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Diagnosing Market Power in California's Restructured Wholesale Electricity Market

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Author Info
Severin Borenstein
James Bushnell
Frank Wolak

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Abstract

Effective competition in wholesale electricity markets is a necessary feature of a successful electricity supply industry restructuring. We examine the degree of competition in the California wholesale electricity market during the period June 1998 to September 1999 by comparing the market prices with estimates of the prices that would have resulted if owners of instate fossil fuel generating facilities behaved as price takers. We find that there were significant departures from competitive pricing and that these departures are most pronounced during the highest demand periods, which tend to occur during the months of July through September. Through most of the winter and spring of 1999 there was little evidence of the exercise of market power. Overall, the exercise of market power raised the cost of power purchases by about 16% above the competitive level. Following the presentation of our methodology for computing the counterfactual price-taking market price, we describe why our calculation represents a lower bound on the extent of market power and why the observed market prices cannot by attributed to competitive peak-lead pricing.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7868.

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Date of creation: Sep 2000
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Publication status: published as Borenstein, Severin, James B. Bushnell and Frank A. Wolak. "Measuring Market Inefficiencies In California's Restructured Wholesale Electricity Market," American Economic Review, 2002, v92(5,Dec), 1376-1405.
Handle: RePEc:nbr:nberwo:7868

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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. Andrews, Donald W K, 1991. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Econometrica, Econometric Society, vol. 59(3), pages 817-58, May. [Downloadable!] (restricted)
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  2. Bushnell, J. & Oren, S., 1997. "Transmission pricing in California's proposed electricity market," Utilities Policy, Elsevier, vol. 6(3), pages 237-244, September. [Downloadable!] (restricted)
  3. 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. [Downloadable!] (restricted)
  4. Green, Richard J & Newbery, David M, 1992. "Competition in the British Electricity Spot Market," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 929-53, October. [Downloadable!] (restricted)
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(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. Andreas Freytag & Dirk Schiereck & Thomas W. Thomas, 2005. "Consolidation and Market Power of Energy Utilities - The case of US-American and German Utility Takeovers," Jenaer Schriften zur Wirtschaftswissenschaft 07/2005, Friedrich-Schiller-Universität Jena, Wirtschaftswissenschaftliche Fakultät. [Downloadable!]
  2. Ahmed Anwar, 2006. "Single or Multiple Pricing in Electricity Pools?," ESE Discussion Papers 143, Edinburgh School of Economics, University of Edinburgh. [Downloadable!]
  3. Juan Pablo Montero & Hugh Rudnick, 2001. "Precios Eléctricos Flexibles," Cuadernos de Economía (Latin American Journal of Economics), Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 38(113), pages 91-109. [Downloadable!]
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