WEBVTT 00:00:00.000 --> 00:00:02.200 Okay, let's time travel for a second. I want 00:00:02.200 --> 00:00:05.740 you to picture California at the absolute turn 00:00:05.740 --> 00:00:08.800 of the millennium. It's the year 2000. Very specific 00:00:08.800 --> 00:00:11.619 vibe, yeah. Right. The dot -com bubble hasn't 00:00:11.619 --> 00:00:14.300 quite burst yet. It's leaking a little, maybe. 00:00:14.480 --> 00:00:18.300 But the optimism is still just off the charts. 00:00:18.460 --> 00:00:21.079 Oh, completely. You've got pets .com, sock puppets 00:00:21.079 --> 00:00:24.500 on TV. People are becoming millionaires overnight 00:00:24.500 --> 00:00:28.140 in Silicon Valley. California isn't just a state. 00:00:28.320 --> 00:00:31.030 It's like... The engine of the entire world. 00:00:31.250 --> 00:00:33.450 It really was. I mean, if California were a country 00:00:33.450 --> 00:00:35.109 in the year 2000, it would have been the fifth 00:00:35.109 --> 00:00:37.570 largest economy on the planet. Wow. Bigger than 00:00:37.570 --> 00:00:40.950 France. Bigger than Italy. It was the absolute 00:00:40.950 --> 00:00:43.570 golden child of the global economy. Exactly. 00:00:43.630 --> 00:00:45.570 It's the home of the future. High tech, high 00:00:45.570 --> 00:00:48.850 growth, high hopes. But then you go home after 00:00:48.850 --> 00:00:50.490 a long day at your startup. You flip the light 00:00:50.490 --> 00:00:52.630 switch. And nothing. And nothing happens. And 00:00:52.630 --> 00:00:54.990 silence. Lights don't turn on. The traffic lights 00:00:54.990 --> 00:00:57.350 outside are dark. People are getting stuck in 00:00:57.350 --> 00:00:59.380 elevators. A manufacturing. that are supposed 00:00:59.380 --> 00:01:02.119 to be building that future just grind to a halt. 00:01:02.159 --> 00:01:04.579 The entire grid crumbles. It sounds like the 00:01:04.579 --> 00:01:07.500 plot of a dystopian novel, honestly. A post -apocalyptic 00:01:07.500 --> 00:01:10.739 movie. But for millions of people, this was just 00:01:10.739 --> 00:01:13.840 a Tuesday. So today we are doing a deep dive 00:01:13.840 --> 00:01:17.780 into the 2000, 2001 California electricity crisis. 00:01:18.120 --> 00:01:20.799 Sometimes it's called the Western U .S. energy 00:01:20.799 --> 00:01:23.760 crisis. Right. And we have pulled a massive stack 00:01:23.760 --> 00:01:26.540 of source material for this. We've got government 00:01:26.540 --> 00:01:30.000 reports from FERC, historical records, media 00:01:30.000 --> 00:01:33.500 coverage from the time, and some truly wild transcripts 00:01:33.500 --> 00:01:36.099 from inside the energy trading floors. And the 00:01:36.099 --> 00:01:38.799 mission here is really to solve a mystery. Because 00:01:38.799 --> 00:01:42.239 on paper, this... This just shouldn't have happened. 00:01:42.400 --> 00:01:44.959 That's the thing that gets me. I mean, we aren't 00:01:44.959 --> 00:01:47.420 talking about a developing country with crumbling 00:01:47.420 --> 00:01:49.159 infrastructure. We're talking about the richest 00:01:49.159 --> 00:01:50.959 state in the richest country on Earth. Yeah. 00:01:50.980 --> 00:01:53.359 How does a place like that just run out of power? 00:01:53.540 --> 00:01:55.239 Well, that was the narrative at the time, right? 00:01:55.260 --> 00:01:57.540 We ran out or everyone turned on their hair dryers 00:01:57.540 --> 00:01:59.719 at once. Yeah. But when you actually dig into 00:01:59.719 --> 00:02:01.859 these documents, you realize that running out 00:02:01.859 --> 00:02:04.079 wasn't really the problem. It was something much 00:02:04.079 --> 00:02:06.680 more sinister. It was a perfect storm. It was 00:02:06.680 --> 00:02:10.159 this mix of good intentions gone wrong, some 00:02:10.159 --> 00:02:12.680 genuinely bad luck with the weather, and then, 00:02:12.680 --> 00:02:14.800 you know, waiting in the wings, some of the most 00:02:14.800 --> 00:02:17.180 ruthless corporate greed we have ever seen in 00:02:17.180 --> 00:02:18.759 modern history. We're talking about a crisis 00:02:18.759 --> 00:02:22.120 that caused an 800 % spike in wholesale electricity 00:02:22.120 --> 00:02:25.979 prices. 800%. It's just an insane number. It 00:02:25.979 --> 00:02:28.560 bankrupted Pacific Gas and Electric, which is 00:02:28.560 --> 00:02:31.439 a massive utility. And it cost the state somewhere 00:02:31.439 --> 00:02:34.939 between $40 and $45 billion. That number is hard 00:02:34.939 --> 00:02:37.400 to even wrap your head around. $45 billion essentially 00:02:37.400 --> 00:02:39.560 just evaporated from the California economy. 00:02:39.860 --> 00:02:43.599 So buckle up. We're going to unpack how this 00:02:43.599 --> 00:02:45.879 happened, who the villains were, and there are 00:02:45.879 --> 00:02:48.340 definitely villains, and why the lights finally 00:02:48.340 --> 00:02:50.939 came back on. But to understand the collapse, 00:02:51.039 --> 00:02:52.240 we have to understand the setup. We have to go 00:02:52.240 --> 00:02:55.520 back to 1996. The year of the Macarena. And the 00:02:55.520 --> 00:02:57.699 year of deregulation. So set the stage for us. 00:02:57.780 --> 00:03:00.340 What was happening in the California state legislature 00:03:00.340 --> 00:03:03.460 in 1996? Well, the mood was, and this is important 00:03:03.460 --> 00:03:06.000 to remember, it was bipartisan optimism. This 00:03:06.000 --> 00:03:08.460 wasn't one party shoving something down the other's 00:03:08.460 --> 00:03:10.879 throat. OK. You had Democratic state Senator 00:03:10.879 --> 00:03:13.620 Steve Peace, who is often called the father of 00:03:13.620 --> 00:03:15.960 deregulation. And you had Republican Senator 00:03:15.960 --> 00:03:18.180 Jim Brulte. They were working together with a 00:03:18.180 --> 00:03:20.520 Republican governor, Pete Wilson. And what was 00:03:20.520 --> 00:03:22.800 the problem they were trying to solve? Like, 00:03:22.840 --> 00:03:25.520 why mess with the electricity system at all? 00:03:25.919 --> 00:03:28.620 The argument was that California's energy prices 00:03:28.620 --> 00:03:31.400 were too high. Industrial companies, factories, 00:03:31.740 --> 00:03:33.879 big businesses, they were complaining. They were 00:03:33.879 --> 00:03:36.400 saying, look, we pay way more for power here 00:03:36.400 --> 00:03:38.240 than they do in other states. It's hurting our 00:03:38.240 --> 00:03:40.419 competitiveness. And the solution they came up 00:03:40.419 --> 00:03:43.960 with was the free market. Exactly. The prevailing 00:03:43.960 --> 00:03:46.460 economic theory of the 90s was that monopolies 00:03:46.460 --> 00:03:49.099 are bad and competition is good. Up until this 00:03:49.099 --> 00:03:52.060 point, utilities like PG &E were monopolies. 