What Lessons Can California Learn From Its Energy Crisis 20 Years Ago?

Wildfires. Heat waves. A massive energy utility emerging from bankruptcy.

California's electric grid is under considerable strain, with energy operators facing mounting challenges in consistently keeping the lights on for millions of residents.

But this is hardly the first time the state has faced an energy predicament.

Twenty years ago, in 2001, a recently deregulated California energy market suddenly found itself without enough juice to power the state. Rolling blackouts shut down businesses, PG&E filed for bankruptcy (the first time around), the state’s economy contracted and the administration of then-Gov. Gray Davis spiraled into crisis.

Enter Enron Corporation, a Houston-based energy company whose brokers created an artificial electricity shortage by taking power plants offline, thereby raising prices by 800% or more. The firm ultimately unraveled when whistleblowers revealed that its managers were cooking the books, but not before the company wreaked havoc on energy markets, including in California.

Early this week, KQED Forum guest host Lily Jamali spoke to former government officials and a veteran journalist to gauge what the state may have learned from that tumultuous period.

Forum guests included:

Loretta Lynch, the former president of the California Public Utilities Commission

Steve Weissman, an energy expert at the UC Berkeley Goldman School of Public Policy, who directed the CPUC's initial investigation into the 2001 energy crisis

Rebecca Smith, a Wall Street Journal energy reporter, who was a Pulitzer Prize finalist for her coverage of the 2001 crisis

Gray Davis, the former governor of California

The following interview has been edited for length and clarity.

What was the energy crisis like from where you sat? It's easy to see now what a calamity this was. But was the gravity of the problem clear to you in those early days?

Gov. Gray Davis: That was the whole problem, we couldn't figure out what was creating the blackouts. So six months after I left office, a video was released where Enron ordered that the power serving the city of San Francisco would go down and there were traffic accidents, and computers didn't work and all kinds of problems ensued.

The reason that date is important, it was four days after a whole bunch of us met in Washington [D.C.] to see if there couldn't be some sort of settlement arrangement. And I had two Republicans and two Democrats and all five of us rejected the only proposal that Enron and the other energy providers suggested, which was to raise rates ... five to 10 times what used to be paid for electricity.

And none of us wanted the ratepayers to bear that burden because the ratepayers were not pushing for energy deregulation. That was the energy company. So I suspected all along that Enron was up to no good. I never thought they would be ordering blackouts, but that's exactly what they did. And why did they do it? To drive up electricity prices.

Rebecca Smith: I was actually worried about the California market from the moment it was deregulated. That happened, ironically, on April Fools Day in 1998. I was worried because I had watched the Legislature put together Assembly Bill 1890, which was the bill that deregulated California's retail market. And after that law was passed, I interviewed people about the contents. I went through it literally line by line to try to understand everything that was included in that bill. And what I discovered was that the number of people in the Legislature whom I felt could actually show that they had a full understanding of that law, you could count the number of people on one hand. And I found that very worrisome, even though the thing passed nearly unanimously.

It sounds like you had a fairly clear view of just how dire the situation was, perhaps sooner than a lot of other players.

Loretta Lynch: That came from the private sector. I was a white-collar criminal defense lawyer before I joined the state government, so I knew a criminal when I saw one, and I knew that Enron was engaged in criminal activity. The question to me was, was it a criminal conspiracy? And it turned out, yes, it was. The problem is, the law that Rebecca Smith talked about almost let the criminals win. They designed the electricity market, which was brand new in the United States then. It was by them and they operated it. So not surprisingly, they got away with all sorts of fraud and it took government a really long time to catch up to them.

The 16 years of Republicans before Gov. Davis was elected intentionally starved the regulatory agencies so that they would not be able to catch the crooks from 20 years ago, Enron and its cronies took advantage of California's new electricity markets to defraud those systems for profit. And that severely damaged California's economy and frankly, helped the historic recall. The political and economic fallout of their fraud was vast.

Did you get the sense that there was corruption involved in this on the part of the state Legislature and on the part of regulators? 

Rebecca Smith: No, I would not say I felt there was corruption, I felt what we saw was what we always see, which is that well-heeled interests that have money and that have an economic stake in outcomes are the most active forces in crafting legislation and participating in rulemaking proceedings. I mean, they're the ones who have the time and the money to be active participants.

So what we really need is to make sure that the organizations and agencies that are responsible for representing consumers, that they also receive the resources they need. We need the ratepayer advocate office of the U.S. and these other institutions to be well resourced. They have to be in the game. They have to be representing the rest of us.

How can we prevent future blackouts?

Loretta Lynch: Other Western states and other local government-owned utilities within California are not blacking their customers out and are not charging these exorbitant prices. This isn't about climate change — the blackouts — because they all face droughts, wildfires and too little water to run their hydro systems.

The difference here is, California turned its electricity system over to a private corporation that answers to the feds. And we created an electricity market that has become a casino for the electricity traders. And we all pay and pay and pay. We have to shut down that casino or protect our people and our businesses.

I know from speaking with fire survivors in places like Paradise, in Sonoma County, they want nothing more than to not have to have PG&E provide their power. How realistic is it, this idea of decentralizing or having people kind of do their own thing? 

Steve Weissman: Well, as it happens, UC Irvine is now really on the cutting edge in terms of trying to develop its own internal reliability by creating what people refer to as a microgrid, which would have a lot of the features like renewable energy sources and storage and the ability to relate to the bigger grid, but to isolate when there's a problem on the bigger grid.

There's a difference in terms of what reliability means to different kinds of customers. And there is now, fully, the technological capability of having these microgrids not only serving something as holistic as one university campus, but serving broader communities, taking care of emergency services within a particular city, for instance.

But we have a challenge in the state law, which was designed to protect the monopoly status of traditional utilities and doesn't allow for this kind of, what I'd call, a community-based microgrid system, to be installed without being encumbered with all the regulations that traditional utilities would have. And efforts to deal with this in the Legislature have been quashed.

I think there's a tremendous amount of concern, especially among the utility workers' representatives, that this would somehow lead to a loss of good union jobs. And I think that's not a necessary result.

But in the meantime, the state is spending, through the energy commission, millions of dollars to promote various kinds of pilot examples of these microgrids. And I think there's no doubt that you could not only improve local reliability by having that kind of structure, but you also could improve the reliability of the broader grid by having many, many decentralized energy sources to work with.

Listen to KQED Forum to hear the full episode.