California electricity crisis

California electricity crisis

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Chronology
1996 California begins to modify controls on its energy market and takes measures ostensibly to increase competition.
April 1998 Spot market for energy begins operation.
May 2000 Significant rise in energy price.
June 14, 2000 Blackouts affect 97,000 customers in San Francisco Bay area during a heat wave
Heat wave
A heat wave is a prolonged period of excessively hot weather, which may be accompanied by high humidity. There is no universal definition of a heat wave; the term is relative to the usual weather in the area...

.
August 2000 San Diego Gas & Electric Company files a complaint alleging manipulation of the markets.
January 17–18, 2001 Blackouts affect several hundred thousand customers.
January 17, 2001 Governor Davis declares a state of emergency.
March 19–20, 2001 Blackouts affect 1.5 million customers.
April 2001 Pacific Gas & Electric Co. files for bankruptcy.
May 7–8, 2001 Blackouts affect upwards of 167,000 customers.
September 2001 Energy prices normalize.
December 2001 Following the bankruptcy of Enron, it is alleged that energy prices were manipulated by Enron.
February 2002 Federal Energy Regulatory Commission begins investigation of Enron's involvement.
Winter 2002 The Enron Tapes scandal begins to surface.
November 13, 2003 Governor Davis ends the state of emergency.

The California electricity crisis, also known as the Western U.S. Energy Crisis of 2000 and 2001 was a situation in which California
California
California is a state located on the West Coast of the United States. It is by far the most populous U.S. state, and the third-largest by land area...

 had a shortage of electricity caused by market manipulations and illegal shutdowns of pipelines by Texas energy consortiums. The state suffered from multiple large-scale blackout
Power outage
A power outage is a short- or long-term loss of the electric power to an area.There are many causes of power failures in an electricity network...

s, one of the state's largest energy companies collapsed, and the economic fall-out greatly harmed Governor
Governor of California
The Governor of California is the chief executive of the California state government, whose responsibilities include making annual State of the State addresses to the California State Legislature, submitting the budget, and ensuring that state laws are enforced...

 Gray Davis
Gray Davis
Joseph Graham "Gray" Davis, Jr. is an American Democratic politician who served as California's 37th Governor from 1999 until being recalled in 2003...

's standing.

Drought and delays in approval of new power plants and market manipulation
Market manipulation
Market manipulation describes a deliberate attempt to interfere with the free and fair operation of the market and create artificial, false or misleading appearances with respect to the price of, or market for, a security, commodity or currency...

 decreased supply, with manipulation responsible for most of the supply squeeze. This caused 800% increase in wholesale prices from April 2000 to December 2000. In addition, rolling blackouts adversely affected many businesses dependent upon a reliable supply of electricity, and inconvenienced a large number of retail consumers.

California had an installed generating capacity of 45GW, but at the time of the blackouts demand was 28GW. A demand supply gap was created
Market manipulation
Market manipulation describes a deliberate attempt to interfere with the free and fair operation of the market and create artificial, false or misleading appearances with respect to the price of, or market for, a security, commodity or currency...

 by energy companies, mainly Enron
Enron
Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. Before its bankruptcy on December 2, 2001, Enron employed approximately 22,000 staff and was one of the world's leading electricity, natural gas, communications, and pulp and paper companies, with...

, to create an artificial shortage. Energy traders took power plants offline for maintenance in days of peak demand to increase the price. Traders were thus able to sell power at premium prices, sometimes up to a factor of 20 times its normal value. Because the state government had a cap on retail electricity charges, this market manipulation squeezed the industry's revenue margins, causing the bankruptcy of Pacific Gas and Electric Company
Pacific Gas and Electric Company
The Pacific Gas and Electric Company , commonly known as PG&E, is the utility that provides natural gas and electricity to most of the northern two-thirds of California, from Bakersfield almost to the Oregon border...

 (PG&E) and near bankruptcy of Southern California Edison
Southern California Edison
Southern California Edison , the largest subsidiary of Edison International , is the primary electricity supply company for much of Southern California, USA. It provides 14 million people with electricity...

 in early 2001.

The financial crisis was possible because of partial deregulation legislation instituted in 1996 by Governor Pete Wilson
Pete Wilson
Peter Barton "Pete" Wilson is an American politician from California. Wilson, a Republican, served as the 36th Governor of California , the culmination of more than three decades in the public arena that included eight years as a United States Senator , eleven years as Mayor of San Diego and...

. Enron
Enron
Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. Before its bankruptcy on December 2, 2001, Enron employed approximately 22,000 staff and was one of the world's leading electricity, natural gas, communications, and pulp and paper companies, with...

 took advantage of this deregulation and was involved in economic withholding and inflated price bidding in California's spot markets. The crisis cost $40 to $45 billion.

