California electricity crisis
The California electricity crisis, which unfolded between 2000 and 2001, was marked by severe power shortages and rolling blackouts across the state. The origins of the crisis can be traced back to California's deregulation efforts initiated by Assembly Bill 1890 in 1996, intended to improve the efficiency of the energy market. This bill established new wholesale electricity markets and regulatory bodies but inadvertently created vulnerabilities, particularly when retail price controls prevented energy suppliers from adjusting prices in response to rising wholesale costs.
As demand for electricity surged due to economic growth, California struggled to meet its needs, becoming reliant on external sources, particularly hydropower from the Northwest. However, a drought in that region compounded the issue, leading to outages in California's aging power plants. Market manipulation by energy companies, including intentional blackouts, further exacerbated the crisis, driving prices to unsustainable levels. Ultimately, government intervention was necessary to restructure pricing plans and stabilize the market, demonstrating the complexities and challenges inherent in energy deregulation. The crisis remains a critical case study in the ongoing discussions about energy policy and market regulation in California and beyond.
California electricity crisis
The Event: A period of energy shortages and rolling blackouts in California
Date: 2000–2001
Place: California
Between 2000 and 2001, California experienced a widespread electricity crisis, during which severe power shortages led to extended periods of rolling blackouts. While the crisis was attributable to a number of different causes, it was eventually revealed that the crisis was primarily the result of market manipulation on the part of power companies and energy traders.
The roots of the California electricity crisis can be traced back to 1996, when the state passed California Assembly Bill 1890 (AB 1890). This deregulation bill was designed to help restructure the state’s energy system, which many regarded as inefficient, overly expensive, and lacking the proper incentives to encourage the establishment of new generating facilities. AB 1890 created new markets for wholesale electricity transactions and established the California Independent System Operator (CAISO) and the California Power Exchange (CalPX) to control these wholesale markets. In addition to these changes, the California Public Utilities Commission (CPUC) introduced retail price controls that placed a cap on how much consumers could be charged, regardless of the costs faced by producers. Although this new system was a necessary step toward deregulation, its implementation proved to be problematic.
Under the rules of the new system, CAISO and CalPX were allowed to operate independently of one another. This arrangement created a potentially volatile energy market that could lead to serious consequences, particularly when combined with retail price controls. While the system was initially successful, the conditions it created left California in a vulnerable position.
After several successful years under its newly deregulated energy system, California faced a series of difficult circumstances that placed significant strain on its energy resources. Strong economic growth in the region had led to significantly increased demand for electricity. From the outset, California was unable to meet its own energy demands, having too few generation facilities to provide adequate energy to meet the growing demands of its population. This, in turn, led the state to become dependent on generation facilities located in neighboring states, primarily hydroelectric plants in the northwestern United States.
The Crisis
In 2000, much of the Northwest was subject to severe droughts that hindered energy production at the region’s hydroelectric plants. Faced with staggeringly high demand and virtually no support from power facilities outside the state, some of California’s aging power plants experienced outages that left customers without power. While some of these outages were likely legitimate, others, it was later discovered, were part of a plan by power companies to manipulate the market.
The market system established by AB 1890 only made the situation worse. While the ongoing conditions continually increased the cost of energy for suppliers, the retail price controls they were forced to abide by prevented them from passing those costs on to the customers. In April 2000, prior to the onset of the crisis, the wholesale price of electricity was about $30 per megawatt hour. Within six months, prices rose as high as $450 per megawatt hour. As wholesale prices grew and retail prices remained the same, the financial disparity surrounding the energy crisis in California deepened.
Market Manipulation and Resolution
The imbalance between wholesale and retail energy prices led many power companies to become financially unstable. In an effort to offset their losses, some of these companies attempted to manipulate the market by staging intentional blackouts at critical times to increase their profits. Using this tactic, energy traders, such as Enron Corporation, were able to take advantage of the situation and sell power at significantly higher than normal prices for enormous profit.
Eventually, the state government was forced to step in and address the crisis. Actions were taken to help return California’s energy system to normal operation. Most notably, in May 2001, CPUC conceded to a restructuring of the state’s retail pricing plan, raising rates for customers based on their individual financial situations. This and other government actions, combined with mild weather and concerted conservation efforts, helped to slowly alleviate the crisis. By the summer of 2001, prices returned to a normal level.
Impact
The California electricity crisis continues to serve as an important lesson on the potential difficulties of electrical deregulation. The crisis illustrated that the deregulation of the electrical energy industry is a more complicated and potentially more problematic endeavor than the deregulation of other, similar industries. The crisis is not, however, a complete indictment of deregulation. Rather, it is a reminder that, while deregulation may indeed be worthwhile, it is an extremely delicate process requiring close attention to detail and careful monitoring.
Bibliography
Borenstein, Severin. “The Trouble with Electricity Markets: Understanding California’s Restructuring Disaster.” Journal of Economic Perspectives 16.1 (2002): 191–211. PDF file. Examines the challenge of deregulation in the energy industry using the California electricity crisis as an example.
Cosgrove-Mather, Bootie. “California Energy Crisis a Sham.” CBS News. CBS Interactive, 11 Feb. 2009. Web. 10 Sept. 2012. Reveals the role that power companies and energy traders played in the California energy crisis.
Goyette, Martin. “The California Energy Crisis 2000–2001: Update on Post-Crisis Developments.” Office of the Attorney General. California Department of Justice, 26 Sept. 2011. Web. 10 Sept. 2012. A presentation on the California electricity crisis, created by the state’s attorney general’s office.
“Subsequent Events—California’s Energy Crisis.” EIA. US Energy Information Administration, 8 June 2005. Web. 10 Sept. 2012. An official US Energy Information Administration report on the California electricity crisis.
Sweeney, James L. The California Electricity Crisis. Stanford: Hoover Inst. P, 2002. Print. Provides a detailed review of the California electricity crisis, the history of the state’s deregulation efforts, and more.
---. “The California Electricity Crisis: Lessons for the Future.” Stanford University. Stanford University, 12 May 2002. Web. 10 Sept. 2012. Provides an overview of the California electricity crisis and what it can teach about deregulation of the energy industry.
“The Western Energy Crisis, the Enron Bankruptcy, and FERC’s Response.” FERC. Federal Energy Regulatory Commission, 2005. Web. 10 Sept. 2012. The official Federal Energy Regulatory Commission chronology of the California electricity crisis.