Home > California electricity crisis

1 Overview

The California electricity crisis of 2000 and 2001 followed the partial deregulation, in 1996, of the electricity market in the state. The deregulation was signed into law by then-Governor Pete Wilson. Part of the process, which was promoted as a means of increasing competition, involved the partial divestiture, in March, 1998 of electricity generation stations by the incumbent utilities, who were still responsible for electricity distribution and were competing with independents in the retail market. 20,164 megawatts of capacity, a total of 40% of installed capacity, were sold to what were called "independent power producers." These included Mirant, Reliant, Williams, Dynegy, and AES.

Then, in 2000, wholesale prices were deregulated, but retail prices were regulated for the incumbents as part of a deal with the regulator allowing the incumbents to recover the cost of assets that would be stranded as a result of greater competition. However, rapid growth in demand for electricity soon ate into the excess capacity and in the summer of 2000 two events compounded the situation. These were a drought in the North West states and a large increase in the price of natural gas. California depends on the supply of hydroelectricity from the north and gas fired generation within the state, since the 1970s decision to discontinue the development of nuclear energy.

When electricity wholesale prices exceeded retail prices, end user demand was unaffected, but the incumbent utilityThis article is about "utility" in economics and in game theory. For utility companies and similar concepts, see public utility. For utilities in computers, see computer software. In economics, utility is a measure of the happiness or satisfaction gained companies still had to purchase power, albeit at a loss. This allowed independent producers to manipulate prices in the electricity market by withholding electricity generation at some plant, arbitragingIn economics, arbitrage is the practice of taking advantage of a state of imbalance between two (or possibly more) markets: a combination of matching deals are struck that exploit the imbalance, the profit being the difference between the market prices. the price between internal generation and imported (interstate) power and causing artificial transmissionLund, Sweden Electric power transmission is the second process in the delivery of electricity to consumers. Electricity is generated by power plants and is then sold as a commodity to end consumers by retailers. The electric power transmission and electri constraints. This was a procedure referred to as "gaming the market." In economic terms, the incumbents who were still subject to retail price caps were faced with inelastic demand . They were unable to pass the higher prices on to consumers without approval from the public utilities commission. The affected incumbents were Southern Califonia Edison (SoCalEd) and Pacific Gas & Electric (PG&E). Pro- privatization advocates insist the cause of the problem was that the Regulator still held too much control over the market, and true market processes were stymied -- whereas opponents of deregulation simply assert that the fully regulated system had worked perfectly well for 40 years, and that deregulation created an opportunity for unscrupulous

Prior to deregulation, the electricity market in California was largely in private hands. The main players were PG&E, SoCalEd, and San Diego Gas and Electric . The problems arose from an inefficient deregulation of the market. Ownership of certain power stations was transferred in order to increase competition in the wholesale market. In return for divesting some of their power stations the major utilities negotiated a deal to protect them from their assets being stranded. Part of this deal involved price caps for retail customers and a prohibition on the utilities from entering into hedging arrangements. The consequence was the PG&E and SoCalEd were forced to buy from a spot market at very high prices but were unable to raise retail rates. They racked up $20 Billion in debt by Spring of 2001 (PG&E declared bankruptcy in April of that year) and were reneging on power purchase deals and limiting supply. Between 2000 and 2001, the combined California utilities laid off 1,300 workers, from 56,000 to 54,700, in an effort to remain solvent. San Diego had worked through the stranded asset provision and was in a position to increase prices to reflect the spot market. Small businesses were badly affected.

Customers of some municipal utility districts (namely the Los Angeles Department of Water and Power, Glendale, Burbank, and Imperial County) were not affected by rolling blackouts.

Vice President Dick Cheney was appointed in January, 2001 to head the National Energy Development Task Force . In the Spring of that year, officials of the Los Angeles Department of Water and Power met with the Task Force, asking for price controls to protect consumers. The Task Force refused, and insisted that deregulation must remain in place. The State of California responded by directly buying electricity on the wholesale markets, and then re-selling it at lower prices to the utilities. The cost to the state was $43 Billion.

One of the energy wholesalers that became notorious for "gaming the market" and reaping huge speculative profits was the Enron corporation. Enron CEO Ken Lay mocked the efforts by the California State government to thwart the practices of the energy wholesalers, saying, ""In the final analysis, it doesn't matter what you crazy people in California do, because I got smart guys who can always figure out how to make money." Enron eventually went bankrupt, and Ken Lay is facing multiple criminal charges.