Conference Agenda

In auction markets that are prone to market power abuse, preventive mitigation of bid prices can be applied through automated mitigation procedures (AMP). Despite their widespread application in US electricity markets, there is scarce evidence on how firms strategically react to such price-cap-and-penalty regulation. Here, we causally assess the impact of AMP on the bids of generation firms, using 2019 data from the New York and New England electricity markets (NYISO, ISO-NE). We employ a regression discontinuity design, which exploits the fact that the price cap with penalty is only activated when a structural index (e.g., congestion, pivotality) exceeds a certain cutoff. In each market, 30-40% of the analyzed bidders strategically decrease their maximum bid prices by 4-10 $/MWh to avoid the penalty. However, the overall regulatory impact is not statistically detectable, suggesting heterogeneity in firm response and lax mitigation thresholds. Using a merit-order simulation, we estimate the welfare impact of more stringent thresholds to lie between 350 and 980 thousand dollars of increased buyer surplus per mitigated hour; the related number of mitigated hours remains below 33 hours/year. Our results motivate the empirical calibration of thresholds to improve the efficiency of price-cap-and-penalty regulation.