Severe upward pressure on electric rates after a decade of stability has regulators, legislators, utility executives, consumer advocates, and myriad other stakeholders searching for solutions....
Fingerprinting the Invisible Hands
Opaque markets inflate power prices.
options provide the flexibility requested by commenters…
We assume the data to be released would consist not only of physical offers and bids but demand and virtual offer and bids as well. However, if RTOs and ISOs object to such inclusion, they may address it in their compliance filings. Likewise, if they desire to release additional data such as system lambda, they may propose it in their filings…
We adopt the NOPR proposal to retain the masking of identities. The objection that sophisticated market participants may be able to infer identities of those submitting offers and bids does not resolve confidentiality concerns; if anything, it argues for more protection, rather than less. We decline to establish a time period for the eventual unmasking of identities, but invite RTOs and ISOs to propose a period when such unmasking might be permitted, if they believe it to be desirable. 7
Given the lack of debate concerning transparency within RTOs, it’s not surprising that the argument for keeping bids secret generally involves the theory that public bidding will aid conspiracies to set pricing. The flaw in this argument is self-evident. Conspirators are free to provide their information to each other. They aren’t likely to avoid a price-fixing scheme simply because the RTOs do not supply the data. Schemes like Project Stanley in Alberta didn’t rely upon the ISO’s Web site; instead the conspirators coordinated their activities using the telephone.
Two years ago, ERCOT changed its transparency rules in response to a settlement at the Texas PUC. This is the first opportunity to observe whether changing transparency rules actually affects bidding. While the obvious common sense answer is so clear that it almost seems superfluous to address it, the fact is that market participants generally have argued against reducing the level of secrecy on the basis that they, themselves, could take advantage of the additional transparency to raise prices. Luckily, the facts back common sense rather than legal rhetoric.
Efficiency and Transparency
In an efficient market, prices converge to marginal cost since bids higher than marginal cost aren’t able to change the equilibrium price. Bids higher than marginal cost will reduce the probability of sale, however, so any inefficient bids will reduce the bidders’ potential profits. The real world is short on efficient, competitive wholesale electricity markets. Real world markets often display a degree of concentration that makes perfect competition difficult to achieve. In Texas, for example, one market participant dominates the Dallas zone. This participant, all things being equal, will receive prices above marginal cost, since the marginal revenue line crosses the marginal cost curve at a smaller quantity than that observed in perfect competition (see Figure 1) .
The only check on the ability of market participants to set prices higher than those that would take place in perfect competition is the presence of other competitors. In a world in which bid data never was released, market participants would be able to judge their degree of market power only by experimentation. While the demand curve and the marginal revenue curve reflect the response of