California Reamin': California and the Power Pirates
from The Best Democracy Money Can Buy published by ZNet
April 23, 2003
On April 10, 1989, Jacob "Jake" Horton,
senior vice president of Southern Company's Gulf Power unit, boarded the company plane to confront his board of directors
over the company's accounting games and illegal payments to local politicians. Minutes after takeoff, the plane exploded.
Later that day, police received an anonymous call: "You can stop investigating Gulf Power now."
Fast-forward to December 2000. The lights
in San Francisco blinker out. Wholesale electricity prices in California rise on some days by 7,000 percent, and San Francisco's
power company declares bankruptcy. Dick Cheney, just selected vice president by the U.S. Supreme Court, begins a series of
secret meetings with power company executives. On their advice, within three days of Bush's inaugural, his Energy Department wipes away
regulations against price gouging and profiteering ordered that December by outgoing President Clinton.
Out of Cheney's off-the-record meetings
came the energy plan released by the president in May 2001. Billed as the response to the California electricity crisis, the
president told us the plan contained the magic potion to end the power shortage. Then, after the horrors of September 11,
2001, the plan was remarketed as a weapon against Middle East terrorists. Nasty-minded readers may believe the Bush energy
program, still rolling around Congress, is just some pea-brained scheme to pay off the president's oil company buddies, fry
the planet and smother Mother Earth in coal ash, petroleum pollutants and nuclear waste. In truth, it's more devious than that.
There is a link running from Jake's exploding
plane to blackouts on the Golden Gate Bridge to the polluters' wet dream of an energy plan offered by Cheney and Bush. They
are connected through the mystical economics of electricity deregulation. Beneath the murky surface of this odd backwater
of market theory is a multi-continental war over the ownership and control of $4 trillion in public utility infrastructure-gas,
water, telephone and electricity lines-a story that began a decade earlier with Jake Horton and continued through a coup d'Útat
in Pakistan and the bankruptcy of a company called Enron. Andersen's Magic Show
In 1989, I was brought into an investigation
of Horton's employer, Southern Company of Atlanta, by Georgia civic groups suspicious that Southern had overcharged its several
million electricity customers in Georgia, Alabama, Mississippi and Florida. I focused on transcripts of tape recordings made
a year earlier by accountant Gary Gilman. Wearing a hidden microphone, Gilman recorded his fellow executives detailing the
method by which Southern charged customers $61 million for spare parts which, in fact, had not been used. Like all good accountants,
Southern's kept a careful record of the phantom parts in electronic ledgers-found in the trunk of one executive's car. I obtained
copies of the documents, spending months decoding the accounts, gaining an insight into what would, a decade later, lead to
blackouts and bankruptcies from California to Argentina.
There's two sets of numbers-one for government
and one for the boys at the top of the company structure to keep track of reality. Here's where it turns a little technical.
The parts held in inventory should have been "capitalized," that is, listed as an investment in "Account 154." In fact, they
were "expensed"-to use the accounting lingo-and charged as if they were used. The difference between capitalizing and expensing
is the difference between having your cake (investing) and eating it (using it up).
from one account to the other cheated the IRS and bill payers out of millions.
Shortly after Horton's death, a grand
jury in Atlanta was prepared to indict Southern Company's Georgia unit for the spare-parts accounting manipulations. But,
invoking a rarely used procedure under the federal racketeering statute, Bush Sr.'s Justice Department overruled local prosecutors
to quash the request for indictment. The reason? Keeping hidden accounts in secret files and booking costs into the wrong
accounts may be a bit unusual, and may have cost the public a bundle, but it was approved at each step by that upstanding
auditing firm, Arthur Andersen.
Indeed they had. I found one letter from
Andersen coaching the power company executives on how to wave a bookkeeping magic wand over the spare-parts records to make
the problem disappear. I suggested at the time, "Why not indict Andersen?" and proposed a civil racketeering claim against
the accounting giant, naming them as Southern's coconspirator. My suggestion, not surprisingly, was dismissed with a chuckle
by lawyers who understood that politics trumps law. The signal from the Bush administration was clear enough: Hire Andersen,
knead your account books like cookie dough, and get a "Get Out of Jail Free" card.
The New World
What about poor Jake? "Looks like he saw
no other way out," says former Southern chairman A. W. "Bill" Dahlberg of the airplane explosion. A suicide? Jake's brother
doubts it: He says Horton had planned to meet with the U.S. attorney in Atlanta. Jake apparently had a lot to say about Southern's
charging consumers for loads of coal bought from an affiliated mining company. At times the train cars were filled with rock
instead of coal.
