Enron and Davis: California Governor Blacks Out the Truth

On Aug. 20, 2003, California Gov. Gray Davis stated that Enron and the Bush administration were to blame for the Golden State's electricity crisis.

"I inherited the energy deregulation scheme which put all of us at the mercy of the big energy producers. We got no help from the federal government. In fact, when I was fighting Enron and the other energy companies, these same companies were sitting down with Vice President [Dick] Cheney to draft a national energy strategy," stated Davis.

However, Davis is playing fast and loose with the real facts of his relationship with Enron. For example, according to the Sacramento Bee, Davis has received $119,500 in campaign donations from Enron, including $42,500 since becoming governor. Davis openly stated that he would not return the Enron money.

Davis has previously been quick to blame Enron for California's lack of power. In May 2002, Davis called Enron executives "robber barons."

"As far as I'm concerned, the persons responsible are a menace to society and should be facing serious jail time, not 9 a.m. tee times," said Davis.

In 1999, only months before the California energy crisis, Davis led a $200,000 trade trip to Europe for Enron. Davis traveled at California taxpayer expense with his wife for two weeks in Europe and finally in ancient Greece, lobbying on behalf of Enron for the Greek Wind Project.

Davis also took a close-knit group of heavy campaign donors along on his trip to Greece. The group included grocery store magnate Ron Burkle, who donated $350,000 to Davis, and workers' compensation insurance executive Stanley Zax, who donated $100,000 to Davis.

The project in Greece was so important that Davis also took his good friend, major DNC donor and Sacramento developer Angelo K. Tsakopoulos.

Tsakopoulos and his family are million-dollar contributors to the Democratic National Committee and Democratic candidates including Davis, Al Gore, and Bill and Hillary Clinton.

According to documents forced from the U.S. Commerce Department, Enron noted that Davis and Tsakopoulos were tripping to Greece with some very unusual comments.

"Best man at my Greek wedding," noted one handwritten comment next to a Los Angeles Times article on Tsakopoulos attached to documents from the U.S. Embassy in Athens.

"Major Clinton donor – may be on Clinton trip to Greece," states the handwritten comments.

Enron considered the trade trip so important that they also included a 22-page briefing paper addressed to Gov. Davis detailing the "Greek Wind Project Permitting Issue." Interestingly, the same briefing paper made its way into the U.S. commercial section of the American Embassy in Athens.

The 1999 documents are part of a long string of heavy lobbying efforts that the Clinton administration carried out to convince the Greeks to buy Enron wind products for Crete.

For example, a 1998 document prepared for the U.S. ambassador in Greece noted, "The company [Enron] was given an installation license last year, but construction was held up while an archeological study was performed. In the interim, the licenses lapsed and Enron's request for a renewal has not been answered."

"Enron should send more high-level visitors to Greece to underscore the importance of this market," states the 1998 memo to the U.S. ambassador to Greece.

More importantly, the facts surrounding the California energy crunch do not support Davis' claim that Enron executives committed crimes. According to a study done by the CATO institute, the California governor is not telling the truth about Enron.

"Records pried from the governor's office by legal action reveal that during last year's crisis Enron was charging less for electricity than the market average and significantly less than Davis's own L.A. Department of Water & Power, under the direction of the governor's 'electricity czar,' David Freeman," states an article by Jerry Taylor, director of natural resource studies and Peter VanDoren, editor of Regulation, at CATO.

"Enron was accepting IOUs from the power companies and the state of California rather than demanding cash upon delivery at the height of the crisis. But trusting the state to make good on its promises to pay was an example of the corporate heart ruling the head. According to energy economist Phil Verleger, the state of California ended up stiffing Enron for millions of dollars, a (dare we say 'ruthless'?) maneuver that certainly didn't help Enron stay out of bankruptcy," notes the CATO institute report.

The fact is that Enron supplied barely 4 percent of California's power. Davis' attempt to paint the power shortage in California as some sort of right-wing conspiracy is so false as to be ridiculous.

