From time to time, things which I write for my classes seem to have a larger relevance, and may be of interest to other people. I would like to post these, just to get a feel for what people are thinking.
Enron and the California Blackouts
From the mid-1990s to 2001, one of the most egregious examples of corporate malfeasance in recent history took place. Soon overshadowed by other events, this set of incidents nonetheless exhibited the lengths to which a corporation could go, absent strict government controls, and with an internal set of ethics more suited to a graft operation than a corporate boardroom. In the wake of energy deregulation, California had major rolling blackouts, allegedly because of a lack of available energy to serve the state's needs. Electricity bills for many consumers began spiraling out of control, reaching points many times higher than they had been prior to deregulation.
Initially, a disparate conglomeration of people sang from the same sheet of music, with the energy companies insisting they couldn't bring any more power to the state, and environmentalists giving doomsday predictions of this being the start of the end for the gas-guzzling, appliance-driven culture of America. At the height of the blackouts, power plants were even being taken offline, needing repairs because they were being so overstressed.
By the end of 2001, Enron, the company at the heart of the blackouts, filed for bankruptcy, and a clear picture of corruption and profiteering began to appear. From the very beginning, it was all a farce. The entire `crisis' had been manufactured. From blackouts to plant shutdowns to dire warnings about energy usage, it had all been an elaborate ploy to drive up electricity prices and fatten the wallets of the insiders of the corporation.
But beyond the direct criminal aspect- with some guilt having been already assigned, and other members still under investigation- there are some serious ethical questions which haven't been satisfied as of yet. Certain companies, specifically in the Defense Industry, have always been subject to a very stringent set of rules, including who they can sell their products to, and when they can send them. The existence of these rules prevents the companies from realizing their shareholders' interest in making as much money as possible, but it is seen as essential to the security of the United States that these restrictions remain in place.
When it comes to internal security, however, the United States has been much more reticent to provide guidelines of acceptable behavior in recent times, leaving it up to businesses to decide the proper balance between their fiduciary duty to their shareholders and their larger duty to the population as a service providing essential materials.
The roots of the `crisis' came from the deregulation movement in California of the mid-1990s. As part of broader moves across the country in the previous pair of decades, the theory of deregulation was that an open market would encourage new competitors in the deregulated markets, leading to lower prices for consumers. In theory, regulated (i.e. fixed-price) markets were more expensive, since there was little incentive for companies to innovate and reduce prices. No matter their performance, they received the same government-fixed payments.
In 1996, the plan for deregulation of the energy market in California was passed. In order to open up the market to competition, the first requirement was for the state utility companies- of which Pacific Gas & Electric and Southern California Edison were the largest players- to sell off their power-producing sections (Wikipedia, 2005). Once they had completed this, PG&E and SCE would become no more than energy brokers, buying up their power from an open market, at market rates, and selling it to consumers. The theory was that this would allow other energy brokers- Enron and friends- to enter the market. With multiple brokers bidding for power, a price war would take place, with each broker trying to undercut the prices of their competitors. Consumers would be freed from being forever linked to their local provider. In much the same way as telephone deregulation turned telephone lines into merely a conduit from which consumers could choose their long-distance carrier, power lines would now carry energy from a multitude of different carriers.
The price wars did ensue, but in a way nobody outside of the energy companies thought possible. In 2000, energy prices began skyrocketing, ostensibly because hot weather had increased demand. Because of the structure of the deregulation, the retail price to consumers was protected through 2002, while the wholesale price which the utility companies were paying was now wholly unregulated (Encarta, 2005). In the facts known at the time, this was causing massive amounts of money to be lost by the utility companies, and the crisis would come to a head in 2001, when the rolling blackouts began hitting the state.
During the blackout period, PBS ran numerous interviews with the major players in the issue, from corporate executives to then-Governor Gray Davis. Encapsulated for history, these interviews are extremely enlightening, being free from the revisionism of hindsight. And in those, the extent of malfeasance was already noted. An interview from April, 2001, with the president of PG&E, shortly after PG&E had declared bankruptcy, noted that PG&E had been extremely profitable, but that large amounts of monies were transferred from it to a sister corporation, National Energy Group.
