Market Power Evaluation in

Power Systems with Congestion

Tom Overbye, George Gross, Peter Sauer

Department of Electrical and Computer Engineering
University of Illinois at Urbana-Champaign
Urbana, IL

Mark Laufenberg, Jamie Weber

PowerWorld Corporation
Urbana, IL
 Introduction

• Power industry is rapidly restructuring

• Key goal of restructuring is to reap benefits
of competitive marketplaces
• Significant concerns benefits could be lost
through development of horizontal market
power
 Horizontal Market Power
• Market power is antithesis of competition
– ability of a particular group of sellers to
maintain prices above competitive levels
• An extreme case is a single supplier of a
product, i.e. a monopoly.
• In the short run, Price monopolistic
producer can charge depends upon price
elasticity of the demand.
 Horizontal Market Power

• Market power can sometimes lead to decreased

prices in the long run
– Accompanying higher prices can result in a quickening
of the entry of new players and technological
innovation
• Some market power abuses are actually self-
inflicted by consumers by their reluctance to
respond to favorable prices offered by new
vendors in deregulated markets
 Symptoms of Market Power

• Economic theory tells us that in a market with

perfect competition, prices should be equal to
the marginal cost to supply the product
• Therefore prices above marginal cost can
indicate market power
 Market Power Analysis

• Market power analysis requires 3 steps

– identify relevant product/services
– identify relevant geographic market
– evaluate market concentration
 Relevant Product

• FERC defines at least three distinct products

– non-firm energy
– short-term capacity (firm energy)
– long-term capacity
• Emphasis shifting to short-term energy markets
• Presentation considers short-term
• Challenge in electricity markets is demand
varies over time
 Relevant Geographic Market

• Most difficult step in electricity market due to

impact of transmission system
• Size of market is dependent on
– competitive prices of generators
– impacts of charges from transporting energy in
transmission network
– physical/operational characteristics of transmission
network
 Herfindahl-Hirshman Index
(HHI)
• HHI is a commonly used methodology for
evaluating market concentration

N
HHI   q 2
i
i 1

• where N is number of participants

• qi is percentage market share
 HHI Examples

• For monopoly HHI = 10,000

• If N=4, q1=40%, q2=25%, q3=25%, q4=10%,
then HHI = 2950
• DOJ/FTC standards, adopted by FERC for
merger analysis
– HHI below 1000 is considered to represent an
unconcentrated market
– anything above 1800 is considered concentrated
 Market Power Without
Transmission Considerations

• If transmission system is ignored, market

power depends only on concentration of
ownership relative to other producers in
interconnected system
• Without considering any constraints (using
NERC 1997 peak data)
– Eastern Interconnect HHI = 170
– ERCOT HHI = 2415
 Market Power with Transmission
Charges
• In determining geographic market, FERC
requires that suppliers must be able to reach
market
– economically
• supplier must be able to deliver to customer at cost no
greater than 105% of competitive price to customer
• delivered cost is sum of variable generation cost and
transmission/ancillary service charges
– physically
 Pricing Transmission Services

• Goal is to move energy from source to sink

• A number of different mechanisms exist;
examples include
– pancaking of transmission service charges along
contract path
– establishment of Independent System Operator
(ISO) with single ISO-wide tariff
 Market Power with Transmission
Constraints
• Market size can be limited by physical ability to
delivery electricity
• Whenever physical or operational constraints become
active, system is said to be in state of congestion
• Congestion arises through number of mechanisms
– transmission line/transformer thermal limits
– bus voltage limits
– voltage, transient or oscillatory stability
 Radial System with Market Power

Models the
remainder
Line Limit = 100 MVA
Rest of of the
100% Electric electrical
System
99.5 MW system
Bus A