The fact is that Enron became a large, corrupt corporation with the support and approval of Gray Davis and Bill Clinton.

I have written several stories on the 5,000 pages of Enron materials forced from the U.S. Commerce Department by the Freedom of Information Act. In 1994, Enron did a dirty deal with Indonesian dictator Suharto and paid millions to Suharto's son for an electric power plant that was never built. These facts are known because the Clinton administration documented and supported the deal.

The documented evidence shows that Clinton worked for Enron in China, Vietnam, South Africa, India, Brazil, Argentina, Mozambique, South Korea, Japan, Belgium, France, Russia, the Philippines, the West Bank and Uzbekistan.

Enron's chairman met with Clinton and Gore in the Oval Office. Enron gave $420,000 to the DNC. Enron donated $100,000 to Clinton's inauguration festivities. The taxpayer-supported Export-Import Bank subsidized Enron for more than $600 million in just one transaction at the behest of President Clinton.

Many former Clinton administration officials eventually went to work for or lobbied on behalf of Enron, including former White House counsel Jack Quinn, former Treasury Secretary Robert Rubin, former Assistant Treasury Secretary Linda Robertson, former Chair of the Federal Energy Regulatory Commission Elizabeth Moler, and the former media adviser to Vice President Al Gore, Greg Simon.

The scandal that became Enron corrupted nation after nation, spreading its wings as part of Bill Clinton's stained legacy. The Enron stain on California Gov. Gray Davis shows clearly in the light.

California's Consumer-Power Crisis

Senator Tom McClintock
Date: December 20, 2001
Publication Type: Column Print Version

The wholesale price of electricity has plunged 95 percent from its highs earlier this year, while most electricity rates have simultaneously shot up 40 percent. What’s wrong with this picture? Government tried to help.
When electricity prices surged last year, Gov. Davis decided to shield consumers from the temporary price spike by subsidizing their rates, first with utility company capital and when that ran out, with tax money. This pushed the state’s major utilities to the verge of bankruptcy and then ate a gigantic hole in the state treasury.

Fortunately, the Governor didn’t lift a finger to help us with natural gas prices, which spiked at the same time. As a result, heating bills went through the roof, consumers turned down their thermostats, the higher prices uncorked transmission bottlenecks and attracted additional supplies, and gas rates quickly settled back down. Not so with electricity.

By subsidizing electricity prices at their peak, the Governor prolonged the price spike by directly underwriting it. This put the state’s finances into a fiscal death spiral that Davis could only exit by signing long-term contracts at prices well above what they would otherwise have settled down to if simply left alone. As a result, the state now owns $43 billion of electricity contracts costing roughly $70 per megawatt-hour in a $30 market.

Now let’s add up the cost of all this “help.” To recover utility losses, the administration has just bailed out Southern California Edison with $3 billion of ratepayer money, adding $750 to an average customer’s future bills. To replenish state coffers, Davis is attempting to borrow up to $13.4 billion which, with interest, would tack an additional $2,000 to an average customer’s payments over the life of the bond. In addition, the long-term contracts more than double the price that consumers should be paying, and will for years to come.

What can be done?

First, the contracts should be challenged. A court has already ruled that the Davis administration illegally negotiated them in secrecy, in direct violation of state law. And it turns out that while the Governor was locking consumers into ridiculously high prices, key administration officials advising him were also on utility payrolls or holding stocks in the companies they were negotiating with.

The Attorney General is paid to act as a consumer watchdog but has instead become an administration lapdog. Private organizations have stepped into the breach to challenge the contracts, but they are no match for the legal resources of the companies they must battle. The Attorney General should do his job.

Failing this, the legislature should restore consumers’ freedom to decline these obscene prices by shopping around for the lowest-priced electricity available.

Recently in Texas, for example, NewPower Company offered consumers $672 in savings if they simply picked up the phone and shifted their electricity business away from a competitor. Eighty thousand Texans did.

