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Power Play, Who's to Blame for the Energy Crisis by Chris Bury Nightline, ABC News, June 4, 2002

Chris Bury, ABC News: Rolling power blackouts, bankrupt utilities, skyrocketing electricity prices.

1st Man: It is the most volatile commodity in the world.

Chris Bury: Are power generators gouging consumers?

1st Woman: I think it's pretty appalling that the folks who sell us power can charge whatever they want.

Kenneth L Lay, Chairman, Enron: And every time there's a shortage or a little bit of a price spike, it is always collusion or conspiracy or something. I mean, it always makes people feel better that way.

Chris Bury: And right in the middle, a federal agency you've probably never heard of.

Curtis Hebert, Chairman, Federal Energy Regulatory Commission: They didn't build this monopolistic system overnight, and we won't change it overnight either.

Chris Bury: Tonight, Power Play, Who's to Blame for the Energy Crisis?

Chris Bury: California is known as the great American incubator. From hemlines to Hula-Hoops, the Golden State gives birth to trends that often spread east. That is why so many states are paying close attention to California's troubled attempt at deregulating electricity. Last week, California Governor Gray Davis asked President Bush for help in the form of a price cap on power companies. The president said no. Now Governor Davis is threatening to sue the federal agency that regulates electricity prices. More on that later.

But first, the results of a new ABC News / Washington Post poll. It suggests that President Bush is developing an energy problem. When asked what they think of the president's performance on energy, a clear majority, 58 percent, say they disapprove. That's up 15 percent since Mr. Bush released his energy plan. When asked if they think the United States is heading into an energy crisis, six in 10 Americans answer yes.

California is already there. For months now, the New York Times and the public broadcasting program "Frontline" have teamed up to investigate. Their collaboration, "Blackout," airs tomorrow night on many PBS stations. It documents a colossal mismatch in the brand new game of buying and selling power on the open market. It's like the New York Yankees against the Toledo Mud Hens.

2nd Woman: We didn't use his five because their minimum was, you know, higher than what we were willing to pay.

2nd Man: I'll sell you 108 now.

Chris Bury: (VO) On one side, companies such as Enron, the Texas energy broker, trade electricity like any other commodity. A sophisticated trading operation buys and sells billions of dollars worth of energy every day. It's the largest company of its kind in the world.

3rd Man: See what I'm saying?

Kelly: CRS. This is Kelly.

Chris Bury: (V0) On the other side, in this converted department store in Sacramento, is California's trading team.

4th Man: This is the operations center. This is the -- this is the location where we make energy purchases and fill the state of California energy requirements.

Chris Bury: (V0) Here, employees drafted from the state's water department go head-to-head with the pros from Enron and other companies. Since 1999, the cost to California has skyrocketed from $7 billion to an estimated $60 billion this year, an increase of 750 percent. And the demand for electricity, up less than 5 percent.

(OC) In their documentary, reporters for The New York Times and "Frontline" address a fundamental question, who's to blame? Narrating this segment is "Frontline" correspondent Lowell Bergman.

5th Man: Our forecast reserves look like they'd be pretty thin over the peak as well.

6th Man: How much is . . .

Lowell Bergman, Frontline Correspondent: (VO) The power industry blames the high prices on shortages brought on by California's failure to build any major power plants over the last decade, despite a booming economy.

Kenneth Lay: I mean, we have a supply/demand imbalance. Too much demand, too little supply in California.

Lowell Bergman: (VO) Not everyone agrees. Consumer advocates in California accuse the generators of actually withholding supply.

Nettie Hoge, Executive Director, Turn: The idea that all of a sudden we had a supply crunch is preposterous. What happened is, all of a sudden, the new plant owners and the traders, like Mr. Lay's organization, looked at the data and figured out how to manipulate the market. As soon as that happened, the prices never went down again. If it was totally a supply problem, why would we have excess prices at 5:00 in the morning on Christmas Day when nobody but Santa is working?

Lowell Bergman: (VO) The generators, in turn, say they shut down plants for routine winter maintenance.

Kenneth Lay: Every time there's a shortage or a little bit of a price spike, it is always collusion or conspiracy or something. I mean, it always makes people feel better that way.

Lowell Bergman: But you know as well as I do that the price -- it's nice for a business.

Kenneth Lay: Yeah.

Lowell Bergman: You're in the business of -- of making money for your shareholders.

Kenneth Lay: Mm-hmm.

Lowell Bergman: Right, as a company?

Kenneth Lay: Yeah.

