Market Power Mitigation Research Articles

Electricity Derivatives and the Spot Market in Italy. Mitigating Market Power in the Electricity Market

The increased uncertainty regarding electricity prices caused by the liberalization of the sector and the launch of wholesale spot electricity markets has led to the development of financial derivatives both in regulated and over-the-counter markets. The ability of the spot market to stimulate the economic efficiency and competitiveness of the energy sector depends crucially on its efficiency and liquidity. However, as the theoretical analyses developed after the Californian crisis show, the concentration of spot-market transactions in the day-ahead market in a non-competitive industry exposes electricity prices to excessive peaks and volatility. This is due to their higher exposure to the exercise of market power by the dominant producer as well as to contingent events. This paper argues that introducing a regulated market for standardized derivatives, while giving consumers a strategic role in the market, would contribute to solving the trade-off between the liquidity of the market and the stability of the system. Some interesting policy implications emerge from the analysis. (Version: April 2003)

Beyond Market Shares and Cost-Plus Pricing: Designing a Horizontal Market Power Mitigation Framework for Today's Electricity Markets

Without proper market definition, any diagnostic tests for market power and market pricing safeguards could create more long-term harm than good. FERC needs to supplant its default market definition approach with a prescribed set of market definition techniques, then allow stakeholders to implement these techniques to define the relevant markets in which they participate.

Watching watts to prevent abuse of power

To successfully monitor power market operations and anticipate how market changes could affect the exercise of market power, indices of market power that are grounded in theory, reliable and easily calculated are needed. In this article, we present an index that we have found particularly useful in California: the Residual Supply Index (RSI). We demonstrate the empirical relationship between RSI and the mark-up of prices above competitive levels. We also describe two applications of this new index: using RSI to assess the overall competitiveness of the market during three years of dramatic changes in underlying structure, and estimating the benefits of increasing market competitiveness by upgrading Path 15. We also present some questions that market designers must consider when deciding how to mitigate market power when it is detected.

04/00791 Improving market power mitigation rules for peaking units: Crespo, J. G. and Giacchino, L. The Electricity Journal, 2003, 16, (8), 47–60

04/00791 Improving market power mitigation rules for peaking units: Crespo, J. G. and Giacchino, L. The Electricity Journal, 2003, 16, (8), 47–60

Allocating Transmission to Mitigate Market Power in Electricity Networks

We ask what conditions transmission contracts increase or mitigate market power. We show that the allocation process of transmission rights is crucial. In an efficient arbitraged uniform price auction, generators will only obtain contracts that mitigate their market power. However, if generators inherit transmission contracts or buy them in a ‘pay-as-bid’ auction, then these contracts can enhance market power. In the two-node network case, banning generators from holding transmission contracts that do not correspond to delivery of their own energy mitigates market power. Meshed networks differ in important ways as constrained links no longer isolate prices in competitive markets from market manipulation. The paper suggests ways of minimising market power considerations when designing transmission contracts.

Improving Market Power Mitigation Rules for Peaking Units

Marginal cost bidding should not be used as a benchmark for setting mitigated prices because it can create perverse incentives that threaten long-run efficiency and financial viability in electricity markets. More broadly, it is inconsistent with competitive market behavior. Thus, marginal cost bidding should be replaced with more sophisticated and appropriate benchmarks for use by market monitoring committees.

Market Power Mitigation and Energy-Limited Resources

FERC’s Standard Market Design takes aim at the problem of withholding by proposing automated mitigation procedures (AMP) as a tool to prevent the exercise of market power. However, only “light-handed” AMP with bid caps based on opportunity costs and no must-offer requirement will result in efficient operations of energy-limited resources.

Hydrothermal market simulator using game theory: assessment of market power

The aim of this work is to build a model able to simulate a hydrothermal electric power market based on simple bids to a power exchange. The model studies the behavior of different market agents in a short-term horizon and delivers information about spot prices, use of water, and other relevant variables. Initially, a thermoelectric market is simulated through a static model based on Cournot concepts. The addition of hydroelectric power stations and time dependencies is made later, using a dynamic programming algorithm to build a dynamic model. In each stage and state of the dynamic programming, a Nash-Cournot equilibrium is determined to assess the behavior of the thermoelectric power stations (static model). Different strategies that firms can follow and the consequences of each one of them are analyzed. Market power mitigation effects of physical and financial bilateral contracts are also investigated. A case study with data on the Chilean power system is presented and analyzed.

