Understanding Competitive Pricing and Market Power in Wholesale Electricity Markets

In the ̄rst year of the deregulated California electricity market, a number of issues have arisen that relate to the competitiveness of the wholesale electricity market in the state. There have been lively debates over the need for price caps in the California Power Exchange (PX) day-ahead market and the California Independent System Operator's (ISO) real-time and ancillary services markets. These debates have raised the question of whether the high prices that have been observed at times are a natural result of peak demand times or whether they have been exacerbated by strategic behavior by some ̄rms attempting to manipulate market prices. The debate about the appropriate treatment of Reliability Must-Run (RMR) plants has likewise focused attention on the possibility that some producers may attempt to supply power in ways designed to in°uence market prices. The questions raised in these discussions are central to judgments about the degree to which the California market is able at this point to operate e±ciently without intervention from the PX, ISO, or government regulatory institutions.