A California Conundrum: Tradeoffs Among Rates, Reliability and the Environment During California’s 2000–2001 Energy Crisis

Abstract

The 2000–2001 California energy crisis was a public policy problem of huge complexity and scope. Once considered a national and international electric restructuring model, the California system veered far off course in 2000 and 2001 as demand increases, supply shortages, a poorly designed market and abuses of market power led to exorbitant wholesale electricity prices, ongoing threats of blackouts and threats to the environment. The purpose of the paper is to consider actions of policy makers that were undertaken in 2000 and early 2001 to address policy objectives of rates, reliability and the environment within the context of the unfolding energy crisis. The paper develops a theory of how these three objectives can be addressed in a crisis. The paper then examines the actual behavior of policy makers as they developed and implemented various programs to fix or limit the consequences of the electricity crisis. Finally, the paper compares theory to practice. The paper concludes that policy makers prioritized improved reliability over low rates and environmental improvement, and prioritized low rates over environmental improvement. Based on information and predictions available at the time, policy makers’ choices reflected the expected level of degradation of each objective: policy makers believed reliability would suffer more than rates might increase and more than the environment would degrade. However, policy makers’ choices increased taxpayer and ratepayer future costs by billions of dollars.