Will They Deliver? Assessing the Proposed Reforms of the Western Australian Electricity Industry

The Electricity Reform Task Force (ERTF) has recently released its blueprint for the future of the electricity industry in Western Australia. In general, the market structure proposed is appropriate, but with some caveats. Perhaps the most important issue affecting the future success of reforms to the industry is the Government imposed requirement that retail prices should not rise for smaller customers, which has lead the ERTF to incorporate Western Power's current uniform tariff into a price cap for retail services. If this price cap transpires to be 'too low' (below the competitive market price of electricity in at least some temporal and locational markets), then resource constraints are likely to ensue, jeopardising the future success of reforms. Importantly, as the paper shows, attempts by the ERTF to mitigate such resource constraints are unlikely to be successful, as are measures intended to mitigate residual market price volatility. This leaves WA without a safety net in the event that the price cap is too low. The ERTF believes that its price caps are not too low, but has provided little evidence to support this contention. More importantly perhaps, as the paper shows, price caps are neither necessary, nor the most efficient way to maintain low prices for residential consumers. There are also some concerns as to the likely effects of measures to mitigate market power, although auctions of capacity (with some caveats) should be sufficient to address any concerns which cannot be addressed with extant competition laws, some doubts about the validity of the ERTF's assertions that State Generation and State Retail must be separated to generate competition, and some questions about the appropriateness of the Government's proposals for enhancing the production of energy from sustainable sources.

Allocating Transmission to Mitigate Market Power in Electricity Markets

We ask under what conditions transmission contracts increase or mitigate market power. We show that the allocation process of transmission rights is crucial. In an efficiently arbitraged uniform price auction generators will only obtain contracts that mitigate their market power. However, if generators inherit transmission contracts or buy them in a 'pay-as-bid' auction, then these contracts can enhance market power. In the two-node network case banning generators from holding transmission contracts that do not correspond to delivery of their own energy mitigates market power. Meshed networks differ in important ways as constrained links no longer isolate prices in competitive markets from market manipulation. The paper suggests ways of minimising market power considerations when designing transmission contracts.

Hydrothermal Market Simulator Using Game Theory: Assessment of Market Power

The aim of this work is to build a model able to simulate a hydrothermal electric power market based on simple bids to a power exchange. The model studies the behavior of different market agents in a short-term horizon and delivers information about spot prices, use of water, and other relevant variables. Initially, a thermoelectric market is simulated through a static model based on Cournot concepts. The addition of hydroelectric power stations and time dependencies is made later, using a dynamic programming algorithm to build a dynamic model. In each stage and state of the dynamic programming, a Nash-Cournot equilibrium is determined to assess the behavior of the thermoelectric power stations (static model). Different strategies that firms can follow and the consequences of each one of them are analyzed. Market power mitigation effects of physical and financial bilateral contracts are also investigated. A case study with data on the Chilean power system is presented and analyzed.

Market Power in Deregulated Wholesale Electricity Markets: Issues in Measurement and the Cost of Mitigation

An analysis of three recently deregulated markets—California, PJM, and New York—finds that none of them can be regarded as highly competitive, contrary to what conventional measures of market power indicate. Auctions for generation are unlikely to be competitive and costly steps will be needed to mitigate market power, likely eroding any benefits from increased operating efficiency in deregulated markets. Thus, FERC and state legislators need to reexamine the desirability of deregulating the generation portion of the industry.