Market manipulation


As the FERC
Federal Energy Regulatory Commission
The Federal Energy Regulatory Commission is the United States federal agency with jurisdiction over interstate electricity sales, wholesale electric rates, hydroelectric licensing, natural gas pricing, and oil pipeline rates...

 report concluded, market manipulation
Market manipulation
Market manipulation describes a deliberate attempt to interfere with the free and fair operation of the market and create artificial, false or misleading appearances with respect to the price of, or market for, a security, commodity or currency...

 was only possible as a result of the complex market design produced by the process of partial deregulation. Manipulation strategies were known to energy traders under names such as "Fat Boy", "Death Star
Death Star (business)
The Death Star strategy, named after the Death Star, was the name Enron gave to their practice of shuffling energy around the California power grid to receive payments from the state for "relieving congestion." According to the company's own memo they would be paid "for moving energy to relieve...

", "Forney Perpetual Loop", "Ricochet", "Ping Pong", "Black Widow", "Big Foot", "Red Congo", "Cong Catcher" and "Get Shorty". Some of these have been extensively investigated and described in reports.

Megawatt laundering is the term, analogous to money laundering, coined to describe the process of obscuring the true origins of specific quantities of electricity being sold on the energy market. The California energy market allowed for energy companies to charge higher prices for electricity produced out-of-state. It was therefore advantageous to make it appear that electricity was being generated somewhere other than California.

Overscheduling is a term used in describing the manipulation of capacity available for the transportation of electricity along power lines. Power lines have a defined maximum load. Lines must be booked (or scheduled) in advance for transporting bought-and-sold quantities of electricity. "Overscheduling" means a deliberate reservation of more line usage than is actually required and can create the appearance that the power lines are congested. Overscheduling was one of the building blocks of a number of scams. For example, the Death Star group of scams played on the market rules which required the state to pay "congestion fees" to alleviate congestion on major power lines. "Congestion fees" were a variety of financial incentives aimed at ensuring power providers solved the congestion problem. But in the Death Star scenario, the congestion was entirely illusory and the congestion fees would therefore simply increase profits.

In a letter sent from David Fabian to Senator Boxer in 2002, it was alleged that:
"There is a single connection between northern and southern California's power grids. I heard that Enron traders purposely overbooked that line, then caused others to need it. Next, by California's free-market rules, Enron was allowed to price-gouge at will."

Effects of partial deregulation


Part of California's deregulation
Deregulation
Deregulation is the removal or simplification of government rules and regulations that constrain the operation of market forces.Deregulation is the removal or simplification of government rules and regulations that constrain the operation of market forces.Deregulation is the removal or...

 process, which was promoted as a means of increasing competition, involved the partial divestiture in March 1998 of electricity generation
Electricity generation
Electricity generation is the process of generating electric energy from other forms of energy.The fundamental principles of electricity generation were discovered during the 1820s and early 1830s by the British scientist Michael Faraday...

 stations by the incumbent utilities, who were still responsible for electricity distribution
Electricity distribution
File:Electricity grid simple- North America.svg|thumb|380px|right|Simplified diagram of AC electricity distribution from generation stations to consumers...

 and were competing with independents in the retail
Electricity retailing
Electricity retailing is the final process in the delivery of electricity from generation to the consumer. The other main processes are transmission and distribution.- Beginnings :...

 market. A total of 40% of installed capacity — 20 gigawatts — was sold to what were called "independent power producers
Electricity generation
Electricity generation is the process of generating electric energy from other forms of energy.The fundamental principles of electricity generation were discovered during the 1820s and early 1830s by the British scientist Michael Faraday...

." These included Mirant
Mirant
Mirant Corporation, an Atlanta-based energy company, produces and sells electricity in the United States. The company was spun off from its former parent, Southern Company, on April 2, 2001...

, Reliant, Williams, Dynegy
Dynegy
Dynegy Inc. , based in Houston, Texas, United States, is a large owner and operator of power plants and a player in the natural gas liquids and coal business...

, and AES
AES Corporation
AES Corporation is a Fortune 500 company that generates and distributes electrical power. The company was founded on January 28, 1981, as Applied Energy Services by Roger Sant from the US Federal Energy Administration and Dennis Bakke from the Office of Management and Budget. AES Corporation is...

. The utilities were then required to buy their electricity from the newly created day-ahead only market, the California Power Exchange (PX). Utilities were precluded from entering into longer-term agreements that would have allowed them to hedge their energy purchases and mitigate day-to-day swings in prices due to transient supply disruptions and demand spikes from hot weather.


