Trading and Power Market Deregulation – The California Story October 2004 Return to Risk Limited Website at

California Power Market California Power Deregulation Cost Utilities About $20 Billion During 1999/2000 Crisis –Total Cost Is Some Multiple Of That The California Deregulation Approach Was Probably Doomed From The Start Damped Enthusiasm for Deregulation In Other States

Any Lessons From Californias Deregulation? Partial Deregulation Does Not Work The California Crisis Does NOT Prove That Deregulation Does Not Work Supply And Demand Will Prevail As The Drivers In The Market No One Is Too Big To Fail

Underlying Phenomena That Created The Flawed California Deregulation Strategy Powerful Political Forces Designed The California Deregulation Strategy –To Appease A Number Of Participants –With Provisions That Were Thought To Be Favorable To The 3 Big Utilities

A Recap Of The California Situation Lots Of Debate Over Why The Situation Occurred, But The Facts Of What Occurred Are These –Electric Power Prices In California Skyrocketed –Power Supply Shortages Resulted In Rolling Blackouts –The 2 Largest California Utilities Lost About $20 Billion, One Went Into Bankruptcy (PG&E), And The California Power Exchange (CalPX) Failed

Collateral Damage From The California Situation The State Economy Was Hurt –Lost Production During Repeated Blackouts –Loss Of Confidence In The Reliability Of The Grid –Businesses Considering Locating In California Reconsidered –Some Industry There Moved Production Elsewhere –Still A Factor That New Gov. Will Have To Address

Collateral Damage From The California Situation First Big Political Hit To Former Governor Davis, Who Was Then Considered A Presidential Contender –Political Factions Still Trying To Assign And Avoid Blame For The Debacle –Increased Reluctance In Congress Of Addressing National Electric Power Issues That Are Still Pending, Even After 8/03 Blackouts

Questionable Trading Practices Enron Collapse and Subsequent Investigations Revealed Market Manipulation –Results Are Increased Market Oversight What Were the Basic Trading Practices that Were Exposed? Did Trading Caused the California Debacle?

What Was Needed? Change Of The Deregulation Plan More California-Sited Generation Supply Price Signals To Users, So That Consumers Will Respond –Motivate Conservation –Encourage Energy Efficiency Projects Investments In Transmission Upgrades

Energy Policy US Energy Policy May Finally Change –Due To New Concerns About Excessive Reliance On Oil Imports –The California Debacle –The 2003 Northeast Blackout This Will Have Global Implications –In Oil & Gas, And In Power (e.g. Possible Repeal of PUHCA)