June 4, 2004

Hon. Arnold Schwarzenegger, Governor
State Capitol
Sacramento, CA 95814

Hon. Fabian Nuñez, Speaker
State Capitol, Room 219
Sacramento, CA. 95814

Dear Governor Schwarzenegger and Speaker Nuñez:

Have you listened to the Enron tapes? If you haven’t, you ought to — they are available from CBS News.

The voices of Enron employees celebrating and mocking California’s last energy crisis should be the final evidence you need to stop any effort to deregulate any portion of California’s electricity system. Think about what the energy executives were telling Californians during the crisis — indeed, what Ken Lay himself told you, Governor Schwarzenegger, personally during your 2001 meeting with the former Enron CEO — in contrast with what they undoubtedly knew was being perpetrated by their companies under the guise of deregulation.

The disaster that squandered the wealth of California was born of regulation by the few, not markets of the many.
– Ken Lay, Chairman and CEO of Enron (August 22, 2001)

Burn, baby, burn. That’s a beautiful thing.
— An unnamed Enron electricity trader gleefully talking
about a California wildfire that knocked down power lines and helped push electricity prices higher.

The math is pretty simple. There’s not enough supply. Northern California will be looking at rolling blackouts. There’s just no way around it.
— Gary Ackerman, power industry lobbyist (March 15, 2001)

Taped Enron Employee #1: He just f—s California. He steals money from California to the tune of about a million.
Taped Enron Employee #2: Will you rephrase that?
Employee #1: OK, he, um, he arbitrages the California market to the tune of a million bucks or two a day.

When the power industry said they “arbitraged” the California market, they meant that they were buying California power at one price and then immediately selling it back into California at twice the price. So when energy companies tell you now that they need “direct access” — the rule that allows businesses to purchase electricity from unregulated power firms rather than through a regulated utility — what they really mean is this: They will balkanize the electricity supply in order to again leave the grid exposed to manipulation and blackout blackmail by energy producers.

Under your plans the biggest corporate customers will get the cheapest power, leaving the residential and small business customers paying more. The reason is that the cheapest plants were sold to the unregulated energy producers, as part of the first deregulation scandal, and they are the ones marketing directly to big business. The more expensive electricity is concentrated into the bills of residential and small business ratepayers. Once the state is split between unregulated and regulated ratepayers, the next round of “arbitraging” will begin. Then the unregulated price will skyrocket, the blackouts will hit and the big business customers of the direct access system will demand to re-enter the regulated system, pushing rates up for everyone.

History will repeat itself if you ignore what these tapes reveal and continue to advocate an energy system left in the hands of the energy firms. Enron‘s traders, of course, were not some rare rogues of the industry and these tapes are not the first time that we have seen proof that the energy industry lied to California about the effects of deregulation and the reasons for the energy crisis.

Reliant Energy Wholesale Group’s former President Joe Bob Perkins said in a company press release in May, 2001:
Reliant hopes the Governor and others will stop these baseless accusations and focus on true solutions to California’s energy shortage. We are now being singled out because we believe in an open market.

Earlier this year the United States Department of Justice indicted Reliant for manipulating the deregulated California energy market as early as June 2000.

Now, consider the fact that your proposals would allow big energy companies to once again operate as much as 30% of the state’s energy market without state oversight of their rates and practices. Assurances that these new plans to deregulate will not lead California to the same fate as the first experiment on California businesses and consumers, cannot be squared with the evidence provided by the tapes.

As the Enron employees (as well as previously released taped conversations among traders from other energy companies) illustrate, in an unregulated environment there is an overriding incentive to create shortages that push electricity prices up. Whether it is callously cheering on natural disasters like the fires or intentionally taking plants off line (“Well, why don’t you just go ahead and shut her down,” as one Enron trader put it), deregulation will lead to energy shortfalls and skyrocketing prices.

Prior to the implementation of the first deregulation bill, Edison‘s CEO John Bryson called deregulation:
the best, soundest way to move to a desirable competitive market that will benefit all customers, large and small’

But the hopes for the deregulation law soured in practice, blowing a hole in our state budget, sending businesses out of state, saddling consumers with ten years of overpriced contracts and decades of crisis-related debt and a series of lawsuits aimed at getting some of the money back. As one Enron employee put it:
Yeah, now she wants her f—–g money back for all the power you’ve charged right up, jammed right up her a—- for f—–g $250 a megawatt hour.

These tapes are like an alarm clock that should wake you from the dream that deregulation can work. Even Edison‘s Bryson realizes that another attempt at deregulation “would be like playing Russian roulette with the state’s electricity system.”

Lawmakers voted unanimously in 1996 to deregulate, on a faith in the market and trust that the energy companies would compete for business, not manipulate for profit. The officials at the time, mistaken as they were, did not have the benefit of these tapes or the blackouts or bailouts or bankruptcies that came along with energy deregulation.

These tapes lay out the foul and indecent truth that unregulated energy companies will never deliver reliable electricity because they are paid more when energy is scarce and the supply unreliable. You cannot ignore these warnings.

Sincerely,

Douglas Heller
Executive Director