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INEFFICIENCIES AND MARKET POWER IN FINANCIAL ARBITRAGE: A STUDY OF CALIFORNIA'S ELECTRICITY MARKETS* |
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| Authors: | SEVERIN BORENSTEIN JAMES BUSHNELL CHRISTOPHER R. KNITTEL CATHERINE WOLFRAM |
| Affiliation: | 1. Haas School of Business, University of California, Berkeley, Berkeley, California 94720‐1900, U.S.A. University of California Energy Institute, 2547 Channing Way, Berkeley, California 94720‐5180, U.S.A. and NBER, Cambridge, Massachusetts 02138 U.S.A. e‐mail: borenste@haas.berkeley.edu.;2. University of California Energy Institute, 2547 Channing Way, Berkeley, California 94720‐5180 U.S.A. and NBER, Cambridge, Massachusetts 02138, U.S.A. e‐mail: bushnell@haas.berkeley.edu.;3. University of California, Davis, Department of Economics, One Shields Avenue, Davis, California 95616, U.S.A. University of California Energy Institute, 2547 Channing Way, Berkeley, California 94720‐5180, U.S.A and NBER, Cambridge, Massachusetts 02138, U.S.A. e‐mail: crknittel@ucdavis.edu.;4. Haas School of Business, University of California, Berkeley, California 94720‐1900, U.S.A. University of California Energy Institute, 2547 Channing Way, Berkeley, California 94720‐5180, U.S.A and NBER Cambridge, Massachusetts 02138, U.S.A. e‐mail: wolfram@haas.berkeley.edu. |
| Abstract: | For two years prior to the collapse of California's restructured electricity market, power traded in both a forward and a spot market for delivery at the same times and locations. Nonetheless, prices in the two markets often differed in significant and predictable ways. This apparent inefficiency persisted, we argue, because most firms believed that trading on inter‐market price differences would yield regulatory penalties. For the few firms that did make such trades, it was not profit‐maximizing to eliminate the price differences entirely. Skyrocketing prices in 2000 changed the major buyers' (utilities') incentives and exacerbated the price differentials between the markets. |
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