Then, in 2000, wholesale prices were deregulated, but retail prices were regulated
Regulation
Regulation is administrative legislation that constitutes or constrains rights and allocates responsibilities. It can be distinguished from primary legislation on the one hand and judge-made law on the other...

 for the incumbents as part of a deal with the regulator, allowing the incumbent utilities to recover the cost of assets that would be stranded as a result of greater competition, based on the expectation that "frozen" rates would remain higher than wholesale prices. This assumption remained true from April 1998 through May 2000.

Energy deregulation put the three companies that distribute electricity into a tough situation. Energy deregulation policy froze or capped the existing price of energy that the three energy distributors could charge. Deregulating the producers of energy did not lower the cost of energy. Deregulation did not encourage new producers to create more power and drive down prices. Instead, with increasing demand for electricity, the producers of energy charged more for electricity. The producers used moments of spike energy production to inflate the price of energy. In January 2001, energy producers began shutting down plants to increase prices.

When electricity wholesale prices exceeded retail
Electricity retailing
Electricity retailing is the final process in the delivery of electricity from generation to the consumer. The other main processes are transmission and distribution.- Beginnings :...

 prices, end user demand was unaffected, but the incumbent utility
Utility
In economics, utility is a measure of customer satisfaction, referring to the total satisfaction received by a consumer from consuming a good or service....

 companies still had to purchase power, albeit at a loss. This allowed independent producers to manipulate prices in the electricity market by withholding electricity generation, arbitraging
Arbitrage
In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices...

 the price between internal generation and imported (interstate) power, and causing artificial transmission
Electric power transmission
Electric-power transmission is the bulk transfer of electrical energy, from generating power plants to Electrical substations located near demand centers...

 constraints. This was a procedure referred to as "gaming the market." In economic terms, the incumbents who were still subject to retail price caps were faced with inelastic demand
Elasticity (economics)
In economics, elasticity is the measurement of how changing one economic variable affects others. For example:* "If I lower the price of my product, how much more will I sell?"* "If I raise the price, how much less will I sell?"...

 (see also: Demand response
Demand response
In electricity grids, demand response is similar to dynamic demand mechanisms to manage customer consumption of electricity in response to supply conditions, for example, having electricity customers reduce their consumption at critical times or in response to market prices...

). They were unable to pass the higher prices on to consumers without approval from the public utilities commission. The affected incumbents were Southern California Edison
Southern California Edison
Southern California Edison , the largest subsidiary of Edison International , is the primary electricity supply company for much of Southern California, USA. It provides 14 million people with electricity...

 (SCE) and Pacific Gas & Electric (PG&E). Pro-privatization
Privatization
Privatization is the incidence or process of transferring ownership of a business, enterprise, agency or public service from the public sector to the private sector or to private non-profit organizations...

 advocates insist the cause of the problem was that the regulator still held too much control over the market, and true market processes were stymied — whereas opponents of deregulation assert that the fully regulated system had worked for 40 years without blackouts.

Government price caps


By keeping the consumer price of electricity artificially low, the California government discouraged citizens from practicing conservation. In February 2001, California governor Gray Davis stated, "Believe me, if I wanted to raise rates I could have solved this problem in 20 minutes."

Energy price regulation incentivized suppliers to ration their electricity supply rather than expand production. The resulting scarcity created opportunities for market manipulation by energy speculators.

State lawmakers expected the price of electricity to decrease due to the resulting competition; hence they capped the price of electricity at the pre-deregulation level. Since they also saw it as imperative that the supply of electricity remain uninterrupted, utility companies were required by law to buy electricity from spot market
Spot market
The spot market or cash market is a public financial market, in which financial instruments or commodities are traded for immediate delivery. It contrasts with a futures market in which delivery is due at a later date...

s at uncapped prices when faced with imminent power shortages.

When the electricity demand in California rose, utilities had no financial incentive to expand production, as long term prices were capped. Instead, wholesalers such as Enron
Enron
Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. Before its bankruptcy on December 2, 2001, Enron employed approximately 22,000 staff and was one of the world's leading electricity, natural gas, communications, and pulp and paper companies, with...

 manipulated the market to force utility companies into daily spot markets for short term gain. For example, in a market technique known as megawatt laundering, wholesalers bought up electricity in California at below cap price to sell out of state, creating shortages. In some instances, wholesalers scheduled power transmission to create congestion and drive up prices.

