Californias Electricity Crisis During 2000 2001 - Research Paper Example

California’s Electri Crisis During 2000 – 2001 The California Electri Crisis, which was also known as the WesternUnited States Energy Crisis, was a situation where there was a shortage of electricity in the market due to the illegal shutdowns of the pipelines by the Texas Energy Consortiums. This was caused by drought, manipulation of markets and delays in approval of new power plants which, in turn, led to an 800% increase in power wholesale price between 2000 and 2001. The state suffered multiple large-scale power black-outs which adversely affected many businesses dependent on electricity for their running, which, in turn, inconvenienced a large number of retail consumers. The state had installed a generating capacity of 45 gigawatts but at the time of the frequent power black-out, the demand was at 28 gigawatts (Sweeney 89). Energy companies created a demand supply gap to create an artificial shortage. Energy traders took advantage of the situation and sold electricity at premium prices which sometimes were 20 times its normal value. In addition, this caused the bankruptcy of Pacific Gas and Electric Company and the near bankruptcy of Southern California Edison (Sweeney 123). The power black-out affected over 97,000 customers spread across San Francisco Bay and San Diego which cost the state $40 to $45 billion during the period. One of the energy supply wholesalers became very notorious form inflating the electricity prices and, in turn, reaping huge profits from the crisis. The responsible company was Enron Corporation. Trouble first cropped up in mid 2000 when the power bills went so high in the San Diego areas. Energy experts warned of an energy crisis in the state, but the governor did very little to avert it. The state legislation pushed the governor to act on the warning, but he did not respond, which became a crisis that caused the state to lose billions in revenue (Weare 28). The governor declared a state of emergency in the energy crisis on January, 17, 2001, which allowed the state to buy electricity for the financially cramped utility companies. The emergency authority also allowed the governor to order the streamline of the California Energy Commission in the application process for new power plants in the state. With reference to the discussion questions provided, this paper will assess what happened during the electricity power crisis in California between 2000 and 2001 and discuss how different market designs and smart grid technology could prevent the crisis from happening again. The electricity crisis in California was described as a very big blow to the economy of the United States of America considering that the country lost over $50 billion between 2000 and 2001. The main causes of the electricity crisis were drought that had rocked havoc across the state, market manipulation by notorious companies and delays in approval of new power plants by the state (Sweeney 65). The financial crisis also came about following the legislation of partial deregulation legislation instituted in 1996 by Governor Pete Wilson. It also came about following the taking advantage of several companies to sell electricity to consumers at exorbitant rates which was up to 20 times the original price. The crisis also came about due to the ignorance of the then governor of the state of California to heed the warning of energy experts (McNamara 196). The crisis also allowed independent companies to manipulate the electricity prices in the market by withholding electricity generation; hence the prices went up so exorbitantly that caused an artificial power shortage in the whole state of California. The procedure of withholding electricity to the consumers for their own benefits was known as “gaming the market” (McNamara 106). This was mainly because some of the companies held so much market control and hence could manipulated the market to cater for their need, leading to huge profit margins. Some of the energy producing companies advocated the pro-privatization of the energy sector in the state to ease up the current energy crisis. This crisis was further fueled by the government putting price caps in the energy sector by keeping the consumer price artificially low, making the California government discourage its citizens against practicing conservation (Weare 23). This crisis in California attracted the attention of the world at large as by the first four months of 2001, the wholesale price of electricity averaged at over $300/mwh, ten times the price in 1998 and 1999. This meant that California’s two largest energy companies, Pacific Gas & Electricity (PG&E) and Southern California Edison (SCE), were paying so much more for wholesale power than they were able to sell in retail to the state. The led to the declaration of bankruptcy of Pacific Gas & Electricity in April 6, 2001 and the near declaration of Southern California Edison by the federal bankruptcy court (McNamara 28). As a result of this financial crisis in the companies, the unregulated suppliers of wholesale power stopped supplying them with electricity for a short period. Emergency orders were issued by the United States Department of Energy and the Federal Courts which required generators to be subjected to federal jurisdiction to continue supplying until the whole crisis could be resolved. To avoid the widespread black-out which had become a common thing due to the crisis, the state of California stepped in and used the funds available to buy power from the unregulated suppliers. The state spent more than $8 billion in buying the electricity and entered into deal with some of the suppliers in a twenty year contract stretching into the future. The signing of the contracts was reported to involve commitments of billions of dollars. This, in turn, translated into the increase of retail prices of 30% to 40%, which came into effect in June 2001, meaning the retail prices