High-Wire Dreamin’

Enron didn't win its "pure" market model, but it didn't lose, either. The splintered market meant that utilities, generators and major consumers would all make their own transactions through the schedule coordinators, and then submit the prices to the central exchanges, meaning plenty of action for the traders and derivatives specialists at Enron.

Hogan immediately denounced the split-market approach, which he dubbed the "separation fallacy." "This is a seriously flawed idea. No commercial or technical case can be made" for such a scheme, Hogan wrote in the December 1995 edition of The Electricity Journal. "There are, by contrast, very compelling reasons for keeping these functions together. These reasons explain why there is no competitive electricity market in the world" that operates without a unified, central exchange.

Those sorts of objections stalled the move to open markets in states across the country, leading Ken Lay in August 1997 to launch what he called "an attack on a consensus-driven process" that produced "halfway" reforms. In one state, however, Lay was able to report "good news": "We have the ear of the market-oriented commission in California." Later that year, state officials submitted a hybrid market design for final approval by the FERC.

Eric Woychik, an MIT-trained energy consultant to TURN, the San Francisco­based consumer group, made one last effort to raise a red flag. In testimony before the FERC, Woychik and two colleagues called for "substantial revisions to the proposal . . . in order to create a truly competitive market structure." Otherwise, they said, "Decentralized markets enable market players to achieve price discrimination, game markets, arbitrage price differences, and to avoid the increased competition that results from uniform pricing." It was a concise outline of what was to follow.

CALIFORNIA INAUGURATED ITS NEW ENERGY MARket in March of 1998, and for a time it seemed to work. Prices sank as generators underbid competitors for a share of the market. A year later, however, prices began drifting higher. And by June of 2000 they were spiking. Electricity that cost between $20 and $40 to produce was selling for as much as $1,000, with average prices hovering over $100. The crisis was on.

Caught between sky-high prices and regulated rates, the state's utilities quickly ran through their reserves and were forced into bankruptcy. Political leaders headed by Governor Gray Davis demanded price caps to bring the market under control, but federal regulators, echoed by generators in California, denounced excessive demand and the failure to build new power plants. "It's easy to blame people from out of state," said Steve Kean, the Enron vice president. "The real underlying cause was that you had rapid demand growth and you didn't have enough supply."

It has since become clear that Kean was wrong on both counts. Robert McCullough, a Portland-based economist who specializes in energy issues for clients in the U.S. and Canada, conducted a thorough survey of the Western market and presented his findings in testimony before Congress in January. "The industry was in better load/resource condition in the summer of 2000 than it had been in some time," McCullough told the House Subcommittee on Energy and Air Quality in January. "Peak loads were lower and total resources were higher than in previous years."

Just how large a share of Enron's business derived from California remains in dispute. But McCullough reports that a sample of interstate traffic between California and Oregon shows that Enron handled one-third of those transactions. The company itself disclosed in court filings last year that it was owed $570 million by PG&E, and Enron was named to the creditors' committee for the bankrupt utility. And some Enron executives made unguarded statements that contradicted the company line. "We've probably bought and sold more power than any other market maker in the West," Steve Kean told reporters early last year.

Besides, Enron did much more than simply deliver power. "I know what Enron likes to say, that they were bit players, that they did less than 10 percent of the business in California," said state Senator Joseph Dunn. "That doesn't really tell you that much."

A plainspoken Democrat from Orange County, Dunn spent much of the past year making inquiries as chairman of the Senate Committee To Investigate Price Manipulation of the Wholesale Energy Market. Dunn explained that the actual sale of power to a utility is simply the last step in a complex process, and that the price hikes in California were actually set well before final delivery. "The sale from the wholesale market to the utility is one small act in a whole series of events," he says. "A single megawatt is traded 20 to 25 times before it is sent."

Most of those trades took place on the private exchange at Enron, where as many as 1,500 young traders bought and sold contracts at the company's state-of-the-art Houston trading floor, with scores of flat-screen price/quote boards and piped-in rock & roll to keep things jumping. In 2000, Enron was the nation's largest wholesale buyer and seller of electricity, as well as its largest trader in natural gas, a key component in the price of power. In California as well, Dunn says, "Enron was a huge player in the market."