Access to competitor data raises prices in wholesale electricity markets

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The American Public Power Association released the results of a study that examines the effect of frequent changes in control of electric generating units on the competitiveness of wholesale electricity markets.

The study focused on the New York Independent System Operator and found that parties offering to sell electricity often changed control of generating units. This practice provides market participants the opportunity to learn their competitors’ costs, greatly reducing the degree of competition in the market.

Knowledge of the costs of rival bidders’ generation units enables a bidder to offer higher prices, an outcome confirmed by the detailed statistical analysis performed in the study. Because of shortcomings in the data available from other Regional Transmission Organizations, the extent of this behavior in other RTOs could not be ascertained.

The study, titled “The Effect of Cross-Control on Bidding Behavior and Prices in Electricity Auction Markets” was written by John Kwoka, Finnegan Professor of Economics at Northeastern University. The study confirms that it is the generators themselves that have the greatest access to data, and are using such data to increase prices at the expense of consumers.

Also demonstrated in the study is the difficulty of discerning all of the potential RTO market rule provisions that may be hindering competition. APPA has long called for greater data transparency in the wholesale electricity markets operated by RTOs, specifically the public release of offers to sell power, costs of operating units and identities of generating units on the next operating day. Such data transparency would allow for needed oversight and accountability of the wholesale electricity markets.

The study is part of APPA’s Electric Market Reform Initiative, created in 2006 to address the pervasive problems in the nation’s wholesale electricity markets, particularly the Federal Energy Regulatory Commission-approved RTO-run markets.

Based in Washington, D.C., APPA is the national service organization for the nation’s more than 2,000 community- and state-owned not-for-profit electric utilities serving 45 million customers.

Executive Summary

Auction markets for electricity generation have been designed to operate like competitive markets and thereby bring the benefits of competition to consumers and producers alike. In practice, however, these markets have often deviated from that ideal.

This report investigates one such deviation, stemming from the ability of a bidder in an electricity auction market to acquire information about the costs of rival bidders’ generation units. Such cost information reduces the uncertainty associated with rivals’ bids, in particular, alleviating the threat that rivals might bid in their output at a lower price. The effect is to allow the bidder with such information to raise its own bid price and shift market price upwards.

This report first presents the economic theory of such bidding markets, focusing on the role of information about rivals’ costs. This theory establishes the proposition that information about rivals’ costs can elevate bids and thus the final market price.

The report goes on to examine the New York Independent System Operator auction market for electricity for evidence of such an effect. Using a variety of statistical techniques, it finds an extensive amount of disclosure of information about rivals’ costs, and a significant upward effect of that disclosure on bidding and prices.

The mechanism by which a bidder gains information about rivals’ costs in the NYISO market is simple. Bidders need not be the owners of generation units themselves, and if not, they can have supply contracts with any number of actual generation owners whose output they bid into the auction.

Crucially, bidders can alter their portfolio of such contracts as often as they wish. As a result any single bidder will have nearly-current information about other generation units with which it had recent (but expired) contracts. This contractual control conveys information about rivals — notably, their costs — that is not available in truly competitive markets and permits bidding into the auction market at levels higher than otherwise would be the case.

The practical importance of this effect is established by analysis of data from operation of the NYISO auction market for electricity in 2006-2008. The report finds that during this time period on average any single bidder controlled about twelve different generators in the 6-month period preceding any bid that it made.

An examination of bidding practices finds that the level of bid submitted by any one bidder increases with the number of contracts that the bidder previously held, that is, the number of rival generators whose unit cost data were revealed to it by recent cross-control. For the average bidder with twelve such recent contracts, that bidder’s bid price rises by 7 percent relative to a bidder with only a single generating unit under its control.

This report examines all marginal bidders — that is, those that set the market-clearing price in each hour — as well as other bidders with prices near the marginal price and who therefore were most likely affected by these incentives to raise price. All of these bidders raised their prices based on their degree of prior cross-control, resulting in higher market-clearing price in the auction market.

This effect is further corroborated by consideration of those bidders whose number of contracts varied most widely over the time period studied, to see if their bidding behavior over time tracks the degree of cost information that they acquire through these contracts. Again, the effect on bid price and market-clearing price is confirmed.

The report concludes that permissive market rules on cross-control have significant anticompetitive effects in the New York auction market for electricity. Analysis of this possible effect in other Regional Transmission Organizations (RTOs) and ISOs is hampered by the practice of nondisclosure of information at the level of individual bidders.

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The Clarion Energy Content Team is made up of editors from various publications, including POWERGRID International, Power Engineering, Renewable Energy World, Hydro Review, Smart Energy International, and Power Engineering International. Contact the content lead for this publication at Jennifer.Runyon@ClarionEvents.com.

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