Strategic Reneging in Sequential Imperfect Markets

Benatia, David and Billette de Villemeur, Etienne (2019): Strategic Reneging in Sequential Imperfect Markets.

Abstract

This paper investigates the incentives to manipulate markets by strategically reneging on forward commitments. We first study the behaviour of a dominant firm in a two-period model with demand uncertainty. We then use the model’s predictions and a machine learning approach to investigate multiple occurrences of reneging on long-term commitments in Alberta’s electricity market in 2010-2011. We find that a supplier significantly increased its revenues by strategically reneging on its capacity availability obligations, causing Alberta’s annual electricity procurement costs to increase by as much as $600 million (+17%).

• Item Type: MPRA Paper
• Language: English
• Keywords: Strategic Outages; Market Manipulation; Functional Data Analysis,; Wind Curtailment
• Subjects: D - Microeconomics > D4 - Market Structure, Pricing, and Design > D43 - Oligopoly and Other Forms of Market Imperfection; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L12 - Monopoly ; Monopolization Strategies; L - Industrial Organization > L5 - Regulation and Industrial Policy > L51 - Economics of Regulation; L - Industrial Organization > L9 - Industry Studies: Transportation and Utilities > L94 - Electric Utilities

References

Allaz, Blaise, and Jean-Luc Vila. 1993. “Cournot Competition, Forward Markets and Efficiency.” Journal of Economic Theory, 59(1): 1–16.

AUC. 2012. “Application for Approval of a Settlement Agreement between the Market Surveillance Administrator and TransAlta Energy Marketing Corp, Decision 2012-182, July 3, 2012.” Alberta Utilities Commission.

AUC. 2015. “Market Surveillance Administrator Allegations against TransAlta Corporation et al., Mr. Nathan Kaiser and Mr. Scott Con-nelly, Phase 1, Decision 3110-D01-2015, July 27, 2015.” Alberta Utilities Commission.

Ayres, Matt. 2014. “Assessment of Price Impact. Comparison of Actual and Counterfactual Timing of Outages between November 2010 and February 2011.” AUC Proceedings 3110 - Appendix 7.

Benatia, David. 2018a. “Essays in Econometrics and Energy markets.” PhD Thesis, University of Montreal.

Benatia, David. 2018b. “Functional Econometrics of Multi-Unit Auctions:an Application to the New York Electricity Market.” Working Paper.

Benatia, David. 2022. “Ring the alarm! Electricity markets, renewables, and the pandemic.” Energy Economics, 106: 105755.

Benatia, David, Marine Carrasco, and Jean-Pierre Florens. 2017. “Functional Linear Regression with Functional Response.” Journal of Econometrics, 201(2): 269–291.

Bergler, Julian, Sven Heim, and Kai Hüschelrath. 2017. “Strategic Capacity Withholding through Failures in the German-Austrian Electricity Market.” Energy Policy, 102: 210–221.

Bernhardt, Dan, and David Scoones. 1994. “A Note on Sequential Auctions.” American Economic Review, 84(3): 653–657.

Billette de Villemeur, Etienne, and Annalisa Vinella. 2011. “Long-term contracting in hydro-thermal electricity generation: Welfare andenvironmental impact.” Utilities Policy, 19(1): 20–32.

Birge, John R., Ali Horta ̧csu, Ignacia Mercadal, and J. Michael Pavlin. 2018. “Limits to Arbitrage in Electricity Markets: A Case Study of MISO.” Energy Economics, 75: 518–533.

Borenstein, Severin, James B. Bushnell, and Frank A. Wolak.2002. “Measuring Market Inefficiencies in California’s Restructured Wholesale Electricity Market.” American Economic Review, 1376–1405.

Brown, David P, and Andrew Eckert. 2021. “Analyzing firm behavior in restructured electricity markets: Empirical challenges with a residual demand analysis.” International Journal of Industrial Organization, 74: 102676.

Brown, David P., and Derek E.H. Olmstead. 2017. “Measuring Market Power and the Efficiency of Alberta’s Restructured Electricity Market: An Energy-only Market Design.” Canadian Journal of Eco-nomics/Revue Canadienne d’ ́Economique, 50(3): 838–870.

Brown, David P., Andrew Eckert, and James Lin. 2018. “Information and Transparency in Wholesale Electricity Markets: Evidence from Alberta.” Journal of Regulatory Economics, 54(3): 292–330.

Burlig, Fiona, Christopher Knittel, David Rapson, Mar Reguant, and Catherine Wolfram. 2020. “Machine learning from schools about energy efficiency.” Journal of the Association of Environmental and Resource Economists, 7(6): 1181–1217.

Bushnell, James B., Erin T. Mansur, and Celeste Saravia. 2008. “Vertical Arrangements, Market Structure, and Competition: An Analysis of Restructured US Electricity Markets.” American Economic Review,98(1): 237–66.

Carlton, Dennis W., and Ken Heyer. 2008. “Appropriate Antitrust Policy towards Single-Firm Conduct.” Economic Analysis Group Discussion Paper No. EAG, 08–2.

Carrasco, Marine, Jean-Pierre Florens, and Eric Renault. 2014. “Asymptotic Normal Inference in Linear Inverse Problems.” Handbook of Applied Nonparametric and Semiparametric Econometrics and Statistics,73(74): 140.

Church, Jeffrey. 2014. “Church Economic Consultants Ltd. The Competitive Effects of TransAlta’s Timing of Discretionary Outages.” AUC Proceedings 3110 - Appendix 4.

Coase, Ronald H.1972. “Durability and Monopoly.”The Journal of Lawand Economics, 15(1): 143–149.

