Friday, April 07, 2006

The Engineer and Grandma Millie: The California Energy Crisis Revisited

Engineers like to think that what they do professionally helps people. The payoff in this regard is not as direct as a doctor gets when he takes in a dying patient and sends them home feeling fine. But most engineers, I suspect, would like to believe that the work they do makes a positive difference in the lives of people who use their products and services.

This connection is especially visible in the area of electric utilities. In the aftermath of numerous hurricanes and storms in 2005, we saw teams of hundreds of linemen coming from all across America to repair the damaged distribution infrastructure. Linemen aren't engineers, true, but I have encountered the same "keep the power coming" attitude in power engineers whose job it is to direct operations of the regional power pools that maintain a moment-by-moment balance between the fluctuations of electricity demand and the available supply. Since electricity cannot be stored in large quantities, it must be produced as needed, and keeping abreast of changing demands can be a headache, even when no one is trying to play financial games too.

This week, two of the all-time top financial game-players are on trial for lying about their company's profitability. Jeffrey Skilling, former CEO of Enron, and Kenneth Lay, the firm's founder, are being tried in a fraud and conspiracy case that the federal prosecutors have framed in simple terms. In the years 2000 and 2001, some parts of Enron were losing lots of money, and the claim is that Skilling and Lay knew this and lied about it to investors and the general public. Ironically, one part of Enron that was extremely—some would say sinfully—profitable was the energy-trading division, which the Attorney General of the State of California claims was responsible for many of the rolling blackouts that hit that state in the same years. Skilling and Lay didn't have to lie about that—they just had to live with their consciences.

What happened to the energy market in California in 2000 has been described as the perfect storm of electric-utility deregulation. To make a long and complex story short, increasing demand and partial deregulation led to a situation in which there was simply not enough electricity available in California for several days of unusually hot weather or short supply. The new tariffs allowed companies like Enron to charge whatever the traffic would bear for energy imports and futures, and as a result rates soared to the stratosphere in only a few months. The Attorney General claims that Enron and other utility interests purposefully took generating facilities offline in order to increase their profits. The fallout in terms of accusations, lawsuits, bankruptcy proceedings, and other effects continues to this day. In the process, state investigators unearthed a set of recorded phone conversations among energy brokers at Enron and other firms.

These tapes make for depressing listening. One took place as the state legislature was debating whether to cap the spot price of energy on the open market. "So the rumor's true, they're taking all the f---ing money back from you guys? All the money you guys stole from those poor grandmothers in California?"

"Yeah, Grandma Millie, man. She's the one who couldn't figure out how to vote on the butterfly ballot. Now she wants her f---ing money back from the power utilities. . . ." And these are some of the less obscene samples. Many more such recordings can be found at

The engineers who participated, willingly or unwillingly, in the events of the California energy crisis have not received as much attention as the financial traders who clearly profited from the situation. I have seen a few references in the open literature to their activities and the difficult situation they faced. In the tightly coordinated world of electric power-pool operation, individual action is nearly impossible, since the decision to shut down a facility or make purchases of power here or there is one that only a few individuals can make. Anything other than following orders in a case like this would amount to industrial sabotage, since an uncoordinated attempt to shut down or put online a generator would cause serious damage. Whether or not the engineers involved liked what they were doing, and whether or not they knew its implications, they had few options in the event. Like soldiers in a battlefield, their horizon was limited to their immediate surroundings and the technical circumstances they had to deal with at each moment. It is possible that they realized the wider implications of their actions during the crisis only in retrospect.

If any power engineers involved in the California energy crisis care to share their experiences, it would be appreciated. Engineers are generally far from the centers of political and corporate power where rate setting and related issues are decided. But to the extent that such matters interfere with the average engineer's desire to serve the public, not penalize it, there is something wrong structurally with the way electric utilities are set up and administered.

Since 2001, Enron has gone bankrupt, the California economy has cooled off, continued efforts in energy conservation have alleviated summer blackout threats, and additional generating capacity has been added to the nation's power grid. Sometimes a crisis has to happen in order to galvanize politicians and corporations into action, so we might actually be thankful that the California energy crisis happened when it did, and was no more severe than it was. All the same, it would be easy to become complacent in the face of new schemes for shortchanging Grandma Millie in order to profit the powerful, and we should be wary of them in the future.

Sources: The best source of Enron tapes I have found online is on the California Attorney General's website

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