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An Empirical Analysis of the Potential for Market Power in California's Electricity Industry

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  • Severin Borenstein
  • James Bushnell

Abstract

We use demand and plant-level cost data to simulate competition in a restructured California electricity market. This approach recognizes that firms might have an incentive to restrict output in order to raise price and enables us to explicitly analyze each firm's ability to do so. We find that, under the current structure of generation ownership, there is potential for significant market power in high demand hours. During some months, congestion over Path 15, the primary in-state north-south transmission line, exacerbates the market power potential in northern California. While these results make deregulation of generation less attractive than if there were no market power, they do not suggest that deregulation would be a mistake. Nearly all markets exhibit some degree of market power. We find that the levels of hydroelectric production and the elasticity of demand are two of the most important factors in determining the severity of market power, having greater impact on equilibrium prices than the proposed divestitures of California's largest producers. These results indicate that policies promoting the responsiveness of both consumers and producers to price fluctuations can have a significant effect on reducing the market power problem.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6463.

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Date of creation: Mar 1998
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Publication status: published as Journal of Industrial Economics, Vol. 47 (September 1999).
Handle: RePEc:nbr:nberwo:6463

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  1. Bolle, Friedel, 1992. "Supply function equilibria and the danger of tacit collusion : The case of spot markets for electricity," Energy Economics, Elsevier, vol. 14(2), pages 94-102, April.
  2. Cardell, Judith B. & Hitt, Carrie Cullen & Hogan, William W., 1997. "Market power and strategic interaction in electricity networks," Resource and Energy Economics, Elsevier, vol. 19(1-2), pages 109-137, March.
  3. Frank A. Wolak & Robert H. Patrick, 2001. "The Impact of Market Rules and Market Structure on the Price Determination Process in the England and Wales Electricity Market," NBER Working Papers 8248, National Bureau of Economic Research, Inc.
  4. Richard Schmalensee & Bennett W. Golub, 1984. "Estimating Effective Concentration in Deregulated Wholesale Electricity Markets," RAND Journal of Economics, The RAND Corporation, vol. 15(1), pages 12-26, Spring.
  5. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-77, November.
  6. Severin Borenstein & James. Bushnell & Steven Stoft, 2000. "The Competitive Effects of Transmission Capacity in A Deregulated Electricity Industry," RAND Journal of Economics, The RAND Corporation, vol. 31(2), pages 294-325, Summer.
  7. David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 326-337, Autumn.
  8. Borenstein, Severin & Bushnell, James & Kahn, Edward & Stoft, Steven, 1995. "Market power in California electricity markets," Utilities Policy, Elsevier, vol. 5(3-4), pages 219-236.
  9. Kahn, Edward & Bailey, Shawn & Pando, Luis, 1997. "Simulating electricity restructuring in California: Interactions with the regional market," Resource and Energy Economics, Elsevier, vol. 19(1-2), pages 3-28, March.
  10. David M. Newbery, 1995. "Power Markets and Market Power," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 39-66.
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