EBF 483
Introduction to Electricity Markets

7.4 The Crisis Unfolds

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In this section of the lesson we'll go through a short time line of how the crisis unfolded. A more detailed time line can be found on the website for the documentary "Blackout," referenced at the beginning of the Lesson.

The figure below shows a history of electricity prices in California. As you can see, starting in May 2000 (roughly two years after the PX began operating) prices started to reach very high levels and became very volatile.

Graph showing peak power prices in California spiking after May 2000.
Figure 7.7: Peak power prices in California
Source: Author calculations based on data from the PX and Energy Market Report
  • Stage 1 of the crisis, Summer 2000:
    Beginning in May 2000, prices began to rise far above historical levels and stayed there for the majority of the summer. SDG&E had paid off its stranded costs and so was (temporarily) able to pass these higher prices on to customers through higher rates in the San Diego area. PG&E and SCE were still operating under the frozen retail rates. These companies paying more than $100/MWh on the PX/ISO markets (at times a whole lot more) and re-selling to customers at half the price. Regulators in California refused to intervene by allowing PG&E and SCE to raise their retail electric rates.
  • Stage 2 of the crisis, Fall 2000:
    At a time when power prices typically decline to very low levels in the western market ($10/MWh or less) prices remained stubbornly above $100/MWh. A large proportion of power plants in California were mysteriously declared to be "out of service." PG&E and SCE continued to lose many millions of dollars. California asked the Federal Energy Regulatory Commission to intervene, but the FERC refused to do so, saying that it had warned California not to go ahead with its proposed market design.
  • Stage 3 of the crisis, Winter 2000/2001:
    Winter is also a time when power prices in the western market were typically low. In the beginning of 2001, however, prices in California reached levels even higher than in the Summer of 2000 (when electricity demand was actually high). This stage represented the transition of the energy crisis into a full-blown financial crisis for California. At this point, PG&E and SCE were tens of billions of dollars in debt. PG&E declared bankruptcy and SCE would have done so had it not been bailed out by the state of California. These bankruptcies heightened the energy crisis because out-of-state generators refused to sell any power to PG&E and SCE through the PX, as the generators feared they would never get paid. Since the PX lost all of its sellers, it went out of business in March 2001.
  • Stage 4 of the crisis, Spring 2001:
    Following the imposition of power rationing in the state, California tried to seize control of the power market. It started to buy all electricity for the state's utilities using an obscure agency called the California Department of Water Resources (CDWR). The power traders at CDWR, on orders from the state, began panic buying immediately. By the summer of 2001, CDWR had amassed more than $70 billion in debt.
  • In June 2001,
    FERC finally stepped in and re-regulated California's electricity market. By this time, California taxpayers had spent more than $80 billion to prop up the state's power market and utilities. The governor, a rising star in the Democratic Party named Gray Davis, was ousted in the middle of his term and a movie star named Arnold Schwarzenegger became the new governor of California.