Jake's death and the failure to indict
Southern and Andersen in 1989 marked the radical turning point, albeit unseen at the time, in the way corporate America would
do business-or, as it turned out, fail to do business.
This new world business order would be
lead by power, water, and natural gas corporations and telecommunications (what we used to call phone companies). Until the
1990s, U.S. state governments kept a tight lid on these monopolies' profits. America's old regulatory system, based on public
hearings and open records, was uniquely democratic, found nowhere else in the world. This was a legacy of the Populists, an
armed and angry farmers' movement whose struggles from 1900 through 1930 bequeathed to Ameri- cans just about the lowest priced,
most reliable electricity services in the world-which is, of course, anathema to power company shareholders.
In 1933, President Franklin Roosevelt
caged the man he believed to be the last of the power pirates, Samuel Insull, a wheeler-dealer whose electricity trust companies
were cesspools of rigged prices, cooked books, watered stock and suffocating monopoly. Roosevelt hit Insull and his ilk with
the Public Utility Holding Company Act, the Federal Power Act and the Federal Communications Act which, combined with state
laws, told electricity, gas, telephone and water companies when to sit, stand and salute. Prices and profits were capped;
the tiniest asset had to be accounted for; issuing stock and bonds required government approval; sales between affiliated
companies were controlled; "offshore" and "off-books" subsidiaries were prohibited and lights kept on by force of law: no
blackout blackmail to hike prices. Furthermore, FDR made political donations from these companies illegal-no soft money, no
hard money, no money period. Roosevelt's rules held for half a century. And utilities hated it, for good reason. Southern
Company was typical: In the 1980s, it was an unremarkable regional electricity company dying the death of a thousand financial
cuts. Consumer groups used the old regulatory hearings to force Southern to eat the company's dumb investments on overpriced
nuclear plants. As a result, Southern showed nothing but cash losses for years.
Then CEO Dahlberg, who took over after
Horton's death, conceived an unorthodox way out for Southern from its regulatory and financial troubles. The company had tried
breaking the law without much to show for it (it pled guilty to political donations, a felony crime, and suffered penalties,
though not criminal charges, for its accounting games). Now it would go straight, not by adhering to the law but by changing
the law to adhere to Dahlberg's plan. That plan was not small stuff: The near-bankrupt local company would take over the entire
planet's electricity system and, at the same time, completely eliminate from the face of the earth those pesky utility regulations
that had crushed his company's fortunes. California blackouts were just a hiccup on the road to the astonishing success of
this astonishing program. Today, in 2003, Southern is by far the biggest power company in America (that is, since the collapse
In early 2001, America's papers were filled
with tales of the woes of the two California electric companies bleeding from $12 billion in payments for electricity supplies.
Yet, at the time, virtually nothing was said of the companies collecting their serum: Southern and a half dozen of its corporate
fellow travelers- Entergy International of Little Rock, Duke Power of North Carolina, and Texas operators Reliant, TXU, Dynegy,
El Paso Corp and Enron. Until November 2001, when America discovered a hole in Houston where Enron used to be, the U.S. press
could not be bothered with the who, how and why of these companies. True, there were some profiles of Enron's chairman, Ken
Lay, but these were drooling hagiographies portraying Enron's chairman as a cross between Einstein and Elvis.
America's media have finally taken note
of the Harry Potter accounting methods of many U.S. corporations. But I have yet to read the whole truth: that this ledger-demon began
with the senior Bush's crusade to eliminate Roosevelt's pesky rules, and crucially, the utility accountants' rule book, the
Uniform System of Accounts.
Electricity deregulation, voted into law in 1992, the last big gimme for Bush donors before the elder Bush left the White
House, tore the heart out of FDR's Holding Company Act. At the same time, Bush's Federal Communications Commission castrated
its own oversight system.
As a result, the Uniform System of Accounts
became a museum curiosity. Without it, power and telecommunications companies could outfit their balance sheets with antigravity
shoes. It is no accident that ten of the twenty mega-bankruptcies of the last two years involved the utility industry. Two
companies in particular -WorldCom and Global Crossing-became virtuosi at the trick that got Southern in trouble in the pre-deregulation
days: switching capital and expense items. When Global Crossing paid Bush that $13 million in stock for one chat in 1998,
was it for his golden words or gratitude for his bulldozing the stop signs and safety rails that once constrained Global Crossing's
industry? What was a crime in 1980, by 2000 became "entrepreneurship." These so-called reforms didn't come cheap. The electric
utility industry showered pols with $18.9 million in the last presidential campaign spree, though for every dollar Gore wheedled
from the power players, Bush took seven.
