I think the "deregulation" in CA involved fixing the outgoing price to the consumer, but not the incoming price to the producer. There may have been reasons behind this, such as electricity sellers not wanting to compete to win customers on a price basis.


I remember, I lived in CA when they began "competing," and there was an ad on TV from some utility or other bragging how clean their energy was - and what good people they were - and that is why I should buy my indistinguishable electricity from them and not from somebody else. My instant thought was "By George, they must not be allowed to compete on a price basis - or else they wouldn't stretch for such a silly product differentiation!"


So, somehow, the electricity companies won the right to "compete" for customers - but the price structure was agreed upon in advance - and as such they created a system where they would then compete to bid for electricity to supply for the customers they had won, or something.


On the face of it, it seems so silly. But you can't deny the more general explanation that, whatever and whoever created the system they settled on, everybody thought he was getting a good deal. It may be tough to reconstruct, today, exactly what incentives and constraints the different parties were operating under at the time, and what their assumptions were.


I think the key to reconstructing it - without having to sepnd too much time on Google or at the library - may involve speculating as to why


1) utilities that were to compete were first forced to spin off some of their generating capacity, and


2) they weren't allowed to hedge with forwards, to some extent.


I guess we can imagine why the utilities wanted some sort of competition in any form. And I guess we can imagine why, sort of, they couldn't come to an agreement if wholesale electricity buyers were to compete with electricity generators. I guess the restrictions on forward contracts were to somehow ensure competition, and prevent, like...


Well, you picture it. Like you said, some idiot must have gotten it into his head that some nefarious activity would go on if, like, one company went and bought up all the forward electricity for CA delivery (remember, the grid apparently wasn't that flexible). Maybe the politicians thought the market could be cornered, or something, and the sellers figured the fixed rate would never fall below the spot?


I apologize, I really am an expert in bad economic thinking, but I always assumed the particulars of the CA situation must have been so bad as to be beneath even meriting exploration. I have failed.


eLROY