Understanding Energy "Congestion" and Deregulated Electricity Markets:
Learning from Enron
Understanding Energy "Congestion" by Kurt Reymers, Ph.D.,
STOPNYRI website admin
posted on 04.28.2007
NYRI justifies their project by identifying their interest in relieving "energy congestion" that exists between upstate and downstate New York. In discussing the energy "bottleneck" that exists in New York, their slick public relations machine leaves the impression that this congestion is related to energy supply, and that blackouts (like the 2003 northeast blackout or the rolling blackouts in California in 2001) will be the inevitable result of failing to build their transmission line through beautiful central New York.
The reality? The use of the term "energy congestion" today does not refer to the actual supply of electricity and the reliability of that supply. Rather, it refers to "market congestion." Electricity is now traded on the free market, like "pork futures" or orange juice (the details are somewhat complex). Since the deregulation of electricity markets in 1996, New York has been one of 16 states in the nation to create laws allowing electric utilities to be managed, owned and controlled by private industry in the free market system, virtually unregulated by state governance once running. The reason for deregulation was that it would reduce costs and increase efficiency. However, privatization has not reduced prices significantly in most areas, and has increased consumer prices in many regions (see chart to left; Source: USA Today, Electric Deregulation Fails To Live Up To Promises As Bills Soar, 4/21/2007).
Using scary sound bites like "congestion" and "blackouts", new companies like NYRI are using fear tactics to create an impression in the minds of the public that without their projects we will be neglecting critical electricity infrastructure. This is not the case. Just last June, the New York Times reported that the New York City region "will be able to meet its growing power needs for at least four years longer than originally anticipated, potentially delaying the need for new power plants until 2012" (source: New York Times, Energy Needs Not As Urgent As Anticipated, City Says, 6/26/2006).
What is electricity congestion?
According to the National Rural Electric Cooperative Association (NRECA), electricity "congestion" is clearly not related to the physical electrical supply.
“Congestion occurs when available, low-cost energy cannot be delivered to all loads because of limited transmission capabilities. In such an event, higher-cost generating units must be dispatched in the import-constrained areas...”
So, rather than reducing load during peak times through conservation efforts or institute close-to-the-source alternative energy solutions, the solution to congestion offered by our national Department of Energy is to allow privatization in the transmission market to relieve this so-called "congestion," which allows energy hogs to go on wasting a precious national resource, typically without considering the larger impact of their lifestyle (in Europe, and now in New York City, traffic congestion is controlled by charging overusers, not giving them a fee reduction!). Again, congestion does not mean that we lack a steady supply of energy - it simply reflects cost congestion, which can be relieved in a variety of ways.
NRECA continues: “More new generating capacity entered the market between 2001 and 2003 than in any three-year period in U.S. history. The vast majority of this new generation capacity was in the form of natural gas-fired combined cycle (CC) plants and combustion turbines (CTs). Indeed, there was so much entry and so little exit that by 2003 there was excess generating capacity in most regions of the country… fn320.
After a nearly two-year decline in market liquidity following Enron's collapse, trading in financial electricity products during 2004 increased by a factor of ten and increased again by almost that factor in 2005.”
fn320. Source:
Federal Energy Regulatory Commission, 2004 State of the Markets Report: An Assessment of the Energy Markets in the United States in 2004 , A Staff Report of the Office of Market Oversight and Investigations, June 2005, Docket No. MO05-4-000, p. 53 (hereinafter the “FERC 2004 SOM Report”), p. 59.
Source: http://www.nreca.org/Documents/PublicPolicy/RTO_RC_102406_Final.pdf
Will congestion-related transmission projects like NYRI lower prices for everyday consumers?
The NRECA: 
“In fact, more sophisticated observers never expected retail competition to provide savings opportunities for the vast majority of retail consumers. Large industrials, for example, were quoted in the mid-90s as saying that, “big dogs eat first.” fn10. They expected to drive their costs down at the expense of residential consumers. Many consumer advocates also predicted that residential consumers would fare poorly in competition.
The rate freezes that are causing havoc today were the best that those advocates could negotiate in light of the political power that competition supporters had at the time they were adopted.
