California's Power Market Collapse

People’s Democracy

Organ of the Communist Party of India (Marxist)


No. 17

April 27,

Power Market Collapse And The Electricity Bill


week, the government finally placed the Electricity Bill 2001 (presumably now
2003) in the Parliament. With this, electricity is now to be looked on as a
marketable commodity to be traded like any other. The 1948 Act, drafted by Dr
Ambedkar looked on electricity as a basic pre-requisite for development and put
the responsibility of developing this vital sector on the state. If this Bill is
passed by the Lok Sabha and the Rajya Sabha, the electricity sector would be
primarily for making profits. Obviously, if the power sector, is to be
privatised – the goal of both the BJP and the Congress – changing the 1948 Act
which prohibits profiteering in this sector, is a critical step. The
World Bank, the ADB and their various consultants have been
advocating this for years and if the current Bill passes into an Act, they would
have achieved their goal.



the lessons of the market driven electricity sector reforms have not only not
been learnt, the Indian media is even unwilling to print the huge amount of
material that is now surfacing from California’s disastrous experiment of
creating a power market. It is now clear that the generators withheld
electricity to create shortages and the traders and the generators together
exploited this scarcity to drive up the cost of power through the roof. The
California distribution companies went bankrupt as they had guaranteed they
would not raise their rates for a few years when the market reforms were
initiated in the belief that their power costs would go down in a competitive
market. The prices of power had to be increased by huge amounts to save the
utilities, a measure which still did not work. The California consumers and
distribution utilities lost more than 50 billion dollars in 2000. Finally, the
California power exchange was shut down, and state took over the task of buying
power on behalf of the utilities.

failure of the California power market led to a number of investigations and the
creation of an Energy Task Force under vice president Dick Cheney. The corporate
friendly Cheney committee of course blamed the greens, the Californians and
various other people for the crisis. According to the Task Force, which met with
various energy companies, any attempt at state intervention in California meant
“distorting” the market and was doomed to failure. Cheney and friends
suggested dismantling all environmental regulations, drill for oil in Alaskan
Tundra and let the market continue its high price electricity ways, as “it
would encourage investors to set up more power plants in California”. In
Cheney’s world, the markets could only be distorted by state intervention and
not by electricity generators and energy traders speculating in the market.

Californian state authorities rejected the Cheney path to energy salvation and
instead focussed on old fashioned methods: imposed price caps, bought
electricity on long term contracts and so on. The net result was that the much
prophesied crisis predicted for 2002 summer did not materialise. The California
power scenario stabilised without any of the Cheney reforms being put in place.



California Public Utilities Commission and the Electricity Oversight Board,
after detailed investigations, charged the electricity generators, the power and
gas traders with manipulating the market. Their findings were clear: the
crisis was entirely artificially created.
They detailed how even when the
demand for power was low, the price of electricity was kept high by the
generators and traders. They gave various instances how even with an installed
capacity of more than 50,000 MWs, power demand of 34,000 MW was not meet by the
generators as they had taken their plants out for maintenance, all at the same
time. The California State put in claims of 8.9 billion dollars in refund from
such practices.

Federal Energy Regulatory Commission (FERC) went in details on these issues. The
evidence of price collusion and withholding was overwhelming. Transcripts and
emails at various levels of these companies showed that all of them knew exactly
what was going on and were responsible for creating the scarcity. Having
initially created a scarcity and the right conditions for profiteering, they
acted in tandem to push up the prices in the daily power exchange. Even when
price caps were announced, they quite often became the benchmark price for
selling power. The so-called power market had collapsed and all that
California witnessed was a rigged seller’s 

investigations through the last three years, have dealt with California’s melt
down grudgingly. They initially refused to put in price caps for the western
markets that included California, making it difficult for the state authorities
to deal with the crisis. After 2 years of investigations, they agreed last year
that there was indeed profiteering and asked certain generators and traders to
refund $1.8 billion. However, continuing investigations have clearly brought out
that it was not only the electricity market that was rigged, the gas market,
based on which electricity prices were calculated by FERC, was also rigged and
therefore FERC now admits that the refunds should be much larger than the $1.8
billion initially calculated.

are currently being written about how to create power markets that are free from
the problems witnessed in California. In all this, the fundamental property of
electricity is being lost sight of: electricity can not be stored and therefore
it is always possible to create an artificial shortage. The second
characteristic of electricity is that its demand cannot be easily reduced:
people have to use their lights, fans and gadgets, the factories have to run,
farmers have to pump water to survive. In a market where there is a shortage of
supply and inelasticity of demand, the competition among buyers is intense. This
is exactly what happened in California, where faced with real prospects of
massive powercuts, the grid authorities bought power, at 10-30 times the cost of
production of power. Incidently, the FERC investigations found that Enron of
Dabhol fame in India was the key player in all this and made more than half a
billion from inflating energy costs in California.



brings us back to the Electricity Bill. Unlike California, we are starting with
a deficit power scenario and therefore there is no prospect of this
“so-called” competition amongst generators benefiting the consumers.
In any case, all the new generating stations are producing power at higher costs
than existing plants, the private power producers having the highest costs. In
this scenario, the “market” reforms of the Bill will induce, not
competition, but profiteering with consumers shelling out higher and higher
If California with a surplus could not survive the power market, the
Indian states will face disaster with such reforms. Already, the blue print of
these reforms are being put in place. There will be private generators, who will
operate in a power market and “compete” to sell power to a grid
company. The distributors will also be private and will make a profit on 
bulk power bought from the grid company 
and supplied to consumers. The only entity that will be state owned will
be the state power grid company, who will buy high cost power and sell it at a
lower cost to the distribution companies: the state will underwrite not only all
the profits of the private companies but will make huge losses as the cost of
power goes up. And if people think this is only an assumption that I am making,
they have only to see the DVB  restructuring.
The Gridco is buying power at an average cost of more than Rs 2.00 per unit and
selling it at Rs 1.50 to distribution companies, generating huge losses for the
state exchequer.

aims of the Electricity Bill have nothing to do with making the power sector
efficient. It is to transfer huge assets to private hands who would then make
profits from the sector while the state continues to underwrite the losses.
In this talk about reforms, we have yet to hear one
word about how electricity is to be brought to rural areas. The Bill clearly
states that the objective of the sector is to make profits.

with the new profit oriented electricity sector, the rural areas and the urban
poor can be cut out from electricity use. This is the vital difference from the
vision of 1948 India that resulted in the Act crafted by Dr Ambedkar. The
original vision was expansion of the electricity sector to provide low cost
power for development. The current vision is making as much profits as you can
from the sector and never mind development.
The problem with such a policy
vision is that the electricity market is not like any other, and a profit driven
power market will collapse sooner than later. This is the lesson of California
that the Indian State has yet to learn.