NCPA - National Center for Policy Analysis

California's Energy Crisis

January 29, 2001

California's electric power crisis is due to a poorly constructed electrical industry deregulation -- or restructuring -- plan, and also to the failure of the state to build new power plants, notes Newsweek's Robert J. Samuelson.

  • From 1988 to 1998 the state's electric-generating capacity actually declined 5 percent, says the Department of Energy.
  • Over the same period, power consumption rose 15 percent; in the next two years it increased a further 7 percent.
  • Some experts think California needs about 10,000 megawatts more, about a 20 percent increase in generating capacity.

But that doesn't explain why the crisis has come in the middle of winter, which is the off-peak season for power consumption and thus the time of the year when wholesale prices usually decline. For instance, the record high in California's summer-peak demand (45,844 megawatts on July 12, 1999) was a third larger than that in its winter-peak demand (34,432 megawatts on Dec. 13,1999).

Samuelson notes that in March 1999 Southern California Edison asked the California Public Utility Commission for permission to make long-term purchase contracts for electricity. This would have provided a stable source of power at fairly stable prices. It would have relaxed pressure on the spot market. The CPUC refused.

Without long term contracts, California utilities have been forced to buy wholesale power at the short term, spot market price -- while the retail rates they charge consumers are frozen. As a result, they have been forced to borrow heavily to purchase electricity, and now face bankruptcy.

Source: Robert J. Samuelson, "The American Energy Fantasy," Newsweek, January 29, 2001.


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