borenstein

borenstein - PWP-081 The Trouble With Electricity Markets...

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Unformatted text preview: PWP-081 The Trouble With Electricity Markets (and some solutions) Severin Borenstein January, 2001 This paper is part of the working papers series of the Program on Workable Energy Regulation (POWER). POWER is a program of the University of California Energy Institute, a multicampus research unit of the University of California, located on the Berkeley campus. University of California Energy Institute 2539 Channing Way Berkeley, California 94720-5180 www.ucei.org The Trouble With Electricity Markets (and some solutions) Severin Borenstein* January 2001 Abstract: Since June 2000, California's electricity market has produced extremely high prices and threats of supply shortages. But California's is only the most recent and visi- ble example of the trouble with deregulated wholesale electricity markets. In this paper, I argue that the diculties that have appeared in California and elsewhere are intrinsic to the design of current electricity markets, in which demand exhibits virtually no price responsiveness and supply faces strict production constraints. Such a structure will nec- essarily lead to periods of shortage and of surplus, which will be accompanied by great volatility in prices and prots. This result, however, is not inevitable. By encouraging price-responsive demand and long-term wholesale contracts for electricity, policy makers can create electricity markets that will function much more smoothly. * Director, University of California Energy Institute (http://www.ucei.org) and E.T. Gre- ther Professor of Business Administration and Public Policy, Economic Analysis and Policy Group, Haas School of Business, University of California, Berkeley, CA 94720-1900. http://haas.berkeley.edu/~borenste. I have benetted a great deal from discussions with Carl Blumstein, James Bushnell, Paul Joskow, Steve Puller, Steve Stoft, rank Wolak, Catherine Wolfram, and Hal Varian, but the opinions in this paper do not necessarily reect their views. Erin Mansur provided excellent research assistance. I. Introduction In much of 2000, California has seen unprecedented wholesale electricity prices. These high prices have produced enormous prots for generating companies and nancial crises for the utilities that must buy power in the wholesale markets and sell at much lower regulated prices in the retail markets. Accusations of price gouging and collusion among the sellers have been widespread. Some observers have blamed the problems on the format of the wholesale auctions in California, while others have focused on the way that transmission capacity is priced and locational prices are set. A number of economists, myself included, have done studies that have concluded that sellers are exercising signicant market power, at times raising prices to well above competitive levels....
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This note was uploaded on 12/25/2011 for the course ECON 1 taught by Professor Bergstrom during the Fall '07 term at UCSB.

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borenstein - PWP-081 The Trouble With Electricity Markets...

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