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Another California?
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There’s talk of a California “meltdown” in Illinois. What happened in California? It was NOT all the result of manipulation by unscrupulous power marketers.
You hear that power marketers were behind it all. That’s simply NOT true. It was much more complex than that. What is similar about California to the potential situation in Illinois is that the utilities had a revenue shortfall―a cash crisis because they were paying out more for power than they were bringing in as revenue.
Here a step-by-step explanation of what happened in California:
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As part of the restructuring of the power markets in California, caps were set on utility electric rates.
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These caps prevented utilities from recovering the actual costs they incurred to supply power to customers. As is the case in Illinois where utilities own very little or no generation, many California utilities divested their generation.
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As power prices went up, the utilities’ costs to buy power exceeded the rates they could charge their customers. Eventually, those utilities did not have adequate revenue to cover operating cost, which led to plummeting credit ratings. Then, due to the credit risks of these utilities, power suppliers charged the utilities even higher prices for the power they needed to purchase.
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Ultimately the utilities could not continue to incur more costs than their revenues covered. This situation led to the financial impairment of some of the utilities, which caused at least one California utility to declare bankruptcy.
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The “meltdown” phrase refers to the declining financial health of the utility to a point that required these utilities to seek financial protection from their creditors. In any business, if revenues do not cover costs, the business cannot continue to operate. In the end, the state of California had to step in and buy power on behalf of the utilities with the taxpayers ultimately footing the bill―a large bill.
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