After extensive investigation The Federal Energy Regulatory Commission
Federal Energy Regulatory Commission
The Federal Energy Regulatory Commission is the United States federal agency with jurisdiction over interstate electricity sales, wholesale electric rates, hydroelectric licensing, natural gas pricing, and oil pipeline rates...

 (FERC) substantially agreed in 2003:
"...supply-demand imbalance, flawed market design and inconsistent rules made possible significant market manipulation as delineated in final investigation report. Without underlying market dysfunction, attempts to manipulate the market would not be successful."

"...many trading strategies employed by Enron and other companies violated the anti-gaming provisions..."

"Electricity prices in California’s spot markets were affected by economic withholding and inflated price bidding, in violation of tariff anti-gaming provisions."


The major flaw of the deregulation scheme was that it was an incomplete deregulation—that is, "middleman" utility distributors continued to be regulated and forced to charge fixed prices, and continued to have limited choice in terms of electricity providers. Other, less catastrophic energy deregulation schemes, such as Pennsylvania's, have generally deregulated utilities but kept the providers regulated, or deregulated both.

New regulations


In the mid-90's, under Republican Governor Pete Wilson
Pete Wilson
Peter Barton "Pete" Wilson is an American politician from California. Wilson, a Republican, served as the 36th Governor of California , the culmination of more than three decades in the public arena that included eight years as a United States Senator , eleven years as Mayor of San Diego and...

(R), California began changing the electricity industry. Democratic State Senator Steve Peace, the chair of the energy committee and the author of the bill that put these changes into effect, is often credited as "the father of deregulation". Wilson admitted publicly that defects in the deregulation system would need fixing by "the next governor".


The new rules called for the Investor Owned Utilities, or IOUs, (primarily Pacific Gas and Electric, Southern California Edison
Southern California Edison
Southern California Edison , the largest subsidiary of Edison International , is the primary electricity supply company for much of Southern California, USA. It provides 14 million people with electricity...

, and San Diego Gas and Electric) to sell off a significant part of their electricity generation
Electricity generation
Electricity generation is the process of generating electric energy from other forms of energy.The fundamental principles of electricity generation were discovered during the 1820s and early 1830s by the British scientist Michael Faraday...

 to wholly private, unregulated companies such as AES, Reliant, and Enron. The buyers of those power plants then became the wholesalers from which the IOUs needed to buy the electricity that they used to own themselves.

While the selling of power plants to private companies was labeled "deregulation", in fact Steve Peace and the California legislature expected that there would be regulation by the FERC which would prevent manipulation. The FERC's job, in theory, is to regulate and enforce federal law, preventing market manipulation and price manipulation of energy markets. When called upon to regulate the out-of-state privateers which were clearly manipulating the California energy market, the FERC hardly reacted at all and did not take serious action against Enron, Reliant, or any other privateers. FERC's resources are in fact quite sparse in comparison to their entrusted task of policing the energy market. Lobbying by private companies may also have slowed down regulation and enforcement.

Supply and demand


California's population increased by 13% during the 1990s. The state did not build any new major power plants during that time, although existing in-state power plants were expanded and power output was increased nearly 30% from 1990 to 2001.

California's utilities came to depend in part on the import of excess hydroelectricity
Hydroelectricity
Hydroelectricity is the term referring to electricity generated by hydropower; the production of electrical power through the use of the gravitational force of falling or flowing water. It is the most widely used form of renewable energy...

 from the Pacific Northwest
Pacific Northwest
The Pacific Northwest is a region in northwestern North America, bounded by the Pacific Ocean to the west and, loosely, by the Rocky Mountains on the east. Definitions of the region vary and there is no commonly agreed upon boundary, even among Pacific Northwesterners. A common concept of the...

 states of Oregon
Oregon
Oregon is a state in the Pacific Northwest region of the United States. It is located on the Pacific coast, with Washington to the north, California to the south, Nevada on the southeast and Idaho to the east. The Columbia and Snake rivers delineate much of Oregon's northern and eastern...

 and Washington. California's clean air standards favored in-state electricity generation which burned natural gas because of its lower emissions, as opposed to coal whose emissions are more toxic and contain more pollutants.

In the summer of 2001 a drought in the northwest states reduced the amount of hydroelectric power available to California. Though at no point during the crisis was California's sum of [actual electric-generating capacity]+[out of state supply] less than demand, California's energy reserves were low enough that during peak hours the private industry which owned power-generating plants could effectively hold the State hostage by shutting down their plants for "maintenance" in order to manipulate supply and demand. These critical shutdowns often occurred for no other reason than to force California's electricity grid managers into a position where they would be forced to purchase electricity on the "spot market", where private generators could charge astronomical rates. Even though these rates were semi-regulated and tied to the price of natural gas, the companies (which included Enron and Reliant Energy) controlled the supply of natural gas as well. Manipulation by the industry of natural gas prices resulted in higher electricity rates that could be charged under the semi-regulations.