00:03:52.120 --> 00:03:54.259 They owned the power plants, they owned the wires, 00:03:54.360 --> 00:03:56.539 and they sent you the bill. The government told 00:03:56.539 --> 00:03:59.639 them what they could charge. It was boring, stable, 00:03:59.759 --> 00:04:02.780 but maybe a little inefficient. So the politicians 00:04:02.780 --> 00:04:05.400 thought, hey, if we break up the monopoly and 00:04:05.400 --> 00:04:08.139 let companies compete to sell electricity, prices 00:04:08.139 --> 00:04:10.979 will go down. It's economics 101. If you have 00:04:10.979 --> 00:04:13.099 10 people trying to sell you lemons, the price 00:04:13.099 --> 00:04:15.599 of lemons should drop. So they passed Assembly 00:04:15.599 --> 00:04:19.720 Bill 1890. AB 1890. The legislation that launched 00:04:19.720 --> 00:04:22.139 a thousand lawsuits. And it passed unanimously 00:04:22.139 --> 00:04:24.819 in the Senate. Unanimously. Everyone thought 00:04:24.819 --> 00:04:27.779 they were geniuses. The goal was to lower energy 00:04:27.779 --> 00:04:31.540 costs. But, and here's the massive but, they 00:04:31.540 --> 00:04:34.180 didn't actually create a free market. They created 00:04:34.180 --> 00:04:37.220 a partial deregulation. Right. And this is the 00:04:37.220 --> 00:04:39.459 fatal flaw. I mean, if you take nothing else 00:04:39.459 --> 00:04:42.129 away from this deep dive. You have to understand 00:04:42.129 --> 00:04:44.269 this mechanism. They called it the market design, 00:04:44.449 --> 00:04:46.170 but in hindsight, it looks more like a bear trap. 00:04:46.290 --> 00:04:47.629 OK, so let's break it down. But there are two 00:04:47.629 --> 00:04:50.170 markets here, wholesale and retail. Correct. 00:04:50.509 --> 00:04:53.389 So the wholesale market is where the utilities 00:04:53.389 --> 00:04:56.389 PGE, Southern California Edison, San Diego Gas 00:04:56.389 --> 00:04:59.209 and Electric buy the actual electricity. They 00:04:59.209 --> 00:05:01.490 buy it from the power plants. The legislation 00:05:01.490 --> 00:05:03.930 deregulated this side. Meaning the price could 00:05:03.930 --> 00:05:07.170 float. Totally uncapped. based purely on supply 00:05:07.170 --> 00:05:10.110 and demand. If it's a hot day and power is scarce, 00:05:10.290 --> 00:05:12.110 the generators can charge whatever they want. 00:05:12.290 --> 00:05:14.769 OK, so that's the wholesale side. What are the 00:05:14.769 --> 00:05:16.990 retail market? That's you and me. That's the 00:05:16.990 --> 00:05:19.509 bill that comes to your house every month. The 00:05:19.509 --> 00:05:21.610 politicians were terrified that voters would 00:05:21.610 --> 00:05:24.509 get mad if their bills fluctuated wildly. So 00:05:24.509 --> 00:05:27.810 they kept the retail market heavily regulated. 00:05:28.029 --> 00:05:31.180 They capped the price. They froze it. Wait. I 00:05:31.180 --> 00:05:33.019 want to make sure I'm hearing this right. The 00:05:33.019 --> 00:05:36.540 utilities were forced by law to buy electricity 00:05:36.540 --> 00:05:39.759 on an open market where prices could go to the 00:05:39.759 --> 00:05:43.680 moon. But they were forbidden by law from raising 00:05:43.680 --> 00:05:45.699 the prices they charge their customers. That 00:05:45.699 --> 00:05:47.680 is exactly it. That's the squeeze. That just 00:05:47.680 --> 00:05:50.180 sounds. OK, let's use the analogy. The source 00:05:50.180 --> 00:05:52.980 material mentions the lemonade stand concept. 00:05:53.060 --> 00:05:55.279 It's the best way to visualize it. So imagine 00:05:55.279 --> 00:05:57.670 you run a lemonade stand. The government passes 00:05:57.670 --> 00:06:00.050 a law that says you must sell every glass of 00:06:00.050 --> 00:06:02.870 lemonade for exactly one dollar. You cannot charge 00:06:02.870 --> 00:06:04.769 a penny more. OK, I can live with that as long 00:06:04.769 --> 00:06:06.949 as lemons are cheap. Right. And for a while, 00:06:06.970 --> 00:06:09.250 lemons cost you 50 cents. You buy a lemon for 00:06:09.250 --> 00:06:11.569 50 cents, make juice, sell it for a dollar. You 00:06:11.569 --> 00:06:14.310 make a 50 cent profit. Everyone's happy. But 00:06:14.310 --> 00:06:16.310 then something happens to the lemons. Right. 00:06:16.509 --> 00:06:18.930 The price of lemons goes up. Maybe there's a 00:06:18.930 --> 00:06:21.209 drought shortage. Suddenly, the lemon farmer 00:06:21.209 --> 00:06:24.790 tells you, hey, lemons are ten dollars now. But 00:06:24.790 --> 00:06:27.790 I still have to sell the juice for $1. By law, 00:06:27.949 --> 00:06:31.069 you are a public utility. You have an obligation 00:06:31.069 --> 00:06:33.430 to serve. You can't just close up the stand. 00:06:33.769 --> 00:06:36.430 So for every single glass you hand over the counter, 00:06:36.610 --> 00:06:39.529 you are losing $9. There it is, a recipe for 00:06:39.529 --> 00:06:43.230 instant bankruptcy. I don't get it. Why on earth 00:06:43.230 --> 00:06:46.350 did the utilities agree to this? PG &E had lawyers. 