Gray Davis uses a disgraced company as a political scapegoat.
opinionjournal.com
Those Hideous, Awful Enron Memos
Wednesday, May 15, 2002 12:01 a.m. EDT
We are currently of the opinion that no practice was too low-down for Enron. But even we were surprised to read the charges, breathlessly advertised last week, that Enron had caused the California energy crisis.
How could a single company--especially one too inept to earn an honest profit--have exerted such masterful control over an electricity market with some 5,000 transactions an hour?
For California politicians, the answer is obvious, if also electorally convenient. They claim Enron strategically withheld power from the market in 2000 and 2001, supposedly resulting in billions of dollars in overcharges. The only problem is that nobody has yet found any evidence to prove this. But now come the famous "Enron memos," which Governor Gray Davis and his Senate friends are waving around as the smoking gun, and just in time for November's election.
So we took a look at the memos. How disappointing! We didn't see anything about strategic market power. What we saw (at www.ferc.gov) were trading strategies aimed at gaming California's failed "deregulation" of its wholesale electricity market. And, boyoboy, there were plenty of stupid rules to game.
We could natter on about how California aggregated prices into single, zonal prices, thereby creating all sorts of skewed incentives. Or how the state divided itself into zones that ignored transmission constraints. Or how it assumed its power grid was not connected to the rest of the country, thereby generating arbitrage openings.
But the main action came from the separation of the day-ahead energy market from real-time transmission on the power grid. In the real world these are the same market. But by artificially separating them, California created lots of possibilities for gaming--especially after it slapped price caps on energy sales in the state. In other words, Enron's traders were merely taking advantage of the opportunities that California's regulators gave them.
Consider the ricochet ploy--a simple arbitrage made possible when price caps were introduced. Enron would buy price-capped power in California, launder it by sending it to another state, and then sell it back to California where, as out-of-state power, it was not subject to a price cap. Just because California politicians were stupid enough to think price caps could work doesn't mean everyone else couldn't try to prove them wrong.
Another Enron strategy was a rational response to gaming by the state's own utilities. California utilities routinely submitted load schedules that underestimated the energy they needed, hoping to keep their costs down by demanding less and thus keeping prices down. The next day, in real-time, utilities would buy any additional power from the state of California's grid manager, the Independent System Operator, or ISO. The utilities would compare the ISO's day-ahead forecast with their own, seizing on imbalances by submitting a schedule with inflated demand in the day-ahead market. Enron would then game this back and forth in a way that made the ISO pay Enron for any "excess" generation.
All of these strategies were aimed at exploiting flaws in California's insane energy-market design. They involved manipulating the rules, but they weren't the cause of California's energy shortages and blackouts. Most of these strategies were also risky, with traders speculating on prices that could move against them. In simple economics, traders were trying to arbitrage by buying low in the day-ahead market and selling high in the real-time market. Duh. That's what traders are supposed to do.
It is also not clear if these strategies made money for Enron. It's possible that sometimes Enron was on the wrong side of the trade, thus helping competitors or the utilities. The memos also don't indicate how often the strategies were employed or how much money was involved.
And it is far from clear that any of this was illegal. Most of the ploys were well-known to all the players, including the ISO, and some of the dumber rules were changed in response to the gaming. The ricochet ploy, for one, became unprofitable when the Federal Energy Regulatory Commission extended price caps to the Western states in June 2001.
We're inclined to believe that Enron committed securities fraud, among other sins. But its name has now become so associated with flimflam that the politicians are blaming it for every ill around, including some that they themselves caused. With a budget deficit to justify and down in the polls, Gray Davis needs a scapegoat to win re-election. Voters shouldn't let him get away with a phony Enron-made-me-do-it excuse. |
