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calmelt0214 - CALIFORNIA ELECTRICITY MARKET: POLICY...

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CALIFORNIA ELECTRICITY MARKET: POLICY MELTDOWN William W. Hogan Center for Business and Government John F. Kennedy School of Government Harvard University Cambridge, Massachusetts 02138 KSG Faculty Seminar February 14, 2001
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1 ELECTRICITY MARKET California Developments The crisis in California has become the cloud on everyone's horizon. The problems are serious and surprising. The precedents will affect the speed and content of electricity restructuring developments everywhere. The Cloud on Everyone's Horizon Congestion Management Balancing Ancillary Services Transmission Usage Governance Transcos Incentives Process California
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2 ELECTRICITY MARKET California Developments The California crisis erupted in the Summer of 2000. Bad policy combined with bad luck to create an unexpected and unprecedented price explosion. Bad Policy: Divestiture of thermal generation without vesting contracts left utilities on spot market. Rate caps for load at $65 per MWh eliminated demand response. Separation of ISO and PX and the myriad associated market design flaws that followed. Bad Luck: Low water year and unexpected growth in demand throughout the western system. Binding environmental constraints and eventually a shortage of gas. Bad News : In the Spring of 2000, forward prices were under $80, and viewed as too high. From June through November of 2000 prices in the Western Hubs were $100-$800 . Panic ensued. Villains were sought. Bankruptcy loomed. Restructuring will slow, or stop, or maybe even reverse. California PX Prices in 2000 0 200 400 600 800 1000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Month Price ($/MWh) Max Average Source: CALPX Hourly UMCP Monthly Max and Average
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3 ELECTRICITY MARKET California Developments That the California crisis is man made makes it no less serious. California electric power bills: 1999 $7.5 B; 2000 $28 B; 2001 $80(?) B. Federal Government points to Sacramento as the responsible party. U.S. Department of Energy issues emergency orders to sell to California. Governor and others condemn criminal profiteers from outside the state. Governor draws line in sand, promising not to raise retail prices. Wholesale prices increase further from fear of default under bankruptcy. Company credit ratings drop to junk bond status. Intel announces intent to stop building in California. California DWR burns through $400 million in state general funds in two weeks.
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calmelt0214 - CALIFORNIA ELECTRICITY MARKET: POLICY...

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