Okay, let's time travel for a second. I want
you to picture California at the absolute turn
of the millennium. It's the year 2000. Very specific
vibe, yeah. Right. The dot -com bubble hasn't
quite burst yet. It's leaking a little, maybe.
But the optimism is still just off the charts.
Oh, completely. You've got pets .com, sock puppets
on TV. People are becoming millionaires overnight
in Silicon Valley. California isn't just a state.
It's like... The engine of the entire world.
It really was. I mean, if California were a country
in the year 2000, it would have been the fifth
largest economy on the planet. Wow. Bigger than
France. Bigger than Italy. It was the absolute
golden child of the global economy. Exactly.
It's the home of the future. High tech, high
growth, high hopes. But then you go home after
a long day at your startup. You flip the light
switch. And nothing. And nothing happens. And
silence. Lights don't turn on. The traffic lights
outside are dark. People are getting stuck in
elevators. A manufacturing. that are supposed
to be building that future just grind to a halt.
The entire grid crumbles. It sounds like the
plot of a dystopian novel, honestly. A post -apocalyptic
movie. But for millions of people, this was just
a Tuesday. So today we are doing a deep dive
into the 2000, 2001 California electricity crisis.
Sometimes it's called the Western U .S. energy
crisis. Right. And we have pulled a massive stack
of source material for this. We've got government
reports from FERC, historical records, media
coverage from the time, and some truly wild transcripts
from inside the energy trading floors. And the
mission here is really to solve a mystery. Because
on paper, this... This just shouldn't have happened.
That's the thing that gets me. I mean, we aren't
talking about a developing country with crumbling
infrastructure. We're talking about the richest
state in the richest country on Earth. Yeah.
How does a place like that just run out of power?
Well, that was the narrative at the time, right?
We ran out or everyone turned on their hair dryers
at once. Yeah. But when you actually dig into
these documents, you realize that running out
wasn't really the problem. It was something much
more sinister. It was a perfect storm. It was
this mix of good intentions gone wrong, some
genuinely bad luck with the weather, and then,
you know, waiting in the wings, some of the most
ruthless corporate greed we have ever seen in
modern history. We're talking about a crisis
that caused an 800 % spike in wholesale electricity
prices. 800%. It's just an insane number. It
bankrupted Pacific Gas and Electric, which is
a massive utility. And it cost the state somewhere
between $40 and $45 billion. That number is hard
to even wrap your head around. $45 billion essentially
just evaporated from the California economy.
So buckle up. We're going to unpack how this
happened, who the villains were, and there are
definitely villains, and why the lights finally
came back on. But to understand the collapse,
we have to understand the setup. We have to go
back to 1996. The year of the Macarena. And the
year of deregulation. So set the stage for us.
What was happening in the California state legislature
in 1996? Well, the mood was, and this is important
to remember, it was bipartisan optimism. This
wasn't one party shoving something down the other's
throat. OK. You had Democratic state Senator
Steve Peace, who is often called the father of
deregulation. And you had Republican Senator
Jim Brulte. They were working together with a
Republican governor, Pete Wilson. And what was
the problem they were trying to solve? Like,
why mess with the electricity system at all?
The argument was that California's energy prices
were too high. Industrial companies, factories,
big businesses, they were complaining. They were
saying, look, we pay way more for power here
than they do in other states. It's hurting our
competitiveness. And the solution they came up
with was the free market. Exactly. The prevailing
economic theory of the 90s was that monopolies
are bad and competition is good. Up until this
point, utilities like PG &E were monopolies.
They owned the power plants, they owned the wires,
and they sent you the bill. The government told
them what they could charge. It was boring, stable,
but maybe a little inefficient. So the politicians
thought, hey, if we break up the monopoly and
let companies compete to sell electricity, prices
will go down. It's economics 101. If you have
10 people trying to sell you lemons, the price
of lemons should drop. So they passed Assembly
Bill 1890. AB 1890. The legislation that launched
a thousand lawsuits. And it passed unanimously
in the Senate. Unanimously. Everyone thought
they were geniuses. The goal was to lower energy
costs. But, and here's the massive but, they
didn't actually create a free market. They created
a partial deregulation. Right. And this is the
fatal flaw. I mean, if you take nothing else
away from this deep dive. You have to understand
this mechanism. They called it the market design,
but in hindsight, it looks more like a bear trap.
