To what extent was the policy of deregulation in the energy market responsible for the California electricity crisis?

Essay by raul4High School, 12th gradeA, January 2010

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Extended EssayEconomics HLAbstractThe topic I chose to investigate for this extended essay was the manipulation of the deregulated Californian energy market by the Enron Corporation. This extended essay focuses on the economic aspect of market failure in the energy market due to the deregulation and consequent manipulation of the market rather than the business aspect of Enron Corporation.

Contents PageTitle Page……………………………………………………….……1Abstract……………………………………………………………...2Contents Page………………………………………………….…….3Introduction………………………………………………….……...4Deregulation Process…………………………………………….….51.Changes in Market Structure………………………………....52.Effects of Deregulation……………………………….………7Analysis of Factors………….………………………………….……81.Market Manipulation…………………………………….…....82.Price Controls…………………………………………….…...93.High Temperatures…………………………………………...10Market Failure………………………………………………………12Conclusion…………………………………………………………...14Bibliography…………………………………………………………16Appendix……………………………………………………………..17IntroductionIn the year 2000 and 2001 the state of California in the United States of America faced an energy crisis known as the California electricity crisis. This crisis was directly related to the 'deregulation' of the Californian energy market in 1998. During this crises there were several 'rolling blackouts' and very high prices for electricity.

While in Economics class we were shown a documentary film called Enron: The Smartest Guys in The Room, this film investigates the bankruptcy of Enron Corporation and its participation in the California crisis.

I was immediately enthralled by the depicted exploitation of the energy market. Moreover the film showed the effects of the crisis on the common people who had to suffer power outages and ridiculously high prices for a basic necessity such as electricity. Something as essential as electricity is many a times taken for granted and the film mostly investigated the Business side of the crisis and Enron's involvement, however it also stirred my interest to examine the economic factors.

The deregulation of the California energy market is essentially an example of a supply-side policy. These policies are used to shift the supply curve by increasing long run aggregate supply. In California the deregulation was intended for increasing competitive forces in the energy market. The deregulation mainly consisted of privatizing the power plants...