retail prices to rise some. The expected happened: consumers reduced their consumption. In addition, the weather moderated compared with the previous year, and new electricity-generating capacity started to enter the system.
But it was not until November of 2003 that Governor Davis officially pronounced the crisis over. By then so was his own political career. The state’s voters had just turned him out of office in a special election—only the second governor in the history of the United States to be so dismissed. His successor was Arnold Schwarzenegger.
The Terminator became the Governator. His inauguration was a global event, attended by 650 journalists. Schwarzenegger inherited a $25 billion deficit, much of it the direct and indirect result of the power debacle. “California is in a crisis,” he said after he took the oath of office. “We have the worst credit rating in the country.” But, recalling his days of championship weight lifting, he declared with fortitude, “We are always stronger than we know.”
Gray Davis offered his own explanation for what had gone wrong: “I was slow to act during the energy crisis.” As he left office, he ruefully offered a lasting truism: “It’s a bummer to govern in bad times.”18
IN THE AFTERMATH
Almost a decade after the California crisis first began, the chairman of the Federal Energy Regulatory Commission offered his own judgment: “The California crisis was not a failure of markets,” he said. “It was a failure of regulation.”19
But still, in the rest of the country, in the aftermath of the California electricity crisis, the brakes were slammed on on the movement toward deregulation. The result was to leave the United States with an “unintended hybrid” system. A map of the country reveals a patchwork among the states. About half of the utilities in the country are traditionally regulated, and half are subject to varying degrees of market competition. The utilities in the latter category own only small amounts of generation of their own within their service territories, or none at all. They are in the wires business—transmission and distribution—and thus buy electricity from generators. Yet underlining the hybrid nature of the system, several utilities today hold a portfolio of power plants, some operating in regulated markets and others operating in competitive markets.20 The markets open to retail competition are clustered in the Northeast, the Midwest, and Texas, while the Southeast is characterized by traditional regulation.
At the same time, at the wholesale level competitive markets for electricity have been expanding apace over the past decade. Even as California’s system flopped, other markets demonstrated what a well-designed power market actually looks like. The PJM Interconnection, which stretches from Pennsylvania and Washington, D.C., all the way to Chicago and includes all or parts of fifteen states, is one such market. It is the largest competitive power market in the world, serving 51 million people. PJM has deep roots, going back to a power pool that was established between Pennsylvania and New Jersey in 1927 to bring greater stability in electricity supply to the region. Today PJM operates both the high-voltage transmission system in its region and a competitive wholesale market, bringing buyers and sellers together on a real-time basis.
As for California, the state has kept its wholesale electricity markets open to competition. It now permits long-term contracts. In 2009, after several years of work, the state’s Independent System Operator (ISO) introduced a new market design. It incorporated experience from PJM and other systems as well as the painful lessons from what Mason Willrich, the chairman of the ISO, called the “flawed, flawed market” that had been put in place in California in the 1990s. This new design was intended to better reflect the true cost of electricity, including the cost of transmission congestion in the grid, and, with appropriate market monitoring, deliver the benefits of competition, rather than design a crisis.21
The major question today for electric power is no longer market design—regulation versus deregulation. Rather, it is fuel choice. Whatever the setup in different parts of the country, the United States faces the same question about the future of its electricity supply as do many other countries: What kind of generation to build? This struggle over fuel choice is not just about meeting today’s needs, but also about how to meet expected growth in demand—and new environmental objectives. Coal, nuclear power, and natural gas will all be part of the picture, both in the United States and around the world. Each, however, comes with its own constraints.
20
FUEL CHOICE
The prospects for electric power in the