00:06:46.589 --> 00:06:48.509 They must have seen this coming. You would think 00:06:48.509 --> 00:06:51.189 so. But they made a gamble. There was this issue 00:06:51.189 --> 00:06:54.509 called stranded costs. Basically, the utilities 00:06:54.509 --> 00:06:57.050 had made some bad investments in the past, mostly 00:06:57.050 --> 00:06:59.990 on these really expensive nuclear plants. And 00:06:59.990 --> 00:07:01.769 they wanted the state to help them pay those 00:07:01.769 --> 00:07:05.480 off. So the deal was basically. We accept the 00:07:05.480 --> 00:07:08.480 price cap for a few years. And in exchange, you 00:07:08.480 --> 00:07:11.120 let us add a surcharge to everyone's bill to 00:07:11.120 --> 00:07:13.819 pay off our old debt. So they bet that wholesale 00:07:13.819 --> 00:07:16.180 prices would stay low. They bet the house on 00:07:16.180 --> 00:07:18.079 it. They looked at the historical trends and 00:07:18.079 --> 00:07:19.939 thought power is cheap. It's going to stay cheap. 00:07:20.139 --> 00:07:22.339 We'll pocket the difference and pay off our debts. 00:07:22.379 --> 00:07:24.720 No problem. And for a couple of years, from 96 00:07:24.720 --> 00:07:27.699 to 99, it looked like they were right. It worked 00:07:27.699 --> 00:07:30.600 perfectly until, of course, it didn't. Which 00:07:30.600 --> 00:07:32.920 brings us to section two, the perfect storm. 00:07:33.399 --> 00:07:36.420 Because you can set a trap, but someone or something 00:07:36.420 --> 00:07:39.800 still has to step into it. Exactly. And before 00:07:39.800 --> 00:07:42.060 we even get to the Enron traders and the criminal 00:07:42.060 --> 00:07:44.699 stuff, we have to look at the boring physical 00:07:44.699 --> 00:07:47.399 realities of the grid in the year 2000 because 00:07:47.399 --> 00:07:50.060 the system was already redlining. Yeah, I was 00:07:50.060 --> 00:07:51.660 looking at the population stats in the notes 00:07:51.660 --> 00:07:54.379 and it's staggering. Yeah. California grew by 00:07:54.379 --> 00:07:57.579 13 % in the 1990s. That's millions of people. 00:07:57.620 --> 00:07:59.399 And not just people, tech people. This was the 00:07:59.399 --> 00:08:02.279 dot -com boom. Right. Server farms were popping 00:08:02.279 --> 00:08:04.199 up everywhere. People were buying computers, 00:08:04.459 --> 00:08:06.839 massive monitors, air conditioners. I mean, the 00:08:06.839 --> 00:08:09.819 whole economy was on fire. Retail sales of electricity 00:08:09.819 --> 00:08:13.720 went up by 11 % in that same decade. So demand 00:08:13.720 --> 00:08:17.120 is just skyrocketing. And in a normal functioning 00:08:17.120 --> 00:08:20.449 market, when demand goes up, What happens to 00:08:20.449 --> 00:08:22.449 supply? You build more supply, you build more 00:08:22.449 --> 00:08:24.810 power plants. You would think. But in the entire 00:08:24.810 --> 00:08:28.509 decade of the 1990s, California built zero major 00:08:28.509 --> 00:08:32.009 new power plants. Zero. Effectively zero. In 00:08:32.009 --> 00:08:34.009 fact, the generation capacity of the state actually 00:08:34.009 --> 00:08:36.889 decreased by 2 % during the 90s. Wait, how does 00:08:36.889 --> 00:08:38.909 capacity go down? You don't just lose a power 00:08:38.909 --> 00:08:42.029 plant. Well, old plants get retired. Environmental 00:08:42.029 --> 00:08:44.870 regulations get stricter. So some of the dirtier 00:08:44.870 --> 00:08:47.809 plants get shut down. And honestly, because of 00:08:47.809 --> 00:08:50.450 all the deregulation talks, investors were scared. 00:08:50.809 --> 00:08:53.970 Nobody wanted to spend $500 million building 00:08:53.970 --> 00:08:55.970 a new plant when they didn't know what the rules 00:08:55.970 --> 00:08:57.710 of the game were going to be in five years. So 00:08:57.710 --> 00:08:59.870 they just didn't. So you have a booming population 00:08:59.870 --> 00:09:02.690 hungry for power and a shrinking fleet of power 00:09:02.690 --> 00:09:05.289 plants. That is not a good combination. It's 00:09:05.289 --> 00:09:08.789 a tightrope walk. And then nature decided to 00:09:08.789 --> 00:09:11.429 just shove them off the rope. The weather. The 00:09:11.429 --> 00:09:13.629 weather. Specifically, a drought in the Pacific 00:09:13.629 --> 00:09:16.570 Northwest. I think a lot of people, you know, 00:09:16.570 --> 00:09:18.950 they don't realize how interconnected the grid 00:09:18.950 --> 00:09:21.330 is. California doesn't just make its own power. 00:09:21.470 --> 00:09:24.289 It imports a ton of it. It's huge. In the summer, 00:09:24.389 --> 00:09:27.429 California relies on hydroelectric power from 00:09:27.429 --> 00:09:30.190 Oregon and Washington. Right, from the big dams. 00:09:30.190 --> 00:09:32.450 The Columbia River dams. It's usually cheap, 00:09:32.470 --> 00:09:34.929 it's clean, and it's abundant. It's their safety 00:09:34.929 --> 00:09:37.759 net. But in 2000, it stopped raining up there. 00:09:37.860 --> 00:09:40.799 The water levels just plummeted. The dams couldn't 00:09:40.799 --> 00:09:43.059 generate the excess power. So the Pacific Northwest 00:09:43.059 --> 00:09:46.240 basically said, sorry, California, we need this 00:09:46.240 --> 00:09:48.700 power for ourselves. We can't send you any. So 00:09:48.700 --> 00:09:51.899 the safety net is gone. California has to generate 00:09:51.899 --> 00:09:54.700 its own power. And most of their local plants 00:09:54.700 --> 00:09:57.779 ran on natural gas. And here is the second punch 00:09:57.779 --> 00:10:00.399 from Mother Nature. The price of natural gas 00:10:00.399 --> 00:10:03.799 spiked at the exact same time. It went from about 00:10:03.799 --> 00:10:07.759 $2 per million BTU to over $10. A five -fold 00:10:07.759 --> 00:10:10.019 increase in the fuel cost. Right. So even if 00:10:10.019 --> 00:10:12.559 there was no manipulation, no Enron, nothing. 00:10:13.200 --> 00:10:15.220 electricity prices were going to go up. The input 00:10:15.220 --> 00:10:18.000 cost skyrocketed. But there was also a physical 00:10:18.000 --> 00:10:19.820 bottleneck, wasn't there? Something called Path 00:10:19.820 --> 00:10:22.559 15. Path 15. It sounds like a secret military 00:10:22.559 --> 00:10:25.200 base or something. It does. But it's actually 00:10:25.200 --> 00:10:27.740 a transmission corridor. It's the main set of 00:10:27.740 --> 00:10:30.039 wires connecting Northern California to Southern 00:10:30.039 --> 00:10:32.539 California. And it was clogged. It hadn't been 00:10:32.539 --> 00:10:35.000 upgraded in years. It could only push about 3 00:10:35.000 --> 00:10:38.759 ,900 megawatts south. It acted like a funnel. 