Lowell Bergman: So you would be foolish, as you said, to turn down the kind of money you could make this past winter in California. Is -- isn't there a ...

Kenneth Lay: I -- I -- I think you put words in my mouth out there.

Lowell Bergman: OK.

Kenneth Lay: I said we -- we made some money in California. We made some money across the country and around the world. I mean, and as I tell my friends in California, Enron was doing quite well before California imploded.

7th Man: So you can't blame the Enrons. I mean, they're the guys -- that's -- that's what they do. They try to make as much money from the money that they get invested. You blame the regulators.

Lowell Bergman: (VO) Across the country, tucked in an out of the way building behind Union Station in Washington, DC, sits the Federal Energy Regulatory Commission or FERC. FERC's commissioners are appointed by the president and control a $250 billion energy sector critical to America's economy. With the coming of deregulation, state control over wholesale electricity rates passed to the federal government, making FERC the final arbiter of just and reasonable rates. It's a power FERC has been reluctant to use.

Curt Hebert is a protege of Senator Trent Lott, who convinced President Clinton to appoint Hebert to the FERC in 1997. In January, President Bush made him the FERC chairman, and Hebert has made no bones about where he stands on free markets.

Curtis Hebert: The rules of competition govern that economies work, that choice works. It's why we're American. We inherently like choice. It's why we left the mother country. We didn't like the rules they were setting. We wanted to make our own rules. We want our own choices and we believe that works.

Lowell Bergman: OK, but is electricity different?

Curtis Hebert: It's a transition. It takes some time. Look, they didn't build this monopolistic system overnight, and we won't change it overnight either.

William Massey, Federal Energy Regulation Commission Commissioner: Without some effective price control this summer, I fear for the worst.

Lowell Bergman: (VO) William Massey is a FERC commissioner, a Democrat, who has found himself in opposition to his chairman.

8th Man: Mr. Massey, what is the nub of the disagreement that you have with Mr. Hebert?

William Massey: I think what it boils down to is a philosophical disagreement about the role of my agency in ensuring just and reasonable prices.

I think it's long past time for this agency to step in and -- and impose a temporary time out on the markets.

Curtis Hebert: Well, that is the problem because these people are saying temporary, but they don't mean temporary. It's kind of like the temporary rent control you have in New York. It's not temporary at all. Matter of fact, you know, in Washington, DC, we don't do temporary very well, and that's a problem.

Lowell Bergman: (VO) In fact, late last year, after six months of unrelenting high prices in California, the FERC finally did declare California's rates unjust and unreasonable, but took no action.

Governor Gray Davis, Governor, California: So they found these people guilty a year ago. They just haven't agreed on the sentence.

Lowell Bergman: Well, we talked with Curt Hebert. And we got . . .

Gray Davis: Well that's, you know.

Lowell Bergman: That's what?

Gray Davis: Lots of luck.

Lowell Bergman: What do you mean, "Lot's of luck"?

Gray Davis: Because . . .

Lowell Bergman: He's the federal -- he's the guy you are turning to to give you the money.

Gray Davis: He is the chairman of the commission. But he has not been overly sympathetic to California. He's more of an ideologue than a problem solver.

Lowell Bergman: Well, he's saying you just want him to give you short-term relief, price caps, which won't solve the problem.

Gray Davis: Problems meaning fattening the balance sheet of already enormously wealthy energy companies.

Chris Bury: How much blame do the energy companies really deserve?

Lowell Bergman: Watch your -- your heating bills, your natural gas bills, which are, to a certain extent, reflected in your electricity bill. And don't think that this couldn't happen where you are.

Chris Bury: And how much of this energy crisis did California bring upon itself? Those questions when we come back.

Chris Bury: Joining us from Boston, Lowell Bergman, the correspondent for tomorrow's "Frontline" broadcast. From our Los Angeles bureau, Laura Holson, a business correspondent for The New York Times, who's been covering the California energy crisis. And here in Washington, Joe Kahn, who reports on energy and economics for The New York Times.

Laura, just before the break, we heard California Governor Davis blaming the energy companies and the federal regulators. How much of his argument is sinking in. In other words, whom do Californians blame for this?

Laura Holson, The New York Times: the interesting thing is Californians blame everybody for this ap -- for what has happened with the energy crisis. They blame the governor for not responding quickly enough to a crisis that started, you know, a year ago, if you really, you know, look at when prices starting going up. They are angry at their utilities who they feel have failed them. They have often had very close kind of paternal relationships with their utilities and they feel that they've been cheated. And they are very angry with the power generators, in particular, who they feel are charging them just exorbitant amounts for energy.