In his May, 2001 interview with PBS, Governor Gray Davis, while also noting the extreme profits which had been generated for the companies involved, sounded more at a loss as to the reasons for the shockingly high increases. "The generators have made more money than God. I mean, they've made 700 percent, 800 percent, 900 percent profit. They haven't improved the service. They haven't improved the product. They're just selling us back our own electrons that are sitting here in California. ... In 1999, the entire state--including public power authorities at municipal levels--spent $7 billion for power. In 2000, a year later, for approximately the same amount of electricity, $32.5 billion--a 450 percent increase. And it's going up this year. So ask yourself ... why are we paying these energy companies so much more money for the electrons we bought two years ago for $7 billion?"
The answer would be slow in coming, and one company came to be the heart of it- Enron. As Mimi Schwartz described in her book Power Failure: Inside the Collapse of Enron, there were ways to artificially boost energy costs in a deregulated environment. In one incident (of many) on May 24, 1999, an energy trader in Enron, Timothy Belden, placed a massive order for energy transmission, attempting to put 2,900 megawatts of power through lines which could only handle 15 megawatts. As Schwartz describes it, "Such a plan was destined to cause congestion on the line. California had an automated response to overloaded lines. Immediate electronic requests went to all the state's suppliers--Do you have Power coming across this line? Can you remove it? We will pay you to take it away!" That single trade pushed up prices by 70%, and cleared Enron roughly $10 million in extra profits that day.
Enron was by no means the only player putting through trades like this, although they were one of the largest players. In California, the utility companies were- allegedly- feeling the crunch of deregulation. Since consumer prices were fixed until 2002, the massive increase in wholesale prices was cutting into their book profits, and putting them on the path to bankruptcy which they would meet in early 2001. The extent of their collusion with Enron and friends has not yet been fully explored, so the comparison of reality vs. wolf-crying cannot be made. However, as was noted in the case of PG&E, the passing of monies between sister companies indicates that the bankruptcies were merely one more red-herring, along with the blackouts, to convince the public that there was a real emergency on their hands.
The first break in the claims of the companies that pure market forces of supply and demand created the massive price hikes came in the spring and summer of 2001, as analysts began looking at the hard data. Once they did, they found two major correlations. First, energy usage during the crisis period was actually significantly lower than in previous, non-crisis years. As archived by Paul Kienitz, who chronicled much of the scandal as it played out, the peak flow of electricity in August, 2000 through California's lines was 43.8 gigawatts. In January, 2001, during one of the rolling blackout periods, peak flow was 31.7 gigawatts. In other words, at the height of the crisis, electrical usage was roughly 25% less than times when there was no crisis. Clearly, demand could not be outstripping supply, since supplies were more than ample to meet the demand only a few short months before. Or were they?
The second piece of data uncovered showed a more direct link to deliberate action of the part of the companies to choke off supply. Again archived nicely by Paul Kienitz (fortunately for the user, as these data points seem to have disappeared from the power company sites. A visit to ISO- the Independent System Operator, the company responsible for managing California's deregulated power- shows seasonal assessments of power from summer 2000- present. Interestingly, all periods of time are covered, except one. After the summer, 2000 assessment, the next assessment is winter 2001-2002. The entire period of the blackouts is missing from their site), the amount of power generators/plants (measured in gigawatts produced) taken offline for `service' was also astoundingly high, going from 2 gigawatts offline in July of 2000, to almost 15 gigawatts offline by April, 2001.
With these extremely high rates of `servicing' going on, investigators long suspected that there was deliberate collusion to take down power plants, artificially choking off the energy supply to the state, and, in turn, pushing up the price of electricity even more. But the most vivid evidence wouldn't appear until 2004, in some expletive-filled tapes from Enron's West Coast trading desk. CBS aired the censored tapes, with traders giving such juicy statements as "Do you know when you started over-scheduling load and making buckets of money on that," and directly ordering the shutdown of power plants in the following exchange:
"If you took down the steamer [power plant], how long would it take to get it back up?" an Enron worker is heard saying.
"Oh, it's not something you want to just be turning on and off every hour. Let's put it that way," another says.
"Well, why don't you just go ahead and shut her down."
Once put so blatantly, it was hard to ignore the facts at hand. There never had been a crisis, never had been a shortage. The blackouts were a deliberate act of blackmail, meant to scare people into fearing the imminent collapse of their way of life, and a squeeze of every dollar possible out of their pockets.
