California's "Bogus" Energy Crisis in Retrospect

California’s “Bogus” Energy Crisis in Retrospect Written by Wayne Lusvardi and Charles Warren Tuesday, January 04, 2005

"Enron" or Political "End Run?" We were running out of sky, not energy

To most people the name Enron is associated with all that is wrong with corporate America and as the cause of the California energy crisis of 2000-02. The nicknames of Enron's notorious energy trading maneuvers -- "Death Star," "Fat Boy," "Ricochet," and "Get Shorty" – are now even well known by the public. When U.S. Senator Tom Daschle wanted to state his opposition to pending legislation he coined a new verb - "I don't want to Enron the people of the United States." But in 2000 Enron pulled out of the California energy market after only six months, and gouging by merchant energy traders could not have singularly caused the state's energy crisis.

An explanation for the continuing mystery of what one Los Angeles radio talk show host accurately dubbed the "bogus California energy crisis" (Mr. KABC), might be that it wasn't Enron, but an "end run" around the public by elected officials, the California Public Utilities Commission (CPUC), and the Clinton administration Environmental Protection Agency (EPA), that was behind the electricity crisis of 2000-02.

As someone who sat on the energy crisis task force for one of the state's largest government utilities, I believe that government gambling schemes were much worse than Enron's legal gaming of the energy trading system and that much of the story behind California’s energy crisis remains untold.

Enron charged less on average for electricity than most of the municipally owned utilities in the Pacific West during the energy crisis. Enron committed securities and accounting fraud with derivatives and corporate shell games that were not uncovered by regulators but by investors who learned Enron was a house of cards. Enron's house of cards collapsed prematurely more due to a change of political regimes in California that pulled the plug on open access energy grid regulations than due to its malfeasance. The California energy crisis was not initially caused by gouging energy companies but by the EPA threatening to cut off Federal funds to California by 2000 if it didn't shut down its old polluting power plants to clean the air. To paraphrase a term by Gary Cook of Greenpeace used in a different context, "we were running out of sky, not energy."

How to pay off the from $21 to $39 billion in unpaid bonds, called "stranded assets," on mothballed power plants was the real crisis behind the bogus California energy crisis.

To get out of this mess, both Democratic California legislators and its Republic Governor Pete Wilson initially devised a gambling scheme that bet on the weather and lost. This was called "The Perfect Storm" because in 2000-01 California faced a crisis fueled by a number of factors: the coldest winter weather in over a century occurring in November 2000 and January 2001 resulting in demands for natural gas for home heating , thin backup power supplies due to the mothballing of old power plants, and drought in the Northwest resulting in less availability of backup hydropower. Consumer advocates and the mainstream media charged natural gas suppliers with price manipulation just when the California energy crisis hit. But they failed to understand was that what was behind the four-fold spike in natural gas prices in 2000 was that demand for natural gas jumped as hydroelectric power came into short supply in the western U.S.

In 1998 the Democratic Party seized power of both houses of the California legislature and the Governship and came up with their own gambling scheme of price controls, which also failed. Price controls prevented wild price increases but also ensured no price reductions for consumers. Employing a tactic that might euphemistically be called an "Endrun" around the public, the California Public Utilities Commission (CPUC) mandated a "competitive transition charge" (CTC) be loaded into the price cap to pay for the stranded costs on old power plants. Price controls failed when wholesale electricity prices predictably exceeded the capped retail price in order to pay off the stranded debt. The only way merchant energy traders could play in California’s highly re-regulated energy market, while loading the "competitive transition charge" into their pricing structure, reducing rates to consumers, and reaping any profit, was to deploy some of risky trading tactics made infamous by Enron. In other words, the legislators programmed speculative “gaming” into the system of deregulation in the hopes that merchant energy companies could pull off a miracle and protect legislators from getting thrown out of office for raising electricity bills to consumers.

The so-called deregulated electricity system was everything but deregulated. Under the Democratic version of deregulation energy providers had to order electricity a day ahead of time from the California Independent System Operator (ISO), had to load the "competitive transition charge" into the spot price, and were forced to adhere to retail price caps set by the CPUC. What happened under the Democratic scheme of deregulation was that the old system of regulation of monopoly electrical utilities was replaced by a system of long-term contracts at over-market prices to pay down the unpaid debts on obsolescent power plants. Essentially, this was a system of hidden taxation.

