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 year 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.