Enron: California's Best Friend
Discussion Boards
The Motley Fool Take
By Bill Mann (TMF Otter)
March 20, 2003
Let's get this out of the way: Enron's electricity wholesale group was hopelessly corrupt and took advantage of California's power crisis in 2000-2001 to devastating effect. Enron didn't act alone, either.
But, let's be blunt. The California state government and its regulatory framework created the problem. The state refused to address even core, basic problems, like the fact that power generation capacity in the state had essentially been frozen for a decade, while the demand rose by as much as 10% per year in that same time frame.
By allowing demand for power to close in on peak supply, the state was begging for disaster. California seems to have assumed it could just purchase additional juice from neighboring states. In the midst of a horrible Western drought and record-high temperatures, when hydro-power generation was at a decades-long low, this turned out to be folly.
Moreover, California had just deregulated its wholesale electricity market, but it made a critical, mindbendingly stupid mistake by not allowing transmission companies to purchase long-term forward contracts -- tools that limit the effect of price spikes. No forward protection and low safety against demand surges sound like a recipe for disaster, no?
California's legislature and regulators blew it badly, and their decisions and inactions over the course of a decade cost Californians billions of dollars. During the summer of 2001, many power traders provided power on a cash basis to the state, as its two largest transmission companies, Edison International (NYSE: EIX) and Pacific Gas & Electric (NYSE: PCG), teetered toward bankruptcy, felled by power purchase rates that had spiked several hundred percent in a matter of weeks.
There's no doubt that some trading companies took full advantage of a bad situation. But that situation was caused by California, which for a decade made it near impossible for new generating capacity to be built. That's why the name "Enron" is music to the ears of California politicians. In Enron, they have a despicable, corrupt organization to which they can point and say, "Enron did this to us!"
Bull.
This past week, California struck out at the companies that provided it power during the crisis. It filed a brief with the Federal Energy Regulatory Commission (FERC) naming 60 entities (oddly, including the Los Angeles Department of Water & Power) that withheld power or otherwise caused harm to California. The state is demanding that these companies refund the state $7.5 billion. Other companies named include Duke Energy (NYSE: DUK), Mirant (NYSE: MIR), and Williams (NYSE: WMB). This goes on top of the $1.5 billion FERC has already demanded be repaid to California.
Since there's incontrovertible evidence of manipulation, one has to assume that California has a chance of getting this larger award. But people in California should understand that the seeds of the disaster were sewn by their own elected and appointed officials' negligent actions toward ensuring their grid's viability.
Rest assured that if the weaknesses aren't fixed, the next time there's a power crisis in California, power suppliers from neighboring states will be even less enthusiastic to help. |
