MARKET POWER AND
MARKET MAKERS
Harvard Energy Policy Group
San Diego, CA
January 24, 2002
Joseph E. Bowring
Manager
PJM Market Monitoring Unit
Trading in Forward Markets
• Framework:
– OTC broker market
– Exchanges: e.g. Enron Online; ICE
• Markets
– Energy market
– Capacity market
– FTR market
• Term
– Daily
– Longer term
• Participants
– Sellers of energy from assets
– Buyers of energy for load
– Traders
Market Power
• Definition: Raise market price above competitive level
– Profitability
– Duration/Sustainability
• Method 1: Physical withholding
• Method 2: Economic withholding
– Offer price > Competitive price
– Export when export price < internal price
• Method 3: Transmission related
– Create congestion
Competitive Price
• Competitive price in day ahead and real time spot markets is a
function of:
–
–
–
–
marginal cost
opportunity cost (including optionality)
risk
scarcity
• Competitive price in forward markets is a function of:
– Expected spot price
– Expected fundamentals (including risk)
• Competitive price
– Testable in day ahead and real time markets
– Difficult to test in forward markets
Trading and Market Power Examples
•
•
•
•
Capacity market
Day ahead energy market and FTR market
FTR market and information
Bilateral OTC energy markets
Trading and Market Power in Capacity
•
•
•
•
Trading can enhance/create pivotal position in market
Use of pivotal position to exercise market power
Exercise of market power in PJM daily markets
Relationship between market power in capacity credit markets
and market power in bilateral OTC capacity credit markets
• Relationship between price expectations derived from market
power in PJM daily markets and market power in bilateral
forward markets
• Role of physical position
• Capacity market subject to exercise of market power via trading
strategies
– Actual exercise of market power a function of incentives
• PJM made changes to market rules to reduce incentives to
exercise market power in PJM daily capacity credit markets
Capacity Market Dynamics
• Daily and monthly markets
• Penalty payment if LSE is deficient
• Capacity can be sold within or outside PJM
– Firm energy
– Relative prices
• Marginal cost of capacity
– Direct costs close to zero for daily capacity
– Opportunity cost: external energy markets (firm, LD)
• Inelastic demand
– Function of forecast load
Supply and Demand
Figure 2: PJM Unforced Capacity, Total LSE Obligation, Net PJM Position
58,000
3,000
2,500
56,000
55,000
1,500
54,000
1,000
53,000
500
52,000
0
51,000
Date
Unforced Capacity
Total LSE Obligation
PJM Position
4/1/01
3/1/01
2/1/01
1/1/01
12/1/00
-500
11/1/00
50,000
Net PJM Position (MW)
2,000
10/1/00
Unforced Capacity or LSE Obligation (MW)
57,000
One Supplier and Residual Demand
Figure 8: Entity1 Supply and Residual Demand
2,500
2,000
1,500
1,000
0
-500
-1,000
-1,500
-2,000
Date
Entity1 Offers
Residual Demand
4/1/01
3/1/01
2/1/01
1/1/01
12/1/00
11/1/00
-2,500
10/1/00
MW
500
Daily Capacity Prices
Figure 1: Daily Capacity Credit Market Clearing Price
$400
$300
$250
$200
$150
$100
$50
Date
Daily Capacity Capacity Credit Market Clearing Price
4/1/01
3/1/01
2/1/01
1/1/01
12/1/00
11/1/00
$0
10/1/00
Clearing Price ($/MW-Day)
$350
Prices and Market Comparison
Figure 4: Daily Capacity Credit Market Prices and Value of Exporting Firm Energy From Daily Forwards
October 2000 through April 2001
$400.00
$300.00
$200.00
$0.00
-$100.00
-$200.00
-$300.00
-$400.00
Date
Daily Value Cinergy
Daily Capacity Credit Market Price
Daily Value NY West
4/1/01
3/1/01
2/1/01
1/1/01
12/1/00
11/1/00
-$500.00
10/1/00
$/MW-Day
$100.00
Daily and Monthly Prices
Figure 11: January 2000 Through September 20, 2001
Daily vs Monthly Capacity Credit Market Performance
150,000
200
100,000
150
75,000
100
50,000
50
25,000
Month
Daily CCM (MW)
Monthly CCM (MW)
Wtg Avg Price Monthly ($/MW)
Wtd Avg Price Daily ($/MW)
Oct-01
Sep-01
Aug-01
Jul-01
Jun-01
May-01
Apr-01
Mar-01
Feb-01
Jan-01
Dec-00
Nov-00
Oct-00
Sep-00
Aug-00
Jul-00
Jun-00
May-00
Apr-00
Mar-00
0
Feb-00
0
Jan-00
Volume of Credits Transacted (Installed MW-days)
125,000
Weighted Average Capacity Clearing Price ($/MW-day)
250
Trading and Market Power in Energy
• Trading in PJM day ahead energy market:
– Financial offers/bids: increment/decrement bids.
