Howard Kaloogian: Now we know who created Calif. energy crisis

Howard Kaloogian is a lawyer and a former member of the California State Assembly.

GITMO AND GUNS are getting all the press. But energy mavens are talking about another recent far-reaching — but little noted — U.S. Supreme Court decision on the California energy crisis: It took them seven years but they finally figured it out.

The revisionist part of the story is well known: Big bad oil traders like Enron gamed the market and drove up energy costs fifteen-fold. The blackouts, insolvent utilities and economic chaos are remembered as the worst energy crisis in American history.

But the Supreme Court turned this conventional wisdom on its ear and said there may have been misconduct by energy sellers, but no one ever showed that caused the crisis.

This left the real villains hiding in plain sight: The regulators who enforced the worst law in the history of the Golden State: the California energy deregulation of 1996. The same regulators who now say that despite the Supreme Court ruling they intend to continue their expensive vendetta on energy producers.

The stakes are high and it is worth remembering how we got here. So let’s go back. Way back to 1996. I was a member of the California legislature then.

I voted for what I thought was deregulation. Soon after the “deregulation” became law, one thing became apparent: This was not deregulation, but re-regulation — complete with price controls and trading restrictions that did not produce one extra watt of power.

Once in the hands of the befuddled regulators, this bill went from a bad idea to a nightmarish reality.

Anticipating the Supreme Court and Bart Simpson, the energy economist Geoffrey Styles figured it out six years ago:

“California’s energy crisis grew out of years of neglect, over-regulation and a fatally flawed ‘deregulation’ scheme that, upon scrutiny, failed to meet any common-sense definition of that term.” As the architects of an electric-power deregulation process that grossly distorted the market, California’s elected officials and regulators deserve their own share of the blame.

The regulators established the price caps and scheduling system that Enron’s traders so effectively exploited with their bizarrely named strategies, and the legislature and governor froze retail electricity prices, while letting wholesale prices float (far above retail), deliberately opening up a gap that soon brought the state’s two largest utilities to their knees.

When prices returned to earth, utilities — locked into long-term deals they signed at the peak of the market — suffered what the Supreme Court is calling “buyer’s remorse.”

They demanded refunds from the energy companies. Some agreed. Others did not, saying the sales were fairly negotiated between sophisticated buyers and sellers. And a deal was a deal. So off they went to court.

After a lower court and the Federal Energy Commission found no evidence that dirty dealing caused the crisis, the most overturned court in America got into the act — the Ninth Circuit Court of Appeals. These judges said the federal government had a duty to rip up these contracts because of the high prices.

In giving short shrift to claims that the reviled energy companies were behind the crisis, the court said legally what California voters knew intuitively when they voted the first time for Arnold Schwarzenegger. Absent massive mismanagement, there would have been no crisis.

The Supreme Court has sent a message. California citizens have the right to expect even better: Stop the war on energy producers. Declare victory and go home. Redeploy California’s private army of $700-an-hour lawyers who have frittered away tens of millions of dollars in pursuit of this now hopeless legal endeavor.

Regulators and rhetoric do not. The governor and his regulators should be able to figure this out. The Supreme Court sure did.

Howard Kaloogian is a lawyer and a former member of the California State Assembly.

It was a situation ripe for the harvest.

A commodity (energy, specificly electric energy) was artificially restricted by laws that prevent the expansion of generation capacity within California.

The demand continues to grow, at a known and even anticipated rate, all the while that the source of energy continues to grow more scarce. California has to import energy from neighboring states where there are far fewer restrictions on how electric energy is produced.

The energy supply through the grid can only come IN from outside at a limited level. Maximum is maximum, and any breakdown of the grid is magnified in its effects. There are competing demands for this same energy in other states, where it is being generated. Still, California does nothing to assure a greater in-state capability of producing energy.

Opportunity for the futures trading organizations. Happily they trade the futures in energy delivery back and forth, and as it looks like all the other peak sources are drying up, the prices continue to bid higher and higher.

Does all this have an oddly familiar sound to it? Substitute petroleum for electrical energy, and the United States for California.

Production of petroleum is artificially restricted here in the United States, when the demand is known and expected to increase over time. The United States is forced to import petroleum from regions where there are far fewer restrictions on extraction and refining the crude petroleum.

The crude can only come IN through a limited number of port facilities. Once here it is doled out to the various distribution lines, and because the refinery facilities are limited in how much they can expand, a greater and greater partion of the petroleum stock is imported as already refined. But other areas of the world also have a growing need for petroleum and refined products. Still, the United States does NOTHING to assure greater domestic production of crude oil.

Only, it’s not Enron doing this trading this time. Enron is out of the picture. All the principals are either in prison, or hopelessly locked out of ever being any kind of player again.

There ARE some big dogs out there still running, most notably the Soros International machine. Their structure of shell companies and wholly owned subidiaries make what Enron once was look like a kid’s lemonade stand. These people go in and do stock manipulations, currency trading and just plain cutthroat business practices, that bring the economies of whole countries down. It is not by accident that one of their biggest “wholly owned subsidaries” is the US Democrat National Committee. What Soros International is doing, is taking advantage of the artificial scarcity of petroleum worldwide, and bidding up the prices, trading between several of the different dummy corporations they have set up, for future delivery of oil contracts, oil that is not even out of the ground yet. They can run these prices up an down like running a yo-yo on a string, just by movement of a relatively few of these contracts. Crowd panic in the various trading floors around the world does the rest.

Eventually, like it did with Enron, when they tried to “corner the market” on energy flowing to California, this house of cards will collapse. When it does, anybody holding a contract for which they paid premium price to get, will see its real value drop to a half or a quarter of what they bought it for. A lot of smaller investors, and entities like institutional funds, will be left holding the bag. The big player here, Soros International, will just collapse a bunch of the dummy corporations, declaring them “bankrupt”, and whatever losses result, they can absorb them, where the smaller investors suckered into the trading scheme cannot.

The big plan right now is to keep the bubble in the price of crude expanding until AFTER the Democrats have swept into a majority in both the House and Senate, and Barack Obama is assured of the Oval Office. The tight squeeze will be, has been, blamed on the Republicans, but that is in itself an absurdity, as the initiatives to expand the energy supplies here in the US offered by George Bush have been stymied at every turn by a recalcitrant DEMOCRAT House and Senate, a co-ordinated effort to score a one-two punch on the Bush Administration. George Soros still has a totally deranged view of the entire Bush family, for reasons not apparent to most of the world, but probably well known in the circles at the top.

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