In addition, the energy companies took advantage of California's electrical infrastructure weakness. The main line which allowed electricity to travel from the north to the south, Path 15
Path 15
Path 15 is an portion of the north-south power transmission corridor in California, U.S. It forms a part of the Pacific AC Intertie and the California-Oregon Transmission Project....

, had not been improved for many years and became a major bottleneck point which limited the amount of power that could be sent south to 3,900 MW. Without the manipulation by energy companies, this bottleneck was not problematic, but the effects of the bottleneck compounded the price manipulation by hamstringing energy grid managers in their ability to transport electricity from one area to another. With a smaller pool of generators available to draw from in each area, managers were forced to work in two markets to buy energy, both of which were being manipulated by the energy companies.

The International Energy Agency
International Energy Agency
The International Energy Agency is a Paris-based autonomous intergovernmental organization established in the framework of the Organisation for Economic Co-operation and Development in 1974 in the wake of the 1973 oil crisis...

 estimates that a 5% lowering of demand would result in a 50% price reduction during the peak hours of the California electricity crisis in 2000/2001. With better demand response
Demand response
In electricity grids, demand response is similar to dynamic demand mechanisms to manage customer consumption of electricity in response to supply conditions, for example, having electricity customers reduce their consumption at critical times or in response to market prices...

 the market also becomes more resilient to intentional withdrawal of offers from the supply side.

Some key events


Rolling blackouts affecting 97,000 customers hit the San Francisco Bay area on June 14, 2000, and San Diego Gas & Electric Company filed a complaint alleging market manipulation by some energy producers in August 2000. On December 7, 2000, suffering from low supply and idled power plants, the California Independent System Operator (ISO), which manages the California power grid, declared the first statewide Stage 3 power alert, meaning power reserves were below 3 percent. Rolling blackouts were avoided when the state halted two large state and federal water pumps to conserve electricity.

On December 15, 2000, the Federal Energy Regulatory Commission (FERC) rejected California's request for a wholesale rate cap for California, instead approving a "flexible cap" plan of $150 per megawatt-hour. That day, California was paying wholesale prices of over $1400 per megawatt-hour, compared to $45 per megawatt-hour average one year earlier.

On January 17, 2001, the electricity crisis caused Governor Gray Davis
Gray Davis
Joseph Graham "Gray" Davis, Jr. is an American Democratic politician who served as California's 37th Governor from 1999 until being recalled in 2003...

 to declare a state of emergency. Speculators, led by Enron Corporation, were collectively making large profits while the state teetered on the edge for weeks, and finally suffered rolling blackouts on January 17 & 18. Davis was forced to step in to buy power at highly unfavorable terms on the open market, since the California power companies were technically bankrupt
Bankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....

 and had no buying power. The resulting massive long term debt obligations added to the state budget crisis and led to widespread grumbling about Davis' administration.

Consequences of wholesale price rises on the retail market


As a result of the actions of electricity wholesalers, Southern California Edison
Southern California Edison
Southern California Edison , the largest subsidiary of Edison International , is the primary electricity supply company for much of Southern California, USA. It provides 14 million people with electricity...

 (SCE) and Pacific Gas & Electric (PG&E) were buying from a spot market at very high prices but were unable to raise retail rates. A product that the IOU's used to produce for about three cents per kilowatt hour of electricity, they were paying eleven cents, twenty cents, fifty cents or more; and, yet, they were capped at 6.7 cents per kilowatt hours in terms of what they could charge their retail customers. As a result, PG&E filed bankruptcy, and Southern California Edison worked diligently on a workout plan with the State of California to save their company from the same fate. PG&E and SCE had racked up US$
United States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....

20 Billion in debt by Spring of 2001 and their credit ratings were reduced to junk status. The financial crisis meant that PG&E and SCE were unable to purchase power on behalf of their customers. The state stepped in on January 17, 2001, having the California Department of Water Resources buy power. By February 1, 2001 this stop-gap measure had been extended and would also include SDG&E. It would not be until January 1, 2003 that the utilities would resume procuring power for their customers.

Between 2000 and 2001, the combined California utilities laid off 1,300 workers, from 56,000 to 54,700, in an effort to remain solvent. San Diego had worked through the stranded asset provision and was in a position to increase prices to reflect the spot market. Small businesses were badly affected.

