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Enron & Deregulation Still Haunt Us

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Charles W. Jones
International President Emeritus

FERC didn't learn from California's crisis

If a foreign power conspired to artificially raise the price of electricity, costing our country $40 billion, damaging the national economy, and forcing millions of Americans to do without electricity during "rolling blackouts," someone in Washington would be calling for their heads.

But when U.S. corporations do it, that's another matter. In the case of the California energy crisis of 2000-2001, the federal agency charged with overseeing the production and transmission of electrical energy just looked the other way.

And now they are recommending that we should deregulate the electric power industry throughout the rest of the country, opening the door for the same kinds of abuses in every state.

Something doesn't smell right.

When California began experiencing shortages in electric power in 2000, the Federal Energy Regulatory Commission (FERC) said they could do nothing. Shortages were an inevitable result of California's attempt to deregulate the electric power industry. Faced with no guaranteed profit, power producers failed to increase capacity. When a hot summer increased demand beyond capacity, utilities ran out of juice, causing blackouts and putting power prices out of reach.

That's what they told us, and most people bought it. When the weather cooled, the shortages eased somewhat, only to come back even stronger in 2001.

While California struggled to find a way to provide electricity to all its citizens, a problem that had never occurred before deregulation, President Bush blamed the state's high environmental standards. But as early as May 2001, some investigative journalists were already pointing out that the energy crisis was not being caused by a true shortage of energy, but by manipulation of the market.

Gregory Palast, writing in Britain's the Observer, pointed out that in December 2000, when the prices of natural gas and electricity were ten times what they had been the previous year, two "powerful merchants" had simply blocked the flow of natural gas into California to bump the price up. On the other side of the state line, it was selling for one-tenth California's price. In 2000, similar artificial shortages had been responsible for excess charges of at least $6.2 billion — all of them perfectly legal under the newly deregulated power market.

As Palast put it, California didn't run out of energy, it ran out of government.

We now know that Palast hit it full on the nose. During 2002, investigations into the power shortage revealed that a half-dozen companies conspired internally and sometimes with other companies to artificially raise energy prices. They may not have caused the original shortage (the jury is out on that), but they clearly made it worse while racking up significant profits.

Internal Enron memos detailed numerous price-gouging strategies with clever names like Death Star and Ricochet, as though Enron's energy traders were playing arcade games rather than cheating California consumers out of $40 billion.

In fact, energy traders continue to defend their actions by saying they were not committing crimes, but were merely "gaming" the rules to increase profits in legal ways.

Legal? It's difficult to see how.

Ricochet referred to buying energy in California where prices were capped, then moving it across the state line and selling it back to California at a higher price, because out-of-state sales were not capped. As one memo explained, by using Ricochet, Enron could buy one megawatt in the state for $250 and eventually sell it back for $1,200.

The memo went on to counsel that "[t]his strategy appears not to present any problems, other than a public relations risk arising from the fact that such exports may have contributed to California's declaration of a (power) emergency yesterday."

The aptly named Death Star involved Enron traders creating phantom congestion (too much power for the grid) by providing false data about how many megawatts they intended to transmit to California's grid manager, known as the ISO.

ISO rules provide payment to relieve congestion, so Enron could collect money simply by agreeing to not transmit power that they had no intention of transmitting. A December 2000 memo gloats, "The net effect of these transactions is that Enron gets paid for moving energy to relieve congestion without actually moving any energy or relieving any congestion."

What was FERC doing while Enron "gamed" California consumers for billions of dollars? Looking the other way. An anonymous FERC official told the Los Angeles Times, "Everybody knew that people were engaging in some of this activity. It's just that the commission was in its laissez faire phase."

Laissez-faire: let them do it.

Laissez-faire capitalism — now called market capitalism — is based on a belief that the government should not regulate business at all. They say, "Let the market decide."

That is the philosophy behind deregulation.

You don't need a Ph.D. in economics to see the limitations to that philosophy. Without regulations, unscrupulous businesses will take advantage of powerless consumers. The law of the jungle would prevail.

If that weren't obvious, we should have learned it from Enron's games in California.

But FERC doesn't seem to have gotten the message. They didn't try to stop Enron or any of the other "gamers" during the energy crisis, and they have been unwilling to impose penalties on them now that the truth is public.

Even worse, despite everything that happened in California, FERC continues to push for deregulation. They want all states to completely deregulate their power industries. They say that deregulation, not more regulation, will prevent such abuses in the future.

Are you beginning to wonder how these people on FERC can be so stupid?

Perhaps it would help you to know that FERC members all come from inside the power industry. FERC is a perfect example of the fox guarding the hen house.

Enron is gone — a victim of its own greed. But the problems within the energy industry that allowed their price manipulation in California are still with us.

Further deregulating the power industry nationwide will only open the door to more abuses like we saw in California.

We don't need less regulation; we need better regulation.

We need a national energy plan that has the goal of ensuring that all Americans have access to cheap, reliable, safe power.

Not a plan intended to maximize profits for oil, gas, and power trading companies.

Reporter  V42N1
Published on the Web: June 15, 2007

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