OK, so let's break it down. But there are two
markets here, wholesale and retail. Correct.
So the wholesale market is where the utilities
PGE, Southern California Edison, San Diego Gas
and Electric buy the actual electricity. They
buy it from the power plants. The legislation
deregulated this side. Meaning the price could
float. Totally uncapped. based purely on supply
and demand. If it's a hot day and power is scarce,
the generators can charge whatever they want.
OK, so that's the wholesale side. What are the
retail market? That's you and me. That's the
bill that comes to your house every month. The
politicians were terrified that voters would
get mad if their bills fluctuated wildly. So
they kept the retail market heavily regulated.
They capped the price. They froze it. Wait. I
want to make sure I'm hearing this right. The
utilities were forced by law to buy electricity
on an open market where prices could go to the
moon. But they were forbidden by law from raising
the prices they charge their customers. That
is exactly it. That's the squeeze. That just
sounds. OK, let's use the analogy. The source
material mentions the lemonade stand concept.
It's the best way to visualize it. So imagine
you run a lemonade stand. The government passes
a law that says you must sell every glass of
lemonade for exactly one dollar. You cannot charge
a penny more. OK, I can live with that as long
as lemons are cheap. Right. And for a while,
lemons cost you 50 cents. You buy a lemon for
50 cents, make juice, sell it for a dollar. You
make a 50 cent profit. Everyone's happy. But
then something happens to the lemons. Right.
The price of lemons goes up. Maybe there's a
drought shortage. Suddenly, the lemon farmer
tells you, hey, lemons are ten dollars now. But
I still have to sell the juice for $1. By law,
you are a public utility. You have an obligation
to serve. You can't just close up the stand.
So for every single glass you hand over the counter,
you are losing $9. There it is, a recipe for
instant bankruptcy. I don't get it. Why on earth
did the utilities agree to this? PG &E had lawyers.
They must have seen this coming. You would think
so. But they made a gamble. There was this issue
called stranded costs. Basically, the utilities
had made some bad investments in the past, mostly
on these really expensive nuclear plants. And
they wanted the state to help them pay those
off. So the deal was basically. We accept the
price cap for a few years. And in exchange, you
let us add a surcharge to everyone's bill to
pay off our old debt. So they bet that wholesale
prices would stay low. They bet the house on
it. They looked at the historical trends and
thought power is cheap. It's going to stay cheap.
We'll pocket the difference and pay off our debts.
No problem. And for a couple of years, from 96
to 99, it looked like they were right. It worked
perfectly until, of course, it didn't. Which
brings us to section two, the perfect storm.
Because you can set a trap, but someone or something
still has to step into it. Exactly. And before
we even get to the Enron traders and the criminal
stuff, we have to look at the boring physical
realities of the grid in the year 2000 because
the system was already redlining. Yeah, I was
looking at the population stats in the notes
and it's staggering. Yeah. California grew by
13 % in the 1990s. That's millions of people.
And not just people, tech people. This was the
dot -com boom. Right. Server farms were popping
up everywhere. People were buying computers,
massive monitors, air conditioners. I mean, the
whole economy was on fire. Retail sales of electricity
went up by 11 % in that same decade. So demand
is just skyrocketing. And in a normal functioning
market, when demand goes up, What happens to
supply? You build more supply, you build more
power plants. You would think. But in the entire
decade of the 1990s, California built zero major
new power plants. Zero. Effectively zero. In
fact, the generation capacity of the state actually
decreased by 2 % during the 90s. Wait, how does
capacity go down? You don't just lose a power
plant. Well, old plants get retired. Environmental
regulations get stricter. So some of the dirtier
plants get shut down. And honestly, because of
all the deregulation talks, investors were scared.
Nobody wanted to spend $500 million building
a new plant when they didn't know what the rules
of the game were going to be in five years. So
they just didn't. So you have a booming population
hungry for power and a shrinking fleet of power
plants. That is not a good combination. It's
a tightrope walk. And then nature decided to
just shove them off the rope. The weather. The
weather. Specifically, a drought in the Pacific
Northwest. I think a lot of people, you know,
they don't realize how interconnected the grid
is. California doesn't just make its own power.