According to a 2007 study of Department of Energy
United States Department of Energy
The United States Department of Energy is a Cabinet-level department of the United States government concerned with the United States' policies regarding energy and safety in handling nuclear material...

 data by Power in the Public Interest, retail electricity prices rose much more from 1999 to 2007 in states that adopted deregulation than in those that did not.

Involvement of Enron


One of the energy wholesalers that became notorious for "gaming the market" and reaping huge speculative profits was Enron Corporation. Enron CEO Ken Lay mocked the efforts by the California State government to thwart the practices of the energy wholesalers, saying, "In the final analysis, it doesn't matter what you crazy people in California do, because I got smart guys who can always figure out how to make money." The original statement was made in a phone conversation between David Freeman (Chairman of the California Power Authority) and Kenneth Lay (CEO of Enron) in 2000, according to the statements made by Freeman to the Senate Subcommittee on Consumer Affairs, Foreign Commerce and Tourism in April and May 2002.

S. David Freeman
S. David Freeman
S. David Freeman is an American engineer, attorney, and author, born in Chattanooga, Tennessee, who has had many key roles in energy policy...

, who was appointed Chair of the California Power Authority in the midst of the crisis, made the following statements about Enron's involvement in testimony submitted before the Subcommittee on Consumer Affairs, Foreign Commerce and Tourism of the Senate Committee on Commerce, Science and Transportation on May 15, 2002:
"There is one fundamental lesson we must learn from this experience: electricity is really different from everything else. It cannot be stored, it cannot be seen, and we cannot do without it, which makes opportunities to take advantage of a deregulated market endless. It is a public good that must be protected from private abuse. If Murphy’s Law were written for a market approach to electricity, then the law would state 'any system that can be gamed, will be gamed, and at the worst possible time.' And a market approach for electricity is inherently gameable. Never again can we allow private interests to create artificial or even real shortages and to be in control.

"Enron stood for secrecy and a lack of responsibility. In electric power, we must have openness and companies that are responsible for keeping the lights on. We need to go back to companies that own power plants with clear responsibilities for selling real power under long-term contracts. There is no place for companies like Enron that own the equivalent of an electronic telephone book and game the system to extract an unnecessary middleman’s profits. Companies with power plants can compete for contracts to provide the bulk of our power at reasonable prices that reflect costs. People say that Governor Davis has been vindicated by the Enron confession."


Enron eventually went bankrupt, and signed a US$1.52 billion settlement with a group of California agencies and private utilities on July 16, 2005. However, due to its other bankruptcy obligations, only US$202 million of this was expected to be paid. Ken Lay was convicted of multiple criminal charges unrelated to the California energy crisis on May 25, 2006, but he died due to a heart attack
Myocardial infarction
Myocardial infarction or acute myocardial infarction , commonly known as a heart attack, results from the interruption of blood supply to a part of the heart, causing heart cells to die...

 on July 5 of that year before he could be sentenced. Because Lay died while his case was on federal appeal, his record was expunged and his family was allowed to retain all his property.

Enron traded in energy derivative
Derivative (finance)
A derivative instrument is a contract between two parties that specifies conditions—in particular, dates and the resulting values of the underlying variables—under which payments, or payoffs, are to be made between the parties.Under U.S...

s specifically exempted from regulation by the Commodity Futures Trading Commission. At a Senate hearing in January 2002, Vincent Viola, chairman of the New York Mercantile Exchange—the largest forum for energy contract trading and clearing—urged that Enron-like companies, which don't operate in trading "pits" and don't have the same government regulations, be given the same requirements for "compliance, disclosure, and oversight." He asked the committee to enforce "greater transparency" for the records of companies like Enron. In any case, the U.S. Supreme Court had ruled "that FERC has had the authority to negate bilateral contracts if it finds that the prices, terms or conditions of those contracts are unjust or unreasonable." Nevada was the first state to attempt recovery of such contract losses.

Governor Gray Davis


Perhaps the heaviest point of controversy is the question of blame for the California electricity crisis. Former Governor Gray Davis
Gray Davis
Joseph Graham "Gray" Davis, Jr. is an American Democratic politician who served as California's 37th Governor from 1999 until being recalled in 2003...

's critics often charge that he did not respond properly to the crisis, while his defenders attribute the crisis to the power trading fraud and corporate accounting scandal
Accounting scandals
Accounting scandals, or corporate accounting scandals, are political and business scandals which arise with the disclosure of misdeeds by trusted executives of large public corporations...

s and say that Davis did all he could considering the fact that the federal government, not states, regulate interstate power commerce.

