THE ELECTRICITY MARKET MESS.

• Author: Brown, Matthew H.

...California's well-intentioned attempt to introduce competition into the electricity business fell afoul of the law of unintended consequences, with disastrous results. What can other states learn from its dilemma?...

A failed experiment? A case of blatant manipulation of electricity markets for the benefit of a few greedy companies? Or a few minor quirks in the early stages of a system that will eventually work just fine? The truth about what's happened to California's attempt to restructure its electricity market in 2000 is probably found somewhere between the opposing sides of rhetoric one hears from the sellers, buyers, observers and experts.

The data point to a situation that's become a political quagmire for the state's policymakers and a disaster for many of the state's residential and business ratepayers. The state's electricity retailers have fared no better, with an estimated $12 billion of losses piling up since May 2000--a figure that has left them perilously close to bankruptcy. Only some--and not all--of the power generators that sold power into the state at high spot market prices seem to have come out on top, and even they have had their troubles.

The story in California this year is grim. It shows an electric system that several times came dangerously close to collapse for lack of power (and a citizenry that learned to live with rolling blackouts). It also shows electricity prices that shot upwards not to double, but more than triple their 1999 levels. The problems first became evident in San Diego, although they quickly spread to the rest of the state.

For a while, regulations set out by the Public Utilities Commission and agreed to by the utilities created a volatile situation in San Diego. While northern Californians paid a fixed, or frozen, rate despite the gyrating wholesale market, San Diego citizens had begun to pay market prices for power in the late spring of 2000. San Diegans came close to riot when their bills arrived in the mail and responded eagerly to Senator Steve Peace's call to simply not pay them. The media showed people burning their electric bills, an image reminiscent of the draft card conflagrations of the 1960s. When the troubles--originally expected to last only through the summer--continued into the fall and winter, many Californians lost patience. And, after two special legislative sessions, and the beginning of the regular legislative session many state officials are still unsure of what to do.

And that uncertainty spread well beyond California's borders. Delegate John Doyle of West Virginia makes it clear that he has no interest in becoming another California. "We need to look hard at California's difficulties, and to figure out if we really are so different here," he says. This situation shows us that we need to proceed with our eyes wide open to both the opportunities and the dangers of deregulation."

Closer to California, Nevada delayed full-scale implementation of restructuring. New Mexico held both formal hearings and informal meetings to decide how it should respond to the uncertainty California's difficulties have produced. The issue reached a fever pitch in Montana, which a few years ago passed its own version of electric industry restructuring legislation, where it became an election issue in a few races. It also prompted a slew of new bills seeking to insulate the state in some way from the "California effect." Other states like Ohio and Texas have continued their march toward a competitive electricity market, but have taken pains to point out how different they are from California.

The story of what happened is complex, but it is worth spending the time to understand.

A LITTLE HISTORY

When then-California Public Utilities Commission Chair Dan Fessler released a plan in the rnid-1990s to restructure the business of generating and selling...