00:10:39.250 --> 00:10:41.649 So even if there was spare power in the north, 00:10:41.850 --> 00:10:44.230 they physically couldn't shove it down the wires 00:10:44.230 --> 00:10:46.570 to the south fast enough. So we have high demand, 00:10:46.929 --> 00:10:50.950 no new plants, expensive gas, a drought, and 00:10:50.950 --> 00:10:54.350 bad wires. The table is set for a disaster. But, 00:10:54.509 --> 00:10:56.730 and this is a huge but for me, I want to look 00:10:56.730 --> 00:10:58.169 at the numbers in the source material again. 00:10:58.309 --> 00:11:01.070 The report says California had an installed capacity 00:11:01.070 --> 00:11:04.049 of 45 gigawatts. Correct. That's what was on 00:11:04.049 --> 00:11:06.919 the books. But the demand... even at the absolute 00:11:06.919 --> 00:11:10.179 peak of the crisis, was only about 28 gigawatts. 00:11:10.200 --> 00:11:11.879 That's the number that stops you in your tracks, 00:11:12.019 --> 00:11:14.320 isn't it? If you have 45 and you only need 28? 00:11:15.100 --> 00:11:17.840 I'm not a math genius, but that seems like plenty 00:11:17.840 --> 00:11:20.659 of power. A huge buffer. You should have a massive 00:11:20.659 --> 00:11:23.139 surplus. You should be exporting power, not having 00:11:23.139 --> 00:11:25.899 blackouts. So where was the rest of it? Why were 00:11:25.899 --> 00:11:28.620 the lights going out? That gap. That missing 00:11:28.620 --> 00:11:31.500 17 gigawatts between the 45 they had and the 00:11:31.500 --> 00:11:34.059 28 they needed, that is where the crime happened. 00:11:34.259 --> 00:11:37.039 That gap is where the villains of the story stepped 00:11:37.039 --> 00:11:40.039 in. Okay, let's get into section three, gaming 00:11:40.039 --> 00:11:43.220 the system. Because this is where the story turns 00:11:43.220 --> 00:11:46.740 from an unfortunate series of events into basically 00:11:46.740 --> 00:11:49.960 a heist. Enter Enron. The smartest guys in the 00:11:49.960 --> 00:11:51.860 room. Or so they thought. And it wasn't just 00:11:51.860 --> 00:11:55.240 Enron, but they were the ringleaders. We have 00:11:55.240 --> 00:11:57.419 to understand the mindset here. These traders 00:11:57.419 --> 00:11:59.720 didn't view electricity as a public service. 00:11:59.740 --> 00:12:02.179 No. They didn't see it as something grandmothers 00:12:02.179 --> 00:12:04.600 needed to run their oxygen tanks. They saw it 00:12:04.600 --> 00:12:07.179 as a commodity like pork bellies or orange juice 00:12:07.179 --> 00:12:09.539 futures, just numbers on a screen. There is this 00:12:09.539 --> 00:12:12.659 quote from the Enron CEO, Kenneth Lay. He's on 00:12:12.659 --> 00:12:14.960 a call with the chairman of the California Power 00:12:14.960 --> 00:12:17.779 Authority. It's infamous. It's so arrogant. He 00:12:17.779 --> 00:12:20.700 basically mocked the state. He called them crazy 00:12:20.700 --> 00:12:23.559 people in California. Wow. And he said, and I'm 00:12:23.559 --> 00:12:26.259 paraphrasing here, no matter what the crazy people 00:12:26.259 --> 00:12:28.139 in California did, I have people working for 00:12:28.139 --> 00:12:29.779 me at Enron that can figure out a way to make 00:12:29.779 --> 00:12:32.419 money off of it. It's that arrogance. We are 00:12:32.419 --> 00:12:34.700 smarter than you, and we will take your money. 00:12:35.070 --> 00:12:37.789 And they did. We have the Enron tapes. These 00:12:37.789 --> 00:12:39.870 were recorded conversations between traders. 00:12:40.129 --> 00:12:42.990 And when you listen to them or read the transcripts, 00:12:42.990 --> 00:12:45.950 it's chilling. They are openly gloating. They're 00:12:45.950 --> 00:12:47.529 laughing about it. They are laughing. There's 00:12:47.529 --> 00:12:49.830 one part where they're cheering about a wildfire, 00:12:49.970 --> 00:12:53.549 a literal forest fire, because they knew it would 00:12:53.549 --> 00:12:55.710 take down a transmission line, which would spike 00:12:55.710 --> 00:12:58.250 the price, and they would all make a bonus. That 00:12:58.250 --> 00:13:01.070 is just sickening. It is. And they developed 00:13:01.070 --> 00:13:04.070 these specific strategies to game the market. 00:13:04.460 --> 00:13:06.279 And because they were essentially frat boys in 00:13:06.279 --> 00:13:08.700 suits, they gave them these cool names. Right. 00:13:08.759 --> 00:13:10.639 The gaming strategies. Let's walk through these 00:13:10.639 --> 00:13:13.019 because this is the mechanics of the heist. We 00:13:13.019 --> 00:13:17.639 have Fatboy, Death Star, Black Widow, Get Shorty, 00:13:17.700 --> 00:13:20.840 Bigfoot. It sounds like the lineup for an erratic 00:13:20.840 --> 00:13:23.200 superhero team or supervillain team, I guess. 00:13:23.279 --> 00:13:25.000 Definitely supervillain. So let's start with 00:13:25.000 --> 00:13:27.000 Megawatt Laundering, also known as Ricochet. 00:13:27.480 --> 00:13:30.460 This one seems directly tied to that price cap 00:13:30.460 --> 00:13:33.399 we talked about. Right. Remember, the price inside 00:13:33.399 --> 00:13:36.600 California was capped for the utilities, but 00:13:36.600 --> 00:13:39.120 imported power was treated differently to encourage 00:13:39.120 --> 00:13:42.860 neighbors to help out. So, Enron would buy electricity 00:13:42.860 --> 00:13:46.320 in California at the lower capped price, let's 00:13:46.320 --> 00:13:49.159 say $50. Okay, so they own a megawatt of power 00:13:49.159 --> 00:13:52.299 in San Diego. Then, on paper, they would export 00:13:52.299 --> 00:13:54.450 it. they'd schedule it to go to Oregon. So it 00:13:54.450 --> 00:13:57.049 leaves the state. Then another trader, sometimes 00:13:57.049 --> 00:13:59.509 sitting at the desk right next to them, would 00:13:59.509 --> 00:14:01.970 buy it in Oregon and sell it back into California 00:14:01.970 --> 00:14:05.309 as imported power. And since it's imported. No 00:14:05.309 --> 00:14:08.129 price cap. They could sell it for $500. They 00:14:08.129 --> 00:14:10.070 took California's own power, washed it across 00:14:10.070 --> 00:14:12.649 the border, and sold it back to them at a 1 ,000 00:14:12.649 --> 00:14:15.539 % markup. Ricochet. It bounces out and comes 00:14:15.539 --> 00:14:17.980 back expensive. Exactly. They were laundering 00:14:17.980 --> 00:14:20.919 electrons. What about economic withholding? That 00:14:20.919 --> 00:14:23.480 sounds like a boring economics term. But in practice, 00:14:23.600 --> 00:14:26.059 it was brutal. This was the primary way they 00:14:26.059 --> 00:14:27.820 created that artificial gap we talked about. 