How to Award Pro-Competitive Forward Contracts The case of electricity auctions

Several regulatory authorities worldwide have imposed forward contract obligations on electricity producers as a way to mitigate their market power. In order to understand the e¤ects of such contractual obligations, we introduce forward contracting in a uniform-price auction model with complete information and discrete bids. The model predicts that forward contracts are generally pro-competitive, but might have anti-competitive e¤ects whenever awarded to …rms with little but yet some market power. Furthermore, an increase in contract volume may not always be pro-competitive. Our analysis suggests that forward contracts should be awarded so as to (virtually) reduce asymmetries across …rms. Similar conclusions apply to the e¤ects of other vertical commitments, such as vertical integration. Keywords: Forward contracts, multi-unit auctions, discrete bids, market power, electricity markets, antitrust remedies, simulations. JEL Classi…cation Numbers: L13, L94, G13. Department of Economics. Universidad Carlos III de Madrid. Calle Madrid 126. 28903 Getafe, Madrid. Spain. Emails: [email protected]; [email protected]. We are grateful to Antonio Cabrales, Álvaro Cartea, Jim Bushnell, Alberto de Frutos, Giulio Federico, José Luis Ferreira, Mónica Gandol…, Ángel Hernando, Xavier Jarque, Juan Toro, three anonymous referees, and seminar audiences at the UCEI (Berkeley), Universidad de Málaga, Universidad Carlos III de Madrid, IESE (Barcelona), EARIE Conference (Toulouse), and ASSET Meeting (Florence) for valuable insights. Pablo Angulo provided excellent research assistance. We also thank Fundación Ramón Areces for …nancial support.