But the official records of donations
don't tell half the story. GreenMountain.com is one of the power-selling creatures created in Bush Sr.'s deregulation laboratory,
founded by Sam Wyly. The Wyly clan of Texas are billionaires listed with the Federal Elections Commission as the eleventh
largest contributor to George W. Bush's campaigns, with donations totaling a quarter million dollars. But that's just the
tip of the cash-berg. The Wyly's laid out a crucial $2.5 million for Bush that you won't find on any campaign report. These
millions paid for venomous advertisements aired in March 2000 smearing Senator John McCain who was, until then, wiping the
electoral floor with Bush Jr. in the Republican primaries.
Bush Sr.'s killing federal regulations
in 1992 put Sam Wyly in the power biz. Still, there were restrictions at the state level. Bush Jr.'s deregulation act, which
Wyly's company helped draft, gave Wyly the right to sell into that big Western market. On the day George W. signed the Texas
law, Sam Wyly said, "Governor Bush's hard work and leadership have paid off." And, it eems, in March 2000, the Wylys paid
of a Woman in Authority
The cloudburst of cash for politicians
was not limited to, nor really begun, in the USA. The success of the plan by Southern, Enron and their Texas followers for
world power conquest (or, if you prefer, "vision for globalization of energy supplies") hinged on Britain. As the economist
J. M. Keynes said, "The mad rantings of men in authority often have their origins in the jottings of some forgotten professor
of economics." The professor in question here is Dr. Stephen Littlechild. In the 1970s, young Stephen, a Briton who studied
at the University of Texas, cooked up a scheme to replace British government ownership of utilities with something almost
every economist before him said simply violated all accepted theorems and plain common sense: a free market in electricity.
The fact that a truly free market didn't exist and cannot possibly work did not stop Britain's woman in authority, Prime Minister
Margaret Thatcher, from adopting it. It was more than free market theories that convinced her. Whispering in her ear was one
Lord Wakeham, then merely "John" Wakeham, Thatcher's energy minister. Wakeham approved the first "merchant" power station.
It was owned by a company created only in 1985-Enron. Lord Wakeham's decision meant that, for the first time in any nation,
an electricity plant owner, namely Enron, could charge whatever the market could bear . . . or, more accurately, could not
It was this act in 1990 that launched
Enron as the deregulated international power trader. Shortly thereafter, Enron named Wakeham to its board of directors and
placed him on Enron's Audit and Compliance Committee, charged with keeping an eye on the company's accounting methods. In
addition to his board fee ($10,000 a month), the company paid him for consulting services. If that strikes you as a conflict
of interest, conflict is Wakeham's forte. His lordship took the Enron posts while remaining a voting member of Parliament.
In Britain, that's quite legal.
Following the Enron deal, Wakeham pushed
the British government to sell off every power plant in the nation along with all the wires from plant to home. Thatcher then
launched the England-Wales Power Pool, Professor Littlechild's dream: an auction house for kilowatts that would set electricity
prices for the nation based on free market principles. On paper, the Power Pool was an academic beauty to behold. The new,
privately owned power plant owners would bid against each other every day, ruthlessly undercutting each other's prices for
the right to sell to England's consumers, who would, as a result of this market competition, benefit from lower bills.
That was the theory. I can't say whether
the market scheme failed in minutes or days, but the Power Pool quickly became a playground for what the industry called "gaming"-bid
manipulation techniques that allowed the deregulated companies to expertly vacuum the pockets of consumers. Electricity prices
jumped and the owners of the power plants saw their investments grow in value by 300 percent and 400 percent virtually overnight.
Thatcher put the nutty professor Littlechild
in charge of regulating the power industry mess. When his term ended in 1998, he left behind a "free market" that worked like
a fixed casino and stank of collusion. Littlechild then landed on the board of one of Enron's strange little affiliate companies.
There was no way that Southern was going
to let Enron and the Brits have all the loot to themselves. In 1995, the Atlanta company, besieged at home by consumers and
regulators, bought up England's South Western Electricity Board. In England, Southern could charge double what they charged
in Georgia and earn five times the profit allowed by U.S. regulators. This was the first purchase ever by an American power
company outside the United States. The takeover was new, bold-and illegal.
Or, at least the law said so. Bush Sr.
had mangled and beaten FDR's regulations, but many still stood, including the prohibition, written in clear no-nonsense language,
that barred U.S. electric companies from gambling on foreign operations (or even operating outside their home states). But
as Enron showed, rules were made to be broken-or "reformed." Despite a formal complaint by elderly "New Deal" Democratic congressmen,
the Securities and Exchange Commission blessed the Southern Company purchase after the fact. Getting the SEC to bend over
wasn't easy, but then, Southern had political insurance: Entergy International of Little Rock, Arkansas. Bill Clinton was
president, and Entergy, his wife's former client, also wanted a piece of the English action.
