1. Introduction

Herd behaviour in electricity trading systems refers to a situation in which market participants—generators, retailers, utilities, traders, financial institutions, or large consumers—make trading, bidding, or contracting decisions by following the actions or expectations of other market participants rather than relying independently on their own information, costs, forecasts, and risk assessments.

Herding is particularly significant in electricity markets because electricity is largely non-storable, demand is highly time-sensitive, transmission networks are constrained, and wholesale prices can change rapidly. A relatively small number of participants acting in the same direction can therefore produce substantial effects on prices, congestion, reserve availability, and system reliability.

Herd behaviour is not automatically unlawful. A trader observing competitors and reaching the same conclusion independently may be engaging in legitimate market activity. The legal problem arises where coordinated behaviour involves fraud, false information, artificial transactions, collusion, manipulation, or deliberate distortion of supply and demand.

The Western U.S. electricity crisis of 2000–2001 demonstrates the importance of this distinction. FERC concluded that supply-demand imbalances, inadequate infrastructure and flawed market design contributed to conditions that enabled market manipulation. (Federal Energy Regulatory Commission)

2. Meaning of Herd Behaviour

In ordinary market theory, each trader is expected to make an independent decision based upon:

expected electricity demand;

generation costs;

fuel prices;

weather forecasts;

transmission constraints;

available generation capacity;

expected market-clearing prices;

contractual obligations;

regulatory requirements; and

the trader's own risk tolerance.

Under herd behaviour, however, the decision-making process becomes partly dependent upon the observed behaviour of others.

For example:

Trader A observes that several generators are bidding electricity at unusually high prices. A concludes that the market must be experiencing scarcity and also increases its bid. Trader B observes A and the other generators and does the same. The resulting collective bidding behaviour may push the market price substantially upward.

The important characteristic is the feedback loop:

Observed trading behaviour → imitation → increased demand/withholding → price movement → further imitation → amplified market movement.

3. Why Electricity Markets Are Particularly Vulnerable

Electricity markets have characteristics that can intensify herd behaviour.

A. Electricity cannot easily be stored

Unlike oil or many other commodities, electricity generally must be produced and consumed almost simultaneously. Consequently, a temporary imbalance between supply and demand can produce very large price movements.

B. Demand can be highly predictable

Weather forecasts, heatwaves, cold weather and major events can provide traders with information about expected electricity consumption.

If several traders expect extreme demand, they may simultaneously increase purchases or bid prices.

C. Limited transmission capacity

Electricity cannot necessarily move freely from one region to another. Transmission congestion can divide markets into separate pricing zones.

Consequently, herd behaviour in one constrained area can have much larger price consequences than similar behaviour in a liquid unconstrained market.

D. Small number of significant participants

Some electricity markets have relatively concentrated generation or trading structures. When a limited number of firms control substantial capacity, their simultaneous decisions can have significant market effects.

E. Algorithmic and automated trading

Modern electricity markets increasingly rely on automated bidding and forecasting systems. If algorithms use similar market signals, they can sometimes produce correlated trading behaviour even without explicit communication between traders.

4. Types of Herd Behaviour in Electricity Trading

4.1 Herding in Electricity Purchasing

Traders may purchase electricity because other market participants appear to be aggressively buying.

For example:

Trader A begins purchasing substantial quantities.

Trader B interprets A's activity as evidence of an impending shortage.

B also purchases.

Other traders observe the increased activity.

Prices rise.

Additional traders purchase because prices are moving upward.

This creates a self-reinforcing price movement.

The conduct is not necessarily illegal. It becomes legally problematic where transactions are designed to create a false appearance of demand or to manipulate the market.

4.2 Herding Through Capacity Withholding

Another form occurs when generators observe competitors withholding generation capacity.

Suppose several generators have the ability to produce electricity but offer only part of their available capacity into the market.

Other generators may conclude that supply is becoming scarce and respond with higher bids or additional withholding.

This can produce:

Reduced available supply → higher clearing price → further withholding → even higher price.

FERC has specifically identified withholding as an important form of electricity-market manipulation. Its materials describe both physical withholding and economic withholding and connect withholding practices to the California electricity crisis. (Federal Energy Regulatory Commission)

4.3 Herd Behaviour During Price Spikes

Electricity markets can experience sudden price spikes.

When traders see rapidly increasing prices, some may assume that the market has fundamentally changed and follow the prevailing direction.

This can produce:

excessive buying;

speculative positions;

increased volatility;

distorted price signals; and

increased balancing costs.

A price increase therefore can become partly self-reinforcing.

4.4 Herd Behaviour Based on Information

Electricity traders receive enormous amounts of information, including:

weather forecasts;

generator outages;

transmission outages;

fuel prices;

demand forecasts;

renewable generation forecasts;

market announcements;

regulatory decisions; and

publicly observable bids and prices.

If traders disproportionately rely upon the behaviour of other market participants rather than fundamental information, informational cascades can arise.

5. Herd Behaviour and Market Manipulation

The most important legal distinction is between legitimate parallel behaviour and unlawful manipulation.

