California’s State of Total Recall

By the time you are reading this, my home state may have a new governor. On Tuesday, September 14th, California will hold a special election, which could have been called Total Recall because it will determine whether governor Gavin Newsom will be recalled. 

 

 

The last time this happened in California, it was 2003 and governor Gray Davis was replaced by Arnold Schwarzenegger. And the main reason behind it all was the California Power Crisis, which resulted in severe blackouts, very high electricity prices and lots of political drama. 

 

 

DEREGULATION ≠ LIBERALIZATION 

California is the largest electricity consuming state in the United States and traditionally had higher prices than most other places in the US due to limited generation within the state (limited hydro, almost non-existent nuclear). 

 

 

 

 Toward the end of the last century, in an attempt to control prices, California set up a deregulated market structure. It had a number of flaws that not only exacerbated the cost problem, but it also allowed unscrupulous Enron traders to manipulate the market. 

 

  

Numerous articles and books have been written about the California Power Crisis and Enron’s manipulation of the electricity markets, including a PBS special entitleBlackout 

 

THE DOMINO EFFECT 

In a nutshell, large energy consumers of California complained about high electricity prices forcing the state to deregulate the electricity markets in 1998. The upshot of this was Enron traders manipulating the markets, driving prices by orders of magnitude and causing a lot of volatility in the trading markets. Consequently, widespread blackouts and shortages became a normal occurrence in the state that is home to Silicon Valley. It all came crashing down with a lot of political fireworks as well as the whole Enron debacle.  

 

And the eventual replacement of governor Gray Davis with the Terminator! 

 

With or without deregulation, energy prices will always be volatile. If you are buying, selling, or consuming energy, contact us to find out how we can help you manage your risk.

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