EBF 483
Introduction to Electricity Markets

7.0 Introduction

PrintPrint

In the history of major energy crises in the United States, probably the most well known is the oil crisis of the 1970s, which inflicted substantial damage on the US economy and spawned a political fear of dependence on imported energy that persists to this day. The subject of this part of the lesson, California's energy crisis, was not as severe nationally but had serious repercussions for people living in that state. California's energy crisis began as a financial problem but quickly spiraled out of control, leading to blackouts and an enormous debt burden for the state. The state's deregulated electricity market opened on (in all seriousness) April Fool's Day in 1998. Within two years, prices had increased by a factor of 100 or more, the state was forced to ration electricity just as developing countries do, and the state was basically forced to take over its largest electric utilities because they had been completely drained of cash.

This is the story of how lawyers, lobbyists and economists tried to create a commodity market for electricity and failed. It's the story of an epic battle between the state of California and the US government. It's the story of the company (Enron) that created the risk management tools that most energy companies still use today, and then crashed as fast as it had risen. It's the story of how the Terminator became governor of California.

California's disastrous experiment with electricity deregulation has spawned countless books, articles, and even movies. For this section of the course you're asked to read Jim Sweeney's paper "The California Electricity Crisis: Lessons for the Future," and the material here will give you a brief idea of how California tried to deregulate and why it failed so badly. If you want to know more, here are a few other references:

  • The PBS series Frontline put together a nice documentary called "Blackout." While the video itself is not on the web, you can find some excerpts from the show and a nice time line of what happened in California.
  • Jim Sweeney also has a full-length book on California's power crisis, which is very well written.
  • If you are interested to know more about Enron specifically, probably the best resource is the book The Smartest Guys in the Room by Bethany McLean. There is also a movie by the same name. (Full disclosure - the author of this course was quoted in the book.)

This story will play out in a few parts. First we'll talk about why California wanted to deregulate its utilities, how that deregulation worked, and the reasons that it failed so badly. We'll conclude with a look at Enron specifically and the ways that it was able to manipulate California's power market.

There are a couple of external readings for this lesson, available on Canvas:

  • "The California Electricity Crisis: Lessons for the Future," by James Sweeney, which provides a readable overview of California's power crisis.
  • "California's Electricity Crisis," by Paul Joskow. This is another readable (but longer and with more data) overview of California's power crisis.

Learning Outcomes

By the end of this lesson, you should be able to:

  • Identify similarities and differences between Regional Transmission Organizations and electric utilities.
  • Explain how the design of California's electricity market and market manipulation contributed to that state's energy crisis in 2000.

Lesson Roadmap

Lesson 7 Roadmap
To Read Online course material This course website
To Do Homework Assignment 7 Submission in Canvas

Questions?

If you have questions, please feel free to post them to the General Questions and Discussion forum in Canvas. While you are there, feel free to post your own responses if you, too, are able to help a classmate.