A number of new private companies started to enter the market, which bought the generating plants from the utilities. While generation was owned before deregulation by Utilities (55 percent), Public Agencies (23 percent) and Qualified Facilities and Others (22 percent), the ownership structure changed in a way such that Utilities had to cede 40 percent of their ownership to Non-Utility Owners, USA-owned energy and international active companies.
Large industrial consumers were able to make their own bilateral contracts or to buy on the CalPX, and so were able to take advantages of their market power to get cheaper electricity at first. Residential and small business users technically had the same right, but the ten percent rate cut in addition to the costs added to every bill cover stranded costs made undercutting the utilities themselves virtually impossible. That is the reason why most non-state companies abandoned the residential market. Consequently, residential and small business consumers saw no real benefit from deregulation, since there was no competition nor
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decrease in their bills18. A tremendous transfer of wealth from the consumers and utilities to the generators was the consequence.
From the utilities point of view, the system seemed to work during 1998 and 1999, since wholesale prices declined and, with consumer rates frozen, vast sums of their stranded costs could be reimbursed. However, price spikes did occur, but residential and small business consumers were protected from the market instability by the price freeze. With the year 2000 wholesale prices started to rise dramatically with ten times higher peak prices and four to five times higher off-peak prices compared to the same period a year ago19. Hence SCE and PG&E were paying far more for wholesale power than they were able to resell it for retail and therefore soon faced huge losses. Both subsequently were demanding to remove the price freeze in order to pass the costs on to consumers, while creditors became increasingly concerned about their financial conditions20.
California was the first state in the United States to restructure its power markets followed by Pennsylvania, New Jersey and Maryland, York, and the New England States. Generally, due to its different market structures these other markets the utilities have depended upon spot markets for much less of their retail loads, so they naturally have not had the same price volatility problems as California.
Since California was dependent on purchasing significant amounts of power form outside of its state, it is member of a voluntary organisation called the Western Systems Coordinating Council that oversees the interconnected transmission systems in the 14 western states of United
18
The only exception was San Diego, where SDG&E had a relatively small amount of stranded investments to reimburse. What is more, a small percentage of customers who were interested in "green” energy benefited, since they were offered the opportunity to purchase such at a premium.
19
In June prices were routinely hitting the maximum price allowed by the FERC on the CalPX of $750 for a megawatt hour as compared with $25 to $35 per MWh a year before. See: Hall/Weinstein.
20
SDG&E’s retail prices, however, were allowed to adjust to changes in wholesale market prices beginning in January 2000, and passed the costs on to their customers, which ended up in an unignorable public outcry. In September 2000 a new law passed limiting the price cap to 6.4 cents per KWh, which was still higher than the cap for the other both.
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States and parts of Canada. California traditionally exported power during the cold winter months, and therefor the crisis quickly spread to other states. Since private unregulated generators were no longer required to sell power to California utilities, they sold power to the highest bidder whether or not that bidder was in California. In the view of the fact that FERC allowed the ISO to lower the price cap on CalPX from $750 down to $250 per MWh and other states were not part of the Californian ISO, generators were quite willing to export to states at much higher prices.
FERC took two rather decisive actions during the last four months of 2000. The first was lowering the price cap on wholesale energy without forcing the generators to give back any of the excessive profits they had already made as requested by regulation and legislation. They also allowed the utilities to purchase electricity outside the CalPX, which the utilities denied fearing to get caught in long-term bilateral contracts at excessively high prices. Subsequently, disregarding all request to lower the caps even further, FERC removed them all and replaced them with a "soft cap" of $150 per MWH. To circumvent this order, all the generators had to do was filling in some paperwork with some reasonable arguments why their asking price was higher than that cap. Some industries such as aluminium even shot down their operations in order to sell the power which they had already bought on long-term contracts, at prices which were fixed well before the price rise in 2000. Other industries like Montana’s largest manufactures, on the other hand, suffered from the rising energy costs and had to scale back production. Since selling energy to other states increased the potential shortage in California, the federal government was forced to use emergency powers and issued emergency orders forcing generators in the whole western region to sell power to California and to cash- strapped PG&E and SCE. They both became insolvent in January 2001 and PG&E finally had to declare bankruptcy in April 2001. In order to avoid blackouts the state of California used state funds of about $8 billion during the first five months of 2001 to buy electricity from unregulated wholesale suppliers and negotiated long-term contracts
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with suppliers which makes retail prices likely to remain high for a period of twenty years to come21.
In spite of this the Municipal Utilities, like the Los Angeles Department of Water and Power (DPW), seemed to be the only real winner by refusing to take part in the deregulation process. They were able to keep prices down and sell excess power on the CalPX and to other private utilities which resulted in surplus in their accounting and by passing on the benefits in lowered retail prices for their consumers22.