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Fingerprinting the Invisible Hands

Opaque markets inflate power prices.

Fortnightly Magazine - July 2009

in the supply environment that would induce additional risk or other adverse shifts in the cost basis. An example of this is a bid that appears to change only in response to increased demand or reduced reserve margins, particularly if the timing of the bid is related to public announcements of system conditions or to timing of outages in a participant‘s portfolio.

Should public utility market participants engage in any of the prohibited behavior discussed above, their rates will be subject to increased scrutiny by the commission and potential refunds. This could result in further conditions or restrictions on their market-based rate authority, including prospective revocation of market-based rate authority. 13

In Texas, hockey stick bids are discouraged, but there’s no outright prohibition. Logically, Ms. Smith’s WSJ story should have had little impact on the market. To the degree it did, it should have had approximately the same level of impact as the “shame cap.” Yet the regression results indicate a very different impact. Using a dummy variable to measure the impact on high bids on and after July 17, 2008 indicates that Ms. Smith’s article caused a $71/MWh reduction on high bids in ERCOT (see Figure 3C) .

Adam Smith believed that competition, not regulation, is the best defense against market problems. The analysis above illustrates that this is the case in ERCOT and, almost certainly, in other administered wholesale electricity markets where high levels of secrecy are the norm. In addition, the analysis proves that publishing a story in one of the nation’s most respected business newspapers has a significant impact—but only if data from the market can be accessed soon enough for the media to use it in their stories.



1. Analysis of Data Release Practices in Centrally-Dispatched Electricity Markets , CRA, July 25, 2007, p. iii.

2. The Wealth of Nations , Book IV, Chapter 11, pp. 484-485.

3. Ibid., Book 1, Chapter 7, pp. 67-68.

4. Adam Smith discusses trade organizations that restrict competition by the enforcement of regulations in a variety of contexts. For example, in Book 1, Chapter 10, Part 1, he says, “The majority of a corporation can enact a bye-law with proper penalties, which will limit the competition more effectually and more durably than any voluntary combination whatever. The pretence that corporations are necessary for the better government of the trade, is without any foundation. The real and effectual discipline which is exercised over workmen is not that of his corporation, but that of his customers.”

5. At PJM, bids from different markets are reported in a muddled format that makes it impossible to ascertain which bids have been submitted to which market. MISO reports only bids that are actually taken. In most administered markets, bids are revealed after a substantial delay and without revealing the identities of the bidders.

6. A FERC investigation in early 2002 revealed internal Enron memos referring to numerous trading schemes—including “Death Star,” “Get Shorty,” etc.—that traders used to manipulate California energy markets.

7. Wholesale Competition in Regions with Organized Electric Markets , Oct.