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Sheffrin - Empirical Evidence of Strategic Bidding in...

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Empirical Evidence of Strategic Bidding in California ISO Real Time Market March 21, 2001 Prepared by Anjali Sheffrin, Ph.D. Director, Department of Market Analysis California Independent System Operator
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2 Empirical Evidence of Strategic Bidding in California ISO Real-time Market (Summary of Results) This study builds on previous studies by the California Independent System Operator Corporation’s Department of Market Analysis (“DMA”) of indications that prices in the California electricity markets have persisted at levels indicating that significant market power is being exercised in the California wholesale energy markets. 1 This study examines bids by individual suppliers (both instate and importers) in the real-time imbalance energy market of the ISO in order to determine whether individual suppliers’ behaviors were responsible for raising prices above competitive levels. 2 Resolving that issue affirmatively, it then explains how suppliers successfully employed bidding strategies to insure high market clearing prices. The evidence described in this study thus provides a direct link between the observed pattern of prices and the bidding behavior of individual suppliers that produced those prices. Previously, regulators, including the FERC, have found strong evidence of the exercise of market power in the prices prevailing in the ISO and Power Exchange (PX) markets, but have been unable to identify evidence that any individual supplier in the California market exercised market power to create those prices. 3 This report reveals the linkage between individual suppliers’ bidding behavior and market prices by examining information available to DMA, including individual supplier bidding data in California markets, bilateral and Power Exchange schedules from generation units, unit specific heat-rates for generation levels, and scheduled outages. 1 See Comments of the ISO on November 1, 2000 Order, Attachment A, November 22, 2000. Additionally, several analyses have been filed at FERC showing consistent findings on the level of price cost markup in the California energy markets, including “Diagnosing Market Power in California’s Restructured Electricity Markets”, (Borenstein, Bushnell, and Wolak), August 2000 , MSC Report, September 6, 2000; DMA’s An Analysis of the June 2000 Price Spikes in the California ISO’s Energy and Ancillary Service Markets ; and Joskow/Kahn. "A Quantitative Analysis of Pricing Behavior in California’s Wholesale Electricity Market During Summer 2000." 2 This study reviewed bidding activities from 5 large in-state non-investor owned utility suppliers and 16 importers in the real time market of CA ISO for each hour between May and November of 2000. 3 Both the November 1, 2000 FERC proposed order on California power market and the accompanying staff report contained a finding that the ISO and PX electricity markets were not workably competitive. They did not, however, identify actions of individual suppliers exercising market power. San Diego Gas and Electric Company, et al. , 93 FERC 61, 121 (2000); Staff
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