A market power analysis and its application on the California´s wholesale electricity market

This paper analyzes empirically whether or not the prices and related behavior observed in California\´s wholesale electricity market this past summer are consistent with what would be expected in a workably competitive market. Some have argued that the huge increase in wholesale electricity prices observed during the Summer 2000 can be fully explained by "market fundamentals" such as rising natural gas prices, increased loads in California, a reduction of supplies available for import into California due to higher loads elsewhere in the Western States Coordinating Council (WSCC) and poor hydro conditions in the Northwest. Our analysis incorporates these "market fundamentals" and seeks to quantify their effects on wholesale market prices in a competitive market. We find that actual wholesale market prices far exceed competitive benchmark prices that reflect this summer\´s natural gas price, demand, and import conditions. Thus, these "market fundamentals" cannot explain the huge increases in wholesale market prices observed during Summer 2000.