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Electric Competition, One Year Later: Winners and Losers in California

Fortnightly Magazine - March 1 1999

of September.

That week represented a problem at the PX and the ISO. Explanations differ, but the result was that the ISO launched into emergency purchases for a substantial portion of the week. Clearly, a problem exists in the scheme that administers market prices in California, and the price spikes did not reflect a fundamental change in market economics.fn4

If the predictions of classical economics are correct, we also should have seen a change in quantities. An oligopsony reduces the quantity purchased in order to keep the price paid low. When market power is eliminated, both price and quantity return to competitive levels. Recent data from the Energy Information Administration supports this view. The EIA publishes Electric Power Monthly, which contains monthly generation and consumption data by state. The data for California for the last three years shows that California imported more last summer than it did in previous years, even though flows on the Columbia River were significantly less than average (see figure 4).

The last comparable year to 1998 was 1995, when river flows on the Columbia were 98 percent of average. Imports into California were approximately 10 percent higher in 1998.

Implications: Market Power and Volatility

The economic changes since April 1 show ramifications from one end of the region to the other. Since major industrial rates largely are indexed to spot markets outside of California, the change in pricing has raised prices to major industries throughout the West. Puget Sound Energy's price indices are now under review at the Washington Utilities and Transportation Commission, in part because of the surprisingly high spot prices of last summer.

Since most of the price changes occurred in the warm months when California loads increase dramatically, the following analysis is limited to July, August and September. We would expect to see the effect of the PX in other months as well, but we simply do not have sufficient information yet.

It is possible to provide a simple analysis of the costs and benefits of the terms of trade shift by using the information reviewed above and applying it to the oligopsonistic model. If the shift in market structure increased imports by 10 percent and prices by 4 mills,fn5 the consumer (California) and producer (Pacific Northwest) surplus is a simple arithmetic calculation.

In figure 5 it is assumed that supply and demand are straight lines. The oligopsonistic customer value is the polygon whose floor is the oligopsonistic price (P1) with a right wall along the oligopsonistic quantity purchased (Q1) and then the diagonal formed by the demand curve. The supplier value is the triangle formed by the oligopsonistic price and the supply curve.

Shifting to a competitive price (P2) changes the size of the two areas. With straight-line supply and demand curves, the consumer's value is the area of the triangle formed by the competitive price bounded by the demand curve above. The supplier value is the triangle formed by the competitive price and the supply curve below.

After oligopsonistic power is lost, the distribution of surplus shifts toward producers:

Before After