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A Quantitative Analysis of Pricing Behavior in California's Wholesale Electricity Market During Summer 2000

During the Summer of 2000, wholesale electricity prices in California were nearly 500% higher than they were during the same months in 1998 or 1999. This price explosion was unexpected and has called into question whether electricity restructuring will bring the benefits of competition promised to consumers. The purpose of this paper is to examine the factors that explain this increase in wholesale electricity prices. We simulate competitive benchmark prices for Summer of 2000 taking account of all relevant supply and demand factors-gas prices, demand, imports from other states, and emission permit prices. We then compare the simulated competitive benchmark prices with the actual prices observed. We find that there is a large gap between our benchmark competitive prices and observed prices, suggesting that the prices observed during Summer 2000 reflect, in part, the exercise of market power by suppliers. We then proceed to examine supplier behavior during high price hours. We find evidence that suppliers withheld supply from the market that would have been profitable for price-taking firms to sell at the market price.

Purchase ( $25 )

Energy Specializations: Energy Modeling – Sectoral Energy Demand & Technology; Electricity – Local Distribution; Electricity – Markets and Prices ; Electricity – Policy and Regulation

JEL Codes:
Q55 - Environmental Economics: Technological Innovation
D44 - Auctions
D42 - Market Structure, Pricing, and Design: Monopoly
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: California electricity market, increased loads Summer 2000, wholesale electricity, Natural gas prices, electricity supply, Market power

DOI: 10.5547/ISSN0195-6574-EJ-Vol23-No4-1

Published in Volume23, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.