Experimental Tests of Deregulated Markets for Electric Power: Market Power and Self Commitment

The deregulation of the electricity industry in the U.S.A. has been implemented in a relatively decentralized way. Individual states or groups of states within a region have developed different approaches to deregulation. Consequently, the structures of the new markets for electricity are very different from one another. For example, eastern markets have favored a more centralized control compared to the Californian market. Nevertheless, major problems in the performance of these markets have arisen, and there is no obvious winner in the design of a market which delivers reliable power to customers in an economically efficient way. Prices, in particular, have been higher and more volatile than expected. Supplying electricity to customers involves complex interactions among different generators because they share a common transmission network. The characteristics of this network are governed by the laws of physics more than market forces. Many of the traditional assumptions that underlie the performance of a competitive market are violated. For example, different sources of generation are not perfect substitutes for supplying load at a particular location. Competitive prices may vary spatially much more than they do in a typical market with access to a variety of modes of transportation, such as the market for heating oil. In some circumstances, one generator may, in effect, be a perfect monopolist because it is the only generator able to keep voltages within the ranges required to meet reliability standards for one section of the network. However, this situation may only exist for a short time, and at other times, there is no potential for the generator to exploit market power. Under regulation, system operators had access to a wide variety of information about the operating characteristics and costs of individual power plants. Give this information, it was possible to determine optimum dispatch schedules for individual generators that minimize total operating costs subject to meeting reliability constraints. Even with all of this information, deriving optimum dispatch schedules is a very difficult computational problem for a large network, and in many cases, simplifying assumptions have been adopted to make the computations tractable. In deregulated markets, the operating characteristics of individual power plants are not public information, and the information needed by a system operator must be provided by generators. However, there is no obligation in a competitive market to submit accurate information. An offer to sell real energy may be substantially higher than the true marginal cost of generation. …