Professor Jurewtiz presented The California Electricity Crisis: Causes and Lessons Learned at an ISCR seminar in March 2001

L, John. Jurewitz

Victoria University of Wellington

Dr. John L. Jurewitz
Director, Regulatory Policy
Southern California Edison Company
The California Electricity Crisis:
Causes and Lessons Learned
- 2 -
Outline
n What happened?
n Why did it happen?
n What lessons should we learn from it?
- 3 -
The Making of California’s Electricity Crisis
Short-Sighted
Restructuring
Rules
Complex
Market Rules
and
Supplier 
Behaviour
Adverse
Market
Fundamentals
Regulatory
and Political
Inaction
Generators
Marketers Utilities
Competitive
Retailers Utilities
End-Use
Customers
Federal Jurisdiction
n Sales for Resale and 
Transmission service in 
interstate commerce
State Jurisdiction
n Local utility distribution 
service and sales to 
retail end-use customers
- 4 -
Regulatory Jurisdictions in the United States
California’s Major 
Investor-Owned Utilities
SDG&E
4,763 MW Peak 
Demand
1.2 Million 
Customers
PG&E
SCE
SDG&E
SCE
19,935 MW Peak Demand
4.3 Million Customers
PG&E
23,031 MW Peak 
Demand
4.5 Million Customers
- 5 -
New Zealand 
5,800 MW Peak Demand
1.6 Million Customers
The New California Structure
Gen Gen Gen
ESP ESP ESP ESP
Customers
Independent System
Operator (ISO)
New Private
Businesses
New Non-Profit
Governmental 
Company
Remaining
Local Utility
Energy
Service
Providers
Distribution
Transmission
Default
Retail
“Market-Based”
Regulation by
The FERC
Regulated by the FERC
Regulated by the CPUC
No economic regulation
Gen
- 6 -
- 7 -
1997 1998 1999 2000 2001
Rate Freeze
“HEADROOM”
Business-as-usual Rate Trajectory
¢/kWh
Rate Freeze Creates “Headroom”
for Transition Cost Recovery
- 8 -
n 20,212 MW Divested so far
n New owners:
AES 4,076
Calpine 1,224
DukeEnergy 3,751
Dynegy 3,447
Port of San Diego 713
Reliant 3,776
Southern 3,065
Thermo Ecotek 280
n Sales proceeds used to reduce customer 
stranded cost obligation
n Market valuation of remaining non-
nuclear generation (over 6,000 MWs) 
required by year-end 2001SCE PG&E SDG&E
10,016
8,040
1,996
California Generation Divestiture
CPUC Initially Insisted that Utilities Buy Everything 
Through the PX and ISO Spot Markets?
n Wanted transparent pricing to assure against self-dealing
n Did not want utilities incurring long-term obligations and 
potentially stranded costs in their role as default provider
n Wanted to encourage independent retailers
– Customers wanting price hedges should seek them from ESPs
- 9 -
- 10 -
Key Restructuring Rules Created 
Over-Exposure To Spot Market
n CPUC’s requirement that utilities
buy all power through Power Exchange 
and ISO
n Generation divestiture without 
buy-back contracts
n Retail rate freeze
Over-exposure
to the spot 
market
California’s Electricity
Market Crisis
- 12 -
0
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600
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$/
M
W
h
Min/Max Zonal Avg
California Day-Ahead Electricity Prices
(PX - Southern Zone)
- 13 -
California Market Prices Have Skyrocketed in 2000
Comparison of Average Cal PX SP15 Monthly* Prices
n Actual prices for last six months of 2000 averaged more than four times 1998 and 1999 prices
*Simple average of all hourly prices within the month
0
50
100
150
200
250
Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan
1998
1999
2000
2001
$/
M
W
h
- 14 -
Cumulative Cost of California Electricity
n Estimated annual cumulative cost to serve all load in the CA ISO’s control area
– Cost includes energy and ancillary services
Source: ISO Board material, January, 2001
1999 and 2000 Cost of Electricity 
0
5
10
15
20
25
30
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
