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Don't let Gray Davis get away with using Enron as a scapegoat.
Those Hideous, Awful Enron Memos Gray Davis uses a disgraced company as a political scapegoat.
We are currently of the opinion that no practice was too low-down for Enron. But even we were surprised to read the charges, breathlessly advertised last week, that Enron had caused the California energy crisis.
How could a single company--especially one too inept to earn an honest profit--have exerted such masterful control over an electricity market with some 5,000 transactions an hour?
For California politicians, the answer is obvious, if also electorally convenient. They claim Enron strategically withheld power from the market in 2000 and 2001, supposedly resulting in billions of dollars in overcharges. The only problem is that nobody has yet found any evidence to prove this. But now come the famous "Enron memos," which Governor Gray Davis and his Senate friends are waving around as the smoking gun, and just in time for November's election.
So we took a look at the memos. How disappointing! We didn't see anything about strategic market power. What we saw (at http://www.ferc.gov) were trading strategies aimed at gaming California's failed "deregulation" of its wholesale electricity market. And, boyoboy, there were plenty of stupid rules to game.
We could natter on about how California aggregated prices into single, zonal prices, thereby creating all sorts of skewed incentives. Or how the state divided itself into zones that ignored transmission constraints. Or how it assumed its power grid was not connected to the rest of the country, thereby generating arbitrage openings.
But the main action came from the separation of the day-ahead energy market from real-time transmission on the power grid. In the real world these are the same market. But by artificially separating them, California created lots of possibilities for gaming--especially after it slapped price caps on energy sales in the state. In other words, Enron's traders were merely taking advantage of the opportunities that California's regulators gave them.
Consider the ricochet ploy--a simple arbitrage made possible when price caps were introduced. Enron would buy price-capped power in California, launder it by sending it to another state, and then sell it back to California where, as out-of-state power, it was not subject to a price cap. Just because California politicians were stupid enough to think price caps could work doesn't mean everyone else couldn't try to prove them wrong.
Another Enron strategy was a rational response to gaming by the state's own utilities. California utilities routinely submitted load schedules that underestimated the energy they needed, hoping to keep their costs down by demanding less and thus keeping prices down. The next day, in real-time, utilities would buy any additional power from the state of California's grid manager, the Independent System Operator, or ISO. The utilities would compare the ISO's day-ahead forecast with their own, seizing on imbalances by submitting a schedule with inflated demand in the day-ahead market. Enron would then game this back and forth in a way that made the ISO pay Enron for any "excess" generation.
All of these strategies were aimed at exploiting flaws in California's insane energy-market design. They involved manipulating the rules, but they weren't the cause of California's energy shortages and blackouts. Most of these strategies were also risky, with traders speculating on prices that could move against them. In simple economics, traders were trying to arbitrage by buying low in the day-ahead market and selling high in the real-time market. Duh. That's what traders are supposed to do.
It is also not clear if these strategies made money for Enron. It's possible that sometimes Enron was on the wrong side of the trade, thus helping competitors or the utilities. The memos also don't indicate how often the strategies were employed or how much money was involved.
And it is far from clear that any of this was illegal. Most of the ploys were well-known to all the players, including the ISO, and some of the dumber rules were changed in response to the gaming. The ricochet ploy, for one, became unprofitable when the Federal Energy Regulatory Commission extended price caps to the Western states in June 2001.
We're inclined to believe that Enron committed securities fraud, among other sins. But its name has now become so associated with flimflam that the politicians are blaming it for every ill around, including some that they themselves caused. With a budget deficit to justify and down in the polls, Gray Davis needs a scapegoat to win re-election. Voters shouldn't let him get away with a phony Enron-made-me-do-it excuse
How could a single company--especially one too inept to earn an honest profit--have exerted such masterful control over an electricity market with some 5,000 transactions an hour?
For California politicians, the answer is obvious, if also electorally convenient. They claim Enron strategically withheld power from the market in 2000 and 2001, supposedly resulting in billions of dollars in overcharges. The only problem is that nobody has yet found any evidence to prove this. But now come the famous "Enron memos," which Governor Gray Davis and his Senate friends are waving around as the smoking gun, and just in time for November's election.
So we took a look at the memos. How disappointing! We didn't see anything about strategic market power. What we saw (at http://www.ferc.gov) were trading strategies aimed at gaming California's failed "deregulation" of its wholesale electricity market. And, boyoboy, there were plenty of stupid rules to game.