It imports a ton of it. It's huge. In the summer,
California relies on hydroelectric power from
Oregon and Washington. Right, from the big dams.
The Columbia River dams. It's usually cheap,
it's clean, and it's abundant. It's their safety
net. But in 2000, it stopped raining up there.
The water levels just plummeted. The dams couldn't
generate the excess power. So the Pacific Northwest
basically said, sorry, California, we need this
power for ourselves. We can't send you any. So
the safety net is gone. California has to generate
its own power. And most of their local plants
ran on natural gas. And here is the second punch
from Mother Nature. The price of natural gas
spiked at the exact same time. It went from about
$2 per million BTU to over $10. A five -fold
increase in the fuel cost. Right. So even if
there was no manipulation, no Enron, nothing.
electricity prices were going to go up. The input
cost skyrocketed. But there was also a physical
bottleneck, wasn't there? Something called Path
15. Path 15. It sounds like a secret military
base or something. It does. But it's actually
a transmission corridor. It's the main set of
wires connecting Northern California to Southern
California. And it was clogged. It hadn't been
upgraded in years. It could only push about 3
,900 megawatts south. It acted like a funnel.
So even if there was spare power in the north,
they physically couldn't shove it down the wires
to the south fast enough. So we have high demand,
no new plants, expensive gas, a drought, and
bad wires. The table is set for a disaster. But,
and this is a huge but for me, I want to look
at the numbers in the source material again.
The report says California had an installed capacity
of 45 gigawatts. Correct. That's what was on
the books. But the demand... even at the absolute
peak of the crisis, was only about 28 gigawatts.
That's the number that stops you in your tracks,
isn't it? If you have 45 and you only need 28?
I'm not a math genius, but that seems like plenty
of power. A huge buffer. You should have a massive
surplus. You should be exporting power, not having
blackouts. So where was the rest of it? Why were
the lights going out? That gap. That missing
17 gigawatts between the 45 they had and the
28 they needed, that is where the crime happened.
That gap is where the villains of the story stepped
in. Okay, let's get into section three, gaming
the system. Because this is where the story turns
from an unfortunate series of events into basically
a heist. Enter Enron. The smartest guys in the
room. Or so they thought. And it wasn't just
Enron, but they were the ringleaders. We have
to understand the mindset here. These traders
didn't view electricity as a public service.
No. They didn't see it as something grandmothers
needed to run their oxygen tanks. They saw it
as a commodity like pork bellies or orange juice
futures, just numbers on a screen. There is this
quote from the Enron CEO, Kenneth Lay. He's on
a call with the chairman of the California Power
Authority. It's infamous. It's so arrogant. He
basically mocked the state. He called them crazy
people in California. Wow. And he said, and I'm
paraphrasing here, no matter what the crazy people
in California did, I have people working for
me at Enron that can figure out a way to make
money off of it. It's that arrogance. We are
smarter than you, and we will take your money.
And they did. We have the Enron tapes. These
were recorded conversations between traders.
And when you listen to them or read the transcripts,
it's chilling. They are openly gloating. They're
laughing about it. They are laughing. There's
one part where they're cheering about a wildfire,
a literal forest fire, because they knew it would
take down a transmission line, which would spike
the price, and they would all make a bonus. That
is just sickening. It is. And they developed
these specific strategies to game the market.
And because they were essentially frat boys in
suits, they gave them these cool names. Right.
The gaming strategies. Let's walk through these
because this is the mechanics of the heist. We
have Fatboy, Death Star, Black Widow, Get Shorty,
Bigfoot. It sounds like the lineup for an erratic
superhero team or supervillain team, I guess.
Definitely supervillain. So let's start with
Megawatt Laundering, also known as Ricochet.
This one seems directly tied to that price cap
we talked about. Right. Remember, the price inside
California was capped for the utilities, but
imported power was treated differently to encourage
neighbors to help out. So, Enron would buy electricity
in California at the lower capped price, let's
say $50. Okay, so they own a megawatt of power
in San Diego. Then, on paper, they would export
it. they'd schedule it to go to Oregon. So it
leaves the state. Then another trader, sometimes
sitting at the desk right next to them, would
buy it in Oregon and sell it back into California
as imported power. And since it's imported. No
price cap. They could sell it for $500. They
took California's own power, washed it across
the border, and sold it back to them at a 1 ,000
% markup. Ricochet. It bounces out and comes
back expensive. Exactly. They were laundering
electrons. What about economic withholding? That
sounds like a boring economics term. But in practice,
it was brutal. This was the primary way they
created that artificial gap we talked about.