$ 
(B
ill
io
ns
)
2000
1999
- 15 -
ISO Emergency Operations
n Stage 1 Emergency 3 32 11 40
» Operating reserve below 7%
n Stage 2 Emergency 1 17 9 40
» Operating reserves below 5%
» Interruption of voluntary customers
n Stage 3 Emergency 0 0 1 38
» Operating reserves below 1.5%
» Possible involuntary interruptions
(rolling blackouts)
n Involuntary Rolling Blackouts 0 0 0 2
– Rolling blackouts were initiated on 1/17, 1/18
Summer
1999
Summer
2000
Nov/Dec
2000
Jan/Feb
2001
Occurrences
- 16 -
How Can Rolling Blackouts 
Be Needed in Winter?
n This winter, the ISO initiated rolling blackouts at a demand of only 65% of last summer’s peak
ISO Actual  Load
20000
25000
30000
35000
40000
45000
1 3 5 7 9 11 13 15 17 19 21 23
Hour
M
W
h
08/16/2000 01/17/2001
Load levels when rolling 
blackouts implemented
Summer 2000 Peak
Utility
Undercollections
Generators
Reluctant
to Supply
Political
Inaction
Bankruptcy
Fears
Rolling Blackouts
and Higher Prices
Retail
Price
Freeze
California
Government Enters
Market as Purchaser
High
Wholesale
Spot Prices
Over-Reliance
On
Spot Market
High Retail Prices
(SDG&E)
Anatomy of a Rolling Disaster
- 17 -
- 18 -
High Wholesale Prices:
Market Fundamentals
n High rate of demand growth
n Virtually no new plants sited
n Reduced availability of imports
n Skyrocketing gas prices
– Pipeline capacity shortages
n Air emissions limitations and high priced emission credits
- 19 -
SCE Sales Growth Rates
(Weather Adjusted)
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999
-2
-1
0
1
2
3
4
5
Growth Rate
Percentages
- 20 -
Comparing Growth in Electricity Capacity and Population in 
California vs. Other WSCC States 1993-1999
0 5 10 15 20 25
WSCC (Other)
California
% Change in Capacity MWs 1993-
1999
% Change in Population 1993-1999
- 21 -
Comparing Growth in Electricity Capacity and Peak Load Demand 
in California vs. Other WSCC States 1993-1999
0 5 10 15 20 25
WSCC (Other)
California
% Change in Capacity MWs 1993-
1999
% Change in Peak Load Demand
1993-1999
- 22 -
Natural Gas Prices in 2000
n Prices peak at an unheard level of $60/MMBtu
n Gas prices for the second half of 2000 were more than four times higher than 1998 and 1999 
prices
$-
$ 1 0
$ 2 0
$ 3 0
$ 4 0
$ 5 0
$ 6 0
02
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03
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31
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$/
M
M
B
tu
- 23 -
Emissions Credit Prices
in Los Angeles Area
$0.00
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
16
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(d
o
lla
rs
/p
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d
)
spot price
- 24 -
High Wholesale Prices:
Market Structure, Rules, and Conduct
n Complex ISO/PX market protocols
n Large amount of unhedged power purchases
n Underdeveloped demand-side responsiveness
n Question of market power or shortage-induced high prices
- 25 -
Unhedged
Spot Market
CAISO 40-50% 50-60%
% Market Hedged
(long-term forward contracts,
self-owned generation)
PJM 85-90% 10-15%
New England 80% 20%
Australia 90% 10%
Comparison of Forward Contracting/Hedging
in Other Electricity Markets
Regulatory Constraints in Forward Contracting in CAISO Market 
Was a Key Source of High Costs in Summer 2000
1999 2000 2001
0
5
10
15
20
25
30
Headroom available
for CTC collection
Undercollection
of operating costs
¢/kwh
Utility Undercollections:
Wholesale Average Electricity Prices
as Flowed Through to SCE Customers in
Monthly Billing Cycles
- 26 -
- 27 -
Procurement Undercollections (SCE)
$Billions
0
.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
June SeptJuly Aug Oct Nov Dec Total
Gross
Net
Revenues
from
Utility-owned
Generation
NetJan
