Chapter 10 - California Electricity Restructuring, The Crisis, and Its Aftermath

Abstract

This chapter provides an overview of California's electricity restructuring in the mid-1990s. California's goal was to deregulate both the wholesale and the retail electricity market, after a transition period during which utilities would be able to recover stranded costs. The California experience proves that electricity deregulation has been an utter failure in California, and by extension, is likely to be a failure elsewhere. 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. The California experience illustrates that actions economically isolating the supply side of markets from the demand side create problems. California's electric system includes both complicated organizations and complex economic structures. Flaws in the California market design encouraged market gaming or exercise of market power by generators, traders, utilities, and the state itself. Nevertheless, the future regulatory direction remains uncertain, with some advocates trying to force a return to a vertically integrated monopoly structure and others striving to improve regulatory rules within a partially regulated, partially deregulated system.