Californians had the same freedom when this governor took office. He took it from them because he needed a captive market in which to recoup all the costs his blunders caused.

So while competing power companies woo Texans with bargain-basement offers, Californians are held hostage to crushing rates created by their own government, with no escape but to leave California or to drop dead.

True, if consumers escaped this Soviet-style power gulag for the freedom of the open market, the state treasury would lose the difference, but that money has already been lost. The only question is whether it is recouped by sky-high electricity bills for decades to come, or some governmental belt-tightening now.

Restoring consumers’ freedom to chose would arm them with the most powerful consumer weapon of all: the ability to take their business elsewhere. If government really wants to help, it could start by getting out of the way.

California's Corrupted Contracts

Senator Tom McClintock
Date: May 15, 2002
Publication Type: Column Print Version

At the height of California’s electricity purchases in March 2001, the Wall Street Journal quoted a trading floor manager for the Bonneville Power Administration. The expert was incredulous as he watched California traders bid on electricity, “at times offer(ing) to pay $50 to $100 per megawatt hour more than the available market price.” He said, “They agree to prices that make you wonder. You’d at least think they’d check to see what the prevailing price is before throwing out their offer.”
At the same time, California officials were also committing consumers to long-term energy contracts at unprecedented prices. Californians are now paying an estimated $14 billion above the market price for this power – unnecessarily adding about $1,400 to an average consumer’s electricity bill.

How could the interests of California consumers be so completely compromised? The answer to that question may free them from the contracts.

In the winter of 2000-01, Southern California Edison and other utility monopolies tottered on brink of bankruptcy. Caught in a vortex of bad policy, they were losing billions of dollars – and were desperate to be relieved of their burdens.

In January, the Governor declared that a cornerstone of his energy policy was to prevent utility bankruptcies. To do so, he substituted taxpayer funds for the utilities’ capital – plunging the state into the power-buying business on behalf of those utilities.

Davis hired Vikram Budhraja, a former senior vice president with Southern California Edison, to oversee the purchases. Budhraja and his colleagues ignored state law that requires public officials to disclose outside sources of income, and began a frenzied and reckless buying binge that stunned veteran traders.

Southern California Edison’s finances improved dramatically, with the utility posting a profit of $121 million last quarter. California’s state finances were devastated, and consumers’ electricity rates soared.

It was not until July 12, 2001 that Budhraja finally filed the required financial disclosures, revealing that he had received “over $100,000,” from Southern California Edison’s parent company while overseeing California’s negotiations. (He also purchased between $10,000 and $100,000 of Edison stocks just four days after signing his contract with the state, selling them eleven days later for a 44 percent profit.)

Shouldn’t there be a law against that kind of conflict of interest? There already is. Government Code section 1090 is unambiguous: “(State) employees shall not be financially interested in any contract made by them in their official capacity.” Specifically, if that public official has received more than five percent of his income from an entity affected by that contract, the contract is void.

The Davis administration defends Budhraja’s conduct by contending that he never negotiated directly with his financial benefactor. State Schools Superintendent Bill Honig unsuccessfully tried the same defense against conflict of interest charges in 1992. California courts have consistently ruled that the financial interest “may be direct or indirect” and even include “the contingent possibility” of benefit. In Budhraja’s case, the very purpose of the contracts was to shore up Edison’s finances.

There is no question that Budhraja was involved in the long term power contracts, that the contracts affected Edison’s finances and that Budhraja received “over $100,000” from Edison while he was involved. The only question remaining is, did Budhraja’s Edison payments exceed five percent of his total income? If they did, the contracts are void.

The two parties who know for sure – Budhraja and Edison – aren’t talking. The Davis administration isn’t asking. And the Attorney General, responsible under the state constitution for enforcing the law, isn’t acting.

