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Not So Fast

Proving market performance requires detailed analysis.

Fortnightly Magazine - January 2010

higher prices than a competitive outcome would produce. This is because a strategy can be used of withholding capacity to cause a higher marginal cost unit to be dispatched and set the price, even if all units were offered at their respective marginal costs. The mark-up estimation value would look insignificant, but unilateral market power was exercised nonetheless.

This leads to the second problem with relying on this approach to decide whether markets are competitive; it can’t detect strategic behavior suppliers might use to raise the price above a competitive level. Academic studies using simulations or experiments with students has suggested that even with a relatively large number of suppliers, suppliers can, over time with repeated iterations, learn what others are doing and adjust in ways to raise the price above a competitive level. This doesn’t require direct—and illegal—explicit collusion, but because of the nature of the market conditions ( i.e., repeated bidding, some knowledge of others’ actions in certain circumstances, etc.), suppliers can lean and tacitly collude—that is, without coordin- ated activity—even when they have no unilateral market power themselves. Market concentration measures and the way markup estimates are calculated simply can’t detect strategies that raise prices above competitive levels.

While PJM has made a considerable amount of price and demand data available to the public, PJM doesn’t release the data that would be required to conduct an analysis of strategic bidding behavior or whether that bidding has been successful and, if so, how much it has affected prices. FERC also has access to this data, but hasn’t and doesn’t conduct analysis in sufficient detail. These data also should be made available to the states to conduct their own analysis. While state commissions and others have tried to obtain this information, with the promise of not releasing the results in a form that may reveal the identity of individual suppliers, to the author’s knowledge these data never have been provided.

FERC—not PJM or any other RTO—bears the responsibility to require this information be released to the states. Once the data are released, it would be up to FERC and the states to ensure that independent analysis is conducted.

Better Late Than Never

Care needs to be given when considering the impact of fuel costs on electricity prices. Fuel costs and demand are correlated with electricity prices, but this correlation says nothing about the perfor- mance of wholesale electricity markets. The way to determine the market’s performance is through more detailed and independent analysis—something that isn’t available at this time. FERC can and should require the necessary data to be made available to the states and allow them to conduct their own independent analysis.

In many respects we need serious analysis now more than ever. Demand is down, fuel prices are lower, and electricity prices are lower too. It’s a good time to take a careful look and make a rational assessment, rather than waiting for the next run-up of fuel prices or whatever predicament the future holds in store.

Also, with the industry perhaps being required to make a