Power Exchange

A. Scott Piraino

As California goes, so goes the nation. First an “energy crisis” caused rolling blackouts throughout the state, and bankrupted California’s government . Now the biggest blackout in US history has crippled the Northeastern United States, leaving Americans in the dark as to the cause.

The history of power regulation in this country can be traced to one man, Samuel Insull. He was a British born entrepreneur who became an assistant to Thomas Edison when the first power plants were being built in this country. His expertise helped pioneer the use of massive steam turbines using alternating current to create the power grid we take for granted today.

But Samuel Insull was not content to make electricity, he wanted to make money. He realized that the way to increase profits was by consolidating smaller electric companies into much larger utilities. Although he is not remembered as an inventor, Samuel Insull created an electric empire that would become the first utility holding company.

He began buying up utilities for the sole purpose of issuing stock in his newly created holding company. Soon other investors followed suit, and a new class of power barons began pyramiding holding companies one atop another, and borrowing money to purchase more utilities. As the economic boom of the 1920’s created soaring demand for electric power, speculation in utility stocks became the norm.

These companies were no longer concerned with producing electricity more efficiently, their purpose was to maximize profits for shareholders. Since all revenues ultimately came from selling electricity, consumers were forced to pay for this debt and speculation through higher prices. In 1928 the Federal Trade Commission investigated the energy trusts, uncovering evidence of price fixing, stock manipulation, and investment pyramid schemes.

But it was too late. In 1929, the greatest stock market crash in US history wiped out the power trusts. Samuel Insull’s empire collapsed as spectacularly as Enron would sixty years later.

During the Great Depression, citizen groups and politicians began calling for reform and regulation of the power companies. Franklin Delano Roosevelt fought against the utility conglomerates, going so far as to call them “evil” during his State of the Union address in 1935. That year, Congress signed the Public Utility Holding Company Act (PUHCA), into law, making the pyramidal structure of energy conglomerates illegal.

President Roosevelt was not content to rein in the power trusts, he made inexpensive, reliable electricity a cornerstone of his New Deal Legislation. The Federal Power Act of 1935 made utilities subject to federal regulations, and mandated that utilities provide electricity at “fair and reasonable” prices. Finally, FDR passed legislation that subsidized delivering electric power to rural communities.

The end result of President Roosevelt’s campaign against the utility monopolies was more electric power, delivered to more homes and businesses, at lower rates.

Samuel Insull and the first power barons can perhaps be forgiven for their mistakes and transgressions. Electric utilities had just been invented after all, and it was inevitable that unscrupulous business types would take advantage of a new source of income. Particularly since no one could know for certain what the consequences of private, unregulated power monopolies would be.

But Enron and these new “energy trading companies” have no such excuse. They know exactly what they are doing. They have de-regulated the electricity industry so it is once again legal for utilities to soak ratepayers.

Enron was founded in 1985, in Houston, Texas as a nondescript energy supply company. The company’s biggest investments were not in power plants or infrastructure, but in politicians. Enron used political connections and campaign contributions to buy deregulation.

Enron’s first dividend from their investments in the Republican Party, and the Bush family in particular, came when George Bush signed the Energy Act of 1992. This mandated that all utilities must allow power trading companies access to their grids. That same year Wendy Gramm, wife of Senator Phil Gramm, exempted Enron from regulations governing trade in energy futures.

Through corruption, Enron had created a new business of buying, selling, and trading energy, even without the infrastructure to generate power.

Enron’s biggest payoff came in the year 2000. The company was the number one contributor to the Bush campaign, and Enron founder Kenneth Lay was a longtime friend of the new President. The Bush Administration wasted no time drafting an energy policy tailored to the company’s needs, knowing that policy would conflict with the public interest.

As soon as Bush’s policy was in effect, Enron began eyeing California, the richest power market in the US, and the one most dependent on out of state power. Energy traders sent prices for electricity skyrocketing from 40 dollars to as high as 1,500 dollars a kilowatt-hour by December of 2000. As rolling blackouts plagued California, state regulators sought relief from the federal government.

