Why did California Electricity Crisis Occur? A Numerical Analysis Using Multi-Agent Intelligent Simulator

During the summer (2000), wholesale electricity prices in California were approximately 500% higher than those during the same months in 1998-1999. The price hike was unexpected by many policy makers and individuals who were involved in the electric utility industry. They have been long wondering whether the electricity deregulation policy (1996) produced benefits of competition promised to consumers. This study proposes a use of a multi-agent intelligent simulator (MAIS) to numerically examine several reasons regarding why the crisis has occurred during May 2000-Janurary 2001. The MAIS explains the price fluctuation of wholesale electricity during the crisis with an estimation accuracy (91.15%). We also find that 40.46% of the price increase was due to an increase in marginal production cost, 17.85% to traders’ greediness, 5.27% to a real demand change and 3.56% to market power. The remaining 32.86% came from other unknown components. This result indicates that the price hike has occurred due to an increase in fuel prices and real demand. The two market fundamentals explained 45.73% (= 40.46%+5.27%) of the price increase. The responsibility of energy firms was 21.41% (= 17.85%+3.56%). The numerical evidences are different from the very well-known research of Joskow and Kahn (2002), which has attributed the exercise of market power by large energy firms.