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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
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
investigate cause
Investigate cause
  • Describe old regulated structure
  • Initial regulated structure
  • Evolution of the crisis and underlying causes
  • Mitigation plans
  • Lessons
old system
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)
problems with old
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
goals of deregulation
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.
deregulation program
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.
  • 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
  • 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
what happened
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
market power
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”
  • Price caps, soft and hard
  • Voluntary/compulsory forward contracts
  • Re-regulation of prices
  • 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.
  • Some suppliers would not sell, increasing emergency
  • FERC and generators in mediation. FERC claimed $9 bill. Generators offered $1 bill.
my view
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.
my view15
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.
  • 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.