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California electricity crisis

From Academic Kids

The California electricity crisis of 2000 and 2001 followed a failed partial-deregulation, in 1996, of the electricity market in the state. The deregulation was signed into law by then-Governor Pete Wilson. Rolling blackouts occured in northern and central California on January 18 2001, and state-wide blackouts occured on March 19 and 20, 2001.

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

Contents

Causes

Part of California's deregulation 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. A total of 40% of installed capacity - 20,164 megawatts - was 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 new power producers 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: a drought in the North West states, and a large increase in the price of natural gas. California has depended on the import of excess hydroelectricity from the north and on gas fired generation within the state since the 1970s decision to end the development of nuclear energy.

When electricity wholesale prices exceeded retail prices, end user demand was unaffected, but the incumbent utility 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, arbitraging the price between internal generation and imported (interstate) power, and causing artificial transmission 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 speculators to wreck a viable system.

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 (SDG&E). 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. The consequence was the PG&E and SoCalEd were buying from a spot market at very high prices but were unable to raise retail rates.

They had racked up $20 Billion in debt by Spring of 2001 (PG&E declared bankruptcy in April of that year), and their credit ratings were reduced to junk status. The financial crisis meant the PG&E and SoCalEd were unable to purchase power on behalf of their customers. The state stepped in on January 17 2001, having the California Department of Water Resources buy power. By February 1 2001 this stop-gap measure had been extended and would also include SDG&E. It would not be until January 1, 2003 that the utilities would resume procuring power for their customers.

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.

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.

One of the energy wholesalers that became notorious for "gaming the market" and reaping huge speculative profits was 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.

Handling of the crisis

Perhaps the heaviest point of controversy is the question of blame for the California electricity crisis. Governor Davis's critics often charge that he did not respond properly to the crisis, while his defenders attribute the crisis solely to the corporate accounting scandals and say that Davis did all he could. In a speech at UCLA on August 19, 2003, Davis apologized for being slow to act during the energy crisis, but then forcefully attacked the Houston-based energy energy suppliers: "I inherited the energy deregulation scheme which put us all at the mercy of the big energy producers. We got no help from the Federal government. In fact, when I was fighting Enron and the other energy companies, these same companies were sitting down with Vice President Cheney to draft a national energy strategy."

Signs of trouble first cropped up in the spring of 2000 when electricity bills skyrocketed for customers in San Diego, the first area of the state to deregulate. Experts warned of an impending energy crisis, but Governor Davis did little to respond until the crisis became statewide that summer. Davis would issue a state of emergency on January 17, 2001, when wholesale electricity prices hit new highs and the state began issuing rolling blackouts.

The crisis, and the subsequent government intervention, have had political ramifications, and is regarded as one of the major contributing factors to the 2003 recall election of Governor Davis.

On November 13, 2003, shortly before leaving office, Davis officially brought the energy crisis to an end by issuing a proclamation ending the state of emergency he declared on January 17, 2001. The state of emergency allowed the state to buy electricity for the financially strapped utility companies. The emergency authority allowed Davis to order the California Energy Commission to streamline the application process for new power plants. During that time, California issued licenses to 38 new power plants, amounting to 14,365 megawatts of electricity production when completed.

Crisis timeline

  • January 17, 2001 - Governor Davis declares a state of emergency. Rolling blackouts in northern and central California.
  • January 18, 2001 - Rolling blackouts in northern and central California.
  • March 19, 2001 - Rolling blackouts statewide.
  • March 20, 2001 - Rolling blackouts statewide.
  • May 24, 2001 - future governor Arnold Schwarzenegger and former Los Angeles Mayor Richard Riordan meet with Enron CEO Ken Lay, at the Peninsula Hotel in Beverly Hills, at a meeting convened for Enron to present its "Comprehensive Solution for California," which calls for an end to Federal and state investigations into Enron's role in the California energy crisis.
  • November 13, 2003 - Governor Davis ends the state of emergency declared on January 17, 2001.

See also

External links

  • FERC Staff Report on Price Manipulation in Western Markets (March 23, 2003)(PDF Files)
At A Glance (http://www.ferc.gov/legal/ferc-regs/land-docs/Gelinas_at_a_glance2.pdf); Part I (http://www.ferc.gov/legal/ferc-regs/land-docs/PART-I-3-26-03.pdf); Part II (http://www.ferc.gov/legal/ferc-regs/land-docs/part-2-03-26-03.pdf); Appendices (http://www.ferc.gov/legal/ferc-regs/land-docs/Appendices3-26-03.pdf) 
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