Enron Tapes

Some more Enron tapes transcripts have been released, and they continue to show Enron, among others, helped precipitate the 2000-2001 electricity crisis. Still, electricity deregulation was badly handled in 1996, and created the weaknesses that Enron was able to exploit.

Kevin Drum expresses some well-grounded outrage, but also reveals unfortunate naivete, with his opinion:

I hope there's no one left who still thinks California's problems were caused by too little power plant construction, or overly restrictive environmental regulations, or a badly constructed power grid, or mismanagement by Gray Davis.

Well, Kevin's hopes are dashed! All these other factors that Drum discounts nevertheless contributed to the crisis. Blaming Enron and the power traders alone is foolish. The traders helped set up the regulatory situation, but public officials like Steve Peace, who masterminded the 1996 deregulatory reform, went willingly to their own slaughter. The traders exploited regulatory and infrastructure weaknesses in order to bring the crisis into existence.

Power traders understood (and state officials didn't) that relying upon markets to set prices of commodities like electricity, which can't be effectively stored, REQUIRES a cushion of excess power supply to be readily available PLUS the capacity to make long-term contracts, in order to avoid price spikes. Governor Gray Davis was extremely reluctant to allow the making of long-term power contracts, and he displayed a near-pathological inability to make tough decisions in general, which just helped seal Californians' fate.

The California Energy Commission (CEC) largely discouraged the construction of new power facilities in California throughout most of the electricity-consuming dot-com boom of the 90's, until prompted to relax by the 1996 electricity market deregulation (and, in practice, really not until 1998, with the effort to license the Metcalf power plant near San Jose.) Thus, in 2000, California didn't have that much of a power supply buffer to work with.

Electricity was regulated in a piecemeal fashion that aggravated the California power crisis. Public officials were not acting in concert to prevent power outages. A significant fraction of California's power plants were required by air pollution districts around the state to be off-line at various times in 2000/2001, primarily for NOx retrofits. This forseeable reduction in supply apparently wasn't as well-coordinated as it might have been with the California Independent Service Operator. Better coordination from the top (namely Governor Gray Davis), and the emergency suspension of NOx retrofits, might have helped.

Problems with the power grid and the utility infrastructure aggravated the crisis: too few power lines to readily transfer power between Northern and Southern California, and inadequate natural gas storage capacity in the San Diego area.

The bright spot in the power crisis was how well PUBLIC power utility districts functioned, despite severe shocks: e.g., LA Water and Power, and Sacramento Municipal Utility District. Their long-term contracts saved them almost completely from blackouts. Elevators in Sacramento high-rises continued to operate when elevators in San Francisco (PG&E territory) came to a halt.

It wouldn't surprise me if the motivation of the traders was as much ideological arrogance as greed. Aggressive Republican free-marketers, exploiting a flawed market, against stupid California Democrats, symbolized by hapless "Aunt Millie."

We are already setting up Phase II of the California power crisis. After 2000, following the decline of the stock market, investment in new power facility construction slowed. Continued population growth guarantees increased power consumption, despite the fact that the salubrious climate and general energy-consciousness makes Californians the most electrically-thrifty people in the USA. Despite all that has happened, it really wouldn't take much to put us in crisis again.

Here is more of that story from the LA Times:

According to the newly released transcript, Enron traders on Jan. 16, 2001, hatched a plan to take an Enron-controlled power plant in Las Vegas off-line the following day. In a phone call, "Bill of Enron" informed "Rich," a Las Vegas power plant employee, that "we want you guys to get a little creative … and come up with a reason to go down."

The shutdown, he added, was "supposed to be, ah, you know, kinda one of those things."

In an effort to cooperate, Rich responded: "OK, so we're just comin' down for some maintenance, like a forced outage type thing?"

"I think that's a good plan, Rich," Bill said. "… I knew I could count on you."

The 52-megawatt plant was out of operation for several hours the next day, when rolling blackouts plagued Northern and Central California and about half a million homes and businesses lost power. At that same time, U.S. Energy Secretary Bill Richardson had ordered suppliers to make power available in the West.

Some observers viewed the taped conversation as a window into Enron's broader strategic approach.

Through contracts with more than a dozen power plant owners, including municipal utilities in Glendale and elsewhere in California, Enron controlled 3,500 megawatts of electricity as of August 2000, according to documents uncovered by the Federal Energy Regulatory Commission in its investigation of Enron. That was enough electricity to serve more than 2.6 million homes."

The fact that Enron would jeopardize the health and safety of Western citizens to chase profits in the energy market is disgraceful," Sen. Maria Cantwell (D-Wash.) said Thursday. "But it's not just disgraceful on a human level — it's also illegal."

...Suggestions that Enron's plans to exploit the energy marketplace as much as three years before the 2000-01 energy crisis jarred some officials, who recalled how Enron executives were traveling the country about the same time making a case to deregulate the marketplace."Enron put out the most polished presentations, the glossy materials, the things they put out to every policymaker in the West," said Eric Saltmarsh, executive director of California's Electricity Oversight Board."

To know that it was basically a scam as far back as that says it wasn't just a fraud on the marketplace in 2000 and 2001, it was really a fraudulent ambition in creating what became of the California marketplace," Saltmarsh said. "In that sense, the [marketplace deregulation] was in some respects set up to fail."