Enron’s California smoking gun

Did the Bush administration do the disgraced company's bidding during the state's electricity crisis?

Topics: Enron, Energy, California,

Enron's  California smoking gun

Remember the California energy crisis? As the implications of the collapse of Enron spiral ever wider, increasing attention is being paid to the close connections between the White House and the Texas energy trader. So far, there has been no evidence that Bush officials tried to stave off the Enron disaster. But the real smoking gun for Enron could be its role in the California energy deregulation debacle.

Vice President Cheney has already admitted that he and Enron CEO Ken Lay discussed the California situation in some of their six meetings last year, leading some critics to believe that Bush’s hands-off policy toward the Golden State’s energy meltdown was adopted at the bidding of Enron, whose profits soared during the crisis. Lay was also instrumental in replacing the chairman of the federal commission that regulates energy issues with his own nominee, after the original chairman refused to kowtow to Enron’s wishes on electricity deregulation. A California state Senate committee is currently calling for depositions of Enron and Arthur Andersen officials to find out if the former energy giant or its auditors willfully destroyed documents that were under subpoena from the committee. And an ongoing criminal investigation by California Attorney General Bill Lockyer is still looking into allegations that energy producers and traders, including Enron, artificially manipulated the price of energy to profit off of California’s poorly constructed energy deregulation plan.

Enron officials once took pains to note that California’s problems could not be blamed on energy producers but on California’s partially deregulated market, which they said didn’t go far enough. But it’s now becoming apparent that Enron was as responsible as anyone for the shape of that deregulation plan. As the Enron mess continues to heat up, California could prove to be the company’s biggest political embarrassment.

The fast-moving story took another twist on Tuesday, when Joe Dunn, a California state senator chairing a committee conducting an investigation into possible price gouging, noted that Arthur Andersen, Enron’s accountant, may have destroyed documents that had already been subpoenaed by the California Legislature.



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“We are requesting subpoenas to Enron and Arthur Andersen,” Dunn said. “There is significant concern at this point in time that the documents that were destroyed by Arthur Andersen may have been embraced in the subpoena that was served upon Enron last June. The media reports are that those documents that were destroyed were destroyed in September or October, last fall. That would have been after the legislative subpoena was served upon Enron. If those documents were willfully destroyed after they were subpoenaed, that is very, very serious.”

Dunn is hoping to call high-ranking Enron and Arthur Andersen officials before his committee for depositions later this year. He says his committee is not looking into filing criminal or civil charges against any company. His committee, Dunn says, is simply looking into “how we got into an energy crisis and whether any legislative fixes are necessary.” And that process involves a hard look at Enron.

“The real questions,” says Dunn, “and this is an enormous task to unravel, is what role Enron had in 1) driving up the price of a given megawatt, even though they were not the final seller; and 2) What role did Enron play in the shuffling of megawatts for the purpose of creating artificial shortage on the distribution lines.”

But getting Enron to cooperate has not been easy. In fact, Dunn characterized the company’s response as “disgusting. Enron has been the worst of all market participants with respect to their cooperation with our committee, and that’s been true from the very beginning. They were the one and only holdout of producing documents to the committee.” Dunn says it was only when Enron realized that the Legislature had the votes to pass a resolution holding Enron in contempt and threatened them with fines of $1 million per day that they handed over the documents.

Even then, Dunn says, Enron continued to give the committee the runaround. He says the company produced about 50 boxes of documents that were “woefully inadequate.” His committee will be reviewing Enron’s compliance in a public hearing sometime in the next couple of weeks, and Dunn says he is “cautiously pessimistic about avoiding further contempt hearings against Enron.”

Meanwhile, Attorney General Bill Lockyer is still investigating allegations that energy producers and traders, including Enron, manipulated prices. “This investigation has been open for over a year, and it is still ongoing,” said Lockyer spokeswoman Sandra Michioku. “There are some questions about pricing practices, and unfair business practices by many energy companies.” Michioku said the attorney general’s office was still “at least weeks away” from wrapping up the investigation.

And to complete the California-Enron trifecta, Rep. Henry Waxman, D-Calif., said recent revelations by Vice President Cheney seem to indicate that Cheney took marching orders about how to handle the California crisis directly from Lay.

In his response to Cheney, Waxman said Cheney’s timeline “raises additional questions about the extent to which Enron may have influenced the administration’s energy policies.”

