The California electricity crisis of 2000 and 2001 was a situation where California had a shortage of electricity.
The California electricity crisis (also known as the Western Energy Crisis) of 2000 and 2001 resulted from the gaming of a partially deregulated California energy system by energy companies such as Enron and Reliant Energy. The energy crisis was characterized by a combination of extremely high prices and rolling blackouts. Price instability and spikes lasted from May 2000 to September 2001. Due to price controls, utility companies were paying more for electricity than they were allowed to charge customers forcing the bankruptcy of Pacific Gas and Electric and the public bail out of Southern California Edison. This led to a shortage in energy and therefore, blackouts. Rolling blackouts began in June 2000 and recurred several times in the following 12 months.
||California begins to loosen controls on its energy market and takes measures to increase competition.
||Spot market for energy begins operation.
||Significant energy price rises.
|June 14, 2000
||Blackouts affect 97,000 customers in San Francisco Bay area during a heat wave.
||San Diego Gas & Electric Company files a complaint alleging manipulation of the markets.
|January 17-18, 2001
||Blackouts affect several hundred thousand customers.
|January 17, 2001
||Governor Davis declares a state of emergency.
|March 19-20, 2001
||Blackouts affect 1.5 million customers.
||Pacific Gas & Electric Co. files for bankruptcy.
|May 7-8, 2001
||Blackouts affect upwards of 167,000 customers.
||Energy prices normalize.
||Following the bankruptcy of Enron, it is alleged that energy prices were manipulated by Enron.
||Federal Energy Regulatory Commission begins investigation of Enron's involvement.
||The Enron Tapes scandal begins to surface.
|November 13, 2003
||Governor Davis ends the state of emergency.
Energy price regulation forced supplies to ration their electricity
supply rather than expanding production. This scarcity created
opportunity for market manipulation by energy speculators.
State lawmakers expected the price of electricity to decrease due to
the resulting competition; hence they capped the price of electricity
at the pre-deregulation level. Since they also saw it as imperative
that the supply of electricity remain uninterrupted, utility companies
were required by law to buy electricity from spot markets at uncapped
prices when faced with imminent power shortages.
When the electricity demand in California rose, utilities had no
financial incentive to expand production, as long term price were
capped. Instead, wholesalers such as Enron
manipulated the market to force utilities companies into daily spot
markets for short term gain. For example, in a market technique known
as megawatt laundering, wholesalers bought up electricity in California
at below cap price to sell out of state, creating shortages. In some
instances, wholesalers scheduled power transmission to create
congestion and drive up prices.
After extensive investigation The Federal Energy Regulatory Commission (FERC) substantially agreed in 2003:
"...supply-demand imbalance, flawed market design and inconsistent
rules made possible significant market manipulation as delineated in
final investigation report. Without underlying market dysfunction,
attempts to manipulate the market would not be successful."
"...many trading strategies employed by Enron and other companies violated the anti-gaming provisions..."
"Electricity prices in California’s spot markets were affected by
economic withholding and inflated price bidding, in violation of tariff
In summary, poorly structured deregulation which relied on active
policing by the FERC led to situations where energy companies could
manipulate the California energy market with near impunity and reap
substantial profits at the expense of California energy consumers and
Some proponents of deregulation suggest that the major flaw of the
deregulation scheme was that it was an incomplete deregulation -- that
is, "middleman" utility distributors continued to be regulated and
forced to charge fixed prices, and continued to have limited choice in
terms of electricity providers. Other, less catastrophic energy
deregulation schemes have generally deregulated utilities but kept the
providers regulated, or deregulated both.
California was the first state to deregulate its energy market. In
the mid-90's, under Republican Governor Pete Wilson, California began
deregulating the electricity industry. Democratic State Senator Steve Peace,
the chair of the energy committee and the author of the bill that
caused deregulation, is often credited as "the father of deregulation".
Wilson admitted publicly that defects in the deregulation system would
need fixing by "the next governor".
The deregulation called for the Investor Owned Utilities, or IOUs, (primarily Pacific Gas and Electric, Southern California Edison, and San Diego Gas and Electric)
to sell off a significant part of their power generation to wholly
private, unregulated companies such as AES, Reliant, and Enron. The
buyers of those power plants then became the wholesalers from which the
IOUs needed to buy the electricity that they used to own themselves.
