Measuring Market Inefficiencies in California's Restructured Wholesale Electricity Market

Borenstein, Severin; Bushnell, James; Wolak, Frank A.

doi:10.1257/000282802762024557

Cited by 767 publications

(603 citation statements)

References 23 publications

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“…That welfare maximization can be compromised by the exercise of market power by strategic agents is well known, and many studies (see e.g. [2]) have been carried out to estimate the extent of the inefficiency caused by this.…”

Section: Introductionmentioning

confidence: 99%

Equilibrium, uncertainty and risk in hydro-thermal electricity systems

2016

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The correspondence of competitive partial equilibrium with a social optimum is well documented in the welfare theorems of economics. These theorems can be applied to single-period electricity pool auctions in which price-taking agents maximize profits at competitive prices, and extend naturally to standard models with locational marginal prices. In hydro-thermal markets where the auctions are repeated over many periods, agents seek to optimize their current and future profit accounting for future prices that depend on uncertain inflows. This makes the agent problems multistage stochastic optimization models, but perfectly competitive partial equilibrium still corresponds to a social optimum when all agents are risk neutral and share common knowledge of the probability distribution governing future inflows. The situation is complicated when agents are risk averse. In this setting we show under mild conditions that a social optimum corresponds to a competitive market equilibrium if agents have time-consistent dynamic coherent risk measures and there are enough traded market instruments to hedge inflow uncertainty. We illustrate some of the consequences of risk aversion on market outcomes using a simple two-stage competitive equilibrium model with three agents.

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Section: Introductionmentioning

confidence: 99%

Equilibrium, uncertainty and risk in hydro-thermal electricity systems

2016

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“…Borenstein and Bushnell (1999) use historical cost data to simulate California's electricity market after restructuring, and find potential for significant market power during high-demand hours. Using California post-restructuring data, Borenstein et al (2002) find near-competitive pricing during low-demand months, but a significant departure from competitive pricing during high-demand summer months. Similarly, Wolak (2003) finds a significant increase in unilateral market power for each of the California's five large electricity suppliers, following restructuring.…”

Section: Effects Of Restructuring On Market Outcomesmentioning

confidence: 94%

“…9 On the right hand side, α s is the state fixed effect and β t is the year fixed effect, allowing for a linear time trend as a special case. R st is a dummy variable that takes on the value 1 if the retail market in state s has been restructured in year t, and 0 otherwise.…”

Section: Econometric Modelmentioning

confidence: 99%

“…Thus, we also estimate the following differential impact 9 We focus on the average price instead of marginal price of retail electricity for several reasons. First, even if one can find the tariff schedules offered by retails service providers, the choice of the applicable tariff schedule is potentially endogenous and influenced by a customer's forecast of his own future demand, and customer-level data is not publicly available.…”

Section: Econometric Modelmentioning

confidence: 99%

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Have customers benefited from electricity retail competition?

2014

J Regul Econ

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Compared to traditional cost-of-service (COS) regulation, electricity retail competition may lead to lower costs but higher markups. Thus, the net policy effect on the average electricity retail price is ambiguous. This paper uses a difference-in-difference approach to estimate the policy impact for U.S. states that restructured their electricity retail markets. The results suggest that in restructured states, only residential customers have benefited from significantly lower prices but not commercial or industrial customers. Furthermore, this benefit is transitory and disappears in the long run. Overall, retail competition does not seem to deliver lower electricity prices to retail customers across the board or over time.

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“…Hence, simulation models have been applied widely, particularly to the former England and Wales power pool [8,9] and the Californian electricity market [10], where a broad set of cost data was available due to central planning by a (former) power pool manager. Cost simulation models have been applied to the German electricity market by Müsgens [11] as well as Schwarz and Lang [12].…”

Section: Introductionmentioning

confidence: 99%

Electricity pricing and market power—evidence from Germany

Janssen

Wobben

2009

Int Trans Elec Energy Syst

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The aim of this paper is to develop a methodology for measuring the exercise of potential market power in liberalized electricity markets. We therefore investigate producer behavior in the context of electricity pricing with respect to fundamental time-dependent marginal cost (TMC), i.e. CO 2 -and fuel cost. In doing so, we do not -in contrast to most current approaches to market power investigation -rely on an estimate of the entire generation cost, which inevitably suffers from the lack of appropriate available data. Applying an analytical model of a day-ahead electricity market, we derive work-on rates, which provide information about the impact of TMC variations on electricity prices in the market constellations of perfect competition, quasi-monopoly and monopoly. Comparing these model-based work-on rates with actual work-on rates, estimated by an adjusted first-differences regression model of German power prices on the cost for hard coal, natural gas and emission allowances, we find evidence of the exercise of market power in the period 2006 to 2008. However, our results reveal that German market competitiveness increases marginally. We confirm our results by simulating a TMC-driven diffusion model of futures power prices estimated by maximum-likelihood. AcknowledgementWe gratefully acknowledge the Deutsche Forschungsgemeinschaft (DFG = German Research Foundation) for financial support.

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Measuring Market Inefficiencies in California's Restructured Wholesale Electricity Market

Cited by 767 publications

References 23 publications

Equilibrium, uncertainty and risk in hydro-thermal electricity systems

Equilibrium, uncertainty and risk in hydro-thermal electricity systems

Have customers benefited from electricity retail competition?

Electricity pricing and market power—evidence from Germany

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