	Background

California moved to a deregulated electricity market in April 1998. Average prices rose dramatically in May 2000 and remained high. They argue that generating firms have withheld supplies of electricity by staging outages in order to drive up prices, and point to higher-than-normal levels of outages since summer 2000. Studies Used Differing Methodologies and Reached Different Conclusions

FERC’s study differed from the other two in its methodological approach and reached different conclusions. FERC performed an audit of specific generating plants and companies that had experienced outages during December 2000. On the basis of these audits, FERC found that there was no evidence that the audited companies were incurring physical outages in an effort to drive up prices. The other two studies examined market prices and compared them with estimates of the costs of producing electricity to determine if prices were consistent with generating companies’ exercising market power. The second study, by Joskow and Kahn, examined electricity prices during summer 2000. FERC’s Study Not Thorough Enough to Support Its Conclusion

FERC’s study of electricity generator outages was not thorough enough to support its overall conclusion that the audited companies did not physically withhold electricity supplies to influence prices. Scope and Methodology

To develop an understanding of the issues surrounding market power in the electricity industry, we interviewed numerous economists from Stanford University, the University of California, Berkeley, and the University of California, Irvine, and reviewed written studies of market power and related issues. We also interviewed officials from state and federal energy agencies, including the California Public Utilities Commission, the California Independent System Operator, and FERC. To compare the FERC outage study and the other two studies on market power, we reviewed the three studies, evaluating the methodologies used and the results. Edward Kahn is a principal at Analysis Group/Economics, a private consulting firm. Appendix II: Comments From the Federal Energy Regulatory Commission
Why GAO Did This Study

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.

What GAO Found

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.