Alternating currents: electricity markets and public policy

Many states within the U.S., and many countries across the world, are opening their electicity markets to competition. Many others are uncertain about their plans. These differences emphasize the complexities involved in the technology and regulatory structure of the electricity industry--an industry for which the introduction of market competition has been notoriously difficult. In response to these challenges, Alternating Currents provides a timely overview and analysis of the concerns facing industry regulators, legislators, and others as they consider whether, when, and how to open electricity markets. Authors Brennan, Palmer, and Martinez offer background on the history of regulatory policy and the technology for producing and delivering electric power. They then provide insights into the policy debates and economic issues involved in eleven important topics, including industry structure, system integrity and reliability, the mitigation of market power, and environmental protection. Alternating Currents describes the recent events leading to the demise of retail competition in California with the intent on drawing lessons for the future. In the end, the authors offer their perspective about what makes electricity a unique resource and how those factors make the potential conflict between competition and reliability the most pressing of the long-term concerns about the transformation of the electric power industry.

California power crisis: failure of market design or regulation?

This article identifies the critical factors that led to the Californian power crisis and assesses whether the crisis was brought about by a failure of market design or not. It argues that, until long-term solutions can be put in place and adequate supply is restored, effective region-wide market power mitigation measures must be implemented to protect consumers from the exercise of market power.

Market Power in Electricity Supply

Restructuring of the power industry worldwide has brought the issue of market competitiveness to the forefront. While vertical market power has been limited by disaggregating generation and transmission, nondiscriminatory access to the transmission system by power suppliers, and the creation of the independent system operator (ISO), horizontal and localized market power still survives. In the last few years, the issue of a small number of generators exercising market power has received a great deal of attention, and much has been published on how to identify and mitigate such abuse by market management measures. This paper focuses on the analysis and mitigation of market power in electricity supply.

Market Power Assessment and Mitigation in Hydrothermal Systems

The objective of this paper is to investigate market power issues in bid-based hydrothermal scheduling. Initially, market power is simulated with a single-stage Nash-Cournot equilibrium model. Market power assessment for multiple stages is then carried through a stochastic dynamic programming scheme. The decision in each stage and state is the equilibrium of a multi-agent game. Thereafter, mitigation measures, specially bilateral contracts, are investigated. Case studies with data taken from the Brazilian system are presented and discussed.

An Analysis of Market Power Mitigation Strategies in Colorado's Electricity Industry

We apply an algorithm that optimizes the generation dispatch for a dominant firm to Colorado's electricity market and show that the dominant electricity generation firm can strategically congest transmission into the region to receive a maximum price over 50% of the time. When it does not get the maximum price, the dominant firm still receives an average markup more than 10% over the competitive price. We use this model to show how mitigation strategies such as enhancing the transmission grid, divesting the dominant firm's generation assets, and promoting entry into the generation market can lower prices in a wholesale electricity generation industry by limiting a dominant firm's market power.

Market Monitoring by Regional Transmission Organizations: What Role Should They Play in Detecting and Mitigating Market Power?

The socially optimal mitigation policy is apt to blend several approaches. These may include the sort of bid caps that RTOs now contemplate; but those surely are not optimal by themselves, nor is it sensible to dump market problems entirely in the laps of RTOs.

An Empirical Analysis of the Impact of Hedge Contracts on Bidding Behavior in a Competitive Electricity Market*

A major concern in the design of wholesale electricity markets is the potential for the exercise of market power by generating unit owners. To better understand the determinants of generating unit owner market power and how it is exercised, this paper derives a model of bidding behavior in a competitive electricity market which incorporates various sources of uncertainty and the impact of the electricity generator's position in the financial hedge contract market on its expected profit-maximizing bidding behavior. The model is first used to characterize the profit-maximizing market price that a generator would like set by its bidding strategy for several hedge contract and spot sales combinations. This model is applied to bid and contract data obtained from the first three months of operation of the National Electricity Market (NEM1) in Australia. This analysis illustrates the sensitivity of expected profit-maximizing bidding strategies to the amount of financial hedge contracts held by the generating unit owner. It also provides strong evidence for the effectiveness of financial hedge contracts as a means to mitigate market power during the initial stages of operation of a wholesale electricity market. [L 94]

The ABCs of Market Power Mitigation: Use of Auctioned Biddable Contracts to Enhance Competition in Generation Markets

Auctioned biddable contracts, which offer the right to schedule or bid generation into the market, allow for the creation of multiple players while leaving operational control of generation assets in the hands of incumbent firms. The auction process can be designed to facilitate the rent transfer objectives of stranded cost/benefit recovery.