An Analysis Of California's Failed Electricity Deregulation

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Economics | Social and Behavioral Sciences


Joseph Friedrichs, Economics


In the mid to late 1990’s, California undertook a deregulation of its electricity markets, seeking to disintegrate the former monopoly utility firm system. Historical factors and politics led to a deregulation plan that included a transition period for the recuperation of “stranded costs” by monopoly utility firms, during which the price of retail electricity was fixed while the price of wholesale electricity was allowed to fluctuate. Despite later allegations of the exercise of market power in the wholesale electricity market, I will show that exogenous factors such as weather, demographics, and the innate price volatility of a commodity that cannot be effectively stored were alone enough to bring down this poorly designed plan during its transition period. I examine here the historic, political, and economic reasons for the failure of California’s electricity deregulation plan.