How California's Power Crisis Works

By: Kevin Bonsor

The Roots of the Crisis

As you can imagine, there is a lot of finger-pointing going on in California as to who is responsible for this most recent energy shortage. This crisis isn't something that developed overnight. It is a problem that has been building for years. Here are a few of the factors that have contributed to the current situation:

  • Deregulation of California utilities - Many are pointing to the deregulation plan that former Governor Pete Wilson signed into law in 1996. The plan was designed to open up the state's electricity industry to competition. At the time, Wilson and many in the legislature viewed the electricity industry as a monopoly taking advantage of consumers. Nearly five years later, that deregulation plan is being blamed for the current energy problems that the state is faced with. When deregulation occurred in 1996, California's major utilities sold many of their power plants to a handful of electricity wholesalers. The problem here is that deregulation has given power suppliers little incentive to increase their capacity to meet the state's growing demand for electricity. Gov. Davis is among the critics who are suggesting that these suppliers have even withheld supply to gouge electricity prices, a claim that the suppliers have vehemently denied.
  • Growing power consumption - Demand for electricity in California has grown by 6 percent per year for the past five years, according to Pacific Gas and Electric, one of state's biggest utilities. Part of this growing consumption is due to the large number of digital and Internet companies headquartered in cities such as San Jose and San Francisco. A 1998 study reported that the Internet is responsible for 8 percent of all of national electricity consumption. Critics of that study say that number is inflated.
  • Regulated consumer prices - Because of the high demand, unregulated wholesale energy prices have risen dramatically in the last year. But the rates charged to customers are still under a freeze. So the utilities buy energy at a deregulated rate from the wholesale suppliers, but have to charge customers a much lower regulated rate. This situation is leading to more serious problems for two of California's major utilities -- PG&E and SoCal Edison. The deficit caused by paying more to the wholesalers than what they can charge customers is causing an increasing amount of debt. Together, these two companies have accumulated billions of dollars of debt. Each have suggested that they might have to file for bankruptcy within the next two months. If that were to happen, blackouts could become more frequent unless the state or federal government intervene. On Friday, Jan. 19, Davis provided a short-term solution to the crisis by signing legislation that approved the spending $400 million of state funds to buy power and sell it to the state's struggling utilities.
  • No new power plants - There have been no major power plants built in California in the past 10 years. There are currently four new plants under construction, and plans for another plant have been approved, but none of these new plants will be up and running in time to help California meet the state's needs during the peak consumption months of this coming summer. Davis said that none of these plants will be opened for at least another two years.
  • Outside companies cut supply - California relies on many out-of-state companies to provide them with electricity. California imports 25 percent of its electricity to meet daily demand, according to the California Energy Commission. Recently, these companies have become reluctant to sell power to the state's utilities because of concerns over the utilities' ability to pay for that power. On Jan. 11, U.S. Energy Secretary Bill Richardson extended an emergency order that required these out-of-state companies to sell power to California.
  • Lack of snow/rain - One of the areas that California depends on for energy is the Northwest, where states are dependent on hydroelectric power generation. A lack of snow and rain in that region has caused a decrease in power production by hydroelectric power plants; therefore, there's not as much electricity to sell to California.

Officials in California face some tough decisions over the next several weeks and months; but in the meantime, they are putting a Band-Aid on the situation by imposing rolling blackouts across the state. In the next section, we will examine how these rolling blackouts work.