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Inefficiencies and Market Power in Financial Arbitrage: A Study of California's Electricity Markets

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  • Borenstein, Severin
  • Bushnell, James
  • Knittel, Chris
  • Wolfram, Catherine

Abstract

For two years prior to the collapse of Californiaï¾’s restructured electricity market, power traded in both a forward and a spot market for delivery at the same times and locations. Nonetheless, prices in the two markets often differed in significant and predictable ways. This apparent inefficiency persisted, we argue, because most firms believed that trading on inter-market price differences would yield regulatory penalties. For the few firms that did make such trades, it was not profit- maximizing to eliminate the price differences entirely. Skyrocketing prices in 2000 changed the major buyersï¾’ (utilitiesï¾’) incentives and exacerbated the price differentials between the markets.

Suggested Citation

  • Borenstein, Severin & Bushnell, James & Knittel, Chris & Wolfram, Catherine, 2008. "Inefficiencies and Market Power in Financial Arbitrage: A Study of California's Electricity Markets," Staff General Research Papers Archive 13133, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genres:13133
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    References listed on IDEAS

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