Last week, a non-profit legal group, the U.S. Justice Foundation, filed suit in superior court seeking to do what the Administration hasn’t: to enforce California’s existing anti-corruption law.

Will Californians be locked into sky-high electricity prices for years to come? Without a fundamental change in California’s current regime, the law’s last line of defense is again the courts.

# # #

Western Power Trading Forum - Ojai, California

Senator Tom McClintock
Date: June 21, 2002
Publication Type: Speech or Statement Print Version

I appreciate the opportunity to join you to discuss California’s continuing energy woes. It is a welcome relief from discussing California’s continuing budget woes.
I will begin by stating that California’s energy crisis is not cured. It is in remission only. Not only is it not cured, but the minimal efforts everyone agreed were necessary to avert future disasters have not been made. Very little has actually been done to address the root cause of last year’s rolling blackouts and sky-high prices: a catastrophic shortage of electricity.

At the peak of the crisis, on February 8, 2001, Gov. Davis promised– and I quote – to bring on 5,000 new megawatts of power this summer, (and) 5,000 more next summer. – end quote.

So how are we doing? From the date of that speech to the end of the summer of 2001, we brought on not 5,000 new megawatts, but only 2,700. And instead of bringing an additional 5,000 new megawatts on line by the end of this summer, we now expect to bring on just 2,900. Put another way, we have added just over half the power we were supposed to. Meanwhile, a reported 62 powerplant projects have been postponed, canceled or withdrawn since last winter.

This administration reminds me of Churchill’s description of Clement Atlee as someone whom “occasionally stumbles over the truth, but always picks himself up and carries on as if nothing has happened.” Eighteen months ago we stumbled over a problem of potentially catastrophic proportions, but have simply picked ourselves up and carried on as if nothing has happened.

Perhaps it will take yet another electricity emergency before we realize that there is only one way out of our energy woes, and that is to restore an era of clean, cheap and abundant energy.

We once enjoyed governments that clearly understood that simple fact. When my family moved to Thousand Oaks in 1965, I remember the newest, most modern homes in the neighborhood had an emblem near the front door proclaiming that the visitor stood on the threshold of a “Gold Medallion, All-Electric Home.” California itself stood on the threshold of an era of limitless electricity so abundant that meters would soon be obsolete, or so they said.

As delusional as those times seem today, there was every reason for optimism. The state and federal governments had embarked upon an ambitious program of hydroelectric dam construction, promising absolutely clean and reliable electricity in vast quantities. The electricity generated by the Castaic dam alone powers one and a half million homes. The cost of generating power from these dams is minuscule: as low as a half cent per kilowatt-hour today. At that price, the electricity bill of an average home would come to $31 -- a year. And plenty more were planned.

But electricity was just a byproduct of the dams, whose principal mission was to tame the environmentally ruinous cycle of floods and droughts that tormented California, and to conserve enough water to complete the greening of the entire state from the resources within the state.

The real promise lay in the nuclear facilities then under construction. The San Onofre plant opened in 1968, and today generates electricity for more than two million homes with steady efficiency and stunning economy: about 3-cents per kilowatt-hour (or $16 per month for an average home). California has only two nuclear plants now operating, but together they generate 16 percent of all the electricity in the state. By contrast, nuclear power produces 76 percent of France’s electricity, with an unblemished safety record.

Had these programs continued, the optimism of the 1960’s would have been realized long ago.

But in the 1970’s, a radical ideology entered California public policy. Its chief protagonist, Jerry Brown, summed it up as “the Era of Limits.” The construction of new dams halted so abruptly that the Auburn site in Northern California literally was abandoned in mid-construction. The newly created California Energy Commission became a graveyard for power plant applications. If just the three Stanislaus nuclear plants proposed in 1977 had been approved, there would be 7,200 megawatts of additional power on the grid today, and there would have been no energy shortage.

