Disconnect: A transaction cost analysis of California electric power industry restructuring

This dissertation employs Transaction Cost Economic theory (TCE) to interpret two main proposals—PoolCo and Direct Access—that emerged in California's electric industry restructuring process. The first part of this work involves the development of a TCE-based framework that permits a side-by-side comparison of the two restructuring proposals in terms of how they organize functions and transactions that comprise electric service provision. In part two, TCE theory is utilized to discern patterns in the proponents' market structure design rationale that explain the seeming ‘disconnect’ in the partisan debate, to show why the proposals appeared to talk past one another. Thus, this work is a contribution to our methods for understanding and analyzing alternative institutional structures for economic activities.; Patterns regarding the role or treatment of production costs, technology, uncertainty, and politics/institutional environment in the proposals' designs reveal that the crafters of these proposals used very different cognitive maps. Consequentially, concerns and structural solutions advanced by one proposal conflict with those posed by the other. Reliance on different cognitive maps explains the fundamental disconnect between the two proposals and makes comparison difficult. The designers of the PoolCo proposal explicitly relied on a neoclassical microeconomic theoretic view of the world to create a new industry structure, dominated by the goal of minimizing short-run production costs and achieving short-term allocative efficiency through marginal-cost pricing. Proponents' theoretical orientation caused them to only secondarily consider transaction hazards in design and to inappropriately narrow the range of feasible options for organizing functions and transactions in the electric power industry.; Designers of the Direct Access model did not generally reference any academic theory, however, their dominant focus—mitigation of perceived ex post transactional hazards through governance structure design—is broadly consonant with TCE theory. While emphasis on hazard mitigation appropriately directs industry restructuring efforts toward discrete structural rather than marginal analysis, the proposal fails to provide explicit standards of production efficiency and articulate specific mechanisms for addressing the information/coordination requirements associated with creating external, decentralized transactions between functions that have traditionally been bundled and integrated.