00:14:27.860 --> 00:14:29.899 They would simply refuse to sell power. But can 00:14:29.899 --> 00:14:31.720 they just do that? They would claim maintenance. 00:14:32.460 --> 00:14:35.299 or technical difficulties. So it's the middle 00:14:35.299 --> 00:14:37.820 of a heat wave. Demand is peaking. And suddenly 00:14:37.820 --> 00:14:41.840 an Enron owned plant calls up and says, oh, sorry, 00:14:41.980 --> 00:14:43.879 our plant needs to go offline for unexpected 00:14:43.879 --> 00:14:46.860 repairs. So they artificially lower the supply 00:14:46.860 --> 00:14:49.320 to create a panic. Exactly. The grid operator 00:14:49.320 --> 00:14:51.600 sees the supply dropping and gets desperate. 00:14:51.840 --> 00:14:53.980 They start bidding higher and higher just to 00:14:53.980 --> 00:14:56.740 keep the lights on. Enron waits until the price 00:14:56.740 --> 00:15:00.039 hits the absolute ceiling. And then miraculously, 00:15:00.220 --> 00:15:03.629 the plant is fixed. they sell the power. So they 00:15:03.629 --> 00:15:06.230 create the emergency to profit from the rescue. 00:15:06.370 --> 00:15:09.370 Precisely. It's market manipulation 101. And 00:15:09.370 --> 00:15:11.649 then there's the Death Star. That is the most 00:15:11.649 --> 00:15:13.629 ominous name of the bunch. And the most complex. 00:15:13.669 --> 00:15:15.629 This one was all about gaming the transmission 00:15:15.629 --> 00:15:17.669 lines themselves. The traffic jams we talked 00:15:17.669 --> 00:15:19.830 about. Right. So the grid has physical limits. 00:15:20.110 --> 00:15:22.450 If you try to push too much power through a line, 00:15:22.549 --> 00:15:25.370 it melts. So the grid operator will actually 00:15:25.370 --> 00:15:28.929 pay companies a fee to not send power if a line 00:15:28.929 --> 00:15:30.970 is congested. It's called a congestion relief 00:15:30.970 --> 00:15:33.330 fee. OK, that makes sense. You pay people to 00:15:33.330 --> 00:15:36.370 back off to save the wires. So Enron would intentionally 00:15:36.370 --> 00:15:39.669 schedule massive amounts of power to move in 00:15:39.669 --> 00:15:42.279 a direction. they knew was already full. They 00:15:42.279 --> 00:15:45.659 would create a fake traffic jam on paper. They 00:15:45.659 --> 00:15:47.980 would book the lane knowing it was already closed. 00:15:48.279 --> 00:15:50.620 The grid computer would see this and say, alert, 00:15:50.720 --> 00:15:53.039 congestion, we need to pay someone to relieve 00:15:53.039 --> 00:15:55.679 this. And it would automatically pay Enron to 00:15:55.679 --> 00:15:58.210 not send the power. But here's the kicker. The 00:15:58.210 --> 00:16:00.870 kicker is that Enron often didn't even have the 00:16:00.870 --> 00:16:02.610 power they were scheduling in the first place. 00:16:02.730 --> 00:16:06.029 They were scheduling phantom power to create 00:16:06.029 --> 00:16:08.830 phantom congestion to get paid real money to 00:16:08.830 --> 00:16:10.710 relieve it. So they were getting paid to not 00:16:10.710 --> 00:16:12.230 do something they couldn't do anyway. It was 00:16:12.230 --> 00:16:15.110 pure arbitrage of the rules. The FERC report 00:16:15.110 --> 00:16:17.730 later called the market inherently gameable. 00:16:18.049 --> 00:16:20.169 Inherently gameable. That's some very polite 00:16:20.169 --> 00:16:22.730 government speak for totally broken and corrupt. 00:16:23.009 --> 00:16:25.509 And the result was that wholesalers were selling 00:16:25.509 --> 00:16:28.820 power at up to $20. times the normal value. It 00:16:28.820 --> 00:16:32.980 was a feeding frenzy. So section four, the crisis 00:16:32.980 --> 00:16:36.299 unfolds. We have the trap set. The shortage is 00:16:36.299 --> 00:16:38.940 now real, or at least feels real. And the sharks 00:16:38.940 --> 00:16:41.340 are circling. Now let's watch the ship go down. 00:16:41.519 --> 00:16:45.639 It starts in the summer of 2000, June 14th. A 00:16:45.639 --> 00:16:49.519 massive heat wave hits the Bay Area. 97 ,000 00:16:49.519 --> 00:16:53.139 customers lose power. That must have been a shock. 00:16:53.320 --> 00:16:55.220 I mean, rolling blackouts weren't really a thing 00:16:55.220 --> 00:16:57.840 in America in the 90s, you know. It was absolutely 00:16:57.840 --> 00:17:00.240 stunning. But the real panic started in San Diego. 00:17:00.399 --> 00:17:03.720 Why San Diego specifically? So San Diego Gas 00:17:03.720 --> 00:17:06.220 and Electric SDG &E was in a unique position. 00:17:06.619 --> 00:17:08.980 They had actually managed their finances better 00:17:08.980 --> 00:17:11.180 than the other utilities. They had paid off their 00:17:11.180 --> 00:17:13.900 stranded costs early. So they were released from 00:17:13.900 --> 00:17:15.509 the deal. They were released from the retail 00:17:15.509 --> 00:17:18.309 price cap. They were the first to be fully deregulated. 00:17:18.390 --> 00:17:20.509 Oh boy, so when the wholesale prices went crazy. 00:17:20.769 --> 00:17:22.549 The San Diego customers felt it immediately. 00:17:22.970 --> 00:17:25.930 In August 2000, electricity bills in San Diego 00:17:25.930 --> 00:17:29.690 doubled. Just boom, doubled. Then they tripled. 00:17:29.809 --> 00:17:31.730 I can't even imagine opening your mail. Your 00:17:31.730 --> 00:17:35.390 bill is usually $100, and now it's $250 or $300. 