The California Electricity Crisis, 2004 What, Why, and What's Next

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.

List of Tables and Figures. List of Terms. Preface. 1. Introduction. 2. Power Production Economics. 3. Principles of Traditional Regulation. 4. Reconciling Marginal Cost and Revenue Requirements. 5. Competitive Wholesale Markets for Electricity. 6. California's Market Design: an Initial Success Followed by a 'Perfect Storm'. 7. Design Flaws and a Worsening Crisis. 8. Testable Hypothesis. 9. Survey of Electricity Models for California. 10. An Economic Analysis of Natural Gas Price Movements During the Crisis. 11. An Econometric Analysis of Electricity Prices in California. 12. Market Manipulation. 13. Gaming and Cheating. 14. Market Monitoring and Initial Regulatory Response. 15. Refunds and Mitigation. 16. California Responds. 17. Handicapping the Winners. 18. Conclusion: Wrapping Up and Lessons Learned. Index. About the Authors.