The Joint Task Force should recognize in the final report that vertically integrated utilities operating under the regulatory compact successfully provided American consumers with safe, reliable, and affordable power for over 60 years at consistently declining rates. There were, of course, some regulatory failures. But the cost of those failures paled in comparison with the costs to consumers caused by the melt-down of the California market and the enormous rate increases being experienced in a number of restructured states today as they begin to remove price caps.”
fn10: See, e.g. , John Anderson, ELCON Statements at NASUCA Conference (March 15-16, 1999), reported in The Energy Report (“Competition will not benefit everyone . . . we're going to do some balancing.”); Electric Utility Shareholders Alliance (Electric USA ) 1998 Comments to OMB re Administration Bill (“In a moment of candor, an employee of one large industrial conglomerate observed: ‘In the world of electric deregulation, the big dog eats first . . . ‘”). Source: http://www.nreca.org/Documents/PublicPolicy/AD05_17_062606_fin.pdf
Note: Despite their statements above, the National Rural Electric Cooperative Association (NRECA) strongly supports FERC's current (2007) congestion designation and has been the top contributor to electric industry lobby in Washington, having donated $1,463,566 (44% to Democrats, 56% to Republicans) in the 2006 election cycle. Source: The Center for Responsive Politics, http://www.opensecrets.org/industries/contrib.asp?Ind=E08&cycle=2006
How did Enron manipulate the markets in deregulated California in 2000-2001?
Enron was primarily a private energy market company capitalizing on deregulation in California and elsewhere. One strategy used by Enron for bilking Californian energy consumers was called the "Death Star" strategy:
“The Death Star strategy was the name that Enron gave to their practice of shuffling energy around the California power grid to receive payments from the state for "relieving congestion." According to the company's own memo they would be paid "for moving energy to relieve congestion , without actually moving any energy or relieving any congestion."
For example, if the California power grid was congested with energy flowing south, Enron would schedule energy to be transmitted north to Oregon . They would receive a payment from California for apparently relieving congestion on the grid. Then Enron would schedule the energy to be transferred back to its point of origin, but not through California . Ultimately the energy would end up right back where it started, and Enron would be paid by California without actually putting any electricity on their grid.
Other fraudulent Enron strategies included the "Fat Boy" and "Ricochet" schemes designed to overschedule power transmission and "launder" megawatts (like money laundering, only using energy instead), respectively.
Source: Death Star (business). (2007, April 15). In Wikipedia, The Free Encyclopedia. Retrieved 13:06, April 28, 2007, from http://en.wikipedia.org/w/index.php?title=Death_Star_%28business%29&oldid=123103162
What can we learn from the Enron case?
David Freeman, former New York Power Authority leader and the first person to coordinate the national energy policy under President Lyndon Johnson, suggests that "[in] the free market, it's OK for the price of fur coats to go up and down. It's OK for carrots to go up and down, or almost anything else that you can do without or that you can store. It's not OK for the oxygen of life in this high-energy civilization. That's the lesson we need to learn. The economists, they have an interesting word; it's a Freudian slip. They call it "externalities." That's their word for saying that the impact on the consumer, you just have to live with it. After all, it's kind of like deregulating the police department and saying, "Well, we have a shortage of police, a few people get murdered, it doesn't matter. Then we'll hire more police and it'll all work out." They are without any human feeling as to the impact on the consumer, or, actually, the impact on small, independent producers when the price gets too low. This volatility, what we're learning, is no good...
(Source: PBS Frontline, "Blackout")
“There is one fundamental lesson we must learn from this experience: electricity is really different from everything else. It cannot be stored, it cannot be seen, and we cannot do without it, which makes opportunities to take advantage of a deregulated market endless. It is a public good that must be protected from private abuse.
If Murphy's Law were written for a market approach to electricity, then the law would state “any system that can be gamed, will be gamed, and at the worst possible time.” And a market approach for electricity is inherently gameable.
Never again can we allow private interests to create artificial or even real shortages and to be in control. Enron stood for secrecy and a lack of responsibility. In electric power, we must have openness and companies that are responsible for keeping the lights on.
We need to go back to companies that own power plants with clear responsibilities for selling real power under long-term contracts. There is no place for companies like Enron…”
Source: Testimony of S. David Freeman Before the Subcommittee on Consumer Affairs, Foreign Commerce and Tourism of the Senate Committee on Commerce, Science and Transportation, Wednesday, May 15, 2002, http://commerce.senate.gov/hearings/051502freeman.pdf
Just how manipulative and deceitful were the Enron executives?
