Opaque markets inflate power prices.
Robert McCullough (Robert@mresearch.com) is managing partner of McCullough Research in Portland, Ore.
In the administered North American electricity markets, a high level of secrecy concerning bids, bidders, and computations is currently the norm. The decision to maintain such secrecy has little discussion and the impacts of secrecy on prices and efficiency have never been comprehensively studied. One of the very few surveys of transparency in this area, a CRA report prepared in 2007, concludes that “[f]ew, if any, of the markets had evaluated information disclosure explicitly for its effects on competition or market efficiency.”1 In practice, the issue of transparency has been left to Adam Smith’s “invisible hands.” Recent statistical analysis from the Texas independent system operator indicates that the benefits from additional transparency may be considerable.
In 1776, in his book, The Wealth of Nations, Adam Smith made an offhand reference to “an invisible hand.” Since few of us have ever read the book in its entirety, it’s useful to observe by his words that Adam Smith wasn’t nearly as naïve as legislators and federal regulators who have done away with checks and balances over the past 16 years with such catastrophic consequences: