Regulation's Rationale: Learning from the California Energy Crisis

By Duane, Timothy P. | Yale Journal on Regulation, Summer 2002 | Go to article overview
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Regulation's Rationale: Learning from the California Energy Crisis


Duane, Timothy P., Yale Journal on Regulation


Further deregulation of energy markets has been challenged by the California energy crisis of 2000-2001 and the collapse of Enron. Many observers have argued that these events are unrelated, and, therefore, deregulation itself should not be questioned. Each disaster is just a symptom, however, of something more fundamental and structural: the failure of modern American political discourse to appreciate regulation's rationale. In particular, both the California energy crisis and Enron's collapse were caused by legislative and administrative failures to design regulatory institutions that adequately constrained opportunistic behavior. This Article challenges the conventional wisdom about what happened in California and therefore challenges the conventional wisdom about what should be done to avoid similar problems. This inquiry has relevance both for other states considering deregulation (or its euphemistic cousin, "restructuring"), as well as how the federal government approaches its role in a partially-deregulated electricity market. The dominant story of what happened in California is riddled with both factual and conceptual errors, and those errors engendered a series of policy responses that exacerbated, rather than alleviated, the underlying causes of the crisis. Political discourse on the Bush Administration's National Energy Plan suffers from similar problems. Our nation, therefore, runs a serious risk of repeating the conditions that gave rise to the California energy crisis, rather than learning from them.

Introduction

The collapse of Enron Corporation,1 the criminal indictment of its auditor Arthur Andersen,2 the bankruptcy of Pacific Gas and Electric IMAGE FORMULA8

Company,3 and the rolling blackouts and price spikes of the California energy crisis of 2000-2001 all have one thing in common: They were caused by legislative and administrative failures to design regulatory institutions that adequately constrained opportunistic behavior. Each of these specific events has more proximate causes as well, of course, and many analyses will probably point to specific circumstances that suggest each is an aberration. There is great temptation to blame the Enron collapse on unethical, and perhaps illegal, behavior,4 for example, while the dominant narrative of the California crisis places blame on California legislators and regulators for poorly implementing electricity deregulation. For some, the collapse of Enron illustrates the power of market forces to make intelligent judgments swiftly and without political consideration.5 and the California crisis would have been averted if politicians had been willing to rely more on the market than politics. Such a perspective leaves the basic thrust of the deregulation project intact. Why throw the baby of deregulation out with the dirty bathwater of Enron's greed and California's incompetence? This view is quite dangerous, however, if we are going to learn useful lessons from these events. Each crisis is, in fact, a symptom of a more fundamental and structural problem: the failure of modern American political discourse to appreciate regulation's rationale.6

This Article will explore these issues more deeply with respect to the California energy crisis. In particular, I will correct several common misperceptions about what happened in California and, therefore, challenge the conventional wisdom about what should be done to avoid similar problems in the future. This inquiry has relevance both for other states considering deregulation (or its euphemistic cousin, "restructuring"), as well as for how the federal government approaches its role in a partially deregulated electricity market. Both Congress and the Federal Energy IMAGE FORMULA10

Regulatory Commission ("FERC") would do well to examine the California case more carefully.8 The dominant story of what happened in California is riddled with both factual and conceptual errors, and those errors propagated a series of policy responses that exacerbated, rather than alleviated, the underlying causes of the crisis.

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