300.0 MW
200.50 MW

100 MVA limit on line limits

bus A imports to 100 MVA
 Networked System

Analysis is
Limit = 100 MVA substantially
25.0 MW
25% Rest of
more complex.
100.0 MW Electric
100%
System
Bus A Limit = 100 MVA Transfer
capability
175.00 MW 300.0 MW into bus A
is NOT equal
to sum of
tie-line limits
 Three Bus Networked Example
Imports = 74 MW
Bus B
99.6 MW
100% In this
324.0 MW example the
25.7 MW 224.4 MW allowable
26%
50.0 MW interchange
Bus A
23% is less than
limit either
226.00 MW 300.0 MW
300.0 MW line
Bus C

25 MWs of power is wheeling through bus A

 Congestion in Networks

• Need to introduce several definitions concerning

network power transfers
– source: set of buses increasing their injection of power
into network
– sink: set of buses decreasing their injection of power
into network
– direction: source/sink pair
• Power transfer is then associated with a particular
direction
 Congestion in Networks

• To understand impact of congestion in networks,

need to consider two interrelated issues
– power transfer in a particular direction may impact
line flows in large portion of system
• this impact is commonly defined as the power transfer
distribution factor (PTDF)
– once a line is congested, any new power transfers
with a PTDF on the congested line above 5% can not
take place
 Nine Bus, Nine Area Example
400.0 MW 400.0 MW 300.0 MW Pie charts
A B
250.0 MW
D show
17%
C
percentage
58%
41%
51%
34%
loading
42%
45% on lines
6%
G F E
150.0 MW

250.0 MW 250.0 MW
Figure
39% 32%
54%
29%
shows
H I base case
200.0 MW
50.0 MW
flows
Each area contains one bus/one 500 MVA generator.
Each line has 200 MVA limits. HHI = 1089
PTDF Values for A to I Direction

A 44% D
B

30% 10% PTDF show

C the incremental
56% 13%
10% impact on
35% F
20%
line flows, in
G
2%
E
this case for
34% 34%
a transfer from
32%
area A to area
H
34%
I
I.

Pie charts now show the percentage PTDF

value; arrows show the direction.
PTDF Values for G to F Direction

D
A 6% B
6%
Note that
18%
C
for both the
6% 12%
6% A to I and
F
12% the G to F
61%
G
19% directions
E

21%
almost all
20%
PTDFs are
H
21% above 5%
I

Example: For 200 MW transfer from G to F, line

H to I MW flow will increase by 200*21%=42MW
 Large Case PTDF Example:
Direction Southern to NYPP
WPS
Pie
charts
NEPOOL

NSP

NYPP
SMP

ONT HYDR
24%
OTP

21% 20%
show
DPC MGE

ALTE 32%
15%
WEP

DECO

14%

percentage
ALTW
CONS PENELEC
7% PP&L

9% 5%
PSE&G

7%
16%
MEC
NI
6% 5%
14%
FE

DLCO PJM500 11%

MPW 8% 17% PECO JCP&L

11%
NIPS

PTDF on
6%
DPL
5% AEP

38% METED

AE

CILCO IPL
24% BG&E

8%

interface
6%
12%
CWLP
A P
CIN
HE PEPCO

IP DPL
STJO

IMPA
OVEC
19% 5%
KACY
INDN
5%
SIPC VP
KACP
MEC LGEE

OPPD
NPPD
AMRN
SIGE
BREC
19% 13%
EKPC
MIPU

WERE 9%
6%
ASEC
EEI
23%
7%
SPRM
DOE

YADKIN

EMDE
KAMO CPLE

GRRD
6% TVA
15%
DUKE

CPLW

PSOK SWPA
7%

45% 22%
HARTWELL
ENTR
OMPA
SCPSA
9% SEPA-RBR

SOUTHERN
9% SCE&G

SEPA-JST

AEC

LEPA
SWEP

Figure shows the area to area interface PTDFs

Southern to NYPP Line PTDFs
H A W T H O R N

M A S S 7 6 5

B R U J B 5 6 1

B R U J B 5 6 9

B R U J B 5 6 2
E S S A

PTDFs
key
J A P I T Z P
C L A I R V I L I N D E P N 9D MC I P T 1

O S W E G O
S C R I B A

M A R C Y T 1
V O L N E Y

M I L T O N
E D I C

T R A F A L H 2
C L A Y
T R A F A L H 1

K I N T I 3 4 5

D E W I T T 3

E L B R I D G E
L A F A Y T T E
P A N N E L L 3 R E Y N L D 3
B E C K B
R O C H 3 4 5
N I A G 3 4 5
A L P S 3 4 5
B E C K A
N . S C O T 9 9

