Subsequent Events California's Energy Crisis

California's new wholesale power market and customer choice program, which started in March, 1998, worked fairly well for about a year and a half. In the summer of 2000, retail electricity prices in southern California reached all time highs, and generation capacity shortages forced temporary power outages in northern California.

Since then, coverage of California's energy crisis has been reported on television and in newspapers around the country. The complexity of problems, the contrasting views and sometimes conflicting solutions offered by politicians, government officials, and other stakeholders make it difficult to follow what has happened.

To help bring the situation into better focus, the following paragraphs present a broad perspective of the crisis.

Three Major Problems

California's energy crisis can be grouped broadly into three interrelated problems including (1) precipitous increase in wholesale electricity prices, (2) intermittent power shortages during peak demand periods, and (3) the deterioration of the financial stability of California's three major investor-owned utilities (IOUs)—Pacific Gas and Electric (PG&E), Southern California Edison (SCE), and San Diego Gas and Electric (SDG&E).

1. High Wholesale Electricity Prices: The price of wholesale electricity sold on California's newly created California Power Exchange (CalPX) starting escalating around June 2000, reaching unprecedented levels over the remainder of the year. From June 2000 through July 2000 wholesale electricity prices increased on average 270 percent over the same period in 1999.⁽¹⁾ By December 2000 wholesale prices on the CalPX cleared at $376.99 per megawatthour (MWh), over 11 times higher than the average clearing price of $29.71 per mwh in December 1999.⁽²⁾
   
   

   High wholesale prices resulted in a steep, but temporary increase in retail electricity prices in southern California in the summer of 2000. This is what happened. In July 1999, SDG&E's retail price freeze was eliminated as called for in California's industry deregulation plan, and SDG&E customers were exposed to unregulated retail electricity prices (PG&E and SCE's retail customers were, at that time, still protected from high retail prices by rate freezes imposed by the restructuring plan). SDG&E could now pass through the high wholesale prices to retail customers, and by July 2000 residential electricity rates had increased to approximately 16 cents per kilowatthour, up from about 11 cents per kilowatthour in July 1999.⁽³⁾ To stop the increase in retail prices, the California legislature established a ceiling of 6.5 cents per kilowatthour on the energy component of electric bills for residential, small commercial, and lighting customers of SDG&E.
   
   

2. Intermittent Power Shortages: Since 1999, California has experienced a significant increase in emergency conditions that in some instances have necessitated rotating blackouts (a rotating blackout is an involuntary curtailment of electricity usage). Stage 3 emergency notifications, which may necessitate rotating blackouts, have increased from 1 in 2000 to 38 through May 22, 2001 (see graph). Stages 1 and 2 notifications have increased from 91 in 2000 to 127 through May 22, 2001. In some instances Stage 2 requires voluntary curtailment of power usage.
   
   

   California's Declared Staged Power Emergencies, 1998--May 22, 2001

   
   

   Stage 1 emergency notice is declared any time that an operating reserve shortfall (less than MORC minimum) is unavoidable or, when in real- time operations, the operating reserve is forecast to be less than minimum after utilizing available resources. Stage 2 emergency notice is declared any time it is clear that an operating reserve shortfall (less than 5 percent) is unavoidable or, when in real-time operations, the operating reserve is forecast to be less than 5 percent after dispatching all resources available. Stage 3 emergency notice is declared any time it is clear that an operating reserve shortfall (less than 1.5 percent) is unavoidable or when in real-time operations, the operating reserve is forecast to be less than 1.5 percent after dispatching all resources available.

   
   

3. Three investor-owned utilities face severe financial problems: Because of high wholesale power prices and the imposition of retail price caps restricting recovery of these costs, California's three major IOUs are experiencing severe financial problems.

