Allocating Transmission to Mitigate Market Power in Electricity Markets

Whether transmission contracts increase or mitigate market power depends crucially on the allocation of transmission rights. In an efficiently arbitraged uniform-price auction, generators will only obtain contracts that mitigate their market power. Contracts inherited or bought in a "pay-as-bid" auction can enhance market power. In the two-node case, banning generators from holding transmission contracts not corresponding to delivery of their own energy mitigates market power. Meshed networks differ in important ways, as constrained links no longer isolate prices from market manipulation. We suggest ways of reducing market power when designing auctions and transmission contracts.