Entergy, the near-bankrupt owner of some
badly built nuclear plants and lines running across Louisiana and Arkansas, soon became the proud owner of giant London Electricity.
In just eighteen months, Entergy would "flip" London to the French government for a gain of over $1 billion. The return on
investment was infinite; Entergy bought London without putting up one dime in equity cash.
Behind Southern and Entergy came TXU of
Dallas and other Americans, which within three years owned 70 percent of the British power distribution market, no money down.
Southern nearly grabbed Britain's biggest power seller, but reports of Horton's demise and unsavory stories of accounting
trickery forced the Tory government, then fighting a losing election battle, to ban the takeover.
The new government of Tony Blair was outwardly
hostile to the American colonizers. But in 1998, while working undercover for the Observer newspaper, I secretly recorded
the details of a backroom deal between government ministers and a power company executive to let Reliant of Houston take over
the second largest company in England. I also learned that Blair had personally overruled his regulators to allow Enron and
Entergy to build new deregulated power plants-the special request of the Clinton White House.
By 1998, after boarding and capturing
England, U.S. power buccaneers, led by Southern, Enron, TXU, Reliant and Entergy had grabbed generating stations and wires
on every continent save Antarctica.
But not in the United States, not at first.
Americans believe in free enterprise, but we prefer cheap electricity and nearly free water, the product of a combination
of our tight regulations and government ownership. Almost alone on the planet, the USA stubbornly exempted itself from what
the World Bank calls "neo-liberal reform"-and this rankled the new international players who hungered to work the free market
con in the USA. The industry lobbyists landed on two beachheads, Texas and California, the only two states with electric systems
big enough, and governments Republican enough, to convert to "free" markets.
California was the first to fall over
the electricity deregulation cliff, but Texas was the first to leap-with a push from its young new governor, George W. Bush.
With Texas companies raking it in worldwide, it's not surprising that the rush to deregulate started in the Lone Star State.
But there was a technical problem that
delayed the ripping down of regulation in Texas. To understand why requires a little lesson in engineering. The power stations
of Texas produce three things: electricity, pollution and political donations. And, as always, Texas is biggest in all three.
Take, for example, the giant power plant named, with admirable candor, Big Brown, owned by TXU. When it comes to filth, Big
Brown is champ. A strip mine near Waco stuffs Big Brown's furnaces with lignite, a kind of flammable dirt. TXU dumps 389,000
tons of contaminants into the air each year, making it the number-one polluter in the number-one polluting state in the USA.
Bush made Dallas residents gasp (literally)
when he signed a "grandfather" statute exempting some TXU plants from laws requiring scrubbers for these fossil-burning dinosaurs.
The other beneficiary: polluter number two, Reliant. TXU and Reliant popped over half a million dollars into Bush's second
In 1995, the Clinton Justice Department
opened an investigation into evidence of conspiracy by TXU and Reliant to monopolize the Texas power lines. The promised "competition"
created by deregulation could placate the Feds and make Enron's Ken Lay a very happy man at the same time. Problem was, TXU
and Reliant were stuck with Big Brown and plants so costly, inefficient, dangerous and contaminated the companies would lose
billions in a true competitive market.
was always cautious to avoid conflicts of interest-in this case, the conflict between the interests of his top donors, Enron,
El Paso Corporation and Dynegy (power traders) and TXU and Reliant (power producers). Former Enron lobbyist Terry Thorn told
me straight up this quandary for the governor kept Texas deregulation stalled for two legislative sessions until Bush found
a third party to pick up the tab: Texas electricity customers. In 1999, the governor, the power traders and power producers
shook hands on a deal to add a $9 billion "stranded cost" surcharge to Texans' electric bills.
Ken Lay had another concern. Bush's
stranded cost surcharge would let the games begin, but if the deregulation house of cards ever folded, there would be hell
to pay because one set of rules remained: tort law, the unique right of Americans to sue the bastards who rip us off. In 1994,
the year Bush ran for governor, Lay founded Texans for Lawsuit Reform. Lay doesn't fool around: TLR's PAC pays out a million
dollars a year to Lone Star politicians. In 1995, Bush's first big move as governor was to call an emergency session of the
legislature to act on TLR's agenda. "Tort reform" in the hands of Bush and Lay became tort deformed. The governor pushed through
the legislature new restrictions on the right of stockholders, workers and pensioners to sue rogue executives. It looks like Ken Lay thought of everything.