We could natter on about how California aggregated prices into single, zonal prices, thereby creating all sorts of skewed incentives. Or how the state divided itself into zones that ignored transmission constraints. Or how it assumed its power grid was not connected to the rest of the country, thereby generating arbitrage openings.
But the main action came from the separation of the day-ahead energy market from real-time transmission on the power grid. In the real world these are the same market. But by artificially separating them, California created lots of possibilities for gaming--especially after it slapped price caps on energy sales in the state. In other words, Enron's traders were merely taking advantage of the opportunities that California's regulators gave them.
Consider the ricochet ploy--a simple arbitrage made possible when price caps were introduced. Enron would buy price-capped power in California, launder it by sending it to another state, and then sell it back to California where, as out-of-state power, it was not subject to a price cap. Just because California politicians were stupid enough to think price caps could work doesn't mean everyone else couldn't try to prove them wrong.
Another Enron strategy was a rational response to gaming by the state's own utilities. California utilities routinely submitted load schedules that underestimated the energy they needed, hoping to keep their costs down by demanding less and thus keeping prices down. The next day, in real-time, utilities would buy any additional power from the state of California's grid manager, the Independent System Operator, or ISO. The utilities would compare the ISO's day-ahead forecast with their own, seizing on imbalances by submitting a schedule with inflated demand in the day-ahead market. Enron would then game this back and forth in a way that made the ISO pay Enron for any "excess" generation.
All of these strategies were aimed at exploiting flaws in California's insane energy-market design. They involved manipulating the rules, but they weren't the cause of California's energy shortages and blackouts. Most of these strategies were also risky, with traders speculating on prices that could move against them. In simple economics, traders were trying to arbitrage by buying low in the day-ahead market and selling high in the real-time market. Duh. That's what traders are supposed to do.
It is also not clear if these strategies made money for Enron. It's possible that sometimes Enron was on the wrong side of the trade, thus helping competitors or the utilities. The memos also don't indicate how often the strategies were employed or how much money was involved.
And it is far from clear that any of this was illegal. Most of the ploys were well-known to all the players, including the ISO, and some of the dumber rules were changed in response to the gaming. The ricochet ploy, for one, became unprofitable when the Federal Energy Regulatory Commission extended price caps to the Western states in June 2001.
We're inclined to believe that Enron committed securities fraud, among other sins. But its name has now become so associated with flimflam that the politicians are blaming it for every ill around, including some that they themselves caused. With a budget deficit to justify and down in the polls, Gray Davis needs a scapegoat to win re-election. Voters shouldn't let him get away with a phony Enron-made-me-do-it excuse
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What Energy Shortage? - A Subjective Personal Account
California had, and has, plenty of generating capacity, so much in fact that several planned power plants have recently been put on hold. The real reason not many power plants have been built in California in the past decade is that they were, and are, not needed. An examination of the available electricity and the offline and online generating capacity at the time of last year's "shortage" shows that the demand never exceeded what had been supplied reliably for the previous several years- in fact, California's demand had dropped from the previous years. It also shows that as much as one third of this generating capacity was off line at the very time the "shortage" appeared. No amount of generators is sufficient anywhere if enough of them are offline.
And why were they offline?
Many of them were recklessly throttled up and down over long periods of time. Scheduled maintainence was postponed, causing premature breakdowns. There were reports that spare parts supplies had been depleted. As though orchestrated, "Unscheduled Maintainence" shut down a large portion of the plants.
Coupled with deregulation, California style, which had been lobbied for hard and long by energy companies which also poured millions of dollars into Cailfornia elections to assure its passage, lots of companies joined Enron in taking advantage of this breakdown of the system to defraud the state.
How could they get away with it?
As 2001 dawned, a new administration filled with energy professionals took control in Washington DC, people whose philosophy was, and is, Energy and Lots of it. Conservation is scorned as anachronistic, even unamerican. I can almost hear their thinking...How dare California claim to not need more power plants! What a hotbed of anti-nuclear activists! What they need is a big bunch of new power plants! Maybe a Nuke or Two!
Gray Davis is no favorite of mine. But when the blackouts hit, his first responsibility was to get power, uninterrupted power, to the state. What else could he do except pay for outrageously expensive power until the Feds stepped up to the plate and assumed their responsibility for controlling fraud in the interstate power industry, something they still seem reluctant to do? (Isn't that what the Federal Government is for?) I heard calls for him to declare right of eminent domain and nationalize the power industry. I'm curious what his critics would have rather seen him do.
