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

Abstract

2 FERC (1998) gives a detailed account of price spikes in Midwestern markets in 1998. Price spikes in the Eastern US during 1999 were related to reliability problems of various kinds (DOE, 2000). Prices in California remained remarkably high in October and November and then reached unprecedented levels during December 2000. The latter part of this period was also accompanied by an order of magnitude increase in gas prices, the evaporation of imports from the Northwest, a large fraction of California's generating capacity was unavailable to supply due to planned or forced outages, some of which were mandated by environmental regulators, new regulatory interventions, and utility credit problems that may have made some suppliers reluctant to supply voluntarily. It is clear that by late 2000, the normal functioning of the wholesale electricity markets had completely broken down. The analysis reported here does not cover the post-September 2000 period, however.

Price Spikes in Energy Markets: “Business by Usual Methods” or Strategic Withholding?

“…Unit cost would differ if the firm in question represented marginal capacity, but even then the cost effect is likely to be secondary. For an approach that allows for some cost variation, see Joskow and Kahn (2002). 14 The important analytical construct is therefore the residual demand curve faced by the firm in question.…”

“…For 80-90 percent of capacity, elasticity equals 0.3, and above 90 percent, it is 0.1. See Joskow and Kahn (2002), Wolfram (1998), Hortacsu and Puller (2008). share suffices. And if E = 1.0, a 10 percent pre-withholding margin still requires only a 10 percent post-withholding share.…”

“…Prominent among such studies are Borenstein et al (2002) and Joskow and Kahn (2002), both of which focus on the 2001 California experience. The basic methodology for each of these is similar and involves a comparison of actual price to a counterfactual competitive price based on calculated marginal costs of the marginal generation plant.…”

Privatization of Water-Resource Development

“…5. Joskow and Kahn (2002) and Borenstein et al (2002) find evidence of substantial market power in the restructured California electricity markets. 6.…”

The Year in Review: Economics at the Antitrust Division, 2005–2006

“…One of the primary causes of the run-up in electricity prices during the California crisis of 2000-2001 was the exercise of unilateral market power by wholesale generation firms. See, e.g., Wolak (2003) and Joskow and Kahn (2002). Indeed, significant market power apparently was being exercised even before the price spikes in the summer of 2000.…”