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Diagnosing Market Power in California's Deregulated Wholesale Electricity Market

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  • Borenstein, Severin
  • Bushnell, James
  • Wolak, Frank

Abstract

Effective competition in wholesale electricity markets is the cornerstone of the deregulation of the electricity generation industry. We examine the degree of competition in the California wholesale electricity market during June-November 1998 by comparing the market prices with estimates of the prices that would have resulted if all firms were price takers. We find that there were significant departures from competitive pricing and that it was most pronounced during the highest demand periods. Overall, this raised the cost of power purchases by about 22% above the competitive level. We also explain why the prices observed cannot be attributed to competitive peak-load pricing.

Suggested Citation

  • Borenstein, Severin & Bushnell, James & Wolak, Frank, 1999. "Diagnosing Market Power in California's Deregulated Wholesale Electricity Market," Competition Policy Center, Working Paper Series qt3rx965d5, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
    • Handle: RePEc:cdl:compol:qt3rx965d5
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    References listed on IDEAS

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    1. 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.
    2. Tirole, Jean & Joskow, Paul L, 1999. "Transmission Rights and Market Power on Electric Power Networks I: Financial Rights," CEPR Discussion Papers 2093, Centre for Economic Policy Research.
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    6. Bushnell, J. & Oren, S., 1997. "Transmission pricing in California's proposed electricity market," Utilities Policy, Elsevier, vol. 6(3), pages 237-244, September.
    7. 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.
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    9. Bushnell, James, 1999. "Transmission Rights and Market Power," The Electricity Journal, Elsevier, vol. 12(8), pages 77-85, October.
    10. 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.
    11. Severin Borenstein & James Bushnell & Christopher R. Knittel, 1999. "Market Power in Electricity Markets: Beyond Concentration Measures," The Energy Journal, , vol. 20(4), pages 65-88, October.
    12. Tirole, Jean & Joskow, Paul L, 1999. "Transmission Rights and Market Power on Electric Power Networks. II: Physical Rights," CEPR Discussion Papers 2087, Centre for Economic Policy Research.
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    Cited by:

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    2. Jostein Skaar & Lars Sørgard, 2006. "Temporary Bottlenecks, Hydropower and Acquisitions," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(3), pages 481-497, October.
    3. Sertaç Oruç & Scott Cunningham, 2014. "Transmission Rights to the Electrical Transmission Grid in the Post Liberalization Era," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 5(4), pages 686-705, December.
    4. Paul L. Joskow, 2001. "California's Electricity Crisis," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 17(3), pages 365-388.
    5. Sirin, Selahattin Murat & Camadan, Ercument & Erten, Ibrahim Etem & Zhang, Alex Hongliang, 2023. "Market failure or politics? Understanding the motives behind regulatory actions to address surging electricity prices," Energy Policy, Elsevier, vol. 180(C).
    6. Joel I. Singer, 2002. "Double Auctions Across a Constrained Transmission Line," Operations Research, INFORMS, vol. 50(3), pages 449-461, June.
    7. Sirin, Selahattin Murat & Erten, Ibrahim, 2022. "Price spikes, temporary price caps, and welfare effects of regulatory interventions on wholesale electricity markets," Energy Policy, Elsevier, vol. 163(C).

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