Eighteen months ago the California energy crisis captured the world's attention. Many saw the crisis as the death knell for customer choice and a deregulated power market – a conspiracy of generators and traders to extort short-term profits at the expense of Californian customers. Others saw the crisis as a predictable response to California's notoriously poor energy market design. Now, in its second year, the California energy crisis has taken new forms and the challenges are even greater.

The energy crisis that began in the autumn of 2000 had multiple causes. First, the designers of the restructured Californian market had neglected to repeal the law of supply and demand. Although restructuring was partly a response to the recession in California in the mid-1990s, by 2000 California was enjoying an incredible energy-intensive high tech boom. Demand far outstripped supply and no new power plants had been built in more than a decade.

Second, the California Public Utilities Commission (CPUC) mandated a market in which the utilities had to buy and sell power only in the spot market. Since the CPUC would not assure the utilities that portfolio purchases would be deemed reasonable, and since purchases through the Power Exchange (PX) were reasonable, utilities took the expedient route and continued their over-dependence on the spot market. Third, there was a severe drought in the Pacific Northwest. This had a devastating effect on supply in California, a net importer of up to 20% of its electricity. Finally, with retail rates frozen until 2002, there was no price elasticity of demand.