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The California energy crisis. Introduction (Wolak March ‘01) Wholesale: averaged $33 MWH in 1999, $116 MWH in 2000, $310MWH Jan 2001. Natural gas $3-$4 mm btu in late 1990s $10 nationally & $56.54 S Cal Dec 2000 April 6,2001 PG&E, bankrupt with debts of $9 billion. Deregulated market.

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The California energy crisis

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The california energy crisis l.jpg

The California energy crisis

  • Introduction (Wolak March ‘01)

    • Wholesale: averaged $33 MWH in 1999, $116 MWH in 2000, $310MWH Jan 2001.

    • Natural gas $3-$4 mm btu in late 1990s

    • $10 nationally & $56.54 S Cal Dec 2000

    • April 6,2001 PG&E, bankrupt with debts of $9 billion.

    • Deregulated market

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Investigate cause

  • Describe old regulated structure

  • Initial regulated structure

  • Evolution of the crisis and underlying causes

  • Mitigation plans

  • Lessons

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Old system

  • Deregulation began in 1995.

  • Before this, C-O-S regulation of vertically integrated utilities

    • Generation, transmission, distribution, retail.

    • Equivalent of public ownership

    • Based on idea of natural monopoly

    • Regulation to set “just and reasonable” rates

    • Public Utility Commission, Federal Energy Regulatory Commission (FERC)

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Problems with Old

  • Technical, economic, with treatment of depreciation

  • Very costly

  • No incentive to reduce costs, innovate, increase efficiency, guaranteed return, promotes cost-padding, unwise investment

    • Green energy, cost overruns in nuclear

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Goals of deregulation

  • Competition in generation

    • No natural monopoly here

    • Increases efficiency, lowers prices, makes better use of existing facilities, gives better signals to generators re new investment

  • Competition in retail

    • Consumer choice, innovative packaging of energy products, lower prices, less waste.

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Deregulation program

  • Generation separated, power plants auctioned

  • Utilities allowed to recover $28 bill re. nuclear and green

  • Retail tariffs reduced by 10% and frozen till 31.3.02 or until debt paid

  • PG&E and SCE never paid off. San Diego G&E did.

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  • Cal PX receives price and quantity offers from generators and bids from buyers

  • No long-term arrangements allowed. All day-of or day-ahead.

  • Cal-Independent System Operator: non-profit, role to avoid blackouts, make sure the system works, buy at any price

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  • 1998 & 1999 excess capacity, wholesale prices declined, retail fixed, profit of utilities increased, some debt paid off. SDG&E paid off all debt, retail no longer fixed

  • 2000 demand increased (20%?)

  • Result as discussed. Wholesale price increased, retail fixed

    • PG&E bankrupt, SDG&E customers faced bills up to 20 times higher 2.7 cents to 52 cents kWh

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What happened?

  • Supply and demand or market power?

  • Supply restricted by the deregulation program

    • No new power plants, new entrants lumbered with past costs of incumbents, for fairness

    • Still uncertainty re future regulations/prices restricts new entrants

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Market power

  • Also evidence of market power

    • Unverifiable forced outages

    • Generators purchasing gas at high prices through affiliates

  • Under mediation whether wholesale prices were “just and reasonable”

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  • Price caps, soft and hard

  • Voluntary/compulsory forward contracts

  • Re-regulation of prices

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  • Natural gas prices in July ‘01 $3/mmbtu NYME, about $4/mmbtu Cal.

    • Temperate weather, increased conservation, increased gas production, slowing economy.

  • FERC June 19, power emergency in California sets price caps in all western states. Cost of production in marginal plant, was $90MWH.

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  • Some suppliers would not sell, increasing emergency

  • FERC and generators in mediation. FERC claimed $9 bill. Generators offered $1 bill.

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My view

  • Bad legislation

  • Markets create incentives

    • True scarcity, high prices give signals to consumers to reduce consumption and producers to increase production (long run)

    • Here consumers were insulated and producers would not invest for uncertainty.

    • Result, more scarcity.

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My view

  • Here the incentives the system created were to increase profit by using the faults in the system, like income tax in many countries.

  • Example: price cap avoidance by selling into other markets, reducing supply to increase price.

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  • Markets often work better than planned economies because the players innovate in ways that cannot be anticipated by the planners.

  • Deregulation should be designed to capture the benefits of this innovation rather than to give an incentive to avoid the rules.

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