00:17:35.849 --> 00:17:37.710 People revolted. I mean, literally, there were 00:17:37.710 --> 00:17:39.450 protests in the streets. People were burning 00:17:39.450 --> 00:17:41.910 their utility bills in public. Small businesses, 00:17:42.150 --> 00:17:44.829 restaurants, dry cleaners were closing because 00:17:44.829 --> 00:17:47.170 they couldn't pay for electricity. It was political 00:17:47.170 --> 00:17:49.829 poison. And this brings us to Governor Gray Davis. 00:17:50.109 --> 00:17:52.750 He's sitting up in Sacramento watching San Diego 00:17:52.750 --> 00:17:55.750 burn. The Gray Davis problem. Oh. And he was 00:17:55.750 --> 00:17:58.450 completely paralyzed. He saw what was happening 00:17:58.450 --> 00:18:01.940 in San Diego, voter anger. And he decided, I 00:18:01.940 --> 00:18:04.140 cannot let that happen to the rest of the state. 00:18:04.299 --> 00:18:07.579 So he refused to lift the price caps for PG &E 00:18:07.579 --> 00:18:09.980 and Edison. He protected the consumers in LA 00:18:09.980 --> 00:18:12.460 and San Francisco from the immediate price spike. 00:18:13.079 --> 00:18:15.700 But by doing that, he basically doomed the utilities. 00:18:16.000 --> 00:18:17.839 Because the utilities were still stuck buying 00:18:17.839 --> 00:18:21.279 power at that 800 percent markup. Right. Treasury 00:18:21.279 --> 00:18:23.720 officials and economists were screaming at Davis. 00:18:23.819 --> 00:18:25.779 They were saying, you have to raise rates. If 00:18:25.779 --> 00:18:27.599 you raise rates, people will use less power. 00:18:27.859 --> 00:18:30.380 Demand will drop and the wholesale price will 00:18:30.380 --> 00:18:32.759 come down. It's the price signal. If power is 00:18:32.759 --> 00:18:36.660 expensive, I turn off the AC. Exactly. But Davis 00:18:36.660 --> 00:18:39.619 feared political suicide. So he kept the caps 00:18:39.619 --> 00:18:43.140 and the utilities just bled to death. By December 00:18:43.140 --> 00:18:47.099 2000, wholesale prices were up 800%. The utilities 00:18:47.099 --> 00:18:49.200 were paying up to 50 cents per kilowatt hour, 00:18:49.299 --> 00:18:51.359 but were only allowed to sell it for six or seven 00:18:51.359 --> 00:18:53.819 cents. You can't make that math work. Not for 00:18:53.819 --> 00:18:57.140 long. You absolutely cannot. In April 2001, the 00:18:57.140 --> 00:18:59.539 inevitable happened. Pacific Gas and Electric 00:18:59.539 --> 00:19:01.920 filed for bankruptcy. One of the biggest companies 00:19:01.920 --> 00:19:05.339 in America. Bust. And while the money was running 00:19:05.339 --> 00:19:08.099 out, the grid was physically collapsing. Winter 00:19:08.099 --> 00:19:11.339 2000 into spring 2001, we started hitting stage 00:19:11.339 --> 00:19:13.500 three alerts. And that means reserves are below 00:19:13.500 --> 00:19:16.000 3%. It means you are driving on the highway at 00:19:16.000 --> 00:19:18.240 70 miles an hour and your gas light is flashing. 00:19:18.420 --> 00:19:20.319 You are moments from stalling out. And they did 00:19:20.319 --> 00:19:23.279 stall out. They did. March 19th and 20th, 2001 00:19:23.279 --> 00:19:27.140 were the dark days. 1 .5 million customers lost 00:19:27.140 --> 00:19:29.680 power. One and a half million. That's huge. And 00:19:29.680 --> 00:19:31.519 then again in May, it really felt like the state 00:19:31.519 --> 00:19:33.480 was falling apart. Traffic lights out means car 00:19:33.480 --> 00:19:35.920 accidents. Elevator stopping means fire rescues. 00:19:35.980 --> 00:19:38.680 It was absolute chaos. OK, let's talk about the 00:19:38.680 --> 00:19:41.480 political fallout. Section five, because when 00:19:41.480 --> 00:19:44.759 the lights go out, voters want a head on a platter. 00:19:44.839 --> 00:19:47.440 And Gray Davis was the main course. His popularity 00:19:47.440 --> 00:19:50.039 absolutely tanked and he was getting hit from 00:19:50.039 --> 00:19:52.500 both sides of the aisle. From the left, you had 00:19:52.500 --> 00:19:55.170 people like Arianna Huffington. Right. The critique 00:19:55.170 --> 00:19:57.730 from the left was that Davis was too cozy with 00:19:57.730 --> 00:20:00.349 the energy companies. They said he waited too 00:20:00.349 --> 00:20:02.450 long to crack down on the manipulators because 00:20:02.450 --> 00:20:04.690 he was taking campaign contributions from them. 00:20:04.829 --> 00:20:08.230 They wanted him to seize the power plants, nationalize 00:20:08.230 --> 00:20:10.490 them. And from May, right. The critique from 00:20:10.490 --> 00:20:12.890 the right was that he interfered too much. They 00:20:12.890 --> 00:20:15.410 said the price caps were the problem. If he had 00:20:15.410 --> 00:20:17.589 just let the market work, even if it was painful 00:20:17.589 --> 00:20:20.170 for consumers in the short term, the crisis would 00:20:20.170 --> 00:20:22.819 have burned itself out much faster. But Davis 00:20:22.819 --> 00:20:25.039 tried to fix it with those long -term contracts. 00:20:25.539 --> 00:20:28.680 And that became a huge and very negative part 00:20:28.680 --> 00:20:31.079 of his legacy. It was a total desperation move. 00:20:31.220 --> 00:20:33.660 The utilities were bankrupt, so the state of 00:20:33.660 --> 00:20:36.000 California itself stepped in to buy the power. 00:20:36.259 --> 00:20:39.259 And Davis signed these massive long -term contracts 00:20:39.259 --> 00:20:42.519 with the generators to guarantee supply. But 00:20:42.519 --> 00:20:44.460 he signed them at the absolute peak of the market. 00:20:44.619 --> 00:20:47.819 It's like panic buying toilet paper for $50 a 00:20:47.819 --> 00:20:51.119 roll. He locked in those insane crisis level 00:20:51.119 --> 00:20:54.759 prices for 10 years. Wow. So California consumers 00:20:54.759 --> 00:20:57.400 were paying a crisis surcharge on their bills 00:20:57.400 --> 00:21:00.539 long, long after the crisis was over. And all 00:21:00.539 --> 00:21:03.420 this anger, all this frustration, it opened the 00:21:03.420 --> 00:21:06.240 door for a very famous replacement. The Terminator. 