Energy Deregulation Agenda Criticized

Santa Monica, CA — Governor-elect Schwarzenegger must explain the substance of his private May 2001 meeting with Enron chief Ken Lay, the Foundation for Taxpayer and Consumer Rights (FTCR) wrote in a letter to Schwarzenegger today. Read the letter.

A copy of internal Enron e-mails confirming the Schwarzenegger-Lay meeting is available from FTCR. FTCR, which was the state’s most vocal critic of Governor Davis’ handling of the energy crisis, said that if the governor-elect did not recount the meeting by the time of his inauguration, the group would ask state lawmakers to open an investigation to uncover the substance of the meeting, including any information that might further the state’s efforts to return billions of dollars that taxpayers and consumers overpaid for electricity during the energy crisis.

“A meeting with the biggest corporate crook in recent memory, while he and his firm were in the midst of ripping off the state, should not be taken lightly,” FTCR wrote. “As Governor, you must explain to Californians what you were doing at that meeting, what information Ken Lay shared with you and how the meeting has influenced your thinking on energy issues.”

In addition to calling on Schwarzenegger to come clean about the meeting with Ken Lay, the group highlighted key aspects of the governor-elect’s energy program that reflect an Enron-perspective on energy policy. In the letter, FTCR asked Schwarzenegger to rewrite his energy policy and remove his push for further energy deregulation.

The policy proposals, available online at http://www.joinarnold.com, call for the expansion of California’s failed experiment with electricity deregulation, including a dramatic ceding of power from state regulation to federal control. Schwarzenegger also proposes to dismantle the California Power Authority, which FTCR identifies as the “state’s last line of defense against a real or manufactured energy shortage.”

“Your proposal to revisit the deregulation experiment that exploded into California’s single worst financial and public policy disaster directly contradicts the public interest in ending deregulation once and for all. Californians cannot afford another deregulation nightmare,” FTCR wrote.

A copy of the full letter follows.

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October 14, 2003

Governor-elect Schwarzenegger
Governor’s Transition Office
Sacramento, CA 95814
Fax: 916/321-9301

Re: Energy crisis meeting with Ken Lay and the energy policy of your administration

Dear Governor-elect Schwarzenegger:

Your campaign tapped into Californians’ anger, often highlighting the failure of leadership during the state’s devastating energy crisis. This outrage over a lack of decisive leadership is what we at Foundation for Taxpayer and Consumer Rights articulated since the very early days of the crisis. What businesses and consumers needed most was a courageous leader to take on the power industry, yet the politicians were still defending their imprudent decision to deregulate the nation’s largest electricity system.

While California faced blackouts and rate hikes, however, you were secretly meeting with Enron‘s Ken Lay, who had come to be widely reviled by Californians as the progenitor of deregulation and the head of the gang stealing billions from our businesses, consumers and taxpayers. It was his firm, you will recall, that developed the market manipulation strategies known by such names as Get Shorty, Death Star and Fat Boy. A meeting with the biggest corporate crook in recent memory, while he and his firm were in the midst of ripping off the state, should not be taken lightly.

As Governor, you must explain to Californians what you were doing at that meeting, what information Ken Lay shared with you and how the meeting has influenced your thinking on energy issues. Though you are just one week into your transition period, Californians should not be expected to wait too long for you to come clean about your private engagement with Ken Lay.

By the time of your inauguration, we expect you to provide a recounting of the substance of that May 17, 2001 meeting. If, for some reason, you should refuse, we will ask the State Legislature to investigate this meeting; we will call on lawmakers to subpoena you and other attendees in order to reveal your knowledge of the details surrounding the biggest financial rip-off in state history and Enron‘s efforts to continue that crime. In attending that meeting, you were privy to information inaccessible to the federal government, as Ken Lay has “taken the fifth” during investigations into his role in the crisis. Furthermore, Californians should have access to any information that might affect your decision as to whether or not you will fully commit to the fight for the billions of dollars stolen from this state by the energy firms that were manipulating our market, including Enron.

