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 gas prices, demand, and imports during this time period. We also examine the impact of changes in the prices of NOx emissions permits on the competitive benchmark prices for electricity. The competitive benchmark prices are 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 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 during these hours is identified.