The fallout continues to spread
from Enron's questionable trading practices and California's energy meltdown,
which will cost the state, consumers and businesses tens of billions of dollars
in energy overpayments and bailout money for its utility companies. As the finger-pointing
quickens from Washington to Sacramento, analysts, lawmakers and consumer groups
debate whether deregulation is a villain or an ally. Did the deregulated market
in California fuel the wild trading by energy brokers, as Enron critics contend?
Or, as the energy industry argues, can free-market trading keep energy prices
low, and can regulators be counted on to stamp out illegal or manipulative behavior?
Outraged Western senators claim their constituents were
bilked out of billions of dollars by Enron and other energy traders who sold
power in 2000 and 2001 into newly deregulated Western markets. In documents
released May 7 by FERC, Enron lawyers outline manipulation by the firm's West
Coast traders during the California power crisis to drive up prices.
Wood, who took over the chairmanship nearly a year ago,
walks a fine line in dealing with the issue. He's an outspoken supporter of
deregulated power markets, appointed by a president for whom excessive regulation
is anathema. Yet Wood has taken pains to condemn manipulation by Enron and other
California wholesalers, and last year supported FERC's imposition of price caps
at the wholesale level. That cools the crisis, at least until the caps expire
on Sept. 30.
Under persistent questioning, Wood declined to say that
the caps will be extended. He said only that FERC will not allow them to expire
without protection for consumers against unscrupulous traders.
Lawmakers skewered the apparent inactivity of FERC for
nearly a year before price caps were put in place. During that time, corporations
went bankrupt, jobs were lost and Californians endured blackouts.
Said Sen. Byron Dorgan, D-N.D.: "The agency you head was
shamefully absent. People at FERC sat on their hands and did nothing."
Some lawmakers, however, refused to let the California
crisis be portrayed as the fault of scheming traders and indulgent federal regulators.
The flawed design of California's deregulation law also bears blame, said Sen.
Frank Murkowski, R-Alaska. "If you create a flawed system, riddled with loopholes,
people will take advantage of it," Murkowski said.
Stephen Hall, an outside lawyer hired as part of an Enron
defense team, said he became "increasingly concerned" as he interviewed Enron
traders about how they bought and sold electricity. "Certain of these trading
strategies involved deception," Hall said. Enron corporate lawyers agreed, and
testimony indicated the practices ended in December 2000.
Hall was the main author of a memo made public by FERC
that outlined trading strategies that artificially drove up prices paid by California
The Enron lawyers stopped short of declaring their clients'
practices illegal, but there were no shortage of testifiers to list state and
federal laws that seemed to be broken: fraud, antitrust violations and racketeering.
Other testifiers also attacked the Enron lawyers for the suggestion that some
good was done by their recommendation that the maneuvers be stopped, saying
enormous economic damage had already been done by the time it stopped.
Richard Sanders, an Enron lawyer who continues to work
for the downsized energy company, told the committee that in June 2001, about
six months after the Hall memo, he briefed former Enron CEO Jeffrey Skilling
about the firm's trading practices as the executive prepared for a trip to California.
He says he recalls Skilling responded with surprise to
the sophomoric names given the strategies — Death Star, Get Shorty, Fat
Boy, Ricochet and the like. Sanders said he doesn't recall any reaction from
Skilling to the trading activities.
Enron spokeswoman Karen Denne declined to comment Wednesday
on the hearings, saying, "We will continue to cooperate with all investigations."
In the meantime, energy experts and Enron critics say the
deregulated electricity market in California allowed Enron to engage in disastrous
trading of energy during the state's power crisis two years ago.
They believe that rampant trading — not an energy-supply
shortage in California and aging power plants, as the energy industry says —
led to blackouts and higher prices for businesses and consumers.
"Deregulation was a license to steal," says Doug Heller
of the Foundation for Taxpayer & Consumer Rights.
In the 1990s, Kenneth Lay, Enron's former CEO, and other
Enron and industry executives were the biggest cheerleaders for a free energy
market in California.
As early as June 1994, Skilling urged the California Public
Utilities Commission to embrace deregulation. A free market would drive down
electricity prices and save the state $9 billion dollars, he said.
"The stakes are huge," Skilling said in a transcript of
the Los Angeles hearing. "And every minute that we delay bringing competitive
markets to California allows the meter to keep ticking."
Consumer groups warned that free-market trading of wholesale
electricity would be disastrous. But politicians and regulators believed Lay,
described by one politico as "the slickest pitchman" for deregulation.
In 1996, California became the first state to deregulate
its electricity market.
Under the plan, the state's utility companies sold some
of their power plants and repurchased electricity through a wholesale auction.
In the auction model, freewheeling traders negotiated buy-and-sell prices with
the state and power companies.
On paper, energy companies would compete fiercely for business
and lower their prices on electricity sold to California and its utilities.
It didn't work. Trading quickly got out of control. In
late 2000, wholesale power prices rose to more than $300 per megawatt hour from
$30 earlier in the year.
Memos released by FERC suggest that Enron falsely overstated
power demand in its requests for energy from the California Independent System
Operator, which runs the state's power grid.
"The Enron schemes demonstrate that Enron was willing to
go to any length to exercise its market power," says Sean Gallagher, general
counsel for the California Public Utilities Commission.
The recession also struck, worsening the crisis. Heat waves
and a cold winter fueled surges in demand for power. Blackouts swept much of
the state. Bills for consumers, small businesses and corporations tripled. Pacific
Gas & Electric, the utility for Northern California, filed for bankruptcy protection.
Energy industry officials defend the free-market system
and energy trading, blaming California's crisis on a drought in the Pacific
Northwest that hurt hydroelectric production there while driving up demand and
prices in California. "Everyone is pointing fingers at FERC, when it was a supply-and-demand
problem," says Jan Smutny-Jones of the Independent Energy Producers Association.
California officials demanded that White House officials
and FERC take action. After months of delay, federal regulators last year capped
the price of wholesale electricity, and the energy system stabilized.
California Gov. Gray Davis and his negotiators ended up
signing long-term power contracts with energy companies for $43 billion —
well over market prices. State officials are negotiating to rewrite the contracts.
"Billions of dollars got thrown overboard," says Nettie
Hogue of The Utility Reform Network, a San Francisco consumer group. "Who's
going to pay for the party now?"