This may not be the hottest current affair topic but I would like to recap the California electricity crisis of 2000. There are many interesting lessons that I learnt that I would like to share. As everyone will be aware, California electricity crisis of 2000 was an acute shortage of electricity caused by illegal market manipulations by some of the smartest con men (Read ENRON) in the energy industry. It caused some of the industry giants like Pacific Gas and Electricity to go bankrupt and cost the state around $40 billion. The causes of the crisis have been debated and analyzed for years. I will mention a few of those briefly.
Megawatt Laundering: Refers to obscuring the true origins of electricity supply. The market rules of the 2000 dictated that a market participant is paid more for the supply from out of state and ENRON made good use of this. The problem with electricity is that you can’t see it, store it or track the electrons. You cannot distinguish the power (the electrons) from a renewable source or from the dirtiest and oldest coal plant . If only electricity could be traded like apples, we would need a separate complex market.
Over scheduling: The transmission lines have limited thermal capacities. There was only one major line connecting Northern and Southern California and the market rules dictated that if you over schedule but because of the thermal limit constraint you are not able to deliver that power, the state pays you. ENRON made use of this loophole to make a few million dollars in a short period of time .
Partial Deregulation and Complexity: It is not that electricity deregulation was the root cause of all these problems, the partial deregulation (variable wholesale but fixed retail prices) coupled with an overly complex and non-transparent market model was the driving force for ENRON to manipulate the market. A complete free market knows to adjust itself but we need more care when we try to regulate one.
The electricity crisis also changed the political climate in California. It saw the replacement of Governor Gray Davis with Arnold Schwarzenegger. The market rules were redesigned to penalize over scheduling rather than incentivizing it. The California crisis may have pushed the process of electricity deregulation back by a few years.