They would simply refuse to sell power. But can
they just do that? They would claim maintenance.
or technical difficulties. So it's the middle
of a heat wave. Demand is peaking. And suddenly
an Enron owned plant calls up and says, oh, sorry,
our plant needs to go offline for unexpected
repairs. So they artificially lower the supply
to create a panic. Exactly. The grid operator
sees the supply dropping and gets desperate.
They start bidding higher and higher just to
keep the lights on. Enron waits until the price
hits the absolute ceiling. And then miraculously,
the plant is fixed. they sell the power. So they
create the emergency to profit from the rescue.
Precisely. It's market manipulation 101. And
then there's the Death Star. That is the most
ominous name of the bunch. And the most complex.
This one was all about gaming the transmission
lines themselves. The traffic jams we talked
about. Right. So the grid has physical limits.
If you try to push too much power through a line,
it melts. So the grid operator will actually
pay companies a fee to not send power if a line
is congested. It's called a congestion relief
fee. OK, that makes sense. You pay people to
back off to save the wires. So Enron would intentionally
schedule massive amounts of power to move in
a direction. they knew was already full. They
would create a fake traffic jam on paper. They
would book the lane knowing it was already closed.
The grid computer would see this and say, alert,
congestion, we need to pay someone to relieve
this. And it would automatically pay Enron to
not send the power. But here's the kicker. The
kicker is that Enron often didn't even have the
power they were scheduling in the first place.
They were scheduling phantom power to create
phantom congestion to get paid real money to
relieve it. So they were getting paid to not
do something they couldn't do anyway. It was
pure arbitrage of the rules. The FERC report
later called the market inherently gameable.
Inherently gameable. That's some very polite
government speak for totally broken and corrupt.
And the result was that wholesalers were selling
power at up to $20. times the normal value. It
was a feeding frenzy. So section four, the crisis
unfolds. We have the trap set. The shortage is
now real, or at least feels real. And the sharks
are circling. Now let's watch the ship go down.
It starts in the summer of 2000, June 14th. A
massive heat wave hits the Bay Area. 97 ,000
customers lose power. That must have been a shock.
I mean, rolling blackouts weren't really a thing
in America in the 90s, you know. It was absolutely
stunning. But the real panic started in San Diego.
Why San Diego specifically? So San Diego Gas
and Electric SDG &E was in a unique position.
They had actually managed their finances better
than the other utilities. They had paid off their
stranded costs early. So they were released from
the deal. They were released from the retail
price cap. They were the first to be fully deregulated.
Oh boy, so when the wholesale prices went crazy.
The San Diego customers felt it immediately.
In August 2000, electricity bills in San Diego
doubled. Just boom, doubled. Then they tripled.
I can't even imagine opening your mail. Your
bill is usually $100, and now it's $250 or $300.
People revolted. I mean, literally, there were
protests in the streets. People were burning
their utility bills in public. Small businesses,
restaurants, dry cleaners were closing because
they couldn't pay for electricity. It was political
poison. And this brings us to Governor Gray Davis.
He's sitting up in Sacramento watching San Diego
burn. The Gray Davis problem. Oh. And he was
completely paralyzed. He saw what was happening
in San Diego, voter anger. And he decided, I
cannot let that happen to the rest of the state.
So he refused to lift the price caps for PG &E
and Edison. He protected the consumers in LA
and San Francisco from the immediate price spike.
But by doing that, he basically doomed the utilities.
Because the utilities were still stuck buying
power at that 800 percent markup. Right. Treasury
officials and economists were screaming at Davis.
They were saying, you have to raise rates. If
you raise rates, people will use less power.
Demand will drop and the wholesale price will
come down. It's the price signal. If power is
expensive, I turn off the AC. Exactly. But Davis
feared political suicide. So he kept the caps
and the utilities just bled to death. By December
2000, wholesale prices were up 800%. The utilities
were paying up to 50 cents per kilowatt hour,
but were only allowed to sell it for six or seven
cents. You can't make that math work. Not for
long. You absolutely cannot. In April 2001, the
inevitable happened. Pacific Gas and Electric
filed for bankruptcy. One of the biggest companies
in America. Bust. And while the money was running
out, the grid was physically collapsing. Winter
2000 into spring 2001, we started hitting stage
three alerts. And that means reserves are below
3%. It means you are driving on the highway at
70 miles an hour and your gas light is flashing.
