Energy Markets

Wholesale electricity prices in California rose sharply in May 2000 and have remained high. In addition, there were disruptions in service--blackouts--this winter and spring. The California Independent System Operator, the state agency in charge of balancing electricity supply with demand, expects high prices and service disruptions to continue and perhaps worsen this summer. In response to concerns about high prices and generator outages in California, the Federal Energy Regulatory Commission (FERC) undertook a study, released in February 2001, to determine whether outages were being used to withhold power and drive up prices of electricity in California. Other studies of the electricity market in California have been conducted by economists and industry experts. One study, conducted by three economists from Stanford University, the University of California at Berkeley, and the University of California Energy Institute examined whether market prices of electricity in California in 1998 and 1999 were higher than competitive levels. A second, similar study by two economists--one from the Massachusetts Institute of Technology and one from a private consulting firm--examined the California market during 2000. This report reviews the FERC study, as well as the two studies on the California electricity market to determine (1) how the methodologies and results of the three studies compare and (2) if FERC's study was thorough enough to support its conclusions that audited companies did not physically withhold electricity supplies to influence prices. GAO found that FERC's study used a very different methodological approach from the approach used by the other two studies and reached different conclusions. FERC's study performed an audit of specific generating plants and companies that experienced outages to determine if audited companies were incurring outages in an effort to drive up prices, while the other two studies compared market prices with estimates of the costs of producing electricity. GAO further found that FERC's study was not thorough enough to support its conclusion that audited companies were not withholding electricity supply to influence prices.