Unilateral Market Power Research Articles

Mixed Oligopoly and Market Power Mitigation: Evidence from the Colombian Wholesale Electricity Market*

Using information on price bids in wholesale electricity pools and empirical techniques described in the literature on electricity markets, this study identifies the market power mitigation effect of public firms in the Colombian market. The results suggest that while private firms exercise less market power than is predicted by a profit‐maximization model, there are marked differences between private and public firms in their exercise of unilateral market power. These findings support the hypothesis of the market power mitigation effect of public firms.

The impact of price transparency and competition on hospital costs: a research on all-payer claims databases

BackgroundPublic reporting has been considered effective in reducing health care costs by mitigating information asymmetry in the market as payers have incorporated publicly available information mandates into pay-for-performance programs and value-based purchasing. Therefore, hospitals have faced increasing pressures to provide price transparency. Despite the widespread promotion of healthcare transparency, the effectiveness of public reporting has not yet been sufficiently understood. This study analyzed the impact of transparency policy and competition on hospital costs by taking the state operations of all-payer claims databases (APCDs) as a case of interest.MethodsWe employed a fixed-effects regression, which allows the generation of hospital-specific effects, in accordance with the suggestion by the Hausman test. The study samples comprise nonprofit and for-profit general acute care hospitals in the United States for 2011–2017. The finalized dataset ranges from 3547 observations in 2011 to 3405 observations in 2015 after removing missing values.ResultsWe found that hospitals in the states with APCDs tend to bear higher average operating expenses than those without APCDs, which may indicate that states maintaining higher healthcare expenditures are more attentive to a price transparency initiative and tend to adopt APCDs. With regard to competition, the results showed that weak market competition is significantly associated with higher operating costs, supporting the traditional competition theory. However, the combined effect of APCDs and competition did not indicate a significant association with operating expenses. Further investigation showed a continued tendency for a weak intensity of competition to be linked to lower hospital operating costs in states without APCDs. For those located in non-APCD adopted states, market consolidation helped hospitals coordinate care more effectively, economize operating costs, and enjoy economies of scale due to their large size. Similar trends did not appear in APCD-adopted states except for in 2015.ConclusionsThis study observed limited evidence of the impact of APCDs and market competition. Our findings suggest that states need to make multifaceted efforts to contain hospital costs, not solely depending on the rollout of cost information or market competition. Market concentration may lead to coordinated care or cost economization in some cases. Still, the existing literature also demonstrates some potentially harmful impacts of increased concentration in the healthcare market, such as inefficient use of resources, unilateral market power, and deterrence of innovation. The introduction of a price transparency tool may require additional policy actions that take market competition into consideration.

Game-based investigation of standardized forward contracting for long-term resource adequacy

High and growing shares of wind and solar generation can lead to economic retirements of controllable capacity, which creates the need for long-term resource adequacy mechanisms that compensate units needed to maintain system reliability. We use game-based simulation to compare two approaches for ensuring long-term resource adequacy: capacity markets and forward contracting. We also conduct “policy prototyping” of a specific implementation of forward contracting, Standardized Fixed-Price Forward Contracts (SFPFCs). SFPFCs are standardized forward energy products sold through a centralized procurement process in which 100% of expected demand is auctioned off several years ahead of energy delivery. SFPFCs retroactively adjust contract quantities in each covered hour according to that hour’s share of total demand in the compliance period. This encourages generating companies to manage the risk of higher-than-expected demand in any given hour. Our game runs suggest that forward contracting can yield significantly lower cost to load than capacity markets because it removes the incentive for gencos to exercise unilateral market power in the short-term energy market. The SFPFC implementation in our games effectively maintained system reliability and delivered moderate costs to consumers while maintaining financial viability for gencos. It did this even in scenarios with high carbon prices and high renewable shares incentivized by a Renewable Portfolio Standard (RPS) with tradable Renewable Energy Certificates (RECs).

