Pacific Views

How Deregulation Worked In California

During the 1990's the plans for deregulating the energy market were in full swing and California was one of the first to jump in. But today we have proof that those who were pushing deregulation were actually planning to fleece the public and had planned from the first to institute an elaborate con.

Suggestions that Enron's plans to exploit the energy marketplace as much as three years before the 2000-01 energy crisis jarred some officials, who recalled how Enron executives were traveling the country about the same time making a case to deregulate the marketplace.

"Enron put out the most polished presentations, the glossy materials, the things they put out to every policymaker in the West," said Eric Saltmarsh, executive director of California's Electricity Oversight Board.

"To know that it was basically a scam as far back as that says it wasn't just a fraud on the marketplace in 2000 and 2001, it was really a fraudulent ambition in creating what became of the California marketplace," Saltmarsh said. "In that sense, the [marketplace deregulation] was in some respects set up to fail."

Well, yeah. The California deregulation legislation was the result of a collusion between the politicians and their corporate campaign contributors. And Enron helped write the legislation that allowed them to exploit the weaknesses in the state's laws.

In the mid-1990s, Enron was aggressively hopscotching from state to state, urging deregulation and offering money and promises.

The company pushed for opening up markets in Iowa and Michigan, priming politicians there with contributions. In 1997, it doled out more than $858,000 in soft money and political-action contributions to members of Congress, becoming the largest contributor from the energy industry. That year it hired Ralph Reed, the former head of the Christian Coalition, to preach its agenda.

At the time, Enron was a comparatively small ($8 billion a year in revenue) marketer of natural gas. But it was on its way toward becoming one of the world's most successful companies, a $100-billion-a-year giant that counts President Bush among its friends.

Enron had qualms about the system California was leaning toward. In testimony before the PUC in June 1994, it warned that the highly centralized market structure could lead to higher prices.

But ultimately the company joined the chorus urging California to plunge ahead. Enron executive Jeffrey Skilling told the PUC in 1994 that California could lower its $23 billion-a-year energy bills by as much as $9 billion -- enough money to triple the police forces of its largest cities.

"Commissioners, the patient is on the ground bleeding," Skilling testified. "Delay kills."

Then after the legislation was enacted, there were signs that there were some problems. Well before the full fledged crisis, a sudden spike in the price was seen showing that warnings that the system could be gamed were credible.

On July 9, 1998, the price for reserve power needed by the ISO was running at $1 a megawatt hour and was being tracked on computer screens in the market operations department of the agency.

A staffer hurried up to ISO chief executive Jeffrey Tranen with a note. The $1 price tag, set by the power generators, had shot up to $2,500. Then, just as suddenly, it spiked again to $5,000, where it stayed for three hours.

After that, it mysteriously dropped again, all the way back to $1.

Four days later it happened again, but this time the price went to $9,999 and stayed there for four hours. Then it dropped to a penny.

"All of us saw those numbers and realized ... there was nothing to stop someone from bidding infinity," said Tranen, now a software executive.

Under the rules, the identities of power generators are kept secret. But Levin, the New York businessman who'd warned of higher prices back in 1994, said the price spikes were clear signs of someone probing for weak spots.

In the documents just released by the Snohomish PUC, we find:

As part of its case against Enron, the Washington utility found a May 6, 1998, Enron memo referring to a "PHONY import," another tactic for taking advantage of the energy market. The memo noted that the independent system operator "will call and tell us we're out of balance, so tell them we intend to correct the imbalance in the 'hour-ahead' market. In fact, we really intend to do NOTHING…. "

It was a story of greed and graft writ large. And today we have further proof that politicians having their palms greased by campaign contributions are more than willing to sign over the people's welfare to their corporate sponsors.

Kudos to the Snohomish County Public Utility District for actively battling Enron and forcing the company to cough up the proof.

Posted by Mary at February 4, 2005 09:03 AM | Corruption & Graft | Technorati links |