While the selling of power plants to private companies was labeled
"deregulation", in fact Steve Peace and the California legislature
expected that there would be regulation by the FERC which would prevent
manipulation. The FERC's job, in theory, is to regulate and enforce
Federal law, preventing market manipulation and price manipulation of
energy markets. When called upon to regulate the out-of-state
privateers which were clearly manipulating the California energy
market, the FERC hardly reacted at all and did not take serious action
against Enron, Reliant, or any other privateers. FERC's resources are
in fact quite spare in comparison to their entrusted task of policing
the energy market.
Supply and demand
California's utilities came to depend in part on the import of excess hydroelectricity from the Pacific Northwest states of Oregon and Washington.
California's groundbreaking clean air standards favored in-state
electricity generation which burned natural gas because of its lower
emissions, as opposed to coal whose emissions are more toxic and
contain more pollutants.
In the summer of 2000 a drought in the northwest states reduced the
amount of hydroelectric power available to California. Though at no
point during the crisis was California's sum of [actual
electric-generating capacity]+[out of state supply] less than demand,
California's energy reserves were low enough that during peak hours the
private industry which owned power-generating plants could effectively
hold the State hostage by shutting down their plants for "maintenance"
in order to manipulate supply and demand. These critical shutdowns
often occurred for no other reason than to force California's
electricity grid managers into a position where they would be forced to
purchase electricity on the "spot market", where private generators
could charge astronomical rates. Even though these rates were
semi-regulated and tied to the price of natural gas, the companies
(which included Enron and Reliant Energy) controlled the supply of
natural gas as well. Manipulation by the industry of natural gas prices
resulted in higher electricity rates that could be charged under the
In addition, the energy companies took advantage of California's
electrical infrastructure weakness. The main line which allowed
electricity to travel from the north to the south, Path 15,
had not been improved for many years and became a major bottleneck
(congestion) point which limited the amount of power that could be sent
south to 3,900 MW.
Without the manipulation by energy companies, this bottleneck was not
problematic, but the effects of the bottleneck compounded the price
manipulation by hamstringing energy grid managers in their ability to
transport electricity from one area to another. With a smaller pool of
generators available to draw from in each area, managers were forced to
work in two markets to buy energy, both of which were being manipulated
by the energy companies.
It is estimated
that a 5% lowering of demand would result in a 50% price reduction
during the peak hours of the California electricity crisis in
2000/2001. With better demand response the market also becomes more resilient to intentional withdrawal of offers from the supply side.
Effects of deregulation
Part of California's deregulation process, which was promoted as a
means of increasing competition, involved the partial divestiture in
March 1998 of electricity generation stations by the incumbent utilities, who were still responsible for electricity distribution and were competing with independents in the retail market. A total of 40% of installed capacity - 20,164 megawatts - was sold to what were called "independent power producers."
These included Mirant, Reliant, Williams, Dynegy, and AES. The
utilities were then required to buy their electricity from the newly
created day-ahead only market, the California Power Exchange (PX).
Utilities were precluded from entering into longer-term agreement that
would have allowed them to hedge their energy purchases and mitigate
day-to-day swings in prices due to tranisent supply disruptions and
demand spikes from hot weather.
Then, in 2000, wholesale prices were deregulated, but retail prices were regulated
for the incumbents as part of a deal with the regulator, allowing the
incumbent utilities to recover the cost of assets that would be
stranded as a result of greater competition, based on the expectation
that "frozen" would remain higher than wholesale prices. This
assumption remained true from April 1998 through May 2000.
Energy deregulation put the three companies that distribute
electricity into a tough situation. Energy deregulation policy froze or
capped the existing price of energy that the three energy deliveries
could charge .
Deregulating the producers of energy did not lower the cost of energy.
Deregulation did not encourage new producers to create more power and
drive down prices. Instead, with increasing demand for electricity, the
producers of energy charged more for electricity.
When electricity wholesale prices exceeded retail prices, end user demand was unaffected, but the incumbent utility
companies still had to purchase power, albeit at a loss. This allowed
independent producers to manipulate prices in the electricity market by
withholding electricity generation, arbitraging the price between internal generation and imported (interstate) power, and causing artificial transmission
constraints. This was a procedure referred to as "gaming the market."
