regulatory failure in the california electricity crisis

Regulatory Failure in theCalifornia Electricity Crisis

The widely held view that FERC ‘‘failed’’ in its oversightof Western power markets is overly simplistic. It ignoresthe physical and political realities of the crisis. Above all,it ignores the fact that the crisis was solved not by FERCintervention but by vigorous state action that restoredthe balance of supply and demand. The real regulatoryfailure was that FERC and state policymakers wereunable to work together to resolve the crisis.

Steven Peterson and Charles Augustine

Steven Peterson is a VicePresident at Lexecon Inc.,

Cambridge, Massachusetts. He is anexpert in industrial organization and

regulation. In the electric utilityindustry, Dr. Peterson has analyzed

the effects of proposed mergers andthe problem of market power in

restructured electricity markets. Heholds a Ph.D. in Economics from

Harvard University.Charles Augustine is a Senior

Consultant at Lexecon, specializingin the analysis of regulated markets,

particularly natural gas andelectricity. He has a Master in Public

Policy degree from Harvard andworked as an economic analyst forthe Massachusetts Department of

Public Utilities from 1994 to 1995.The authors thank Nikolai Caswell

for assistance in preparing thefigures this article. All views

expressed here are those of theauthors and do not necessarily

reflect those of Lexecon Inc. or anyof Lexecon’s clients.

I. Introduction

California’s electricity crisis

was the result of the collision of a

shortage of resources, poorly

designed markets, and inaction

by regulators or ‘‘regulatory fail-

ure.’’1 The Federal Energy Regu-

latory Commission (FERC) is the

regulator most often cited as

having fallen down on the job.

However, California retained

jurisdiction over its physical sys-

tem and ultimately had respon-

sibility for supply adequacy in the

state. California’s vigorous attack

on the state’s capacity shortage

ended the crisis—but that

response began in earnest many

months after resource shortages

had been recognized. Ultimately,

the ‘‘regulatory’’ failure was the

result of a conflict between state

and federal jurisdiction and of the

political realities and regulators’

incentives that slowed action.

P undits have roundly criti-

cized FERC for its role in the

crisis. For its part, FERC seems to

recognize that it erred in its

oversight of California’s restruc-

turing by ‘‘defer[ring] to the State

on all significant aspects of State

restructuring of California electric

56 # 2003, Elsevier Inc., 1040-6190/$ – see front matter doi:10.1016/S1040-6190(03)00095-2 The Electricity Journal

power markets and market

rules—including those aspects

which directly implicated

[FERC’s] exclusive jurisdiction.’’2

More direct involvement by FERC

in the period leading up to the

crisis might have led to Califor-

nia’s improving its wholesale

market design. FERC has also been

harshly criticized for failing to give

California the regulatory protec-

tion (‘‘a cop on the beat’’) it needed

during the crisis and particularly

for its failure to impose price caps

until the crisis was waning or over.

FERC’s critics claim that FERC

could have ‘‘fixed’’ the crisis by

imposing price caps (e.g., West-

wide ‘‘hard caps’’ of $150 or $250/

MWh) that would have prevented

much of the pain caused by high

prices. The broad acceptance of

this view has led to FERC’s paying

an enormous political cost for its

decision not to impose price caps

earlier in the crisis.

W hile the focus of most

criticism has been on

FERC, California’s policymakers

also bear substantial responsibil-

ity for the crisis. Most now agree

that the crisis had a true physical

shortage at its core. FERC had

jurisdiction over trading in Cali-

fornia’s markets, but California

retained jurisdiction over its uti-

lity distribution companies

(UDCs) and its physical infra-

structure. Thus, California had

jurisdiction over the portions of

the electric system that were at the

heart of the state’s problems, and

state action was necessary to

bring about an end to the crisis.

Moreover, California’s regula-

tors and policymakers enacted and

retained many counterproductive

policies. California chose to freeze

retail rates and leave them frozen

until late in the crisis, resulting in

poor price signals to consumers

and ultimately contributing to the

state’s utilities’ financial crises.

