required to participate in the wholesale electricity markets, but also cause compliance costs to be incurred. Therefore, there are countervailing effects of these organizations on participation in the wholesale markets. This paper utilizes the diversity of the United States electricity market and a panel data set of electric utilities for the period 1990-2009 to study the effects that RTOs have had on the trade of wholesale electricity. The paper finds that the presence of a transparent wholesale marketplace for electricity has the effect of increasing participation, but that this participation does not occur symmetrically across all types of electric utilities. Greater participation is induced in privately-owned and larger utilities. These results have important implications for public policy aimed at increasing transparency in wholesale markets, and the organizations that facilitate it, as the opportunities afforded by this policy may not be uniformly distributed across all market participants.