Enron spokeswoman Karen Denne says the company has cooperated and will continue to cooperate “with all inquiries and investigations.” It’s going to be busy.

Enron was involved in California from the beginning of the state’s move to deregulate its electricity system. The company was a key voice calling for the federal legislation that set the various deregulation plans in motion. That law, known as the Energy Policy Act of 1992, was one of President George H.W. Bush’s final acts as president.

California was among the first states to jump on the deregulation bandwagon. At the tail end of a crippling recession, companies were leaving the state in droves, complaining that the price of doing business there was too high. That cost included high taxes, and among the highest energy costs in the nation.

In its zeal to deregulate, California set up a poorly designed system, deregulating the wholesale side of the energy market, while leaving price caps in place on the retail side. So wholesale prices skyrocketed for the utilities buying power from the producers, while at the same time, the utilities were prevented from passing the spike to ratepayers.

Lenny Goldberg, lobbyist for the Utility Reform Network (TURN), says Enron played a key role in setting up California’s broken marketplace. “Unlike the market in Pennsylvania, which is transparent and works, Enron was pushing for a pretty murky, nontransparent, easily gameable market. They wanted much less authority and power in the [Independent System Operator], so it would be much easier to manipulate the market.”

The ISO was designed to be a central command station coordinating the scheduling for the delivery of power so that everyone would get the power they needed. But Goldberg says Enron’s insistence that the coordination be conducted essentially in private helped energy producers artificially manipulate the market.

During hearings before the Public Utilities Commission, as the state was crafting its deregulation plan, Enron argued for establishing a separate power exchange, or PX, to serve as a sort of clearinghouse, a place where competitive forces would lower the price of power for California electricity consumers.

“Their argument was that you don’t want utility-like people running a market,” says John Rozsa, an aide to Sen. Steve Peace, who played a key role in the Legislature’s first attempts at electricity deregulation. “It gave them the ability to arbitrage between markets, and that’s what their business was. What Enron really wanted was a dark market — contracts that were not subject to any regulatory scrutiny.”

Though it is unclear just how much Enron made off the California energy crisis, a hint comes from the company’s stock price during the spring of 2000. During the second quarter of 2001, the peak of the California crisis, the company reported earnings of $404 million (45 cents per share) compared with $289 million (34 cents) a year earlier, an increase of nearly 40 percent. The previous quarter, Enron reported a 34 percent increase in quarterly profit.

Goldberg says Enron’s biggest profits in California may have come from a spike in natural gas prices during the state’s energy crisis. “I don’t know. Ask Arthur Andersen whether Enron made any money on the California market,” he quipped.

Now, congressional Democrats are calling on Dick Cheney to clarify just how influential Enron was in shaping the administration’s hands-off approach to the California crisis.

While the state was in the midst of rolling blackouts and soaring wholesale energy prices — prices that many argue were artificially manipulated by Enron and other energy producers and traders — the White House refused to intervene as Enron and power plant owners cashed in.

But throughout the California meltdown, Enron continually downplayed its role. “California is a very, very small percentage of our profitability,” Enron spokesman Mark Palmer told the San Franicsco Chronicle last year.

Indeed, when California Gov. Gray Davis asked the Federal Energy Regulatory Commission (FERC) to reimburse California consumers to the tune of $8.9 billion for what he says were artificially high energy prices, Enron was far down on the list of companies the state wanted money from.

“I don’t think anyone would dispute the statement that they made significant profit off the situation we found ourselves in the past year, year and a half,” Joe Dunn said of Enron. “They like to describe themselves as a minor player in the California energy market, and as evidence of that they cite that they were only 10 percent of the final sales of electricity through the ISO. That’s an interesting statistic, but that’s not the whole picture. Enron was probably the most significant trader; the trading of a given megawatt may go through 15 different owners before it’s ultimately sold through the ISO.”

Last summer, California lawmakers, led by Gray Davis, lobbied the FERC to place price caps on energy prices in California. But the administration, in the person of Vice President Dick Cheney, refused to step in.

On April 18, Cheney told the Los Angeles Times, “California is looked on by many folks as a classic example of the kinds of problems that arise when you do use price caps,” referring to the caps on retail energy prices under the state’s deregulation plan, put in place to protect California consumers.

When asked about regulating wholesale energy prices in California, Cheney said, “I don’t see that as a possibility … Any package you can wrap it in, any fancy rhetoric you can prop it up with, it does not solve the problem.”

