Empirical assessment of strategic behavior in the Italian power exchange

In this paper we examine the bidding behavior of Enel in 2004 to estimate the extent to which Enel was bidding opportunistically in temporal and geographic markets in which it was indispensible. Two types of competitive benchmark for bid levels were used. First, bids submitted by Enel in temporal and geographic markets in which it was pivotal were compared with Enel's bids submitted for similar generating units in markets where potential for market power exercise is low. Second, price bids of Enel were compared with bids submitted for comparable plants by other small generators that have no market power. This analysis has shown that over the period from April to August 2004 the bidding behavior of Enel varied across plant types. Both competitive benchmarks suggest that price bids of Enel submitted for Combined Cycle Gas plants were about 40-50% above the competitive level when Enel was pivotal. The excessive bidding was also present for Traditional Oil plants and Repowered Gas plants, although at a lower level, and was not established at all for Traditional Coal plants. We have verified whether this conduct could have had a material impact on market prices. An analysis of impact suggests that Enel's bidding during the peak hours was indeed 40% in excess of competitive levels for its CCGT units, 30% on Repowering units, and 20% on Oil units, such bidding have resulted in 20-30% higher average peak energy prices (PUN) in Italy. Copyright (C) 2010 John Wiley & Sons, Ltd.