In economic terms, the incumbents who were still subject to retail
price caps were faced with inelastic demand (see also: Demand response).
They were unable to pass the higher prices on to consumers without
approval from the public utilities commission. The affected incumbents
were Southern California Edison (SCE) and Pacific Gas & Electric (PG&E). Pro-privatization
advocates insist the cause of the problem was that the regulator still
held too much control over the market, and true market processes were
stymied — whereas opponents of deregulation simply assert that the
fully regulated system had worked perfectly well for 40 years, and that
deregulation created an opportunity for unscrupulous speculators to wreck a viable system.
As the FERC report concluded, market manipulation
was only possible as a result of the complex market design produced by
the process of partial deregulation. Manipulation strategies were known
to energy traders under names such as "Fat Boy", "Death Star", "Forney Perpetual Loop", "Ricochet", "Ping Pong", "Black Widow", "Big Foot", "Red Congo", "Cong Catcher" and "Get Shorty". Some of these have been extensively investigated and described in reports.
Megawatt laundering is the term, analogous to money
laundering, coined to describe the process of obscuring the true
origins of specific quantities of electricity being sold on the energy
market. The California energy market allowed for energy companies to
charge higher prices for electricity produced out-of-state. It was
therefore advantageous to make it appear that electricity was being
generated somewhere other than California.
Overscheduling is a term used in describing the manipulation
of capacity available for the transportation of electricity along power
lines. Power lines have a defined maximum load. Lines must be booked
(or scheduled) in advance for transporting bought-and-sold
quantities of electricity. "Overscheduling" means a deliberate
reservation of more line usage than is actually required and can create
the appearance that the power lines are congested. Overscheduling was
one of the building blocks of a number of scams. For example, the Death Star
group of scams played on the market rules which required the state to
pay "congestion fees" to alleviate congestion on major power lines.
"Congestion fees" were a variety of financial incentives aimed at
ensuring power providers solved the congestion problem. But in the
Death Star scenario, the congestion was entirely illusory and the
congestion fees would therefore simply increase profits.
In a letter sent from David Fabian to Senator Boxer in 2002, it was alleged that:
"There is a single connection between northern and southern
California's power grids. I heard that Enron traders purposely
overbooked that line, then caused others to need it. Next, by
California's free-market rules, Enron was allowed to price-gouge at
Some key events
Rolling blackouts affecting 97,000 customers hit the San Francisco
Bay area on June 14, 2000, and San Diego Gas & Electric Company
filed a complaint alleging market manipulation by some energy producers
in August 2000. On December 7, 2000, suffering from low supply and
idled power plants, the California Independent System Operator
(ISO), which manages the California power grid, declared the first
statewide Stage 3 power alert, meaning power reserves were below 3
percent. Rolling blackouts were avoided when the state halted two large
state and federal water pumps to conserve electricity.
On December 15, 2000, the Federal Energy Regulatory Commission (FERC)
rejected California's request for a wholesale rate cap for California,
instead approving a "flexible cap" plan of $150 per megawatt-hour. That
day, California was paying wholesale prices of over $1400 per megawatt,
compared to $45 per megawatt average one year earlier.
In January 17, 2001, the electricity crisis caused Davis to declare a state of emergency. Speculators, led by Enron Corporation,
were collectively making large profits while the state teetered on the
edge for weeks, and finally suffered rolling blackouts January 17-18.
Davis was forced to step in to buy power at highly unfavorable terms on
the open market, since the California power companies were technically bankrupt
and had no buying power. In addition, some of Davis' energy advisors
were formerly employed by the same energy speculators who made millions
from the crisis. The resulting massive long term debt obligations added
to the state budget crisis and led to widespread grumbling about Davis'
Consequences of wholesale price rises on the retail market
As a result of the actions of electricity wholesalers, Southern California Edison (SCE) and Pacific Gas & Electric
(PG&E) were buying from a spot market at very high prices but were
unable to raise retail rates. A product that the IOU's used to produce
for about three cents per kilowatt hour of electricity, they were
paying eleven cents, twenty cents, fifty cents or more; and, yet, they
were capped at 6.7 cents per kilowatt hours in terms of what they could
charge their retail customers. As a result, PG&E filed bankruptcy,
and Southern California Edison worked diligently on a workout plan with
the State of California to save their company from the same fate. PG&E and SoCalEd had racked up US$20 Billion in debt by Spring of 2001
and their credit ratings were reduced to junk status. The financial
crisis meant that PG&E and SoCalEd were unable to purchase power on
behalf of their customers. The state stepped in on January 17, 2001, having the California Department of Water Resources buy power. By February 1, 2001 this stop-gap measure had been extended and would also include SDG&E. It would not be until January 1, 2003 that the utilities would resume procuring power for their customers.
