Using data from Alberta's wholesale electricity market, we demonstrate the empirical challenges that can arise when employing empirical methodologies to characterize a firm's unilateral profit-maximizing offer curve. We illustrate that such residual demand analyses can result in non-monotonic, downward sloping, optimal best response offer curves violating restrictions imposed on bidding behaviour. We show that this arises because of the highly non-linear nature of residual demand functions firms can face in practice. We find that firms could have achieved the vast majority of expected profits by employing an offer curve that represents a monotonically smoothed version of the often non-monotonic optimal offer curves. Our findings shine light onto empirical challenges associated with commonly employed equilibrium models to analyze firm behaviour in restructured electricity markets. Further, our analysis illustrates that the failure to account for these empirical challenges may lead researchers to incorrect conclusions regarding observed firm behaviour. These findings stress the importance of accounting for regulatory and practical constraints firms face when modeling bidding behaviour in these multi-unit, uniform priced, procurement auctions.
Electricity, Market Power, Information, Regulation, and Antitrust
We examine allegations that firms in Alberta's electricity industry manipulated public information to coordinate in the wholesale market. We investigate whether bids by firms who employed unique pricing patterns were consistent with unilateral expected profit maximization. Our results suggest that these firms could have increased expected profits through unilateral deviations. For one firm, the potential to increase profits is greater on days when certain offer patterns are observed, providing support for the claim that such patterns may have assisted coordination on high-priced outcomes. These results suggest that regulators should exercise caution when designing information disclosure policies in concentrated electricity markets.
Eckert, Andrew, Langinier, Corinne, and Zhao, Long
Working Papers, 2019.
Canadian firms and locational patenting behavior
Using a unique data set combining Canadian and U.S patent data with firm level data, we analyze Canadian firms' locational patenting decisions during the period 2000-2008. We f ind first that Canadian firms' propensity to patent increases in rm size and research and development intensity, but decreases in firm age and profitability. Second, the likelihood of patenting in both the U.S. and Canada is associated with past patenting experience, firm size, profitability and patent scope. While manufacturing firms in export intensive industries are more likely to patent in both countries, firms in Foreign Direct Investment intensive industries are more likely to patent domestically. Finally, Canadian Intellectual Property Office's role as an International Search Authority under the Patent Cooperation Treaty (PCT) is associated with an increase in the use of PCT by Canadian firms.
Faske, Trevor M., Thompson, Lily M., Banahene, Nana, Levorse, Andi, Quiroga Herrera, Melisa, Sherman, Kayla, Timko, Sarah E., Yang, Banruo, Gray, David R., Parry, Dylan, Tobin, Patrick C., Eckert, Andrew J., Johnson, Derek M., and Grayson, Kristine L.
Electricity, Market Power, Information, Regulation, and Antitrust
We examine the role of information transparency in Alberta's wholesale electricity market. Using data on firms' bidding behavior, we analyze whether firms utilize information revealed in near real-time through the Historical Trading Report (HTR), which is released 10 minutes after each hour and contains a complete (de-identified) list of every firms' bids into the wholesale market from the previous hour. We demonstrate that firms are often able to identify the offers of specific rivals by offer patterns adopted by those firms. For one of these firms, these patterns are associated with higher offer prices. This is consistent with allegations by Alberta's Market Surveillance Administrator that firms may be utilizing unique bidding patterns to reveal their identities to their rivals to elevate market prices. We show that certain firms respond to rival offer changes with a lag consistent with responding to information revealed through the HTR, and that they respond differently to different firms, suggesting that they are able to infer identification.
Electricity, Renewables, Market Power, Regulation, and Procurement
We analyze the effects of commonly employed renewable compensation policies on firm behavior in an imperfectly competitive market. We consider a model where firms compete for renewable capacity in a procurement auction prior to choosing their forward contract positions and competing in wholesale electricity markets. We focus on fixed and premium-priced feed-in tariff (FIT) compensation policies. We demonstrate that the renewable compensation policy impacts both the types of resources that win the renewable auction and subsequent market competition. While firms have stronger incentives to exercise market power in wholesale markets under a premium-priced FIT, they also have increased incentives to sign pro-competitive forward contracts. Despite these countervailing incentives, in net firms have stronger incentives to exercise market power under the premium-priced policy. We find conditions under which renewable resources that are more correlated with market demand are procured under a premium-priced design, while the opposite occurs under a fixed-priced policy. If the cost efficiencies associated with the "more valuable" renewable resources are sufficiently large, then welfare is larger under the premium-priced policy despite the stronger market power incentives in the wholesale market. Finally, we consider incumbent behavior in the renewable auction when competing against entrants with more valuable resources.
Brown, David P., Eckert, Andrew, and Eckert, Heather
Working Papers, 2017.
Electricity, Market Power, Carbon Price, and Pass-Through
In this paper, we examine the use of carbon pricing and an output-based subsidy in a market with imperfect competition. We consider a carbon pricing policy in Alberta's electricity market as a case study. This policy consists of two phases. In the first phase, the carbon price is doubled with the output subsidy being based on a fraction of facility-level emission intensity. In the second phase, the carbon price will remain constant, while the output subsidy is altered to be uniform across assets and based on the emissions intensity of an efficient natural gas asset. Using a model of oligopoly competition, we simulate the short-run impacts of the two phases on electricity prices, emissions, and unit and firm-level profitability. We find that the mechanisms by which electricity prices and emissions change in response to carbon pricing differ depending on whether the market is perfectly competitive or oligopolistic. We demonstrate that regardless of market structure, changing the basis of the output subsidy has substantially larger effects than a doubling of the carbon price. The estimated effects of carbon pricing vary as the firms' generation portfolios change.
Electricity, Retail Markets, Market Power, Regulation, and Default Rates
We investigate the impacts of default regulated products and their design on the development of competitive retail markets and retailers' pricing decisions. We analyze this question in the context of Alberta's competitive retail electricity market, using data on the prices and characteristics of both regulated and unregulated retail products from July 2006 to March 2017. Our analysis consists of a descriptive discussion of the evolution of market structure in the industry, followed by an econometric analysis of the effect of default prices on unregulated retail prices. We find that as the default product moved from being a long-term stable product, to one based on short-term forward market prices, the number of products and competitors increased substantially. This suggests that the change in the default product was successful at facilitating the development of a competitive retail market. However, our econometric analysis of the pricing of unregulated contracts suggests that competitive retailers may continue to exercise market power by adjusting prices upward in response to short-term changes in the regulated rate, even after controlling for changes in the costs of providing retail products.