Unfortunately, one message repeatedly communicated is that the California experience proves that electricity deregulation has been an utter failure in California, and by extension, is likely to be a failure elsewhere. Yet a fair assessment of the California experience cannot reach such a conclusion.
In California, restructuring has set the stage for widespread wholesale market competition and adequate electric generation capacity. California’s restructuring has resulted in increases in new electric generating plants proposed, approved, and under construction.
An oft-repeated contention is that deregulation caused the electricity crisis. However, the Western electricity crisis appears to be primarily the product of a “perfect storm”, a combination of several adverse conditions, of flawed market rules, and only secondarily of exercise of market
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For example, during the crisis, Governor Davis’ public communications, carried on television, radio, and newspapers, assign all virtually blame for California’s electricity problems on electricity generators and marketers. Words and phrases such as “profiteering”, “plunder”, “unconscionable”, “price gouging”, “exorbitant profits”, “market marauders”, “pirate generators”, “privateers”, “obscene profits”, and “outrageous wholesale prices” were essential parts of his formal statements.
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The initiative justification in the Voter’s pamphlet begins as follows: “Five years ago, California was devastated by an electricity crisis.
“Enron and other energy traders held California hostage, extorting tens of billions of dollars from us. They manipulated the electricity market, driving up wholesale prices 1000%. California faced rolling blackout and untold economic damage.
“Audiotapes released by the U.S. Justice Department revealed Enron energy traders boasting of “making buckets of money” by creating power shortages. One trader laughed about ‘all the money you guys stole from those poor grandmothers in California,’ while another ordered a power plant worker to ‘just go ahead and shut her down.’
“California’s failed experiment in electric deregulation cost our people and businesses billions of dollars. “We learned many lessons from that disaster. The state has taken some positive steps to clean up the mess – but not nearly enough. Amazingly, legislation to require sufficient supplies of electricity [AB 2006, the Nunez bill] was vetoed by the Governor last year.
“That’s why Proposition 80 – the Repeal of Deregulation and Blackout Prevention Act – is on the ballot.” The statement was signed by Robert Finkelstein, Executive Director of TURN; Richard Holober, Executive Director, Consumer Federation of California; Nan Brasmer, President, California Alliance of Retired Americans.
power and market gaming. The financial crisis was the direct result of California regulatory actions. However, the financial crisis was not the result of deregulation, but rather of
inappropriate regulation. Even though all municipal utilities and IOUs throughout the entire West faced the electricity crisis, only the IOUs located in California, facing the CPUC regulatory rules, experienced the financial crisis.
The California experience illustrate that actions economically isolating the supply side of markets from the demand-side create problems. Particularly retail price control isolated consumer from the changing economics of the supply side of electricity markets. Retail price control discouraged energy demand reductions – energy conservation – even though energy conservation was California’s best hope for forcing decreases in wholesale prices.
The California experience also brought into sharp focus the importance of managing risks associated with implementation of any policies, especially policies that radically change the system. California electricity restructuring radically changed regulations, altering an electricity system that itself has never been free of economic risk. Risks exist and they should be managed, distributing risks appropriately.
The California experience highlights something well known to everyone who has managed, participated in, or observed large-scale changes in complicated organizations or economic structures. Any major restructuring of such important systems will continue to require modifications well after the initial changes. System operation requires monitoring and may require leadership to identify and implement changes that are needed after unintended adverse consequences of the system change become apparent.
California's electricity system includes both complicated organizations and complex economic structures. The restructuring was fundamental and sweeping. No one was able to predict with any certainty how all the changes would work. Nor could anyone rule out unintended adverse consequences of the restructuring. System flaws requiring changes can be expected. Thus, it was important that State carefully monitored system operation and it was important that
leadership was available to respond to the problems once identified. The California experience shows the real lasting harm that can befall a state when its leaders fail to take the appropriate leadership roles.
References
Severin Borenstein, James Bushnell and Frank Wolak, 2002 “Measuring Market Inefficiencies in California’s Restructured Wholesale Electricity Market,” American Economic Review,
December, 92(5), 1376-1405.
Severin Borenstein. “The Trouble with Electricity Markets: Understanding California’s Restructuring Disaster”, Journal of Economic Perspectives, 16(1): 191-211. 2000.
California Public Utilities Commission. “California’s Electric Services Industry: Perspectives on the Past, Strategies for the Future,” (The Yellow Book) February 3, 1993,
California Public Utilities Commission. Decision D.95-05-045.
California Public Utilities Commission. Order Instituting Rulemaking on the Commission’s
Proposed Policies Governing Restructuring California’s Electric Services Industry and
Reforming Regulation. (The Blue Book) Decision 95-12-063 (December 20, 1995) as modified
by D.96-01-009 (January 10, 1996).
California Public Utilities Commission. “Roadmap Decision” CPUC Decision D.96-03-022. 1966
Dennis Carlton and Jeffrey Perloff. Modern Industrial Organization. Harper Collins College Publishers (1994), p 139 and p 922.
Ralph Cavanagh. “Revisiting ‘the Genius of the Marketplace’: Cures for the Western Electricity and Natural Gas Crises”, Electricity Journal, June 2001.
Robert Thomas Crow, “Not Invented Here: What California Can Learn from Elsewhere about Restructuring Electricity Supply”. Stanford Institute for Economic Policy Research Working Paper, December 2001.
Scott Harvey and William Hogan, “On the Exercise of Market Power Through Strategic Withholding in California,” April 2001
William W. Hogan. “Electricity Market Restructuring: Reforms of Reforms”, May 25, 2001,
Harvard University.
Jolanka V. Fisher and Timothy P. Duane. “Trends in Electricity Consumption, Peak Demand, and Generating Capacity in California and the Western Grid, 1977-2000”. September, 2001, working paper from the University of California Energy Institute Program on Workable Energy Regulation (POWER).
Energy Information Administration. “Electricity Shortage in California: Issues for Petroleum and Natural Gas Supply.”
Energy Information Administration. “Natural Gas Monthly”.
Federal Energy Regulatory Commission: “Order On Rehearing Of Monitoring And Mitigation Plan For The California Wholesale Electric Markets, Establishing West-Wide Mitigation, And Establishing Settlement Conference” (Issued June 19, 2001)
Federal Energy Regulatory Commission: “Report On Plant Outages In The State Of California” Prepared by: Office of the General Counsel, Market Oversight & Enforcement, Office of
Markets, Tariffs and Rates Division of Energy Markets, February 1, 2001
Federal Energy Regulatory Commission: “Order Directing Remedies For California Wholesale Electric Markets” Issued: December 15, 2000
P. Joskow and E. Kahn, “A Quantitative Analysis of Pricing Behavior in California’s Wholesale Electricity Market During Summer 2000,” NBER Working Paper 8157, March 2001
Paul Joskow and Edward Kahn, “A Quantitative Analysis of Pricing Behavior in California’s Wholesale Electricity Market During Summer 2000,” The Energy Journal, 23(4),1-35. South Coast Air Quality Management District. “White Paper on Stabilization of NOx RTC Prices”, web site: http://www.aqmd.gov/hb/010123a.html
James L. Sweeney. The California Electricity Crisis. 2002. Hoover Institution Press; Stanford Institute for Economic Policy Research. Stanford, California.
U.S. General Accounting Office. “Energy Markets: Results of Studies Assessing High Electricity Prices in California”, June 2001.
Western Governors’ Association, “Conceptual Plans for Electricity Transmission in the West” August 2001.