Five years ago this winter, California's wholesale power market imploded. Power prices soared. California residents endured weeks of rolling blackouts. Two California utilities were forced into bankruptcy even as their suppliers -- independent power companies -- reaped huge windfalls.
Five years later, the tables have turned. Formerly bankrupt California utilities are profitable while formerly robust power generators scramble to survive. Established power suppliers like Dynegy, Williams, El Paso Energy and Duke have sold assets at fire-sale prices and halted merchant energy trading. Two others, Mirant and NRG, went into bankruptcy, and PG&E's energy trading unit disappeared altogether. What happened?
Some explain the industry's turmoil as a perfect storm of macro-economic and industry-specific events. Seduced by price spikes in California and the eastern U.S., power developers rushed to increase the number of new plants. But too many plants were built and many came online at the worst moment -- just as the U.S. economy entered its post-9/11 recession. Enron's collapse in late 2001 made a bad situation worse, given Enron's central role as an intermediary in thinly traded forward power markets, where most one-month to one-year power deals were conducted. Power companies that sold to Enron before it imploded rushed to replace lost revenue, only to find that erstwhile buyers -- chastened by Enron's collapse -- now restricted how much business they would do with one entity unless they received costly credit guarantees.
This narrative suggests the power industry's post-California funk was a one-time event, and on the surface, the industry does appear healthier. Rising fuel and power prices since mid-2004 have translated into higher profits for utilities and owners of low-cost nuclear and coal plants. But beneath the surface, more fundamental problems remain. Independent power generators are still struggling.
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