California’s utilities divested

much of their generation capacity

without entering long-term con-

tracts to purchase the plants’ out-

put, and the state severely limited

the ability of its UDCs to enter into

forward contracts that would

reduce their exposure to price

volatility. Perhaps most impor-

tantly, California’s markets lacked

an adequate mechanism to spur

timely investment.

C alifornia’s energy watch-

dogs recognized many of

these problems as well as the risk

of impending capacity shortages

in the years leading up to the

crisis, and yet California policy-

makers were slow in responding

to clear signals of a serious sup-

ply–demand imbalance in the

state. Even after the crisis began,

they concentrated their efforts on

lobbying federal policymakers

and did little to address the fun-

damental imbalances that were at

the root of the crisis and largely

within the state’s rather than

FERC’s jurisdiction.

There is little doubt that had

California and FERC been able to

act sooner and with a common

approach, they could have,

together, limited the negative

impacts of the crisis. However,

events could always have turned

out differently than they did, and

this particular counterfactual out-

come does not appear to have been

within the realm of political pos-

sibility. California’s policymakers

looked to FERC to solve the pro-

blem largely because they were

unable or unwilling to undertake

politically difficult actions (e.g.,

raising retail rates, promoting

conservation, accelerating the sit-

ing of plants, etc.) that fell within

state jurisdiction and that could

have brought down wholesale

prices and protected the state’s

utilities from financial distress.

FERC’s approach to the crisis

shows it was intent on following a

course that emphasized its long-

term interests in infrastructure

development and promotion of

competitive electricity markets

and its finding that shortages and

poor market design were at the

heart of the crisis.3 The political

wrangling between FERC and

California delayed action, and this

delay was enormously costly.

In its Dec. 15, 2000, Order, FERC

largely left the crisis on Califor-

nia’s plate and thus ended the

struggle between itself and the

state regarding who would take

what steps to address the crisis. As

a direct result of FERC’s refusal to

Had Californiaand FERC beenable to act sooner andwith a commonapproach, they couldhave, together, limitedthe negative impacts ofthe crisis.

August/September 2003 # 2003, Elsevier Inc., 1040-6190/$–see front matter doi:10.1016/S1040-6190(03)00095-2 57

provide price caps, California

began a vigorous and effective

campaign to address the crisis. The

quick success of California’s cam-

paign also shows that the tools to

resolve the crisis were in state

hands. In fact, many of the actions

undertaken by the state were

probably necessary to achieve a

satisfactory resolution of the crisis.

In this situation where FERC and

California failed to cooperate and

California had spent six months in

a state of crisis without taking

effective action, FERC’s decision

not to impose price caps made it

possible—and necessary—for the

state to act to end its crisis.

II. The Genesis of theCalifornia ElectricityCrisis

A. California’s restructuring

It is clear that the seeds of

California’s electricity crisis were

built into its market design from

the start. Further, while no one

predicted the magnitude of the

California electricity crisis, a

number of market watchers—

including California state agen-

cies charged with monitoring and

regulating California’s energy

markets—observed the growing

supply–demand imbalance and

predicted as early as 1998 and

1999 that shortages were likely

under certain conditions.

T he origin of the supply–

demand imbalance that is at

the heart of California’s electricity

crisis can be traced to the way the

state chose to restructure its mar-

kets. While California’s market

design had many flaws, the pri-

mary decision that kept generators

from responding with investment

to California’s impending capacity

shortage was the decision to rely

almost exclusively on the short-

term energy market to send price

signals that would drive invest-

ment in the state.

California’s market design

reflected a deliberate and well-

understood choice by the state’s

policymakers. Moreover, it was

well understood that shortages

and their resulting high prices

could be expected to occur natu-

rally in such a market.4 During the

debate leading up to restructuring,

these choices were attractive

because the state had a capacity

surplus and wholesale prices were

expected to remain low. The low

wholesale prices generated by this

market structure allowed Califor-

nia to pay down its utilities’

stranded costs quickly without

raising rates to consumers.

Restrictions on utility forward

contracting ensured that resources

would be available to marketers

who wished to enter in the retail

market. It was expected that, in the

future, the energy market would

provide conservation and new

capacity in response to prices.

