California blackout: Why it happened

California tried to follow European power models

By BBC News Online's Richard Allen Greene

It seems incredible: a state whose name is synonymous with the hi-tech industry, movie-making and the good life shut down by the first mandatory power cuts since World War II.

How did America's richest and most populous state get into such a situation?

The problems stem from an ambitious - but poorly executed - plan to deregulate the energy industry.

In 1996, California began liberalising its market - a scheme which should, in theory, have meant lower electricity bills for consumers.

Based on similar successful programmes in the UK and Scandinavia, the California plan allowed customers to choose their energy supplier, and loosened controls on what power companies could charge.

No spare capacity

But there are important differences between Europe and California that the Americans did not take into account.

A power grid shows an error message

When the UK deregulated energy prices, it had excess capacity, and set up a pricing scheme to encourage producers to continue generating more power than the country used.

California, on the other hand, was facing a rapidly increasing energy demand and did not encourage excess production.

In fact, some blame the state's strict environmental laws for discouraging energy firms from building new power plants.

No new generating plants were built in the 1990s.

Poorly understood

Critics also argue that California did not do enough to explain deregulation to the public.

Few took advantage of the opportunity to switch to cheaper providers.

The combination of factors meant utilities charged more for power, upsetting consumers, who demanded political solutions.

In August last year, politicians responded by placing caps on what power companies could charge. That put the energy firms under financial strain.

Bankruptcy threat

Southern California Edison (SCE) and Pacific Gas and Electric (PG&E), the state's two major utilities, faced bankruptcy and asked for state and federal help.

Gray Davis is trying to get a handle on the problem

But before a deal could be agreed to bail them out, severe storms in January increased the demand for electricity in the state.

The storms broke the camel's back. Worried that SCE and PG&E would not be able to pay for increased supply, four major power generating companies refused to sell them more energy to distribute to consumers.

California Governor Gray Davis declared a state of emergency and ordered a state agency to buy power to pass on to the utilities.

But it is a quick-fix solution - which may have turned the cappuccino machines back on for the moment, but does not resolve the underlying crisis.