M I D D 8 0 8 6

S T O L E 3 4 5

G I L B 3 4 5

N A N T I C O K

L E E D S 3

L O N G W O O D

F R A S R 3 4 5

O A K D L 3 4 5 H U R L E Y 3

W A T E R C 3 4 5

P L T V L L E Y

F I S H K I L L

R O S E T O N
C O O P C 3 4 5

I n d i a n P o i n t
R O C K T A V

B u c h a n a n

M i l l w o o d

P l e a s a n t v i l l e
E a s t v i e w

R A M A P O 5

S h o r e h a m
P o r t J e f f e r s o n W i l d w o o d
R i v e r h e a d
S p r a i n B r o o k
D u n w o o d i e N o r t h p o r t
B r o o k h a v e n
D v n p t . EN lK w o o d
H o l b r o o k
G r e e l a w n
T r e m o n t H m p . H a r b o r
S y o s s e t P i l g r i m H o l t s v i l l e
S U S Q H A N A
S h o r e R d .
L c s t . G r v .
B e t h p a g e
R a i n e y
L a k e S u c c e s s R u l a n d R d .
W 4 9 t h S t . N e w b r i d g e
E . G . C .
C o r o n a
E 1 5 t h S t .
J a m a i c a
F a r r a g u tV e r n o n

C o g e n T e c h V a l l e y S t r e a m
G o w a n u s B a r r e t t
S U N B U R Y
G r e e n w o o d
G o e t h a l s
F r e s h K i l l s
F o x H i l l s