This interview with Jeff Skilling of Enron, from the PBS Frontline program “Blackout” shows how little humility the directors of the Enron plot had:
Frontline: I know you read the California press that calls you "pirates." ... When you hear people say "pirate, loan shark, profiteer," what's your reaction?
Skilling: ... I was up talking to some of our people in Portland , and they hear it and they read it in the newspapers. They don't feel good about it. What I told them is, "Look, guys, the business we're in is making it better for everyone. We're bringing the cost down; we're giving consumers choice." And you have a tough political situation in California . No one likes to raise rates. ... So I think it's probably easier to find scapegoats than it is to really face that challenge, but yes, it makes us feel bad. We are doing the right thing. We are working to create open, competitive, fair markets, and in open, competitive fair markets, prices are lower and customers get better service.
Frontline: You are the good guys?
Skilling: We are the good guys. We are on the side of angels. ...
Frontline: There's a lot of feeling that it was a bad experiment and, as David Freeman of L.A. Water and Power said, "Look around the country. Wherever there's public power, the lights haven't gone out."
Skilling: Yes, and what are the customers paying for public power? There are enormous subsidies to public power in the form of tax preferences. If you adjust for tax preferences in public power and you look at prices--delivered prices to consumers for public power against an open competitive marketplace--I guarantee you the open competitive marketplace will be cheaper. ...
Frontline: A general comment that I've heard about Enron, and to a certain extent about you, [is] that you're very, very smart, very aggressive. You'll lay out your argument, "The rules in California are terrible," but then once you see what the rules are, you guys push those rules to the edge in an effort to make a buck.
Skilling: That's probably fair, yes. Once you set the rules to a marketplace, we adhere to the rules. If that's what you're saying, that's what we do.
Frontline: But you know what I mean--you play the game hard. You take it right down to the--
Skilling: We adhere to the rules. If they set up rules, we adhere to them. It's like the tax code. No one expects you to pay more taxes than what you owe. And so you're expected to interpret the rules and conduct your business in that fashion...
Epilogue: For his unique interpretation of "the rules," on October 23, 2006, Jeffrey Skilling (at 52 years of age) was sentenced to 24 years and 4 months in prison for his role in the pervasive fraud and conspiracy that led to the bankruptcy of Enron. He was also forced to give up $45 million dollars earned through his fraudulent practices. There is no parole for federal crimes and since Skilling was sentenced to more than seven years, he can't serve his term in a minimum security facility.
Enron was the second largest bankruptcy in the history of the world. An estimated $30 billion was lost by Enron investors; $1 billion was lost from people's retirement accounts nationwide.
View video from the PBS Frontline program “Blackout”, including the interview above (first video excerpt) at http://www.pbs.org/wgbh/pages/frontline/shows/blackout/etc/video.html
While NYRI is admittedly not (yet) as big a company as the infamous Enron corporation, we still have no idea who the investors are in the $1.6 billion project and what their plans are for the future of New York's electrical markets.
David Freeman noted above that "Enron stood for secrecy and a lack of responsibility. In electric power, we must have openness and companies that are responsible for keeping the lights on." NYRI has demonstrated that they are manipulative, deceitful, secret, and basically unwilling to work with the public in an open manner. Their dissembling at public meetings, Senate hearings, and in press releases makes it clear that they share these characteristics with Enron. See our list of the top ten lies told by NYRI for more information on their deceitfulness.
As former Congressman Sherwood Boehlert said in a letter to Department of Energy Secretary Samuel Bodman, "NYRI has sacrificed the objectivity required to make energy decisions on behalf of the public interest." The letter is so condemning of NYRI it is worth reprinting the bulk of it here:
There are two enormous problems inherent to their request: one is a matter of public interest and the other is a bizarre story of incompetence.
By proposing to both construct and operate 200 miles of high voltage power lines, NYRI has sacrificed the objectivity required to make energy decisions on behalf of the public interest. As you no doubt agree, Mr. Secretary, we are living in an era when sound energy decisions require objectivity and transparency. NYRI is a private company, and one that has proven its incompetence by beginning their proposed public works project by infuriating the public. Were it not so clearly rooted in arrogance, their bumbling would be a point of amusement. However, there is nothing amusing about the potentially-devastating impact their proposal could have on Upstate New York.