The market’s design guaran-

teed that prices would rise in

response to scarcity before

investment in new capacity

began. As the California Energy

Commission (CEC) staff recog-

nized in a February 2000 report,

the energy market alone simply

would not produce prices that

would make capacity investments

pay prior to the time capacity

became short to the point of

reducing system reliability.5

Moreover, the California Public

Utilities Commission (CPUC)

constrained California’s utilities’

forward contracting to a degree

that it was not able to spur or fund

investment in plants even when

prices were anticipated to rise.6

B. Early warnings

In hindsight, it is clear that the

price signals produced by Cali-

fornia’s markets did not induce

sufficient timely investment in

new resources, or in conservation,

to maintain adequate reserves to

ensure reliable supplies. The

state’s reserve margins shrank as

load growth steadily outpaced

new resource additions, and,

contrary to the assertions of some

pundits, the impact on reliability

did not go unnoticed. At least as

early as 1998, market observers

recognized that California had

experienced and could again

experience tight electricity sup-

plies. Figure 1 shows the dates of

some of the warnings, along with

FERC’sdecision not to

impose price capsmade it possible—

and necessary—forthe state to

act to end itscrisis.


the day-ahead power price at the

time. In particular, the CEC issued

a report in July 1999 warning that

hot weather could lead to

shortages where the system could

not reliably meet load.

F ollowing these predictions of

tight supplies, in summer

2000 California found itself, in

fact, facing constriction in elec-

tricity supplies. From hot weather

throughout the West, to poor

hydro conditions, to nuclear

outages, to maintenance on its

fleet of older fossil units, Califor-

nia faced numerous challenges to

providing reliable electric service.

While there is legitimate dis-

agreement over how high prices

should have risen and whether

and the degrees to which market

power and scarcity contributed to

high prices, there is no real debate

that California’s supply and

demand conditions were signifi-

cantly tighter than they had been

in previous years and that new

capacity was required in Califor-

nia and the West. In fact, many

who contend that market power

played a significant role in raising

prices assert that generators had

market power because supplies

had grown tight, making with-

holding profitable.7

III. FERC’s Handling ofthe Crisis

A. FERC enters the fray

When electricity prices rose in

summer 2000, the initial response

by California stakeholders was to

ask FERC for price caps. FERC

resisted and ordered a study of

Western electricity markets. Based

on this study, FERC found that

California’s markets were ser-

iously flawed and that market

rules in conjunction with an

imbalance of supply and demand

for energy led to unjust and

unreasonable rates for short-term

energy in the state. FERC declined

to impose price caps and instead

proposed remedies intended to

address these fundamental pro-

blems while inducing sufficient

investment in capacity to ensure

adequate service for the benefit of

consumers.8

F ERC’s reluctance to impose

price caps isn’t surprising,

given its stated long-term inter-

Figure 1: Capacity Shortfall Warnings and NP 15 On-Peak Day-Ahead Electricity Price (Jan. 6, 1995–Aug. 31, 2002)


ests and goals, such as the main-

tenance and development of

energy infrastructure and the

continued advance of competitive

markets to supplant price regula-

tion. The imposition of price caps

is generally inconsistent with both

of these long-term goals. More-

over, FERC’s interests in sound

energy markets extend beyond the

borders of California. To the extent

California’s market structure was

causing problems throughout the

West, FERC had a legitimate

interest in a resolution of Califor-

nia’s problems that did not nega-

tively affect surrounding states.

Even if FERC believed that Cali-

fornia would benefit from price

caps, many of FERC’s constituents

in neighboring states had different

interests and actively opposed

price caps.9 Thus, while political

consensus now appears to be that

FERC should have imposed price

caps, such was not the view in

early 2001.

FERC’s primary mitigation

policy was to move demand out

of California’s ‘‘dysfunctional’’

short-term markets and to

encourage load-serving entities to

enter into longer-term contracts.

FERC also imposed the $150/

MWh ‘‘soft’’ price cap and

imposed penalties for under-

scheduling load. FERC’s effort to

shift procurement to long-term

contracts clearly improved

incentives in and operation of

California’s short-term markets.

