PWP-044r An Empirical Analysis of the Potential for Market Power in California's Electricity Industry

Using historical cost data, we simulate the California electricity market after deregulation as a static Cournot market with a competitive fringe. Our model indicates that, under the pre-deregulation structure of generation ownership, there is potential for significant market power in high demand hours, particularly in the fall and early winter months when hydroelectric output is at its lowest level relative to demand. The results also show that two of the most important factors in determining the extent and severity of market power are the level of available hydroelectric production and the elasticity of demand. * We would like to thank Shawn Bailey of Southern California Gas Co., and Philippe Auclair, Tom Flynn, and Mark Hesters of the California Energy Commission for their help in providing data and input, Richard Green, William Hogan, Paul Joskow, Ed Kahn, Christopher Knittel, Mike Waterson, Frank Wolak, and two anonymous referees for their helpful comments, and Haru Connolly, Wedad Elmaghraby, and, especially, Christopher Knittel for their excellent research assistance. This research was partially funded by the California Energy Commission under contract # 300-95-007.