Enron Vision Proved Costly to Firm, State
Despite the hundreds of thousands of dollars Enron spent trying to influence California’s energy debate in the 1990s, including timely donations to key politicians, its most lasting accomplishment was almost intangible:
It helped persuade state officials that electricity ought to be subject to market forces.
“The idea that you could commoditize everything and trade everything--and that government was foolish and wasteful and ineffective compared to the market--that faith was the one they had really imparted to everyone,” said V. John White, executive director of the Center for Energy Efficiency and Renewable Technologies. “It was intellectual domination, in part because nobody wanted to defend the status quo.”
Enron invested more time and money in the debate than any other energy company, say lawmakers, consumer advocates, utility officials and others who in the 1990s helped shape the new competitive electricity market. But, they say, more often than not the company failed to win what it sought.
Today, as the firm faces bankruptcy, congressional hearings and criminal investigations, its role in California is relatively small. It plans to build a power plant near Sacramento, and it continues to supply electricity to some large businesses and college campuses.
In June 1994, with California debating how to deregulate its electricity industry, a top Enron official promised California “enormous” savings if companies like his could compete for the state’s utility customers.
Jeffrey Skilling, then chief of Enron’s natural gas group, tossed out a figure of $8.9 billion a year. Then he told the Public Utilities Commission just what that could buy.
“You can triple the number of police officers in Los Angeles, San Francisco, Oakland and San Diego,” Skilling said, “and you could double the state of California construction budget for hospitals.
“And you could double the number of teachers in Los Angeles, San Francisco, Oakland and San Diego,” he went on. “You could pay all the interest on the California state debt.”
“The stakes are huge,” Skilling told the PUC, “and every minute that we delay bringing competitive markets to California allows the meter to keep ticking.”
The company didn’t make its case with words alone.
In April 1994, for example, Enron gave $10,000 to Republican Gov. Pete Wilson just one day before his appointees on the PUC issued a historic document declaring their support for deregulation.
In the following years, as debate solidified into concrete proposals, Enron’s contributions to politicians and its stable of lobbyists expanded.
By 1998, the company’s donations to California politicians topped $100,000. That included $25,000 to Gray Davis’ successful campaign for governor and $20,000 to his Republican opponent, Dan Lungren. State Sen. Jim Brulte (R-Rancho Cucamonga), the author of the 1996 deregulation law, got $4,000.
The company gave $172,000 to the state’s politicians in 2000 and $78,500 last year.
Thousands Spent on Payments to Lobbyists
From 1991 through 1996, Enron’s payments to lobbyists ranged from $30,000 to $70,000 each year. By 1998, it was paying nearly half a million dollars for lobbyists working the Legislature and PUC.
The company also gave $100,000 to the host committee for the 2000 Democratic National Convention in Los Angeles, for which then-Mayor Richard Riordan, now a Republican candidate for governor, was the lead fund-raiser. Last May, then-Enron Chairman Kenneth L. Lay met with Riordan to talk about the company’s solutions to the state’s energy crisis.
For all that, though, many observers say Enron influenced California deregulation most by way of Washington, not Sacramento.
“The entire electric restructuring agenda on a national level was an Enron agenda,” said state Sen. Steve Peace (D-El Cajon), who led the Legislature’s effort in 1996 to shape deregulation. “They had such control and influence over [federal regulators] that that in turn put California in a place where we had no choice.”
The PUC, under pressure, set out in 1993 to overhaul its 80-year-old system of regulating the monopolies of Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric.
Enron jumped into the fray.
“The fact that Skilling was in PUC meetings was an indication of how important we thought this was,” said Dave Parquet, an Enron vice president who has been with the company in California since 1993.
Few Other Companies Follow Enron’s Lead
Few other energy companies followed.
Most of the ones that would later come to dominate the California market--Reliant Energy, Duke Energy and Mirant Corp., for example--did not hire lobbyists or begin giving campaign contributions until after 1997, when they bought the power plants that PG&E;, Edison and SDG&E; were forced to auction under deregulation.
“Enron did spend a lot of money on this,” said Robert Michaels, an economics professor at Cal State Fullerton who has worked as a consultant for the firm. “Enron was essentially the only company other than the utilities that had the resources and motivation to send lawyers and experts to thousands of working groups and hearings.”
