Question

Describe the various reasons that caused the power crisis in California and how it affected America?

Discuss; deregulation, what that meant and how Eron's exploited it, outrageous prices on utilities, and 32 billion plus on California books

Answer 1

Overview:

California electricity crisis is series of events that occurred in the state of California in United States of America during 2000-2001 as a result of deregulations implemented by the californian government in it's energy markets in 1996.The main goal of these deregulations is to reduce the electricity prices for most of it's population. However due to various reasons like economic burden on utilities, Illegal shutdowns by private energy producers,market manipulations by these private investors, there was a shortage of electric power supply which resulted in several blackouts and economic setbacks in the state.

Reasons for deregulations:

In 1996 the price of electricity is 75% more than the prices in rest of the regions in United States connected to the same grid.The demand in California has been gradually increasing compared to its generation capacity (In early 1990’s-2000, in western states, the power generated generally exceeds the demand). In 1996 these utilities sold about 20% more than the generated electricity. However these utilities have option of selling power to other states. Hence the final flow of power sometimes has been out of California.As 3/4 of the total energy market is controlled by these utilities, it is assumed by California government that by increasing competition between these utilities and by introducing private producers, overall prices of the power could be reduced. By deregulation, consumers will have choice of selecting their own service provider thus they can choose providers with low cost which further increases the competition thus achieving the goal of reduction in prices. Deregulations are also encouraged because this will force the private renewable energy producers to use much cheaper methods of generation.

How deregulation effected California energy market and incidents that led state into a crisis and lessons for future:

The deregulations forced the main 3 utilities in the state to divest about 40% of the market they held to private investors. Although they regained the ownership of these transmission and distribution units in these areas. They are forced to buy electricity from these private producers on daily basis and are not allowed to get in to long term contracts with them. This led to sharp spikes in prices which was a burden for both consumers and utilities. In order to save consumers from this fluctuating high prices, California government, in 2001 froze the price on the consumer side to pre deregulation rates. This meant that utilities are forced to buy electricity at higher costs and sell it to consumers and municipal utilities at much lower cost. This meant that utilities were running at heavy losses. Some private producers like Enron, shutdown their generation units in the name of maintenance to raise these prices.

Enron's Exploitaion:

One of Enron Corp.'s favorite trading strategies during the California electricity crisis was like booking an airline ticket for a flight you don't intend to board.

It's a waste of time and money unless you're sure the flight will be overbooked and the airline will have to dish out rewards to passengers who agree to stay home.

Enron--and, possibly, other energy traders--worked variations on this theme to collect special fees from the California Independent System Operator, the embattled traffic cop for the state's power grid following deregulation.

Sometimes Cal-ISO would pay Enron premiums not to use power that the firm didn't really need in the first place. Sometimes Enron would exploit California's emergency price caps, buying power at the capped price and then selling it at huge profit out of state, where there were no price caps.

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