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  One man who couldn’t ignore the lessons, because they destroyed his career, was the public official who was later credited with being the author of California’s deregulation plan. Oddly enough, he was a liberal Democrat, and a moviemaker, no less. His name was J. Stephen Peace, and he worked in the state capital of Sacramento.

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  It is significant that the disaster began in Sacramento. One reason the chaos originated there is that almost nobody paid attention to what happened in Sacramento. The world’s attention was focused on other parts of California—Hollywood, the world’s entertainment capital, and Silicon Valley, the world’s technology capital. Sacramento, by contrast, wasn’t the capital of anything, other than California’s state government.

  While the power outages and economic crisis in late 2000 would draw worldwide attention when they unfolded, very little attention was being paid in 1996, when the state dismantled and rebuilt its electricity industry.

  That isn’t to say that Stephen Peace didn’t try. He did his best to draw a crowd, and had the flair of a natural showman. He was tall and slender and looked a lot like the actor Jack Nicholson, with a wide forehead and thick, sharp eyebrows that amplified his facial expressions. His parents were both schoolteachers, and Peace said his family’s motto was “It’s better to be a smartass than a dumbass,” a piece of wisdom that he employed in public hearings. When he disagreed with someone’s opinion, he was quick to call it out as “happy horseshit.”

  Peace was put in charge of the effort because he was head of the State Senate’s energy committee. He was an unlikely champion of deregulation, being both a Democrat and a skeptic of free markets. But the momentum to deregulate California’s markets was unstoppable, and Peace thought he could shape the effort for the better. He was known in Sacramento as a lawmaker who relished in the challenge of dealing with profoundly complicated issues.

  Steve Peace had the storyteller’s gift. Like a lot of kids who grew up in Southern California, Peace had fallen in love at a young age with the business of moviemaking. When he was in his twenties, Peace and two of his high school buddies came up with an idea for a campy humor film called Attack of the Killer Tomatoes! Peace produced the movie, cowrote it, and starred in it. He was only twenty-five years old when the film was released in 1978. It became a cult sensation and made him moderately wealthy. The success of Killer Tomatoes! was puzzling to almost everybody. The movie didn’t even have many killer tomatoes in it. But everything about it—from the clumsy jokes to the wooden acting—was painfully low-budget. Many people might have enjoyed it simply because it was so bad.

  It only became apparent years later that Attack of the Killer Tomatoes! was prophetic in important ways. The movie captured the spirit of the age, and it documented the kind of political struggles that would eventually ruin Peace’s political career. At its core, the movie is about government incompetence and institutional decay. The tomatoes make only a few cameo appearances as they attack Californians enjoying the fruits of American middle-class life. What’s more important is the fact that the tomatoes were unleashed by incompetent government scientists working at a top-secret USDA test plot, who accidentally create a strain of lethal fruit.II

  The tomatoes kill civilians and attack cities across the nation. But the president just sits at his desk and signs blank pieces of paper. The Senate holds hearings but does nothing. The army sends in soldiers, and they end up sitting in offices, arguing, and looking at maps on the wall as the country is destroyed state by state (“There goes Arkansas!” one soldier declares). The only effective institution in the movie was the public relations industry, which bombarded Americans with the idea that the tomato attack was a blessing.

  Peace had a feature role in the film. He played a mentally unbalanced commando who doesn’t seem to realize that World War II is over. He runs around most of the time dragging a deployed parachute on the ground behind him. If Peace was cynical about American politics, he wasn’t without hope. His stepfather was heavily involved with local Democratic politics, and Peace became intrigued with the political process. He got a job as a legislative staffer and saw the process of lawmaking up close. When he was twenty-nine years old, he decided that he would run for a seat in the California State Assembly. He won the seat, and over the next decade, he won the confidence of his fellow legislators. One of the first things that anybody seemed to mention about Steve Peace was that he’d starred in the tomato movie. It was an invitation not to take him seriously. But his coworkers soon discovered that Peace had a real interest and aptitude in taking on the most intractable issues. There were whole continents of public policy where even the most hardened lawmakers didn’t dare to tread, areas that were so tedious and so complicated and so lacking in public exposure that they promised to swallow public-service careers whole. Regulating public utilities was one of these areas. Just the phrase “regulating public utilities” was enough to make a citizen change the channel or skip to the next news article. It was one of those ironic facts of America life: very few issues affected people more deeply than providing them with electricity, but very few issues drew less public interest.

  For whatever reason, Steve Peace was profoundly interested in the topic. He learned the issue from top to bottom and from inside to out. If caught in the hallways of the state capitol, Peace could immediately be drawn into a heated and hours-long conversation about California’s utilities companies and regulatory structure. Because of this knowledge and interest, Peace was given more committee assignments and more responsibilities. He won a race to become a state senator, and became a leading authority on electricity and utilities.

  This is how, in 1996, Steve Peace came to lead the state’s efforts to break apart the existing electricity industry and replace it with something new. Over a matter of months in 1996, he oversaw a grueling process—it would earn the nickname “the Peace Death March”—to produce a bill that was described as being as thick as a telephone book, which created the new markets for trading megawatt-hours.