Between 2000 and 2001,
the combined California utilities laid off 1,300 workers, from 56,000
to 54,700, in an effort to remain solvent. San Diego had worked through
the stranded asset provision and was in a position to increase prices
to reflect the spot market. Small businesses were badly affected.
According to a 2007 study of Department of Energy
data by Power in the Public Interest, retail electricity prices rose
much more from 1999 to 2007 in states that adopted deregulation than in
those that did not.
The involvement of Enron
One of the energy wholesalers that became notorious for "gaming the market" and reaping huge speculative profits was Enron Corporation. Enron CEO Ken Lay
mocked the efforts by the California State government to thwart the
practices of the energy wholesalers, saying, "In the final analysis, it
doesn't matter what you crazy people in California do, because I got
smart guys who can always figure out how to make money." The original
statement was made in a phone conversation between David Freeman
(Chairman of the California Power Authority) and Kenneth Lay (CEO of
Enron) in 2000, according to the statements made by Freeman to the
Senate Subcommittee on Consumer Affairs, Foreign Commerce and Tourism
in April and May 2002.
S. David Freeman, who was appointed Chair of the California Power
Authority in the midst of the crisis, made the following statements
about Enron's involvement in testimony
submitted before the Subcommittee on Consumer Affairs, Foreign Commerce
and Tourism of the Senate Committee on Commerce, Science and
Transportation on May 15, 2002:
"There is one fundamental lesson we must learn from this
experience: electricity is really different from everything else. It
cannot be stored, it cannot be seen, and we cannot do without it, which
makes opportunities to take advantage of a deregulated market endless.
It is a public good that must be protected from private abuse. If
Murphy’s Law were written for a market approach to electricity, then
the law would state “any system that can be gamed, will be gamed, and
at the worst possible time.” And a market approach for electricity is
inherently gameable. Never again can we allow private interests to
create artificial or even real shortages and to be in control."
"Enron stood for secrecy and a lack of responsibility. In electric
power, we must have openness and companies that are responsible for
keeping the lights on. We need to go back to companies that own power
plants with clear responsibilities for selling real power under
long-term contracts. There is no place for companies like Enron that
own the equivalent of an electronic telephone book and game the system
to extract an unnecessary middleman’s profits. Companies with power
plants can compete for contracts to provide the bulk of our power at
reasonable prices that reflect costs. People say that Governor Davis
has been vindicated by the Enron confession."
Enron eventually went bankrupt, and signed a US$1.52 billion
settlement with a group of California agencies and private utilities on
July 16, 2005. However, due to its other bankruptcy obligations, only
US$202 million of this was expected to be paid. Ken Lay was convicted
of multiple criminal charges unrelated to the California energy crisis
on May 25, 2006, but he died due to a massive heart attack on July 5 of that year before he could be sentenced.
Enron traded in energy derivatives specifically exempted from
regulation by the Commodity Futures Trading Commission. At a Senate
hearing in January 2002, Vincent Viola, chairman of the New York
Mercantile Exchange -- the largest forum for energy contract trading
and clearing -- urged that Enron-like companies, which don't operate in
trading "pits" and don't have the same government regulations, be given
the same requirements for "compliance, disclosure, and oversight." He
asked the committee to enforce "greater transparency" for the records
of companies like Enron. In any case, the U.S. Supreme Court had ruled
"that FERC has had the authority to negate bilateral contracts if it
finds that the prices, terms or conditions of those contracts are
unjust or unreasonable." Nevada was the first state to attempt recovery
of such contract losses.