Pricing Patterns in Wholesale Electricity Markets: Unilateral Market Power or Coordinated Behavior?*

AbstractWe examine allegations that firms in Alberta's electricity industry manipulated public information to coordinate in the wholesale market. We investigate whether bids by firms who employed unique pricing patterns were consistent with unilateral expected profit maximization. Our results suggest that these firms could have increased expected profits through unilateral deviations. For one firm, the potential to increase profits is greater on days when certain offer patterns are observed, providing support for the claim that such patterns may have assisted coordination on high‐priced outcomes. These results suggest that regulators should exercise caution when designing information disclosure policies in concentrated electricity markets.

COVID-19 lockdown and market power in the Italian electricity market

The Italian electricity market was characterized by a remarkable decrease in demand during the COVID-19 lockdown (10 March to 2 June 2020). There were also negative peaks of over 50% and record low prices of about 20 Euro/MW. This paper aims to investigate the exercise of market power in the Italian power exchange during the pandemic, explicitly considering transmission line congestion, and disentangling the measure of the unilateral market power from congestion rent and re-dispatching costs.We computed the Zonal Lerner Index for every hour in January–June 2020 for the main operators on the supply and the demand side in the Italian day-ahead market. Furthermore, we analyzed the correlation between market power, congestion, and the effect of COVID-19. The results showed that the exercise of market power on the supply (mark-up) and demand (mark-down) sides were considerably weakened during peak hours by massive demand reduction. However, it was surprisingly reinforced during emergency periods in specific off-peak hours.Overall, the main players have somehow increased the intensity of market power during the COVID-19 pandemic crisis, which calls for more pro-competitive action by the regulatory authority and paying more attention to heterogeneous players’ behaviors.

Offer Price Information and the Exercise of Market Power: The Effect of the Publication of the Historical Trading Report on Competition in the Alberta Electricity Market

This paper considers the effect of the publication of offer price information on unilateral market power in Alberta’s electricity market. This market is an hourly auction characterized by repeated interaction among a small number of producers, common knowledge of costs and production capabilities, and price inelastic demand. For the period July 13, 2000 to May 18, 2017, offer prices for each hour were published by the market operator, the Alberta Electric System Operator (AESO), in the Historical Trading Report (HTR) after the end of the hour. Using counter-factual analysis from 2010 to 2015 (52,584 hours), the paper finds that the effect of offer price changes after the HTR publication was to raise the average hourly price for electricity in Alberta by $2.48/MWh or about 4.2%, which raised the cost of electricity for Alberta consumers during the six-year period by approximately $1.14 billion. Based on an earlier version of this paper, the AESO was instructed by Alberta’s utilities regulator to cease publication of the HTR.

Optimal offer-bid strategy of an energy storage portfolio: A linear quasi-relaxation approach

This paper proposes a model of the behavior of an expected profit-maximizing merchant storage owner with the ability to exercise unilateral market power. The resulting non-linear bilevel optimization problem is transformed into a single-level stochastic bilinear program using the Karush-Kuhn-Tucker conditions of the lower-level Independent System Operator dispatch problem. By discretizing the offers and bids of the merchant storage owner, the problem is formulated as a stochastic disjunctive program. Using the disjunctive nature of the derived program, a specialized branch-and-bound algorithm that applies a linear quasi-relaxation of the merchant storage problem is proposed. Our solution algorithm is able to solve the problem in an efficient manner; returning the charge and discharge strategies for the merchant storage owner that yield the highest expected profits. Simulations of test systems reveal the various abilities of the merchant storage owner to exercise unilateral market power. Those include demand withholding, generation withholding and under-use which result in an increased congestion in both space and time when compared to the welfare-maximizing use of storage. Factors such as uncertain bids by other players, final state-of-charge requirements and arbitrage by other storage players are investigated. Moreover, numerical results demonstrate the superior computational performance of the proposed solution algorithm when benchmarked against current practices in the literature.

Tax induced emissions? Estimating short-run emission impacts from carbon taxation under different market structures

This article finds that the introduction of a carbon tax increased short-run carbon emissions in an imperfectly competitive wholesale electricity market. The unique feature of the Western Australian setting is that the same carbon tax was introduced and later repealed, but the market structure differed at each event. At the repeal event, the dominant firm had less incentive to exercise unilateral market power. Then, the opposite result is observed — emissions were lower with the tax. I show how the short-run impact of pollution taxation in imperfect markets depends on production technologies, market structure and the size of the tax.