$644
Million
$457
Million
$870
Million
$387
Million
$283
Million
$561
Million
$1,288
Million
$5.5
Billion
$1.7
Billion
$3.8
Billion
$975
Million
- 28 -
Regulatory and Political Inaction
n FERC’s blamed California for creating a flawed structure
n Californian Governor blamed FERC for not setting tighter 
controls on wholesale prices
n CPUC’s inaction in approving long-term contracts and 
setting reasonableness standards
n CPUC’s unwillingness to end the retail rate freeze last Fall
- 29 -
California State Government
Enters Power Purchasing Business
n On January 17, Governor Davis authorized the California 
Department of Water Resources (CDWR) to begin purchasing 
spot and short-term power to avoid rolling blackouts
n On February 1, Governor Signed Assembly Bill 1X
– CDWR directed to purchase entire “net short” requirements of utilities
– Authorizes up to $10 billion in revenue bonds for long-term power 
contracts
– CDWR authorized to enter into contracts until 1/2/3003
n CDWR now spending $40-50 million per day on near-term 
power purchases; $3 billion spent so far
n Governor recently announced the signing of 40 long-term 
contracts totaling 8900 MWs
- 30 -
Governor Davis’ Announced
Utility Recovery Plan
n State purchase of transmission grid at fair value
– Amount in excess of book used to pay down utility 
undercollections
n Utility-owned generation will supply power at cost-based 
rates for ten years
n State receives conservation easements on utility-owned 
wilderness lands
- 31 -
What’s Needed in the Near Term?
n Reasonable long-term wholesale contracts
– FERC enforcement of its “just and reasonable” standard would be 
helpful
n Reasonable retail price increases
n Assurance of recovery of past and future procurement 
undercollections
n Very serious statewide (and West-wide) conservation 
program
– Governor’s objective is 5,000 MW in Summer 2001
n Continue to foster development of new generation
– Governor’s objective is 5,000 MW by Summer 2001
Is There Long-Term Relief ?
New Generation In California
Generation Scheduled for Summer 2001
5007/1Northwest
4,260Summer 2001 Total 
MWDateProject
2,070California Total 
1,6906/1 – 7/1Southwest
1,0706/1 - 9/1Various
5007/1Los Medanos
5008/1Sutter
California
Approved/Under Construction 6,273 MW
In Licensing 7,716 MW
Proposed 5,780 MW
Total 19,769 MW
California 2001-2004
- 32 -
- 33 -
California ISO Load/Resource Forecast
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
2000 2001 2002 2003 2004 2005 2006 2007
11,260 11,260 11,260 11,260 11,260 11,260 11,260 11,260
45,565 45,602 50,011 62,861 62,878 62,861 63,190 63,180Max Avail. Gen. Capacity
Max Import Capacity
49,209 50,188 51,463 53,602 54,462 55,306 56,177 57,928Load Forecast + OR
Source: California Independent Operator
- 34 -
Lessons Learned
n Regulatory vision must be internally consistent - Mixture of 
regulated retail prices and unregulated wholesale prices was an especially 
inconsistent and dangerous combination in California.
n Policies need to respond to unforeseen and unintended 
consequences
n Absence of clear policy accountability creates a slowness or 
inability to respond to evolving problems - The “blame game” 
doesn’t solve problems
n Uncertainty deters investors - key generation investments in late 1990’s 
were delayed due to policy uncertainty
n Market realities cannot be sidestepped - policy design should harness 
rather than ignore these forces 


The California Electricity Crisis: Causes and Lessons Learned

http://researcharchive.vuw.ac.nz/bitstream/10063/4136/1/CA_electricity_crisis_JJ_2001.pdf

The California Electricity Crisis: Causes and Lessons Learned

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