Steve Della Maggiora
California had, and has, plenty of generating capacity, so much in fact that several planned power plants have recently been put on hold. The real reason not many power plants have been built in California in the past decade is that they were, and are, not needed. An examination of the available electricity and the offline and online generating capacity at the time of last year's "shortage" shows that the demand never exceeded what had been supplied reliably for the previous several years- in fact, California's demand had dropped from the previous years. It also shows that as much as one third of this generating capacity was off line at the very time the "shortage" appeared. No amount of generators is sufficient anywhere if enough of them are offline.
And why were they offline?
Many of them were recklessly throttled up and down over long periods of time. Scheduled maintainence was postponed, causing premature breakdowns. There were reports that spare parts supplies had been depleted. As though orchestrated, "Unscheduled Maintainence" shut down a large portion of the plants.
Coupled with deregulation, California style, which had been lobbied for hard and long by energy companies which also poured millions of dollars into Cailfornia elections to assure its passage, lots of companies joined Enron in taking advantage of this breakdown of the system to defraud the state.
How could they get away with it?
As 2001 dawned, a new administration filled with energy professionals took control in Washington DC, people whose philosophy was, and is, Energy and Lots of it. Conservation is scorned as anachronistic, even unamerican. I can almost hear their thinking...How dare California claim to not need more power plants! What a hotbed of anti-nuclear activists! What they need is a big bunch of new power plants! Maybe a Nuke or Two!
Gray Davis is no favorite of mine. But when the blackouts hit, his first responsibility was to get power, uninterrupted power, to the state. What else could he do except pay for outrageously expensive power until the Feds stepped up to the plate and assumed their responsibility for controlling fraud in the interstate power industry, something they still seem reluctant to do? (Isn't that what the Federal Government is for?) I heard calls for him to declare right of eminent domain and nationalize the power industry. I'm curious what his critics would have rather seen him do.
Steve Della Maggiora
Will gov. gray davis sign solar energy bills on his on his desk ? solar energy will go "gray" if he does not sign the bills, as there are 0 / zero funds for rebates and buy down;s. and there is no policy or program by cec to direct any future purchasers of solar systems, this stops any purchasers of solar systems in receiving any of the legal and viable rebates,who wins is clear =p, g&e. call the gov. to sign the bills and stop the madness.
Steve, what we'd have Davis not have done is put the massively fucked up regulation of the market in place. He was the one who put the new, obviously fucked up regulations into law, because of heavy lobbying from the industry wanting a way to maintain and increase their profits in a less regulated market.
There's some new mainstream news: http://www.nytimes.com/2002/09/18/national/18ENER.html that is newsworthy IMO (yeah I know mainstream news usually isn't the IMC's favorite chow, but an analysis of this article provides a good education) - results of the CPUC's investigation confirm collusion is obvious. (NY Times- free registration required; you can give false info too.)
In the goal of "balance", the NYT has quotes from the generators in their defense, including one jewel: "Our capacity utilization during the crisis was among the highest in California among all the generators" - if you parse this carefully, you'll realize that it's a totally content-free statement: it sounds good, but says absolutely nothing specific.
There's some new mainstream news: http://www.nytimes.com/2002/09/18/national/18ENER.html that is newsworthy IMO (yeah I know mainstream news usually isn't the IMC's favorite chow, but an analysis of this article provides a good education) - results of the CPUC's investigation confirm collusion is obvious. (NY Times- free registration required; you can give false info too.)
In the goal of "balance", the NYT has quotes from the generators in their defense, including one jewel: "Our capacity utilization during the crisis was among the highest in California among all the generators" - if you parse this carefully, you'll realize that it's a totally content-free statement: it sounds good, but says absolutely nothing specific.
He capped the amount of money utility companies could charge and then didn't allow them to purchase power when the prices were low. So when the prices jumped, California, which hasn't built a power plant in 10 years even though the population has boomed, got stuck in the middle. The utility companies would have to buy the energy for more than they could sell it, a good way to go broke, or they could purchase the energy and pass the cost on the consumers. So they contract to purchase the energy and afterwards the prices, as they always do after peak season, go back down. Now Dufas wants to break the contracts and place all utilites under State control. Well, we all know how efficient the State is. The prices should have never been capped, no lines should have ever been shut down, more plants should have been built so California could have sold energy to others states for a profit. He'll get re-elected. We're screwed!
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