A quantitative analysis of pricing behavior in California's wholesale electricity market during summer 2000

Abstract

Summary form only given. This paper analyzes empirically whether or not the prices and related behavior observed in California's wholesale electricity market in summer 2000 are consistent with what would be expected in a workably competitive market. Some have argued that the huge increase in wholesale electricity prices observed during the Summer 2000 can be fully explained by "market fundamentals" such as rising natural gas prices, increased, loads in California, a reduction of supplies available for import into California due to higher loads elsewhere in the Western States Coordinating Council (WSCC) and poor hydro conditions in the Northwest. Our analysis incorporates these "market fundamentals" and seeks to quantify their effects on wholesale market prices in a competitive market. We find that actual wholesale market prices far exceed competitive benchmark prices that reflect this summer's natural gas price, demand, and import conditions. Thus, these "market fundamentals" cannot explain the huge increases in wholesale market prices observed during Summer 2000. After taking all of the factors into account our analysis leads us to conclude that truly competitive prices in the California electricity market would have been substantially lower than those observed this past summer. This "price gap" provides a rough measure of the effects of market power and related market imperfections reflected in wholesale market prices in California during the June through September 2000 period.