The role of demand underscheduling in the California energy crisis

The lack of demand response to rapidly increasing prices in the California electricity market in 2000 and early 2001 has been identified as one significant factor in the descent of that market into dysfunction. Only consumers in San Diego saw their bills increase with the increase in spot market costs in the state, and they saw it after the fact. Less noticed and now hotly denied was the effect of the day-ahead demand bidding behavior of Pacific Gas & Electric (PG&E), specifically, on the disequilibrium and ultimate collapse of the California electricity market. The objective of this paper is to evaluate the impact of PG&E's bidding behavior during the crisis. The paper will examine PG&E's underscheduling of load through the creation and bidding of hourly demand curves that bore no relation either to the realities of inelastic demand within the service territory or to the spatial distribution of that demand within the state. The paper concludes that the silent initiator of the California crisis was the economically rational, but structurally destabilizing, bidding behavior of PG&E in their effort to shift purchased energy from the day-ahead to the real-time market. This shift was neither anticipated by the designers of the market nor effectively responded to by California or Federal regulators when its impact was identified.