Enron and the California Energy Crisis

Gaming the California Market
Enron’s power-selling subsidiary, Enron Energy Services, expected to make substantial profits in California in the year 2000. General Thomas White was its CEO and pursued a policy of encouraging traders to give substantial up-front discounts to acquire contracts and customers. The discounts often involved losses for the firm, but White was certain that they would easily be covered by profits generated in the California spot market in 2000. The Golden State did face an energy crisis in that year which followed into 2002, but it is unclear how much Enron netted during the crisis. The four-star general, who seemed to have been more a front man than an actual manager, tired of job by 2001. Enron CEO Kenneth Lay, who was briefly under consideration for Secretary of Energy, persuaded his friend George W. Bush as Secretary of the Army. ( )
The deregulation of wholesale electricity exposed California to a severe energy crisis in 2000-2001. Enron CEO Jeff Skilling had predicted that energy deregulation in California would save customers there $9 billion a year. Instead deregulation resulted in hiked costs from $7 billion to $27 in a year. California energy prices began to soar in 2001 and continued to do so until mid-2002. During the California energy crisis, the federal government did very little to protect California from price gauging or to look into charges that Enron and other large providers were creating artificial power shortages to drive up prices. On December 20, 2000, Bill Clinton, who had believed in deregulation, imposed price caps on energy going into the state and ended the crisis for the moment. Three days after George W. Bush occupied the white House, the price caps were removed and the Golden State again faced an energy crisis. Enron’s Ken Lay told Cheney, “The administration should reject any attempt to regulate wholesale power markets by adopting price caps or returning to archaic methods of determining the cost-basis of wholesale power.” Enron controlled 30% of the energy in California and three other western states, but it traded ten times as much energy as the other firms during the crisis. It did this by trading with itself and the others, thus putting itself in a position keep forcing prices to rise It was also able to charge from 63 to 185% more for energy than its competitors.

In the last days of the administration of George H.W. Bush, Congress passed legislation in 1993 permitting the states to deregulate energy. The same bill repealed the prohibition on energy companies donating to political campaigns, and the power companies thereafter donated $16 million to the Republican Party. In 1996, Governor Pete Wilson pushed through the California legislature a measure drafted Southern California Edison that partly deregulated electricity and permitting the utilities to collect a $ 28 billion bailout from ratepayers as a compensation for supporting deregulation. A portion of this money was used to cover stranded assets. This was the same ploy used to win approval in Texas under Governor George W. Bush. In 1998, the electric utilities invested $39 million to defeat Ralph Nader’s referendum to end deregulation.

Some California utilities sold off their generating plants to Duke Energy of North Carolina, Enron of Texas, and other out-of-state providers. During the crisis, PG&E and Edison paid heavily for this blunder facing bankruptcy because they had to pay ten times more for energy than when regulations were in force. Edison had assets that could have been sold off, and PG &E’s energy producing subsidiary was raking in record profits while its retailing arm was demanding relief. Credit Suisse First Boston told its customers that the California blackouts were created by the utilities in order to persuade the legislature to vote for rate increases. The utilities demanded and received another rate hike. A state investigation later revealed that key California generators withheld 30 to 50% of their energy to create shortages and at the worst times as much as 55 to 76% was withheld. Federal regulators obtained Williams energy power control room audiotapes of people receiving orders to drastically cut back on power output. Then federal regulators sealed the tapes and refused to loan them to California authorities. Williams had given $500,000 to the Republican Party and had participated in the Cheney energy task force.

