The California Electricity Crisis

1. Front Matter

   Pages i-xviii

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2. Introduction

   Pages 1-4

3. Power Production Economics

   Pages 5-13

4. Principles of Traditional Regulation

   Pages 15-23

5. Reconciling Marginal Cost and Revenue Requirements

   Pages 25-45

6. Competitive Wholesale Markets for Electricity

   Pages 47-52

7. California’s Market Design: an Initial Success Followed by a “Perfect Storm”

   Pages 53-62

8. Design Flaws and a Worsening Crisis

   Pages 63-70

9. Testable Hypothesis

   Pages 71-73

10. Survey of Electricity Models for California

    Pages 75-83

11. An Economic Analysis of Natural Gas Price Movements During the Crisis

    Pages 85-102

12. An Econometric Analysis of Electricity Prices in California

    Pages 103-125

13. Market Manipulation

    Pages 127-136

14. Gaming and Cheating

    Pages 137-145

15. Market Monitoring and Initial Regulatory Response

    Pages 147-157

16. Refunds and Mitigation

    Pages 159-171

17. California Responds

    Pages 173-184

18. Handicapping the Winners

    Pages 185-193

19. Conclusion: Wrapping Up and Lessons Learned

    Pages 195-201

20. Back Matter

    Pages 203-209

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This book attempts to explain what went wrong in California’s restructured energy markets and what must be done to restore California’s economy and build new electricity systems. The intention here is to reconcile the principles of competition and regulation. California had a severe electricity crisis for about thirteen months beginning in May of 2000. The economic consequences and political fallout that arose from this crisis persist. California’s economy continues to suffer and the state’s treasury is deeply in debt. The state’s three investor-owned utilities were nearly financially decimated. San Diego Gas & Electric has recovered to a greater degree than the other two only because its retail prices are about three times the national average and, for a time, well above the other two IOUs in California. Southern California Edison has recently been restored to investment grade and was granted a rate increase. Pacific Gas & Electric is emerging from bankruptcy. This book discusses all of this in greater detail. The problems and consequences arising from California’s ill-fated foray into electricity market restructuring could damage the state for years to come. Challenges of this nature are not new to the Golden State. In the past, as we explain here, pragmatic, not entrenched, approaches have worked best in California. If California is to relatively quickly restore its previous enviable economic vitality and recover from the damage done to tarnish its luster, pragmatic approaches must again be used.

• competition
• econometrics
• energy
• natural gas
• science and technology

• School of Policy, Planning, and Development, University of Southern California, Los Angeles

  Charles J. Cicchetti

• Division of Humanitiies and Social Sciences, California Institute of Technology, Pasadena

  Jeffrey A. Dubin

• Pacific Economics Group, L.L.C., USA

  Colin M. Long

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