It is difficult to come to terms with the exact scale of the Enron raid on Californian energy consumers, or to understand the long-term implications of their actions. Their efforts can best be understood as a concentrated grab for power. They were wildly successful, though it was a Pyhrric victory, and they set the pattern for the next decade of business malfeasance. Even now, a decade later, we are struggling to understand the implications of Enron’s actions in California.
The Californian Power Crisis
The stage was set for the Californian power crisis in 1996, when Californian legislatures, under pressure from investment groups, “deregulated” that state’s energy market. The partially deregulated market was in no way simpler or smaller in regulatory load, but oversight was largely removed. Representatives and lobbyists assured the public that the natural workings of the free marketplace would keep prices low and the services responsive. In hindsight, it is obvious to what degree Enron manipulated the regulatory mechanisms to their own advantage. At the time warnings were ignored and deregulation was sped along.
By 1998 deregulation was in full swing, the energy spot market was open, and utility prices had already begun to climb for consumers. The stage was almost set for the Californian energy crisis. The last event occurred in 2000 when wholesale energy prices were “deregulated.” As is often the case with deregulation, laws were not removed as much as they were altered to the benefit of the traders. Wholesale energy prices were no longer controlled by law, but the prices of electricity sold to consumers at retail remained tightly regulated. Legislators and oversight agencies assumed that retail prices would always be higher than wholesale prices. They did not reckon with Enron, who wasted no time turning the situation that they had created to their advantage.
Using their newfound clout Enron began to turn the market against itself. They turned off utilities to raise demand and transmitted power away from where it was needed in order to create artificial scarcity. Their manipulations occurred on a daily level and made enormous profits. Since the retail price of the electricity was closely regulated, electric companies had no choice but to buy the power necessary to meet demand, sell it to consumers at the legally ordained price, and swallow the loss. It is estimated that Enron, over the year of its California operation, cost California utilities between 45 and 50 billion dollars.
The Heat Wave of 2000
California became aware of the terrible situation during a heat wave in the summer of 2000, when Enron used any number of market tricks to congest the power system and cause a rolling blackout in San Francisco. Enron deployed unethical market plans with names like “Ricochet” and “Death Star,” and voice recordings made at the time leave no doubt that the traders were well aware of what they were doing and how much they were hurting the customer. Utility prices continued to skyrocket and a state of emergency was declared in California in January 2001. Enron responded by provoking rolling blackouts across the state, but the writing was on the wall. Within two years Enron would go bankrupt and the state would resume normal power generation.
Enron managed to extract more than a billion dollars in profit from this chaotic situation. California utilities were forced to lay off more than 5% of their workforce to remain solvent and were buried under such crushing debt that they had to be taken over by the state. Enron’s involvement was not widely known at the time, but in the years since investigators have built a convincing picture of their mendacity. The California power crisis remains a monument to the negative effects of deregulation on the power system.
This piece was composed by Derek Finland, a freelancer based in the city of Indianapolis. Aside from racecar driving, Derek focuses on finance, politics, business and commerce, international affairs and other significant topics; to learn about a firm with a positive interest in Californians contact Kanetix in California.
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