Failure by Design: The California Energy Crisis and the Limits of Market Planning

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Georg Rilinger

Failure by Design

The California Energy Crisis and the Limits of Market Planning

Georg Rilinger

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English

University of Chicago Press
27 August 2024

Sociology; Political economy; Energy industries & utilities

A new framework for studying markets as the product of organizational planning and understanding the practical limits of market design.

The Western Energy Crisis was one of the great financial disasters of the past century. The crisis began in April 2000, when price spikes started to rattle California's electricity markets. These new markets, designed to introduce competition and, ideally, drive down prices, created new opportunities for private companies. Within a year, however, California's three biggest utilities were on the brink of bankruptcy. Competing for energy at public auctions, providers were unable to afford the now wildly expensive energy their customers needed. In sheer desperation, California's grid operator instituted rolling blackouts to accommodate the scarcity. Traffic lights, refrigerators, and ATMs stopped working. It was a perfect scandal—especially when it turned out that the energy sellers had manipulated the market to drive up the prices and then profit from the resulting disaster. Who was at fault?

Decades later, some blame economic fundamentals and ignorant politicians, while others accuse the energy sellers who raided the markets. In Failure by Design, sociologist Georg Rilinger offers a different explanation that focuses on the practical challenges of market design. The unique physical attributes of electricity made it exceedingly challenging to introduce markets into the coordination of the electricity system, so market designers were brought in to construct the infrastructures that coordinate how market participants interact. An exercise in social engineering, these infrastructures were going to guide market actors toward behavior that would produce optimal market results and facilitate grid management. Yet, though these experts spent their days worrying about incentive misalignment and market manipulation, they unintentionally created a system riddled with opportunities for destructive behavior. How could some of the world's foremost authorities create such a flawed system? Rilinger first identifies the structural features that enabled destructive behavior and then shows how the political, organizational, and cognitive conditions of design work prompted these mistakes. Rilinger's analysis not only illuminates the California energy crisis but develops a broader theoretical framework to think about markets as the products of organizational planning and the limits of social engineering, contributing broadly to sociological and economic thinking about the nature of markets.

By: Georg Rilinger
Imprint: University of Chicago Press
Country of Publication: United States
Dimensions: Height: 229mm, Width: 152mm, Spine: 23mm
Weight: 454g
ISBN: 9780226833200
ISBN 10: 0226833208
Pages: 320
Publication Date: 27 August 2024
Audience: Professional and scholarly , Undergraduate
Format: Paperback
Publisher's Status: Active

Georg Rilinger is the Fred Kayne (1960) Career Development Assistant Professor of Entrepreneurship and Assistant Professor of Technological Innovation, Entrepreneurship, and Strategic Management at the MIT Sloan School of Management in Massachusetts.

Reviews for Failure by Design: The California Energy Crisis and the Limits of Market Planning

"""In this groundbreaking book, Rilinger reveals the complex dynamics of markets, organizations, and technological innovation that are behind the regulation of commerce in this digital age. A large literature exists on systemic failures, breakdowns, accidents, and mistakes as well as a literature on market failure and financial crises. However, Rilinger is the first to expose failure as a ""failure by design."" He reveals market design as a novel multi-dimensional organizational form with its own structures, processes, and socio-technical-economic concepts. Further, the book goes beyond anything yet published in the now-burgeoning literature about infrastructure, algorithms, and platforms. Failure by Design is a significant achievement, a comprehensive, analytically wise, exciting work that sets a new direction for understanding organizations in a changing society.""--Diane Vaughan, Columbia University"