   The worst case is PG&E, which on April 6, 2001 filed for protection under Chapter 11 of the U.S. Bankruptcy Code. PG&E estimated that since June 2000 they have spent $9 billion for wholesale power with no reimbursement for those expenditures (referred to as unrecovered power costs).⁽⁴⁾ SCE is in a similar situation to PG&E with respect to power purchase costs. In November 2000, SCE estimated their unrecovered power purchase costs at $2.6 billion. ⁽⁵⁾ SDG&E estimated their unrecovered power costs at $447 million by December 2000. ⁽⁶⁾

Factors Contributing to the Energy Crisis

Although there is not universal agreement on the causes of California's problems, there is general agreement among industry leaders on a core set of factors contributing to the energy crisis.⁽⁷⁾

1. Investment in new power generation capacity has not kept pace with the increasing demand for electricity. California's generation capability decreased 2 percent from 1990 through 1999, while retail sales increased by 11 percent. Further, no new generation capacity has been constructed in California for over a decade.

2. To meet its demand for power, California relies on about 7 to 11 gigawatts of out-of-state generation capability, of which a significant portion is hydroelectric capacity located in the northwestern United States. Reduced hydroelectric power generation caused by unusually low water levels in the northwest resulted in a reduction of power imports to northern California.

3. During 2000, approximately 10 gigawatts of generation capability was out of operation during some of the high demand times, which contributed to power shortages.

4. Path 15, the high voltage transmission line connecting southern California to northern California, became congested at times, reducing the flow of surplus electricity capacity in southern California to meet shortages in northern California.

5. Exacerbating the power shortages, many independent power generators were reluctant to sell power to PG&E, and SCE because of their financial troubles and the uncertainty of receiving payment for the power sold.

6. Shortcomings of the wholesale electric market rules established under the State's restructuring plan contributed to the increase in wholesale prices. Specifically, under the market rules, PG&E, SCE, and SDG&E were required to buy all of their power through the CalPX. They could not enter into forward long-term contracts for energy. When spot market wholesale prices increased because of power shortages and increasing generation costs, the utilities had no option but to purchase the high-priced power.

7. An increase in natural gas prices and the high costs of meeting California's power plant emissions requirements also contributed to the increase in wholesale electricity prices.

8. The three IOUs paid high wholesale prices for their power, but were unable to recover their costs because retail electricity prices were frozen. This situation, as noted above, resulted in the three IOUs accumulating enormous debts.

Actions Taken to Contain the Energy Crisis

The following actions have been taken by California and Federal Government authorities to help mitigate the energy crisis and to put into place permanent solutions to the problems California has been experiencing since the summer of 2000:

June 28, 2000: The California Public Utility Commission (CPUC) reduced its buy-side price cap to $500 per megawatt for the real-time, ancillary services, and congestion management markets. The CPUC further reduced its price cap to $250 per megawatt on August 1, 2000.

August 3, 2000: The CPUC issued a rate stabilization plan for SDG&E. The plan was designed to provide electricity price relief for some residential and commercial customers served by SDG&E.

August 30, 2000: The California legislature passed a law (AB265) that established rate caps of 6.5 cents per kilowatthour for SDG&E customers. The rate cap was retroactive to June 2000, and it will be effective through 2002.

December 14, 2000: The Secretary of Energy initiated an order requiring certain generators and power marketers to supply electricity to California's power system operator in order to help avert power outages.

December 15, 2000: The Federal Energy Regulatory Commission (FERC) ordered remedies for California's wholesale power markets. The order, among other things, eliminated the mandatory requirement that the three IOUs sell and buy all of their power through the CalPX. The FERC also terminated the CalPX's wholesale rate schedule that enabled it to continue to operate. CalPX discontinued operating in January 2001.

January 4, 2001: The CPUC granted PG&E and SCE an interim surcharge to raise rates. The temporary surcharge was in effect for 90 days.