In particular, there was a company last week, a power generator that said it charged consumers, rather the utilities, 4,000, nearly $4,000 per megawatt hour, which is enough to light a thousand homes for one hour. And when they heard this, they were outraged. they just thought, you know, 'How can this be? How can we get,' in their terms, kind of ripped off by power generators who are using them to make, you know, a lot of money.

Chris Bury: Joe Kahn we heard those poll numbers from this survey out tonight suggesting that President Bush has a bit of a public relations problem on energy. How is that going to affect the politics here in Washington?

Joseph Kahn, The New York Times: Well, clearly the -- President Bush and the White House are calculating that by the time people have to go to the polls to select a new president, a slew of new power plants will be online in California. Electricity prices, presumably, will come down quite a bit and their free market stance on this will not ultimately cost him at the polls. It's not as clear that Republicans in the Congress have the same commitment. This has already been a very turbulent time in Washington with the Democrats now in control of the Senate. I think you can expect to see a legislative initiative by the Democrats to introduce some kind of price caps in California. Some Republicans may sign on to that. Some have already indicated that they will. It's going to be a real knockdown political flight -- fight in Washington over what the strategy ought to be.

Chris Bury: Lowell Berman, talk a little bit about that free market activity that Joe just mentioned. We saw the clip from your documentary with the -- the traders from Enron pitted against the -- the buyers from California. And I must say, it really did look like a mismatch.

Lowell Bergman: Well, in fact, some of the people at Enron told us that they welcome the day when PG&E and Southern California Edison, the regular utilities get back in the marketplace because they do feel like they've got them, if you will, outgunned. And -- but I should point out to the audience, that when Laura was talking about this $3800 a megawatt hour, which was Duke Energy Company, the normal price, if you will, the standard price for a megawatt hour was around $40 or less. so the level of profit that we're talking about is what people are upset about. And the problem here is -- is primarily that in a free market and the way that the marketplace in California is set up in particular, there' no limit to what could be -- could be charged when you get close to that area of scarcity with electricity. Electricity truly is different and as Jeff Skillings says in our documentary, he's the CEO of Enron, it is the most volatile commodity in the world.

Chris Bury: Yet, at the same time, Joe, we are seeing electricity traded as if it were oil or soybeans or steel. I mean, how is electricity different?

Well, for economic reasons, it's different in a -- in a couple of key respects. for one thing, its an absolutely vital commodity. People aren't prepared to do without it. Moreover, electricity powers every other part of the economy. So, it's one of these sort of fundamental rights that we have. In fact, as far back as the New Deal, Franklin Roosevelt made clear that electricity was so important that it would be subject to federal legislation guaranteeing everybody in this country just and reasonable electricity prices.

Chris Bury: But just and reasonable electricity prices, Laura, do you want to pick up the question of well, who determines what's just and reasonable here?

Laura Holson: Well, it's very clear that President Bush believes that the market, you know, sets what's just and reasonable. And, you know, that has not been what Governor Davis has said at all. He believes that because this is a commodity that people, you know, believe is guaranteed that there should be some price cap on it. It's an interesting, if you will, situation when business and politics kind of intersect. Governor Davis said very early on that he did not want two things to happen in California. One is that the utilities would go bankrupt and the second was that rates would be raised for consumers. And he's in a very tight spot right now because those two things that he did not want to happen indeed have happened. And it only looks like it will get worse this summer when experts have said Californians can expect another 260 hours of blackouts.

Chris Bury: Laura, we have to take a break. But when we come back, we want to address the question of whether power companies are doing what just comes naturally to them. Back with our guests in a moment.

(Commercial break)

Chris Bury: We're back with "Frontline"'s Lowell Bergman and Laura Holson and Joe Kahn of The New York Times.

Joe, aren't these power companies doing exactly what they are supposed to be doing, which is maxi--maximizing profits and to get the biggest return for their shareholders?

Joseph Kahn: Sure. that's their responsibility. They -- they have no excuse for arbitrarily lowering the price that they could charge for electricity if the market will bear a higher price.

Chris Bury: Lowell Bergman, in your documentary, do you find any evidence that the power companies are -- are gouging consumers or doing anything illegal?

Lowell Bergman: Well, illegality, no one really has any serious evidence, although there have been lots of allegations and there's been lots of speculation about it. But we should also point out in the documentary and in The Times that some of the companies are starting to realize, it seems, that even though they are owed hundreds of millions, in some cases %500 million or more still by these bankrupt utilities, they're going to have to take a hair cut as Governor Davis describes it. They're going to have to make some bargain. And I think we may . . .