The fallout is still continuing, with cases ongoing in the courts. Ultimately, California was able to recover a tiny portion of the amount it was overcharged, and the consumers took the hit. As perhaps final proof of the illegitimacy of the whole deal, California hasn't had any blackouts since.
But there are many unanswered questions which leave the door open to the next crisis waiting to happen. Certain commodities are `mission-essential' for the average citizen, among these food, oil (gasoline and heating oil), electricity, transportation, and telephones. In prior ages, the government held tight control over these, with the simple logic that, on some things, people don't really have a choice. In non-essential areas (much of the apparel market, toys, music, movies, etc.), the market has had some success controlling prices. Where there is an element of choice, people can and will, ultimately, refuse to pay above a certain price.
But in the essential markets, people will pay whatever price is required to get it. Look at panic-buying of gasoline on 9/11 and post-Katrina. Gas stations in some areas of the country marked up their prices over $5 a gallon, and people were lining up to buy it, fearful that it would be their last tank for a while (Okay, so X-box 360's were doubling their value on eBay within a few minutes of the midnight release in stores, but that's a different issue altogether). When it comes to the essentials, people are the slaves to the suppliers.
Free market enthusiasts consistently preach that a deregulated market will give the cheapest price possible to the consumer, as competition will keep corporations from overcharging, but this argument has been undermined time and time again. In the midst of their fight against Napster, the Recording Industry quietly paid a massive fine for fixing CD prices over a number of years. The Baby Bells had their own incident with price-fixing for long distance service. Since deregulation is only a generation old, it may very well be that these are only growing pains, and that the nascent industries will eventually come into line with the economic laws of supply and demand. But there is clearly a large risk in this. As companies are becoming larger than countries, they are wielding more power than at any point in history. California was a warning bell of what can go wrong when these mega-corporations decide to play around with their power.
Since government has declared itself to be a sideline player in these events, it has become incumbent on the corporations to provide whatever ethical protection to prices that they are willing to give. Particularly with corporations which provide services essential to our way of life, sensitivity to the enormity of their task needs to be infused into the corporate ethos at every level. Employees of our Defense contractors such as Boeing and Lockheed are already aware of their role in National Defense. They know that, for example, leaking missile secrets to other nations, while it might be advantageous to the corporate bottom line, is, quite simply, un-American (Yet, they still have done that...), and endangers our security.
That ethos, however flawed in practice it is, needs to be transferred to the other corporations out there, the telephone, energy, food, pharmaceutical, and oil companies (among others). Their ethical line needs to include their role in America, and they should not be looking to profit at the cost of the nation. What if California had been attacked while large portions of its grid were knocked out? Sure, our strategic defense systems have their own power backup, but what would have been the chaos resulting when evacuation orders couldn't be sent out to cities because all of the power was out- before any missiles hit?
Doomsday prediction? Certainly. But these companies fail to realize the import of their actions all too often. In their tapes, the traders laugh about the consumer paying $250 for a megawatt hour. They certainly didn't think that that same person could have paid with his life. If that sensitivity became a part of the corporate boardrooms of America, this country would be a far different place.
Works Used during this diatribe:
CBSNews.com, (2004). Enron traders caught on tape. Retrieved Dec. 01, 2005, from http://www.cbsnews.com/....
Kienitz, P. (n.d.). Energy shortage?. Retrieved Dec. 01, 2005, from Paul Kienitz Web site: http://www.paulkienitz.net/....
PBS.org, (2001). Retrieved Dec. 01, 2005, from Frontline: Blackout Interviews Web site: http://www.pbs.org/....
Wikipedia, (n.d.). Retrieved Dec. 01, 2005, from California electricity crisis Web site: http://en.wikipedia.org/....
Schwartz, M. (n.d.). How enron fabricated a fake energy crisis in california. Retrieved Dec. 01, 2005, from Excerpt from: POWER FAILURE: The Inside Story of the Collapse of Enron Web site: http://home1.gte.net/....
York, A. (2001). The deregulation debacle. Retrieved Dec. 01, 2005, from http://www.salon.com/....
MSN Encarta, (n.d.). California. Retrieved Dec. 03, 2005, from York, A. (2001). The deregulation debacle. Retrieved Dec. 01, 2005, from http://www.salon.com/.... .