Reclaiming Power

Absolute market power corrupts absolutely. That’s the important subtext of Enron’s stunning “smoking gun” memos.

For Californians, the memos remove any doubt whether last year’s electricity meltdown was the result of market manipulation. The state now has strong legal grounds to successfully void--forget renegotiating--$43 billion in overpriced contracts signed as a result of the manipulation.

California ratepayers also should recover almost $10 billion in overcharges based on a pending claim before the Federal Energy Regulatory Commission. This refund is due not just from Texas bandits like Enron, Dynegy and Reliant but also home-grown pirates such as Los Angeles’ Department of Water and Power.

To focus narrowly on Enron and California, however, is to miss this much larger point: Our nation’s energy markets cannot function properly without strong regulatory oversight.

Unlike highly competitive markets in commodities like wheat and pork bellies, energy markets are vulnerable to monopoly. The high capital requirements of this industry pose a formidable barrier to entry.

Because of this barrier--and decades of lax antitrust enforcement--every key energy sector has settled into a comfortable oligopoly structure where a few large players call the shots. They are quite willing to provide electricity, natural gas and gasoline at reasonable prices most of the time but are all too capable of engaging in an orgy of price-gouging whenever the opportunity arises--from the winter heating season to the summer driving season.

Moreover, this structural problem in our energy markets is further exacerbated by a breakdown in corporate ethics.

Item: Under the “Fat Boy” gambit revealed in a secret Enron memo, traders bought regulated power in California and sold it to the Pacific Northwest for five times the price. They knew this would lead to brownouts and blackouts in California but saw no human or economic suffering, only a “public relations risk.”

Item: British Petroleum executives cooked up a scheme to dump Alaskan crude on Japan at bargain prices to deny supplies to California refineries and drive up gasoline prices. They figured they would make more money gouging Californians than they would lose selling Japan our cheap oil--motorists be damned.

Item: El Paso Natural Gas executives thwarted the expansion of the Southwest’s pipeline system by buying a key rival and scuttling its plans to build. Last winter, natural gas prices spiked far above the national average.

Item: Major oil companies in California bought up refinery capacity and independent gas stations and closed some of them to reduce competition. Prices now spike every summer.

Clearly, the ability to exert market power coupled with an unethical willingness to do so is a lethal combination. But this is hardly a zero-sum game between greedy energy producers and victimized consumers.

Indeed, low-cost and reliable electricity, natural gas and gasoline supplies are three of the most important ingredients of strong and stable national economic growth. That’s why it would be a serious mistake to misread the message of the latest Enron outrage as a story about a particular company or even California.

Instead, the memos should be a powerful catalyst for a national reflection on the direction of our energy future.

In this regard, we must reinvigorate rather than continue to eviscerate our antitrust laws. Such laws must be used to promote competition rather than create cartels.

We also must reevaluate the arguments in favor of energy deregulation. What looks wonderful in principle in the economic textbooks and conservative playbooks is failing miserably in practice.

Most specifically, we must insist that our most important energy regulatory agency, FERC, start protecting the public rather than merely the companies it regulates. In the short run, this means doing little things like extending electricity price caps in California and giving Californians their refunds. Over the long run, however, it also means crafting a coherent set of regulatory laws and procedures that protects the integrity of the country’s energy markets and imposing a much tougher set of sanctions for wayward executives who knowingly manipulate those markets.