Truckee Donner PUD feature: A look back at the California energy crisis | SierraSun.com

Truckee Donner PUD feature: A look back at the California energy crisis

Matthew Renda and Ardy Raghian
Special to the Sierra Sun

TRUCKEE, Calif. — Rolling blackouts, exorbitant prices and market manipulation prompted the California electricity crisis that began in 2000 and lasted two years, driving some of the largest utility companies in America into bankruptcy and contributing to the downfall of prominent politicians, including California Gov. Gray Davis.

Beginning in March 1998, the electricity market in California was deregulated in an attempt to drive down prices by allowing consumers to choose where they purchase power. Previously, consumers were restricted to purchasing power from local utility companies.

During the first two years deregulation prompted the desired effect, with the average wholesale price falling from $24 MWh (megawatts an hour) to roughly $19 MWh.

However, in May 2000, power supplies began to dwindle as a growing California economy demanded more energy. While PG&E and Southern CA Edison customers were protected by a rate freeze — to be expired in March 2002 and paying 10 cents kWh (kilowatts an hour) — the wholesale market price increased to more than 50 cents kWh.

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READ MORE: Locally, the Truckee Donner Public Utility District felt major impacts from the energy crisis, and it was driven to the brink of bankruptcy at the turn of the century.

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PG&E and Southern CA Edison, who supplied energy for a majority of California, found themselves headed toward bankruptcy, since they were forced to purchase energy on the wholesale market at high rates and were unable to recover their costs from consumers.

Meanwhile, wholesale market consumers complained about unjustified rates, prompting the California Independent System Operator to impose price caps. In response, power generators sold power out of state where there were no caps, reducing the supply for California customers.

By December 2000, the California wholesale rate was over $1,400 MWh, compared to the average price of $45 MWh in 1999 — a 3,000 percent increase.

Select private sector power generation companies realized by shutting down certain power plants for "maintenance," they could dramatically drive up the cost of wholesale prices and essentially force California to buy electricity at outsized price points.

Along with sharply escalating prices, many private energy companies engaged in market manipulation, which was at best within the rules but unethical, and at worst illegal.

Post-crisis investigations revealed Enron deliberately created both real and artificial shortages during the crisis in order to drive up prices and reap vast profits.

The architects of the Houston-based company, Jeff Skillings and Kenneth Lay, were later convicted of multiple felony charges relating to massive fraud.

Enron, in one example, bought power in California at lower capped prices, then resold the power out of state, then bought it back to resell to California at a huge markup — a practice labeled "Megawatt laundering."

Total energy costs for wholesale power skyrocketed from $7.4 billion in 1999 to about $27 billion from 2000 through 2001, imposing Californians with $40 billion in added costs.

Compelled to act, the Federal Energy Regulatory Commission in December 2000 removed price caps in California in an attempt to reestablish sales to the state.

With bankruptcy looming for utility companies forced to play the role of middleman, independent electricity firms like Reliant Energy were profiting handsomely, so much so that Reliant reported a 600 percent increase in earnings during its third quarter of 2000.

Electricity reserves began to fall below 1.5 percent, pressuring California to declare thirty-eight rolling blackouts, lasting 60-90 minutes, during the first six months of 2001 for rationing purposes.

Desperate to halt further blackouts, California Gov. Gray Davis signed an emergency order in January 2001, allowing the Department of Water Resources to purchase power on behalf of PG&E and Southern CA Edison to stop them from declaring bankruptcy. Their bad credit due to mounting debts to independent power producers left California with no other option.

A few days later, Gov. Davis signed yet another emergency legislation, directing the DWR to spend up to $400 million of taxpayer money to buy power from PG&E and Southern CA Edison.

About a month later, California was again pressured to approve a $10 billion power-buying plan to rescue PG&E and Southern California Edison from drowning in debt. In addition, California agreed to sign long-term contracts with generators at prices lower than the wholesale market. Bleeding $40-50 million per day buying electricity on the wholesale market, the state saw no other alternatives.

The rescue plan failed for PG&E, which was $8.9 trillion in debt by April 2001, and consequently had to file for bankruptcy. Slowly but surely, however, California's long-term contracts took pressure off the market, causing the amount of power traded on the market to decline substantially.

Realizing the flaws of deregulation, California ended retail competition and reintroduced regulations in September 2001, and in early 2002, the wholesale price returned to $30-35 MWh.

S. David Freeman, appointed as the Chair of the California Power Authority in the midst of the crisis, said in testimony to the federal government that one of the fundamental lessons of the experience is that "electricity is a public good that must be protected from private abuse."

When Vice President Dick Cheney was appointed as Chairman of the National Energy Task Force in January 2001. Cheney subsequently met with various officials that asked for price controls to protect consumers. Those requests were denied.

Later, California Sen. Dianne Feinstein met with Cheney to ask for similar measures to be undertaken. She later remarked that it was clear from the amount of times the vice president glanced at his watch he was eager to leave the meeting. Ultimately, she was rebuffed as well.

Gov. Davis, who was widely criticized for his perceived failure to respond to the crisis rapidly and decisively, said his hands were tied by the indifference of federal regulators.

"We got no help from the federal government," he said. "In fact, when I was fighting Enron and the other energy companies, these same companies were sitting down with Vice President Cheney to draft a national energy strategy."

— Matthew Renda is a former reporter for the Sierra Sun and North Lake Tahoe Bonanza and currently is a Santa Cruz-based writer. He may be reached for comment at matthew.renda@gmail.com. Ardy Raghian is a fourth-year undergraduate student and editor at City on a Hill Press, the student-run weekly at University of California, Santa Cruz.

EDITOR’S NOTE | Information and statistics in the below story were gathered from the following sources, among others: The National Museum of American History website, Senator David Freeman’s testimony delivered before the Subcommittee on Consumer Affairs, Foreign Commerce and Tourism of the Senate Committee on Commerce, Science and Transportation on May 15, 2002. Senator Dianne Feinsten’s quote comes from a New York Times interview conducted in 2002, and Governor Gray Davis’s quote is from a speech at UCLA in 2003.