TY - JOUR AU - Borenstein,Severin AU - Bushnell,James AU - Knittel,Christopher R. AU - Wolfram,Catherine TI - Trading Inefficiencies in California's Electricity Markets JF - National Bureau of Economic Research Working Paper Series VL - No. 8620 PY - 2001 Y2 - December 2001 UR - http://www.nber.org/papers/w8620 L1 - http://www.nber.org/papers/w8620.pdf N1 - Author contact info: Severin Borenstein Haas School of Business University of California, Berkeley Berkeley, CA 94720-1900 Tel: 510/642-3689 E-Mail: borenste@haas.berkeley.edu James B. Bushnell Department of Economics One Shields Ave. University of California, Davis Davis, CA 95168 Tel: 530/752-3129 E-Mail: jbbushnell@ucdavis.edu Christopher R. Knittel MIT Sloan School of Management 100 Main Street, E62-513 Cambridge, MA 02142 E-Mail: knittel@mit.edu Catherine Wolfram Haas School of Business University of California, Berkeley Berkeley, CA 94720-1900 Tel: 510/642-2588 Fax: 510/643-1420 E-Mail: wolfram@haas.berkeley.edu AB - We study price convergence between the two major markets for wholesale electricity in California from their deregulation in April 1998 through November 2000, nearly the end of trading in one market. We would expect profit-maximizing traders to have eliminated persistent price differences between the markets. Institutional impediments and traders' incomplete understanding of the markets, however, could have delayed or prevented price convergence. We find that the two benchmark electricity prices in California -- the Power Exchange's day-ahead price and the Independent System Operator's real-time price -- differed substantially after the markets opened but then appeared to be converging by the beginning of 2000. Starting in May 2000, however, price levels and price differences increased dramatically. We consider several explanations for the significant price differences and conclude that rapidly changing market rules and market fundamentals, including one buyer's attempt to exercise a form of monopsony power, made it difficult for traders to take advantage of opportunities that ex post appear to have been profitable. ER -