Trading Inefficiencies in California's Electricity Markets / Severin Borenstein, James Bushnell, Christopher R. Knittel, Catherine Wolfram.

Format:

Book

Author/Creator:

Borenstein, Severin.

Contributor:

National Bureau of Economic Research.

Bushnell, James.

Knittel, Christopher R.

Wolfram, Catherine.

Series:

Working Paper Series (National Bureau of Economic Research) no. w8620.

NBER working paper series no. w8620

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2001.

Summary:

We study price convergence between the two major markets for wholesale electricity in California from their deregulation in April 1998 through November 2000, nearly the end of trading in one market. We would expect profit-maximizing traders to have eliminated persistent price differences between the markets. Institutional impediments and traders' incomplete understanding of the markets, however, could have delayed or prevented price convergence. We find that the two benchmark electricity prices in California -- the Power Exchange's day-ahead price and the Independent System Operator's real-time price -- differed substantially after the markets opened but then appeared to be converging by the beginning of 2000. Starting in May 2000, however, price levels and price differences increased dramatically. We consider several explanations for the significant price differences and conclude that rapidly changing market rules and market fundamentals, including one buyer's attempt to exercise a form of monopsony power, made it difficult for traders to take advantage of opportunities that ex post appear to have been profitable.

Notes:

Print version record

December 2001.