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New manifesto urges state to let market forces rebuild California's power industry
31 January 2003

By Ute Frey, Haas School of Business

Berkeley - A manifesto, signed by an ad hoc group of 20 people -professors from the University of California, Berkeley, UCLA and Stanford University, plus consultants and former regulators - urges policymakers to move swiftly and vigorously toward a market-based restructuring of California's electricity industry.

Failure to reform the industry will only compound California's energy problems, say the manifesto's signatories.

"While wholesale electricity prices have moderated, and California no longer faces the risk of blackouts, in many ways the industry is in worse shape now than it was at the start of 2001," the manifesto says. "Electricity rates today are 40 percent higher than at the start of the industry's restructuring, state regulation is increasing, and once vibrant generators and utilities struggle for solvency."

Since the 2001 electricity crisis, two California utilities have become insolvent, the state has entered long-term contracts to buy electricity at exorbitant rates and the electricity trading industry has gone into near collapse. Meanwhile, the confidence of electricity reformers around the world has been shaken, and initiatives to introduce competition outside California have been delayed, according to the manifesto.

Experts in regulatory and energy economics, who organized under the auspices of UC Berkeley's Institute of Management, Innovation & Organization (IMIO), generated the manifesto.

"It is not easy to get consensus amongst such a disparate group," said David Teece, Mitsubishi Bank Professor of International Business and Finance at UC Berkeley's Haas School of Business and director of IMIO. "We have come together because we are concerned with the conflicting policy directions being pursued for the industry at the state and federal levels. "

This is the second such manifesto from IMIO on the energy crisis. The first manifesto was published in response to severe electricity price hikes and rolling blackouts in January 2001. It strongly recommended against long-term procurement contracts, which Gov. Gray Davis ordered the Department of Water Resources to sign.

"California would be a lot better off today if our advice had been heeded," said Teece.

This latest manifesto proposes that the state take the following steps toward recovery:


  • Vigorously develop competitive markets
  • Reassemble a functional set of electricity oversight rules and policies
  • Limit regulation to those functions the market cannot perform efficiently
  • Allow unregulated producers to provide electricity generation
  • Clarify the jurisdiction of federal and state agencies to avoid further delays in the restructuring of electricity markets
  • Rebuild the commodity market for power, and allow consumers and suppliers to enter into long-term contracts
  • Implement real-time pricing of electricity

"We encourage the state to realize that the energy crisis was the consequence of a flawed regulatory design and of misguided decision-making at the time of the crisis, rather than the result of any inherent inability of electricity markets to work," say the manifesto authors.

The signatories of the "2003 Manifesto on the California Electricity Crisis" include Vernon Smith, a Nobel Laureate in economics from George Mason University; professor James Sweeney from Stanford University; professors Harold Demsetz, John Riley and Richard Rumelt from UCLA; professor Pablo Spiller from UC Berkeley; and Mitch Wilk, former president of the California Public Utilities Commission.

The 2003 manifesto and its list of signatories is available on the IMIO Web site.


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