Friday, May 10, 2002
Former Enron hack Paul "Line 47" Krugman is at it again. Krugman gleefully goes into "I told you so" mode over the revelations earlier this week that Enron documents reveal that the bankrupt energy trader gamed the market to charge me higher prices for electricity. No one in California is really surprised by this fact. The San Diego Union-Tribune months ago reported allegations that Duke Energy had consciously shut down it's power plant to drive spot market prices up.
Energy companies had the motive, the means and the opportunity to drive prices sky-high. And the crisis exhibited exactly the features you would expect if market manipulation was playing a big role: much of the state's generating capacity stood idle even as wholesale electricity prices went to 50 times normal levels.
Krugman wants to put all of the blame for the state's electricity problems on the energy companies and the Federal Energy Regulatory Commission -- and certainly some fault lies in both those places. But there are plenty of other guilty parties. A screw-up this big can't be blamed solely on those two entities.
Others to blame include:
- The California legislature (D) and former Gov. Pete Wilson (R): Created a market system that was so flawed it allowed unscrupulous energy companies the opportunity to game the system.
- Gov. Gray Davis and his appointees on the Public Utilities Commission: Forbade SDG&E, PG&E and Southern California Edison from signing long-term power contracts when the prices were low, leaving them to deal with the wild price fluctuations on the spot market.
- Statewide air pollution boards and the Environmental Protection Agency: Their regulations and fines caused some older plants to charge higher prices for electricity because they were exceeding their emission limits. The higher prices were not profit for the companies running these plants, instead they were income to the government in the form of fines.
- Environmental groups: For the past decade no new power plants were built in the state, despite the increase in energy-intensive manufacturing and research taking place in the state, and a growing population. The lack of new, cleaner power plants also contributed to costs for power during this time (see previous item).
Plenty of blame to go around. But does Krugman acknowledge that some of the crisis was California's own doing. Not a chance. Why? Well, Republicans aren't in control of California government. If they were, you can bet that Krugman would spread the blame much wider.
These memos came to light despite FERC's evident determination to see no evil. (We now know that the Bush administration in effect allowed Enron to choose the commission's members.) As one California official put it: "FERC is like a parent who doesn't want to believe their teenager has gone bad. The memos are significant because they are like finding a diary in the kid's backpack saying, `I robbed the liquor store.' "
Actually the FERC isn't determined to see no evil. It's determined not to jump to potentially costly conclusions. Just imagine if FERC had said: "It looks like you're gouging them. Give all the money back." And it turned out later that it hadn't happened. Of course, this is speculation, but you'd better believe that a flurry of lawsuits would have been filed.
The truth is, while FERC was initially loath to get involved, an investigation is starting to ramp up. Of course, where did Krugman get his "smoking gun" documents? From FERC.
FERC's investigation is beginning to ramp up (possibly too late to help Davis' re-election chances -- that could be by design too). Earlier this week FERC sent letters to more than 120 California energy producers ordering them to "admit or deny" that they gamed the market. Krugman cynically likens this to taking the thieves' word for it, but it's really a first part of enforcement. It's a challenge: "Fess up now and get a financial beating. Fess up later, get a financial beating, perjury charges and jail time.
And lest anyone think, like Krugman, that this is just a whitewash act, industry defenders and foes both believe that this is a serious move.
"For the first time, these are toughly worded, dead-serious questions," said Michael Shames, executive director of the Utility Consumers' Action Network.
A spokesman for electricity suppliers in the West agreed that FERC's latest inquiry was not routine.
"I'm sure nobody in trading rooms is happy about this request," said Gary Ackerman, executive director of the Western Power Trading Forum.
Krugman does have some good points, when he sticks closely to the actual facts. But when he speculates, which occurs too often, he has a tendency to shoot himself in the foot.
The great risk now is that this will be treated purely as an Enron story. That's wrong; Enron was mainly a trader rather than a power producer, and as such could have only limited impact on electricity prices. The bigger story involves market manipulation by a number of producers. The circumstantial evidence for that manipulation is overwhelming. And if no smoking-gun memos have yet come to light, what do you expect? The Enron story shows just how easy it is for companies to cover their tracks, especially when the regulators are in their corner. If Enron hadn't lost its clout by going bankrupt, you can be sure that we would never have heard about Fat Boy and Death Star.
Well, from everything we've seen in the past week this isn't being treated as just an Enron story. So Krugman can rest easily. Krugman states that it's so easy for these companies to cover their tracks -- he's wrong. I'm confident that these Enron documents would have leaked out, no matter what the company's financial situation was. I've already referred to one whistleblower, and I'm sure there will be more. The truth is out there, and it will come out.
There is, however, one specific Enron angle here. I may have done Thomas White, secretary of the Army, an injustice. He ran Enron Energy Services, a division that — or so I thought — was mainly used as a way to generate phony profits, inflating Enron's stock price. But the division turns out to have had another role: to create phony energy transactions, inflating Enron's actual profits at the expense of the state of California. Why, exactly, is Mr. White still in office?
I may have wronged Mr. Krugman in an earlier piece. I thought he was a hack that used his prestige to tout Enron, a company that created phony profits. What Krugman really is, though, is an arrogant hack that used his qualifications to help Enron take money out of my pocket due to higher energy prices. Why, exactly, is Mr. Krugman still writing for the New York Times?
What really annoys me in this story, however, isn't the behavior of the energy companies. It isn't even the behavior of the Bush administration — though the administration not only stood idly by while California was robbed of around $30 billion, it also shamelessly exploited the state's misery to promote its own, utterly irrelevant energy plan. (Now, of course, that same energy plan is essential to the war on terrorism.)
No, what bothers me is the position taken by so many business and political commentators: that the California catastrophe says nothing about the risks of deregulation and the dangers of loving free markets too much. It was California's own fault, they say, for creating a "flawed" system — a wonderfully vague term that evades the necessity of explaining what really happened. In fact, the main flaw was that the system contained no safeguards against market-rigging.
In one sentence Krugman says that saying the system was flawed "evades the necessity of explaining what really happened." and then goes on to say: "Here's the flaw." Color me confused. Does Krugman think the system was flawed or not?
And I'm sure that there will be a determined effort to ignore even these latest revelations. After all, why let facts get in the way of a beautiful, and politically convenient, theory?
Well, let's answer that with a story from the Union-Tribune:
FERC declined to comment on the situation, citing its ongoing investigation. The probe was launched in February, after Wood heard Senate committee testimony that Enron might have manipulated prices on the West Coast.
(Tuesday), FERC indicated it is moving toward granting a broad release of confidential industry documents to Michael Aguirre, a San Diego attorney pressing a class-action lawsuit against electricity suppliers.
The commission told electricity suppliers they have 10 days to dispute the release to Aguirre of previously secret documents collected during two earlier investigations of the California market meltdown.
The only person in this whole situation who appears to have a politically convenient theory that they're holding tight to is Krugman.