Measuring market power and the efficiency of Alberta's restructured electricity market: An energy‐only market design

AbstractWe measure the degree of market power execution and inefficiencies in Alberta's restructured electricity market. Using hourly wholesale market data from 2008 to 2014, we find that firms exercise substantial market power in the highest demand hours with limited excess production capacity. The degree of market power execution in all other hours is low. Market inefficiencies are larger in the high demand hours and elevate production costs by 6.7%–19% above the competitive benchmark, with an average of 13%. This reflects 2.1% of the average market price across all hours. A recent regulatory policy clarifies that certain types of unilateral market power execution is permitted in Alberta. We find evidence that suggests that strategic behaviour changed after this announcement. Market power execution increased. We illustrate that the observed earnings are often sufficient to promote investment in natural gas based technologies. The rents from market power execution can exceed the estimated capacity costs for certain generation technologies. However, we demonstrate that the energy market profits in the presence of no market power execution are generally insufficient to promote investment in new generation capacity. This stresses the importance of considering both short‐run and long‐run electricity market performance measures.

A waste of energy? A critical assessment of the investigation of the UK energy market by the Competition and Markets Authority

In this paper, we assess the findings of the UK energy market investigation by the Competition and Markets Authority, conducted during June 2014–June 2016. We argue that the results of the investigation have been advantageous for the large energy companies and they risk failing to bring any significant and positive change to the energy industry. We highlight three major aspects of the Competition and Markets Authority's assessment. First, the panel examined retail and wholesale segments of the energy industry in isolation, which can be misleading in the assessment of vertical integration. It also considered new entries to the sector as a sign of competitive strength when many were due to favourable government policies in the form of exemptions from various obligations. Second, its conclusion that a position of unilateral market power by the large energy companies arises from weak customer engagement (i.e. low switching rates) shifts the focus and responsibility for the problems of the energy markets away from the conduct of the companies onto customers. Finally, the investigation placed an overemphasis on competition without due reference to its consequences for consumers’ welfare.

Renewable Energy and Market Power in the Italian Electricity Market

The Italian electricity market has been characterized by a remarkable increase of renewable energy source (RES) supply since 2010, which has determined relevant structural changes in the electric system. Noticeably, during favorable weather conditions, such as sunny or windy hours, increasing supply of RES generation exerts a downward pressure to the formation of the equilibrium price in the market and at the same time forces an increase in line congestion. The aim of this paper is to investigate whether such RES increase has affected the exercise of market power in the Italian Power Exchange (IPEX), explicitly considering transmission line congestion. We employ our approach to construct the residual demand curve and to disentangle the measure of the unilateral market power from the congestion rent. We compute the zonal Lerner index during the period 2009 to 2013 for the main generators in the Italian day-ahead market and we analyze the correlation among market power, congestion and RES supply. In particular, we investigate whether RES development has affected congestion and firm's strategic behavior, empirically testing whether structural changes have occurred in market power or in congestion rent. Our results show that the exercise of market power has been considerably weakened during peak hours by the massive competition of RES, but it has been surprisingly reinforced in specific off-peak hours, in the absence of solar RES and in specific zones, where congestion yields market splitting. These findings support pro-competitive market regulation and reform strategies, and shed light on the impact of RES and congestion on market outcomes.

Market Power and Transmission Congestion in the Italian Electricity Market

Analysis of market power in electricity markets is relevant for understanding the competitive development of the industry’s restructuring and liberalization process, but in the existing literature, there is not an adequate consideration of line transmission congestion. The aim of this paper is to propose a new approach to measuring market power in the Italian Power Exchange (IPEX), explicitly considering transmission line congestion. We construct a new measure of the residual demand curve to disentangle unilateral market power from congestion rent for the main Italian generators during the period April 2004 to December 2007. In Italy, this period was one of stable transmission network structure. Following the approach of Wolak (2003, 2009), we measure the unilateral market power with the Lerner index (LI), computed as the inverse of the residual demand elasticity. In conclusion, the correct modeling of the residual demand curve including transmission congestions enables us to compute the zonal LI and therefore more accurately measure the market power when congestion occurs. Our results show that various generators exercise market power only in specific zones. These findings provide deeper understanding of market outcomes in the presence of congestion, suggesting appropriate policy directions for market surveillance and competition regulation.