00:21:06.359 --> 00:21:09.079 Arnold Schwarzenegger. Yeah. But there is a detail 00:21:09.079 --> 00:21:12.019 in the sources that I found fascinating. An Arnold 00:21:12.019 --> 00:21:14.039 connection during the crisis before he was even 00:21:14.039 --> 00:21:16.839 running for governor. Yes, this is a scene right 00:21:16.839 --> 00:21:19.740 out of a movie. It's May 2001. The Peninsula 00:21:19.740 --> 00:21:23.420 Hotel in Beverly Hills. Very swanky. Arnold Schwarzenegger 00:21:23.420 --> 00:21:25.539 and the former L .A. Mayor Richard Riordan are 00:21:25.539 --> 00:21:28.619 having a meeting. And who walks in? Kenway. The 00:21:28.619 --> 00:21:31.829 CEO of Enron. The villain himself. Enron presented 00:21:31.829 --> 00:21:34.029 what they called a comprehensive solution to 00:21:34.029 --> 00:21:36.410 Arnold. What was the solution? Essentially, make 00:21:36.410 --> 00:21:38.849 the investigations go away. Enron wanted the 00:21:38.849 --> 00:21:41.130 political heat to stop. They wanted the federal 00:21:41.130 --> 00:21:43.569 and state investigations into their trading practices 00:21:43.569 --> 00:21:46.349 to end. And in exchange, they implied they could 00:21:46.349 --> 00:21:48.930 help stabilize the market. It's basically extortion. 00:21:49.789 --> 00:21:52.049 Nice grid you have there. Shame if something 00:21:52.049 --> 00:21:54.190 were to happen to it. It shows how incredibly 00:21:54.190 --> 00:21:56.470 powerful Enron thought they were. They thought 00:21:56.470 --> 00:21:58.230 they could just negotiate with the future governor 00:21:58.230 --> 00:22:01.089 to wipe away their fraud. But it didn't work. 00:22:01.269 --> 00:22:04.109 No. By that point, the house of cards was already 00:22:04.109 --> 00:22:06.769 shaking. Before we see those cards fall, there 00:22:06.769 --> 00:22:09.529 is one weird exception in this whole story that 00:22:09.529 --> 00:22:13.430 we have to mention. Los Angeles. Ah, yes. The 00:22:13.430 --> 00:22:17.250 Los Angeles Department of Water and Power. LADWP. 00:22:17.390 --> 00:22:19.289 While the rest of the state was in the dark, 00:22:19.769 --> 00:22:24.410 LA kept the lights on. How? Why? This is the 00:22:24.410 --> 00:22:27.450 great irony of the whole situation. LADWP is 00:22:27.450 --> 00:22:30.490 a government -owned municipal utility. So they 00:22:30.490 --> 00:22:32.579 weren't part of the deregulation law? They were 00:22:32.579 --> 00:22:35.059 exempt. They kept their old school vertical monopoly 00:22:35.059 --> 00:22:37.539 structure. They own their power plants. They 00:22:37.539 --> 00:22:39.380 own their lines. And they answered to the city 00:22:39.380 --> 00:22:42.180 council, not to shareholders. So the inefficient 00:22:42.180 --> 00:22:44.240 government bureaucracy actually worked better. 00:22:44.420 --> 00:22:46.799 Not only did it work better, they profited from 00:22:46.799 --> 00:22:49.900 the crisis. Because LEDWP had excess capacity, 00:22:50.180 --> 00:22:52.720 they sold their extra power into the state's 00:22:52.720 --> 00:22:54.960 spot market. Wait, what? They were selling power 00:22:54.960 --> 00:22:58.700 to PG &E and the state at those same inflated, 00:22:58.700 --> 00:23:02.049 manipulated prices. The city of L .A. was playing 00:23:02.049 --> 00:23:03.869 the shark. They made millions and millions of 00:23:03.869 --> 00:23:06.250 dollars off the crisis, and they used that money 00:23:06.250 --> 00:23:09.109 to keep rates low for their own residents. So 00:23:09.109 --> 00:23:11.430 if you lived in L .A., you were watching the 00:23:11.430 --> 00:23:13.609 rest of the state burn while your bill stayed 00:23:13.609 --> 00:23:15.769 flat. That really challenges the whole narrative 00:23:15.769 --> 00:23:18.150 that private enterprise is always more efficient. 00:23:18.349 --> 00:23:21.269 In this specific case, the public model was the 00:23:21.269 --> 00:23:24.390 lifeboat. So how did the nightmare finally end? 00:23:25.269 --> 00:23:29.259 Section 6. Resolution and justice. It wasn't 00:23:29.259 --> 00:23:32.220 one single silver bullet, but the biggest factor 00:23:32.220 --> 00:23:35.519 was the FERC finally doing its job. The Federal 00:23:35.519 --> 00:23:37.900 Energy Regulatory Commission. Yeah. For a long 00:23:37.900 --> 00:23:39.180 time, they were just sitting on their hands. 00:23:39.319 --> 00:23:41.500 They were ideologically paralyzed. They believed 00:23:41.500 --> 00:23:44.279 in the sanctity of the free market. Their leadership 00:23:44.279 --> 00:23:46.019 kept saying, we can't intervene. The market will 00:23:46.019 --> 00:23:49.200 correct itself. But by June 2001, the evidence 00:23:49.200 --> 00:23:51.680 of manipulation was undeniable. The state was 00:23:51.680 --> 00:23:54.640 bleeding to death. So they stepped in. They instituted 00:23:54.640 --> 00:23:57.660 hard price caps across the entire Western market. 00:23:57.980 --> 00:24:00.579 They basically said, you cannot charge more than 00:24:00.579 --> 00:24:03.299 X dollars for a megawatt, period. And what happened? 00:24:03.460 --> 00:24:06.539 The volatility vanished overnight. It's almost 00:24:06.539 --> 00:24:09.359 like the shortage wasn't real. Exactly. Once 00:24:09.359 --> 00:24:12.019 the incentive to manipulate the price was gone, 00:24:12.140 --> 00:24:14.559 once they couldn't make 20 times the normal value, 00:24:14.779 --> 00:24:17.279 the generators suddenly found enough power to 00:24:17.279 --> 00:24:19.720 sell. All those plants that needed maintenance 00:24:19.720 --> 00:24:22.019 were suddenly fixed. The weather helped too, 00:24:22.059 --> 00:24:25.000 right? Yes. The drought eased up in the Pacific 00:24:25.000 --> 00:24:27.720 Northwest, and honestly, Californians did an 00:24:27.720 --> 00:24:30.559 amazing job at conservation. People really did 00:24:30.559 --> 00:24:32.500 turn off their lights and appliances when asked. 00:24:32.819 --> 00:24:36.539 Demand dropped significantly. And then the giant 00:24:36.539 --> 00:24:40.859 fell. Enron. December 2001. Enron filed for bankruptcy. 