Whether the ‘‘soft’’ cap and

under-scheduling penalties were

helpful in resolving California’s

crisis and protecting consumers is

highly debatable.

FERC selected a set of policies

to address California’s problems

that included incentives for

conservation, changes to utility

procurement practices, and the

siting of new plants.10 However,

FERC recognized that these

policies fall within California’s

rather than FERC’s jurisdiction,

and thus their implementation

relied on the political will of

state policymakers. FERC

encouraged the state to take such

actions, but had no power to

order them.

California’s policymakers had

different political incentives and

espoused a different view of the

crisis than FERC. Above all, they

advocated wholesale market

price caps as the proper solution

to the crisis. In fact, the CPUC

actively worked against FERC’s

programs in certain areas, such as

improving California’s market

design.11

FERC’s decision not to provide

price caps to California had the

effect of leaving the problem on

California’s plate. After FERC’s

Dec. 15 Order, California pol-

icymakers publicly recognized

the changes they implemented in

California’s energy policy as a

response to FERC’s refusal to

provide price caps. California

had to act because, in Gov.

Davis’ view, FERC had refused

to act.

B. The logic of price caps

In evaluating FERC’s efforts to

address California’s problems, it

is reasonable to ask whether a

regime of temporary price caps

could have protected California’s

utilities without interfering with

FERC’s other efforts to correct the

flaws in California’s markets.

Certainly price caps would have

kept wholesale prices down and

would have helped preserve the

financial integrity of California’s

utilities in the face of fixed retail

rates.

O f course, implementing

price caps in a market

where supply is short and costs

(e.g., natural gas prices) are high is

a risky business. It is true that if

short-run market power explained

some of the price increases in

California, a price cap at an

appropriate level could reduce

market prices and possibly even

increase supplies generators

brought to the market. This could

occur because the benefit of with-

holding—high prices—would be

eliminated by the cap and prices

could remain above marginal cost.

As a result, generators would have

an incentive to bring supplies back

to the market.

Of course, having a theory that

says price caps can improve a

market’s performance is different

It is reasonable to askwhether a regime of

temporary price caps couldhave protected California’sutilities without interfering

with FERC’s other effortsto correct the flaws inCalifornia’s markets.


from actually implementing price

caps that do improve a market’s

performance. Data from FERC

refund proceedings covering

California’s short-term markets

indicate that a hard price cap at

the levels generally called for,

$150/MWh or even $250/MWh,12

would have been below the

competitive price of energy in a

large number of hours and would

have substantially worsened the

shortage and increased black-

outs.13

P rice caps affect supply not

only in the short run, but

also in the long run. As described

above, there is broad agreement

that California and the West

needed additional generating

capacity as of late 2000. One

benefit of the high prices observed

in California and the West in 2000

and later is that generators

invested in significant amounts of

new capacity. Generators began

construction on approximately

17,000 MW of capacity in 2001.

The construction of this capacity

indicates that generators’ actions

would eventually bring supply

and demand back into balance

and that prices would fall, no

matter whether they were the

result of scarcity, short-term

market power, or some combi-

nation of the two.

Up until the time the bulldo-

zers start moving dirt, and even

for a time after, it is easy to cancel

or delay the construction of a

plant. Had FERC imposed price

caps in late 2000, generators’

expectations regarding the future

profitability of new plants could

only have fallen, and investment

levels would have fallen with

generators’ expectations. Thus,

price caps would have stood in

the way of the long-term solution

to short supplies in the West.

With tight capacity already being

predicted again for California,

these capacity additions must

be considered an important part

of the solution to the California

crisis.

IV. CaliforniaPolicymakers TakeAction

Beginning in summer 2000, the

California ISO, the ISO’s Market

Surveillance Committee, the

California Power Exchange (PX),

and the CPUC issued reports

finding that the crisis was caused

in part by inadequate generation

supply, growth in demand, and

limited demand responsiveness

to price. In addition, all but the

CPUC found inadequate forward

contracting to be a cause of the

crisis.14

Despite apparent awareness

within the state that the crisis was

caused at least in part by a sup-

ply–demand imbalance, Califor-

nia took few steps to address this

imbalance between May and

December 2000. For example,

Gov. Davis’ own presentation of

his handling of California’s elec-

tricity crisis shows that prior to

the Dec. 15 Order, most of his

efforts were directed at getting

FERC to institute prices caps or

‘‘to do its job.’’15 Only five of Gov.

