California energy crisis

In the years 2000–2001, the population of the US state California was exposed to a massive electricity crisis. Associated with the energy crisis were several large-scale blackouts and the bankruptcy of one of the state's largest energy companies. Many industrial companies that were dependent on a reliable power supply were also damaged. The economic cost of the crisis is estimated at $ 40-45 billion.

The crisis occurred as a result of the so-called deregulation of the energy industry in California. The new regulatory framework was thus also associated with the crisis. After a thorough investigation, the Federal Energy Regulatory Commission (FERC) concluded in 2003:

“... Imbalance of supply and demand, flawed market design and inconsistent market rules enabled significant market manipulation as detailed in the final research report. Without the dysfunctionality of the underlying regulated market, attempts to manipulate the market would not have been successful. "

Since many other American and European countries as well as Germany began at the same time to restructure their energy supply industries in a similar way and to subject them to new regulatory frameworks, the Californian energy crisis received widespread international attention as a kind of textbook example for state regulators.

Main events of the crisis

On June 14, 2000 , 97,000 coastal San Francisco customers experienced rolling power cuts.

In August 2000 , the San Diego Gas & Electric Company filed a complaint about market manipulation by some energy producers.

On December 7, 2000 , the independent network operator, who operates the Californian power grid, announced the first state-wide power alarm level 3, which means that the power reserves were below 3 percent, due to a lack of supply and dormant power plants. Rolling shutdowns were avoided by the state's decision to take two large federal and state-owned water pumps out of operation in order to reduce energy consumption.

On December 15, 2000 , the Federal Energy Regulatory Commission (FERC) rejected California's request for a ceiling on trading prices. On that day, California was paying trading prices in excess of $ 1,400 per megawatt hour compared to an average price level of $ 45 per megawatt hour a year ago.

On January 17, 2001 , the electricity crisis prompted Governor Gray Davis to declare a state of emergency. Speculators, headed by Enron , made huge profits while the state wavered. On 17 and 18 January , there were rolling blackouts.

High retail prices in connection with state-fixed end customer prices put the state's established energy suppliers in a critical position. On April 6, 2001 , the utility company Pacific Gas and Electric  (PG&E) declared bankruptcy and Southern California Edison  (SCE) saved itself from the same fate only through a restructuring plan persistently negotiated with the California state. Between 2000 and 2001, Californian utilities laid off 1,300 employees (from 56,000 to 54,700).

Governor Davis bought electricity on the open market at extremely unfavorable terms as California's electricity companies were virtually bankrupt and had no purchasing power. The resulting long-term debt exacerbated the state's debt crisis and lowered the reputation of Davis' administration.

It was not until June 2001 that new power plants were in production and electricity trading prices were back to normal. However, the debt crisis that emerged from the electricity crisis lasted for years.

Deficiencies in the regulatory market design

In 1996 , Governor Pete Wilson initiated the so-called deregulation of California's power supply. As part of this deregulation, which had the aim of increasing competition, the industry was restructured.

The established utilities Southern California Edison  (SCE), San Diego Gas & Electric and  Pacific Gas and Electric  (PG&E) had to sell most of their generation. In March 1998 40% of the installed generation capacity, a total of 20 GW, was sold to independent producers in this way. The latter included Mirant ,  Reliant ,  Williams ,  Dynegy , AES, and Enron . The energy suppliers were still responsible for the power distribution and competed with other companies in the end-user market. In order to supply their customers, they now had to buy the electricity on the newly created spot-only exchange, the California Power Exchange (PX), from the aforementioned producers. The energy suppliers were forbidden to conclude long-term contracts that would have enabled them to secure the procurement of their long-term end customer sales against daily price jumps caused by interruptions in supply and weather effects.

In 2000, the price controls that had existed on the trading markets were replaced by a soft cap, which allowed higher prices if they were cost-based. However, the end customer prices remained regulated. The latter was part of an agreement with the regulator and was intended to allow energy suppliers to write off the costs of systems that had become ailing due to increased competition.

The expectation was that the frozen retail prices would remain higher than the retail prices. In fact, the regulation of retail prices encouraged abuse. Energy traders were able to enforce higher trading prices if they could justify this with import prices from other US states. So it was more profitable to export energy from California and re-import it at a higher price.

