California’s Power Market Collapse And The Electricity Bill

LAST 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.


Meanwhile 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.

The 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.

The 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.


The 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.

The 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  paradise.

FERC’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.

Reams 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.


This 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 sums. 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.

The 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.

Presumably, 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.