Dechenaux, Emmanuel, and Dan Kovenock. 2007. Tacit collusion and capacity withholding in repeated uniform price auctions." The RAND Journal of Economics, 38(4): 1044-1069.

de Frutos, Marıa- Angeles, and Natalia Fabra. 2012. “How to Allocate Forward Contracts: The Case of Electricity Markets.” European Economic Review, 56(3): 451–469.

Eisenhart, Stephen. 2014. “VATICS Associates, North American Practices, Management of Discretionary Outages for Coal-Fired Electricity Generating Facilities in North America.” AUC Proceedings 3110 - Appendix 3.

EUC. 2018. “COMMISSION DECISION of 24.5.2018 relating to a proceeding under Article 102 of the Treaty on the Functioning of the European Union (TFEU) and Article 54 of the EEA Agreement Case AT.39816 – Upstream Gas Supplies in Central and Eastern Europe. Date:24/05/2018.” European Union Commission. Antitrust Procedure. Council Regulation (EC) 1/2003.

Falk, Jonathan, and Ramsey Shehadeh. 2014. “An Economic Assessment of the Competitive Effects of the Timing of TransAlta’s Forced Outages.” NERA Economic Consulting.

FERC. 2012. “Constellation Energy Commodities Group, Inc., 138 FERC ¶61,168. March 9, 2012.”

Fogelberg, Sara, and Ewa Lazarczyk. 2019. “Strategic Withholding through Production Failures.” The Energy Journal, 40(5).

Frayer, Julia. 2014. “Independent Review & Analysis of Dr. Ayres Report.” Olser, Hoskin & Harcourt LLP.

Graf, Christoph, Federico Quaglia, and Frank A. Wolak. 2020. “(Machine) learning from the COVID-19 lockdown about electricity market performance with a large share of renewables.” Journal of Environmental Economics and Management, 102398.

Green, Edward J., and Robert H. Porter. 1984. “Noncooperative Collusion under Imperfect Price Information.” Econometrica, 87–100.

Green, Richard, and Chloé Le Coq. 2010. “The Length of Contracts and Collusion.” International Journal of Industrial Organization, 28(1): 21–29.

Heath, Doug. 2014. “Renoir Consulting Inc. Expert Report of Mr. Doug Heath on Discretionary Outages.” AUC Proceedings 3110 - Appendix 2.

Hewitt, John R, and James B Carlson. 2019. Securities practice and electronic technology. Law Journal Press.

Holmberg, Pär, and Frank A Wolak. 2018. Comparing auction designs where suppliers have uncertain costs and uncertain pivotal status." The RAND Journal of Economics, 49(4): 995-1027.

Hortaçsu, Ali, and Steven L. Puller. 2008. “Understanding Strategic Bidding in Multi-unit Auctions: a Case Study of the Texas Electricity Spot Market.” The RAND Journal of Economics, 39(1): 86–114.

Horta¸csu, Ali, Fernando Luco, Steven L Puller, and Dongni Zhu. 2019. “Does strategic ability affect efficiency? Evidence from electricity markets.” American Economic Review, 109(12): 4302–42.

Hyndman, Rob J. 1996. “Computing and Graphing Highest Density Regions.” The American Statistician, 50(2): 120–126.

Imkeller, Peter. 2003. “Malliavin’s Calculus in Insider Models: Additional Utility and Free Lunches.” Mathematical Finance, 13: 153–169.

Ito, Koichiro, and Mar Reguant. 2016. “Sequential Markets, MarketPower, and Arbitrage.” American Economic Review, 106(7): 1921–57.

Kim, Tae-Woo, Yenjae Chang, Dae-Wook Kim, and Man-Keun Kim. 2020. “Preventive Maintenance and Forced Outages in Power Plants in Korea.” Energies, 13(14): 3571.

Ledgerwood, Shaun D., and Paul R. Carpenter. 2012. “A Frameworkfor the Analysis of Market Manipulation.” Review of Law & Economics,8(1): 253–295.

Lo Prete, Chiara, William W. Hogan, Bingyuan Liu, and JiaWang. 2019. “Cross-product Manipulation in Electricity Markets, Microstructure Models and Asymmetric Information.” The Energy Journal,40(5).

Markham, Jerry W. 1991. “Manipulation of commodity futures prices-the unprosecutable crime.” Yale J. on Reg., 8: 281.

Marks, Levi, Charles F Mason, Kristina Mohlin, and Matthew Zaragoza-Watkins. 2017. “Vertical market power in interconnected natural gas and electricity markets.” CESifo Working Paper Series.

McAfee, R. Preston, and Daniel Vincent. 1993. “The Declining Price Anomaly.” Journal of Economic Theory, 60(1): 191–212.

MSA.2012. “Market Share Offer Control 2012, June 11, 2012.” Market Surveillance Administrator.

MSA. 2014a. “Capital Power Will Say Statement.” AUC Proceedings 3110 - Appendix 5.

MSA. 2014b. “ENMAX Will Say Statement.” AUC Proceedings 3110 - Appendix 6.

Olmstead, Derek E.H., and Matt J. Ayres. 2014. “Notes from a Small Market: The Energy-only Market in Alberta.” The Electricity Journal,27(4): 102–111.

Puller, Steven L. 2007. “Pricing and Firm Conduct in California’s Deregulated Electricity Market.” The Review of Economics and Statistics,89(1): 75–87.51

Schwenen, Sebastian. 2015. Strategic Bidding in Multi-Unit Auctions with Capacity Constrained Bidders: the New York Capacity Market." The RAND Journal of Economics, 46(4): 730-750.

Simon, Noah, Jerome Friedman, and Trevor Hastie. 2013. “A Blockwise Descent Algorithm for Group-Penalized Multiresponse and Multinomial Regression.” arXiv preprint arXiv:1311.6529.

Weber, Robert J. 1981. Multiple-Object Auctions. Northwestern University.