The power industry in the U.S. may not be of particular interest to you. If you have any interest in keeping your utility costs from shooting through the roof, however, read on.
Most everyone has heard at least something about Enron. After Enron declared bankruptcy on November 30, 2001, American media broadcast the investigation into the dirty accounting and energy trading schemes that led to Enron’s robbing millions of dollars from the people of California.
Those who made the time to see ASP Film’s screening of “Enron: The Smartest Guys in the Room” last week were given a layman’s look at an incredibly complex web of manipulation of the American power markets. What even those more informed on the issues may not know is though Enron is through, the danger of these events happening again is quite real.
For six consecutive years, the thriving company had won Fortune 500’s Most Innovative Company award. They were the world’s largest electric, natural gas and communication corporation. They were also well known for literally creating the power trading market, and for hauling in some serious cash. Enron stock was once valued as high as $90 dollars a share.
The leadership at Enron was a crack team of “ex-nerds,” according to the film. Kenneth Lay acted as the Chairman/CEO, and was a pivotal force in Washington D.C. Enron and its executives— including Lay— shelled out more than five million dollars in campaign funds from 1994 to 2001 to get both Republicans and Democrats elected to office who shared its agenda of power deregulation.
The ideology of power deregulation centers around the belief that, with a free market, prices will be driven down by fierce competition. In reality, the opposite became true when Enron was able to capitalize on a deregulated.
“Mark-to-market” accounting “allowed Enron to book potential future profits on the very day that a deal was signed,” according to the film. “No matter how little cash came in the door, to the outside world, Enron’s profits could be whatever they said they were.” Enron coasted on this high, yet the company continued to lose more and more money.
When it became apparent that Enron was falling far short of their profit margin, a new plot was developed. In the film, whistleblower Sharon Watkins’ attorney said, “What Sharon was telling me was more than accounting irregularities as such; it was a massive fraud of enormous proportions. It has evolved to the corporate crime of the century.”
California’s newly deregulated power market essentially, “opened the door to the bank vault and let Enron and their ilk in to steal all of the money,” according to Eric Christensen, the Assistant General Counsel for Snohomish Public Utility District.
If you remember hearing about rolling blackouts in California’s energy crisis in January of 2001, the cause was in fact, “never a lack of supply” according to the California PUD. Enron was in fact the cause.
By shutting down the power in various power plants across California, the prices of power skyrocketed, allowing Enron to make a tidy bundle by just flipping on and off the switch.
In tapes secured by Eric Christensen and the legal team at Snohomish PUD for their case against Enron, “You hear Tim Belden [former head of trading in Enron’s Portland, Ore., office] saying, ‘We’re ripping off California to the tune of a million or two a day’ and that’s pretty easy to understand,” said Christensen. “It’d be hard to deny what is going on. A lot of the evidence is really astonishing and if you sat down and put this into a screenplay, no one would believe it. No one would say something like that on a recorded line! So the whole thing has sort of a strange novelistic quality. It’s all highly unusual in my industry to say the least.”
In a recorded incident from December 2000, during the height of the California energy crisis, an Enron trader tells El Paso Electric Co. to shut down the power at one of their generators.
“There’s not much, ah, demand for power at all and we’re running kind of fat,” said the Enron trader.
“Why don’t you just go ahead and shut her down, then, if that’s OK.”
But how could someone so callously put such incriminating evidence on tape? “They were famously arrogant, so I think that they believed that they were so clever they’d never be caught. The schemes are very complex and detailed…And I think it was also [related to] the sort of locker room mentality,” said Christensen, “There was a lot of chest pounding about how much money they were making. These guys got bonuses based on the amount of profits they could make, so there is a lot of boasting about that. There [were] lots of attempts to inflate the profits.”
During the energy crisis, many questions were asked about the cause. In an interview with “Frontline,” Vice President Dick Cheney blames the power outages on the lack of sufficient power plants in California. He was also asked, “When people see that the companies are making 500 percent profit last year, the generators, when you have $2000 a megawatt-hour prices and prices almost that high constantly, couldn’t it be manipulation? Couldn’t there be some kind of cartel like behavior going on?” He replied very simply: “No.”
Though Enron and its leaders have since fallen during subsequent investigations, Christensen sees the Federal Energy Regulatory Commission (FERC) as flawed: “fundamentally what’s happened is that the whole policy of electric deregulation has been [governed] by a statute written in the 1930’s,” said Christensen. “The statue lacks adequate authority to prevent the kind of market manipulation that went on. It also lacks adequate authority for the agency to impose meaningful punishments on wrongdoers like Enron.
“So I guess the larger point is that this was action taken by political appointees not directly answering to the voters, in fundamentally restructuring… arguably the most important industry in America.”
Enron might not be in the news on a daily basis any more, but all Americans should remain vigilant regarding the regulation of their power suppliers. The Bush administration has recently been proposing normalizing our lower power rates to those of the rest of the country, a move with potentially deleterious effects for our local economy. Power is an essential commodity of the 21st century and it behooves us all to know where we’re getting it and how we’re ultimately paying for it.