At each subsequent exchange with the public, NYRI has been glib and condescending to property owners and local officials. They have withheld information and sought to usher in their agenda on rhetoric and scare tactics by relying on the yet-unwritten rule in the Energy Policy Act of 2005, regarding national energy corridors.
When private and public interests intersect, it is incumbent upon the private sector to win the public trust. Not only is NYRI seemingly unconcerned with the property owners their proposal will directly impact; but they are attempting to skirt New York State regulators - despite the fact that the project is encompassed entirely within New York State.
Apparently, they view the rule as a vehicle to circumvent state authority and state interests; whereas my explicit understanding of the Energy Policy Act of 2005 is that any group must first go through the state regulatory process and, if one year passes without action, then their application may be considered at the federal level.
I would be hard pressed to entrust a matter of tremendous public importance to a group who has exhibited, at every phase, the utmost contempt for the public and transparent dialogue. The Northeast is clearly in need of utility upgrades; however, this proposal raises questions, many questions, and the cavalier response from NYRI seem to be "trust us, we know best." That qualifies as one of the most absurd statements from a source that has yet established any public trust.
I don't mean to get preachy, but as I see it the government is of the people and not, as NYRI's insulting action would lead one to believe, an institution with the means and will to skirt the very people from whom we derive power.
Thank you for looking into the matter, Mr. Secretary. I appreciate your attention and look forward to hearing your comments.
NYRI is clearly not working with the greater interest of the public in mind. Furthermore, the government incentives provided for new transmission facilties in the 2005 Energy Policy act encourage a raping of the public commons by companies like NYRI who, frankly, are only in it for the money. This is made abundantly clear by the testimony to the NYS Senate given by Counseler Leon Singer, below.
Whose money is being invested so as to reap no doubt fantastic returns? We have no complete idea. Here's who NYRI themselves say they are:
"NYRI is a New York Transportation Corporation and is a wholly owned subsidiary of Colmac NYRI, Inc., a Delaware corporation. Colmac NYRI, Inc., is owned 50% by American Consumer Industries, Inc (ACI), a Delaware corporation and 50% by Asgard Resources Limited (ARL), a corporation formed under the Canada Business Corporations Act. All of the ownership interests of ACI and ARL are held by Canadian citizens. ACI is not a public corporation. More than 50% of the equity of CI is controlled by Willis S. McCleese. ARL is not a public corporation. More than 50% of the equity of ARL is controlled by Richard A. Muddiman." Source:Transcript of the NYS Senate Energy Committee hearing on NYRI, June 15, 2006, Norwich, New York. (NOTE: the PDF document linked here is 8.5MB and may take time to load).
This information was provided only after the hearing by NYRI's legal counsel, Couch White, LLP, in response to the direct question from Senator Libous: "Gentlemen, I would ask that if you could provide this Committee in writing the officers and investors in American Consumer Industries, the officers and investors in NYRI, the officers and investors in Co-Mac[NYRI], Inc.... the officers and investors for those companies, also. You mentioned that -- when Senator Meier was questioning you -- that you are going to do this for the public good, and I believe both my colleagues, Senator Meier and Senator Seward, brought up that there was no public good for us here. And I think that was pretty evident. And I am not going to rehash that because we don't need to do that. You are, obviously -- your principals, the people who hired you, are in this for the public good or to make money? Reply by Mr. Singer: We can't answer that question. Libous: Could you speculate on it? Singer: No."
"Silence is golden," as the old German proverb goes.
Perhaps in other markets, speculation, secrecy, and disregard for public opinion could be expected and sanctified - after all we are still a capitalist nation and it is free-market enterprise that created the enormous wealth we benefit from today. But in a natural monopoly such as the electricity distribution market, the kind of deregulation provided for by the 1996 regulatory reform and the 2005 Energy Policy act does not serve the public interest and encourages the creation of more "Enron's" in the future. In all likelihood, NYRI will be one of them.
STOP NYRI, Inc. seeks to bring to public awareness these important aspects of energy markets, congestion and deregulation so as to encourage intelligent, community-oriented, and public decisions about our collective energy future.
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