The PUC eventually narrowed its proposals for opening the electricity industry to competition to two. The first, pushed by former Commission President Daniel Fessler, was known as “poolco.” It involved the creation of a new agency that would both operate the transmission grid and run a market. Electricity prices in the “pool” would be set hourly based upon supply and demand.
Enron hated the idea.
“We opposed the concept of the pool,” Lay said in an interview with The Times last January. “Markets work when consumers and suppliers interact with each other....Each knows what the other wants and can do, and in the process creative things start occurring and all kinds of new products get developed. And when you go through a [pool], all that gets screened out.”
Enron backed a second proposal, carried by former PUC member Jesse Knight, known as the “bilateral” approach. Under such a market, buyers and sellers would cut their own deals secretly. The job of making sure electricity flowed smoothly on the grid would be left to an agency that acted like a neutral air traffic controller, but didn’t buy or sell electricity itself.
In the summer of 1995, the utilities, their biggest customers and private power plant owners tried to find a way around the deadlock at the PUC. They settled on a compromise approach.
There would be a market called the Power Exchange, with prices set hourly, as Fessler proposed. But it would be separated from the grid-operating agency--the California Independent System Operator--which would run its own small market for the last-minute flow of electricity needed to avoid blackouts.
With much political heft backing this compromise, the PUC voted for it 3 to 2 in December 1995. Knight’s bilateral approach was narrowly rejected.
“I lost,” he said. “I lost fairly.”
Some argue that Enron, realizing that Knight’s proposal would fail, lobbied for the separation of the Power Exchange and Cal-ISO because it would be easier for the company to manipulate.
“Enron was very, very insistent on what came to be called the market separation rule,” said Paul Joskow, a Massachusetts Institute of Technology economist who worked for Edison as a consultant. “Those of us who participated warned the commission that there were significant potential dangers there.”
Mike Florio, a senior attorney with The Utility Reform Network and a member of the board that oversees Cal-ISO, said he is convinced that a more integrated approach would have spared California the worst of the soaring prices that lasted from June 2000 to June 2001.
“With the ISO and [the Power Exchange] being separate,” he said, “none of the market monitors could see the whole picture ... so it was possible for people to play games much more easily without being detected.”
In spite of all its efforts to shape California’s electricity market, Enron never became a major player once it opened.
The company does not own any power plants in the state but instead acts as a middleman, buying and selling megawatts in a daisy chain of deals.
Officials with Cal-ISO and the state Department of Water Resources, which began buying electricity on behalf of the cash-strapped utilities in January 2001, say they don’t do a lot of business with Enron.
In January, February and March 2001, for example, less than 2% of the electricity purchased by the water department came from Enron Power Marketing Inc.
Rate Freeze Thwarts Retail Market Plan
Wholesale electricity was never Enron’s main concern in California. More than anything, the company wanted to create a thriving retail market where it would compete to buy electricity on behalf of utility customers, from computer chip manufacturers to apartment renters.
Such choice in electricity service providers was a keystone of California’s deregulation plan. But by 1998, the company had given up signing any new residential customers and was complaining loudly that California’s deregulation rules made competition next to impossible.
The biggest problem, said Enron Vice President Parquet, was that the Legislature froze residential utility rates as part of the 1996 law that slightly modified the PUC’s deregulation plan.
With frozen rates, Parquet said, utility customers had no reason to shop and Enron could not find electricity to sell at a better price.
So far, despite having filed for bankruptcy, Enron continues to provide about 1,200 megawatts at peak to customers it recruited during the brief heyday of choice in California’s retail electricity market.
But state power buyers are prepared for the worst, ready to step in to fill the gap should the troubled company suddenly fail to meet its commitments.
Today the hub of Enron’s activity in California is the permitting of a 900-megawatt power plant in Roseville, a far cry from the robust market it set out to manage.
The problem, said Parquet, is that California never delivered a true market. “I would hate for people to go back and say, ‘See, deregulation did not work,’ ” he said. “Because it was not deregulated, it was re-regulated.”
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Times staff writer Jeffrey L. Rabin contributed to this report.