Davis’ reported actions between

June 14, 2000, and Dec. 15, 2000,

were calculated to either reduce

demand or increase supply.16 By

contrast, after the Dec. 15 Order,

Gov. Davis took many actions

directed at restoring the supply

and demand balance, and finan-

cial stability, in the California

market.17

T here is little doubt that the

Dec. 15 Order was the

source of much of this activity. In

fact, the watershed nature of the

Dec. 15 Order was explicitly

recognized by Gov. Davis. On Jan.

3, 2001, he announced a special

legislative session:

In response to the Federal EnergyRegulatory Commission’s (FERC)failure to meet its obligations, Iam taking the extraordinary stepof calling the California Legisla-ture into a concurrent Extraor-dinary Session to immediatelyaddress the energy situation inour state.18

Thus, while Gov. Davis main-

tained his rhetorical and political

position that price caps were the

proper response to California’s

shortage, he pragmatically and

vigorously set about implement-

ing the very policies FERC (lack-

ing jurisdiction to mandate) had

strongly urged in its Dec. 15


Order, and he was quite clear that

the steps he took after FERC

refused to provide price caps

were a response to that decision.

I n the following months, Cali-

fornia introduced a flurry of

new initiatives that collectively

have been labeled the Energy

Stabilization Plan.19 Gov. Davis

also appeared to have grasped the

fact that the supply–demand

imbalance was at the root of

California’s problems. On Feb. 8,

2001, the CEC projected that

generation resources available to

California at its July peak were

expected to be approximately

5,000 MW short of what would be

needed to meet load with a 7

percent reserve margin.20 In order

to close this so-called ‘‘generation

gap,’’ the Governor established a

Generation Team and a Conser-

vation Team to work to balance

supply and demand.21 California

officials took steps to expedite

power plant siting and construc-

tion, to fund conservations pro-

grams, and to restore financial

stability to industry participants.

The evidence from Western

electricity markets shows that

California’s efforts to procure

supplies in the forward market, to

conserve on the demand side, and

to increase capacity on the supply

side were hugely successful.

California succeeded in closing its

generation gap and more. The

CEC reports, for example, that the

state’s conservation efforts sig-

nificantly reduced both peak and

overall demand. The CEC reports

that in July 2001, California’s

electricity consumers saved an

aggregate 7,613 MW of peak

demand.22 At the same time, the

expedited siting and construction

program resulted in 449 MW of

operational new capacity by July

2001 (and 683 MW by the end of

2001).23 Following January and

February 2001, CAISO-declared

emergencies dropped dramati-

cally.

The result of California’s vig-

orous attack on the generation

gap was that prices were return-

ing to normal levels by June 2001,

making FERC’s imposition of a

price cap a non-event.24 Accord-

ing to the CEC, California’s

program contributed impor-

tantly to restoring the supply–

demand balance in California’s

electricity market, leading to

lower prices and more reliable

supply:

These structural changes [i.e.,Commission actions to changeWestern market structure]—together with the negotiation ofnew long-term contracts, increasedelectricity generation facility con-struction, mandated efficiencyprograms, and reduced energyconsumption patterns—havemoderated the market volatilitythat was anticipated for 2001.25

Some observers had expected

that shortages—and high spot

prices—would persist for two

years, because it normally takes at

least two years to build a new

plant. Expectations for summer

2001 were also affected by very

pessimistic forecasts about hydro

conditions. As a result, forward

prices for the third quarter of 2001

at Western market hubs were high

in early 2001.

However, electricity markets

responded to the Governor’s

vigorous policies. While forward

prices for summer 2001 rose in the

early parts of 2001, they peaked

on April 12 and began a relatively

steady decline from that point

forward (Figure 2). It is notable

that spot prices did not peak until

May. Thus, the forward market

recognized the prospects of

improving prospects for summer

2001 even before the current

supply–demand imbalance

reflected in spot market prices

was ameliorated.