W E S C O V L E

B R A N C H B G

A L B U R T I S
H O S E N S A K
K E Y S T O N E

D E A N S
S M I T H B R G

E L R O Y

J U N I A T A
L I M E R I C K

W H I T P A I N
C O N E M - G H

3 M I L E I

0 1 Y U K O N

H U N T E R T N
P E A C H B T M

K E E N E Y

C N A S T O N E

B R I G H T O N

W C H A P E L

8 M T S T M

0 8 M D W B R K
8 L O U D O N

8 C L I F T O N
B U R C H E S
8 O X

C H A L K 5 0 0
8 P O S S U M
C L V T C L F
8 M O R R S V L

0 7 M E R O M 5

8 V A L L E Y

8 D O O M S
8 L D Y S M T H
8 N O A N N A
8 B A T H C O

8 E L M O N T

8 L E X N G T N

8 M D L T H A N

8 C H C K A H M

8 S U R R Y

8 S E P T A
8 C A R S O N

8 Y A D K I N
8 F E N T R E S
8 C L O V E R

8 A N T I O C H
8 S H A W N E E

8 M A Y O 1
8 M A R S H A L 8 P E R S O N
0 5 N A G E L

8 P H I P P B

8 S U L L I V A

8 M O N T G O M

8 P A R K W O D

8 P L G R D N

8 V O L U N T E
8 W A K E
8 W I L S O N
8 B U L L R U
8 W E A K L E Y

8 R O A N E

8 D A V I D S O
8 J V I L L E

8 M A U R Y
8 M C G U I R E
8 W B N P 1

8 J A C K S O N

8 F R A N K L I

8 C U M B E R L
8 S N P

8 S H E L B Y
8 R I C H M O N

8 R A C C O O N 8 J O C A S S E

8 C O R D O V A
8 B A D C R K

8 W I D C R K 8 O C O N E E
W M - E H V 8

8 B N P 1
8 M A D I S O N
8 F R E E P O R
8 B N P 2

8 L I M E S T O
8 B F N P

8 T R I N I T Y

8 U N I O N

8 B O W E N

8 B U L L S L U
8 B I G S H A
8 N O R C R O S

8 V I L L A R

8 K L O N D I K

8 U N I O N C T
8 M I L L E R

8 W P O I N T

8 W A N S L E Y
8 L O W N D E S

8 S . B E S S 8 S C H E R E R

M C A D A M 8

Color contour of PTDFs on 345 kV and up lines

 PTDF Implications on Market
Power

• Once congestion is present on line, any power

transfer with PTDF above 5% on congested
line, in direction such that line loading would
be increased, is not allowed
• Congestion on a single line can constrain many
different directions
 Nine bus example - Area I buying

• Table : Line G to F PTDF Values

• Seller to Buyer PTDF for Line G to F
• A to I 35% 400.0 MW 400.0 MW 300.0 MW

• B to I 29% A B
250.0 MW
D

• C to I 11%
58%
17%
C
34%

•
51%
D to I 5% 41%
45%
42%

•
6%
E to I -1% G F
150.0 MW
E

• F to I -20% 54%
250.0 MW 250.0 MW
39% 32%

• G to I 41% H
29%
I

• H to I 21% 200.0 MW
50.0 MW
 Nine Bus Example
400.0 MW 400.0 MW 300.0 MW
If the line from G to
A

17%
B
250.0 MW
D
F were congested,
58% 51%
C
34% then area I could
only buy from areas
41% 42%
45%
6%
G F
150.0 MW
E E, F or I.
250.0 MW 250.0 MW
54% 39% 32%

29%
H I

50.0 MW
200.0 MW

When congestion is present, area I load only has

possibility of buying from three suppliers. If we
assume each supplier has 1/3 of the potential
market, resultant HHI is 3333.
 Strategic Market Power

• Characteristic that congestion can limit market

size allows possibility that generator portfolio
owner may unilaterally dispatch generator to
deliberately induce congestion
– this results in market power
– allows charging of higher prices
• Ability to induce congestion depends on generator
portfolio and transmission system loading
 Portfolio Flow Control

• A portfolio of N generators may be redispatched to

unilaterally control the flow on a particular line, i, by an
amount

N N
Pi  max  sik Pgk such that  P gk 0
k 1 k 1

• where Sik is sensitivity of line i MW flow to change in

generation at bus k
 Portfolio Flow Control

• Once a line is congested, any generators with a

PTDF to a particular load pocket that would
increase loading on the congested line are
prevented from selling to that market.
• Likewise affected loads are prevented from
buying from the “blocked” generators.
Merged Areas F and G Blocking
Line
400.0 MW 400.0 MW 300.0 MW

A B
250.0 MW
D
With G-F
22% congestion
C
53% 67%
39% area I can
30%
100%
53%
only buy
11%
G F E
from FG,
150.0 MW

430.0 MW 70.0 MW
21%
or E
73% 31%

48%
H I

50.0 MW
200.0 MW

Generators F and G are deliberately

dispatched to congest line G to F
 Cost to the Congestors

• Such a strategy of deliberate congestion could

certainly involve additional costs to congestors
(since they presumably would have to move
away from an economic dispatch)
• Congestors need to balance costs versus
benefits from higher prices
 Integrating Economics into the
Analysis
• The first step to doing this is developing an
optimal power flow
• Lagrange multipliers then used as spot-prices
Benefits Costs
Maximize “Social Welfare”
max Bd  - C s 
x,s,d
Include the
s.t. h(x, s, d)  0 Power Flow Equations

g(x, s, d)  0 Include Limits such as:

* transmission line limits
* bus voltage limits
 Market Simulation Setup: Get
away from “costs” and “benefits”
• Suppliers and Consumers will submit price-dependent
generation and load bids
– For given price, submit a generation or load level

B 
C
Pr
ic
e=p= Pr
ic
e=p=
[
$/
M W
h]
r d [
$/
M W
h]
r s

p
ma
x
m
d

m
s

p
mi
n
S
up
pl
yBid D
e
ma
ndB
i
d
[MW ] [MW
]
 Market Simulation Setup

• Consumers and suppliers submit bid curves.