From around May 2000, retail prices rose above the fixed end customer prices. The situation for the three established electricity suppliers became critical. The existing regulation froze the end customer prices, but did not ensure lower purchasing costs for the suppliers. The short-term price increase in the trading markets had no effect on supply because of the long planning, approval and construction times for power plants. Instead, with the growing scarcity of electricity, the existing producers simply asked for more money. In January 2001, producers began to shut down power plants to drive up prices.

The fact that retail prices became more expensive had no effect on demand because of the fixed end customer prices. The established suppliers therefore had to buy, even if at a loss. For electricity products that they had previously produced at 3 cents / kWh, they now had to pay 11, 20, 50 or more cents. On the other hand, they were only allowed to pass on a maximum of 6.7 ct / kWh to their end customers. Price increases were not possible without the permission of the public energy supply commission.

By spring 2001, utilities PG&E and Southern California Edison had accumulated $ 20 billion in debt and their assets were junk. As a result, they were no longer able to buy energy for their customers. The state stepped in and entrusted the California Department of Water Resources with the purchase of energy. On February 1, 2001, this measure was expanded and also affected SDG & E. On April 6, 2001, PG&E declared bankruptcy and Southern California Edison narrowly avoided it.

Noticeably, the city of Los Angeles was not affected by the crisis, as the government-owned utilities in California (including the Los Angeles Department of Water & Power) were not affected by the new regulation and sold their surplus energy to the private utilities of the state (mainly to Southern California Edison). This ensured that the greater Los Angeles area suffered only rolling brownouts rather than long-term blackouts in other parts of the state.

The crisis led beyond California to skepticism about experiments with electricity markets. S. David Freeman , named chairman of the California Power Authority in the midst of the crisis, testified before a committee on May 15, 2002: “From this experience we should learn a fundamental lesson: Electricity is real unlike anything else. You can't store it, you can't see it, we can't do without it, which makes the opportunities to take advantage of a deregulated market countless. Electricity is a public good that needs to be protected from private abuse. If Murphy's law were written for a market approach to electricity, the law would be, 'Any system that can be manipulated will be manipulated, will be manipulated at the worst possible time.' And a market approach for electricity can in itself be manipulated. We must never again allow private interests to create artificial or real scarcity and to take control. Enron stood for secrecy and irresponsibility. In the power supply we need openness and companies that are responsible for keeping the lights on. We have to come back to companies that operate power plants with a clear responsibility for selling real electricity in long-term contracts. There is no place for companies like Enron who have the equivalent of an electronic telephone directory and play the system to make the profit of useless brokering. Firms that own power plants can compete for contracts to deliver our electricity purchases at reasonable prices that reflect the cost. "

A later study by the Department of Energy in 2007 showed that retail prices rose significantly more between 1999 and 2007 in states that had initiated deregulation than in those that had not.

supply and demand

California's population grew 13% in the 1990s. The state did not build a new power plant during this period, but existing power plants were expanded and electricity production increased by almost 30% between 1990 and 2001.

However, the generation capacity was relatively scarce. There had been delays in approving new power plants and California's utilities were increasingly dependent on imported hydropower from the Pacific Northwest states of  Oregon  and  Washington .

In the summer of 2001, a drought in the Northwest reduced the availability of hydroelectric power to California. Although the available generation capacity plus external supply was greater than demand at any point in the crisis, energy was scarce enough that private producers could successfully blackmail the state by sending their power plants overhaul in order to create an artificial shortage.

The market manipulators also benefited from California's poor network infrastructure. The main connection between north and south had not been expanded for many years and became a bottleneck with a maximum capacity of 3,900 MW. Without manipulation, the bottleneck was unproblematic, but in the situation that arose, it contributed to making the available pool of generation smaller and the suppliers more blackmailed in the event of local scarcity.

According to the International Energy Agency  , a 5% lower demand would have resulted in a 50% price reduction during the peak hours of California's energy crisis in 2000/2001. A more price-sensitive demand would also have made the market more robust against reluctance to supply.

Market manipulation and the role of Enron

Enron became notoriously known for playing out the rules of the market and achieving high speculative profits. Enron CEO Kenneth Lay scoffed at the California state government's efforts to thwart energy traders' practices, saying, “In financial analysis, it doesn't matter what you crazy people do in California because I have smart guys who always do find out how to make money. "

With secret agreements with generation companies, Enron ensured that power plants were shut down and the price rose. Enron were also accused of fictitious power plant failures. At Enron and other energy traders, various constructs that ultimately served the profitable redeclaration of electricity were used under names such as "Fat Boy", "Death Star", "Forney Perpetual Loop", "Ricochet", "Ping Pong", "Black Widow" , "Big Foot", "Red Congo", "Cong Catcher" and "Get Shorty" are known.

