Soft Paths, Hard Choices: Environmental Lessons in the Aftermath of California's Electric Deregulation Debacle
By Steven Ferrey
INTRODUCTION
In 2001, the regulated world changed. The most essential and capital-intensive industry in the United States, in the largest state in the Union, which itself is one of the five largest economies in the world, collapsed. The implosion of California's electric power restructuring, bankruptcies of some of the world's largest companies and the demise of Enron, a private wholesale energy supplier, and several other major providers of essential electricity amid charges of market manipulation are of global dimension.2 How we produce, distribute and consume electric power has profound implications not only for social welfare but for the environment. The response to the California crisis highlights the relative institutional priority of energy availability above and before environmental protection. It illuminates how regulatory institutions function at times of market stress and the emerging role of the judiciary as arbiter of a restructured environment.
This article legally deconstructs how laws and regulations malfunctioned and how institutions responded to create, and eventually abate, the California energy crisis. In a panic response, California enacted new legal constraints on its supposedly deregulated market, which now are subject to constitutional challenge and legal attack. The problems in California unleashed a flood of litigation and administrative proceedings of every conceivable claim and action, with parties involved in every aspect of the electric market as the California system struggles to equilibrate. The particular legal response of the state elevated a short-term market dysfunction into a long-term fiscal crisis.
The California failure fundamentally re-shaped the role of legal and regulatory institutions overseeing the most essential commodity in the industrialized world--electricity. The crisis warped the national trajectory of deregulation of this critical industry. Private contract rights--and legal suits regarding those rights--have replaced the traditional role of regulation: the courts will be forced to decide more, and the regulators less, of the rules of the newly deregulated electric market place.
The lasting irony of the California crisis is that its solution was already installed and available at the crisis point, but that solution could not be identified or accessed by decisionmakers. California had installed enough small distributed generation that, had it been identified and energized, would have abated the crisis. Distributed generation, on the customers' side of the utility meter, has been touted for its reliability and transmission savings, but it was never appreciated as a system-wide planning tool to buffer dysfunction of deregulated electric markets.
While there are important lessons on market design to glean from the California debacle, there are even more important lessons on the potential role of distributed generation to augment system supply at critical emergency times. Distributed generation could have saved California citizens $20 billion. Yet, the importance of the potential interconnection of already-installed distributed generation has not registered with most state energy officials who now have the time and luxury to prevent the California crisis from re-emerging in their states.
This article explores the California energy market dysfunction and the trade-off between environmental protection and energy supply in Part II. Part III examines the emerging role of courts to replace utility regulation during and after the crisis. Part IV analyzes the federal-state tension in regulating energy markets in crisis. Part V critiques the misguided legislative and executive branch responses to market collapse. In Part VI, I analyze what really occurred, postulate several techniques to avoid such a calamity in other states, highlight a solution to the crisis that California overlooked and analyze the legal issues that remain in the ashes of this collapse. First, let us understand how the restructuring of the energy sector in California was accomplished and how embedded structural weaknesses invited crisis and collapse.
In 2001, the regulated world changed. The most essential and capital-intensive industry in the United States, in the largest state in the Union, which itself is one of the five largest economies in the world, collapsed. The implosion of California's electric power restructuring, bankruptcies of some of the world's largest companies and the demise of Enron, a private wholesale energy supplier, and several other major providers of essential electricity amid charges of market manipulation are of global dimension.2 How we produce, distribute and consume electric power has profound implications not only for social welfare but for the environment. The response to the California crisis highlights the relative institutional priority of energy availability above and before environmental protection. It illuminates how regulatory institutions function at times of market stress and the emerging role of the judiciary as arbiter of a restructured environment.
This article legally deconstructs how laws and regulations malfunctioned and how institutions responded to create, and eventually abate, the California energy crisis. In a panic response, California enacted new legal constraints on its supposedly deregulated market, which now are subject to constitutional challenge and legal attack. The problems in California unleashed a flood of litigation and administrative proceedings of every conceivable claim and action, with parties involved in every aspect of the electric market as the California system struggles to equilibrate. The particular legal response of the state elevated a short-term market dysfunction into a long-term fiscal crisis.
The California failure fundamentally re-shaped the role of legal and regulatory institutions overseeing the most essential commodity in the industrialized world--electricity. The crisis warped the national trajectory of deregulation of this critical industry. Private contract rights--and legal suits regarding those rights--have replaced the traditional role of regulation: the courts will be forced to decide more, and the regulators less, of the rules of the newly deregulated electric market place.
The lasting irony of the California crisis is that its solution was already installed and available at the crisis point, but that solution could not be identified or accessed by decisionmakers. California had installed enough small distributed generation that, had it been identified and energized, would have abated the crisis. Distributed generation, on the customers' side of the utility meter, has been touted for its reliability and transmission savings, but it was never appreciated as a system-wide planning tool to buffer dysfunction of deregulated electric markets.
While there are important lessons on market design to glean from the California debacle, there are even more important lessons on the potential role of distributed generation to augment system supply at critical emergency times. Distributed generation could have saved California citizens $20 billion. Yet, the importance of the potential interconnection of already-installed distributed generation has not registered with most state energy officials who now have the time and luxury to prevent the California crisis from re-emerging in their states.
This article explores the California energy market dysfunction and the trade-off between environmental protection and energy supply in Part II. Part III examines the emerging role of courts to replace utility regulation during and after the crisis. Part IV analyzes the federal-state tension in regulating energy markets in crisis. Part V critiques the misguided legislative and executive branch responses to market collapse. In Part VI, I analyze what really occurred, postulate several techniques to avoid such a calamity in other states, highlight a solution to the crisis that California overlooked and analyze the legal issues that remain in the ashes of this collapse. First, let us understand how the restructuring of the energy sector in California was accomplished and how embedded structural weaknesses invited crisis and collapse.