were likely to remain high for many years due to the long term contracts negotiated by the state, which were already paid off. Although the wholesale prices of electricity began to moderate in June 2001, the competition between wholesale and retail companies remained high. It was a must for the shortcomings in the design of California’s electricity crisis to be resolved although the amendments that should be made still remained a matter of debate. All the effort at market restructuring always met an unexpected problem that required correction making experts doubt the robust model which they thought already existed. The California ISO redesigned the proposal of the then market and submitted it to the state. There were three central points, however, which raised hopes (Sweeney 92). The first is that the state of California’s market was to allow long-term power contract to have greater roles when it comes to matters appertaining to the state’s electricity. The use of long-term contracts helped control the risk and improve the stability of the energy market. In addition to that, they expanded their market which the generators struggled to compete to sell the power. The logic was that the buyers had a wider range of choices and prices when it came to buying their electricity in advance (Weare 72). Nevertheless, regulators developed strict rules under which the electricity service providers had to enter into bilateral contracts, forward contracts, and long-term contracts. It was important to note that although the forward contracts increased competitiveness, they do not guarantee lower prices for consumers. Over the long run, forward prices in a competitive market will be similar to the average of spot market prices. In other words, although long term contracts were able to protect consumers from price hikes, they were not able to protect the consumers against higher prices resulting from the tight electricity supplies. The second issue was degree in which decision making authority was centralized. California had chosen a design that relied so much on the market transaction and less on the management centralization than all the other markets did. A system unwieldy to manage during alerts was created by that choice as the operators scrambled to maintain the grid. The state was concerned about the mistakes. There was evidence that showed utilities that obtained significant operational savings from their management generator dispatch of specialized services required to maintain reliable grid operations risks squandering the benefits of centralized grid management (Weare 15). The third concerned the market design in that the market rules developed were put to be as important as the specific rules. The then environment posed threats to a constructive debate. Many state lawmakers did not trust the energy traders who were to blame for the energy crisis facing the state back then. The generator and energy traders were wary of the ISO because it had become politicized during the crisis and the stakeholders of the energy ministry remained on bitter ends with one another. The ISO which was responsible for the market design amendments operated in isolation from the state lawmaking organs. This created a forum with which the stakeholders and independent experts came together in a move aimed at helping the state forge forward (McNamara 51). Market design can be used to prevent a crisis like that witnessed between 2000 and 2001 in that it will be easy for the state to control the market prices in that it prevents notorious organization from moving in and making huge profits by inflating the price of electricity when the state faces a similar crisis. By the state controlling the market prices both wholesale and retail, it will be easy for it to regulate the price, hence cushioning the consumers from very high prices that are set by the notorious organizations. The state will also be able to monitor the market and be able to make sure that none of the electricity suppliers are making huge profits from the consumers but charging them exorbitant rates for electricity and for other organizations which hide electricity to artificially create electricity shortages so as to take advantage (Griffin & Puller 81). In June 2001, the retail prices began to rise and, in turn, the wholesale prices began to fall and by the end of August 2001, the wholesale prices had fallen 90% down from the prices experienced in December 2000. The California Power Exchange (PX) stopped operating in January 2000 and was later declared bankrupt, eliminating them from the energy market of which they accounted for 80% of the sales to California energy consumers before the crisis occurred. In September 2001, the California Public Utilities Commission terminated the completion in the retail market that was the primary motivation for the restructuring and deregulation program that was initiated in the mid 1990s. The state had then taken over many of the key components in the electricity industry in the whole state and had replaced the wholesale and retail electricity markets with the state procurement and regulated retail prices due to financial crisis that was nearly crippling the whole state (Sweeney 208). It was then with the cooperation of the Federal Energy Regulatory Commission (FERC) as the wholesale market policies diverged further from the FERC regulations. This was not what the state predicted would happen when it reformed the electricity industry and while many energy experts predicted that there would be problems resulting from the market design and regulatory decisions that were made during the new system’s formation, none of them predicted that the state’s electricity restructuring and competition would have led to such as a huge crisis. Smart Grid Technology generally refers to a level of technology that people use to bring utility electricity delivery systems into the 21st century which is mostly by use of computer-based remote control and