Working Paper: NBER ID: w8620
Authors: Severin Borenstein; James Bushnell; Christopher R. Knittel; Catherine Wolfram
Abstract: 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.
Keywords: No keywords provided
JEL Codes: G13; G14; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Deregulation of California's electricity markets in April 1998 (L43) | Price convergence between the power exchange's day-ahead price and the independent system operator's real-time price (L97) |
| Institutional impediments and traders' understanding (D47) | Hindered expected price convergence (D43) |
| Market conditions (D49) | Trader behavior (L14) |
| Price levels and differences increased dramatically starting in May 2000 (E30) | Complicated traders' ability to exploit profitable opportunities (D84) |