- The Observer,
- Sunday January 28 2001
America 2001. While the inflated riches of the new economy are wilting, an older power is stalking the land. As George W. Bush arrives in Washington from Texas he brings with him a coterie of friends from the Lone Star state whose fortunes, in common with his own, have been founded on power - oil, gas, and electricity.
The timing could hardly be more symbolic. Twenty-first century California is plunged into spasms of nineteenth-century darkness because its power system cannot cope with the demands of its internet-fuelled economy. Meanwhile, energy companies are making fortunes as they sell electricity at vastly inflated prices - up to $1,000 a megawatt-hour compared with a $30 norm - into the starved Californian grid. These are swell times for Bush's new oiligocracy.
But there is more. Electricity deregulation, the problem at the heart of the farce in California, promises to be one of the most controversial legislative issues of Bush's term in office.
With a finely balanced Congress, the California humiliation, and a summer of massive energy price volatility in midwest states, there is waning support for further deregulation.
But Bush and his energy industry players want deregulation. They would do. Two California utilities, Southern California Edison (SCE) and Pacific Gas & Electric, may be facing financial ruin because they can't get consumers to pay the price they are having to shell out for wholesale power. But companies supplying power, be they utilities operating Californian power plants they bought under deregulation or energy traders, are cashing in.
This is happening not only in the Golden State, but right across the US - half of which is deregulated - where fortunes can be made from the mismatch between supply and demand.
Some of these big players will be familiar in the UK. Utilities owning California plants include Southern Energy, part of a consortium buying Welsh utility Hyder, AES Corp, which owns the massive Drax power station in Yorkshire, trader Dynegy, Reliant, which held merger talks with PowerGen, and TXU, owner of Eastern Electricity and a pan-European trader. Enron, which trades in California, operates two plants in Britain and trades here. The last four are all Texan.
Reliant, Dynegy, and AES have been branded by California governor Gray Davis as 'pirates and plunderers'. The companies and their shareholders won't care. Last week Enron announced a huge increase in revenues at the end of the fourth quarter, driven by soaring wholesale operations. It refused to split out Californian earnings. Dynegy's fourth quarter saw earnings double to $105.9m.
These companies want further deregulation wherever in the world they operate. In the US they want to negotiate on a state-by-state basis rather than have onerous environmental and consumer protection conditions imposed by the Federal Energy Regulatory Commission (FERC).
They will take their message to the heart of the White House.Texas energy companies, including Enron, TXU, Dynegy and Reliant, have long exerted influence with the Bush dynasty. Diane Albaugh, wife of Bush's campaign manager, registered last autumn to lobby on behalf of TXU, Reliant, and Entergy, another Texas-based utility.
The heads of two Texas energy players - Enron's Kenneth Lay and TXU's Earl Nye - are on the energy team of Bush's transitional administration, and both have made hefty donations to Bush: Lay $310,000 in the past two years and Nye $50,000, according to the Washington-based Center for Responsive Politics.
Lay is particularly close to Bush, having served his father and acted as a fundraiser. Since 1999, Enron, which is also an oil and gas operator with an interest in deregulation, has bankrolled George W's election campaign to the tune of $555,275 - his highest single donor.
Both Lay and Nye are arguing that what has happened in California should not taint future plans, despite the fact that deregulation in midwest states such as Illinois and Ohio caused massive price volatility last summer.
Deregulation supporters argue that California is a one-off, caused partly by environmental blocks to new power stations. Only 700mwh have been built since 1995, compared with 5,700mwh in Bush's Texas. Lay even argues that instead of a federal cap being imposed on wholesale prices, Californian consumers should reduce their electricity consumption.
This desire from the energy giants for deregulation and minimal federal interference was clear from the four-year campaign in Congress run by industry and the Republicans. In 1996 the FERC ordered utilities to open their electricity lines to competitors. Further deregulation has divided Congress, and in the run-up to the 2000 election the main concern was the role of FERC.
Two Congressmen spearheaded the move for state-by-state control: Joe Barton, chairman of the House energy and power subcommittee and a Texas Republican with close links to Bush; and Alaskan senator Frank Murkowski, head of the Senate energy and natural resources committee. According to CRP, of the total $793,064 contributions to Bush's election funds, a massive $256,940 was paid by energy companies.
This included $12,750 from TXU, $10,000 from Reliant, $7,591 from industry lobby group Edison Electric Institute, $5,000 from Ohio utility Cinergy, and $3,000 from Enron. Energy analyst Jerry Oppenheim says it is clear what the companies were paying for: 'Deregulation created volatility, which is what energy traders want. Doing it state by state increases the ability to lobby individual states for favourable deregulation.'
With Bush in the White House, the energy giants are pushing at an open door. In 1997 Bush pushed for a bill that would have deregulated the industry without offering safeguards to consumers or the environment. This 'Bush Bill' failed. In 1999, the Texas legislature passed a deregulation bill, again backed by Bush, this time with some protections in place.
Janee Briesemeister of the South-west region of the US Consumers Union says: 'Bush will argue that California is unique. That's what the energy people want, and access to Bush's team gives them great influence. But there are no consumers' representatives on it, and the 1997 bill shows where his concerns lie.' The question now is, will Republicans be able to drive the plans through a divided Congress?
Some of the lobbying by these US companies will effectively be supported by UK consumers through revenues contributed to parent companies. In the UK itself they could make a great deal of money from the next stage of electricity deregulation here: the introduction of new electricity trading arrangements, (NETA) which will replace the electricity pool.
NETA is intended to make the energy market more competitive by matching supply and demand more accurately than the current pool does. Under the new arrangement, forward contracts between generators and suppliers will become important. For companies that have not contracted successfully and matched demands with their supply, there will be a short-term balancing market.
The prices at this balancing stage, particularly in the first year of NETA, are expected to be very volatile.
David Warwick of KWI, a risk management consultancy, says that while bankrupt utilities and power cuts may not be a feature of NETA, there will be problems that traders can exploit.
'The problem is that many electricity suppliers have not bought forward contracts. They will have to rely a lot on the balancing market, which will become very volatile at times, and very expensive. I would expect some suppliers to see their profits hit. And the traders which get it right will make a lot of money.'
The US companies that have spent so much time lobbying for American deregulation have done so here too, putting in detailed papers to the UK regulator. Four are, coincidentally, from the Lone Star state - Enron, TXU, Entergy and Dynegy. For them, if not for Bush, there will continue to be a special relationship with the UK.
