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

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. This paper examines the factors that explain this increase in wholesale electricity prices. Competitive benchmark prices for Summer of 2000 are simulated, taking account of all relevant supply and demand factors gas prices, demand, imports from other states, and emission permit prices. The simulated competitive benchmark prices are then compared with the actual prices observed. A large gap between is found between the benchmark competitive prices and observed prices, suggesting that the prices observed during Summer 2000 reflect, in part, the exercise of market power by suppliers. Supplier behavior during high-price hours is then examined. Suppliers withheld supply from the market that would have been profitable for price-taking firms to sell at the market price. Copyright International Association for Energy Economics 2002