The Failure of Jeff Skilling's Deregulation

Like a huckster setting up a tent to hock snake oil, Jeffrey Skilling strode into a regulatory hearing in California 12 years ago hell-bent on making a sale.

"[Under deregulation, California] would save about $8.9 billion per year," Skilling told California's Public Utility Commissioners during a hearing on June 14, 1994. "If you had $8.9 billion you could triple the number of police officers in Los Angeles, San Francisco, Oakland and San Diego. You could double the State of California construction for hospitals. You could double the number of teachers in Los Angeles, San Francisco, Oakland and San Diego ... Commissioners, the patient is on the ground bleeding," Skilling testified. "Delay kills."

During this time Enron was still a relatively small company, with $8 billion in annual revenue, a majority of which came from its marketing of natural gas. But with Skilling at the reins, Enron was on its way to becoming a $100 billion-a-year behemoth.

In 1997, a year after California became the first state in the country to unanimously pass a law opening up its electricity market to competition, Skilling spread his gospel to a more powerful audience.

Opening the US electric power system to consumer choice and competition would be the equivalent of an "$800 tax refund for every family in the country," the former Enron president told lawmakers during a May 9, 1997, hearing on the economic benefits of deregulation. "Two separate studies tell us that deregulation of electricity markets could save us $60-80 billion a year."

That year, Enron hired Ralph Reed, the former head of the Christian Coalition, to pimp the company's agenda. Under Skilling and former Enron chairman Ken Lay's leadership, Enron donated more than $858,000 in soft money and political-action contributions to numerous members of Congress and became House's largest contributor from the energy sector.

Skilling's charisma and Enron's hefty political contributions helped turn the concept of a competitive electricity into federal law. Deregulation in turn helped Enron to become the sixth richest corporation in the world, and that ultimately made Skilling and his colleagues very, very rich.

But Skilling's bold prediction turned out to be wildly off the mark. Two new reports over the past few months have concluded that retail electricity rates are on the rise. In other words, deregulation of the electricity industry has turned out to be an utter failure; consumers pay higher prices for power now than they did under a regulated system. More than a decade since the idea was introduced and implemented in some states, deregulation has been responsible for the numerous nationwide reliability issues, including rolling blackouts, daily power shortages, and the reality that the wholesale energy market can be manipulated.

As demonstrated by the 2000-2001 California energy crisis, companies including Enron, Williams Companies, Duke Energy, Reliant Energy and others exploited the so-called free market. They caused the wholesale price of electricity to skyrocket by shutting down power plants in order to create an artificial shortages, and sent their much-needed electrical supplies to other states that were willing to pay a premium for juice just so they could boost their bottom lines and please investors. The scheme nearly bankrupted the Golden State. California was forced to tap into its budget surplus at a rate of $50 million or more a day to pay for electricity because the utilities were broke. Eventually, the debacle cost Governor Gray Davis his job.

And now Skilling, for all his hubris, is headed to a federal penitentiary where he will spend the next 24 years sorting out his life after being found guilty of conspiracy, fraud, and a laundry list of other charges related to the financial machinations that brought down Enron Corporation five years ago. But the carnage that deregulation has wrought across the country has cost consumers tens of billions of dollars in additional costs over the years. Even worse, the deregulated market that Skilling insisted would be a boon to consumers in the long run is still ripe for manipulation.

Look no further than Enron's home state of Texas, where consumers pay the highest price for power in the country, about 12 cents a kilowatt hour, as compared to 6 cents/kwh 10 years ago prior to deregulation. Skilling told the Texas Public Utilities Commission back then that 6 cents was "absurdly high" and if the state implemented the consumer choice model rates would fall well below that figure. Next year Texas is expected to transition to a fully deregulated market, meaning consumers would pay whatever the free market dictates. With deregulation just around the corner, the Texas PUC started to take notice of a pattern of questionable trading practices in its wholesale power market that seemed eerily familiar to those that took place in California five years ago.

On Friday, the Texas PUC announced that it will immediately launch an investigation of TXU Corporation to determine whether the energy company manipulated Texas's wholesale electricity market by withholding its supplies from the marketplace on certain days in 2005 whereby the company created an artificial shortage and boosted the wholesale price. The investigation stems from an annual review of the state's power market prepared by Potomac Economics Ltd. The report says TXU's "balancing energy offer patterns raise substantial competitive concerns."

