How Regulators Overcome 'Deep Blindspots' Discovering Market Power in California's Electricity Markets (1996-2001)

• In Event: 3541 - The Economic Sociology of Knowledge and Expertise

Abstract

The interplay between regulators and companies is often shaped by a dialectic of ‘regulation-rule-evasion-re-reregulation’. Regulators fall behind in this game, when they develop blind-spots after companies innovate strategies that are ambiguous to regulators’ epistemic frameworks. This paper asks how regulators recover from such blindspots. It distinguishes between shallow and deep blindspots. While shallow blindspots can be resolved within the dominant imagination of the market environment, deep blindspots affect the fundamental metaphors regulators use to collect and analyze data about the environment. To explain how deep blindspots can be resolved, it draws on an inductive, qualitative case study of regulatory processes in California’s wholesale electricity markets between 1996 and 2001. Using 36 in-depth interviews and fine-grained archival data, it investigates how local regulators in California (CAISO/PX) discovered rampant market power as early as 1998, while the Federal Energy Regulatory Commission (FERC) did not perceive these problems in 2001. In a first step, the paper shows that both regulators initially suffered from a deep blindspot: they relied on a flawed metric that seemed plausible against the metaphorical imagination of energy markets as ‘places’. Only after CAISO/PX switched to the metaphor of markets as ‘machines’ did they discover market power problems. The second part shows that the switch relied on a cooperation between economists and engineers that challenged the fundamental assumptions both sides used to analyze the markets. This mutual engagement occurred because the teams confronted raw system data that persistently resisted attempts to apply the standard tools informed by the ‘place’ metaphor. In contrast, at FERC data always conformed to pre-defined standards informed by the guiding metaphor and thus never pushed back against the conception of the market as a ‘place’. Deep blindspots can thus be resolved if regulators confront data that challenges the fundamental metaphors that inform their analytical tools.

Author

• Georg Rilinger, University of Chicago