Abstract

The California model is the more advanced experiment in restructuring the electricity sector that has been introduced until now. The model implies the transition from vertically integrated spatial monopolies to a de-integrated structure in which generation, transmission, distribution and supply have been separed and competition simultaneously introduced in generation and supply. What is really new in this model is the degree of decentralisation of the different functions that has never been attempt before. Two are most relevant features. First, California has introduced non-mandatory wholesale electricity markets that are conducted in sequence and allow a multisettlement system in which prices are defined prior to dispatching. Second, the role of the Independent System Operator in scheduling is minimal. The paper investigates these aspects and underlines that the potential inefficiencies connected to a lower level of integration are less likely to occur than the exercise of market power in the wholesale market and in the firm transmission rights market. After two years only, from the implementation of the new model, the dramatic increase in wholesale prices, in summer 2000, shows that regulatory failure has occurred and the market has failed in providing cheaper power and more reliable supply.