The Electric Slide

Late this spring, while hardly anyone was paying attention, the epicenter of the California energy crisis moved east. For a year, the focus had been on the state's misbegotten deregulation scheme and on Democratic Governor Gray Davis's dithering response to the mess it created. But in the past couple of months, there's been a seismic shift in emphasis and onus: to the out-of-state generators, marketers, and pipeline companies that have made exorbitant profits off the crisis; to the do-next-to-nothing Federal Energy Regulatory Commission (FERC) that's failed to cap runaway wholesale prices despite the commission's own finding that rates have not been "just and reasonable," as federal law requires; and to the Bush administration, which has insisted for months that the problem is California's. The state will still have a long, hot summer, but a lot of people outside California will start feeling the heat.

Davis has been talking about energy company "profiteers" and "pirates" ever since January. But although he recently hired (at $30,000 a month) Mark Fabiani and Chris Lehane, a couple of heavy media hitters from Al Gore's presidential election campaign, this shift wasn't just the governor's doing. Vice President Dick Cheney's drill-and-burn energy plan certainly contributed, as did the Bush administration's monumental political clumsiness. When the president agreed to a "summit" with Davis late in May--a summit with a governor?--he inadvertently gave Davis a chance to grab media exposure on the Sunday talk shows, on Larry King Live, and in The Washington Post and The New York Times.

More important, there's the fortuitous defection of Vermont Senator James Jeffords from the Republican Party and the resulting change of control in the Senate--where Jeff Bingaman of New Mexico, a co-sponsor of Dianne Feinstein's bill capping wholesale electric rates for the next two years, is now chairing the Energy and Natural Resources Committee. The new chair of the Committee on Governmental Affairs is Senator Joseph Lieberman of Connecticut, who's already asked the General Accounting Office to investigate price gouging in the industry.

They'll have plenty to work with. Evidence that generators and marketers have exploited the situation has been accumulating for months. By now it's common knowledge that wholesale rates, which rarely went higher than $40 per megawatt hour in 1999, sometimes ran higher than $1,900 last year (and in at least one extreme case, nearly $3,900). Electricity that cost the state $7 billion in 1999 could cost as much as $70 billion this year. Not all of this is the consequence of gaming. It's been driven in part by an acute drought, which triggered a shortage of hydropower in the Pacific Northwest, and in part by the high price of natural gas. But since rates charged by a subsidiary of El Paso Corporation have sometimes been five times higher in California than across the border in Arizona, these price spikes may also have been manipulated.

Every major study indicates that electricity generators and marketers have exercised market muscle. In March economists at the California Independent System Operator, which manages the state's power grid, calculated that there was no other way to account for overcharges of some $6.2 billion between May 2000 and February 2001. At almost the same time, economist Paul Joskow at the Massachusetts Institute of Technology and economic analyst Edward Kahn in San Francisco concluded in a paper published by the National Bureau of Economic Research that there's "considerable empirical evidence ... that the high prices experienced in the summer of 2000 reflect the withholding of supplies from the market by ... generators and marketers."

A similar estimate was recently issued by Severin Borenstein, director of the University of California Energy Institute, and his colleagues, who "very conservatively" calculate the overcharges so far at $4.5 billion. Even more suspicious is the fact that price spikes occurred not merely at times of peak usage but at off hours and in cool months--when no one had ever seen a price spike before--and that there were unprecedented numbers of unscheduled plant outages during those times. The overcharges weren't all attributable to suppliers under FERC jurisdiction; California's largest municipal utility often had surplus power and sold it back into the state's grid at equally exorbitant rates. But it was the market leverage of a small number of generators and marketers in Texas and North Carolina, combined with a lack of effective retail price signals to dampen demand, that made those extortionate wholesale rates possible.

Little of this behavior--perhaps none--may be illegal. Absent collusion between suppliers, there is no violation of the antitrust laws. But it adds plenty of fuel to the political fire. Much of California's energy industry, largely composed of independent generators doing what regulated utilities had once done, hardly existed until deregulation began in the mid-1990s. The immense Houston-based marketer Enron--a global broker of commodities, electricity, gas, and broadband fiber-optic communications lines (the new thing in "energy")--is supervised by nobody. Through mergers and acquisitions, El Paso Corporation (formerly El Paso Natural Gas Company, a modest pipeline company based in western Texas) has become one of the biggest gas companies on earth. In the wake of the dot-com fizzle, energy IPOs became the darlings of Wall Street. As one broker put it, "They're in the driver's seat."

And they haven't been shy about exercising their clout. In the 2000 election cycle alone, energy companies--including utilities and the older oil-and-gas sectors, many of them known for their close connections to Bush and Cheney--contributed more than $64 million to political campaigns (double the $32 million they put up in 1992), of which 75 percent went to Republicans. Among the biggest donors were Enron (nearly $2.5 million), Southern Company ($1.4 million), El Paso Corporation ($843,000), and Reliant Energy ($822,000).

More telling, perhaps, is the recent disclosure by investigative reporter Lowell Bergman (working both for The New York Times and the PBS program Frontline) of a conversation between Enron Chairman Kenneth Lay, a close friend and major financial supporter of George W. Bush, and Curt Hébert, a free market ideologue and the chairman of FERC. As Hébert tells it, Lay offered him a deal: If Hébert would support Enron in its effort to gain access to transmission lines controlled by Southern Company, Lay would use his influence with Bush to keep Hébert in the FERC chair. Lay's version has it that Hébert asked for his support--but there is no doubt that the conversation took place. Bergman also reported that Duke Energy Corporation, the subject of investigations about overcharges, made a secret offer to Governor Davis to refund unspecified amounts if the state would drop all investigations and lawsuits against the company.

But the clincher, both as symbol and driver of the new focus on the marketers, was "Blackout," Bergman's Frontline program, which aired June 5 on many PBS stations. The show was not about Davis's failure to raise retail rates before Pacific Gas and Electric Company declared bankruptcy, or about what Cheney called the governor's "harebrained scheme" to buy the wholesale power that the state's uncreditworthy utilities can no longer purchase, or about the predictable standoff between Bush and Davis about temporary re-regulation of wholesale prices in the western market. It was about the cozy relationship between the energy companies, the Bush White House, and federal regulators, and the inability of consumer groups to secure any access at all; about Cheney's lame declaration that "there's not a lot you can do"; about FERC's failure over a period of some 18 months to investigate evidence--including an internal memo about manipulation--that El Paso Corporation had been rigging California gas prices; and about the influence and insouciant arrogance of energy industry executives who regard themselves as the heroes of a market that threatens the sixth-largest economy on earth.

By sheer coincidence, 2001 is the 100th anniversary of the publication of The Octopus, Frank Norris's seminal populist novel about the battle of California wheat farmers against the stranglehold of the Pacific and Southwestern Railroad (a fictionalized Southern Pacific Railroad), which controls freight and interest rates and dominates state government with savage thoroughness. Like today's energy executives, the railroad's president turns out to be not a monster but a genial fellow who's certain that his actions are dictated by economic laws.

Look at a map of the U.S. pipeline holdings of El Paso Corporation or at the earnings and wholesale-pricing practices of the oligopoly of marketers and generators in California in the past year. You may not see an octopus, but you'll get a rich understanding of the impulses that, a century ago, led to regulation of railroad-freight rates and, eventually, utilities. FERC Commissioner William Massey, a lone dissenter, told Bergman that "it's long past time for the agency to step in." If it does not, he said, "the market will fail" and "consumers will rise up in a political revolt." The Bush administration may still be slow to budge. But politically and economically, it's now a whole new game.

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