In virtually all competitive markets,some exchanges are settled through forward commitments.Those commitments often take the form of physical contracts specifying a given price for a quantity of goods to be delivered at term.A supplier is hence committed to deliver the contract's quantity but can also sell some production at the spot price.The contract price is however not directly tied to the spot market price,but relates to its expected value(Weber,1981)Forward contracts are widely used to hedge risks associated to the spot price volatility.The market duality created by the co-existence of the two prices-the forward and spot prices-may give room for market manipulations.A market participant who not only competes in the spot market but also holds forward commitments has both direct and indirect effects on the spot market outcomes.By reneging on its commitments,a supplier can mechanically increase the spot market demand since some of the withdrawn output must be replaced in equilibrium.Reneging hence shifts the firm's residual demand function in the spot market,which results in artificially inflated spot price and quantity.This paper focuses on the opportunities to renege on prior commitments,and the channels through which they create incentives to manipulate markets.Those incentives are especially relevant to imperfect markets subject to capacity constraints and demand uncertainty,such as the energy and transportation markets,because spot prices may at times be very sensitive to unexpected supply and demand shocks.Strategic reneging routinely occurs in electricity markets under false claims of emergency maintenance of power plants,often referred to as ``forced outages''or ``production failures''.An illustrative case took place in Alberta's electricity market in 2010.The regulator accused TransAlta Corporation of multiple instances of market manipulations through strategically timed forced outages of a coal-fired power plant subject to a long-term forward contract(MSA,2015).This contract specifies that the plant's output must be sold forward at a regulated fixed price.Such contracts are widely used by regulation authorities in energy markets to reduce market concentration.The firm's manipulative scheme combined strategic reneging,through emergency shutdown of the committed generating units,with an adjustment of its supply strategy on the spot market based on the insider's information about outage timing.Following those accusations,TransAlta agreed to pay $56 millions in settlement.
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