This first chapter started with a short outline of the research question, followed by the main theses guiding the research. The central questions to be answered are
(1) which were the incentives for firms to manipulate prices in the wholesale market for electricity during the period of examination in the years 2006 to 2009 (positive anal-ysis), and
(2) how regulation may change the incentives in a way that impacts the market partici-pants´ behavior and results in the ex-ante prevention of market manipulations.
Subsequently, the research methodology was introduced. This work follows the law and economics approach, an interdisciplinary subject using the tools of economics to examine legal frameworks positively and analyze different legal correctives normatively. Section C.
of this chapter offered a detailed introduction to the law and economics paradigm and its suitability to produce evidence for the research theses.
The following subsection D. of this chapter presented a brief introduction to the German energy market from an economic point of view. Starting from a quick overview of the basics of competitive economic markets compared to concentrated markets and their eco-nomic losses, the analysis turned to the special case of energy markets. In the light of the historical development of this market from a monopolized structure to a regulated industry as well as the specific features of the good electricity, the market structures in power generation, distribution, and trade during the period of examination were introduced. It was shown that the market was highly concentrated with the four established energy pro-ducers E.ON, RWE, Vattenfall, and EnBW controlling up to 85 percent of the production facilities. Based on this analysis, the formation of electricity prices according to the merit order mechanism was subject to a detailed description. In summary, the marginal cost of a kWh of electricity produced by the last power plant needed to satisfy market demand determined the market price of all kWhs of electricity.
Subsection E. switched the focus from the economic examination to the legal facts relevant to the energy industry. The three main fields of law shaping the energy sector, namely
▪ energy law,
▪ competition law, and
▪ capital market law
were introduced and presented with their main features. Thereafter, critical points and legal gaps were pointed out and a first approach to their closing was indicated. Notably, practical problems in the proof of antitrust violations in the field of competition law, as well as lacking supervision of the EEX spot market and the inapplicability of provisions against market manipulation codified in the Securities Trading Act in the field of capital market law were identified to hinder the efficient execution of the existing legal framework to the benefit of the market. This creates incentives for market participants to engage in manipulations of the market to their firms´ benefit.
On the basis of these fundamental findings, the following chapter 2 will examine possible manipulation strategies and identify the authorities´ practical problems with regard to the enforcement of sanctions for offences against the legal bans in a positive analysis. The following chapters 3 to 5 build on the findings regarding distorted incentives and propose corrections of the law to achieve an impact on the market participants´ behavior in line with the regulator´s goals.
SECOND CHAPTER:
STRATEGIES OF MARKET MANIPULATION AT THE EEX – ECONOMIC AND LEGAL CLASSIFICATION A. Introduction
“The `free market´ is the product of laws and rules continuously emanating from legislatures, executive departments, and courts.”394
Based on the preceding analysis of structure and pricing in the German energy market, this chapter will examine pricing strategies that favor the energy suppliers, but drive the market towards an equilibrium that deviates from the competitive welfare-maximizing level. With regard to energy trading at the EEX, physical and financial capacity reten-tion are two harmful strategies to influence the market price. Both will be examined in depth in the following sections.
The chapter starts with an economic description and a legal classification of the two ma-nipulation strategies named above (section B). Subsequently, the incentives of market participants to actually engage in the manipulation strategies introduced before are ex-amined in section C. of this chapter. This work´s approach uses the tools of industrial organization395 and game theory396 to analyze the market participants´ incentives and optimal pricing strategies under the existing oligopoly situation. With the help of this anal-ysis, it will be shown that pricing above the competitive level is – from an economic point of view – an optimal choice for firms in this market during the period of examination. It was hence likely that an oligopoly firm chose a manipulation strategy if the law did not actually prevent such behavior.
Past regulatory efforts to reach efficient deterrence of market manipulations by way of detection, proof and punishment of both the European Commission and the German FCO
394 Robert Bernhard Reich, University of California, Berkeley.
395 The field of industrial organization examines interactions between markets and firms. In its traditional branch, industrial organization acts on the assumption that market structure influences the behavior of partici-pants in the market, which results in a (then predictable) market outcome (so-called Structure-Conduct-Perfor-mance Paradigm), see for example Helmut Bester, Theorie der Industrieökonomik, 3rd ed. (Berlin: Springer, 2004), 1-3.
396 Game theory treats strategic interaction of agents and is therefore widely used for the economic analysis of firm behavior in oligopolistic markets, see Hal R. Varian, Intermediate Microeconomics (New York: W.W. Nor-ton & Company, 2006), 504.
will be presented in section D. It will be shown, that despite reasonable suspicion by mar-ket participants and competition authorities, manipulations could not be proved until now.
Section E of this chapter summarizes and concludes.