Electricity How Inadequate Hydro, Gaming

Electricity

How inadequate hydro, gaming of the system, hot summers let to failure of California deregulation

Californian Crisis

How inadequate hydro, gaming of the system, hot summers let to failure of California deregulation

The failure of the deregulation of electricity in California had a number of complex causes. These included the issue of the lack of sufficient hydroelectric power in the region, as well as drought during the period of deregulation which placed further strain on the electricity supply. However, a central causative factor lay in the process and nature of the deregulation itself, as well as the important factor of the manipulation of the market and the gaming of the system for profit.

The electricity crisis in the region, also known as the Western Energy Crisis during 2000 and 2001, refers to a critical period when the state was subjected to numerous blackouts, as well as the failure of one of California's largest energy companies. As has already been noted, the reasons for the failure of deregulation in the region are complex. However, a number of central factors can be isolated and shown to have provided the impetus towards the failure of this deregulation.

In 1998, California was one of the first states to implement deregulation (Bradshaw and Woodrow). In 1997, before the advent of deregulation, the Public Utilities Commission moved to open the twenty billion dollar market to competition. The rationale behind this thinking was that such a move would have a number of benefits. These included the view that it would result in a reduction of prices due to increased competition and that this increased competition would also lead to new services and innovations in the market. In 1998 residential customers were permitted to "…buy competitive retail electric power. Expectations about the benefits were high." ( Ritschel and Smestad 1380)

Other benefits that were envisaged included improved customer services and new products, as well as improved environmental benefits, such as "green" power.

( Ritschel and Smestad 1379)

However, while at the beginning the move towards deregulation seemed to be successful, the results were a failure, with rolling blackouts in 2001. (Bradshaw and Woodrow) A central reason given for this crisis was the "gaming of the system." In other words, there was a manipulation of various market factors by some players, which contributed to the failure of the deregulation. Gaming is in referred to as the practice by "…greedy private companies gaming the system through rules they helped write." (Bradshaw and Woodrow) As one study on this subject notes: "….generators "gamed" California's electricity auctions to extract high prices." (THE CALIFORNIA CRISIS) Other factors that are also mentioned are the"…lack of long-term, price-established contracts between producers and distributors." (THE CALIFORNIA CRISIS)

Studies also refer to the very structure of the deregulation system in California as being intrinsically flawed. As one study notes; "The most important flaw of California's deregulated electricity market was that the market was more re-regulated than deregulated" and that it was "...the most complicated electricity market ever created..." (Ritschel and Smestad 1379)

This situation was exacerbated by other pertinent factors, all of which contributed to the crisis. Central to these factors was the drought during this period, which can be linked to the shortage of hydroelectric power. There was a severe drought in the northwest states in 2001 and California obtained much of its hydroelectric power from the Pacific Northwest. The drought in this region therefore placed a heavy drain on the supply of power to California. This was also worsened by the increased demands on the electricity supply at the time due to the extremely hot weather. (Hot, Dark Summer Ahead for California)