Posted on 05/09/2002 8:33:21 AM PDT by Ernest_at_the_Beach
WASHINGTON – Despite the political furor caused by revelations of Enron Corp.'s apparent manipulation of California electricity prices, energy experts said the state's poorly designed power market was ripe for schemers.
State officials were warned that such tactics were likely when they created the system in 1996, energy analysts said.
"People who do a lousy job designing markets get lousy results," said Richard J. Pierce Jr., a regulatory expert at George Washington University Law School. "Most (of the Enron tactics) would not work elsewhere."
Gov. Gray Davis and other California officials have acknowledged flaws in the state's power deregulation plan, approved unanimously by the Legislature before Davis became governor. But they say that does not excuse alleged wrongdoing by Enron and other power sellers.
"It is very clear that Enron attempted to take advantage of the rules, drive up prices in California, create artificial shortages, cause blackouts and make a killing all at the same time," Davis said.
Analysts said the weaknesses in state law were compounded by lax federal oversight of the wholesale power market and the long refusal by federal regulators to take allegations of manipulation seriously.
"You can't say California was warned but not give California or the federal government the essential information about what's going on. This is a completely opaque system," said I. Michael Greenberger, a former top regulator for the Commodity Futures Trading Commission.
Internal Enron memos describe how electricity traders for the company sought to drive up wholesale power prices in California by creating phony congestion on the power grid, evading price caps and utilizing other maneuvers. Federal regulators investigating charges of manipulation of West Coast power markets released the December 2000 memos.
Several energy market experts said they were not surprised by the practices outlined in the memos, which went by such nicknames as "Death Star" and "Ricochet."
"A lot of the things that are described in there are very well-known tactics," Pierce said.
"What was a surprise to me was that they had a name for all of these strategies and they were so well-organized," said Ken Rose, senior economist at Ohio State University's National Regulatory Research Institute.
The flaws in California's power market – notably its exclusion of long-term power contracts, its reliance on more volatile short-term markets and a dearth of new power plants – were well-known to energy traders, the experts said.
"Certainly the market rules in California were a problem," Rose said.
Pierce said experts told California officials of potential problems, including congestion scheming, when they were designing the deregulation plan.
"They decided to go instead with the approach that Enron encouraged them to use," he said, referring to Enron's lobbying to shape the California plan.
The experts were reluctant to judge whether the tactics outlined in the Enron memos were clearly illegal.
"I think they're very troubling documents. They certainly show an intent that is not consistent with the public interest," Greenberger said.
Gregg Fishman, a spokesman for the California Independent System Operator, the state power grid manager, said: "It wouldn't be our place to determine if laws were broken. We definitely are looking at whether regulations have been broken. I think we can definitely say 'yes' at this point."
In fact, two of the Enron memos discuss ISO prohibitions against "gaming" the market and discuss penalties "should it discover such activities." They include fines, suspensions and antitrust investigations.
All of the experts interviewed agreed there is a need for greater disclosure of energy trading practices. Many of the complex trades in which Enron specialized were freed from federal reporting requirements and regulations by Congress in 2000.
"It's like the entire federal structure has gone to sleep on this," Greenberger said.
While the Federal Energy Regulatory Commission recently moved to tighten reporting requirements for power marketers under its jurisdiction, the Senate last month rejected an effort to re-impose regulations on computerized energy trading and "derivatives" used to set future prices for electricity.
Sen. Dianne Feinstein, D-Calif., who championed the legislation, hopes the Enron disclosure will give the effort new momentum.
"Many of my colleagues argued that there was no manipulation," she said. "I hope that the 50 of my colleagues who voted against (the legislation) would reconsider their opposition."
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But, he's like sooo experienced - been in state government for decades! And Davis was Lt. Governor when the deregulated power market was planned and legislated - was he too busy fundraising to notice the foxes in the henhouse, or was he making sure the gate was well oiled and wouldn't squeak when he let them in?
OK, anybody know: (1)which piece of legislation this was, (2) who introduced the legislation, and (3)which democrats voted for the legislation?
I think this information could be used to make the whole Enron thing backfire on the Democrats, expecially if some of the democrats got campaign contributions from Enron and other companies. There might even be interesting freedom of information requests directed to democratic officials in Cal State and at the federal government as to correspondence on favoring this legislation.
"People who do a lousy job designing markets get lousy results,"
Correction: People who design markets get lousy results.
"It is very clear that Enron attempted to take advantage of the rules"
It is very clear the designers of the rules are incompetent and foolish.
"They certainly show an intent that is not consistent with the public interest,"
The same could be said of the Cali politicians who started this mess.
In more ways than one!! :o)
The flaws in California's power market – notably its exclusion of long-term power contracts...
Weren't the short term deals Red Davis' idea?
"People who do a lousy job designing markets get lousy results..."
Obviously this jerk has never read F.A. Hayek, who called any attempt to "design" a free market "The Fatal Conceit" [click on book for more]:
I can't think of one.
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