  When Peace held public hearings on the issue, he realized the audience for public policy debates was minuscule. But the hearings revealed a long and complicated history that reflected the changing nature of America’s economy. Back in the “hands-off” days of laissez-faire economics, in the late 1800s and early 1900s, California’s electricity was a free-market dream. Companies set up shop wherever they wanted and built big power plants and transmission lines to carry power. They charged a market price for electricity. But this turned out to be problematic. Electrical utility companies tended to be monopolies—there was really only room for one big company to operate in any given area, and it was expensive to build power plants and grids. The monopolies charged exorbitant prices for their power, because they could. They also refused to build transmission lines to rural areas or other neighborhoods where they didn’t feel like they could make a profit.

  Electricity—and therefore modernity itself—was something of a luxury good. This was unpopular. People wanted the luxury of electricity, and the government responded to their wishes. This gave rise to a model that prevailed during the era of the New Deal consensus: the utilities remained monopolies with private owners, but they were tightly regulated and overseen by the government. Agencies like the California Public Utilities Commission were created to make sure that the utilities didn’t price gouge customers and that they offered reliable service.

  This system worked so well that everybody forgot it existed. Rates remained reasonable, and the public commissions worked in the background to ensure it. Electrical power was extended into virtually every corner of American life and became something akin to a basic human right.

  Then the age of volatility hit in the 1970s. Electricity prices rose along with those for oil during the era of the OPEC embargo. The bureaucrats who oversaw the electricity business didn’t know how to respond effectively. It seemed like they could never get the porridge just right; prices rose, and the utilities stumbled from one yea
r to another without clear direction. The bureaucrats bickered. What price was “reasonable”? When was a rate increase “justified”? Public faith in the system diminished. At the same time, environmental laws made it harder to build new power plants. The American public put a premium on not living in the haze of a nearby coal plant and dying of respiratory illness at an early age while their children suffered from asthma. This slowed the construction of new facilities. Real scarcity of power emerged at times in California even as regulators managed to cut down electricity usage by encouraging conservation.

  This stoked an effort to deregulate the industry in the 1990s. The idea was to replace highly regulated monopolies with competitive markets where people could buy and sell electricity freely. The power of the invisible hand would make electricity cheaper every day, and would give utilities incentives to become more efficient and increase production.

  Again, this is an excruciatingly dull story that nobody wanted to hear about back then.III When Steve Peace began to hold public hearings in the summer of 1996, the events garnered virtually no media attention. While there would be plenty of national media coverage later, when the catastrophe unfolded, there appears to have been zero national coverage when the deregulation bill was being written.

  This is not to say that the auditorium was empty on the warm summer evenings when Peace and his colleagues would convene to begin debating about megawatt-hours and reasonable rates. In fact, the room was often full. The seats were filled by a class of people who got paid a lot of money to watch the proceedings: lawyers, lobbyists, and consultants who represented large utility companies, natural gas companies, and trading firms like Koch Industries and its fellow energy conglomerate in Texas, Enron.

  The well-dressed lobbyists who filled the seats in Peace’s hearing room were just the most visible piece of a much larger political influence operation. Peace would come to understand this better when he got invited to speak at industry events about deregulation. The invitation came from a strange and little-known organization called the American Legislative Exchange Council. He was as surprised as anyone to find himself, a Democrat, speaking to the group.

  ALEC was an umbrella group that coordinated efforts among conservative state legislators around the nation. ALEC’s mission, and its organization, was a novel innovation. State legislatures were often seen as policy backwaters. ALEC stepped into the breach by giving much-needed resources to overworked and underpaid state lawmakers. This innovation was born of necessity in 1973, when liberal politics dominated Washington. ALEC’s founder, a religious conservative activist named Paul Weyrich, felt it would be far more effective to push policy ideas on the state level. He was right.

  By the time Peace arrived to address the group, ALEC was deeply committed to promoting electricity deregulation, even though the business community was torn on the issue. The reason for ALEC’s support was straightforward: the group’s policy positions were effectively bought by the highest bidder among its corporate members, including big companies like Koch Industries and Enron. This structure came about because ALEC had been only marginally successful in its early years, with few resources and an anemic membership list. Then ALEC’s leaders struck on a novel idea: they would seek corporate sponsorship. This idea played well with business conservatives who believed that government agencies should act more like private corporations, promoting ideas with the highest market value. ALEC offered corporations the chance to become dues-paying members of the organization. Over the years, a pay-to-play structure emerged at ALEC. The dues-paying corporations didn’t just determine which policies would be promoted; they actually coauthored the bills that ALEC’s legislative members took back home and tried to pass.

  ALEC created a set of “task forces” that addressed issues of concern to the corporate members. The task forces were directed by a team composed of corporate representatives and state legislators. This partnership appears to be unique in American history, giving companies an unprecedented chance to craft public policy.

