Managing unilateral market power in electricity

This paper first describes those features of the electricity supply industry that make a prospective market monitoring process essential to a well-functioning wholesale market. Some of these features are shared with the securities industry, although the technology of electricity production and delivery make a reliable transmission network a necessary condition for an efficient wholesale market. These features of the electricity supply industry also make antitrust or competition law alone an inadequate foundation for an electricity market monitoring process. This paper provides examples of both the successes and failures of market monitoring from several international markets. More than 10 years of experience with the electricity industry restructuring process has shown that market failures are more likely and substantially more harmful to consumers than other market failures because of how electricity is produced and delivered and the crucial role it plays in the modern economy. Wholesale market meltdowns of varying magnitudes and durations have occurred in electricity markets around the world, and many of them could have been prevented if a prospective market monitoring process backed by the prevailing regulatory authority had been in place at the start of the market.Access to Markets,Markets and Market Access,Environmental Economics&Policies,Energy Markets,Economic Theory&Research

Unilateral Market Power in Wholesale Electricity Markets

Elektrizitätswirtschaft, Großhandel, Marktführer, Regulierung, Electric utility industry, Wholesale trade, Market leader, Regulation

Lessons from international experience with electricity market monitoring

The author first describes those features of the electricity supply industry that make a prospective market monitoring process essential to a well-functioning wholesale market. Some of these features are shared with the securities industry, although the technology of electricity production and delivery make a reliable transmission network a necessary condition for an efficient wholesale market. These features of the electricity supply industry also make antitrust or competition law alone an inadequate foundation for an electricity market monitoring process. The author provides examples of both the successes and failures of market monitoring from several international markets. More than 10 years of experience with the electricity industry restructuring process has shown that market failures are more likely and substantially more harmful to consumers than other market failures because of how electricity is produced and delivered and the crucial role it plays in the modern economy. Wholesale market meltdowns of varying magnitudes and durations have occurred in electricity markets around the world, and many of them could have been prevented if a prospective market monitoring process backed by the prevailing regulatory authority had been in place at the start of the market.Access to Markets,Markets and Market Access,Environmental Economics&Policies,ClimateChange,Health Economics&Finance

Diagnosing the California Electricity Crisis

Provides a diagnosis of the causes of the California electricity crisis, and the impact of response to the crisis by state and federal regulators. Part of a series of research reports that examines energy issues facing California

The Impact of Market Rules and Market Structure on the Price Determination Process in the England and Wales Electricity Market

This paper argues that the market rules governing the operation of the England and Wales electricity market in combination with the structure of this market presents the two major generators National Power and PowerGen with opportunities to earn revenues substantially in excess of their costs of production for short periods of time. Generators competing to serve this market have two strategic weapons at their disposal: (1) the price bid for each generation set and (2) the capacity of each generation set made available to supply the market each half-hour period during the day. We argue that because of the rules governing the price determination process in this market, by the strategic use of capacity availability declarations, when conditions exogenous to the behavior of the two major generators favor it, these two generators are able to obtain prices for their output substantially in excess of their marginal costs of generation. The paper establishes these points in the following manner. First, we provide a description of the market structure and rules governing the operation of the England and Wales electricity market, emphasizing those aspects that are important to the success of the strategy we believe the two generators use to exercise market power. We then summarize the time series properties of the price of electricity emerging from this market structure and price-setting process. By analyzing four fiscal years of actual market prices, quantities and generator bids into the market, we provide various pieces of evidence in favor of the strategic use of the market rules by the two major participants. The paper closes with a discussion of the lessons that the England and Wales experience can provide for the design of competitive power markets in the US, particularly California, and other countries.

How Do Firms Exercise Unilateral Market Power? Evidence from a Bid-Based Wholesale Electricity Market

This paper uses the framework in Wolak (2003a,b and 2007) and data on half-hourly offer curves and market-clearing prices and quantities from the New Zealand wholesale electricity market over the period January 1, 2001 to June 30, 2007 to characterize how the four large suppliers in this imperfectly competitive industry exercise market power. To accomplish this we introduce half-hourly measures of the firm-level ability and incentive of an individual supplier to exercise unilateral market power that are derived from a simplified model of expected profit-maximizing offer behaviour in a multi-unit auction market. We then show that half-hourly market-clearing prices are highly correlated with the half-hourly values of the firm-level and firm-average measures of both the ability and incentive of the four large suppliers in New Zealand to exercise market power. We then present evidence consistent with the view that this increasing relationship between the ability or incentive of individual suppliers to exercise market power and higher market-clearing prices is caused by the four large suppliers submitting higher offer prices when they have a greater ability or incentive to exercise unilateral market power. We show that after controlling for changes in input fossil fuel prices and other factors that impact the opportunity cost of producing electricity during that half hour, each of the four suppliers submits a higher offer price into the wholesale market when it has a greater ability or incentive to exercise unilateral market power. To strengthen the case that this increasing relationship between market prices and the ability and incentive of each of the suppliers to exercise unilateral market power is actually caused by the four large suppliers exercising unilateral market power by changing their offer prices in response to their ability and incentive to exercise market power, we also perform a test of the implications of the null hypothesis that the four large suppliers behave as if they had no ability to exercise market power. We find strong evidence against this null hypothesis and instead find that these hypothesis testing results are consistent with the perspective that these suppliers are exercising all available unilateral market power.Classification-JEL:Unilateral Market power analysis,New Zealand,Electricity Market,multi-unit auction

Measuring Industry Specific Protection: Antidumping in the United States

This paper provides estimates of the trade impacts of U.S. antidumping law and the determinants of suit filing activity from 1980-1985. We study three possible channels through which the threat or mere possibility of antidumping duties can restrict trade which we believe, when combined with the direct effects of duties, capture most of the trade effects of antidumping law. We refer to these three non- duty effects as the investigation effect, the suspension effect, and the withdrawal effect. Investigation effects occur when an antidumping investigation takes place; suspension effects occur under so-called 'suspension agreements'; and withdrawal effects occur after a petition is simply withdrawn without a final determination. We find substantial trade restrictions associated with the first two effects, but not with the third. Finally, we find evidence suggesting that some firms initiate antidumping procedures for the trade restricting investigation effects alone.