Related publications

N. Guo and C. Lo Prete (2019). “Cross-product manipulation in electricity markets under intertemporal constraints: a complementarity modeling approach”. Energy Policy 134, 110851 (link).

Abstract: The use of uneconomic virtual transactions in day-ahead electricity markets with the intent to benefit related financial positions constitutes cross-product manipulation, and has emerged as a policy concern in recent years. Developing analytical frameworks and models to explain the means for achieving sustained day-ahead price manipulation is a challenge. This paper presents a two-stage equilibrium model of day-ahead price manipulation to enhance the value of financial transmission rights (FTRs). We cast the problem as a Stackelberg game between manipulating traders in the day-ahead market (leaders) and generating firms, grid operator and traders without FTRs in the day-ahead and real-time markets (followers). The model accounts for features specific to electricity systems, like intertemporal constraints of power generating units and real-time uncertainty, and considers imperfect competition as a condition allowing manipulation in equilibrium. We simulate hourly financial trading and operations decisions in a small test system for 24 hours. Results suggest that cross-product manipulation is sustained in equilibrium only when both physical and financial participants engage in Cournot competition. Further, as a result of loop flows, price separation between FTR source and sink may be induced by virtual transactions at network locations that are not on the FTR path.

C. Lo Prete, W.W. Hogan, B. Liu and J. Wang (2019). “Cross-product manipulation in electricity markets, microstructure models and asymmetric information”. The Energy Journal 40(5), pp. 221-246 (link).

Abstract: Electricity market manipulation enforcement actions have moved from conventional analysis of generator market power in real-time physical markets to material allegations of sustained cross-product price manipulation in forward financial markets. A major challenge is to develop and apply forward market analytical frameworks and models. This task is more difficult than for the real-time market. An adaptation of cross-product manipulation models from cash-settled financial markets provides an existence demonstration under uncertainty and asymmetric information. The implications of this analysis include strong empirical predictions about necessary randomized strategies that are not likely to be observed or sustainable in electricity markets. Absent these randomized strategies and other market imperfections, the means for achieving sustained forward market price manipulation remains unexplained.

C. Lo Prete, N. Guo and U.V. Shanbhag (2019). “Virtual bidding and financial transmission rights: an equilibrium model for cross-product manipulation in electricity markets”. IEEE Transactions on Power Systems 34(2), pp. 953-967 (link).

Abstract: Virtual transactions are financial positions that allow market participants to exploit arbitrage opportunities arising when day-ahead electricity prices are predictably higher or lower than expected real-time prices. Unprofitable virtual transactions may be used to move day-ahead prices in a direction that enhances the value of related positions, like financial transmission rights (FTRs). This constitutes cross-product manipulation, and has emerged as a policy concern of the Federal Energy Regulatory Commission in recent years. Absent control over real-time prices, what economic conditions enable a financial market participant to manipulate day-ahead electricity prices? We develop a three-stage equilibrium model to study cross-product manipulation in FTR and two-settlement energy markets, and evaluate its effects on price convergence and other market outcomes using numerical simulations. Our model accounts for demand uncertainty, the likelihood of congestion in both day-ahead and real-time, and transmission capacity constraints at all stages in the game. Numerical results in a two-node setting show that day-ahead price manipulation through virtual transactions to profit from FTR positions is sustained only when generators and traders compete in a Cournot game in the day-ahead market. In contrast, this type of manipulation fails when the FTR holder is the only market participant acting strategically, and generation capacity and credit requirement constraints for other parties are not binding. In the Appendix, we derive conditions for the existence of the day-ahead equilibria and the single-leader multi-follower equilibrium of the three-stage game.

C. Lo Prete and B.F. Hobbs (2015). “Market power in power markets: an analysis of residual demand curves in California’s day-ahead energy market in 1998-2000”. The Energy Journal 36(2), pp. 191-218 (link).

Abstract: We examine the exercise of market power in California’s power market in 1998- 2000, with a focus on its day-ahead energy market and its five non-utility thermal generating companies. Our goal is to assess whether the hourly bids of market participants, together with information on thermal unit characteristics and power output, suggest that the five suppliers were behaving in line with Nash supply function competition, bidding close to their marginal costs or restraining quantities relative to the Nash level. The analysis of residual demand inverse elasticities suggests that the five thermal generators had an incentive to exercise unilateral market power that was not always fully exploited. A comparison of market-clearing prices, estimated marginal costs and marginal revenues finds that firm conduct was broadly consistent with Nash supply function competition or more competitive than Nash behavior in most of our sample.