The utilities sold electricity to consumers at prices determined by the state’s Public Utilities Commission—a state regulatory agency. Costs of generating electricity rose in 2000. Suppliers Exercised Market Power during Periods of Tight Demand and Supply Balances

Our analysis found that electricity suppliers exercised market power by raising prices above competitive levels during some periods after the restructured market opened. Market Design in California Enabled Exercise of Market Power

California’s market design enabled wholesale electricity suppliers to exercise market power. According to prominent experts and analysts, two principal market design flaws increased suppliers’ ability to raise prices above competitive levels: (1) retail prices were frozen, and (2) with few exceptions, the Public Utilities Commission limited utilities’ ability to enter into long-term contracts with suppliers. Conclusion

As discussed in this report, a number of factors caused electricity prices to rise in California in the summer of 2000 and at other times since restructuring. California State Auditor. “Understanding Competitive Pricing and Market Power in Wholesale Electricity Markets” (unpublished).
What GAO Found

Historically, utility monopolies have generated electricity and sold it to customers at prices set by state regulators. Today, private companies in 24 states compete to sell electricity at market prices determined by supply and demand. California is part of a broader western market in which electricity is routinely bought and sold across state and national boundaries. GAO found evidence that wholesale electricity suppliers exercised market power by raising prices above competitive levels during the summer of 2000 and at other times after the restructuring. Neither GAO's analysis nor other studies addressed whether market power exercised in California violated federal or other laws. The design of California's electricity market enabled individual wholesale electricity suppliers to exercise market power. Once prices rose, the design was ineffective in returning prices to competitive levels. Prominent experts on market design and industry experts generally agree that two principal market designs flaws increased wholesale suppliers' incentive and ability to raise prices above competitive levels: (1) retail prices were frozen and (2) the California Public Utilities Commission generally prohibited or discouraged long-term contracts between utilities and wholesale suppliers.