In a speech at UCLA on August 19, 2003, Davis apologized for being slow to act during the energy crisis, but then forcefully attacked the Houston-based energy suppliers: "I inherited the energy deregulation scheme which put us all at the mercy of the big energy producers. We got no help from the Federal government. In fact, when I was fighting Enron
Enron
Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. Before its bankruptcy on December 2, 2001, Enron employed approximately 22,000 staff and was one of the world's leading electricity, natural gas, communications, and pulp and paper companies, with...

 and the other energy companies, these same companies were sitting down with Vice President
Vice president
A vice president is an officer in government or business who is below a president in rank. The name comes from the Latin vice meaning 'in place of'. In some countries, the vice president is called the deputy president...

 Cheney to draft a national energy strategy."

Signs of trouble first cropped up in the spring of 2000 when electricity bills skyrocketed for customers in San Diego, the first area of the state to deregulate. Experts warned of an impending energy crisis, but Governor Davis did little to respond until the crisis became statewide that summer. Davis began asking the federal regulator FERC to probe possible price manipulation by power suppliers as early as August 2000. Davis would issue a state of emergency on January 17, 2001, when wholesale electricity prices hit new highs and the state began issuing rolling blackout
Rolling blackout
A rolling blackout, also referred to as load shedding, is an intentionally-engineered electrical power outage where electricity delivery is stopped for non-overlapping periods of time over geographical regions. Rolling blackouts are a last-resort measure used by an electric utility company in order...

s.

Some critics, such as Arianna Huffington
Arianna Huffington
Arianna Huffington is a Greek American author and syndicated columnist. She is best known as co-founder of the news website The Huffington Post. A popular conservative commentator in the mid-1990s, she adopted more liberal political beliefs in the late 1990s...

, alleged that Davis was lulled to inaction by campaign contributions from energy producers. In addition, the California State Legislature would sometimes push Davis to act decisively by taking over power plants which were known to have been gamed and place them back under control of the utilities, ensuring a more steady supply and slapping the nose of the worst manipulators . Meanwhile, conservatives argued that Davis signed overpriced energy contracts, employed incompetent negotiators, and refused to allow prices to rise for residences statewide much like they did in San Diego, which they argue could have given Davis more leverage against the energy traders and encouraged more conservation. More criticism is given in the book Conspiracy of Fools
Conspiracy of Fools
Conspiracy of Fools is a book by Kurt Eichenwald detailing the Enron scandal. It was published in 2005 when Eichenwald was a business journalist with The New York Times.- Synopsis :...

, which gives the details of a meeting between the governor and his officials; Clinton Administration Treasury officials; and energy executives, including market manipulators such as Enron, where Gray Davis disagreed with the treasury officials and energy executives. They advised suspending environmental studies to build power plants and a small rate hike to prepare for long-term power contracts (Davis eventually signed overpriced ones, as noted above), while Davis supported price caps, denounced the other solutions as too politically risky, and allegedly acted rudely. The contracts Davis signed locked Californians into artificially high electric costs for the next decade. As of October, 2011 electric rates in California had yet to return to pre-contract levels.

The crisis, and the subsequent government intervention, have had political ramifications, and is regarded as one of the major contributing factors to the 2003 recall election of Governor Davis.

On November 13, 2003, shortly before leaving office, Davis officially brought the energy crisis to an end by issuing a proclamation ending the state of emergency he declared on January 17, 2001. The state of emergency allowed the state to buy electricity for the financially strapped utility companies. The emergency authority allowed Davis to order the California Energy Commission
California Energy Commission
The California Energy Commission is California’s primary energy policy and planning agency. Created in 1974 and headquartered in Sacramento, the Commission has responsibility for activities that include forecasting future energy needs, promoting energy efficiency through appliance and building...

 to streamline the application process for new power plants. During that time, California issued licenses to 38 new power plants, amounting to 14,365 megawatts of electricity production when completed.

Arnold Schwarzenegger


On May 17, 2001, future Republican governor Arnold Schwarzenegger
Arnold Schwarzenegger
Arnold Alois Schwarzenegger is an Austrian-American former professional bodybuilder, actor, businessman, investor, and politician. Schwarzenegger served as the 38th Governor of California from 2003 until 2011....

 and former Los Angeles
Los Ángeles
Los Ángeles is the capital of the province of Biobío, in the commune of the same name, in Region VIII , in the center-south of Chile. It is located between the Laja and Biobío rivers. The population is 123,445 inhabitants...

 Mayor Republican Richard Riordan
Richard Riordan
Richard J. Riordan is a Republican politician from California, U.S.A. who served as the California Secretary for Education from 2003–2005 and as the 39th Mayor of Los Angeles, California from 1993–2001...

 met with Enron
Enron
Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. Before its bankruptcy on December 2, 2001, Enron employed approximately 22,000 staff and was one of the world's leading electricity, natural gas, communications, and pulp and paper companies, with...

