Electricity and Ancillary Services Markets in New York State: Market Power in Theory and Practice

Since electricity, and its reliable provision on command, is a multi-attribute commodity, it should be priced over multiple dimensions if it is to be provided efficiently, and that requires multiple but related markets. So far New York is the only domestic electricity market that has introduced separate segments for ancillary services, together with eleven locationally defined markets for energy. By fragmenting the market over dimensions of space, time, and various contributing factors to reliability, the chances for greater efficiency are available in theory, but by spreading the market out, the possibility also exists of having fewer potential suppliers for each segment, thereby increasing opportunities to exercise market power at particular times and places. In fact several instances of market power have been observed that are not surprising with the benefit of perfect hindsight, and the lessons learned are combined with theoretical principles to establish guidelines for future electricity market design and operation.