• Using the bids, an OPF with the objective of
maximization of social welfare is solved
– This will determine the MW dispatch as well as
Lagrange multipliers which will determine the spot
price at each bus.
– The consumers and suppliers are paid a price
according to their bid, but their bid will effect the
amount at which they are dispatched.
 Limit Possible Bids to Linear
Functions
• Each supplier chooses some ratio above or
below its true marginal cost function
Price = p “k times” the “True”
[$/MWhr]
ms Marginal Bid
k

ms
“True” Marginal Bid
Supply Bid
pmin k*pmin
[MW]
 What does an Individual Want to
do? Maximize its Welfare
• Maximize An Individual’s Welfare
– Individual may control multiple supplies and multiple
demands

f (s,d,λ )   [ B ( d )   d ]   [ C ( s )   s ]
i controlled
i i i i
controlled
i i i i

demands supplies

+Benefits -Costs
-Expenses +Revenue
– Note: An individual’s welfare is not explicitly a function of its
bid (implicitly through s,d,)
 Determining a Best Response in
this Market Structure
• A “Nested Optimization Problem”
Individual’s Welfare
maxk
f (s,d,λ )
s,d, are implicit
s.t. (s,d,λ ) are determined by functions of k
 max Bd, k  - C s, k 
 x,s,d  The OPF Problem is
 h(x, s, d)  0  a “constraint” now
 s.t. g(x, s, d)  0 
 

“OPF Sub-Problem”
 Economic Market Equilibriums:
The Nash Equilibrium
• Definition of a Nash Equilibrium
– An individual looks at what its opponents are presently
doing
– The individual’s best response to opponents behavior is
to continue its present behavior
– This is true for ALL individuals in the market
• This is a Nash Equilibrium
• Nash Equilibrium be found by iteratively solving to
individual welfare maximization
 Example: Use 9-bus system and
Assign Cost and Benefit Curves
•Ci(si)=bsisi+csisi2 = supplier cost
• i i di i di i = consumer benefit
B (d )=b d +c d 2

Supplier bsi Supplier csi Consumer bdi Consumer cdi

Bus Coefficient Coefficient Coefficient Coefficient
1 (A) 18 0.05 80 -0.10
2 (B) 18 0.05 80 -0.10
3 (C) 21 0.07 80 -0.10
4 (D) 21 0.07 80 -0.10
5 (E) 21 0.07 80 -0.10
6 (F) 21 0.07 80 -0.10
7 (G) 17 0.05 80 -0.10
8 (H) 0 0.10 440 -0.50
9 (I) 30 0.07 440 -0.50
 Solution for All True Marginal
Cost Bids
286.4 MW 166.8 MW 286.4 MW 166.8 MW 183.2 MW 166.8 MW

46.64 $/MWh 46.64 $/MWh 46.64 $/MWh

A 1 B 2 183.2 MW 166.8 MW D 4

14%
46.64 $/MWh
C 3
46% 22%
42%
32% 36%
49%
3%
46.64 $/MWh
46.64 $/MWh
G 7 F 6 46.64 $/MWh
E 5
166.8 MW
296.4 MW 183.2 MW 166.8 MW 183.2 MW 166.8 MW
95% 60% 63%
14%
46.64 $/MWh 46.64 $/MWh
H 8 I 9

