Electricity Market Deregulation

In 1996 the California legislature deregulated the California electricity market with Assembly Bill (AB) 1890. This followed the deregulation of the airlines and the natural gas market at the national level, which were deemed successful. The California bill, based on earlier decisions by the California Public Utilities Commission (CPUC), created a Power Exchange (PX), which was a wholesale electricity auction market, and an Independent System Operator (ISO) to operate the transmission system. The PX had day-ahead and hour-ahead auctions for wholesale power. The ISO had an energy imbalance market to deal with transmission constraints and to balance generation and load. The intent of this deregulation was to hold prices constant for consumers while assuring an adequate supply of electricity through the use of market forces.
Timing mismatches between the markets and the separation of energy and transmission created opportunities to game the system. A rate freeze by the legislature increased problems by insulating consumers from wholesale prices, which created inelastic demand for electricity.
Market participants quickly learned to withhold generation to increase prices in the real-time market. Power marketers such as Enron developed strategies to defraud the markets. Enron developed falsified schedules to sell energy, claimed payments for congestion relief that it did not actually provide, sold ancillary services without required generating capacity, and intentionally created congestion which increased prices to its benefit.
This resulted in rolling blackouts that began on June 14, 2000, and rapid increases in wholesale prices. Because the legislature had frozen retail prices, California’s major utilities were forced into bankruptcy. In the year 2000, independent power producers made huge profits. The state issued $10 billion in long-term bonds to purchase the energy needed to meet customer demands. This experiment, which was supposed to reduce costs and create efficient supplies of energy, was a failure – costs had increased dramatically, and electricity supply was insufficient.
Neither the CPUC nor the Federal Energy Regulatory Commission (FERC) had the staff or the legal authority to monitor the markets for fraud and manipulative behavior. This problem was corrected in the Energy Policy Act of 2005, which gave FERC the needed authority and more staff. However, some have suggested that FERC’s new authority reduces the profit motive in wholesale power markets, making them less liquid and efficient than they would otherwise be.
Your essay topic is electricity market deregulation.
Is deregulation a good way to balance supply and demand, making the markets more efficient?
Can that be accomplished in hourly and daily energy markets alone? Should there also be a long-term capacity market or capacity obligation? (Bear in mind that it takes at least a year to get a new power plant permitted, and more time for construction.)
Do FERC and/or the state utilities commissions need more (or less) authority to control fraud and market manipulation?
At least two but not more than three pages.

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