Comment: Thank Enron for Texas’ messed-up, deregulated grid

The now-bankrupt energy company was a major force for deregulation it wanted to spread nationwide.

By Gavin Benke / Special To The Washington Post

As the deep freeze begins to lift and the lights come back on in Texas, millions of Texans are now contending with both a water crisis and outrageously high power bills.

For some, the fiasco has revealed the dangers of a deregulated energy system, like the one we saw collapse in Texas. Yet, the usual champions of free enterprise are already warning against regulation; especially when it comes to climate change and energy policy. U.S. Rep. Dan Crenshaw, R-Texas, for instance, falsely blamed Texans’ misery on policies intended to promote cleaner sources of energy. However, the story of Enron’s push for energy deregulation in the 1990s — and its consequences — should caution us against continued enthusiasm for deregulated energy or being scared by such warnings.

Lawmakers have long been attuned to the potential for boondoggles when it came to the nation’s power supply. During the 1920s, concerns about vertically integrated energy monopolies that controlled all elements of the power generating process led to New Deal initiatives such as the Public Utilities Holding Company Act (PUHCA). That law split up energy combinations and introduced price controls and other measures to regulate local utility monopolies.

Eventually, though, energy (like other industries) moved toward deregulation beginning in the late 1970s. Believers in the free market, including Texas energy executives like Enron’s Ken Lay, drove this change, actively pushing for deregulation in the 1980s and 1990s.

Infamously, Enron was a Houston-based energy company that pioneered the use of financial instruments in the natural gas business but collapsed in 2001 after years of accounting fraud came to light. Yet long before Enron became synonymous with white collar crime, the company’s leadership was deeply invested in energy deregulation. After finding success operating in the natural gas market (which had been deregulated in the 1980s), the company’s leaders, Lay and Jeff Skilling, turned their attention to electricity deregulation.

In 1992, President George H.W. Bush signed the Energy Policy Act into law, which represented a decisive, national step forward in the pursuit of electricity deregulation.

In the mid-90s, Enron effectively declared war, intending to smash through any barrier standing in the way of electricity deregulation. Drawing on military metaphors, the company’s 1996 annual report stated: “In the U.S. we are moving forward in a state by state advance to support deregulation and quicken its pace.”

While the push was self-interested, designed to benefit Enron’s bottom line, the company framed its efforts by promising that if “new markets” were “liberated” consumers would see “benefits so big that they will actually improve the quality of life of individuals here and around the globe.” The company was waging a “massive public relations and legislative battle” to “bring competition to the U.S. retail market for electricity, one of the last great monopolies.”

Though the campaign was nationwide, Texas was a centerpiece of the company’s strategy. Lay personally reached out to then-Gov. George W. Bush about how important electricity deregulation was to the Lone Star State. “More competition, leading to lower electric rates,” Lay wrote in one of many letters to the governor, “would benefit all Texans and help keep Texas business competitive in world markets.” By contrast, “restricting important competitors from the wholesale power market harms the Texas economy by causing higher electric prices, less investment, and fewer jobs.”

Because Enron’s business was predicated upon unregulated energy markets, Lay’s claims were highly self-serving, and included equal parts carrot and stick. Enron tried to sell politicians like Bush with the promise of lower prices for businesses and consumers thanks to increased competition. But the company’s lobbying contained the implicit threat that failing to deregulate would hurt Texas companies’ ability to compete.

It was a message that the company exported around the country; aggressively pushing legislatures to adopt “Uniform Business Rules for retail gas and electricity markets” and to restructure “retail electric and/or gas” markets.

If Enron’s leaders had their way, Texas itself would form the beating heart of a new energy system. Skilling and others began to imagine that downtown Houston could become the global center for buying and selling wholesale electricity in an era defined by global electricity deregulation. In pursuit of this vision, Lay became one of the city’s most vocal advocates for building a new downtown ballpark for Major Leage Baseball’s Astros, a centerpiece of a robust downtown that would attract top finance talent to energy trading.

Enron succeeded in Texas. In 1999, Gov. George W. Bush signed Texas Senate Bill 7 into law, paving the way for the deregulated electricity system that is now at the center of the state’s woes. The law (which went into effect in 2002) removed controls on wholesale electricity prices and worked toward eliminating tightly regulated local monopolies.

Yet Enron’s bullish push for electricity deregulation more broadly quickly ran into problems during the California energy crisis in 2000 and 2001. In that state, deregulation meant that investor-owned utilities had to buy and sell power in a short-term market instead of establishing long term arrangements between two parties. Even though retail price controls initially shielded consumers, the new system introduced a tremendous amount of instability to the state’s power system and opened the door to a number of shady trading practices that allowed companies like Enron to profit. Enron had long hoped that deregulation in California (which went into effect towards the end of the 1990s) would persuade more states to deregulate their energy grids. Instead, Enron’s top management and public relations team found themselves defending deregulation in the wake of California’s problems.

As Californians endured rolling blackouts and ballooning electricity prices (which translated directly into profits for Enron), the company’s government affairs team prepared a public relations effort to “stabilize the fallout from California, promote competitive markets and improve public perceptions.”

In truth, though, the damage was already beyond repair. Article after article in California newspapers blamed the West Coast energy crisis on what was going on in Texas. One San Francisco Chronicle story presented Lay as an ominous presence staring “out from his plush, 50th-floor office” where “Houston’s downtown skyscrapers jut like sharp teeth against the overcast sky.”

Skilling traveled to San Francisco to defend electricity deregulation in a speech that was titled, “The Arrogance of Regulation.” Californians did not respond well to the argument. Perhaps expressing the desires of many, one Oakland resident managed to smash a pie in Skilling’s face.

Enron was never able to realize the goal of nationwide deregulation. The U.S. electricity system remains a patchwork of different regulatory schemes across different states.

Yet, the legacy of Enron’s push lives on in Texas today.

Of course, there were many factors that went into creating the energy disaster with which Texans are now dealing. But at least in one respect, the problems in Texas are a product of an approach to the energy business that Lone Star State companies like Enron pursued at the end of the 20th century. In those years, the sense of an optimistic future made it easy for energy executives to dismiss electricity regulation as a dusty relic. Such old-fashioned notions were holding Texas (and other states) back from participating in a future that was bright because of lights powered by cheap, deregulated electricity.

Instead, the combination of the failing power grid and market forces have pushed the price of electricity into the thousands of dollars, leaving consumers facing astronomical bills for just a few days of service, and legislators facing pressure to act to help their constituents.

As the lights come back on in Texas, we should remember Enron and the push for energy deregulation; and remain skeptical of such proposals when, inevitably, free enterprise advocates return to them.

Gavin Benke is a historian and senior lecturer at Boston University and is author of “Risk and Ruin: Enron and the Culture of American Capitalism.”

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