California electricity crisis

The California electricity crisis of 2000 followed the divestiture of California of electricity generators[?] by their electric utilities[?], who were still responsible for electricity distribution. Wholesale prices were deregulated, but retail prices were regulated. When wholesale[?] prices exceeded retail prices, end user demand was unaffected, but the electric utility[?] companies still had to purchase power at a loss. This enabled electricity producers to manipulate the electricity market by turning their power generators off. In economic terms, the generators faced very inelastic demand. The result was higher costs for the utilities, which they were ultimately able to pass on to consumers after approval from the public utilities commission. along with routine black-outs when supply failed to match demand. Pro-privatization advocates insist the cause of the problem was that the California government still held too much control over the market, and true market processes were stymied.

Prior to deregulation, the electricity market in California was largely in private hands. The main players were Pacific Gas & Electric[?], Southern California Edison[?] and San Diego Gas and Electric[?]. The problems arose from an inefficient deregulation of the market. Ownership of certain power stations was transferred in order to increase competition in the wholesale market. In return for divesting some of their power stations the major utilities negotiated a deal to protect them from their assets being stranded. Part of this deal involved price caps for retail customers and a prohibition on the utilities from entering into hedging arrangements. The consequence was the PG&E and SocCalEd were forced to buy from a spot market at very high prices but were unable to raise retail rates. They lost billions and were reneging on power purchase deals and limiting supply. San Diego had worked through the stranded asset provision and was in a postion to increase prices to reflect the spot market. Small businesses were badly affected.

The crisis, and the subsequent government intervention and bailout of the utilities, has had political ramifications, including the potential recall of Governor Gray Davis.

See also

• Energy crisis
• Oil crisis