Meanwhile, California’s existing power plants labor under increasingly draconian operating restrictions. In 1998, a four-stack gas-fired power plant in the South Coast Air Quality Management District spent an average of $22,000 per day purchasing “pollution credits” to avoid vines. Today, that has risen to over $4.8 million per day. On the day Gov. Davis doused the Capitol Christmas tree and urged all Californians to do the same, enough power for two and a half million homes sat off line solely because of environmental restrictions.

We are told it was not a supply problem. It was all those Enron-type robber barons gaming the system. Well, duh. But what makes it possible for them to game the system? A shortage. A seller’s market.

Why is this so completely beyond the understanding of California policy makers? When something is scarce, it becomes expensive. When something is abundant, it becomes cheap. Sellers always jack up their prices in times of scarcity. Ask anybody selling a home today. In times of abundance, they can’t do that. And the only way genuinely to reduce our electricity costs is to increase the supply – the one thing we continue to be reluctant to do.

In a free society, California’s electricity problems would have corrected themselves long ago. A shortage develops, electricity becomes relatively scarce, and prices rise. As prices rise, consumers reduce their demand while producers develop more generation. Consumption declines, production increases, prices fall. The result: low prices and abundant electricity.

In California’s society, a simple shortage became catastrophic. As prices rose, the government began heavily subsidizing electricity purchases. This drove prices still higher while it hid the reality of those prices from consumers. Meanwhile, government officials threaten producers with the seizure of their assets and imprisonment if they set foot in California. The result: consumers will see surcharges tacked onto their power bills and taxes for years to come to pay for the subsidies, while investors who planned to come to California to build more power plants decide to invest elsewhere.

There is a very simple truth that California’s governor just can’t seem to grasp: governments can hide prices, but they cannot set them. When Gov. Davis bought power for 50-cents per kilowatt-hour and sold it back to consumers for 7-cents, consumers weren’t spared the other 43-cents. It simply ended up on their tax bill. And now, it has been shifted to their future electricity bills.

It is ironic that at a time when the wholesale price of power has fallen 95-percent from its highs a year ago, consumers are paying 40 percent more for their electricity – and will do so for the indefinite future.

There are five principles that our government should restore to the electricity policy of this state.

The first and most important is this: IT’S THE SUPPLY, STUPID. Energy surpluses are to the consumers’ advantage. Energy surpluses create a buyers market. Energy surpluses make it impossible to game the system. But energy surpluses can only exist where people are willing to build new power plants. And they’re only willing to build new power plants when they’re allowed to do so. We must welcome new power plants to this state with open arms – rather than with threats of criminal sanctions, omnipotent and omnipresent government inspectors and the constant threat of expropriation and confiscation.

There is an old adage that this regime does not understand. If you whip a dog, you won’t know where he’ll be, but you’ll know precisely where he won’t be. The more we whip the people who make electricity, we don’t know where they’ll be, but we can be very sure they won’t be in California.

The second principle is freedom of choice. In 1996, consumers won the right to choose the provider that offers them the best deal for electricity. Although the state’s electricity supply collapsed before those choices materialized, the fact remains that the ultimate defense against price gouging is the ability to take your business elsewhere. Gov. Davis and the legislature took that right away from consumers. They should give it back.

The third is fairness. When the price of electricity falls, so should our rates. But they won’t, because of billions of dollars in surcharges Gov. Davis has added to our future electricity bills.

The fourth is the truth. Consumers deserve to know the price they’re paying for electricity when they buy it. This is the only way they can decide how much they need and what they’re willing to pay for it. The Governor’s policies have denied them this information. He has instead bought power at absurd prices and stuck taxpayers and consumers with the bills, without those consumers ever having the chance to say, “No thank you, the price is too high, I’ll do without.”

The fifth is justice. In a just society, a consumer would pay only for his or her own consumption -- no more and no less. When politicians intervene, the politically favored always end up benefiting at the expense of the politically weak. It shouldn’t surprise anyone that family electricity bills have been subsidizing businesses for years.

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