Empirical assessment of strategic behaviour in the Italian Power Exchange

Several studies including the formal investigation of Italian Energy Authority and Antitrust Authority have established that the former monopolist Enel has retained its dominant position in Italian deregulated wholesale electricity market that was started on April 1, 2004. In a large number of hours the load could not have been met without the capacity of Enel, making it an indispensible or a pivotal supplier with significant market power. However, being a pivotal supplier does not necessarily imply the fact of exercising the market power, that is, using the dominant position to profitably raise prices above competitive levels. In this paper we examine the bidding behaviour of Enel to estimate the extent to which Enel was bidding opportunistically in temporal and geographic markets in which it was pivotal. 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 suggests that over the period from April to August 2004 the bidding behaviour of Enel varied across plant types. Both competitive benchmars 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 verify 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 res- ulted in 20%-30% higher average peak energy prices (PUN) in Italy.