We introduce a new model for electricity prices, based on
the principle of supply and demand equilibrium. The model
includes latent supply and demand curves, which may vary over
time, and assumes that observed price/quantity pairs are
obtained as the intersection of the two curves, for any
particular point in time. Although the model is highly nonlinear,
we explain how the particle filter can be used for
model parameter estimation, and to carry out residual
analysis. We apply the model in a study of Californian
wholesale electricity prices over a three-year period
including the crisis period during the year 2000. The
residuals indicate that inflated prices do not appear
to be attributable to natural random variation, temperature
effects, natural gas supply effects, or plant stoppages.
However, without ruling out other factors, we are unable
to argue whether or not market manipulation by suppliers
played a role during the crisis period.