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In 2000 and 2001, one of the biggest, filthiest, most audacious and wide-scale con jobs ever perpetrated on a state population occurred in California. And even though many 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 was now governor.
It all began in 1996, with Republican Governor Pete Wilson. He and the state assembly, seeking to stimulate competition, pushed through a law (AB 1890) calling for the “partial deregulation” of the energy market. Not to point fingers, but if there were any justice in the world, Wilson would’ve been taken out and shot with a rusty bullet.
Basically, what happened in the wake of AB 1890, was that the energy companies, seeing the opportunity for astronomical 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. Things were good. There hadn’t been “blackouts” for 40 years.
But energy 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” formula raised its ugly head. Inevitably, the energy suppliers began taking steps to diminish supply and increase demand, albeit artificially.
In order to depress supply and raise the price, they began messing with the grid. They illegally shut down 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. Anything to create a shortage.
They exploited loopholes. Because California law allowed energy companies to charge higher fees when the energy they sold was produced out-of-state, they engaged in a form of “megawatt laundering” (analogous to “money laundering”), where they disguised the source—disguised it to make California-produced energy appear to have been produced out-of-state.
They also ran “overscheduling” scams. Essentially, this 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). The state had no choice. People need electricity. You do everything you can to provide it.
There were two other obvious problems. For one, with power now “scarce,” it forced the state to buy electricity on the “spot market,” the cost of which was beyond exorbitant. From April of 2000 to December of 2000, the wholesale price of electricity increased 800%. As the crisis 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 came up 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 deregulated, there was still a cap on retail electricity charges. In other words, despite being raped in the marketplace, the power companies weren’t allowed to pass any part of those increases to the consumer. So PG&E went belly-up. They went bankrupt. 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, “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 gained wisdom from the debacle, in 2001, officials from the LA Department of Water & Power met with the feds’ National Energy Development Task Force. At this meeting, the Department requested that they initiate price controls to protect consumers.
Alas, the Task Force refused. They insisted that deregulation remain in place. They took this position despite what happened in California, and despite the DOE’s subsequent findings. The chairman of that Task Force was Vice-President Dick Cheney.