By Hillel Aron
By Joseph Tsidulko
By Patrick Range McDonald
By David Futch
By Hillel Aron
By Dennis Romero
By Jill Stewart
By Dennis Romero
To help develop his new market, Lay drafted Skilling, a brash Harvard Business School graduate. Skilling quickly positioned Enron Gas Marketing to serve as a go-between for staid utilities and the energy firms that served them. By 1992, the firm was grossing $6.2 billion in revenues, and Enron set about seeking new realms to conquer.
Electricity represented a natural progression, a $300 billion annual market operating under close state and federal oversight. But Enron's move into energy would be more complex than with natural gas. While the FERC had endorsed deregulation, scores of utility commissions and other state-level agencies across the nation still had a hand in energy matters. For Enron to realize full profit potential, it would have to carve out markets state by state.
California became a proving ground. As a party-line Republican, Governor Pete Wilson had made commitment to free markets a litmus test for his administration's loyalties, and in 1993 the state Public Utilities Commission endorsed the idea of deregulation. It was just the sort of break Enron was looking for. "They were involved in discussions all across the country," recalled Dick Ratcliff, a veteran Sacramento lobbyist retained by Enron in 1992 to help on a pipeline project. "But they saw that California began to wiggle a little bit, and that got their attention."
Still, California was hostile territory. Enron was distrusted for its obvious self-interest, and it was quickly dismissed by the Legislature. "They were disliked," observed Dan Kirshner, an analyst and lobbyist with Environmental Defense in Oakland. "Enron was always from Texas."
But Enron's people were smart, and understood that the critical decisions would be made long before the Legislature affixed its stamp of approval. "Their sense was that this was a regulatory matter," Ratcliff says. "To their mind, you really didn't need or want the Legislature to be involved."
THE DEBATE OVER THE NEW, DEREGULATED ENERGY market quickly turned to the question of design: How do you replace century-old utilities with a system that keeps prices in check and deliveries on time? Two camps quickly emerged. One represented an elite group of professionals, experts in economics and engineering who had helped design new power systems in places as far-flung as Norway and New Zealand. They were led by Bill Hogan, an electrical engineer trained at the U.S. Naval Academy in Annapolis who was a professor of public policy at the Kennedy School of Government at Harvard. Enron led the opposition.
Hogan advocated a "pool" design where all the state's electricity would be bought and sold in a single market. The pool model -- dubbed "PoolCo" -- represented disaster for Enron. With buyers and sellers meeting in a single open market, no middleman would be needed, leaving Enron and its traders out in the cold. Enron's alternative was "bilateral trading," where buyers and sellers would make their deals independently. There would be a central grid operator, but it would be neutral, like air-traffic control or a stock market.
That was fine in theory, Hogan and other experts answered, but it didn't take into account the unique nature of electric power, with its huge generating facilities and elaborate delivery grid. "Electricity is a little different from other commodities," Hogan says. Since there's no way to store it, supply and demand must match precisely and by the minute, he said, with purchase and delivery orders cleared and coordinated through an orderly exchange.
Enron was not alone in opposing PoolCo. Generators and consumer advocates alike were concerned that a central exchange would lend a built-in advantage to established utilities or a convenient avenue for government control. "Many of us were highly suspicious of that model," said Jan Smutny-Jones of the Independent Producers Association. "There were more than a hundred different parties intensely interested in what was happening," added Don Garber, a lawyer with San Diego Gas and Electric. "Many of them were wary of intervention by regulators" through a central power exchange.
Enron gave the opposition credibility by offering an opposing theory for how the electric system might function. "They claimed to understand how markets would work," Garber said. "A lot of these people had no idea how to set up an electricity market," said Larry Ruff, another energy consultant at the PUC workshops. Enron didn't either, but they insisted that they did. "Skilling was talking nonsense," Ruff said. "But he was very influential. He was so full of hot air, he would dominate the hearings."
Besides, Enron was espousing the dominant ideology of the day -- the virtues of the free market versus the evils of regulation. The company executives were young, confident and forward-looking, an attitude that infused the whole state venture into deregulation. "They were the new kids on the block," said lobbyist Ratcliff. "They had very sharp people; they were scooping up new grads out of Harvard. Unfortunately, being very sharp doesn't make you wise."
IN LATE 1995, AFTER A SERIES OF PRIVATE MEETINGS, the anti-pool coalition proposed a far more elaborate model. It called for two separate power markets -- the Power Exchange, where utilities were to buy most of their electricity, and the Independent System Operator, to handle late, spot bids and to dispatch energy throughout the state grid. Most business would be conducted outside the central market through a constellation of "schedule coordinators," which would independently buy and sell power before making deliveries to the larger system.