V. Evaluation of FERCPolicy

Evaluation of FERC’s decision to

wait until June 2001 to impose

price caps depends critically on the

environment in which that deci-

sion was made. FERC and Cali-

fornia’s energy policymakers

espoused different (public) views

of the crisis and were not able to

work together to coordinate a

response. Moreover, where juris-

diction over California’s electricity

markets was split between state

and federal regulators, the pre-


ferred option of price protection

for California’s consumers and

utilities coupled with vigorous

action to eliminate the supply and

demand imbalances appears not to

have been available as a practical

or political matter, given FERC’s

and California’s policymakers’

inability to agree on a course of

action and work well together.

FERC did not have jurisdiction

to raise rates to consumers, fund

conservation programs, or speed

the installation of new capacity

within California. These are the

policies, however, that ended

California’s crisis. Had FERC

imposed price caps, California

policymakers would have been

able to justify continued delay,

and there can be little doubt that

the crisis would have continued

longer than it did. Moreover, it is

clear that marginal operating

costs of some plants were fre-

quently above the levels of pro-

posed caps, indicating price caps

would have increased instances of

blackouts.

T he view that price caps alone

would have fixed the pro-

blem appears to be simplistic.

California suffered from real

shortages, and conservation and

new capacity were needed. The

view that price caps were enough

to solve the problem appears to be

based on the assumption that all

else would remain equal in Wes-

tern electricity markets—that

California’s conservation efforts

and the new capacity begun in

2001 would not have been

reduced by the presence of price

caps. Of course, all else is never

equal, particularly when it comes

to California’s response to the

crisis it faced.

R ather than pointing the fin-

ger at FERC, one could ask

why California did not start

moving demand to forward

markets, promoting conservation,

and expediting the installation of

new capacity in summer 2000 or

even earlier. Clearly, such a policy

would have substantially cur-

tailed California’s crisis. Of

course, such a criticism fails to

recognize that such a solution was

simply politically impossible in

California at the time and is a

‘‘false choice,’’ just as the view

that California could have had

price caps and a new, vigorous

energy policy is a false choice.&

Source: TFS Energy

$0

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$500

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Dec-0

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Figure 2: On-Peak Electricity Forward Contract Prices at Palo Verde (Third Quarter 2001, Calendar 2002, and Calendar 2003)


Endnotes:

1. The crisis is conventionally definedas lasting from May 2000 to June 2001.

2. FERC’s Order issued Dec. 15, 2000,at 3.

3. FERC’s Order issued Nov. 1, 2000, at3.

4. ‘‘When California decided to re-structure its electric industry, consider-able debate arose over the issue of theobligation to serve load. In the regu-lated utility environment, the investor-owned utilities committed to serving allload within a geographic area in ex-change for a regulated rate of return oncapital investment and coverage of itsreasonable operating costs. The design ofthe California market has intentionallycreated an inherent tension between thedesire for lower energy prices and the needfor adequate system reliability. Unlikesome other deregulated electricitymarkets, the California market does notprovide for a capacity payment, at leastdirectly . . .. In theory, as energy pricesincrease reflecting shortage situations,new generators and loads will respondto these price signals and systemreliability will be maintained.’’ [em-phasis added] California IndependentSystem Operator (CAISO), 1998 Trans-mission Reliability Report, July 14, 1998,at E-1 and E-2; see also A-17.

5. Market Clearing Prices under Alterna-tive Scenarios: 2000–2010, Staff Report ofthe California Energy Commission, Feb.2000, at 3. See also Section III. Theeconomics of investment under uncer-tainty in competitive markets alsoindicates that competitive firms will notinvest until prices rise above levels that,if sustained, would provide a competi-tive return. See, e.g., AVINASH K. DIXIT

AND ROBERT S. PINDYCK, INVESTMENT UNDER

UNCERTAINTY (Princeton, NJ: PrincetonUniversity Press, 1994).

