EBF 483
Introduction to Electricity Markets

11.2 Monitoring and Mitigation of Market Power in Electricity Markets

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We have already discussed how electricity markets are different from many other markets for energy commodities in the ease with which firms could exercise market power if allowed to do so. This raises another thorny issue for electricity markets that just isn't faced in other commodity markets - if exercising market power is so easy, then shouldn't we assume that all firms have the ability to exercise market power at any time?

This is a difficult issue because in most areas of anti-trust and competitiveness law, having structural market power is not illegal, but exercising that market power may be illegal. Google, for example, controls the vast majority of web search traffic, but we don't force Google to break up or shut down just because it offers a product that consumers find more useful than competitors' products. In the eyes of competitiveness law, Google is in the position that it is in by virtue of being better than its competitors. So why punish efficiency unless Google starts doing blatantly anti-competitive things?

The problem in electricity markets is that firms may possess market power for all sorts of reasons, not just because they are more efficient than their competitors. Consider Generator 2 in our previous example. It has market power because of its position in the transmission grid. It doesn't matter whether Generator 2 is large or small compared to Generator 1 (remember that Generator 2 actually produces less electricity than Generator 1), or whether Generator 2 is more efficient than Generator 1. Generator 2 has market power entirely because of the configuration of the transmission grid.

Because it does not take a tremendous amount of cleverness to manipulate an electricity market, the markets run by RTOs are subject to constant scrutiny by outside entities known as Independent Market Monitors (IMM). As of this writing, there are two primary firms serving as the Independent Market Monitor for US electricity markets. A firm called Monitoring Analytics (monitoringanalytics.com) serves the IMM function for PJM, while a firm called Potomac Economics (potomaceconomics.com) serves the IMM function for the remainder of US RTOs and the ERCOT market in Texas.

The IMM screens all supply offers submitted to the RTO's energy, capacity, and ancillary services markets. For each of these offers, the IMM compares the offer to information on the power plant's marginal cost, in effect calculating a Lerner Index for that power plant. If the IMM perceives that an offer might be manipulative and intended to raise price, then the IMM can either trigger Automatic Mitigation Procedures that will cut the offer down to marginal cost, or it can refer the suspect supply offer to the RTO or FERC for review and possible mitigation.

The companies that serve as IMM also put out a tremendous amount of analysis on the markets that they monitor. The most comprehensive of these are known as the State of the Market Reports, and are issued quarterly and annually. Below are links to these reports for US RTOs: