Inefficiencies and Market Power in Financial Arbitrage: A Study of California?s Electricity Markets

Christopher Knittel, Catherine Wolfram, James Bushnell and Severin Borenstein

No 105, Working Papers from University of California, Davis, Department of Economics

Abstract: As with other commodities, electricity is often traded on both forward and spotmarkets. This was initially true in the restructured California electricity industryfrom 1998 to 2000. Though the power traded in the forward and spot marketswas for delivery at the same times and locations, prices often differed in significantand predictable ways. We consider several explanations for this apparent inefficiency,concluding that uncertainty about regulatory penalties for trading in the spot marketcaused most firms to avoid trading on inter-market price differences. The few firmsthat did carry out these trades did not find it profit-maximizing to eliminate theprice differences. Skyrocketing prices in the summer of 2000, however, changed themajor buyers? (utilities?) incentives and increased the price differentials between themarkets.

Keywords: market (search for similar items in EconPapers)
Pages: 44
Date: 2006-11-15
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Related works:
Journal Article: INEFFICIENCIES AND MARKET POWER IN FINANCIAL ARBITRAGE: A STUDY OF CALIFORNIA'S ELECTRICITY MARKETS* (2008)
Working Paper: Inefficiencies and Market Power in Financial Arbitrage: A Study of California's Electricity Markets (2008)
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