Legitimate parallel behaviour

Suppose ten generators independently determine that a heatwave will increase electricity demand. All ten increase their bids.

The fact that their conduct is similar does not, by itself, establish manipulation.

Potentially unlawful conduct

Suppose traders communicate secretly and agree to create an artificial shortage, submit deceptive schedules, or conduct transactions designed to move the market price for the benefit of related positions.

That conduct can constitute market manipulation.

In the United States, FERC's Anti-Manipulation Rule, 18 C.F.R. § 1c.2, prohibits devices or schemes to defraud, materially false or misleading statements, and conduct operating as fraud or deceit in covered energy transactions. (Federal Energy Regulatory Commission)

Thus:

Herding itself ≠ necessarily illegal.

But:

Herding + deception/collusion/artificial transactions = potential market manipulation.

6. Case Law

Case 1: Enron Power Marketing, Inc. v. FERC, 296 F.3d 1148 (D.C. Cir. 2002)

This case arose from FERC's regulation of Enron's participation in electricity markets.

The D.C. Circuit considered FERC's authority in relation to Enron's market-based rate authority. The case forms part of the broader legal history surrounding FERC's response to the California electricity crisis. (Federal Energy Regulatory Commission)

Relevance to herd behaviour

The importance of the case lies in the regulatory context: electricity markets operating through market-based pricing require participants to act within the rules governing market integrity.

Where traders collectively respond to market signals, regulators must distinguish normal competitive behaviour from conduct designed to distort those signals.

7. Public Utilities Commission of California v. FERC

The Ninth Circuit's discussion of the California electricity crisis provides important evidence concerning how trading behaviour could exploit market conditions.

The court described practices including withholding, unusual bidding strategies and artificial transactions associated with the crisis. (Justia Law)

The case is particularly relevant because it demonstrates how collective market behaviour can amplify scarcity signals.

For example, the court discussed:

withholding generation;

extremely high bidding;

artificial transactions;

creation of artificial congestion; and

transactions that created the appearance of demand.

These practices demonstrate the difference between genuine scarcity and artificially generated scarcity.

8. P. ex rel. Brown v. Powerex Corp., 2007

In P. ex rel. Brown v. Powerex Corp., the California Court of Appeal examined allegations concerning electricity-market manipulation following the Enron-era crisis.

The case discussed strategies such as Ricochet and Death Star, including transactions designed to exploit California's market rules and create artificial congestion or obtain payments without corresponding physical electricity movements. (Justia Law)

Importance

The case demonstrates how apparently sophisticated trading activity can affect the underlying market mechanism.

Herd behaviour can magnify such conduct because once market participants believe congestion or scarcity exists, other traders may respond to the distorted signal.

9. California Department of Water Resources v. Powerex Corp.

The Ninth Circuit considered litigation concerning allegations that Powerex had participated in Enron-style market gaming and manipulation during the California energy crisis.

The allegations included conduct that tightened the effective supply of electricity and created the appearance of scarcity. (Justia Law)

Relevance

This is particularly important to the study of herd behaviour because electricity markets respond to perceived supply conditions, not simply actual physical supply.

If market participants believe that supply is scarce, they may:

increase bids;

purchase additional electricity;

withhold generation;

change forward positions; or

alter reserve positions.

Consequently, an artificial scarcity signal can potentially trigger broader market reactions.

10. Enron Western Electricity Crisis

The 2000–2001 Western Energy Crisis is one of the most important examples for studying electricity-market behaviour.

FERC's investigation found that the crisis involved a combination of supply-demand problems, infrastructure limitations, flawed market design and manipulation. FERC investigated Enron and other market participants and ultimately obtained billions of dollars in settlements associated with the crisis. (Federal Energy Regulatory Commission)

FERC materials identify practices including:

physical withholding;

economic withholding;

false scheduling;

artificial congestion;

anomalous bidding; and

other gaming strategies. (Federal Energy Regulatory Commission)

The lesson for herd behaviour is that market participants can respond to distorted information and reinforce an existing market imbalance.

11. Barclays Electricity Trading Case

A modern example illustrating the relationship between physical electricity trading and financial positions is the FERC proceeding involving Barclays Bank and its traders.

FERC found that Barclays engaged in loss-generating physical electricity trades designed to influence an electricity index that affected related financial swap positions. FERC assessed substantial penalties and disgorgement. (Federal Energy Regulatory Commission)

FERC's later court proceedings record a $70 million civil penalty and $35 million disgorgement settlement. (Federal Energy Regulatory Commission)

Relevance to herd behaviour

This demonstrates why regulators examine not only an individual electricity trade but also:

physical position + financial position + market price + trading strategy.

A trader's apparent electricity-market activity may have an economic purpose outside the physical electricity transaction itself.

12. MISO Cinergy Hub Transactions

In 2014, FERC approved settlements concerning MISO Cinergy Hub transactions involving Twin Cities Power and several traders.

FERC found violations of its Anti-Manipulation Rule involving physical power transactions used to benefit related swap positions settling against real-time MISO prices. The settlements included civil penalties, disgorgement and compliance measures. (Federal Energy Regulatory Commission)

This case illustrates the importance of examining linked physical and financial transactions rather than analysing electricity trades in isolation.