February 1, 2001: Governor Gray Davis signed into law AB 1X authorizing California's Department of Water Resources to purchase power under long-term contracts for sale to PG&E and SCE. This law was passed because, in part, the two utilities were financially strapped and unable to obtain long-term power contracts with power generators. This law is significant in that the State now becomes an active participant in California's power industry.

March 27, 2001: The CPUC approved a 3-cents-per-kilowatt-hour average rate increase in an effort to support the financially strapped PG&E, and SCE.

April 5, 2001: Governor Gray Davis released a plan to resolve the State's energy problems and to protect residents from volatile energy markets. The plan contains numerous elements aimed at increasing power supply, improving energy conservation, and stabilizing the electricity industry in California.

April 9, 2001: Governor Gray Davis announced an agreement with SCE, and Edison International, SCE's parent company. In the agreement, SCE will sell their transmission system to the State of California for $2.76 billion. The sale is designed to help SCE recover from its financial difficulties. It must be approved by the State Legislature to be completed.

April 25, 2001: The FERC announced a plan to bring more stability, better control, and price relief to California's energy market. Among other things the plan gives the California Independent System Operator (California ISO operates the State's transmission system) more control of power plant outages, establishes price mitigation measures based on market principals, and requires new reporting obligations that will allow the FERC to better monitor the energy market in California.

May 14, 2001: The FERC announced regulatory actions to increase reliable energy supplies in California and other Western States. The FERC streamlined regulatory procedures for wholesale power sales and for certification of natural gas projects. It also urged all hydroelectric licensees to assess the potential for increased generation capacity at their respective facilities.

May 15, 2001: In March the California Public Utility Commission (CPUC) agreed to raise retail electricity prices to customers of PG&E and SCE. Today, the CPUC released a rate structure indicating exactly which customer classes will have their rates increased and by how much. Overall retail rates will increase an average of 19 percent, but low-income customers, medical baseline customers, and residential customers using power below 130 percent of baseline usage amounts will not have a rate increase.

May 16, 2001: Governor Gray Davis signed Senate Bill 6X creating the California Consumer Power and Conservation Financing Authority. The California Power Authority will have broad powers to construct, own, and operate electric power facilities, and finance energy conservation projects.

May 22, 2001: Governor Davis signed another emergency bill, Senate Bill 28X, designed to shorten the times for reviewing an application for a new power plant, and re-powering (i.e., upgrading) an existing power plant. The new law also allows new owners to pay emission mitigation fees in lieu of obtaining actual emission offsets when the new owner can show that emission offsets are not available.

May 28, 2001: U.S. Department of Energy Secretary Abraham ordered the Western Area Power Administration (WAPA), a 15 State power marketing arm of the U.S. DOE, to complete planning and to seek outside financing for increasing California's transmission capacity. This action aims at reducing power transmission bottlenecks on Path 15, a high-voltage power line connecting northern and southern California (see item 4 under Factors Contributing to the Energy Crisis).

June 19, 2001: The Federal Energy Regulatory Commission extended and broadened its price mitigation and market monitoring plan (issued in April 2001). The price mitigation plan will now apply to spot market sales 24 hours a day, 7 days a week, in all 11 States in the Western Systems Coordinating Council. The formula to calculate the market clearing price was changed to reflect the marginal cost of replacing gas used for generation, based on gas prices reported in Gas Daily for three spot market prices in California, adjust operating and maintentance expense upward, and eliminate the emission costs from the calculation (emission costs will be invoiced to the CA ISO and recovered separately). The price mitigation efforts will now apply to all spot market prices. When operating reserves are above 7%, the prices may not exceed 85% of the highest hourly price that was in effect during the most recent Stage 1 reserve deficiency period called by the ISO.

July 18, 2001: The California PUC published for comment a draft rate agreement between the CPUC and the California Department of Water Resources (DWR). The draft agreement contains the mechanism the CPUC will use to set electricity rates to satisfy the DWR's revenue requirements and supports the DWR's power purchase program. The revenue requirements include the costs required to issue and pay off the bonds issued for purchasing power (authorized under AB 1X), costs for DWR's power purchase program, cost of load reduction programs, and operating costs. Comments are to be filed by August 1, 2001.

