Why Did California’s Lights Go Out?

For a reporter, covering California’s recent yearlong energy crisis was not without its guilty pleasures. The story was exciting, fast moving, and a ticket to Page One. It was a bare-knuckled brawl with billions of dollars at stake. What the story lacked in colorful characters it more than made up for in bizarre twists and hidden clues of gross financial abuses and market manipulation.

But how well did we, as journalists, serve our readers? Writing in a recent New Yorker, Nicholas Lemann, dean of the Columbia University Graduate School of Journalism, noted that society has “given journalists what we think is a critical task: amassing, digesting and getting across important material that isn’t readily accessible to ordinary citizens.” Journalists, he wrote, act as “intermediaries between the public and realms that are otherwise moated by power, distance and complexity.”

During the California crisis, reporters faced especially daunting challenges in moving information across this moat. A slowly evolving system of monopoly utility regulation, with carefully documented costs and profits, had been replaced by a complex network of markets in which electricity and risk—contracts for future delivery of power and arcane securities such as “weather de-rivatives”—were traded like pork bellies. We headed out to cover a bank robbery and discovered that the place had been turned into a casino.

Adjusting to Cover the Electric Story

On energy beats, the question usually asked first by reporters is, “How will this event or proposal affect the rates paid by consumers?.” When utilities operated as government-sanctioned monopolies, being a vigilant reporter mainly required looking over the shoulder of regulators whose job it was to make sure that utilities kept the lights on and costs down. Higher rates were bad, and lower rates were good. The challenge was to extract readable stories from the regulators’ quasi-judicial proceedings, in which agendas read like invoices from auto parts dealers and policy choices were buried inside of 300-page alternate rulings. A former newspaper editor who now works as a public relations advisor to an energy company told me the phrase he and his colleagues used to describe this kind of process-encrusted beat—MEGO, for my eyes glaze over.

But with the opening of the electricity industry to competition, the role of reporters began to change. Rates were freed to move up and down. As a means to judge the health of a market, price fluctuations became almost meaningless. More complex criteria, a broader view, and a longer time frame are needed. In reporting on a competitive electricity industry, the soundness of many business, economic and engineering decisions need to be assessed. With competition, sleepy utility companies with low-risk, dividend-paying stocks got pushed aside by new merchant energy companies promising rapid growth and rising stock prices. That drew the interest of business reporters, like myself, who are always looking for stories about hot stocks and booming industries.

Many newspapers, including mine—the Contra Costa Times—normally give only limited coverage to the electricity industry. When the energy crisis hit, we responded by assigning three reporters—one from the environment beat, one from the state government bureau, and me, from the business section. To keep up with the explosion of news and provide context to our readers, each of us had to depend on and value the knowledge of our colleagues and figure out ways to smoothly handoff reporting and writing duties, even while resolving any disagreements we had respectfully.

One big challenge for us was dealing with energy experts. None of us had been on the energy or utility beat regularly while deregulation’s law and regulations were taking shape. Now we had to learn quickly, while relying on and trusting our instincts and also mixing skepticism with open-minded gathering of information.

Framing the energy story was also difficult. Most Americans embrace the idea of free markets and competition, but they do so selectively, depending on results. When the price of a gallon of gasoline or a kilowatt hour of electricity soars, so does populist outrage. But when the market value of one’s house or stock portfolio climbs at the same time, well, that’s called living the American Dream.

Beginning in the 1980’s, deregulation proposals blossomed across the country. In the early to mid-1990’s, a little-known Houston company called Enron acted as a sort of Johnny Appleseed, planting and financially nurturing seeds of change in the electricity industry in states from California to New Hampshire. Economists predicted that electricity markets would work magic, sparing consumers from costs passed on by bloated monopolies. Rising rates, it was argued, would induce consumers to conserve and investors to build power plants. Low rates would squeeze out inefficient and polluting producers and boost demand when power was available.

Some economists rooted their predictions in an understanding of previous deregulation experiments, including airlines and telecommunications and knowledge of the electricity system. Others—like the one who explained to me the workings of a national power market, an impossibility due to limitations of the current transmission grid—were just reiterating their faith in the inherent superiority of markets. What drew more limited attention were critical issues such as electricity’s unusual characteristic as a commodity that can’t be stored. Also the difficulty of setting up new billion-dollar commodity markets received little attention. Sometimes, warnings of deregulation’s pitfalls dealt only with minor issues, such as the undesired prospect of annoying dinnertime calls from retail marketers.

California’s Electricity Crash

In 1998, California launched its aggressive move to competition. At first, things went pretty smoothly. Then, in the late spring of 2000, a sudden jump in wholesale power costs jolted electricity customers in the San Diego area, where market competition had gotten to the point at which regulators no longer set the retail electricity rates. This exposed the customers to the pain of rising costs, and soon consumer outrage prompted legislators to step in and recap rates in that area.

