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Regulation and the Leverage of Local Market Power in the California Electricity Market

Listed author(s):
  • Bushnell, James
  • Wolak, Frank A.

Regulators of electricity markets around the world continue to struggle with the problem of incentivizing generators whose output, due to their location in the grid, has no viable substitutes. Such generators possess 'local' market power. Since these generators also compete in broader regional markets, the actions taken to exploit their local market power can also effect market outcomes over larger areas. In California, a contract structure known as the reliability must-run (RMR) contract was developed to address the problem of local market power. However, the contract form that was in place during 1998 created serious incentive problems. We find that, during the months of June through September 1998, RMR contracts had the effect of raising overall supply bid prices from most producers, thereby leading to higher energy prices in the California regional market.

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Paper provided by Competition Policy Center, Institute for Business and Economic Research, UC Berkeley in its series Competition Policy Center, Working Paper Series with number qt3tq002qk.

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Date of creation: 02 May 2000
Handle: RePEc:cdl:compol:qt3tq002qk
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