September 20, 2001: The California PUC issued an interim opinion that suspended retail choice in California. The CPUC estimates that about 5% of the State's peak load of 46,000 MW is currently under direct access contracts, mostly with large industrial customers. Contracts in place will be allowed to continue until their expiration.

October 5, 2001: U.S. District Court Judge Lew approved the California PUC and Southern California Edison's settlement concerning the lawsuit filed by SCE against the PUC in November 2000. SCE claimed the PUC had violated federal law and unconstitutionally took property by its actions in not providing sufficient retail rates for SCE. The settlement is intended to restore SCE's creditworthiness and enable it to begin purchasing power for its retail customers, limit ratepayer's cost of paying off SCE debt, and enable SCE to pay its debt over a reasonable certain period of time.

January 10, 2002: Attorney General Bill Lockyer filed a suit against Pacific Gas and Electric Corporation because its proposed reorganization plan for its utility would be "a violation of California's unfair competition law." Under the plan, PG&E Corporation would acquire the utility's hydroelectric and transmission assets and transfer them into three new California-based companies, and therefore preempt many state laws and PUC jurisdiction.

January 31, 2002: The California PUC issued a proposed rate agreement with the Department of Water Resources so DWR could issue bonds to pay back the General Fund. According to state law, the PUC "may enter into a rate agreement that would irrevocably commit ratepayer revenues to repay any bonds issued by DWR." A final decision is expected on February 21, 2002.

February 21, 2002: The PUC issued two decisions regarding the adoption of a rate agreement between the PUC and the Department of Water Resources and cost recovery of the agency's revenue requirements for purchasing power under ABX 1. In the first decision, the PUC adopted a rate agreement that allows the DWR to issue bonds to repay over $10 billion in debt, including over $6 billion to California's General Fund. In the second decision, the PUC agreed to implement a cost recovery mechanism for DWR's revised revenue requirements for power purchases made on behalf of the state's three largest utilities: Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric. The revenue requirement for the period covering January 17, 2001 through December 31, 2002 is $9 billion, which is significantly lower than the original requirement. The PUC adopted a 9.295 per kilowatthour charge for PG&E customers, 9.744 cents per kWh for SCE customers, and 7.285 cents per kWh for SDG&E customers. According the PUC revenue requirement order, "these charges shall apply to each DWR-supplied kWh included on bills rendered on or after March 15, 2002."

March 21, 2002: The PUC voted to keep September 20, 2001 as the suspension date for direct access. According to the PUC's decision, customers can renew their contracts or change their electricity providers if they had contracts as of September 20, 2001. The PUC is hoping to impose an exit fee on these customers to provide DWR with more funds to cover the cost of purchasing power. Exit fees will be dealt with in a separate proceeding and order.

As further actions develop, they will be added to this site.

1. California Public Utility Commission, “California's Electricity Options and Challenges Report To Governor Gray Davis,” August 2, 2000.

2. California Power Exchange website http://www.calpx.com.

3. California Public Utility Commission and Electricity Oversight Board, California's Electricity Options and Challenges, Report to Governor Gray Davis, August 2, 2000.

6. Southern California Edison Press Release, November 17, 2000

6. San Diego Gas and Electric Press Release, February 6, 2001.

7. Factors contributing to California's energy crisis have been documented in the following reports: Federal Energy Regulatory Commission, Order Directing Remedies For California Wholesale Electric Markets, December 15, 2000; California Public Utilities Commission and Electricity Oversight Board, California's Electricity Options and Challenges, Report to Governor Gray Davis, August 2, 2000; Anjali Sheffrin, Director of Market Analysis, California Independent System Operator, What Went Wrong With California Electric Utility Deregulation?, April 19, 2001.