A Quantitative Analysis of Pricing Behavior In
California's Wholesale Electricity Market During Summer 2000
and Edward Kahn
January 15, 2001
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.
State government officials have initiated investigations and issued reports about the
behavior and performance of California’s wholesale electricity market.
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.
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.
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.
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).
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.