You are moments from stalling out. And they did
stall out. They did. March 19th and 20th, 2001
were the dark days. 1 .5 million customers lost
power. One and a half million. That's huge. And
then again in May, it really felt like the state
was falling apart. Traffic lights out means car
accidents. Elevator stopping means fire rescues.
It was absolute chaos. OK, let's talk about the
political fallout. Section five, because when
the lights go out, voters want a head on a platter.
And Gray Davis was the main course. His popularity
absolutely tanked and he was getting hit from
both sides of the aisle. From the left, you had
people like Arianna Huffington. Right. The critique
from the left was that Davis was too cozy with
the energy companies. They said he waited too
long to crack down on the manipulators because
he was taking campaign contributions from them.
They wanted him to seize the power plants, nationalize
them. And from May, right. The critique from
the right was that he interfered too much. They
said the price caps were the problem. If he had
just let the market work, even if it was painful
for consumers in the short term, the crisis would
have burned itself out much faster. But Davis
tried to fix it with those long -term contracts.
And that became a huge and very negative part
of his legacy. It was a total desperation move.
The utilities were bankrupt, so the state of
California itself stepped in to buy the power.
And Davis signed these massive long -term contracts
with the generators to guarantee supply. But
he signed them at the absolute peak of the market.
It's like panic buying toilet paper for $50 a
roll. He locked in those insane crisis level
prices for 10 years. Wow. So California consumers
were paying a crisis surcharge on their bills
long, long after the crisis was over. And all
this anger, all this frustration, it opened the
door for a very famous replacement. The Terminator.
Arnold Schwarzenegger. Yeah. But there is a detail
in the sources that I found fascinating. An Arnold
connection during the crisis before he was even
running for governor. Yes, this is a scene right
out of a movie. It's May 2001. The Peninsula
Hotel in Beverly Hills. Very swanky. Arnold Schwarzenegger
and the former L .A. Mayor Richard Riordan are
having a meeting. And who walks in? Kenway. The
CEO of Enron. The villain himself. Enron presented
what they called a comprehensive solution to
Arnold. What was the solution? Essentially, make
the investigations go away. Enron wanted the
political heat to stop. They wanted the federal
and state investigations into their trading practices
to end. And in exchange, they implied they could
help stabilize the market. It's basically extortion.
Nice grid you have there. Shame if something
were to happen to it. It shows how incredibly
powerful Enron thought they were. They thought
they could just negotiate with the future governor
to wipe away their fraud. But it didn't work.
No. By that point, the house of cards was already
shaking. Before we see those cards fall, there
is one weird exception in this whole story that
we have to mention. Los Angeles. Ah, yes. The
Los Angeles Department of Water and Power. LADWP.
While the rest of the state was in the dark,
LA kept the lights on. How? Why? This is the
great irony of the whole situation. LADWP is
a government -owned municipal utility. So they
weren't part of the deregulation law? They were
exempt. They kept their old school vertical monopoly
structure. They own their power plants. They
own their lines. And they answered to the city
council, not to shareholders. So the inefficient
government bureaucracy actually worked better.
Not only did it work better, they profited from
the crisis. Because LEDWP had excess capacity,
they sold their extra power into the state's
spot market. Wait, what? They were selling power
to PG &E and the state at those same inflated,
manipulated prices. The city of L .A. was playing
the shark. They made millions and millions of
dollars off the crisis, and they used that money
to keep rates low for their own residents. So
if you lived in L .A., you were watching the
rest of the state burn while your bill stayed
flat. That really challenges the whole narrative
that private enterprise is always more efficient.
In this specific case, the public model was the
lifeboat. So how did the nightmare finally end?
Section 6. Resolution and justice. It wasn't
one single silver bullet, but the biggest factor
was the FERC finally doing its job. The Federal
Energy Regulatory Commission. Yeah. For a long
time, they were just sitting on their hands.