By May 2001, California energy bills had increased 1,000% since the beginning of the crisis. At one point A megawatt hour cost $250, in comparison to about $12 in 1998. President Bill Clinton tried to address the problem on December 14, 2000 by ordering an end to uncontrolled speculation in energy going to California. That order was rescinded three days after George W. Bush was inaugurated. The Republican-controlled FERC did not do anything about California energy prices until late June, when caps were again applied. Perhaps, the new appointees, who owed their jobs partly to Ken Lay, thought there were legitimate questions about whether legislation passed in 1993 gave the agency power to act. ( )

Enron was also given a major voice in selecting Patrick Wood as the head of the agency that regulates interstate energy prices. Curtis Hebert, Jr., former head of the Federal Energy Regulatory Commission, was appointed to a Republican seat on the FERC by President Bill Clinton. His friend Senate Majority Leader Majority Leader Trent Lott had sponsored him. When George W. Bush became president, Hebert became chairman of the commission. However, Hebert would soon have to be reappointed to the commission by President Bush. Kenneth L. Lay, president of ENRON, was made a member of Bush’s transition force and entrusted with the task of interviewing candidates for the FERC chairmanship. Lay had been considered for a slot on the first Bush’s cabinet. According to Herbert, Lay interviewed him and later telephoned to outline conditions for his support. The New York Times reported that Lay wrote to Hebert promising support if the chairman accepted Enron’s view of deregulation. Chairman Hebert said he refused to accept Lay’s conditions, but it is also clear that FERA did nothing to interfere in the California energy crisis at this time.

Hebert was blocking implementation of Lay’s plan to divide the nation into four regional energy transmission organizations (RTOs) and had begun an investigation of the derivative financing instruments that Enron and others used for energy trades. Ken Lay was not only permitted to interview candidates for the FERC and allowed to submit a list of recommended candidates. When it became clear that he would not retain the chairmanship, Hebert resigned in august even though he had two more years to serve as a commissioner. Two of those he recommended were appointed, including the chairman Pat Wood. According to Republican columnist Robert D. Novak, Enron wanted Pat Wood to become FERA chairman because its expected to profit by learning how to use FERA restrictions of the free flow of energy for its benefit. For six months, Chairman Wood did nothing to limit energy prices in California, while Enron revenues for that period increased by billion dollars.

The White House ridiculed the idea that a price cap would bring relief to California customers, and Vice President Cheney joined the chorus one-day after meeting with Ken Lay. On November 20, 2001, Wood’s FERC divided the country into transmission zones but did not take a firm position against letting firms like Enron manipulate prices of energy flowing through all the zones. Though the agency reluctantly imposed a price cap, it left the door open to Enron’s suggestion that there be no barrier to trading energy that flows through zones. The possibility of creating an energy crisis for the entire nation remained.Wood also assured listeners that Enron’s collapse “doesn’t seem to be tied too much to deregulated energy markets,” making it clear he had no intention of fixing the damaged structure that permitted the spiking of energy prices in California and Utah.

Senator Diane Feinstein requested a meeting with President Bush to discuss the crisis in her state but was refused an audience in a perfunctory note that even misspelled her name. In opposing any price caps during the crisis, both President Bush and Vice President Cheney employed arguments supplied by Kenneth Lay in a letter warning of the dire consequences that would follow any effort to regulate prices. A price cap was not imposed until June, after California Republicans had warned the white House that opposition to regulation was endangering their situation in the Golden State.( )

Five big energy companies, TXU, Reliant of Houston, Dynergy, el Paso, and Enron, had donated $4.1 million to the Republican party. Governor Gray Davis was to call Reliant Corporation a bunch of “pirates.” The out-of-state providers of wholesale energy were doubling and tripling their profits, and there was evidence that they created artificial shortages in order to spike prices. California Edison notified the FERC that it believed that Enron and other providers were manipulating the power system to create interruptions of supplies and false shortages. Enron and other providers reaped $30 billion in profits from sales in that state. Enron’s share proved very difficult to trace, but $1.5 billion turned up in a reserve account. The money was hidden there because it was feared that Congress and the California legislature would investigate the activities and profits of energy providers during the crisis.

A portion of Vice President Dick Cheney’s National Energy Policy suggests that deregulation had made possible the gaming of the California market: “The risk that the California experience will repeat itself is low, since other states have not modeled their retail competition plans on California’s plan.” The FERC report on the crisis referred to “market manipulations” made possible by California’s legislation. David Fabian, a former Enron computer programmer, disclosed in a letter to Senator Barbara Boxer that Enron traders bragged to him about how they could electronically manipulate information on the California wholesale electricity market to create spikes in energy prices.

