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Revisiting California

Market power after two years.
Fortnightly Magazine - April 1 2002

 

Market power after two years.

Two years ago, the California market erupted in a year-long series of emergencies, price spikes, and financial crises. For a short while, a well-fueled public relations campaign had much of the world convinced that the state had run out of electric generating capacity as a result of its own unrealistic environmentalism. 1 Now that the storm has seemingly passed, the more dispassionate view that this was market failure, rather than resource shortage, is gradually gaining the upper hand.

From the beginning, the electric industry was poorly prepared to handle a major market failure. The Western Systems Coordinating Council (WSCC)-the body tasked with the electric reliability of the West Coast of Canada, the United States, and Northern Mexico-never took an effective role in the crisis. Indeed, most of the debaters never even noticed that the West Coast had a reliability council that had been studying electric reliability issues since 1967. The WSCC, itself unfamiliar with a role that would bring it in conflict with its member systems, has never directly commented on the origin of California's problems.

The crisis in California ended with a whimper, not a bang. Although predictions for the summer of 2001 were catastrophic, the last California emergency took place soon after the implementation of a regional price cap. Simply stated, the crisis turned out to be a problem in institutions and not resources.

California's restructuring was characterized by six words-"bad design, bad incentives, bad results."

AB1890, the law that launched California on this path, was complex and difficult to understand. Its unanimous passage was evidence that every interest group had gotten its every desire. When every party to a negotiation leaves the table happy, there is a strong implication that they have been promised far more than can be delivered.

The basic design involved turning all power decisions over to an hourly market. This decision was so audacious and so misinformed that years after the design failed, regional utilities and industries are still having to explain to FERC that the hourly market has little to do with the industry. Further, reliability, the historical strength of the North American supply system, was only considered as an afterthought.

The design flaws were so extensive that the fundamental relationship of the state's Independent System Operator (ISO) to the WSCC had never even been considered. 2 Reporting relationships were fragmentary and staffing and training was minimal. The ISO's motto, "Better Reliability Through Markets," was emblazoned above the attractive receptionists who manned the welcome desk at its Folsome, Calif. headquarters, in spite of the fact that the ISO's reliability principles were far less stringent than the system they had replaced. 3

The crisis started with the announcement of a Stage 1 and Stage 2 emergency on May 22, 2000, 4 and ended on July 3, 2001, with the final emergency declarations. The summer of 2001 actually saw declining prices and increased thermal generation. Every warning that price controls would reduce generation and contribute to the crisis turned out to be wrong.

Politically, the response to the onset of

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