Enron, rolling blackouts, and the market's first great failure.
The summer of 2000 brought a confluence of disasters to California's electricity market. A drought reduced hydropower output from the Pacific Northwest, which California depended on for cheap imports. A heat wave drove air conditioning demand to record levels. Natural gas prices — which set the marginal cost for most generators — spiked due to pipeline constraints.
Into this stressed system stepped traders at Enron and other energy marketing firms, who had discovered that California's market rules contained extraordinary opportunities for manipulation. CAISO's congestion management system could be gamed to create artificial shortages. The "load shift" strategy moved power from the real-time market to a congestion relief mechanism that paid higher prices. "Death Star" created phantom congestion to collect payments for "relieving" it. The strategies had names that should have been alarming to anyone paying attention.
Wholesale electricity prices that averaged $30/MWh in 1999 hit $500/MWh in the summer of 2000. In December 2000, hourly prices briefly exceeded $1,400/MWh. The utilities — required to buy power in the spot market with retail rates frozen — were spending hundreds of millions of dollars more than they were collecting. Pacific Gas & Electric declared bankruptcy in April 2001. Southern California Edison came within weeks of the same fate.
California spent an estimated $40–71 billion in excess electricity costs during the crisis — an enormous transfer of wealth from California ratepayers and taxpayers to generators and traders outside the state.
On January 17, 2001, for the first time since World War II, California experienced rolling blackouts — not from storms or equipment failures, but from a market failure. Hundreds of thousands of customers lost power for hours while the state's grid operators scrambled to balance supply and demand. The blackouts continued, intermittently, through the spring.
Governor Gray Davis declared a state of emergency and signed long-term contracts at above-market prices — contracts that locked California into high-cost power for years after the crisis ended. The political fallout was severe. Davis was recalled in 2003, partly on the strength of anger over electricity costs.
The California crisis generated an enormous literature of post-mortems. FERC ultimately found that generators and marketers had manipulated the market and ordered hundreds of millions in refunds. Market manipulation became a federal offense. CAISO rewrote its market rules from scratch.
But the deeper lessons were more contested. Was the crisis fundamentally about market manipulation (fixable with better rules) or about flawed market design (requiring structural reform)? Different stakeholders drew different conclusions — and in some states, those debates continue today.
January 17–18, 2001, California. For the first time since World War II, the California ISO ordered rolling blackouts across the state — not due to storms or equipment failures, but because the wholesale electricity market had collapsed. Sections of San Francisco, Silicon Valley, and Sacramento went dark for up to two hours with only minutes of warning, affecting roughly half a million customers. Governor Gray Davis declared a state of emergency. The total wholesale electricity cost for December 2000 alone reached $9 billion — compared to roughly $500 million for December 1999.
Washington Post, "California Orders Rolling Blackouts," January 18, 2001