In 1996 California became the first state to deregulate a 23 billion utility industries. Until that time the investor owned utilities' Pacific Gas & Electric, Southern California Edison and Sand Diego Electric controlled both production and supply. The new law of deregulation promised to bring about lower prices but industry. The first shortcoming for deregulation first, utilities were strongly encouraged to divest substantial portion of their supply, while being blocked CPUC into entering into long stable contracts. Second California froze retail rates at low prices and banked on wholesale prices.
No one had any idea when California deregulated the power industry that the demand for electricity would be so great. During the summer of 2000 the elasticity of demand for power went up for consumers. Two things happen to El Paso Gas Pipeline. The first was to sale off all surplus pipeline capacity on El Paso to an unregulated affiliate for fixed price.
The second were explosions that crippled the pipeline for weeks and left it with limited capacity. Thus the following winter it got cold in California determining price of elasticity of demand making the demand for power greater then the production. As the winter continued last winter the time and demand for power went up greatly causing the prices to soar in California causing the principle of the problem. California decided to try to fix the problem with buying power from other states causing consumers electric bills to soar. This also brought about rolling blackouts for consumers.
At the same time PG&E, Southern California Edison and San Diego Electric were claiming deregulation is causing them to go bankrupt and making total cost of power prices soar for consumers. Under deregulation PG&E had hope to pay off it explicit debts from long term debts occurred from building power plants. Residents in California believe that PG&E is making a billions of the dollars. The cost of buying power from spots markets has caused PG&E to earn negative profits causing PG&E to file bankruptcy in April. First the utilities companies in California need to stop shouting bankruptcy. The power companies need to make a firm to commitment to pay all implicit power bills. This arrangement will take away from the accounting profit of the stockholders but they need be able to handle the pain of the loss. Secondly utilities companies will need to raise the retail price of power and start looking at the total cost that it will take to resolve the energy crisis. If the prices do not go up the rolling blackouts will continue in California.
California needs to start making long-run reforms that will ensure this never happens again. Competition must exist in the utility market so the opportunity of cost of power will go down. Deregulation does work well if certain rules apply. Three key elements to make a long term approach work in California work is long term contracts, retail competition and pricing flexibility and competitive market environmen..
In the end California needs to build new power plants. Without new power plants being built the crisis will worsens.. If the crisis is not fixed soon people and companies and people are going to start leaving California causing the state to have economic ruin. On economic scale California does have the 6 largest economy in the world. If the crisis is not fixed soon the rest of the world will feel the effect of the California energy crisis.