Joskow - A Quantitative Analysis of Pricing Behavior In...

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1 A Quantitative Analysis of Pricing Behavior In California's Wholesale Electricity Market During Summer 2000 Paul Joskow * and Edward Kahn ** January 15, 2001 1. Introduction 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 explosion of prices was unexpected (CEC, 2000) and has called into question whether electricity restructuring will bring the benefits of competition promised to consumers. Federal and State government officials have initiated investigations and issued reports about the behavior and performance of California’s wholesale electricity market. 1 Unlike previous price spikes observed in other US wholesale electricity markets, the California experience has not been a transient phenomenon of a few days' duration, but a persistent series of events lasting from June through September. 2 The purpose of this paper is to examine the factors that explain this increase in wholesale electricity prices. There were a number of changes in supply and demand * Elizabeth and James Killian Professor of Economics and Management, Massachusetts Institute of Technology, Cambridge, MA. ** Analysis Group/Economics, San Francisco, CA. We appreciate the comments of Harold Ray, Kevin Cini, Gary Stern, and Nader Mansour. Matt Barmack, Donna Lau and Virginia Perry-Failor provided excellent research assistance. This paper is based on research commissioned by Southern California Edison Company. Professor Joskow also acknowledges support for his research on competitive electricity markets from the MIT Center for Energy and Environmental Policy Research. 1 Reports include FERC Staff Report (2000), Kahn and Lynch (2000), California Independent System Operator Department of Market Analysis (2000), California Power Exchange Corporation Compliance Unit (2000) among others. 2 FERC (1998) gives a detailed account of price spikes in Midwestern markets in 1998. Price spikes in the Eastern US during 1999 were related to reliability problems of various kinds (DOE, 2000). Prices in California remained remarkably high in October and November and then reached unprecedented levels during December 2000. The latter part of this period was also accompanied by an order of magnitude increase in gas prices, the evaporation of imports from the Northwest, a large fraction of California’s generating capacity was unavailable to supply due to planned or forced outages, some of which were mandated by environmental regulators, new regulatory interventions, and utility credit problems that may have made some suppliers reluctant to supply voluntarily. It is clear that by late 2000, the normal functioning of the wholesale electricity markets had completely broken down. The analysis reported here does not cover the post-September 2000 period, however.
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2 conditions in 2000 that would suggest that prices should have been expected to increase from the previous years: natural gas prices increased, demand increased, and power imports available to California decreased in 2000 compared to 1998 and 1999. The first
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This note was uploaded on 11/02/2011 for the course ECON 301 taught by Professor Gandhi during the Spring '01 term at Andhra University.

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Joskow - A Quantitative Analysis of Pricing Behavior In...

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