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Press Release · January 15, 2003

Perfect Storm, The Sequel? Potential For Electricity Crisis Remains Unless State Moves To Reorganize Sector

No Smoking Gun: Many Factors Contributed to Crisis

SAN FRANCISCO, California, January 15, 2003 — Despite their present focus on budget woes, state leaders must forge a consensus on the future of California’s shattered energy sector or risk the same errors that precipitated the electricity crisis in 2000, according to a new study released today by the Public Policy Institute of California (PPIC).

The California Electricity Crisis: Causes and Policy Options reveals the unique confluence of events and factors that sparked the crisis and left the institutions established by deregulation in shambles.  Although many key players in the state’s energy debacle have blamed it on a single factor — from market manipulation to government inaction — the exhaustive analysis of the crisis and its aftermath points instead to broad systemic failure, including a shortage of generating capacity, bottlenecks in related markets, the market power of wholesale generators, regulatory missteps, and faulty market design.

Despite action to stabilize electricity prices through long-term contracts, the energy sector remains in disarray and requires fundamental reconstruction, according to author Christopher Weare. Before a new market and regulatory structure can be developed, policymakers will have to choose between the stability of public regulation or ownership and the prospect of greater efficiency through competition.  “California cannot escape the threat of another electricity crisis until state leaders agree on a new framework,” says Weare, a PPIC research fellow.  “Continued ambiguity and conflict may lead to market uncertainty, stifle investment in critical infrastructure, and increase the likelihood of simplistic and draconian proposals gaining support at the ballot box.”

The report offers three recommendations for policy changes that can improve the performance of the electricity sector under any market or regulatory structure.  First, the state should strengthen and institutionalize demand-management programs that provide financial incentives to conserve.  Second, it should develop the capacity for more comprehensive planning and oversight of California’s energy infrastructure.  Third, it must reassess and reorganize the complex set of administrative structures that currently exist.

The Public Policy Institute of California is a private, non-profit organization dedicated to improving public policy in California through independent, objective, non-partisan research on major economic, social, and political issues. The Institute was established in 1994 with an endowment from William R. Hewlett.