•
•
•
•
•
•
•
•
Trading in PJM monthly FTR market
Combination used to exercise market power
FTR position taken on a radial path
Financial offers and bids in day ahead market used to create
congestion on the path
Congestion makes FTR position valuable
Typically in radial portion of transmission system
No physical positions
PJM introduced rule which eliminates incentive to engage in this
behavior
Incs/Decs/FTRs
Thermal rating 60 MW
A
50 MW
60 MW
B
40 MW FTR
LMPDA = $25
10 MW INC
LMPDA = $25
LMPRT = $25
INC VALUE -$0
DEC VALUE -$250
FTR VALUE $1,000
NET VALUE $750
LMPDA = $25
10 MW DEC
LMPDA = $50
LMPRT = $25
Trading and Market Power in FTRs
• Transmission outage/derating posted after close of monthly FTR
market: reduced flow on a path(s)
• Asymmetric access to information possible
• Incentives to gain access to information
• Purchase of FTR in PJM monthly FTR market on path(s)
• Congestion makes FTR position valuable
• No physical positions
• PJM made rule changes to remove the incentives to engage in this
behavior
Transmission Outage/FTRs
Thermal rating 60 MW
Thermal rating 50 MW
A
50 MW
B
40 MW FTR
LMPDA = $25
LMPDA = $25
LMPDA = $25
LMPDA = $50
FTR VALUE $1,000
Trading and Market Power in Energy
• Trading in OTC bilateral energy market
• Liquidity
– Number of trades
– Number of participants
– Relative size of participants
• Potential size of positions
– Credit
– Assets
•
•
•
•
•
PJM West Hub is relatively liquid
Into Cinergy, Entergy are relatively liquid
Other trading points less liquid
Impact of active balancing market as constraint
Test: compare day ahead prices with daily forwards
NEPOOL
EAST_NYPP_ZONE_G
7/3
/01
7/1
7/0
1
7/3
1/0
1
8/1
4/0
1
8/2
8/0
1
9/1
1/0
1
9/2
5/0
1
10
/9/
01
10
/23
/01
11
/6/
01
11
/20
/01
5/8
/01
5/2
2/0
1
6/5
/01
6/1
9/0
1
1/2
/01
1/1
6/0
1
1/3
0/0
1
2/1
3/0
1
2/2
7/0
1
3/1
3/0
1
3/2
7/0
1
4/1
0/0
1
4/2
4/0
1
Number of Deals
Trading Volumes: PJM and North
Daily Trading Volumes for Selected Hubs 2001
250
200
150
100
50
0
Date
EAST_NYPP_ZONE_J
WEST_NYPP_ZONE_A
PJM_WEST
1/2
/01
1/1
6/0
1
1/3
0/0
1
2/1
3/0
1
2/2
7/0
1
3/1
3/0
1
3/2
7/0
1
4/1
0/0
1
4/2
4/0
1
5/8
/01
5/2
2/0
1
6/5
/01
6/1
9/0
1
7/3
/01
7/1
7/0
1
7/3
1/0
1
8/1
4/0
1
8/2
8/0
1
9/1
1/0
1
9/2
5/0
1
10
/9/
01
10
/23
/01
11
/6/
01
11
/20
/01
Number of Deals
Trading Volumes: PJM and West
Daily Trading Volumes for Selected Hubs 2001
800
700
600
500
400
300
200
100
0
Date
CINERGY_INTO
COMED_INTO
ENTERGY_INTO
PJM_WEST
TVA_INTO
Results of Trading
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Arbitrage between DA and RT markets
Arbitrage between short term and long term markets
Potentially value FTRs based on expected congestion
Potentially value energy based on expected spot
market/fundamentals including market power
Leverage existing asset-based market power
New opportunities for market power
Hedging/risk transfer
Development of more efficient forward markets
More liquid: more players; more trades
Less ability to game
More reflective of expected fundamentals
IF YOU HAVE QUESTIONS
Contact the PJM Market Monitoring Unit
•
•
•
•
(610) 666-4536
(610) 666-4762
bowrij@pjm.com
www.pjm.com
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