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The beginning of wholesale electricity competition in 1996 opened the door to competition at the retail level. California, with the 10th-highest electricity prices in the country, was the first state to enact electric restructuring legislation in 1996.
The California legislature froze electricity prices until 1998 and then gave residential and small business customers of the state's six main investor-owned utilities a 10% discount on electricity prices. In the spring of 1998, these customers were also given the ability to choose among electricity providers. To ensure an open market, operation of California's electric grid was turned over to an independent system operator (ISO). California also enacted several benefit funds that encouraged some forms of distributed energy.
Despite the electricity discount, the retail price was still substantially above the wholesale price, which allowed the electric utilities to pay off debts that had been incurred while they were in the previous tighter regulatory environment—debts that utilities had no way to pay off in a truly competitive market. The intent was that once these so-called "stranded" debts were paid off, the retail price would be tied directly to the wholesale price, and it was expected that this would lead to even lower retail prices.
The most significant problem in California was the lack of power plant investment in anticipation of electric industry restructuring. From 1990 to 1999, electric generating capacity actually decreased by 1.7% in California. California's economy boomed over the same time, which caused electrical load to increase 11.3%. California already relied heavily on imports of power from other states, particularly hydropower from the Pacific Northwest, and this dependence grew to roughly 11,000 MW in 2000.
The mismatch of generation and load came to a head in the summer of 2000, when unusually low water levels in the Pacific Northwest led to a reduction of hydropower imports to Northern California. At the same time, a large amount of power generation was unavailable, primarily because of unplanned outages. The resulting tight electricity markets caused wholesale power prices to skyrocket.
Skyrocketing prices were felt directly by consumers in the service territory of San Diego Gas & Electric Co., which had already paid off its stranded debts and had tied electricity costs directly to wholesale costs. For the rest of the state, fixed retail electricity prices meant utilities paid more for electricity than they were able to sell it for. They were racking up huge debts.
Meanwhile, tight electricity supplies combined with limited transmission capacity from the southern to northern parts of the state led to rolling blackouts in northern California. This caused millions of dollars in lost income to businesses and industries there.
Although the threat of rolling blackouts eased as the summer ended, wholesale prices remained high. Electrical load decreased, but many plants that had maintained full power through the summer were shut down for maintenance. As the financial state of the two largest utilities—Southern California Edison and Pacific Gas & Electric Co.—became less certain, out-of state power companies became hesitant to sell power to them because many power companies were going unpaid. As a result, the state's electricity supplies were critically short from December 2000 through February 2001.
By March 2001, many independent, in-state power producers, which had gone for months without being paid, were unable to continue operating. The loss of generating capacity, combined with unexpectedly hot temperatures, led to rolling blackouts throughout the state in late March.
On April 6, 2001, the financial burden on Pacific Gas & Electric Co. led it to declare bankruptcy.
Then in early May, hot temperatures hit the state again and lead to rolling blackouts. The state also came close to rolling blackouts on May 31 but narrowly avoided them.
In the summer of 2001, the state and federal governments enacted energy efficiency efforts to help stave off the crisis, though the North American Electric Reliability Council remained concerned about the prospect of rolling blackouts.
For more information, see the Energy Information Administration's summary of the California power situation.
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