Editorial: Remembering Enron’s Impact on California
,June 5, 2006 -- Now that the verdict is in and Ken Lay and Jeff Skilling have been convicted of crimes unrelated to the California energy crisis of 2000-2001, the time is ripe for reflection on the enormous impact that a single company, Enron, had on the deregulation disaster that nearly bankrupted this state. While most of the public’s attention has focused on the various manipulative strategies, such as Death Star and Ricochet, that Enron’s traders employed to take advantage of consumers in California, the real story began much earlier.
Enron not only profited handsomely from electric industry "restructuring" in California, in many ways it was the godfather of the entire concept, it’s most vocal champion, and its largest funding source. Beginning in the early 1990’s, Enron led the charge in a nationwide campaign for “customer choice” in electricity, advocating a break-up of the traditional utility monopolies, modeled on the deregulation of the natural gas industry. Jeff Skilling himself told policymakers in California that electric deregulation would lower electric bills by billions of dollars, rewarding the state with billions more in increased consumer spending. Confronted with what at the time appeared to be very high electricity costs and suffering from the effects of the early 1990’s recession, legislators were all too willing to try an easy way out. At the behest of big business, Sacramento quickly embraced the notion that allowing “retail competition” in electricity would quickly and significantly reduce electric rates.
The California Public Utilities Commission, whose members were appointed by then-Governor Pete Wilson, embraced the theory of electric restructuring in 1994, launching a regulatory and legislative process that took until 1998 to reach fruition. Even then there were no immediate cost savings, only a four-year rate freeze during a “transition period,” at the end of which customers were promised, but certainly not guaranteed, rate reductions of at least 20%.
While some have observed that Enron was not a particularly visible participant in the legislative process that resulted in the electric deregulation statute, its team of lawyers and consultants was actually hard at work behind the scenes, shaping the structure and detailed rules of the new “market” in the countless technical meetings at airport hotels around the state. The result, not surprisingly, was a hodgepodge set of rules and regulations, rife with loopholes, ready for exploitation, and unlike anything that had ever been tested anywhere in the world. When the market “went live” in April of 1998, Enron knew better than anyone where “the gold” was hidden in the complex web of tariffs, protocols and operating procedures that define the new landscape.
During the same period Enron was also becoming the pre-eminent force in the market for natural gas, the primary fuel for electric generation in California. In a dramatic evolution from its roots as a sleepy interstate pipeline delivering supplies from Texas to California, Enron became the dominant force in natural gas trading. Using its “Enron Online” trading platform, Enron became the contractual counter-party to a large fraction of the natural gas transactions in the West, positioning the company to manipulate the cost of this key determinant of electricity prices.
By the late spring of 2000, Enron had the knowledge, the market presence, and the tools to turn a handsome profit in the newly deregulated California electricity market. Indeed, the money the company raked in from its trading activities probably helped to keep the entire corporate ship afloat, as losses from other less successful ventures could be hidden behind the avalanche of cash pouring in from California.
As the crisis wore on, the regulated utilities were squeezed between the rising cost of wholesale power and retail rates that were frozen by law, and by the winter of 2000-2001 they were teetering on the brink of insolvency. At that point Enron delivered the final crushing blow, dumping its “retail choice” customers that it had so avidly solicited back into the laps of the utilities. This move forced the utilities, and later the state itself, to buy power in the dysfunctional wholesale marketplace to serve this additional demand, while freeing Enron to sell the power originally obtained for its retail customers at sky-high wholesale prices. Add Death Star, Fat Boy, Get Shorty and Ricochet and, well, the rest is history, a disaster that cost Californians an estimate $45 billion.
Today Lay and Skilling are convicted, and Enron lies dormant in bankruptcy, but California consumers are shelling out an average of 14 cents per kilowatt-hour for electricity, 40% more than the “high rates” that prompted the disastrous experiment with deregulation in the first place. But that is not the end of the story. Incredibly, the Schwarzenegger administration and other true believers in the “free market” are still working hard behind the scenes to make the world safe for yet another round of electricity deregulation. They won’t use the word, of course, but the continued push for new high-tech electric meters, so-called “capacity” markets and, yet again, “customer choice” are all part of the grand scheme to get deregulation “right” the next time around. California simply cannot afford another dose of the same old snake oil.
(first published in CaliforniaProgressReport.com)
