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A Quantitative Analysis of Pricing Behavior In California’s Wholesale Electricity Market During Summer 2000

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Author Info
Joskow, P.
Edward Kahn

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Abstract

During the Summer of 2000, wholesale electricity prices in California were nearly 500% higher than they were during the same months in 1998 or 1999. This price explosion was unexpected and has called into question whether electricity restructuring will bring the benefits of competition promised to consumers. The purpose of this paper is to examine the factors that explain this increase in wholesale electricity prices. We simulate competitive benchmark prices for Summer of 2000 taking account of all relevant supply and demand factors --- gas prices, demand, imports from other states, and emission permit prices. We then compare the simulated competitive benchmark prices with the actual prices observed. We find that there is a large gap between our benchmark competitive prices and observed prices, suggesting that the prices observed during summer 2000 reflect, in part, the exercise of market power by suppliers. We then proceed to examine supplier behavior during high-price hours. We find evidence that suppliers withheld supply from the market that would have been profitable for price-taking firms to sell at the market price.

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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0211.

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Length: 42
Date of creation: May 2002
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Handle: RePEc:cam:camdae:0211

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Related research
Keywords: electricity; market power; deregulation;

Other versions of this item:

Find related papers by JEL classification:
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Catherine D. Wolfram, 1999. "Measuring Duopoly Power in the British Electricity Spot Market," American Economic Review, American Economic Association, vol. 89(4), pages 805-826, September. [Downloadable!] (restricted)
  2. Joskow, P.L., 1989. "Regulatory Failure, Regulatory Reform And Structural Change In The Electric Power Industry," Working papers 516, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Severin Borenstein & James Bushnell & Frank Wolak, 1999. "Diagnosing Market Power in California's Deregulated Wholesale Electricity Market," Competition Policy Center, Working Paper Series CPC99-007, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley. [Downloadable!]
  4. Borenstein, Severin & Bushnell, James, 1999. "An Empirical Analysis of the Potential for Market Power in California's Electricity Industry," Journal of Industrial Economics, Blackwell Publishing, vol. 47(3), pages 285-323, September. [Downloadable!] (restricted)
    Other versions:
  5. Ellerman,A. Denny & Joskow,Paul L. & Schmalensee,Richard & Montero,Juan-Pablo & Bailey Elizabeth M., 2005. "Markets for Clean Air," Cambridge Books, Cambridge University Press, number 9780521023894, February.
    Other versions:
    • Ellerman,A. Denny & Joskow,Paul L. & Schmalensee,Richard & Montero,Juan-Pablo & Bailey Elizabeth M., 2000. "Markets for Clean Air," Cambridge Books, Cambridge University Press, number 9780521660839, February.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Tanga McDaniel & Neuhoff, K., 2002. "Use of Long-term Auctions for Network Investment," Cambridge Working Papers in Economics 0213, Faculty of Economics, University of Cambridge. [Downloadable!]
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  2. John McMillan, 2004. "Using Markets to Help Solve Public Problems," NBER Chapters, in: Governance, Regulation, and Privatization in the Asia-Pacific Region, NBER East Asia Seminar on Economics, Volume 12, pages 73-92 National Bureau of Economic Research, Inc. [Downloadable!]
  3. Alejandro Ibarra-Yunez, 2004. "Strategic Conduct and Access Discrimination, in the Semi-Liberalized Electricity Sector in Mexico," Frontiers in Finance and Economics, Lille Graduate School of Management, vol. 1(1), pages 57-69, June. [Downloadable!]
  4. Juan Pablo Montero, 2009. "Market Power in Pollution Permit Markets," Documentos de Trabajo 355, Instituto de Economía. Pontificia Universidad Católica de Chile.. [Downloadable!]
  5. Reiss, Peter C. & White, Matthew W., 2003. "Demand and Pricing in Electricity Markets: Evidence from San Diego During California's Energy Crisis," Research Papers 1829, Stanford University, Graduate School of Business. [Downloadable!]
  6. Hoel, Michael, 2004. "Electricity prices in a mixed thermal and hydropower system," Memorandum 28/2004, Oslo University, Department of Economics. [Downloadable!]
  7. Mulder, Machiel & Vermeulen, Marcel & Hehenkamp, Meinoud, 2008. "Monitor Energy Markets 2007 - Analysis of developments on the Dutch wholesale markets for gas and electricity," Market monitor energy, Department of Energy, Netherlands Competition Authority, edition 1, volume 1, number 07 edited by Machiel Mulder, Julio. [Downloadable!]
  8. Jamasb, T., 2002. "Reform and Regulation of the Electricity Sectors in Developing Countries," Cambridge Working Papers in Economics 0226, Faculty of Economics, University of Cambridge. [Downloadable!]
  9. James Alm & Edward Sennoga & Mark Skidmore, 2005. "Perfect Competition, Spatial Competition, and Tax Incidence in the Retail Gasoline Market," Working Papers 05-09, UW-Whitewater, Department of Economics. [Downloadable!]
  10. Meredith Fowlie & Christopher R. Knittel & Catherine Wolfram, 2008. "Sacred Cars? Optimal Regulation of Stationary and Non-stationary Pollution Sources," NBER Working Papers 14504, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Jason P. Martinek & Michael J. Orlando, 2002. "Neither Lucky Nor Good - The Case of Electricity Deregulation in California," The Economic and Social Review, Economic and Social Studies, vol. 33(1), pages 75-82. [Downloadable!]
  12. Meredith Fowlie, 2008. "Incomplete Environmental Regulation, Imperfect Competition, and Emissions Leakage," NBER Working Papers 14421, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Twomey, P. & Green, R. & Neuhoff, K. & Newbery, D., 2005. "A Review of the Monitoring of Market Power The Possible Roles of TSOs in Monitoring for Market Power Issues in Congested Transmission Systems," Cambridge Working Papers in Economics 0504, Faculty of Economics, University of Cambridge. [Downloadable!]
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  14. Knittel, Christopher & Kim, Dae-Wook, 2005. "Biases in Static Oligopoly Models? Evidence from the California Electricity Market," Working Papers 05-26, University of California at Davis, Department of Economics. [Downloadable!]
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  15. Stephen P. Holland & Michael Moore, 2008. "When to Pollute, When to Abate? Intertemporal Permit Use in the Los Angeles NOx Market," NBER Working Papers 14254, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  16. Debashis Pal & Arup Bose & David Sappington, 2008. "Pareto Improving Inefficiency," University of Cincinnati, Economics Working Papers Series 2008-04, University of Cincinnati, Department of Economics. [Downloadable!]
  17. SMEERS, Yves, 2005. "How well can one measure market power in restructured electricity systems ?," CORE Discussion Papers 2005050, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
  18. Niamh McCarthy, 2005. "Market Size, Market Structure & Market Power in the Irish Electricity Industry," Papers WP168, Economic and Social Research Institute (ESRI). [Downloadable!]
  19. SANIN, Maria Eugenia, 2006. "Market design in wholesale electricity markets," CORE Discussion Papers 2006100, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
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