 CEO Ken Lay at the Peninsula Beverly Hills Hotel
The Peninsula Hotels
The Peninsula Hotels is an ultra-luxury hotel operator based in Hong Kong, part of The Hongkong and Shanghai Hotels, Limited. Their "flagship" hotel, the famous Peninsula Hong Kong, which opened in 1928, used to be known as the 'finest hotel east of the Suez'....

 in Beverly Hills. The meeting was convened for Enron to present its "Comprehensive Solution for California," which called for an end to federal and state investigations into Enron's role in the California energy crisis.

On October 7, 2003, Schwarzenegger was elected Governor of California to replace Davis.

Over a year later, he attended the commissioning ceremony of a new Western Area Power Administration
Western Area Power Administration
The Western Area Power Administration markets and delivers hydroelectric power and related services within a 15-state region of the central and western U.S. It is one of four power marketing administrations within the U.S...

 (WAPA) 500 kV line remedying the aforementioned power bottleneck on Path 15
Path 15
Path 15 is an portion of the north-south power transmission corridor in California, U.S. It forms a part of the Pacific AC Intertie and the California-Oregon Transmission Project....

.

There were no power shortages or outages while Schwarzenegger was governor, and the Enron corporate officers were swiftly arrested and tried. Those arrested and tried included Treasurer Ben Glisan, Jr., Andrew Fastow
Andrew Fastow
Andrew Stuart Fastow was the chief financial officer of Enron Corporation that was based in Houston, Texas until the U.S. Securities and Exchange Commission opened an investigation into his and the company's conduct in 2001...

, Lea Fastow
Lea Fastow
Lea Weingarten Fastow is the wife of former Enron executive and convicted felon Andrew Fastow and is the second former Enron executive to go to prison after Enron collapsed due to fraud in December 2001....

, Richard Causey
Richard Causey
Richard Alan Causey is one of the prominent figures in the Enron accounting scandal. Causey was Enron's Executive Vice President and Chief Accounting Officer....

, Jeffrey Skilling
Jeffrey Skilling
Jeffrey Keith "Jeff" Skilling is the former president of Enron Corporation, headquartered in Houston, Texas. In 2006 he was convicted of multiple federal felony charges relating to Enron's financial collapse, and is currently serving a 24-year, four-month prison sentence at the Federal...

, Kenneth Lay
Kenneth Lay
Kenneth Lee "Ken" Lay was an American businessman, best known for his role in the widely reported corruption scandal that led to the downfall of Enron Corporation. Lay and Enron became synonymous with corporate abuse and accounting fraud when the scandal broke in 2001...

, Dan Boyle of Enron and Merrill Lynch
Merrill Lynch
Merrill Lynch is the wealth management division of Bank of America. With over 15,000 financial advisors and $2.2 trillion in client assets it is the world's largest brokerage. Formerly known as Merrill Lynch & Co., Inc., prior to 2009 the firm was publicly owned and traded on the New York...

 bankers Daniel Bayly, Robert Furst, William Fuhs and James Brown.

National Energy Development Task Force


Vice President Dick Cheney
Dick Cheney
Richard Bruce "Dick" Cheney served as the 46th Vice President of the United States , under George W. Bush....

 was appointed in January, 2001 to head the National Energy Development Task Force. In the Spring of that year, officials of the Los Angeles Department of Water and Power
Los Angeles Department of Water and Power
The Los Angeles Department of Water and Power is the largest municipal utility in the United States, serving over four million residents. It was founded in 1902 to supply water and electricity to residents and businesses in Los Angeles and surrounding communities...

 met with the Task Force, asking for price controls to protect consumers. The Task Force refused, and insisted that deregulation must remain in place.

Federal Energy Regulatory Commission


The Federal Energy Regulatory Commission (FERC) was intimately involved with the handling of the crisis from the summer of 2000. There were in fact at least four separate FERC investigations.
  • The Gaming Case, investigating general allegations of manipulation of the Western energy markets.
  • The Enron Investigation, specifically investigating the involvement of Enron
    Enron
    Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. Before its bankruptcy on December 2, 2001, Enron employed approximately 22,000 staff and was one of the world's leading electricity, natural gas, communications, and pulp and paper companies, with...

    .
  • The Refund Case, involving wide-ranging recovery of illegal profits made by some companies during the crisis.
  • The Economic Withholding and Anomalous Bidding Case.


In January 2006, the refund case was ongoing.

External links