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Direct Access: The Energy Crisis

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In 1996, California became the first state in the nation to deregulate its retail electricity market. Known as direct access, deregulation initially was a success with low wholesale prices and more than two hundred electric service providers offering products to consumers.  However, the great experiment was not without its setbacks. 

Hampered by a shortage of electricity supply, market manipulation and Mother Nature herself, it would seem that direct access was being attacked on all sides.




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Spurred by unseasonably hot conditions and an over taxed electricity production capability, the California energy market saw a skyrocketing increase in wholesale electricity costs in the spring and summer of 2000. As prices continued to rise, the investor owned utilities were forced to pay increased wholesale market prices for electricity, but were unable to pass those costs to consumers because retail electricity tariff rates had been frozen as part of the deregulation rules. 

Electricity supplies to the state were tight and, as a result, rolling blackouts hit in January 2001 for two straight days. On January 17, 2001, Governor Gray Davis was forced to declare a state of emergency in response to the continued electricity crisis.  A later investigation, conducted by the Federal Energy Regulatory Commission, would find that Mother Nature wasn’t entirely at fault. Energy trading companies, such as Enron, contributed to the crisis by illegally restricting their supply to the point where spikes in power usage would artificially cause blackouts.     

Direct access, and Californians, had taken a hit – but the story doesn’t end there. Determined to bring stability back to the market, California was forced once again to be the pioneer. Next week in part 3 of our series on the California electricity market,  we will take a look at how California again became first in the nation, this time, for suspending deregulation. 

If you're interested in learning more about deregulation, download our complimentary eGuide: The Dollars and Sense of Deregulation. 

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Posted: July 15, 2015

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