Unilateral Market Power in Financial Transmission Rights Auctions

This paper explores market participants’ incentives to exercise unilateral market power in financial transmission rights (FTR) auctions. I present a model of strategic bidding in FTR auctions that illustrates how the standard market clearing mechanism for FTR auctions facilitates cross-path competition, limiting the profitability of demand reduction. Simulation evidence suggests that this force can dramatically reduce rents from unilateral market power relative to other sources of auction revenue shortfalls, highlighting potential adverse effects from proposed market reforms such as decentralized FTR sales and bidding-path restrictions that may weaken cross-path competition. JEL Classification: D44, D47, Q49