ne Economist who Turned Out the Lights in California? Applicable Concept: price ceiling regulation ulong కుమఖింబ 0 This ton is In order to keep electric- Facing shortages from both of highest demand, combined ty cheap for its state, increased demand and decreased with a daily regime of roling the California legislature supply, California utilities had no cam zero blackouts, and calls for conserva- tion. In April 2001, Davis aban- doned the 1996 price ceiling, thus sharply increasing the retail on does in 1996 set a retail ceiling choice but to buy electricity on price of 10 cents per kilowatt- hour. Moreover, no new power- tenfold over their normal levels. generating plants were built Since customer rates were capped, electricity price. during the 1990s. The plan was to require utilities to sell their power plants and import electricity as needed from the "spot market" quickly found themselves facing through high-speed transmission bankruptcy, and this threat caused lines from other states. In the de- additional spot rate increases. regulated wholesale electricity Duke Power Company of North market, a spot market is one in Carolina, for example, stated that which the price of electricity is de- 8 percent of its spot price was a termined by supply and demand premium to cover the risk of sell- conditions each hour. The stage was set for the forces might not pay their bills. A subse- of supply and demand to "turn out the lights." First, demand soared Energy Regulatory Commission during a heat wave in the sum- egulated the spot market as prices soared the price paid by consumers did not cover what the utilities were ANALYZE THE ISSUE paying for electricity. The utilities Draw a graph illustrating California's electricity crisis. Put the label "Price of electricity (cents per kilowatt-hour)" on the vertical axis and "Quantity of electricity (megawatts per hour) on the horizontal axis. As explained in Chapter 4, draw the changes in demand and supply for electricity in California described above. [Hint: Begin the graph in equilibrium below the price ceiling.] ing to California utilities that quent investigation by the Federal (FERC) reported evidence that power companies, such as Enron, on their air conditioners. Second, developed strategies to drive up there was a leftward shift in supply. prices. High natural gas prices increased the cost of producing electricity in Davis, who was governor of all states. Also, low snowpacks and California at the time, called for a drought in the Pacific Northwest more price caps. He convinced reduced the capacity of hydroelec- the FERC to cap wholesale tric dams in this region. mer of 2000 as consumers turned Faced with this crisis, Gray prices in the West during hours