The FERC released documents it had received from Enron in early May 2002. They revealed that the energy giant had strategies called “Fat Boy,” “Get Shorty,” “”Shift.” “Ricochet,” and “Load Shift” to maximize prices, create congestion on transmission, lines, and generally maximize profits. A strategy known as “Death Star” resulted in receiving payment for moving energy that had never been provided. There was also evidence that Enron gave false information to state energy regulators. Though the evidence suggested that Enron could have manipulated prices in the California crisis, the FERC spokesmen claimed there was no conclusive evidence. These documents also included memos from Enron lawyers indicating they thought other energy firms were using fake trades to bid up energy prices. Several days after this material was released Reliant Resources, a large energy trader, admitted that it had engaged in wash trades with four other firms to boost energy prices. Investigators for the California legislature in June, 2002 turned up documents that proved that Perot Systems Corp. demonstrated for Reliant Energy and other providers software that would create the impression of congestion on transmission lines as a way of driving up prices. Transmission lines would appear to be massively overbooked, which would create blackouts and higher wholesale prices. The strategy was identical to one used by Enron. There were many Congressional investigations Enron, but none of them seemed interested in seriously probing this matter. In October 2002, Timothy Norris Belden, a key Enron energy trader, pleaded guilty to manipulating energy supplies to create a crisis and to moving energy out of state so as to avoid state regulations. That energy was then sold to California at sky-high rates. Belden also demonstrated how Enron created the impression that its transmission lines were congested so that other providers using them paid higher prices.

The California legislature and state justice department was most successful in discovering what had happened during the energy crisis. The congressional investigations accomplished nothing more than giving politicians opportunities to denounce corporate corruption, and the US Justice Department’s record was mixed at best--nailing a few executives for securities fraud but taking steps that actually impeded the California investigation of how electricity prices had been manipulated during the crisis.


After the “Fat Boy” memos were released, a aid to Representative Billy Tauzin ( R. La.) was asked if the House would look into the phony trades. Re replied, "What are you going to accomplish? Enron for all practical purposes is dead. Unfortunately, for political reasons, some people want to drag the bodies through the streets." Tauzin, a major recipient of Enron funds, had earlier conducted hearings of Enron’s bankruptcy, which revealed little but provided himself and others with opportunities to denounce Enron practices. Senator Dianne Feinstein of California was still unsuccessfully demanding a thorough probe of the matter. More than a year after the California energy crisis, some senators tried to amend the law so it would be more difficult to hide wholesale electricity prices. Senator Philip Gramm, who had been Enron’s succeeded in killing the measure. The fact that senators from both parties helped Gramm speaks volumes about the power of money in politics. Phil Gramm and his wife were called by Barron’s Financial Weekly “Mr. And Mrs. Enron” ( ) Feinstein’s efforts to restore some regulations on energy trading were also unsuccessful. ( )

The federal government did little to explore how the energy industries gamed electricity prices in California, and the state’s Democratic Governor Gray Davis was to eventually bear the blame. The FERC investigated the crisis, levied small fines, but did not conclude that energy traders created the crisis. It released almost two-dozen Enron e-mail that proved that Enron officials advised the FERC on what its findings should be. By its own rules, the FERC is not permitted to discuss such issues with people outside the commission.”( )

To cope with the crisis, the state incurred heavy debt which became much greater as a result of the recession of the first George W. Bush administration. California’s government was hamstrung in how it raised and spent money by a series of popular initiatives that marked its recent history. In the summer of 2003, well-financed conservative activists acquired enough signatures to force a recall election on October 7, which was likely to force Davis from office and replace him with actor Arnold Schwarzenegger. ( )




Sherman has written African American Baseball: A brief History, which can be acquired from LuLu Publishing on line.