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Diagnosing Unilateral Market Power in Electricity Reserves Market

  • Knittel, Christopher R
  • Metaxoglou, Konstantinos

We use information released during the investigation of the California electricity crisis of 2000 and 2001 by the Federal Energy Regulatory Commission to diagnose allocative inefficiencies in the state’s wholesale reserve markets. Material that has been largely neglected allows us to replicate market outcomes with a high degree of precision for the second and third quarters of 2000. Building on the work of Wolak (2000), we calculate a lower bound for the sellers’ price-cost margins using the inverse elasticities of their residual demand curves. The downward bias in our estimates stems from the fact that we don’t account for the hierarchical substitutability of the reserve types. The margins averaged at least 20 percent for the two highest quality types of reserves, regulation and spinning, generating millions of dollars in transfers to a handful of sellers. We attribute the deviations from marginal cost pricing to the markets’ high concentration and a principal-agent relationship that emerged from their design.

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Paper provided by Institute of Transportation Studies, UC Davis in its series Institute of Transportation Studies, Working Paper Series with number qt14q6c0mk.

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Date of creation: 15 Jan 2008
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Handle: RePEc:cdl:itsdav:qt14q6c0mk
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  1. repec:dgr:kubcen:200763 is not listed on IDEAS
  2. Green, Richard & Newbery, David M G, 1991. "Competition in the British Electricity Spot Market," CEPR Discussion Papers 557, C.E.P.R. Discussion Papers.
  3. Willems, Bert & Rumiantseva, I. & Weigt, H., 2007. "Cournot versus Supply Functions : What Does the Data tell us?," Discussion Paper 2007-023, Tilburg University, Tilburg Law and Economic Center.
  4. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-77, November.
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  9. Frank Wolak, 2000. "An Empirical Analysis of the Impact of Hedge Contracts on Bidding Behavior in a Competitive Electricity Market," International Economic Journal, Taylor & Francis Journals, vol. 14(2), pages 1-39.
  10. Kamat, Rajnish & Oren, Shmuel S, 2002. "Rational Buyer Meets Rational Seller: Reserves Market Equilibria under Alternative Auction Designs," Journal of Regulatory Economics, Springer, vol. 21(3), pages 247-88, May.
  11. Knittel, Christopher R. & Roberts, Michael R., 2005. "An empirical examination of restructured electricity prices," Energy Economics, Elsevier, vol. 27(5), pages 791-817, September.
  12. 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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  15. Steven L. Puller, 2007. "Pricing and Firm Conduct in California's Deregulated Electricity Market," The Review of Economics and Statistics, MIT Press, vol. 89(1), pages 75-87, February.
  16. Par Holmberg, 2007. "Supply Function Equilibrium with Asymmetric Capacities and Constant Marginal Costs," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 55-82.
  17. GABSZEWICZ, Jean J. & THISSE, Jacques-François, . "Price competition, quality and income disparities," CORE Discussion Papers RP -370, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  18. Barmack, Matthew A., 2003. "What Do the ISOs' Public Bid Data Reveal about the California Market?," The Electricity Journal, Elsevier, vol. 16(1), pages 63-73.
  19. Chao, Hung-Po & Wilson, Robert, 2002. "Multi-dimensional Procurement Auctions for Power Reserves: Robust Incentive-Compatible Scoring and Settlement Rules," Journal of Regulatory Economics, Springer, vol. 22(2), pages 161-83, September.
  20. Ramteen Sioshansi & Shmuel Oren, 2007. "How good are supply function equilibrium models: an empirical analysis of the ERCOT balancing market," Journal of Regulatory Economics, Springer, vol. 31(1), pages 1-35, February.
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