That episode caused little stir elsewhere in California, where retail rates had remained frozen. San Diego’s problems were easily dismissed as a local aberration in a solid energy system that typically made news only when disrupted by fire, storm or other natural or man-made disasters. With the implication of changes in the power system not yet clear, few saw San Diego as a warning sign of possible problems elsewhere. “We were kind of watching curiously, wondering what the hell this means,” recalls Mike Taugher, my colleague on our paper’s energy beat.

Energy hadn’t normally been a big story in California. In much of the state, a temperate climate means that heat and air conditioning aren’t big issues. Energy costs aren’t central in the defense, entertainment and technology industries, which are the main economic engines.

By the fall of 2000, the power shortages that hit San Diego were spreading throughout the state. Californians faced occasional rolling blackouts that were made more ominous by the block-by-block pattern in which outages were imposed. Meanwhile, the utilities hemorrhaged money when it turned out the rate freeze they had agreed to as compensation for their lost monopolies was much lower than the cost they were now paying to supply the electricity.

As the state’s electricity system crumbled, it was easy for reporters to find victims and tell their stories. There were residents in unlit and unheated houses, motorists stuck at malfunctioning traffic signals, and businesses forced to pay soaring costs and endure mandatory shutdowns. Interest groups nominated themselves as heroes of the unfolding story. Power sellers welcomed reporters onto trading floors in their Houston skyscrapers, but back home, California politicians were pointing to these Texas addresses as being where the villains in this story worked.

The story was portrayed as a modern-day war between states, with California at the mercy of ruthless energy giants with cowboy hats and protection from the federal government. Soon this story line was strengthened when it surfaced that owners were shutting down power plants to create shortages and slick trading was raising prices. Prosecution of wrongdoers began as the state sought relief from overcharges and overpriced contracts.

For us to help readers understand where the crisis came from meant we needed to explore new dimensions of the energy story. There were complex questions to be asked about electricity markets and the engineering of power systems and their answers conveyed in ways nonexperts could understand. We had to go back and look at why the decision to deregulate electricity had been made and determine its wisdom. And then we had to report on the flawed transition plan and how it opened the door to criminal and unethical market manipulation.

Covering these important dimensions of the story taxed the resources and the abilities of daily papers’ newsroom staff, just at a time when economic slowdowns were driving down newspaper revenue. Internally, each of us coped with pressures (or personal desire) to return to our previous beats.

Watchdog Reporting on Energy

The electricity crisis ended not with a bang but a whimper. During the summer of 2001, energy usage declined. Politicians credited public-spirited conservation and touted the market-calming effects of long-term contracts the state had signed with power sellers. In reality, an economic recession had driven down consumption. Nevertheless, controversies continued.

The energy story—and those who were reporting it—moved into courtrooms. PG&E, the state’s largest utility, sought shelter in bankruptcy. State officials and utilities pursued refunds from power sellers. Administrative actions and criminal prosecutions targeted sellers who had shut down plants, fabricated data, and gamed the market. Electricity rates remained elevated by payments on deferred costs and the now-controversial contracts. When the story moved to the courtrooms, we needed to find ways to draw compelling stories out of droning proceedings and forests of complicated legal briefs. Even the most stubborn reporters now faced pressure (alternating with reduced interest) from editors looking for big headlines from the resources they were devoting to this story.

Viewed in the rearview mirror, the energy crisis appears smaller than in real life. The psychological shock of rolling blackouts far exceeded the actual hurt to public health and safety and the costs incurred by businesses (with the exception of a few in power-intensive industries). And even though the state’s energy crisis was a big factor in the public’s disaffection that led to the recall of Governor Gray Davis, energy issues barely surfaced in the successful campaign of Arnold Schwarzenegger.

California newspapers moved on to other crises, even as the structural problems exposed during the energy crisis remain unsolved. Key interest groups are still deadlocked over such basic issues as how to attract investment in new power plants, even as a new chorus of warnings about impending blackouts sounds. And big questions linger about the wisdom of deregulation in the electricity markets and the unleashing of competition.

One thing is certain: The deregulation project will continue, and newspapers will need to figure out how to be consistent and effective watchdogs. What the California crisis demonstrated is that for us to be the public’s watchdogs means reporters need to spend lots of time wandering around the energy beat’s equivalent of junkyards. And editors—at a time of shrinking newsroom budgets—will need to devote the necessary resources to enable reporters to do this—even when the lights are on.

Rick Jurgens reports on business for the Contra Costa Times, where he was part of the reporting team assigned to cover the state’s energy crisis. He now reports on real estate and energy.