California’s Electricity Crisis

Paul L. Joskow


The collapse of California’s electricity restructuring and competition program has attracted attention around the world. Prices in California’s competitive wholesale electricity market increased by 500% between the second half of 1999 and the second half of 2000. For the first four months of 2001, wholesale spot prices averaged over $300/Mwh, ten times what they were is 1998 and 1999. Some customers have been required involuntarily to curtail electricity consumption in response to supply shortages. While wholesale prices rose dramatically, retail prices were fixed until early in 2001. As a result, California’s two largest utilities — Pacific Gas & Electric (PG&E) and Southern California Edison (SCE) — were paying far more for wholesale power than they were able to resell it for at retail. Both effectively became insolvent in January 2001 and stopped paying their bills for power and certain other financial obligations. PG&E declared bankruptcy on April 6, 2001 and its reorganization is now before a federal bankruptcy court.