The CMA energy market investigation, the well-functioning market, Ofgem, Government and behavioural economics

The GB retail energy market, and Ofgem's regulation of it, have been controversial. In 2014 Ofgem asked the CMA to investigate. Its Provisional Findings of July 2015 take a similar approach to that of Ofgem since 2008. Both find weak customer response allowing unilateral market power, and support various regulatory interventions. The specific characterisation of the CMA's benchmark well-functioning market, with its requirement that firms have efficient costs, seems attributable to Ofgem. Possible reasons for similarities include Ofgem's involvement in the process before the CMA reference, policies of previous Governments including an initial strategic Steer to the CMA, and the increasing influence of behavioural economics especially via the OFT. Now the present Government has put in place a new Steer, without emphasis on consumer behavioural issues and with strong emphasis on deregulation rather than regulation. Experience and thinking about behavioural economics also continue to evolve. The paper discusses implications for the CMA.

Measuring the competitiveness benefits of a transmission investment policy: The case of the Alberta electricity market

Transmission expansions can increase the extent of competition faced by wholesale electricity suppliers with the ability to exercise unilateral market power. This can cause them to submit offer curves closer to their marginal cost curves, which sets market-clearing prices closer to competitive benchmark price levels. These lower wholesale market-clearing prices are the competitiveness benefit consumers realize from the transmission expansion. This paper quantifies empirically the competitiveness benefits of a transmission expansion policy that causes strategic suppliers to expect no transmission congestion. Using hourly generation-unit level offer, output, market-clearing price and congestion data from the Alberta wholesale electricity market from January 1, 2009 to July 31, 2013, an upper and lower bound on the hourly consumer competitiveness benefits of this transmission policy is computed. Both of these competitiveness benefits measures are economically significant, which argues for including them in transmission planning processes for wholesale electricity markets to ensure that all transmission expansions with positive net benefits to electricity consumers are undertaken.

Market Power in Power Markets: An Analysis of Residual Demand Curves in California’s Day-ahead Energy Market (1998-2000)

2000, with a focus on its day-ahead energy market and its five non-utility thermal generating companies. Our goal is to assess whether the hourly bids of market participants, together with information on thermal unit characteristics and power output, suggest that the five suppliers were behaving in line with Nash supply function competition, bidding close to their marginal costs or restraining quantities relative to the Nash level. The analysis of residual demand inverse elasticities suggests that the five thermal generators had an incentive to exercise unilateral market power that was not always fully exploited. A comparison of market-clearing prices, estimated marginal costs and marginal revenues finds that firm conduct was broadly consistent with Nash supply function competition or more competitive than Nash behavior in most of our sample.

Competitive Equilibrium in the Italian Wholesale Electricity Market

The market power analysis in electricity market is relevant for understanding the competitive development of the industry’s restructuring and the liberalization process. The paper analyzes the market power exercised by power generators in the Italian wholesale electricity market. Following the approach of Wolak (2003, 2009), the extent of market power is measured using the Lerner index computed as the inverse of arc elasticity of the residual demand faced by each Cournot competitors. Then, the market supply curves have been adjusted to entail market power effects and the new market resolutions were derived. The new equilibrium prices are the competitive ones and represent the market clearing price that would have been if the electricity market was competitive and the effects of unilateral market power were removed.

A Vision of the European Energy Future? The Impact of the German Response to the Fukushima Earthquake

The German response to the Fukushima nuclear power plant incident was possibly the most significant change of policy towards nuclear power outside Japan, leading to a sudden and very significant shift in the underlying power generation structure in Germany. This provides a very useful natural experiment on the impact of increasing proportions of renewable compared to conventional fuel inputs into power production, helping us to see how changed proportions in future as a result of policy moves in favour of renewables are likely to impact. We find through quasi-experimental exploration of a modified demand-supply framework that despite the swift, unpredicted change, the main impact was a significant increase in prices, partly caused by more frequent situations with unilateral market power. The price impact was also most significant in off-peak hours, leading to changed investment incentives. There were no appreciable quantity effects on the market, such as power outages, contrary to some views that the impacts would be significant. Furthermore, we find the sudden and unilateral phase-out decision by the German government has significantly affected electricity prices and thus competitiveness in neighbouring countries.

