Abstract: Expecting the Unexpected: Networks, Markets, and the Failure of Electric Utility Restructuring in California

Charles Jacobson

Abstract

In this paper, I place California's disastrous recent experiences with market-oriented restructuring of its electric utility industry in the context of broader historical and economic themes. The history is in some respects an ironic one. Whereas advocates of electric utility regulation during the early twentieth century distrusted the market and believed government intervention necessary to prevent monopolistic abuses, the architects of California's electric utility restructuring idealized market forces. Yet, California's electric utility restructuring constituted a far more radical intervention into industry structure than did earlier state and federal regulatory initiatives. I conclude that we can gain insights into the failure of the California restructuring experiment by examining incentives faced by vertically as compared to non-vertically integrated electric utility firms and by considering problems that changing conditions, and measurement and monitoring issues, presented to both regulators and market participants.

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