Savings per year nationwide wolfram 2003 whether

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savings per year nationwide (Wolfram, 2003). Whether these and other productivity changes translate into total factor productivity increases and whether they make up for increased transaction costs is an open question. While California was having its reform meltdown, other U.S. areas, such as New England, New York, and Pennsylvania-New Jersey-Maryland (PJM) were more successful with a more centralized ISO structure designed to recapture lost vertical integration economies (Wilson, 2002). For example, Sutherland (2003) claims that, compared to a sample of non-restructured states, consumers in the five PJM states 20
benefited by almost $ 3.3 billion (or almost 15% of their electricity expenditures) in 2002 alone. Despite the high costs of the crisis to California, the experience therefore suggests that decentralized regulation with a laboratory of the states has worked to some extent. California influenced other U.S. states to restructure but they did not follow the same model. Thus, the response to the California crisis was twofold. States with ongoing reforms strengthened those to avoid California pitfalls. Other states, with the exception of Texas, postponed or canceled any planned electricity reforms at the state level. In addition, the FERC went in to strengthen precautions against the use of short-term monopoly power in generation and to increase interstate transmission coordination and transmission capacity. Crew and Kleindorfer (2001) see the California electricity crisis as a problem of (a) piecemeal policies, (b) ignorance of experience by others and (c) lack of concern for nuts and bolts. An example of piecemeal policies is the lack of coordination between upstream spot pricing and downstream price caps and default service obligation. 11 Politicians cherish price reductions but even more abhor price increases. This made them neglect the vertical issues. There was a naiveté in the mandated price reductions for residential consumers. The IOUs faced a truncated price distribution with a possible squeeze. If wholesale prices were high IOUs would have to supply at the standard offer price. If wholesale prices were low, they would have to compete with entrants at the spot wholesale price plus other costs. The U.K. experience with market power was totally neglected, possibly because of the small market shares of the various generators in California. In the long run, there 21
is a major difference between the exercise of market power by withholding existing capacity versus restricting capacity investment. The latter is likely only if entry is restricted (e.g., in transmission). Nuts and bolts were neglected in the lack of peak-load pricing and smart metering (a problem for U.S. in general). This was topped by a lack of capacity forecasts, a lack of consideration of low demand elasticities and a lack of hedging. At the very latest, when selling their power plants at unexpectedly high prices, utilities should have expected high prices for generation (Kahn, 2001). Also, economic theory would suggest large effects of forecasting errors in industries with inelastic supply and demand.

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