Regulation's Rationale: Learning from the California Energy Crisis

Abstract

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.