Handling of the crisis
Governor Gray Davis
Perhaps the heaviest point of controversy is the question of blame for the California electricity crisis. Former Governor Gray Davis's critics often charge that he did not respond properly to the crisis, while his defenders attribute the crisis solely to the corporate accounting scandals and say that Davis did all he could.
In a speech at UCLA on August 19, 2003, Davis apologized for being slow to act during the energy crisis, but then forcefully attacked the Houston-based
energy suppliers: "I inherited the energy deregulation scheme which put
us all at the mercy of the big energy producers. We got no help from
the Federal government. In fact, when I was fighting Enron and the other energy companies, these same companies were sitting down with Vice President Cheney to draft a national energy strategy."
Signs of trouble first cropped up in the spring of 2000 when
electricity bills skyrocketed for customers in San Diego, the first
area of the state to deregulate. Experts warned of an impending energy
crisis, but Governor Davis did little to respond until the crisis
became statewide that summer. Davis would issue a state of emergency on
January 17, 2001, when wholesale electricity prices hit new highs and the state began issuing rolling blackouts.
Some critics, such as Arianna Huffington, alleged that Davis was lulled to inaction by campaign contributions from energy producers.
In addition, the California State Legislature would sometimes push
Davis to act decisively by taking over power plants which were known to
have been gamed and place them back under control of the utilities,
ensuring a more steady supply and slapping the nose of the worst
manipulators . Meanwhile, conservatives argued that Davis signed
overpriced energy contracts, employed incompetent negotiators, and
refused to allow prices to rise for residences statewide much like they
did in San Diego, which they argue could have given Davis more leverage
against the energy traders and encouraged more conservation. More criticism is given in the book Conspiracy of Fools,
which gives the details of a meeting between the governor and his
officials; Clinton Administration treasury officials; and energy
executives, including market manipulators such as Enron, where Gray
Davis disagreed with the treasury officials and energy executives. They
advised suspending environmental studies to build power plants and a
small rate hike to prepare for long-term power contracts (Davis
eventually signed overpriced ones, as noted above), while Davis
supported price caps, denounced the other solutions as too politically
risky, and acted rudely.
The crisis, and the subsequent government intervention, have had
political ramifications, and is regarded as one of the major
contributing factors to the 2003 recall election of Governor Davis.
On November 13, 2003,
shortly before leaving office, Davis officially brought the energy
crisis to an end by issuing a proclamation ending the state of
emergency he declared on January 17, 2001.
The state of emergency allowed the state to buy electricity for the
financially strapped utility companies. The emergency authority allowed
Davis to order the California Energy Commission
to streamline the application process for new power plants. During that
time, California issued licenses to 38 new power plants, amounting to
14,365 megawatts of electricity production when completed.
On May 24, 2001, future governor Arnold Schwarzenegger and former Los Angeles Mayor Richard Riordan met with Enron CEO Ken Lay, at the Peninsula Hotel in Beverly Hills,
at a meeting convened for Enron to present its "Comprehensive Solution
for California," which called for an end to Federal and state
investigations into Enron's role in the California energy crisis.
In October 7th, 2003, Schwarzenegger was elected Governor of California to replace Governor Davis.
Over a year later, he attended the commissioning ceremony of a new Western Area Power Administration (WAPA) 500 kV line remedying the aforementioned power bottleneck on Path 15.
National Energy Development Task Force
Vice President Dick Cheney was appointed in January, 2001 to head the National Energy Development Task Force. In the Spring of that year, officials of the Los Angeles Department of Water and Power met with the Task Force, asking for price controls to protect consumers. The Task Force refused, and insisted that deregulation must remain in place.
Federal Energy Regulatory Commission
The Federal Energy Regulatory Commission (FERC)
was intimately involved with the handling of the crisis from the summer
of 2000. There were in fact at least four separate FERC investigations.
- The Gaming Case, investigating general allegations of manipulation of the Western energy markets.
- The Enron Investigation, specifically investigating the involvement of Enron.
- The Refund Case, involving wide-ranging recovery of illegal profits made by some companies during the crisis.
- The Economic Withholding and Anomalous Bidding Case.
As of January 2006, the refund case is ongoing.
Source: Wikipedia (All text is available under the terms of the GNU Free Documentation License and Creative Commons Attribution-ShareAlike License.)