by John M. Curtis
(310) 204-8700

Copyright May 8, 2002
All Rights Reserved.

aced with a whopping $22 billion dollar budget shortfall, California Gov. Gray Davis has a perfect alibi, now that Enron was fingered for market manipulation. During the peak of the energy crisis, Davis blamed out-of-state energy traders for causing rolling blackouts and skyrocketing prices. At the time, Davis received little sympathy from the White House and Federal Energy Regulatory Commission, stubbornly insisting that the state's problems were caused by a shortage of power plants. Both President Bush and Vice President Cheney strongly rejected Davis' charges of hanky panky. After FERC released Enron's damaging e-mails detailing market manipulation, Davis asked regulators to cough up all documents related to "Enron's role in manipulating energy markets in California and the West." Davis is now convinced that unlawful market manipulation cost California more than $30 billion, not the original $9 billion. "I assume the companies we have contracts with may have manipulated the market as well," helping to renegotiate a slew of bad contracts, costing taxpayers billions in overcharges.

      Enron and other energy traders cleverly covered their tracks, while skillful marketers drove energy prices through the roof. Trading schemes discussed in the Enron e-mails answer important questions about California's power crisis—including how the Houston-based energy Titan manipulated the market. According to new e-mails, Enron gave the California Independent System Operator false signals about load requirements and expected power demands, causing the Cal-ISO to over-buy power at inflated prices. "Did this happen during the blackouts?" asked Portland, Ore.-based energy consultant Robert McCullough. "I don't know, but by God, we need to investigate." McCullough suggests that the e-mails answer the conundrum of California's instant power crisis. When California's power market spiraled out of control in 2000 and then ran out of power in summer of 2001, it made absolutely no sense that it was due to a lack of power plants. Only the power industry—and White House—pushed that nonsense. Gov. Davis and his energy czar S. David Freeman insisted that California was the victim of insidious manipulation by out-of-state power brokers.

      Faulted for getting badly out-negotiated, Davis has been roundly criticized for locking the state into costly long-term contracts. Recent e-mails give some insight over what Davis faced trying to break the cartel's chokehold on the state's power. Despite the costs, Davis believed that long-term contracts were the only way to break the runaway market. After entering the deals, the market eventually collapsed, dropping power prices from an unthinkable $2,900 to its current $20 per megawatt hour. Scrambling to renegotiate the contracts, Davis has the leverage to call the shots. "I assume the companies we have contracts with may have manipulated the market as well. They have to know the truth will out. It is to their advantage to renegotiate a fairer price," said Davis, realizing that he's back in charge. Blowing the same old smoke, the power industry still maintains its innocence. "Our members were disheartened and disappointed because they feel they were doing the best possible job of holding the regulations both in spirit and letter," said Gary Ackerman, director of the Western Power Forum, unwilling to admit egregious abuses.

      Before 1996, Enron lobbied hard for deregulation, convincing then Gov. Pete Wilson and the legislature that competition would lead to lower prices and abundant supplies. "From the beginning . . . this was a market of gamers, by the gamers for the gamers," said Cal-ISO board member Mike Florio, discussing how Enron bamboozled the state into deregulating the power industry. In fairness to Enron, during the go-go '90s, with unprecedented economic growth and a sizzling stock market, open markets looked too good to pass up. Only after prices raged out of control, utilities hemorrhaged into insolvency, and lights were finally turned off did consumers realize that deregulation was a nightmare. After signing long-term deals, the runaway power market collapsed, leaving the state upside down. Davis can't be blamed for keeping the lights on. But his delayed response, allowing the state's major utilities to rack up massive debt, saddled consumers with obscene rate hikes. With Enron's bankruptcy, it may be too late to reclaim losses—though California Atty. Gen. Bill Lockyer might sue Enron and its auditor Arthur Andersen.

      Standing up to out-of-state power brokers, Davis looks heroic, making it more difficult for his GOP challenger Bill Simon Jr. to score points. While the Oracle software boondoggle still looms, the power crisis—and the state's ballooning deficit—promises to dominate the Fall election. Attacking Davis on energy poses new problems for Simon, whose support for the White House places him on the wrong side of the issue. Already painted as a pro-life, free-market, anti-gun control candidate, Simon faces serious challenges, attacking Davis for gross mismanagement—especially as it relates to energy. Claiming that California was overcharged $30 billion, Davis offers a plausible excuse, reminding voters how the Golden State got into its current mess. With Washington also running deficits, it's difficult to blame Davis without fingering the White House. As long as Enron dominates the headlines, Davis gets a free pass for battling the enemy. If nothing else, the White House and FERC are forced to revamp current energy policy.

      Without saying "I told you so," Gov. Davis now has proof that California was the victim of malicious manipulation. Though the power industry prefers blowing smoke, FERC acknowledged that things must change. With Enron's spectacular collapse, it's difficult to return to the same Wild West responsible for the biggest train robbery in U.S. history. To his credit, Davis corralled runaway power markets, but now must find a way to reimburse hapless ratepayers unduly flogged to save the state's big utilities. "There's not much we can do to them. To a certain extent, it's like squeezing blood out of a turnip," said an unnamed FERC official, admitting the limits of bankruptcy but finally recognizing that Enron fleeced the great state of California. Only last summer FERC took the reluctant step of granting price caps, also acknowledging that something went wrong. "For most of us, this was not a surprise," said another anonymous FERC official. "Everybody knew that people engaging in some of this activity. It's just that the commission was in its laissez-faire phase," no longer touting unqualified free markets. With Enron caught with its pants down, things are finally looking up.

About the Author

John M. Curtis is editor of OnlineColumnist.com and columnist for the Los Angeles Daily Journal. He's director of a Los Angeles think tank specializing in corporate consulting and strategic communication. He's author of Dodging The Bullet and Operation Charisma.

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