  Brand-name companies like Procter & Gamble and Coors Brewing joined ALEC. But Koch Industries was one of the most active participants. Koch almost always sent a representative to ALEC’s task force meetings, recalled Bonnie Sue Cooper, who was chairman of ALEC in 1997. A Koch lobbyist named Mike Morgan was on ALEC’s board of directors with Cooper. In the late 1990s, when ALEC was struggling financially, Koch’s political network loaned the group $500,000 to keep it afloat.IV

  Koch Industries also gained a reputation as an important leader within ALEC because the company was particularly willing to give money to lawmakers’ campaigns. At the time, the return on investment was relatively high when it came to funding a state legislator in his or her race. Even a few thousand dollars could still make a difference.

  During the 1990s, Koch Industries and Enron were key members of the ALEC task force that pushed for electricity deregulation across the nation. Their reasons for doing so were obvious—deregulation would open huge new trading markets that they were ready to enter—but it wasn’t at all clear in the beginning that they would win their case. ALEC’s utility company members opposed the deregulation plan. Deregulation would break apart the existing utility model, forcing companies to buy their power from traders rather than produce it at their own plants.

  Koch and Enron won the battle in part because they could afford ALEC’s premium membership fees. The utility companies got outbid in ALEC’s lawmaking auction. “It’s a situation where you buy a seat at the table, and then you have the opportunity to vote and drive policy,” an exasperated utility lobbyist named Tim Kichline later told the Austin American-Statesman. “We don’t have enough votes. . . . If they are going to do something we like, they don’t need our votes; and if they are going to do something we do not like, we can’t stop them.”

  After Koch and Enron won the fight, ALEC crafted “model bills” for electricity deregulation. In states like Mississippi and South Carolina, ALEC’s model bills were introduced almost verbatim. In California, the Republican state senator and ALEC member Jim Brulte was on hand to help guide the legislative efforts alongside Steve Peace. Without pressure from groups like ALEC, it’s not at all clear that deregulation would have happened at all. The general voting public certainly wasn’t pushing for it—people weren’t taking to the streets with placards and banners demanding electricity trading. Even under the best circumstances, the benefit of deregulation to consumers was likely to be minimal. Consumers would have to shop between electricity providers only to gain a savings of a few dollars, or even a few cents, on their electricity bills.

  Even though he drove the legislative effort to deregulate, Peace remained uneasy. He remained skeptical of the free-market advocates. He knew markets might be more efficient in the long run, but they also created a lot of volatility. The market didn’t care if an average family in San Diego could afford to keep their lights on, or if customers wanted a predictable cost of electricity from month to month. The industry lobbyists and trade groups didn’t seem to fully appreciate this. But Peace saw that there was no stopping the train.

  “I realized that this all was in motion and was many years in the works,” Peace said.

  Peace and Brulte passed the bill in August of 1998. The law was radical in nature. It instantly broke apart the state’s big utility companies. The utilities became glorified middlemen, buying energy on an open market from traders at Koch and Enron and then selling it to the utility’s customers. The utilities had to sell their power plants to outside companies—many of them in Texas—that operated the plants as independent companies. The utilities also lost their transmission lines, which were taken away and turned into something that resembled a railroad or a pipeline. Anybody could now schedule power to run across the transmission lines, making them the common carrier of power. The world of electricity trading, in other words, was starting to look a lot like the world of natural gas trading that made Brenden O’Neill’s team so rich.

  It would take t
wo years for the bill to take full effect. But by 2000, the markets were open, and the gold rush had begun. Koch Industries was one of the few companies ready to capture the opportunity.

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  Koch Industries had constructed its own intelligence network, from the ground up, to support its new team of traders as they bought and sold electrons.

  Traders on the electricity desk analyzed the new marketplace with an internally developed tool called the West Power Clearing Model. It used a software program that sucked in and synthesized huge amounts of data to determine the supply and demand for electricity in places like California. The model considered how high electricity reserves were at key nodes in Southern California, the “Desert Southwest,” and Northern California. It also considered the cost of electricity transmission along power lines and the different price of power at several locations. This helped traders start to make “basis plays,” as they did in the oil markets, exploiting the changing prices within fractured markets. The model also integrated published information about upcoming power plant outages, expected gas prices, and anticipated demand for energy.

  Darrell Antrich helped lead the small team of traders who started using the West Power Clearing Model when California markets were open for business. One of the star traders on his team was a young woman named Melissa Beckett, a graduate of Fort Hays State University in Kansas. She was a small-town girl with the work ethic to prove it. The trading floor was dominated by young white men, but Beckett managed to hold her own among them. She gained respect for her trading acumen and had a no-frills air about her, wearing her hair in a shoulder-length bob cut and dressing in low-key attire like white blouses with dark slacks. She arrived at work early and worked the phones relentlessly, calling around to brokers and other traders and utility companies to get a feel for the going price of electricity. During her career at Koch, Beckett had worked on the crude oil desk, so she was privy to the vast stream of data that Koch used for trading. She used the data to calculate the marginal cost of electricity. Then they could compare it to prices in the market and get to work trying to outsmart everyone else who was selling power.