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Diagnosing Market Power in California's Restructured Wholesale Electricity Market

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  • Severin Borenstein
  • James Bushnell
  • Frank Wolak

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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Bibliographic Info

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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  1. 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.
  2. 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.
  3. Andrews, Donald W K, 1991. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Econometrica, Econometric Society, Econometric Society, vol. 59(3), pages 817-58, May.
  4. Cardell, Judith B. & Hitt, Carrie Cullen & Hogan, William W., 1997. "Market power and strategic interaction in electricity networks," Resource and Energy Economics, Elsevier, Elsevier, vol. 19(1-2), pages 109-137, March.
  5. Green, Richard J & Newbery, David M, 1992. "Competition in the British Electricity Spot Market," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 100(5), pages 929-53, October.
  6. Borenstein, Severin & Bushnell, James & Knittel, Chris, 1999. "Market Power in Electricity Markets: Beyond Concentration Measures," Staff General Research Papers 31548, Iowa State University, Department of Economics.
  7. Bushnell, James, 1999. "Transmission Rights and Market Power," The Electricity Journal, Elsevier, Elsevier, vol. 12(8), pages 77-85, October.
  8. Bushnell, James & Wolfram, Catherine, 2008. "Electricity Markets," Staff General Research Papers 31547, Iowa State University, Department of Economics.
  9. Bushnell, J. & Oren, S., 1997. "Transmission pricing in California's proposed electricity market," Utilities Policy, Elsevier, Elsevier, vol. 6(3), pages 237-244, September.
  10. Shmuel S. Oren, 1997. "Economic Inefficiency of Passive Transmission Rights in Congested Electricity Systems with Competitive Generation," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Number 1), pages 63-83.
  11. Joskow, Paul L & Tirole, Jean, 1999. "Transmission Rights and Market Power on Electric Power Networks I: Financial Rights," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2093, C.E.P.R. Discussion Papers.
  12. Borenstein, Severin & Bushnell, James & Kahn, Edward & Stoft, Steven, 1995. "Market power in California electricity markets," Utilities Policy, Elsevier, Elsevier, vol. 5(3-4), pages 219-236.
  13. Kahn, Edward & Bailey, Shawn & Pando, Luis, 1997. "Simulating electricity restructuring in California: Interactions with the regional market," Resource and Energy Economics, Elsevier, Elsevier, vol. 19(1-2), pages 3-28, March.
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Cited by:
  1. Aitor Ciarreta & María Espinosa, 2010. "Market power in the Spanish electricity auction," Journal of Regulatory Economics, Springer, Springer, vol. 37(1), pages 42-69, February.
  2. Paul L. Joskow & Edward Kohn, 2002. "A Quantitative Analysis of Pricing Behavior in California's Wholesale Electricity Market During Summer 2000," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Number 4), pages 1-35.
  3. 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.
  4. Kennedy, David, 2003. "Liberalisation of the Russian power sector," Energy Policy, Elsevier, Elsevier, vol. 31(8), pages 745-758, June.
  5. 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, Economic and Social Studies, vol. 33(1), pages 75-82.
  6. 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, Friedrich-Schiller-Universität Jena, Wirtschaftswissenschaftliche Fakultät 07/2005, Friedrich-Schiller-Universität Jena, Wirtschaftswissenschaftliche Fakultät.
  7. Juan Pablo Montero & Hugh Rudnick, 2001. "Precios Eléctricos Flexibles," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 38(113), pages 91-109.

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