Chris Bury: Let me jump in there. what do you mean they're going to have to get a hair cut?

Lowell Bergman: Well, apparently, that's Governor Davis's way of telling them that they're going to have to take less to a -- less than a full dollar payment for what they are owed, and that there has to be some kind of settlement here of between the various parties, other we're not -- otherwise we won't see any progress.

Chris Bury: Lowell, one of the old cliches in investigative reporting is follow the money. And much has been made of this argument that the Bush administration, accusations have been made, that the Bush administration is too cozy with the power companies and the power company regulators. What did you find in your reporting?

Lowell Bergman: Well, we found that Vice President Cheney was very up front about it, I mean, about his relationship with Ken Lay, the head of Enron, the fact that he built a stadium for Enron when he was head of Halliburton. You know, the vice president is the first CEO of a Fortune 500 company to hold presidential office in the history of the United States. So -- but they are very open and up front and balance this relationship withth their friends and with the people who they feel comfortable with.

Chris Bury: Laura Holson, this idea that so many Texas companies are profiting from California's misery, as it were, I suppose Californians find that particularly infuriating.

Laura Holson: It's funny, in the San Francisco Bay area when I was growing up near there, there was this great rivalry between the San Francisco 49ers, which is, as we all know, a football team and the Dallas Cowboys. And that seems to be replaced, if you will, with consumers in California who look at Texas gen -- at, you know, a lot of the power generators, which are based in Texas, and who they feel now are just, you know, making a lot of money off them. It's -- there's always been a rivalry between those two states. And now I think it's deeply personal because it's hitting consumers, or as they believe it, it's hitting them in their pocket books.

Chris Bury: Joe Kahn, how long before these new power plants are going to be coming on line? And before they do, or in the time before they do, what -- what is it that the federal government can do to help California out?

Joseph Kahn: Well, it -- it will probably be about 18 months before sufficient new power comes on line in California to start substantially changing the supply and demand equation there. And that's a very speedy pace. That's with a very expedited permit process for new plants. The governor in California has put a lot of effort into building new plats -- plants quickly.

Chris Bury: So what happens between now and then?

Joseph Kahn: Well, that's the question. That's the debate. The Federal Energy Regulatory Commission has the power under the Federal Power Act, in fact some people argue it has the obligation under the Federal Power Act to ensure that just and reasonable electricity rates prevail in California at all times. It can't just selectively choose the times. And it has already found at the end of last year that rates in California are unjust and unreasonable.

Chris Bury: So what's it doing about this?

Joseph Kahn: Well, it's -- it's tried a variety of compromise measures so far, very limited price controls on certain kinds of electricity sales during emergency hours. So far that appears to be an insignificant contribution to reducing the overall electricity bill in California.

Chris Bury: Laura, Governor Davis is demanding wholesale price controls. President Bush has made it pretty clear that he's not going to lean that way. What options does Governor Davis have?

Laura Holson: You know, it's -- again he's stuck in this place where it -- it doesn't look like he's got any kind of real out. I mean, he can try to demand. He can demand as much as he wants from the power generators, but if the federal government doesn't step in, he really can't do anything. The interesting thing, at least I see kind of going forward, is how Californians have really adapted to a really, you know, awful situation. There's a law that's being proposed right now in California in which businesses will know months in advance whether their neighborhood is going to be impacted by a blackout so they can plan. I mean, we've almost turned into -- if anybody remembers traveling through Italy during their college days, you always kind of know when the airlines or the trains were going to go on strike because they told you a day ahead of time. And that's very much what's happening in California where they're warning people, you know, two days, and hour, you know, one day ahead of time so that they can prepare.

Chris Bury: That's a pretty dark scenario. Lowell, we just have a few seconds left, what lessons should the rest of the country take from California's crisis?

Lowell Bergman: Well, watch your -- your heating bills, your natural gas bills, which are to a certain extent reflected in your electricity bills. And don't think that this couldn't happen where you are. And I think that the industry itself is beginning to understand that the crisis in California may, in fact, impact on the future of deregulation nationally.

Chris Bury: Lowell Bergman, Laura Holson, Joe Kahn, thank you so much for joining us tonight.

Lowell Bergman: Thank you.

Joseph Kahn: Thank you.

Laura Holson: Thank you.

Chris Bury: When we come back, an update on a Nightline broadcast from just over a month ago.