Enron’s Revenge

THE RELEASE OF INTERNAL ENRON DOCUMENTS detailing market-manipulation strategies with nicknames like "Death Star" and "Ricochet" has caused an uproar in Congress, which called on the memos' authors to testify this week on how these practices contributed to the California energy crisis.

But for Eric Woychik, an energy analyst, the disclosures from the former energy-trading powerhouse came as something of a relief. "What I'm happy about is that we didn't see anything we didn't know about."

Woychik, who is a consultant for the San Francisco­ based consumer-advocacy group Toward Utility Rate Normalization (TURN), predicted the same schemes employed at Enron even before they took place. He warned federal regulators in 1997 that the state's deregulated energy market would "encourage the abuse of market power by large players and will result in major inefficiencies that create large and deleterious impacts on consumers and the California economy."

Over the intervening years, as blackouts loomed and the state paid excess charges estimated at more than $50 billion, Woychik and others demanded federal action. "We all knew it was going on," Woychik said in an interview this week. Added Representative Sam Farr (D-Carmel), chairman of the California delegation in Congress, "The Enron memos confirm what we were saying all along."

Those warnings were ignored, first by the Clinton administration and then by George W. Bush, due to a confluence of free-market ideology and a gusher of campaign contributions flowing from the Houston oil patch. Now that the Enron memos have confirmed the critics' worst-case scenarios, the question becomes: Who will pay for the looting of California?

"The question of culpability has been largely ignored until now," Farr said. "The bottom line is to recover money for the state of California."

But with Enron in bankruptcy, officials seeking deep pockets must bring other energy firms into the net. Analysts have documented that five firms in particular withheld capacity at the height of the crisis, helping drive electricity costs through the roof.

Already, the Federal Energy Regulatory Commission (FERC) has ordered more than 150 other power generators and traders to disclose any information showing that they engaged in similar practices. State officials are following the same tack. "We've redoubled our efforts to obtain documents from the other market participants," said state Senator Joe Dunn, who chairs a committee looking into the breakdown of the energy markets.

If those demands produce evidence of widespread collusion and manipulation, regulators could order refunds of the entire $9 billion already requested by the state, as well as adjustments in more than $40 billion in future energy contracts signed by the state. Such penalties could prove devastating to an energy industry already rocked by market reaction to the Enron disclosures.

Ironically, Dunn said he believes Enron anticipated just such a result when it put its memos on the record. Legal experts say Enron could easily have protected the memos under attorney-client privilege, and Enron's own lawyers advised the board not to release them.

But the new board at Enron is scrambling to reposition its bankrupt firm, shedding its vaunted trading operations and focusing on old-school pipeline and power-generating interests. A government attack on their competitors would give them a substantial edge. "It was a business decision," Dunn said. "It does damage to the other traders in the field."

THERE REMAINS SOME DISPUTE OVER THE SIGNIFIcance of Enron's role in California. Some, like Frank Wolak, a professor of economics at Stanford who specializes in energy issues, contend that Enron's influence was limited by its position as a pure trader with no capacity in California. "Market manipulation is really the wrong thing to focus on," Wolak said Monday. "The real issue is the unilateral exercise of market power" by generators.

Added Severin Borenstein, director of the UC Energy Institute at Berkeley, "The real big money came from the generators."

Others, including Woychik and Dunn, reject that distinction. They see market manipulation by generators and traders in the same light, and say that Enron set the tone. Said Dunn, "We have to zero in on the marketers."

Robert McCullough, an energy analyst based in Portland, Oregon, declined to put a dollar figure on the cost of the Enron schemes in California, but said some of the strategies had "enormous" impact, forcing emergencies that led to dramatic price spikes. McCullough also observed that the memo made no mention of one key Enron strategy identified by state regulators -- self-dealing among wholly owned subsidiaries.

Besides, Enron's influence extended well beyond the boundaries of the California market. As Senator Dianne Feinstein pointed out during hearings in January, Enron controlled more than half the market in deliveries of natural gas to Southern California. And at the height of the energy crisis, gas selling for $10 elsewhere in the country cost almost $60 in California. "There's a lot of money unaccounted for," Feinstein said.

Recovering those surcharges will require an act of political will. On that score, Eric Woychik is offering another prediction: Energy companies will press Congress and the FERC to keep confidential any records that show they engaged in market manipulation, thus blunting efforts to collect refunds for California. "That's going to become a driving force in campaign fund-raising over the next year," Woychik said.

Woychik said he'd be delighted to see the federal government "actually try to make these people cough up some dough," but he said he's skeptical.

"I don't want to be naive," Woychik said. "Sorry, but this is the American political system at work."