automation. These systems are made by a two-way communication technology and computer based processing that has been around for decades in the energy in other industries (Cicchetti, Dubin, and Long 71). The energy industry has begun using this technology on electricity networks, from the power plants and wind farms straight to the consumers in homes and businesses. The technology offers many benefits to consumers which can mostly be seen by the big improvement in the energy efficiency on the electricity grid and in the energy consumers’ homes and businesses. For decades companies have had to delegate duties to its employees to go out and collect the data that is needed in the provision of electricity which included the reading of meters and fixing broken equipment and measuring of voltage, but since the introduction of the technology the device utilities which they use to deliver electricity have all yet to be computerized now that many options are available to the electricity industry to modernize it. The “grid” is networks that are used to carry electricity from the plants where it is manufactured straight to the consumers. This grid includes the wires, transformers, switches, etc. needed in the delivery of efficient electricity to the consumers. Smart grid means “computerizing” the electric utility grid which includes a two way digital communication technology to the devices that are used in the grid where each device on the network can be given sensors that gathers data, plus two way communication between the device in the consumers’ homes or businesses with that in the utility’s network operations centers. A feature that is most notable in the smart grid is the automation technology that lets the utility adjust and control each individual device or so many more devices in a central location (Griffin and Puller 291). The benefits of smart grid technology include cyber security, handling sources of electricity such as the solar power stations and even integrating electric vehicle on to the grid. The companies that make or offer the services of smart grid technology included well established technology giants and communication firms. The smart grid technology can be used to prevent a repeat of the California Electricity Crisis because it can be used to monitor whatever happens. By using this technology, the state will be able to avert another crisis because experts may be able to detect problems in the systems early enough so as to fix them. By monitoring using this technology, the state will be able to save a lot of money from the detection of broken or faulty equipment in the system, and hence saving them time. This technology can also be used to prevent another electricity crisis in that there is the monitoring of the amount of electricity flow from the production plants to the consumers in their homes and businesses, hence making it easy for the state to detect a minor problem and fix it before it develops into a full crisis. The technology also monitors the notorious organizations that are known for waiting for the opportune time to make huge profits and prevent them early in time before it becomes a crisis (Cicchetti, Dubin and Long 63). By use of this type of technology, the state will be able to save a lot of revenue which would have been used in sending employees of organizations to go and check the status of the cable lines and measure the voltage of the power lines, which is very tiresome and time consuming. This technology will centralize the work of monitoring, hence making it a little bit easier to monitor and make quick responses in case of emergencies or faults in the networks. The technology by itself is not that expensive and is very efficient when it comes to dealing with networks in corporations. In conclusion, the California electricity crisis occurred due to the ignorance and negligence of the state administration which, in turn, translated to the loss of billions of dollars in revenue. California’s financial crisis was the result of the California state government mismanagement of the electricity crisis. Although the state was almost crippled by a short-term electricity crisis, it is to be noted that the then governor made an informed decision to adopt a long-term electricity supply contract that was able to address the short-term crisis that had rocked the state then. In these long-term contracts, the state was to pay prices roughly twice as high as the expected market price so as to avert a looming energy crisis. California businesses and consumers will had to pay the cost of crisis for years to come,making the economy of the state drag. The falling of wholesale prices and the bankruptcy of some companies dried up the supply of investment capital available to fund power projects. As a result of this, the generators cancelled thousands of megawatts which were planned to be constructed. The long-term contracts signed by the governor of the state of California, though expensive, brought stability by reducing the exposure to the energy market. To ensure that there is no repeat of the 2000–2001 crisis in California, the state will have to use the available technology such as the smart grid technology and implement the market design. Lawmakers are also to exercise caution as they contend with the issue of the crisis. Works Cited Cicchetti, Charles, Jeffrey Dubin, and Colin Long. The California Electricity Crisis: What, Why, and What’s next. New York, NY: Springer, 2004. Print. Griffin, James & Steven Puller. Electricity Deregulation: Choices and Challenges. Chicago, CH: University of Chicago Press, 2005. Print. McNamara, Will. The California Energy Crisis: Lessons for a Deregulating. Pennsylvania, PN: PennWell Books, 2002. Print. Sweeney, James. The California Electricity Crisis. California, CA: Hoover Press, 2002. Print Weare, Christopher. The California Electricity Crisis: Causes and Policy Options. California, CA: Public Policy Institute of California, 2003. Print. Read More