6. Three CPUC Commissioners recog-nized the harmfulness of the state’spolicies and welcomed FERC’s inter-vention: ‘‘Indeed, it is our belief thatstate restrictions on bilateral contractingand the purchasing of forward pro-ducts led to an unstable situa-tion . . . [that] contributed to thissummer’s price spikes and high powercosts. In addition, the inability of IOUs

to sign bilateral contracts made itdifficult to secure the financing neededto bring new supply to market. Forthese reasons, we hope that FERC willcontinue to monitor the restrictions thatCalifornia places on IOUs to ensure thatthey do not undermine the federalinterest in a properly functioning mar-ketplace.’’ Separate Statement of Com-missioners Duque, Neeper, and Bilas,Response of the Public Utilities Commis-sion of the State of California to Nov. 1,2000, Order and Request for Rehearing asto Issues which have been Finally Deter-mined, filed in FERC, San Diego Gas andElectric Company, Docket No. EL00-95-000, et al., Nov. 22, 2000, at 59.

7. A CAISO study found ‘‘the capacityreserved margin . . . should be 14 to 19percent of the annual peak load topromote workably competitive marketoutcome. To illustrate this point, thecapacity reserve margin for 2000 wasonly 2 percent, and the correspondingannual price-cost mark-up was at anunacceptable level of 58 percent.’’CAISO, Preliminary Study of ReserveMargin Requirements Necessary toPromote Workable Competition, Nov.19, 2001, at 1.

8. FERC’s Order issued Dec. 15, 2000,at 3.

9. FERC’s Order issued Nov. 1, 2000,at 5.

10. FERC’s Order issued Nov. 1, 2000,at 5.

11. For example, the CPUC indicatedthat it would continue to require thestate utilities under its jurisdiction tobuy and sell through the CaliforniaPower Exchange’s (PX) day- and hour-ahead markets. FERC, however, hadclearly found that demand should beshifted to longer-term markets. Becauseit did not have the cooperation of theCPUC, FERC achieved its goal of end-ing the requirement that utilities buyand sell through PX markets using thebrute force method of eliminating thePX tariff.

12. See, e.g., the Complaint in Califor-nia Electricity Oversight Board v. AllSellers of Energy and Ancillary Servicesinto the Energy and Ancillary ServicesMarkets Operated by the CaliforniaIndependent System Operator Cor-poration and the California Power

Exchange, et al., Docket No. EL00-104-000, Aug. 28, 2000, at 2 and 7. There wasa range of price caps proposed, includ-ing those at $150 and $100.

13. FERC Docket No. EL00-95, et al.,Exhibit No. ISO-17.

14. California State Auditor, EnergyDeregulation: The Benefits of Competitionwere Undermined by Structural Flaws inthe Market, Unsuccessful Oversight, andUncontrollable Competitive Forces, March2001, at 88. The FERC Staff Reportissued on Nov. 1, 2000, made similarfindings.

15. California’s Energy Story: A Chron-ology 1976–2001, produced by theGovernor’s Office of Communicationswith assistance from the Governor’sOffice of Planning and Research, theCalifornia Public Utilities Commission,and the California Energy Commis-sion, May 4, 2001.

16. On June 14, Aug. 2, and Aug. 9,2000, Gov. Davis announced programsto conserve electricity use by stateoffice buildings and grocers. On Aug. 2and Sept. 30, 2000, Gov. Davis an-nounced programs to expedite powerplant siting and construction.

17. California’s Energy Story: A Chron-ology 1976–2001, op. cit., at 27–43(‘‘Actions by Governor Davis to MeetCalifornia’s Energy Challenge’’).

18. Governor Davis Calls Special Leg-islative Session on Energy (Press Re-lease), Jan. 3, 2001.

19. CEC 2002–2012 Energy Outlook Re-port, Feb. 2002, at 6.

20. Id.

21. Id.

22. Id., at 7.

23. Id., at 110. According to the CEC,new generation capacity from all in-itiatives resulted in 42 operationalprojects by Oct. 2001, with a totalcapacity of 2,236 MW. (Id., at 7.)

24. Subsequent analysis by FERC Staffand by the California ISO MarketSurveillance Committee concludes thatthe price cap implemented in FERC’sJune 19 Order had little impact.

25. CEC 2002–2012 Energy Outlook Re-port, Feb. 2002, at 6.


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