California Energy crisis: Version 3.0 Same solution, same mistake Robert J. Michaels Professor of Economics California State University, Fullerton Institute for March 9, 2001 Infrastructure Finance Coral Gables, Florida

California: down for the third time l 1970s: planning production and conservation l 1990s: planning ideal markets l 2000s: planning to undo the 1990s markets l The common mistakes: Assuming complexity can be planned Assuming knowledge resides in government

The 1970s: running out of everything l International dislocations, environment l “Small is beautiful,” except for plans l Forecasts and planning, big time Independent power contracts Nuclear plants, unorthodox energy sources l The inter-utility markets grow Encouraged by federal regulators The state misses the point

The 1990s: designing perfect markets l The choice in Let consumers make deals like utilities do? Or create a perfect market they can’t use? l Determining the choice Utility recovery of uneconomic costs Maintaining retail and regulatory monopolies Textbook visions of competition, unlike reality Utilities gambling their future on price forecasts

2001: trying to fix the unfixable l Bankruptcy: the judge or the legislature? l Rates: Increases by any other name Hope for litigated or federal relief l The plan this time State enters potentially uneconomic contracts State-owned (or pawned) transmission grid Centralized conservation / production initiatives Plan California apart from western markets

Different crises, same response l Three centralizations 1970s: “Integrated resource planning” 1990s: Mandatory unhedged short-term trade 2001: State as bargainer, backer, grid manager l Decentralizing and experimentation Nobody has all the facts Specialists predict specialties, often wrong Easier to end small mistakes than global ones

California’s new policies l Maximize scope for consumer choice California abolishes it in the fine print A core / non-core separation l Do not separate state from markets Any point to the transmission takeover? What logic for long-term contracts l Create electricity, not uncertainty Plant announcements -- the real news