13. Legal Framework for Controlling Herd Behaviour

A. Anti-manipulation rules

The principal legal objective is to prevent traders from creating artificial market conditions.

Under FERC's framework, prohibited conduct includes:

fraudulent schemes;

material misrepresentations;

deceptive conduct; and

practices operating as fraud or deceit.

(Federal Energy Regulatory Commission)

B. Market monitoring

Independent market monitors can examine:

abnormal bidding;

unusual price movements;

repeated trading patterns;

capacity withholding;

congestion patterns;

suspicious transactions;

relationships between physical and financial positions.

This is important because herd behaviour is often visible through patterns rather than individual transactions.

C. Transparency

Transparency can reduce informational asymmetry.

Market operators may publish information concerning:

system demand;

generation availability;

transmission constraints;

outages;

market prices;

reserve requirements; and

market-clearing outcomes.

However, transparency must be carefully designed so that information intended to improve market efficiency does not facilitate coordination or manipulation.

14. Herd Behaviour and Competition Law

Herd behaviour also intersects with competition law.

There is an important distinction between:

Independent parallel conduct

Several firms independently reach the same commercial conclusion.

Coordinated conduct

Several firms communicate or otherwise coordinate their conduct to achieve a common market outcome.

Competition law generally focuses heavily on the second category.

In electricity markets, the concern is especially significant because coordinated withholding or coordinated bidding can have a disproportionate effect on market-clearing prices.

15. Regulatory Challenges in Modern Electricity Markets

Herd behaviour is becoming more complicated because electricity markets now involve:

renewable generation;

battery storage;

demand-response aggregators;

virtual power plants;

algorithmic bidding;

electricity derivatives;

cross-border electricity trading;

distributed energy resources; and

increasingly automated market participation.

An algorithm can react to the same publicly available signal as another algorithm. Consequently, similar bids may emerge without traditional human-to-human communication.

The regulatory challenge is therefore to distinguish:

lawful algorithmic adaptation

from

algorithmic coordination or manipulation.

16. Economic Consequences

Herd behaviour can have several consequences.

1. Price volatility

Large numbers of traders moving in the same direction can amplify price movements.

2. Artificial scarcity

If traders collectively withhold capacity, the market may perceive scarcity that does not accurately reflect physical conditions.

3. Congestion

Trading concentrated around transmission constraints can increase congestion and create large locational price differences.

4. Consumer harm

Wholesale price increases can ultimately increase costs for utilities, retailers and consumers.

FERC expressly identifies consumer harm as one of the principal concerns associated with energy-market manipulation. (Federal Energy Regulatory Commission)

5. Loss of market confidence

If participants believe that prices do not reflect genuine supply and demand, confidence in the market's price-discovery mechanism can decline.

17. Regulatory Tests for Detecting Herd Behaviour

A sophisticated regulatory investigation can examine:

No single indicator necessarily proves unlawful conduct. Regulators generally need to examine the totality of circumstances.

18. Difference Between Herd Behaviour and Market Manipulation

Therefore, herd behaviour is primarily an economic and behavioural phenomenon, while market manipulation is a legal concept requiring particular prohibited conduct or intent/elements under the applicable law.

19. Indian Context

In India, electricity trading is regulated within a framework involving the Electricity Act, 2003, the Central Electricity Regulatory Commission (CERC), power exchanges and market regulations.

The Indian market is also susceptible to behavioural effects because electricity prices respond to:

demand conditions;

generation availability;

renewable-energy variability;

transmission constraints;

fuel availability;

power-exchange bidding;

ancillary-service requirements; and

regulatory interventions.

The legal significance of herd behaviour in India would therefore depend upon whether the conduct violates applicable electricity-market regulations, exchange rules, contractual obligations, competition law or other applicable legislation.

A useful legal approach is to distinguish legitimate competitive bidding from conduct designed to create artificial scarcity, manipulate prices or deceive the market operator.

20. Conclusion

Herd behaviour in electricity trading systems describes the tendency of market participants to follow the observed decisions or expectations of other traders. Because electricity markets are characterized by non-storability, short settlement periods, network constraints and volatile supply-demand conditions, herd behaviour can have unusually strong consequences.

The central legal issue is not simply whether traders behave similarly. Regulators must determine whether the similarity results from legitimate independent responses to common information or from conduct that creates an artificial market signal.

The California electricity crisis and subsequent FERC enforcement actions demonstrate why this distinction matters. The Enron-related cases, P. ex rel. Brown v. Powerex, California Department of Water Resources v. Powerex, and later FERC enforcement involving Barclays and MISO transactions show how electricity trading can be analysed through the combined lenses of market integrity, physical electricity positions, financial positions, deception, market impact and regulatory jurisdiction. (Justia Law)

Ultimately, effective electricity-market regulation should preserve the ability of traders to respond independently to market information while preventing coordinated or deceptive conduct that undermines genuine price discovery, competition and consumer protection.