Seeing Market Power What to Do

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• Seeing Market Power! What to Do?

Richard ONeill richard.oneill_at_ferc.fed.us Chief
Economic Advisor Federal Energy Regulation
Commission Mass. Electric Restructuring
Roundtable Newton, MA May 18, 2001
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Would you be a Pythagorean, an Aristotelian or
a Copernican?
Mr. Shermans wayback machine to 1600
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Are you a Pythagorean, an Aristotelian or a
Copernican?

• Pythagoras(500BC) secret society (geometry cult)
  
• Aristotle(300 BC) postulates and deductive logic
• Immobile earth is the center of the universe
• Ptolemy fit the data into 2-sphere model
• no voids (fill with ether) or swinging stones
• natural position of earth and fire
• Copernicus(1543) earth revolves around the sun
• apologetic preface to the Pope eventually the
  Index
• Galileos empirical evidence earns the
  Inquisition
• Aristotelians are cardinals, bishops and priests
• Copernicans are in jail or the Inquisition
• being right can get you into trouble

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In Western science we dont always get it right
the first time

• History books dont always document the mistakes
• Paradigm shifts we have no-ed and loved
• 2000 years of Aristotelian logic
• geocentrism Aristotle, Ptolemy, Church,
  Copernicus
• Galileos telescope provides damaging evidence
• phlogiston/oxygen Priestley, Lavoisier
• ether Aristotle, Maxwell
• atom Democratius, Aristotle, Thomson (plum
  pudding), Bohr, Hiesenberg, Pauli(spin)

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Changing the weight of the universe

• Old claim 100 periodic table stuff
• Recent gain of 2000
• Observing what happened 14 billion years ago
• Scientists new claim
• 5 old periodic table stuff
• 30 dark matter
• 65 dark energy
• Quantum theory
• Energy/matter duality E mc2
• Cosmic free trade zone?

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Market Power Mitigation Options

• Do nothing let antitrust folks take care of it
• Return to cost-of-service regulation and
  curtailments. Wrong direction!
• Price caps region-wide or generator specific
• Require long-term contracts
• Without price caps how?
• With price caps number please
• Require creditworthiness demand-side bidding
• Require marginal opportunity cost bidding
• hydrants must be checked one hour
  before all fires

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The market power price axis
00
--perfect collusion
(p-mc)/p 1/e
price
--Nash equilibrium
Cournot(1838) (p-amc)/p HHI/e
--market clearing price with marginal bidding
Bertrand (1883) p max mci
0 --
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Slick but Silly arguments

• need high prices to recover fixed costs is a cost
  of service argument
• you may have paid to much
• entitlement to bad market designs
• in competitive markets the market values your
  assets. Its not what you paid!
• one part bids are simpler, but allow for
  infeasible dispatch

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2000 western market fundamentals
High gas prices

• unlucky weather in the west
• Low hydro in the west
• hot summer
• early cold winter
• High gas prices nationwide
• Pipeline capacity problems in Cal
• NOx prices increase in Cal
• HHIs
• california only lt .18
• with imports lt .13
• west wide ltlt .10

Low hydro
hot summer
early cold winter
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FERC order on market power mitigation

• Outages coordinated with ISO
• Must offer all available capacity into real-time
  market at marginal costs
• Standing formula for marginal costs
• Market clearing price with ex-ante price
  mitigation
• LSEs must be creditworthy and submit curtailment
  prices demand curve
• Restricted to phase 1 and California

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RTO/ISOs role

• Market operator not participant
• Market participation only in emergencies
• Creditworthiness no vertical demand curves
• Demand side bids/ICAP is LSE responsibility
• no bias between off-RTO and RTO markets
• Should off-RTO markets be subsidized? No
• Markets are is still evolving

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A market design that works

• Pre-day-ahead markets
• for transmission rights CRT/TCC/TRCs/FGs
• capacity markets (generation options or demand
  schedules)
• market power mitigation via options contracts
• day-ahead market for reliability
• simultaneous nodal market-clearing auctions for
  energy, ancillary services and congestion
• allow marginal(going forward) cost bidding
• higher of market or bid cost recovery
• allow self scheduling
• real time for adjustments
• All markets are nodal-based LMP

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The importance of measurement and good information

• If you can name it you can sell it!
• If you cant measure it, you can argue about it
• Galileo and Copernicus saw the earth move
• the church didnt Galileo suffered
• with new instruments we now see with
  gamma(short), x, ultraviolet, visible, infrared
  and radio(long) rays
• Real-time meters
• market prices and quantities

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You dont always get it right the first time. Now
you have experience