00:24:41.460 --> 00:24:43.539 Now, that was mostly due to their accounting 00:24:43.539 --> 00:24:45.599 fraud, the mark to market scandals and hiding 00:24:45.599 --> 00:24:48.519 debt. But the California crisis was a huge part 00:24:48.519 --> 00:24:50.559 of their unraveling. It put a national spotlight 00:24:50.559 --> 00:24:52.720 on them and their culture of corruption. What 00:24:52.720 --> 00:24:54.740 about justice for California? Did they ever get 00:24:54.740 --> 00:24:57.740 the money back? Some of it. But it was a long, 00:24:57.759 --> 00:25:02.079 painful road. The FERC launched the gaming case 00:25:02.079 --> 00:25:05.539 and the refund case. These lawsuits dragged on 00:25:05.539 --> 00:25:08.319 for over a decade. I saw a note about a settlement 00:25:08.319 --> 00:25:11.759 as late as 2013. Yeah, PowerX. That's a Canadian 00:25:11.759 --> 00:25:14.660 utility. Twelve years after the crisis, they 00:25:14.660 --> 00:25:18.720 agreed to refund $750 million for bad behavior. 00:25:18.980 --> 00:25:21.420 But the total damage? The best estimates are 00:25:21.420 --> 00:25:25.220 between 40 and 45. billion in economic damage. 00:25:25.319 --> 00:25:27.799 You can sue for refunds on overcharges, but. 00:25:28.170 --> 00:25:30.250 You can't get that lost economic growth back. 00:25:30.390 --> 00:25:33.049 No, that money is just gone. It was a massive 00:25:33.049 --> 00:25:35.670 wealth transfer from California consumers to 00:25:35.670 --> 00:25:38.470 energy traders in Houston and elsewhere. So let's 00:25:38.470 --> 00:25:39.990 wrap this up. What does this all mean? Because 00:25:39.990 --> 00:25:42.289 we are still debating energy grids today. We 00:25:42.289 --> 00:25:44.150 have Texas freezing over. We have renewables 00:25:44.150 --> 00:25:46.230 coming online. This isn't just a history lesson. 00:25:46.430 --> 00:25:48.750 It's extremely relevant. I think the first major 00:25:48.750 --> 00:25:51.089 takeaway is that electricity is unique. It is 00:25:51.089 --> 00:25:53.410 not a normal commodity. It's not shoes. It's 00:25:53.410 --> 00:25:56.410 not lemons. Exactly. You can't store it easily 00:25:56.410 --> 00:25:58.589 in large amounts. You can't choose not to buy 00:25:58.589 --> 00:26:01.710 it. If the price of shoes goes to $1 ,000, I 00:26:01.710 --> 00:26:04.049 go barefoot. If the price of electricity goes 00:26:04.049 --> 00:26:07.329 to $1 ,000, I pay it or I die in the heat. It's 00:26:07.329 --> 00:26:09.910 essential for life. As David Freeman, who was 00:26:09.910 --> 00:26:11.910 the expert brought in to clean up the mess for 00:26:11.910 --> 00:26:14.089 the California Power Authority, had this powerful 00:26:14.089 --> 00:26:17.410 quote. He said, any system that can be gamed 00:26:17.410 --> 00:26:20.410 will be gamed. That is the golden rule of regulation. 00:26:20.849 --> 00:26:23.470 And he also said, electricity is a public good 00:26:23.470 --> 00:26:25.890 that must be protected from private abuse. You 00:26:25.890 --> 00:26:27.869 cannot just throw it to the wolves and hope the 00:26:27.869 --> 00:26:30.190 market plays nice. The second takeaway seems 00:26:30.190 --> 00:26:32.970 to be about the design itself. You can't half 00:26:32.970 --> 00:26:35.960 -ass deregulation. Correct. Partial deregulation 00:26:35.960 --> 00:26:39.299 is worse than no deregulation. You cannot uncap 00:26:39.299 --> 00:26:42.400 the sellers but cap the buyers. That fundamental 00:26:42.400 --> 00:26:45.000 disconnect divorced the price signal from the 00:26:45.000 --> 00:26:47.740 consumer. It blinded the market to reality until 00:26:47.740 --> 00:26:50.180 the entire system broke. And finally, the role 00:26:50.180 --> 00:26:53.140 of private interests. Enron proved that a corporation, 00:26:53.539 --> 00:26:56.319 if left unchecked, will ruthlessly exploit a 00:26:56.319 --> 00:26:58.779 broken system, even if it harms millions of people. 00:26:58.980 --> 00:27:01.539 They weren't evil in a cartoon sense. They were 00:27:01.539 --> 00:27:04.009 just maximizing profit within the rules. or the 00:27:04.009 --> 00:27:07.609 lack of rules that existed. If you leave a loophole 00:27:07.609 --> 00:27:10.289 that allows a trader to make a million dollars 00:27:10.289 --> 00:27:12.829 by shutting down a plant, they will shut down 00:27:12.829 --> 00:27:15.349 the plant. It's inevitable. It's a sobering story. 00:27:15.670 --> 00:27:17.450 But before we go, I want to leave the listener 00:27:17.450 --> 00:27:20.089 with a final thought, a bit of a what if. Go 00:27:20.089 --> 00:27:22.890 for it. So the International Energy Agency did 00:27:22.890 --> 00:27:26.019 an analysis. of this crisis, and they estimated 00:27:26.019 --> 00:27:28.880 that during the peak of the blackouts, if demand 00:27:28.880 --> 00:27:32.140 had been lowered by just 5%. Just 5%, that's 00:27:32.140 --> 00:27:34.539 not much. Just 5%, the price of electricity would 00:27:34.539 --> 00:27:37.339 have dropped by 50%. Wow, that is a staggering 00:27:37.339 --> 00:27:39.759 statistic. It shows the insane leverage of the 00:27:39.759 --> 00:27:42.859 margin. When the system is tight, a tiny reduction 00:27:42.859 --> 00:27:45.119 in demand saves everything. It really makes you 00:27:45.119 --> 00:27:48.079 think. We focus so much on the supply side, building 00:27:48.079 --> 00:27:50.539 more plants, drilling for more gas, but the real 00:27:50.539 --> 00:27:53.319 power is on the demand side. If we had better 00:27:53.319 --> 00:27:56.279 ways to just slightly dial back our usage during 00:27:56.279 --> 00:27:58.740 peaks, we could avoid these crises entirely. 00:27:59.220 --> 00:28:03.460 And in an era of AI, electric vehicles, and massive 00:28:03.460 --> 00:28:06.579 data centers, our demand is about to skyrocket 00:28:06.579 --> 00:28:09.599 again. Are we walking into another capacity trap? 00:28:09.839 --> 00:28:11.859 That is the billion -dollar question, isn't it? 00:28:11.859 --> 00:28:14.019 Are we smarter now, or are we just waiting for 00:28:14.019 --> 00:28:16.339 the next Death Star? Let's hope we learned our 00:28:16.339 --> 00:28:19.640 lesson. Thanks for listening to this deep dive 00:28:19.640 --> 00:28:22.680 on the California electricity crisis. Stay curious, 00:28:22.880 --> 00:28:25.539 read the fine print, and maybe turn off the lights 00:28:25.539 --> 00:28:27.140 when you leave the room. See you next time.