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The Performance of California's Natural Gas Market during the Electricity Crisis

We examine the behavior of California's natural gas market between June 1998 and December 2001, with particular attention to the time that coincides with California's electricity crisis. We find that arbitrage forces worked effectively to equate prices across market participants before and after the electricity crisis, but failed during the energy crisis. To explain this phenomenon, we explore the possibility that non-utility generators distorted prices reported for natural gas purchases in order to earn greater profits in the electricity market. Finally, we propose that market power in transmission capacity along interstate pipelines may be responsible for the aberrantly high level of prices for natural gas that coincided with the electricity crisis.

Author(s)
Azeem Shaikh
Publication Date
January, 2003