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

Severin Borenstein, James Bushnell and Catherine D Wolfram

Institute of Transportation Studies, Working Paper Series from Institute of Transportation Studies, UC Davis

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

Keywords: UCD-ITS-RP-09-02; Engineering (search for similar items in EconPapers)
Date: 2006-09-24
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.escholarship.org/uc/item/7fp26301.pdf;origin=repeccitec (application/pdf)

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)
Working Paper: Inefficiencies and Market Power in Financial Arbitrage: A Study of California?s Electricity Markets (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cdl:itsdav:qt7fp26301

Access Statistics for this paper

More papers in Institute of Transportation Studies, Working Paper Series from Institute of Transportation Studies, UC Davis Contact information at EDIRC.
Bibliographic data for series maintained by Lisa Schiff ().