Search

The competitive implications of the ability of firms to trade in transparent forward markets has received considerable attention in the academic literature. These implications have not had much impact on policy however. In this paper I examine the implications of forward contracts on oligopoly environments by extending the model of Allaz and Vila to an environment with multiple firms and increasing marginal cost. I then take estimates of key parameters of this model from existing electricity markets to predict the market impact of one round of public contracting, such as those seen in auctions for retail provision and resource procurement. The results imply that the importance of supplier concentration is magnified when forward contracts are present.

Policies designed to ensure resource adequacy in electricity markets have been rooted in a disparate set of policy goals. Differences over the appropriate goals and focus of such policies have produced different views about what the appropriate means are for achieving these goals. This article explores the motivations for resource adequacy policies and discusses how different RA policies address, or conflict, with these goals.

In the three years following the restructuring of the California electricity industry, 1998 to 2000, power trading occurred in both a day-ahead market and a real-time market. Despite the fact that the power traded in these two major markets was for delivery at the same times and locations, prices differed significantly in many months. We consider several explanations for persistent price differences between the markets. We conclude that uncertainty about regulatory penalties for trading in the real-time market caused most firms to eschew arbitrage between the two markets. The few firms that did carry out this (risky) arbitrage did not find it profit-maximizing to eliminate the price differences. Due to California’s electricity restructuring plan, the investor-owned utilities, which were the primary buyers of electricity, had little incentive to respond to the price differences. In the summer of 2000, however, when prices in both markets skyrocketed, we argue that the utilities’ incentives changed in a way that was consistent with one utility’s subsequent attempts to move demand between markets to minimize their purchase costs.

The factors most often cited as the causes of the California crisis are the scarcity of generation capacity, a flawed market design, and the venality of electricity producers. However, many of these attributes were present in other electricity markets, none of which have suffered through anything like the California crisis. The only factor not seen in other markets in the world is the lack of contracts or other forms of long-term supply arrangements. Policy efforts are therefore best directed at developing a regulatory and retail environment where contracts are freely entered into at prices reflective of underlying market conditions.