A Quantitative Analysis of Pricing Behavior in California's Wholesale Electricity Market During Summer 2000

Abstract

We simulate competitive benchmark wholesale prices for electricity in California during the summer of 2000, taking account of changes in natural gas prices, electricity demand, and imports of electricity from other states during this time period. We also examine the impact of changes in the prices of NOx emissions permits on estimated competitive benchmark prices for electricity. The competitive benchmark prices are then compared to actual prices. A significant fraction of the changes in wholesale electricity prices in California during Summer 2000 can be explained by these four factors. The impact of higher NOx permit prices, and their interaction with reduced imports into California, have a particularly large impact on competitive benchmark prices. However, during June, July and August a large unexplained difference between actual prices and competitive benchmark prices remains. We tentatively attribute this difference to supplier market power and related market imperfections. We then examine whether there is evidence of strategic behavior by suppliers during the highest priced hours during the summer. Evidence of supply withholding --- exercise of market power --- during these hours is identified.