TXU vehemently denied the charges, saying in prepared statement that the company "stands firmly behind its record. We are running our largest, most efficient plants at higher output levels than at any other time in history, while making our excess capacity available to the marketplace."

That's what Skilling and other energy company executives said during the height of the California energy crisis when charges of deceptive trading practices were hurled at them. It took years, but eventually evidence surfaced proving the claims had merit and California sued the energy companies in an attempt to recover $8.9 billion - the amount Skilling said California consumers would save under deregulation The state recovered only a fraction of that amount, and consumers were left holding the bag and will continue to do so for the next 20 years because the state was forced to enter into high-priced contracts to ensure power continued to flow into California.

Since the disaster in California, 34 states have decided to put the brakes on deregulation or scrap the plan outright. But the nationwide trend of higher electricity bills isn't anywhere near abating. In fact, there are warnings from federal energy regulators that it's about to get worse.

The Federal Energy Regulatory Commission, whose main function is to ensure power prices remain at a "just and reasonable" rate, has sent a draft report to Congress saying come next year consumers are likely to experience "rate shock" as utilities across the country seek the authority to raise their rates in order to cover the increased expense of generating electricity.

Electricity rates were set at what was thought at the time to be an artificially high price during the transition to a deregulated market. But no one accounted for the possibility that the cost to generate electricity would exceed the fixed rate, which was the case when natural gas prices skyrocketed. Natural gas is the key ingredient used at many power plants to generate electricity. In some parts of the country, particularly in the Western United States, the wholesale price of electricity went above and beyond what the utilities were permitted under law to collect from its customer base.

California's 1996 deregulation law uncapped wholesale power prices, but froze the rate the utilities could charge consumers. When wholesale prices surged in both the spot and day-ahead markets, running well above what the utilities could charge customers, the utilities couldn't do anything about it because the state deregulation law didn't allow them to sign long-term supply contracts.

FERC warns that as other states start to open up their power markets to competition, the utilities are entitled to recover costs that exceeded the fixed price for power over the years by increasing retail rates. As a result, FERC warned in its draft report to Congress, there will likely be a public outcry to return to a time when power prices were set by regulators. But the commission's chairman, Joseph Kelliher, is urging federal and state lawmakers to stay the course, claiming the free market will eventually soften prices. FERC admits there's no proof that the outcome of deregulation will eventually lower retail prices for consumers but it's apparent that under the old system, when regulators had authority over the retail price for power, it was cheaper, and reliability was never an issue.

It's worth noting that Kelliher, who was appointed chairman of FERC last year by President Bush, has a long been a champion of the free-market as well as a close confidant of Skilling's. He was also a member of Vice President Dick Cheney's energy task force and personally helped write President Bush's National Energy Policy in a way that would be financially beneficial to energy corporations - at the expense of consumers.

The extent to which Kelliher went to solicit key players in the energy industry to help write the National Energy Policy became apparent in 2003, when Judicial Watch, a bipartisan watchdog group that sued Vice President Dick Cheney to gain access to Cheney's list of industry insiders who participated in secret meetings with Cheney's energy task force, won a legal battle that forced the White House to release several hundred pages of task force-related documents.

One such document, a March 10, 2001, email to energy lobbyist Dana Contratto, was damning: in it, Kelliher asked Contratto, if he were "King" or "Il Duce," "what would you include in a national energy policy, especially with respect to natural gas issues?"

Contratto responded with a three-page list of ideas, many of which were included in the final version of the energy policy.

On another occasion, Kelliher sought out Stephen Craig Sayle, an Enron lobbyist, to make similar recommendations. Sayle, former counsel for the House Commerce Committee, sent Kelliher Enron's "dream list," including a recommendation that the administration commit to market-based emissions trading, which was also used in administration's National Energy Policy.

Sayle wrote Kelliher that "a multi-pollutant regulatory strategy should be estimated for the power generation sector including: Gradually phased in [mercury, nitrogen oxides and sulfur dioxide emissions] reductions; Reform/replacement of NSR; Use of market-based/emission trading programs; Inclusion of both existing and new plants and equal treatment for both. The last bullet is the critical one to ensure that: a) we encourage the new generation that is required; b) we ensure that the new technologies developed through DOE programs can come into the market."

