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What went wrong in California's electricity market?

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  • Woo, Chi-Keung

Abstract

The California electricity market reform promised to deliver reliable service at low and stable prices. Frequent capacity shortages and the ensuing rolling black-outs, price spikes, and large price volatility since Summer 2000 raise a simple but substantive question: what went wrong? The answer to this question will help countries contemplating electricity market reform not to commit similar mistakes. We find the answer by identifying the major factors that have turned the California dream into a nightmare. Such factors include poor market design, market power, sustained demand growth not matched by new capacity, rising marginal cost, and financial insolvency. Proposed remedies include an alternative market settlement process, long-term contract, fast licensing and siting process for new generation and transmission, conservation and energy-efficiency, distributed resources, rate options, and debt restructuring. The California experience suggests that a reversible regulatory reform is a safe alternative to an irreversible market reform.

Suggested Citation

  • Woo, Chi-Keung, 2001. "What went wrong in California's electricity market?," Energy, Elsevier, vol. 26(8), pages 747-758.
    • Handle: RePEc:eee:energy:v:26:y:2001:i:8:p:747-758
    DOI: 10.1016/S0360-5442(01)00047-0
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    References listed on IDEAS

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    1. Chi-Keung Woo & Orans, Ren & Horii, Brian & Peter Chow, 1995. "Pareto-superior time-of-use rate option for industrial firms," Economics Letters, Elsevier, vol. 49(3), pages 267-272, September.
    2. Woo, Chi-Keung & Horowitz, Ira & Martin, Jennifer, 1998. "Reliability Differentiation of Electricity Transmission," Journal of Regulatory Economics, Springer, vol. 13(3), pages 277-292, May.
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    4. Aigner, Dennis J., 1984. "The welfare econometrics of peak-load pricing for electricity : Editor's Introduction," Journal of Econometrics, Elsevier, vol. 26(1-2), pages 1-15.
    5. Woo, Chi-Keung, 1990. "Efficient Electricity Pricing with Self-Rationing," Journal of Regulatory Economics, Springer, vol. 2(1), pages 69-81, March.
    6. Chi-Keung Woo & Debra Lloyd-Zannetti & Ira Horowitz, 1997. "Electricity Market Integration in the Pacific Northwest," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 75-101.
    7. Woo, Chi-Keung & Horowitz, Ira & Hoang, Khoa, 2001. "Cross hedging and forward-contract pricing of electricity," Energy Economics, Elsevier, vol. 23(1), pages 1-15, January.
    8. Woo, Chi-Keung & Pupp, Roger L., 1992. "Costs of service disruptions to electricity consumers," Energy, Elsevier, vol. 17(2), pages 109-126.
    9. McAfee, R Preston & McMillan, John, 1987. "Auctions and Bidding," Journal of Economic Literature, American Economic Association, vol. 25(2), pages 699-738, June.
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