Cheney’s comments came just one day after the vice president met with Lay to discuss energy policy. In his letter to Waxman Cheney says that while he and Lay never discussed Enron’s looming financial woes, they did talk about California.

“The vice president met with Mr. Kenneth L. Lay, chairman and chief executive officer of the Enron Corporation,” the letter states. “The meeting occurred on April 17, 2001, and lasted for about a half-hour. They discussed energy policy matters, including the energy crisis in California, and did not discuss information concerning the financial position of the Enron Corporation.”

Enron has long been seen as a way for Democrats — particularly in California — to score political points against the Bush administration. Even before the company’s bankruptcy, it had become a sort of shorthand for Democrats wanting to paint an administration that was propped up by big contributions from the energy industry in exchange for federal policy that would not interfere with their profits.

In his State of the State address last year, Davis, who himself received $10,000 in campaign contributions from Enron, blamed “out-of-state profiteers” for manipulating California energy prices and “holding California hostage.” Lockyer was a bit less tactful, saying, “I would love to personally escort Lay to an 8-by-10 cell that he could share with a tattooed dude who says, ‘Hi, my name is Spike, honey.’”

After Cheney’s refusal to intervene in the California crisis, Sen. Dianne Feinstein, D-Calif., said the administration was doing the energy industry’s bidding at the expense of California energy users. “It was very disappointing,” she says. “He spoke about letting the free market work and drilling in Alaska. That’s not going to help California in the short term. We need price caps until we’re able to fix this very broken market … There seems to be no interest in really wanting to understand the California situation.”

But Davis spokesman Steve Maviglio said the governor did not think that the Lay meeting directly influenced Cheney’s or Bush’s decision to take a hands-off approach in California. “I think we always thought it was philosophical to begin with,” he said. “Cheney and Lay seem to have the same philosophical bent about markets, so it wasn’t a real shocker.”

Davis spoke to Lay repeatedly throughout the California crisis, “because he had the president’s ear,” on energy issues, according to Maviglio. But Lay, like the administration, argued against the FERC bailing out California. “In California, when the shit hit the fan, they were very vocal in their support for deregulation” of the retail side of the energy market, he said.

Lay and Enron clearly enjoyed immense influence in the new Bush White House. Lay reportedly had a large say in who would head the FERC, the agency that regulated Lay’s company. Lay was adamant in getting an FERC chairman who supported Enron’s plan to provide “open access” to state retail power markets. The reluctance of Curtis Hebert, a Republican who briefly became chairman after Bush’s election, to support the plan was reportedly part of the reason that Lay, and Bush, dumped the Clinton appointee.

In an interview on PBS’s “Frontline,” Hebert was asked about his relationship with Lay and the White House.

“Mr. Lay made no secret with us about his close relationship with the president and the White House and so on. We’ve been told that he in fact says things like, ‘I’ll help you with what you need politically, let’s say, staying on as chairman of the FERC, if you’ll go along with me on this policy issue.’ Did that ever happen?” asked the interviewer.

“I would never make that trade,” Hebert responded.

“Did he ever propose such a trade?”

“I would just say that I would never make such a trade.”

“Our sources tell us that in fact he offered to talk to the president on your behalf if you would go along with what he wanted.”

“I don’t think there’s any doubt he would be a much stronger supporter of mine if I … were willing to do what he would want me to do.”

Weeks later, Bush replaced Hebert with Texan Patrick Henry Wood, with Lay’s blessing.

Two weeks later, bowing to immense political pressure by the state’s worsening crisis, the FERC adopted a limited price cap plan to provide some relief to Californians. But those caps did not go far enough, according to consumer advocates.

“They were mitigations,” says Doug Heller, consumer advocate for the Foundation for Taxpayer and Consumer Rights. “But they still capped prices at a higher level than was reasonable. There were ways around it, but at least it was something.”

Soon after the price caps took hold, the state entered into long-term contracts with other energy prices, and after a cooler-than-expected summer, the energy crisis subsided.

But, Heller says, the damage had already been done. “Before the energy crisis, the average price, or the average peak price, was about $30 per megawatt hour. The contracts Davis signed range from $100 to $150 per hour for the next two years, then slowly drop over 10 years into the $60 range. But thanks to this gouging, the state is still now paying about five times the pre-deregulated price and 10 years out, will still be paying about twice the price of energy before deregulation.”

Anthony York is Salon's Washington correspondent.

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