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2009 State of the Market Report

Competitive Assessment

statistics represent a decrease of 13 percentage points from 2008 for WUMS and an increase of 15 percentage points for Minnesota. The decrease in WUMS is consistent with the fact that congestion into WUMS has become less frequent due to key transmission upgrades. Overall, however, the results indicate that BCA and NCA mitigation continues to be essential. The next section evaluates participants’ conduct during 2009 to determine whether participants with market power attempted to exercise it.


Participant Conduct

In this section, we analyze participant conduct to determine whether it is consistent with competitive behavior or whether it is consistent with attempts to exercise market power. We begin this section with a Price-Cost Markup analysis. Then we test for two types of conduct: economic withholding and physical withholding. Economic withholding occurs when a participant offers resources substantially above competitive levels to raise market clearing prices or RSG payments. Physical withholding occurs when a unit that would be economic at the market price is unavailable to produce some or all of its output. This is usually accomplished by claiming an outage or by derating the resource.


Price-Cost Markup Analysis

Our first analysis estimates the “markup” of real-time market prices over suppliers’ competitive costs. In this analysis, we compare the system marginal price that would result under two different sets of assumptions: we estimate the SMP first assuming that suppliers offer at prices equal to their reference levels and second using suppliers’ actual offers. The difference in the estimated SMPs under the two different sets of assumptions is the markup. We then calculated a yearly load-weighted average of the estimated system marginal price. This analysis does not account for physical restrictions on the units and transmission constraints, or potential changes in the commitment of generation, both of which would require re-running the market software.

This metric is useful in evaluating the competitive performance of the market. A competitive market should produce a small mark-up because suppliers should have incentives to offer at close to their marginal cost. Our estimated average annual markup was approximately 1.2 percent in 2009, down from an estimated 2.0 percent for 2008. Many factors can cause reference

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