Empirical Evidence of Strategic Bidding in the California ISO Real-time Market

Abstract

The California deregulated wholesale electricity power market experienced tight supply conditions and unusually high prices following the summer of 2000, after a largely successful first two years of operation. This paper examines the exercise of market power in the California wholesale electricity market. Specifically, this study shows how individual suppliers’ bidding behavior directly caused high market prices to be established. A small number of large suppliers were able to successfully employ bidding strategies to insure high market clearing prices, thereby increasing the price-cost mark-up by approximately 50% above competitive levels. Two main strategies were used: bidding at prices significantly above marginal cost of their generation, and withholding part of the available capacity from the market. This paper explains the methodology used to calculate the bid-cost mark-up index for each supplier, as well as the monopoly rents earned, as a result of these withholding strategies.