Unfortunately, President Bush had appointed a free market maven in hock to Enron as chairman of the Federal Energy Regulation Commission. FERC refused to act, despite a rising public outcry and mounting evidence that the energy trading companies were soaking California. The Bush administration blamed a drought, lack of generating capacity, environmental laws, and even the internet boom for the spike in prices.

Of course these were lies, meant to deflect critics and keep media investigators from broadcasting the truth. Finally, after a year of de-regulation, FERC bowed to public pressure and enforced their mandate to ensure electric power at “fair and reasonable” rates. Price caps were established for wholesale electricity markets in June of 2001, and the “energy crisis” disappeared.

Despite their political connections, and their ability to legally extort electricity, Enron went bankrupt. Federal investigators sifting through the company’s accounts revealed a deliberate policy of manipulating energy prices in California and other western states. FERC has since sited sixty companies for price fixing the energy market during California’s crisis, but little evidence of wrongdoing has been uncovered. This price gouging was legal after all.

Electricity rates tripled for Californians during de-regulation, and Democratic Governor Gray Davis was forced to sign 43 billion dollars in energy contracts. He had no choice, because while FERC refused to regulate electricity prices, the state was at the mercy of the energy trading companies. Governor Davis has since appealed to a Federal court, trying to get California out of those energy contracts claiming they were signed under duress.

Today California is running a deficit of 38 billion dollars. Budget cuts are reducing funds for education and other social programs, while Governor Davis has been forced to raise taxes. The state is facing tough choices., not the least of which is the upcoming recall of the Governor.

The political unrest in California is a direct result of Bush’s corrupt energy policy, and the greed of energy trading companies like Enron. Still the Bush administration refuses to admit that de-regulation is flawed, instead the Republicans sit back and watch California’s economy disintegrate. And as for Governor Davis, he is a Democrat after all.

Then on August 14th, the biggest power failure in US history paralyzed the Northeastern United States, leaving fifty million Americans without power. FirstEnergy, a Midwestern energy company, was initially blamed for the disaster. This newly formed utility conglomerate has over 12 billion dollars in debt, and a history of shirking environmental and safety laws.

FirstEnergy also has connections to the Bush administration. The company donated 700,000 thousand dollars to Republican candidates in 2002 and spent another two million dollars on lobbying, (bribing), politicians. In June the CEO of FirstEnergy hosted a fundraiser for President Bush’s re-election campaign that raised 600,000 dollars.

In return for the patronage of FirstEnergy, the Bush administration has blamed the “antiquated energy grid” for the biggest power failure in American history. Energy Secretary Spencer Abraham has been making the talk show rounds, proposing a 50 billion dollar upgrade of the nation’s energy infrastructure. And in the words of Mr. Abraham, “rate payers obviously will pay the bill because they’re the ones who benefit”.

A more likely cause for the power failure is that a transfer of too much electricity overloaded the power grid. The fact is, the US energy grid was designed to generate and distribute power locally, not trade electricity nationwide. FirstEnergy’s siphoning of electricity from other utilities created the power surge that probably started the meltdown of the power grid.

Energy Secretary Abraham has dodged questions about FirstEnergy’s energy borrowing, and whether it could have contributed to the blackout. FERC also refuses to point the finger at FirstEnergy, or implicate energy trading as the cause of the power failure. The Bush administration will never admit that de-regulation played a role in the blackout, instead they are using it as an argument for new energy legislation.

The Energy Policy Act of 2003, now being debated by Congress, seeks to undo Roosevelt’s utility regulations once and for all. Included in President Bush’s latest energy plan are more giveaways and tax cuts for the utilities and oil companies. But this act goes further, and seeks to repeal the Public Utility Holding Company Act of 1935, and the “fair and reasonable” price clause that protects consumers.

US energy policy has returned to the days of Samuel Insull, not by chance or by the operation of the free market, but through the machinations of the new energy trading companies.

The Bush administration and the new power trusts do not see electricity as an essential public service, but as an opportunity for high risk speculation and profits. De-regulation is not the reason for their energy policy, it is the excuse. And these people are not capitalists. They are crooks.

Published in: on November 25, 2003 at 6:19 pm  Leave a Comment  

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