Abstract

The article analyzes the consequences of the deregulation of the electricity market in California. In 1998, California opened up the market for wholesale electricity. Power was to be sold to public utility companies by unregulated suppliers at unregulated wholesale prices. Before deregulation, a system of vertically integrated public firms generated and distributed their own power. The outcome of this process was to put the energy market on the verge of financial collapse. The authors argue that the design of the market has a fatal flaw: the consumers of electricity are largely disconnected from wholesale prices. Such a structure will necessarily lead to periods of shortage, resulting from both real scarcity of electricity and from sellers exercising market power.