Price-gouging Inquiries Target Enron Overcharges in California May Exceed $40 Billion

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The Boston Globe

LOS ANGELES – The practices of Enron Corp. and other energy companies that designed California’s energy-deregulation bill resulted in $40 billion to $70 billion in utility overcharges and ancillary costs, said a consumer group and the agency that operates the state’s energy grid.

These figures are sharply higher than the $8.9 billion refund that the state has demanded from Enron and other energy firms. They have been calculated as four state entities – the state attorney general’s office, the Public Utilities Commission, the Electricity Oversight Board, and a state senate committee – investigate price-gouging allegations.

“We’ve been ringing the warning bell for quite some time,” said Greg Cook, manager of market monitoring for the California Independent System Operator, which runs the state’s energy grid.

The collapse of Enron has prompted numerous lawsuits and investigations concerning its accounting practices, and media attention has focused largely on the plight of shareholders and employees. But the business practices that propelled a small gas-line operator into the nation’s seventh-largest company are also coming under scrutiny, highlighting the costs to consumers and the markets where Enron operated.

Nowhere was Enron‘s rise more spectacular than in California – the first state to deregulate its energy markets. Until then, three investor-owned utilities served the state. But utility bills were about 50 percent higher than in Washington or Oregon. The idea was that if California would open up its electricity market, the state’s utility bills would drop significantly.

“We thought consumers would pay lower costs and that we could pick and choose our suppliers,” said Eric Woychik, a former adviser to the California Public Utility Commission.

Yet, building such a system was daunting to policy makers. So, several for-profit energy firms advised the CPUC. In June 1994, Enron vice president Jeffrey Skilling testified to the commission that the state could save $8.9 billion a year by deregulating – enough money to triple the number of police in Los Angeles, San Francisco, Oakland, and San Diego, he said.

Over the next few months, Enron and several other companies hammered out their joint recommendations for restructuring the electric industry. Southern California Edison Co., the California Manufacturers Association, the California Large Energy Consumers Association, and the Independent Energy Producers – which included Enron Capital & Trade and others who would profit in California’s new market – signed their plan on Sept. 11, 1995, and submitted it to policy makers.

In the fall of 1996, the California Legislature essentially used that plan as its energy deregulation bill. Years later, some of the other architects of California’s deregulation bill would look back on their proposal and admit its shortcomings. “We didn’t foresee the problems,” said California Manufacturers Association spokesman Gino DiCarlo. “Shame on us for not passing a better law.”

Enron declined to comment on the particulars of this story because of California’s ongoing investigations. “By my count, there’s been four investigations of Enron in California,” said Enron media relations spokesman Vance Meyer. “We’ve cooperated with all of them, and we’ll continue to do so.”

In March 1998, the Independent System Operator opened for deregulated business. But California’s market proved to be murky. For one, the wholesale market was de regulated, but the retail side for consumers was still restricted.

“That meant that utilities were buying very high prices in wholesale markets and selling low to their retail clients,” said Jan Smutney-Jones, spokesman for the Independent Energy Producers.

For another, the utilities by law could not enter into long-term contracts. Instead, they had to buy power a day before they needed it. “Once the market got volatile, the utilities were hit with highly expensive power,” said DiCarlo.

A third problem was that electricity was bought and sold on spot markets. In traditional spot markets, commodities that can be stored like wheat are sold for cash and delivered immediately. But electricity is not perishable and doesn’t have to be moved quickly, said Mark Cooper, research director at the Consumer Federation of America. That meant energy traders such as Enron could hold on to goods indefinitely.

“We found that suppliers were exercising power and withholding supply,” said Cook of the ISO. By stockpiling supplies, traders forced prices sky high.

State Senator Steve Peace, in an October 2000 letter to the Federal Energy Regulatory Commission, said Enron and other marketers cornered supply in order to get “exorbitantly high prices” for power. “This capability distorts [prices] and is purely the result of the unlawful exercise of market power in a market that was collusively structured,” he wrote.

By 1999, the wholesale price of electricity had climbed from $20 a megawatt at the start of regulation to $250 a megawatt, even though demand had been relatively flat. The state’s utility operator wanted to cap prices. But Enron and the other suppliers threatened to take their power elsewhere, said Woychik.

By late 1999, wholesale prices exploded to $750 a megawatt. The ISO declared that price gouging was widespread and capped prices. This angered the private companies, including Enron chairman Kenneth Lay. He wrote to the FERC, urging it to nullify the price caps. On Nov. 1, 2000, the agency removed the caps.

At the height of the state’s power crisis, the price of electricity boomed to $3,000 a megawatt. Some household utility bills were $800 a month – more than rent. All told, the state’s cost rose from $6 billion in 1999 to $27 billion in 2000 and $27 billion in 2001, according to the Third Annual Report from the California Independet System Operator.

Comparing pre- and post-deregulation prices indicates $40 billion in overcharges, confirmed Cook of the ISO. Others claim that the figure is conservative. Woychik says overcharges totaled $50 billion in California and another $20 billion in the rest of the West.

Harvey Rosenfield, head of the Foundation for Taxpayer and Consumer Rights, places the entire cost at $71 billion, reflecting what it will cost California consumers in overcharges, bailouts, and other associated costs.

According to some energy specialists, Enron‘s operations in California were key to the collapse of the company, which filed for bankruptcy protection Dec. 2.

In the summer of 2001, California Governor Gray Davis turned away from the volatile spot markets and entered into long-term contracts with energy suppliers. Enron was not among them.

Enron‘s mistake was that it thought it could continue to fleece California,” said Michael Shames, head of the Utilities Consumers Action Network. “But once the state cut off the cash that fed Enron‘s voracious appetite, the company had to find other sources.”

There wasn’t another field as rich and vulnerable as California, however. “When the spigot got turned off here,” Shames said, “the firm started to collapse.”

Consumer Watchdog
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