They were ideologically paralyzed. They believed
in the sanctity of the free market. Their leadership
kept saying, we can't intervene. The market will
correct itself. But by June 2001, the evidence
of manipulation was undeniable. The state was
bleeding to death. So they stepped in. They instituted
hard price caps across the entire Western market.
They basically said, you cannot charge more than
X dollars for a megawatt, period. And what happened?
The volatility vanished overnight. It's almost
like the shortage wasn't real. Exactly. Once
the incentive to manipulate the price was gone,
once they couldn't make 20 times the normal value,
the generators suddenly found enough power to
sell. All those plants that needed maintenance
were suddenly fixed. The weather helped too,
right? Yes. The drought eased up in the Pacific
Northwest, and honestly, Californians did an
amazing job at conservation. People really did
turn off their lights and appliances when asked.
Demand dropped significantly. And then the giant
fell. Enron. December 2001. Enron filed for bankruptcy.
Now, that was mostly due to their accounting
fraud, the mark to market scandals and hiding
debt. But the California crisis was a huge part
of their unraveling. It put a national spotlight
on them and their culture of corruption. What
about justice for California? Did they ever get
the money back? Some of it. But it was a long,
painful road. The FERC launched the gaming case
and the refund case. These lawsuits dragged on
for over a decade. I saw a note about a settlement
as late as 2013. Yeah, PowerX. That's a Canadian
utility. Twelve years after the crisis, they
agreed to refund $750 million for bad behavior.
But the total damage? The best estimates are
between 40 and 45. billion in economic damage.
You can sue for refunds on overcharges, but.
You can't get that lost economic growth back.
No, that money is just gone. It was a massive
wealth transfer from California consumers to
energy traders in Houston and elsewhere. So let's
wrap this up. What does this all mean? Because
we are still debating energy grids today. We
have Texas freezing over. We have renewables
coming online. This isn't just a history lesson.
It's extremely relevant. I think the first major
takeaway is that electricity is unique. It is
not a normal commodity. It's not shoes. It's
not lemons. Exactly. You can't store it easily
in large amounts. You can't choose not to buy
it. If the price of shoes goes to $1 ,000, I
go barefoot. If the price of electricity goes
to $1 ,000, I pay it or I die in the heat. It's
essential for life. As David Freeman, who was
the expert brought in to clean up the mess for
the California Power Authority, had this powerful
quote. He said, any system that can be gamed
will be gamed. That is the golden rule of regulation.
And he also said, electricity is a public good
that must be protected from private abuse. You
cannot just throw it to the wolves and hope the
market plays nice. The second takeaway seems
to be about the design itself. You can't half
-ass deregulation. Correct. Partial deregulation
is worse than no deregulation. You cannot uncap
the sellers but cap the buyers. That fundamental
disconnect divorced the price signal from the
consumer. It blinded the market to reality until
the entire system broke. And finally, the role
of private interests. Enron proved that a corporation,
if left unchecked, will ruthlessly exploit a
broken system, even if it harms millions of people.
They weren't evil in a cartoon sense. They were
just maximizing profit within the rules. or the
lack of rules that existed. If you leave a loophole
that allows a trader to make a million dollars
by shutting down a plant, they will shut down
the plant. It's inevitable. It's a sobering story.
But before we go, I want to leave the listener
with a final thought, a bit of a what if. Go
for it. So the International Energy Agency did
an analysis. of this crisis, and they estimated
that during the peak of the blackouts, if demand
had been lowered by just 5%. Just 5%, that's
not much. Just 5%, the price of electricity would
have dropped by 50%. Wow, that is a staggering
statistic. It shows the insane leverage of the
margin. When the system is tight, a tiny reduction
in demand saves everything. It really makes you
think. We focus so much on the supply side, building
more plants, drilling for more gas, but the real
power is on the demand side. If we had better
ways to just slightly dial back our usage during
peaks, we could avoid these crises entirely.
And in an era of AI, electric vehicles, and massive
data centers, our demand is about to skyrocket
again. Are we walking into another capacity trap?
That is the billion -dollar question, isn't it?
Are we smarter now, or are we just waiting for
the next Death Star? Let's hope we learned our
lesson. Thanks for listening to this deep dive
on the California electricity crisis. Stay curious,
read the fine print, and maybe turn off the lights
when you leave the room. See you next time.