The term megawatt laundering , analogous to money laundering, denotes the concealment of the true origin of specific amounts of electricity. The California energy market design included a higher price for electricity produced outside of California. It was therefore beneficial to give the appearance that electricity was being produced outside of California.

Overbooking describes the manipulation of the available capacities for power transmission in overhead lines. Power lines have a maximum capacity. Capacity had to be booked in advance in order to transport purchased and sold electricity. Overbooking now refers to the deliberate reservation of more capacity than necessary with the purpose of creating the impression that lines are busy and not available for other users. Overbooking was a component of several abusive constructs. The “Death Star” group, for example, was based on market rules according to which the state has to pay congestion fees in order to reduce congestion on larger interconnected lines. These fees should provide an incentive for producers to solve the bottleneck problem. In the Death Star scenario, however, the bottleneck was imaginary and the fees were net profit. A letter from David Fabian to US Senator Barbara Boxer in 2002 stated: “There is only one connection between the northern and southern power grids of California. I've heard that Enron's dealers intentionally overbooked these and then made others need them. ”The new California market rules allowed Enron to play prize poker at will.

Enron ultimately went bankrupt and on July 16, 2005 reached a settlement for $ 1.52 billion with a group of California government agencies and private utilities. Due to other outstanding claims in connection with the bankruptcy, only a payment of $ 202 million was expected from it. Ken Lay was found guilty of a variety of criminal charges unrelated to California's energy crisis on May 25, 2006, but died on July 5 of that year before the sentencing was pronounced. Since he died while his case was on appeal, the sentence was nullified and his family were allowed to keep all of his property.

Enron traded energy derivatives that were explicitly exempt from the regulation of the Commodity Futures Trading Commission . At a Senate hearing in January 2002, Vincent Viola , chairman of the New York Mercantile Exchange - the largest marketplace for energy trading and clearing - insisted that companies like Enron that do not act “on the floor” and are not subject to the same regulations, the same Compliance, Disclosure and Oversight criteria should be subject to. He asked the committee to demand "greater transparency" for numbers from companies like Enron. In any event, the US Supreme Court ruled that "FERC has the power to invalidate bilateral contracts if it concludes that the prices or terms of those contracts are unfair or unfair." Nevada was the first state to attempt Recover losses from such contracts in this way.

Individual evidence

1. ^ Findings at a Glance. (PDF) Retrieved September 12, 2016 (English). 
2. ↑ ^{a b} The California Energy Crisis. (PDF) (No longer available online.) Archived from the original on September 2, 2016 ; accessed on September 8, 2016 . Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice.  
3. ↑ Energy crisis escalates. Retrieved September 8, 2016 . 
4. ↑ ^{a b} Energy crisis cited as turning point for Davis. Retrieved September 8, 2016 . 
5. ↑ ^{a b c d e f g} The California Electricity Crisis: Lessons for the Future. Retrieved September 8, 2016 . 
6. ↑ THE ENERGY CRUNCH / A YEAR LATER. Retrieved September 8, 2016 . 
7. ↑ California fights energy crisis. Retrieved September 8, 2016 . 
8. ↑ http://webarchive.loc.gov/all/20040724061029/http%3A//commerce.senate.gov/hearings/041102freeman.pdf. (PDF) (No longer available online.) Archived from the original on July 24, 2004 ; accessed on September 8, 2016 . Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice.  
9. ^ Competitively Priced Electricity Costs More, Studies Show. Retrieved September 8, 2016 . 
10. ↑ Is an energy crisis like the one in California also possible in Germany? (PDF) (No longer available online.) Archived from the original on September 15, 2016 ; accessed on September 8, 2016 . Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice.  
11. ^ Path 15 Upgrade Project. (PDF) (No longer available online.) Archived from the original on March 24, 2013 ; accessed on September 8, 2016 . 
12. ↑ Enron Traders Caught On Tape. Retrieved September 8, 2016 . 
13. ^ Tapes: Enron plotted to shut down power plant. Retrieved September 8, 2016 . 
14. ↑ Enron is said to have faked power outages. Retrieved September 8, 2016 . 
15. ↑ schemes designed to take advantage of the California market. (PDF) Retrieved September 6, 2016 (English). 
16. ↑ How Enron turned off the lights in California. Retrieved September 8, 2016 .