The California Public Utilities Commission, whose role is to serve as a watchdog for the public, never itself fully disclosed to the public this scheme to pay for unpaid debts on decommissioned power plants through higher electricity rates. Both then-California Governor Gray Davis and the legislature got cold feet about disclosing anything they knew about the energy crisis to the public for fear of political repercussions. Meanwhile, some school and water districts were going under with huge electricity bills, some industries highly dependent on electricity were looking at insolvency, and tragically some people lost their lives at unlit traffic lights during rolling electricity blackouts.

Meanwhile monopoly utility companies like Edison and municipal power agencies were crying poverty while they made out like bandits. Edison got $10 billion in overcharges to pay off their stranded costs and to legally pass through money from their subsidiary to their parent company to create other start-up companies. And the municipal power agencies, such as the Los Angeles DWP, were legally reaping a windfall re-selling their cheap hydropower provided at taxpayer’s expense to electricity customers across the state.

After the Democratic electricity gambling scheme failed, former Governor Davis, the legislature, and utilities like Edison and PG&E played a game of "hot potato" for two years on who was going to pick up the tab for cleaning the air. Finally the stranded debt was rolled into a general obligation bond issued by a new state Power Authority to be paid out of state taxes instead of raising our electricity bills.

In 2004, state energy regulators and operators are patting themselves on the back that recent record setting peak hour electricity consumption has resulted in only a modest $70 per megawatt-hour price in the spot market and no blackouts yet. But regulators are again deluding themselves in believing that long-term contracts, a new price-control system that prohibits sellers from charging higher than they've charged in the previous 90 days, and threatened criminal prosecutions are going to solve the long-term structural energy crisis. California has added 8,300 megawatts to the grid since 2001, but 10,000 more megawatts of power are on hold because a price-controlled and criminalized system doesn't lead to any incentives to build new plants.

California hoodwinked electricity consumers into believing that mainly a financial crisis resulting from clean air mandates was an energy crisis. This financing crisis evolved into an energy crisis of sorts, but this wasn’t the real reason for the crisis. By not fully disclosing this to the public, government has allowed a falsehood about Enron to cover for the actions of government energy regulators. With the successful gubernatorial recall of Gray Davis in California in 2003 it became apparent that cloaking the reasons for the energy crisis from the public could not curtail the inevitable political disaster. To solve both California’s financial and long-term structural energy crises we first need to get the story straight. And to get the story straight we must get rid of our vested ideas as well as our vested interests as to what caused the California energy crisis of 2000-02.

About the Writer: Wayne is a real estate economist who served on the Metro Water District of S. California. He has published articles on environmental issues and energy resources. Charles Warren is an adjunct professor of real estate finance at Istanbul Techncial University, and a real estate appraiser in San Francisco. He has been published in several journals. Wayne Lusvardi and receives e-mail at wlusvardi@yahoo.com.

--excellent article. I have been following the little material that the print media have on the near bankrupcy of Nevada Power and its parent company , also inextricably tied in with this--

bonk.

From the Memory Vault-- not sure how many still are live:

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Thanks for sharing this...

Thanks for the ping tb. Great article.

Private list.

You've understand part of it, but not all of it.

It's dirtier than the picture you have painted here. The principal culprits are John Bryson and the NRDC.

Somebody is still adding it as a keyword

Thanks guys.

fyi

What? You tryin ta round up the old energy crisis gang??? Gettin ready for round two???

I thought all the problems were solved, now that Path 15 has been beefed up, right?

"Enron charged less on average for electricity than most of the municipally owned utilities in the Pacific West during the energy crisis."

Do ya remember the sour look on the pale face of Gray Davis when it was pointed out to him that public governmental entities were gouging far more that the private sector energy merchants???

I think he groused about a "sister" governmental entity to the state government, referring to LA Water & Power, or whatever it's called, going way beyond the private companies charges of power.

Thanks an interesting article. Simplified some stuff, but also focused in on many of the right things. As we all discussed pollution controls were a big part of what was happening and where a fair chunk of the "money went."

What always amazes me is that Davis screamed that billions were owed to the state, but from a bunch of companies that were all bankrupt or nearly bankrupt. Obviously the money went somewhere else. No one has done a good job of "following the money." I look forward to someone actually documenting where all the money went. My feeling is that it went into pollution controls, overtime work to install them quickly, high natural gas prices that funded extreme gas exploration and pipeline flow enhancements, along with lots of money to political consultants to top Democrats in the State of California and nationally.

All the problems solved....are you kidding....??

along with lots of money to political consultants to top Democrats in the State of California and nationally.

*****Especially that...looting is what I call it.

Thanks for an excellent article.