How the Energy Boys Took Down California

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In 2000 and 2001, one of the biggest, filthiest, most audacious con jobs ever perpetrated on a state population occurred in California. And even though the citizens chose, reflexively, to blame the “government,” the entire fiasco (other than the state assembly stupidly laying the groundwork for it) was invented and put into play by the private sector.

And once the smoke cleared, and people realized what just happened, California had lost roughly $40-$45 billion, its first governor in history had been recalled, the state’s second-largest energy company PG&E (Pacific Gas & Electric) had gone bankrupt, and Austrian steroid hound Arnold Schwarzenegger had become governor.

It was all put into motion in 1996, by Pete Wilson, the state’s Republican Governor. Wilson and the state assembly, believing it would stimulate competition, pushed through a law (AB 1890) calling for the “partial deregulation” of the energy market. This will go down as one of the worst ideas since the Ford Edsel.

Basically, what happened as a result of AB 1890 was the energy companies, seeing the opportunity for windfall profits, began manipulating the market in ways that no one had ever witnessed or even imagined. They did it by creating shortages where none existed. Before this began, California had a generating capacity of 45 gigawatts (GW). Demand was still only 28GW. Energy-wise, things were good. There hadn’t been “blackouts” for 40 years.

But electricity suppliers (notably Enron, a Texas company) had devised a plan. With deregulation of wholesale pricing now in effect, the hoary, time-honored “supply and demand” dynamic raised its ugly head, and inevitably, the energy suppliers began taking steps to diminish supply and increase demand, albeit artificially.

In order to jack up the price, they began tweaking the power grid. They illegally shut down critical pipelines, and intentionally took power plants off-line during periods of peak demand by pretending that these facilities needed “maintenance.” Of course, it was all a lie, and it was all illegal. Anything to create a shortage.

They not only exploited loopholes, they engaged in criminal acts. Because California law allowed energy companies to charge higher fees when the energy they sold was produced out-of-state, they invented a form of “megawatt laundering” (analogous to “money laundering”), where they disguised its source—disguised it to make California-produced energy appear to have been produced out-of-state.

These companies also devised “overscheduling” scams. Essentially, these consisted of purposely overscheduling the transportation of electricity along power lines in order to get the state to pay them a lucrative “congestion fee” for willingly alleviating the congestion (even when they had no intention of using them). Facing one of its greatest crises in history, the state had no choice but to do whatever it took to supply its citizens with electricity.

With power now deemed “scarce,” the state was forced to buy electricity from the “spot market,” the cost of which was beyond exorbitant. As a result of continued manipulation, the spot market was now sky-high. Consider: From April of 2000 to December of 2000, the wholesale price of electricity increased 800%. As the situation worsened, the state finally appealed to the federal government.

In December of 2000, California requested that FERC (Federal Energy Regulatory Commission) institute a wholesale rate cap. The Commission responded with a tepid “flexible cap” which called for $150 per megawatt-hour. Incredibly, on that day—December 15, 2000—California was paying more than $1400 per megawatt-hour. Exactly one year earlier, an average megawatt-hour had cost them only $45. It was insane.

Another problem: Even with wholesale prices being recklessly deregulated, there still remained a cap on retail electricity charges. In other words, despite being raped in the marketplace, the power companies weren’t allowed to pass on any part of those increases to the consumer. This loss of revenue caused PG&E to go belly-up. And, in 2001, Southern California Edison came precipitously close to doing the same.

Of course, “partially deregulating” the market did not lower costs. Indeed, even without the naked manipulation, it’s doubtful energy costs would have decreased. According to a Department of Energy (DOE) study conducted in 2007, it wouldn’t have. Here’s a quote: “Retail electricity prices rose much more from 1999 to 2007 in states that adopted deregulation than in those that did not.”

The crisis reached its zenith on January 17, 2001, when Governor Davis declared a state of emergency, and began approving the dreaded rolling blackouts. While Enron and others were reaping astronomical profits by swindling California, the state was flirting with financial ruin. Besides inconveniencing millions of people, the blackouts more or less finished Gray Davis. He was recalled. Arnold became governor.

Hoping, at the very least, to have learned a lesson from the debacle, in 2001, officials from the LA Department of Water & Power met with the National Energy Development Task Force. At this meeting, the Department formally requested that the federal government initiate price controls to protect consumers.

Alas, in its wisdom, the Task Force refused. They stubbornly insisted that deregulation remain in place. Amazingly, they took this hardline position despite what happened in California, and despite the DOE’s subsequent findings. The chairman of that Task Force was Vice-President Dick Cheney.

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