233.2 MW 393.4 MW 118.9 MW 393.4 MW

 Market Behavior

• Assume all consumers always submit bids

corresponding to true marginal benefit (k=1)
• Assume supplier A-F and I all act alone to
maximize their profit
• Assume suppliers G and H collude (or
merge) together
– G and H now make bid decisions together
What are General Strategies for G
and H?
• G and H could act to raise their prices hoping to
increase profit
• Also could act to take advantage of the
transmission constraint between them
– G lowers price hoping that overload on the line
between G-H will result in increased profit by H
• Nash Equilibria are found for each of these two
general strategies by iteratively solving the
individual welfare maximum
 Nash Equilibrium Found When
Both G and H raise prices
• Combined profit for G and H of $10,638 $/hr
Bus Price Supplier Supplier Consumer Consumer
[$/MWhr] Output [MW] Profit [$/hr] Demand [MW] Welfare [$/hr]
A 48.51 275.8 4,612.36 157.4 2,478.55
B 48.51 275.8 4,612.36 157.4 2,478.55
C 48.51 183.0 2,690.69 157.4 2,478.55
D 48.51 183.0 2,690.69 157.4 2,478.55
E 48.51 183.0 2,690.69 157.4 2,478.55
F 48.51 183.0 2,690.69 157.4 2,478.55
G 48.51 262.1 4,824.89 157.4 2,478.55
H 48.51 216.1 5,813.56 391.5 76,630.97
I 48.51 123.1 1,218.26 391.5 76,630.97
Totals 1885.0 31,844.19 1885.0 170,611.81
 Nash Equilibrium Found G and H
try to Game the Constraint
• Combined profit for G and H of $12,082 $/hr
Bus Price Supplier Supplier Consumer Consumer
[$/MWhr] Output [MW] Profit [$/hr] Demand [MW] Welfare [$/hr]
A 47.08 241.9 4,108.89 164.6 2,709.01
B 47.80 257.5 4,357.63 161.0 2,592.32
C 49.95 192.4 2,978.58 150.3 2,257.62
D 50.67 196.1 3,125.79 146.7 2,151.16
E 51.38 198.3 3,272.70 143.1 2,047.09
F 50.67 196.1 3,126.40 146.7 2,150.68
G 46.36 295.9 4,310.76 168.2 2,828.57
H 60.73 183.3 7,771.83 379.3 71,921.82
I 54.29 84.0 1,546.03 385.7 74,387.47
Totals 1845.4 34,598.62 1845.4 163,045.74
Contour Plot of Combined Profit
of G and H when A-F,I bid k = 1.0
Contour Plot of Combined Profit of Supplier G and H
1.8

1.7

Global Max at (0.990, 1.644)

1.6
Variation of Supply Bid H

1.5

1.4

1.3
Constraint Boundary
1.2

1.1 Local Max at (1.119, 1.119)

1.0
0.8 0.9 1.0 1.1 1.2 1.3 1.4 1.5

Variation of Supply Bid G

 3-D Plot of Combined Profit
of G and H when A-F,I bid k = 1.0
10600
Combined Profit of Supplier G and H

Global Max of $10,456 at (0.990, 1.644)

10400

10200
Local Max of $10,018
10000 at (1.119, 1.119)

9800

9600 Constraint Boundary

9400

9200

9000

8800
1.8 1.7 1.4 1.5
1.6 1.5 1.2 1.3
1.4 1.3 1 1.1
1.2 1.1 0.8 0.9
Variation of Supply Bid H 1 0.7 Variation of Supply Bid G
 Results

• G and H acting together can increase their

profit by gaming around the transmission
constraint
• Transmission Analysis MUST be included in
Market Power Analysis
• Engineering Analysis and Economic Analysis
can be integrated together
 Conclusions

• Market power abuses in a large power system

need to be assessed.
• Regulators need to be cognizant of ability of
market participants to act strategically
• Portfolio owners need to be cognizant of their
own, and their competitors potential for
strategic behavior
 Conclusions

• Rules of the game can make it more difficult to

act strategically, but it would be difficult to
eliminate possibility completely.
• Load’s ability to respond to market power is an
important consideration.
• Slides and free 12 bus version of the
PowerWorld Simulator software are available
at www.powerworld.com