What went wrong in California

Date: 01/02/01

When the California state legislature deregulated the state's power market in 1996, it made a couple of mistakes. Four years on, those oversights are causing a crisis that threatens to undermine the whole global push for liberalised electricity markets.

Regulators grossly underestimated demand for electricity as the state's economy started to boom and Silicon Valley firms consumed power at unbelievable rates; they failed to anticipate that energy companies would exploit a loophole allowing them to hoard power and sell when the system was gagging for it at an inflated rate.

Between 1990 and 2000, power demand in California soared 25&percent; and was not met by expanding supply, so choking the state's utilities.

California couldn't have designed better bottlenecks. Customers failed to cut back as end-user prices were fixed, and tough environmental and land-use laws together with rules forcing a share of past 'stranded costs' onto new market entrants meant that insufficient new plant capacity was built.

Wholesale electricity became scarce and costly, so retail suppliers - labouring under fixed-rate prices while they had to pay inflated rates to generators - ran up massive debts.

It was an accident waiting to happen.