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California Energy Crisis: Understanding the Facts

Delve into the California energy crisis of 2001 with Dr. Richard McCann as he dissects the misconceptions and realities behind the complex web of policy, economics, and decisions that led to the turmoil. Explore the impact of deregulation, market dynamics, and government interventions on the state's energy landscape.

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California Energy Crisis: Understanding the Facts

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  1. California Energy Crisis:Fact or Fiction? Richard McCann, Ph.D. Partner, M.Cubed Davis, California Presented to The California Independent Petroleum Association June 2002

  2. Perfect Mess: Confluence of Forces • 25 years of government policies, corporate decisions, economics and weather • Government policies often oversteered • Environmental policies not to blame, but are impediment to solving crisis • Market did not cause problem, but exacerbated impacts

  3. A Brief Chronology • 1970s energy crisis • 1970s & 1980s deregulation • 1982 California “QFs” • 1986 Gas pipeline deregulation • 1988 Diablo Canyon agreement • 1990s “Age of Surpluses”

  4. How Did Rough Seas Rise So Quickly? • National natural gas prices doubled • Rapid demand growth throughout the West • Reduced hydropower supplies and oncoming drought • Aging power plant fleet • CA gas pipeline market decoupled and explosion • Utilities deterred retail competition • Failure to lock in low prices in long terms contracts • Lack of trust among utilities, ratepayers and regulators

  5. How Did California Survive Summer of 2001? • Consumers reduced demand 8-10% after December • CDWR maniacally bought forwards • Generators “jawboned” into stopping withholding • FERC finally imposed price caps • El Paso reauctioned pipeline capacity • CPUC imposed two rate hikes, totaling 4.5 cents on avg.

  6. The State of the Crisis: Two Parts Financial • PG&E Bankruptcy • DWR Power Purchases and State Bond Issuance • SCE-CPUC Bailout Settlement Physical • Demand Reduction Programs Undersubscription • Drought and Hydro Shortage • Capacity Shortage, "Gaming," and Higher Outages

  7. Bailing Out the Utilities:SCE-PUC Settlement - September 2001 • $6.3 billion owed • Current rates frozen until December 31, 2003 • No dividends until December 2005 • Ratepayers' share = $3 to 6 billion • Shareholders = $300 million to $3 billion

  8. PG&E Bankruptcy: Competing Plans of Reorganization(POR) • PG&E POR - $12 billion debt - Spin off generation, transmission and gas pipeline - Wholesale power contracts with utility for 12 years - No significant shareholder losses • CPUC POR  -  Refinance $6 billion of debt - Issue $1.75 billion in added stock - Shareholders contribute $1.6 billion - Ratepayers contribute $4.7 billion from frozen rates through January 2003

  9. CDWR Power Purchases • CDWR is purchasing all “net short” energy for 3 IOUs • CPUC has raised rates by 3 cents/kWh to cover QFs and CDWR purchases • CDWR is covering purchases through 2002, but contracts in place past 2010. • SCE Settlement in rates, but not PG&E yet. • CDWR likely “net long” for at least 4 years

  10. The Federal Government’s Role • Deregulation of gas and electricity • FERC pipeline and transmission decisions • 1992 EPAct mandated open access • 1994 EPA approves SCAQMD air emission permit market • 1995 FERC rejection of California BRPU • 1997 FERC approval of restructuring • 2000-01 FERC acted timidly to enforce market rules

  11. Some Misconceptions about the Crisis • Retail price freeze suppressed response • Utilities were forced to sell their plants • Power plants were not constructed • Utilities were prohibited from signing long- term contracts • Everyone was forced to buy and sell in one marketplace • The rules in other states are much different • What about stranded cost recovery?

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