Enron Memos May Signal End to Energy Cease-Fire

The new charges of electricity market manipulation against Enron Corp. are rekindling the energy wars between California Democrats and the Bush administration--though with a very different tone than during last year’s power crisis.

The discovery of internal Enron memos detailing schemes to inflate electricity prices in California and other Western states has ended the truce between the two sides that began in June when federal regulators reluctantly imposed limited price caps on the electricity market.

That decision defused an intense conflict between California Gov. Gray Davis and the White House. But now the stage is set for a second round of conflicts.

At a Senate Commerce Committee hearing Wednesday, California officials made it clear that they will use the memos to intensify pressure on the Federal Energy Regulatory Commission to grant them billions of dollars in relief and extend the price caps past their expiration date this fall. “These memos prove what I and many members of our delegation have been saying for almost two years now: Something was rotten,” Sen. Barbara Boxer (D-Calif.) said at the hearing.

The early sparring hasn’t been as vitriolic as last year’s conflict over the price caps--largely because Patrick H. Wood III, President Bush’s appointee as FERC chairman, has established better relations than his predecessor with California officials and consumer advocates. Optimistic that Wood may grant some of his demands, insiders say Davis appears to have made a conscious decision to court, rather than confront, FERC.

“From the purely policy level, the calculation seems to be we can get what we need from this guy and it’s not worth the risk to pick a big public fight,” said one California Democrat close to Davis.

But the tension could increase if FERC doesn’t provide Davis all the relief he’s requesting, which it seems unlikely to do. “We would prefer not to have an antagonistic relationship [with FERC], and so far we haven’t,” Davis press secretary Steve Maviglio said. “But if push comes to shove, Californians come first.”

Wednesday’s hearing marked the sharpest conflict over energy between California officials and the Bush administration since FERC’s decision to impose the price caps. After that decision, electricity prices in the state plummeted and California avoided the summer of brownouts many experts feared.

At Wednesday’s hearing, California officials repeatedly argued that the Enron memos, which detailed a variety of complex strategies to drive up electricity prices, proved they had been right in blaming the state’s electricity crisis on lax federal oversight of the energy market.

“With the publication of the Enron memos, none of us can hide from a basic truth: The California energy crisis has never been about supply or demand or any other set of economic fundamentals,” said Loretta M. Lynch, president of the California Public Utilities Commission. “It has been about a complete lack of appropriate enforcement, and lax or nonexistent federal regulation.”

Yet for all the high-octane rhetoric from Lynch and Boxer, observers said that David Freeman, Davis’ appointee as chairman of the California Power Commission, conspicuously praised Wood in his testimony. And the California Democrat close to the Davis administration noted that the governor reduced the temperature at the hearing by deciding not to testify.

“The political component of this is [Davis] can use the new [Enron] memos both as a sword to really go on the offensive and aggressively pursue an issue on behalf of the people of California and a shield to defend himself against criticism that his leadership was partially responsible for the electricity crisis,” the Democrat said. “But he recognizes that Wood at the end of the day is going to make these decisions, so the thought process is you continue to work with him.”

In response to the Enron memos, Davis and other California officials now are pressing three principal demands on FERC.

Wood was most encouraging Wednesday about the state’s request for action to restrain electricity prices after the price caps expire Sept. 30. Wood signaled--to some skepticism from Democratic senators--that FERC would find a mechanism to prevent price spikes. “We are not going to go from what we have now to something that is less effective,” he said. “It is not like an on or off switch.”

Wood was less definitive on a second Davis demand: a request for nearly $9 billion in refunds to the state from power companies. Privately, one senior administration official said he was expecting FERC would issue a “pretty substantial refund order.” But in his testimony, Freeman complained, “The process is moving at a snail’s pace.”

On the third demand, FERC is considering a request from California to order power suppliers to renegotiate $43 billion in long-term contracts they signed with the state. Davis is arguing that the Enron memos prove that manipulation of the electricity market forced the state to pay excessive prices.

Wood gave no indication of his leaning on that question, and some insiders believe FERC may be reluctant to force the reopening of the contracts. The senior administration official said that “FERC ..., just like Congress, has not been quick to break contracts.” The official added that reopening the California deals might create a ripple effect that forces the renegotiation of energy contracts across the West.

Tyson Slocum, research director for the energy program at Public Citizen, a consumer group, said Davis may be betting too much on influencing Wood. But Davis aides insist that, if FERC resists, they are prepared to escalate the political conflict with the agency.

“FERC is a political animal like everyone else in Washington, and they will feel the heat from this, just as they did when they ordered the price caps,” Maviglio said.