To what extent was the policy of deregulation in the energy market responsible for the California electricity crisis?

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Extended EssayEconomics HLAbstractThe topic I chose to investigate for this extended essay was the manipulation of the deregulated Californian energy market by the Enron Corporation. This extended essay focuses on the economic aspect of market failure in the energy market due to the deregulation and consequent manipulation of the market rather than the business aspect of Enron Corporation.

Contents PageTitle Page……………………………………………………….……1Abstract……………………………………………………………...2Contents Page………………………………………………….…….3Introduction………………………………………………….……...4Deregulation Process…………………………………………….….51.Changes in Market Structure………………………………....52.Effects of Deregulation……………………………….………7Analysis of Factors………….………………………………….……81.Market Manipulation…………………………………….…....82.Price Controls…………………………………………….…...93.High Temperatures…………………………………………...10Market Failure………………………………………………………12Conclusion…………………………………………………………...14Bibliography…………………………………………………………16Appendix……………………………………………………………..17IntroductionIn the year 2000 and 2001 the state of California in the United States of America faced an energy crisis known as the California electricity crisis. This crisis was directly related to the 'deregulation' of the Californian energy market in 1998. During this crises there were several 'rolling blackouts' and very high prices for electricity.

While in Economics class we were shown a documentary film called Enron: The Smartest Guys in The Room, this film investigates the bankruptcy of Enron Corporation and its participation in the California crisis. I was immediately enthralled by the depicted exploitation of the energy market. Moreover the film showed the effects of the crisis on the common people who had to suffer power outages and ridiculously high prices for a basic necessity such as electricity. Something as essential as electricity is many a times taken for granted and the film mostly investigated the Business side of the crisis and Enron's involvement, however it also stirred my interest to examine the economic factors.

The deregulation of the California energy market is essentially an example of a supply-side policy. These policies are used to shift the supply curve by increasing long run aggregate supply. In California the deregulation was intended for increasing competitive forces in the energy market. The deregulation mainly consisted of privatizing the power plants by selling them from Investor Owned Utilities (IOU's) which are mostly public firms such as PG&E to private firms such as Enron. The idea behind this policy was to allow private firms to run power plants and produce energy which they would compete against each other to sell to distributors. By removing government intervention the policy aimed to allow firms to allocate resources and factors of production more efficiently. This would help them decrease costs and increase profits which would entail the potential to increase supply.

Overall, this policy of deregulation was intended to be beneficial to the consumers of electricity in California. It aimed to increase supply and reduce the price for electricity, however the opposite happened and the prices of electricity skyrocketed combined with inadequate supply of electricity to meet the demand. Therefore, I will be investigating to what degree were the policy of deregulation and its flaws responsible for the manipulation of the market and the consequent California electricity crisis?Deregulation ProcessChanges in Market StructureIn the electricity market in California prior to the deregulation the electricity was provided in a vertically integrated system by a few companies. This system consisted of a two major companies namely; Pacific Gas and Electric (PG&E) and South California Edison (SCE). These two companies were allowed to operate under monopolistic conditions and the electricity market had a duopoly structure as there were two large firms which dominated the market.

Prior to the deregulation of the...
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