Sometime during 200-2001 the two major utilities in California went bankrupt. What happened there? The Californians were trying to restructure their electricity market towards more liberalisation. They had liberalised the generatin part of the market, while leaving the retail part regulated and thus selling electricity at a fixed cost. Californians being very green, were not happy to have dirty coal power plants in their backyards. The state was dependant on electricity sourced from elsewhere.
Enter a summer that is hotter and dryer than ususal, hydro dams are not producing much and ACs are turned on full blast. Gas prices are going up as well and the wholesale electricity market price jumps up like crazy. So what happens? The retailers are now buying at the higher price but having to sell at the lower regulated price. Eventually one of them goes bankrupt. The second one tried to be shrewd, it managed to sign a contract for a long term power purchase at a very high discount to the high price. Give it some time and things come back to normal and the electricity price drops again. So now the second utility is stuck with this contract and goes bankrupt as well. It is really not a good idea to regulate a part of the supply chain while liberalising another part.
The details of the story really go much deeper than that, and if you want to learn more, I suggest you download this paper. The paper not only discussed the California story but also went through some interesting properties of electricity markets and how they are structured. One of the more interesting ideas that the paper had was that buying power in a long term contract agreement does not systematically mean lower power prices than buying from the spot market. Because in such a case, an arbitrage opportunity would arise, and someone would just buy long term and sell spot making a profit. So overall the price you pay buying long term is the same as the price you pay buying spot. The paper also sugges some methods to help avoid such crisis again, an interesting read for sure.
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