"Obviously, this is a dream list," Sayle said in the March 23, 2001, email he sent to Kelliher. "Not all will be done. But perhaps some of these ideas could be floated and adopted."

Sayle also provided Kelliher with a PowerPoint presentation on behalf of his other energy clients in the so-called Clean Power Group, a consortium made up of a handful of the country's biggest energy companies, including NiSource Inc., Calpine Corp., Trigen Energy Corp., and El Paso Corp, whose mission, according to the group's web site, is to "streamline requirements under the Clean Air Act for electric generating facilities while at the same time making major reductions in air emissions."

The PowerPoint presentation, "A Comprehensive Multi-Pollutant Emission Control Strategy for Power Generation," summarized the Clean Power Group's support of a "cap and trade" method in addressing emissions of mercury, nitrogen oxides and sulfur dioxide from power plants, but included a proposal for a voluntary cap on carbon dioxide. The Clean Power Group stood to benefit from the initiative it urged Kelliher to get the White House to adopt in that the companies could release more emissions under its proposed plan than under the more restrictive rules the Clinton administration had put in place.

After receiving Sayle's email and supporting material, Kelliher recommended that President Bush "direct the Administrator of the Environmental Protection Agency (EPA) to propose multi-pollutant legislation that would establish a flexible, market-based program to significantly reduce and cap emissions; provide regulatory certainty to allow utilities to make modifications to their plants without fear of new litigation; provide market based incentives, such as emissions-trading credits to help achieve the required reductions," all of which the president approved and which was eventually incorporated into the National Energy Policy.

In fact, President Bush's "Clear Skies" initiative consists of many of the bullet points laid out months earlier in Sayle's email to Kelliher.

The fact that consumers cannot depend upon a federal agency whose priority is to protect them is part of the problem. By law, FERC is not supposed to be a free market advocate, but that is exactly what the agency has become since California's experiment with deregulation went haywire. Demands by consumer groups and state lawmakers that the state return to regulation were met with resistence by Bush's FERC, and even pleas of price caps on out-of-control power prices were initially turned down before FERC finally relented.

Exacerbating the problem of higher retail prices is the fact that under deregulation the nation's power grid is continuously being stretched beyond its means. Today, power is sent hundreds of miles across the grid to consumers by out-of-state power companies instead of being sent directly to consumers by their local utilities, which is what the grid was designed for.

Two weeks ago, the North American Electric Reliability Council, an organization funded by the power industry, and that was named by federal regulators in July as the new watchdog group in charge of overseeing the rules for operating the nation's power grid, issued a grim report saying the nation's electricity future, under deregulation, is gloomy.

Combined with the shortcomings of deregulation, the neglect of the nation's transmission grid will likely have long-term repercussions, as demonstrated by the dozens of scattered blackouts in the month of July throughout the nation this summer - one of the hottest on record. Since July, all seven of the country's regional grid operators that monitor power flow throughout the nation reported record electricity consumption as temperatures increased. Blackouts struck many parts of the country during the month of July, not because of a shortage of supply, but because the dilapidated power grid could not handle the amount of electricity that was sent back and forth across the transmission lines.

But neither FERC nor state lawmakers appear to be considering a return to the old days of utility monopolies or what some refer to as re-regulation. One thing is certain, however, electricity prices will continue to rise over the next few years, ensuring that Jeff Skilling will never be forgotten.

Jason Leopold is a former Los Angeles bureau chief for Dow Jones Newswire. He has written over 2,000 stories on the California energy crisis and received the Dow Jones Journalist of the Year Award in 2001 for his coverage on the issue as well as a Project Censored award in 2004. Leopold also reported extensively on Enron's downfall and was the first journalist to land an interview with former Enron president Jeffrey Skilling following Enron's bankruptcy filing in December 2001. Leopold has appeared on CNBC and National Public Radio as an expert on energy policy and has also been the keynote speaker at more than two dozen energy industry conferences around the country. He is the author of NEWS JUNKIE.

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