Ken Lay's Enron blazed trail for failure in California energy deregulation
The Sacramento Bee, Calif. - July 9, 2003
Kenneth Lay's company was the godfather of electricity deregulation in California and, eventually, the symbol of everything that went wrong.
The criminal charges "will not put money back in the pockets of
ratepayers," former Gov. Gray Davis said in an interview.
Enron officials lobbied California officials feverishly in the early and
mid-1990s, preaching the virtues of free-market energy and warning that the
state's economy would stagnate if it clung to the traditional, regulated
electricity system. "The patient is on the ground bleeding," Lay
protege and one-time Enron Chief Executive Jeffrey Skilling told the Public
Utilities Commission in 1994.
When deregulation came apart in 2000 and 2001, producing rolling blackouts
and crushing the state's big utilities with billions of dollars in debts, Lay
urged California to stay the course. Deregulation would work, he argued in
meetings with California officials.
In an interview with The Bee at the height of the crisis, he said there was
an obvious cure for rolling blackouts: raise customer rates. "Price signals
need to be allowed -- for people to understand there is a shortage," he
said in the February 2001 interview.
Lay also made the case for continued deregulation in a secret Beverly Hills
meeting in 2001 with influential Californians like future Gov. Arnold
Schwarzenegger – a meeting revealed later to great fanfare.
Lay became a lightning rod for criticism among state officials. Attorney
General Bill Lockyer, in a Wall Street Journal interview in 2001, said, "I
would love to personally escort Lay to an 8-by-10 cell that he could share with
a tattooed dude who says, 'Hi, my name is Spike, honey.'"
Discussing Lay's indictment this week, Lockyer said he made the comment after
Davis asked him to "turn up the heat" on energy companies as
California attempted to renegotiate a better deal on power.
Yet Lay was so influential that even as Davis feuded with Enron and other
out-of-state energy companies and blamed them for high prices, Davis often
called on Lay for consultation. Davis' then-spokesman Steve Maviglio said Davis
spoke with Lay more than any other energy executive.
On Thursday, Davis said he eventually concluded that Lay "either was not
on top of things at Enron or was being duplicitous."
Following the accounting scandal that forced Enron to file for bankruptcy
protection, federal officials disclosed internal company memos showing that
Enron had concocted a variety of trading schemes, with colorful nicknames like
"Ricochet" and "Death Star," designed to manipulate prices
in California.
The schemes exploited loopholes in the state's porous electricity system. For
instance, the company arranged to buy electricity in California, sell it to
someone outside the state and then re-import it. That enabled Enron to evade the
state's price ceilings, which didn't apply to energy coming from out of state.
Two former Enron traders, Timothy Belden and Jeffrey Richter, have pleaded
guilty to charges of manipulating Western electricity markets. A third, John
Forney, is due to go on trial this fall.
Recently unearthed audiotapes of Enron phone calls show the company's traders
joking about gouging "those poor grandmothers in California."
On one of the tapes, an Enron official talks about informing Lay and Skilling
about her work in persuading California to delay a plan to reduce the price
ceiling on electricity. But it wasn't clear if the top two Enron executives were
aware of the trading schemes.
A conglomerate with multiple businesses, Enron's California ties included a
Bakersfield-area wind farm, a failed attempt to build a for-profit "water
bank" in the San Joaquin Valley and an investment partnership with the
California Public Employees' Retirement System that led indirectly to an
indictment against former Enron Chief Financial Officer Andrew Fastow.
When CalPERS wanted to cash out its investment in the partnership, Fastow
created an entity called Chewco Investments to pay off CalPERS. Prosecutors
later charged that Chewco was among the largest units Enron created to hide
billions in debts from the public. It was the revelation of those partnerships
that sank Enron financially in late 2001. Fastow pleaded guilty to criminal
charges in early 2004.
California officials continue to pursue Enron. Lockyer is suing Enron, saying
its market manipulations cost the state dearly. In a separate case, the state is
seeking $70 million in refunds from the company, part of a lengthy proceeding at
the Federal Ener- gy Regulatory Commission in which the state says it is owed $9
billion in refunds from a wide range of energy providers.
FERC has indicated it will order refunds of about $3 billion, and Severin
Borenstein, director of the University of California Energy Institute, said this
week's indictment of Lay won't affect FERC's opinions one bit. The indictment
"isn't about the California electricity crisis," he said.
But Lockyer and Davis said the Lay indictment might make FERC more
forthcoming.
"I'm not going to be personally vindicated until the Federal Energy
Regulatory Commission orders $9 billion in refunds," said Davis, whose
political standing started faltering during the crisis.
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