Market Power and Transmission Congestion in the Italian Electricity Market

Analysis of market power in electricity markets is relevant for understanding the competitive development of the industry's restructuring and liberalization process. Because the existing literature lacks adequate consideration of line transmission congestion, this paper sets forth a new approach to measuring market power in the Italian Power Exchange (IPEX) by explicitly taking into account transmission line congestion. We construct the residual demand curve to disentangle the measure of unilateral market power from congestion rent for the main Italian generators during the period of April 2004 to December 2007. In Italy, this was a period of stable transmission network structure. Following the approach of Wolak (2003, 2009), we measure the unilateral market power with the Lerner Index (LI) computed as the inverse of the residual demand elasticity. In conclusion, the correct modeling of the residual demand curve including transmission congestions allows us to compute the zonal LI and therefore more accurately measure the market power when congestion occurs. Our results show that various generators exercise market power in only some zones, which provides us with a deeper understanding of the IPEX and better support for designing appropriate market surveillance and competition regulation.

An Experimental Study of Complex-Offer Auctions from Wholesale Energy Markets

A Payment Cost Minimization auction has been proposed as an alternative to the Offer Cost Minimization auction for use in wholesale electric power markets with an intention to lower procurement cost of electricity. Efficiency concerns have been raised for this proposal while assuming that the true production costs would be revealed to the auctioneer in a competitive market. Using an experimental approach, the study compares the performance of these two complex-offer auctions, controlling for the level of unilateral market power. The analysis finds that neither auction results in allocations that correspond to the true cost revelation. Two auctions perform similarly in terms of procurement cost and efficiency. Surprisingly, consumer prices in a competitive environment approach the prices of an environment with market power. It appears that the expected institutional effects for procurement cost and efficiency are greatly dominated by the effects of anti-competitive behavior due to the offer complexity and a cyclical nature of market demand.

Market Power in Power Markets: The Filed-Rate Doctrine and Competition in Electricity

State and federal initiatives have opened the American electric power industry to competition over the past four decades. Although the process has not occurred uniformly across the country, wholesale electricity markets exist everywhere today. Independent power producers can construct generation facilities and sell their output to utilities and industrial customers through bilateral contracts. In many regions, centralized power markets now facilitate the sale of billions of dollars in electricity annually through auctions. Although market forces have replaced direct price regulation in electricity, antitrust enforcement has not expanded its role commensurately. A lack of competition has been a serious problem in many power markets and led to billions of dollars in wealth transfers from ratepayers to generators. The federal courts, however, have invoked the filed-rate doctrine to prohibit private antitrust suits against generators and other market participants accused of collusive behavior. They have held that federal and state regulation is adequate to maintain competitive markets and questioned their own ability to deter anticompetitive behavior, effectively immunizing power generators from antitrust damages liability. Congress or the Supreme Court should limit the application of the filed-rate doctrine in electricity markets and allow for the antitrust laws to be enforced against collusive conduct. Eliminating the filed-rate immunity, however, is not sufficient to create competitive power markets. Private treble-damages suits could help deter express collusion between competing generators. Yet the antitrust laws are comparatively powerless to remedy two important types of anticompetitive behavior seen in power markets. Antitrust jurisprudence in the United States does not proscribe the exercise of unilateral market power and creates high hurdles to finding liability for tacit collusion. Given the limitations of traditional private antitrust remedies, federal and state regulators must focus on creating competitive market structures. They can take three concrete steps toward this end: police generator consolidation more carefully, encourage expansion of the transmission grid, and expose more ratepayers to wholesale price signals. Applying these broader competition policy measures is necessary to redeem a restructuring project that has resulted in several episodes of serious market-power abuse and yielded uncertain benefits.