In addition to whatever you might have learned about Enron‘s strategies and goals at this meeting, Californians deserve to know the extent of Ken Lay’s influence over your energy policy. A review of your proposals raises serious concerns that you share many of Ken Lay’s views on deregulation. By the time of your meeting with Ken Lay, after three sets of rolling blackouts, the massive increase in consumer energy prices and the insolvency of the state’s private utilities, every Californian knew that electricity deregulation was an unmitigated disaster. It had become indisputably clear that electricity is simply too vital to the economy and public safety to leave in the hands of unregulated corporations.

Your proposal to revisit the deregulation experiment that exploded into California’s single worst financial and public policy disaster directly contradicts the public interest in ending deregulation once and for all. Californians cannot afford another deregulation nightmare.

In the energy program that you have made available online there are a number of points that deserve particular attention:

• “Make markets work.” The notion that electricity can be affordably and reliably served to consumers through a market defies both history and economic logic. Electricity is not like other products and services that are subject to market forces, because the public safety and economic necessity of electricity require consumers and most businesses to buy power at any price. This inelasticity of demand creates a strong incentive for unregulated power firms to withhold supplies and push electricity prices through the roof. Consumers and businesses will be best served by an energy policy that allows power producers to recover costs and, if the producer is a private entity, earn a reasonable regulated profit.
• “Create a working wholesale power market based on the lessons from other states and the FERC standard market design.” FERC has been rebuffed by Congress for trying to undermine states’ rights to protect local consumers and businesses through this market design proposal. Support for FERC is at the grave expense of California’s power to restrain excessive prices through state regulation. Instead, your proposal would leave consumers to fend for themselves in a world in which the appropriate price for electricity and transmission is whatever price “the market will bear.” You should resist the Bush administration’s pull to remove California’s ability to set its own rules for energy generation and transmission. Your policies should protect the proven power of state regulation rather than accept the demonstrated weakness of federal deregulation.
• “Affirm the commitment to private power by dismantling the California Power Authority (CPA).” Although, this agency had been woefully underutilized by the Davis Administration, it was created to ensure that the state of California has the ability to protect consumers against the failure of private energy firms and private markets to provide reasonably priced electricity. During the deregulation experiment in California, power firms balked on their promise to build plants. The CPA is the state’s last line of defense against a real or manufactured energy shortage. The CPA should be protected and expanded to protect Californians from both the potential for future manipulation and the proven inability of private firms to meet the state’s energy needs.
• “Make sure there are adequate power reserves to prevent market manipulation.” Reserves that are controlled by private firms (see above) are meaningless, because it ignores the industry’s practices of illegal manipulation as well as collusive and non-collusive market gaming. Maintaining excess power capacity is both essential and entirely anathema to the theories of the free market and the reality of deregulation. Further, without the regulatory standards of state-based regulation, the price utilities charge for maintaining reserves could be excessive. Rather than creating an unworkable hybrid of mandated reserves and unregulated prices, California should follow a consistent system for maintaining reserves based on a comprehensive cost-of-service regulatory formula.

Also, it is notable that in your program you blame a “delay in raising rates” for utilities’ financial troubles early in the crisis. Actually, the utilities’ troubles were driven by the fact that Enron and other power companies were using the freedom from government oversight to gouge. Your criticism seems to imply that as Governor you would force the consumer to pay any price demanded by the unregulated energy firms rather than take on the energy industry and challenge behavior in the free market.

As a candidate you have promised to do things differently than the “politicians,” but your assessment of the crisis and your proposals for California’s energy future look very much like a return to the miserable policy of deregulation, which was foisted on California by a unanimous vote of Sacramento politicians in 1996 and signed by Governor Wilson, who is now among your chief advisors.

Yours is not a gutsy, independent proposal. It is a retread of special interest policy that will not only raise the ire of the voters who were fed up with special interest politics, but it will ensure the continued failure of a vital economic engine of our society.

While it is evident from both the proposals in your energy policy and recently discovered Enron e-mails, that you met with Ken Lay, it is equally clear that you have not considered the interest and needs of taxpayers, consumers and small businesses in this energy plan.

Californians elected you to be different. Coming clean about your meeting with Ken Lay is a first step and rewriting your energy policy would be the next one.

Sincerely,

Douglas Heller
Senior Consumer Advocate