https://en.wikipedia.org/wiki/California_electricity_crisis
Effects of partial deregulation
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
gigawatts – was sold to what were called "independent power
producers." These included
Mirant,
Reliant,
Williams,
Dynegy, and
AES. The utilities were then required to buy their electricity from the newly created day-ahead only market, the California Power Exchange (PX). Utilities were precluded from entering into longer-term agreements that would have allowed them to hedge their energy purchases and mitigate day-to-day swings in prices due to transient supply disruptions and demand spikes from hot weather.[
citation needed]
PG&E yard in
San Francisco
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 incumbent utilities to recover the cost of assets that would be stranded as a result of greater competition, based on the expectation that "frozen" rates would remain higher than wholesale prices. This assumption remained true from April 1998 through May 2000.[
citation needed]
Energy deregulation put the three companies that distribute electricity into a tough situation. Energy deregulation policy froze or capped the existing price of energy that the three energy distributors could charge.
[13] Deregulating the producers of energy did not lower the cost of energy. Deregulation did not encourage new producers to create more power and drive down prices. Instead, with increasing demand for electricity, the producers of energy charged more for electricity.
[14] The producers used moments of spike energy production to inflate the price of energy.
[14] In January 2001, energy producers began shutting down plants to increase prices.
[14]
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 (see also:
Demand response). They were unable to pass the higher prices on to consumers without approval from the public utilities commission. The affected incumbents were
Southern California Edison (SCE) and
Pacific Gas & Electric (PG&E). Pro-
privatization advocates[
attribution needed] 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 assert that the fully regulated system had worked for 40 years without blackouts.[
citation needed]
Chronology[1][2][3]
1996 California begins to modify controls on its energy market and takes measures ostensibly to increase competition.
September 23, 1996 The Electric Utility Industry Restructuring Act (Assembly Bill 1890) becomes law.
[4] April 1998 Spot market for energy begins operation.
May 2000 Significant rise in energy price.
June 14, 2000 Blackouts affect 97,000 customers in San Francisco Bay area during a
heat wave.
August 2000 San Diego Gas & Electric Company files a complaint alleging manipulation of the markets.
January 17–18, 2001 Blackouts affect several hundred thousand customers.
January 17, 2001 Governor Davis declares a state of emergency.
March 19–20, 2001 Blackouts affect 1.5 million customers.
April 2001 Pacific Gas & Electric Co. files for bankruptcy.
May 7–8, 2001 Blackouts affect upwards of 167,000 customers.
September 2001 Energy prices normalize.
December 2001 Following the bankruptcy of Enron, it is alleged that energy prices were manipulated by Enron.
February 2002 Federal Energy Regulatory Commission begins investigation of Enron's involvement.
Winter 2002 The Enron Tapes scandal begins to surface.
November 13, 2003 Governor Davis ends the state of emergency.
