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Enron's role in California's energy crisis of 2001

Wednesday, Mar 13 2002
Illustration by Melinda Beck

ENRON CEO JEFF SKILLING TOOK IT from all directions when he traveled to San Francisco last June to address the white-glove crowd at the Commonwealth Club.

First the announcement came early that week that the Federal Energy Regulatory Commission would extend price caps to any companies selling energy on California's wholesale market. Then the stock market reacted, with Enron shares slipping to a 52-week low of $43.07. The low price was devastating for Enron; the company now would have to devote additional shares to keeping its off-the-books partnerships afloat.

Outside the Commonwealth Club, protesters gathered, outraged by the continuing sky-high prices Californians were paying for energy. One tossed a berry-cream pie, striking Skilling in the side of his head.

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Altogether a rough week, but Skilling had it coming. He and Enron had helped lay the groundwork for the energy crisis. When millions in Western-market dollars flowed across their balance sheets, Skilling and Enron exulted. Now the party was ending in the same place it had started. Within a month, Skilling would resign from Enron, jumping ship just as the Fortune 500 conglomerate began to slip beneath rising tides of bankruptcy.

For California, meanwhile, the damage is still being tallied. Cost estimates of the state's energy-market meltdown range upward from $40 billion. The state owes $10 billion for power it bought to keep the lights on last year, and another $45 billion in long-term contracts, which is close to double the market value of the electricity California will receive. Also figure in the state budget, which went from a heady surplus to a $15 billion deficit in the space of one crisis-wracked year, and the wreckage of two of the state's century-old utilities, both in bankruptcy proceedings.

Not surprisingly, the state's elected representatives want someone to hang for all the mayhem. Senator Dianne Feinstein has been the most explicit in her critique of Enron, asking the Senate Energy Committee to hold a special hearing "to pursue what role Enron had in the California energy crisis with respect to market manipulation and price gouging."

It's an easy enough charge to make. Enron was one of six new energy firms that played a major role during the crisis. All have been accused -- and four sued by the state of California -- for scheming to drive prices up, and each reported record profits in 2000 and early 2001. But the other five firms are power generators who bought California plants after the state moved to deregulate markets.

What sets Enron apart is that Enron helped design the market that ultimately melted down. The Houston energy company dispatched top executives to testify at scores of hearings in California where the new electricity system took shape, leaning on key public officials in 1994 and 1995. A close review of the record and interviews with veterans of the state's energy war show that when it came to winning critical changes in market structure, Enron carried the day.

Enron's hand in shaping California energy policy makes the question that much more interesting. We can see that we were robbed -- certainly there were some who made out like bandits -- but were we set up? Did Enron manufacture the state's energy crisis to reap huge profits?

The answer is not simple. There were myriad factors at work in designing California's groundbreaking venture into deregulated electricity, including scores of major stakeholders, billions of dollars and the peculiar physics of one of the largest electricity markets on the globe. Still, Enron was there at the beginning, it reported spectacular earnings during the months of spiking prices, and it fought to extend the crisis when the clamor rose for government intervention. Did Enron chairman Ken Lay rig the California market and then clean out the state treasury, or did fate simply take its course, the ball bouncing first his way, and then the other direction?

Part of the answer lies in the company's history, and its first foray into California, long before anyone could sense approaching doom.

AN ECONOMIST BY TRAINING BUT ALSO THE SON of a Baptist preacher, Ken Lay espoused a fervent belief in the virtues of free-market competition. His convictions were honed during a series of government jobs, first as an official in the Nixon administration at the Department of the Interior, and then at the Federal Energy Regulatory Commission (FERC).

He got his chance to put those ideals to work in 1985, when Lay was drafted to helm the merger of two natural-gas pipeline companies in a deal financed by junk-bond king Michael Milken. The new company boasted the nation's only coast-to-coast interstate natural-gas pipeline, but it also carried massive debt. There was little chance the company could survive in the traditional mode of shipping gas from wellhead to utilities and power plants -- the fees simply wouldn't cover the debt service.

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