The deregulation of electricity generation around the world was thought to be good news for customers. In place of government agencies compelling them to pay for capacity that far exceeded any imaginable need, markets would more closely and cost-effectively match supply to demand. If any party suffered, it would be the generators, forced to surrender the guaranteed profits that carried them through the industry’s cycles.

At first, deregulated electricity markets followed that script: wholesale prices went down by 20 to 50 percent, service improved, and the generators’ profits fell. However, recent events suggest that electricity markets don’t necessarily behave like other commodity markets. In California, for example, electricity wholesale prices in 2000–01 were five times higher than they were in 1998 despite the advent of a competitive generation market. Expecting wholesale prices to fall further, industry analysts that year advised utilities to sell their generation assets.

Meanwhile, in the Netherlands, wholesale prices have on average been 30 percent higher than expected over the past two years notwithstanding significant oversupply. In Sweden—the universal model of successful deregulation—the peak price in 2001 actually reached almost ten times the normal one. And in Brazil, a drought that reduced hydropower output has resulted...