Electricity was not something that was traded before you came along? You
Skilling joined Enron in 1990, and in February 2001 he became the company's
president and chief executive officer. In the regulated electricity markets,
says Skilling, consumers were paying twice as much as they should have for
power. But since power transmission is a natural monopoly, he says, regulation
is necessary in order to ensure that companies have open access to the
pipes. FRONTLINE interviewed Skilling on March 28, 2001.
And many people still say it shouldn't be traded, that it's a vital
commodity like oxygen. [They say] you're playing around with our oxygen,
industrial oxygen, if you will.
Do you believe that? Let's stop trading wheat. We need iron. We need the
automobiles to maintain the logistics system. So does that mean we can't trade
steel? These are all markets. ...
The difference is, your family at home, if they don't have electricity, they
not only don't have their computer and their TV, they don't have refrigeration,
they don't have lights. So if the marketplace gets out of whack, as it has in
California where you're buying and selling it, it's the consumers who
I understand what you're saying, but I don't buy it. I just flat out don't buy
it. Any system can fail. We had a regulated system in North America for a
long time that was delivering electricity to consumers at twice what it was
worth. We had a cost structure that was ludicrous. You go around the world
and look at other regulated structures. There are blackouts in most of the
world, consistent blackouts. Where real markets are operating, there's rarely
ever a supply shock.
The problem we have in California is not that we deregulated the market. We
never deregulated the market. The California market today is one of the most
regulated markets in North America. They regulate where you can buy and sell
the product, they regulate the form of contract that you can use to buy and
sell. They won't allow you to go into a ... long-term purchase contract.
That's crazy, absolutely crazy. They have fixed prices to consumers and
they've got a regulatory system that basically prohibits you from building new
facilities. This is a deregulated market? Come on. Deregulate the market;
open it up. Give customers choice. ...
I spent a lot of time in California in 1995 and 1996, where they were coming up
with the method of deregulating the marketplace. ... There were two proposals
that were offered as they were trying to figure out what the method would of
deregulating the market. One was not deregulation at all. ... There was
another model that was called a "bilateral contracting market," which is
basically an open competitive marketplace. They decided not to use that. ...
You cannot have an effectively functioning electricity market if you don't have
a forward market, a contracting market for electricity.
This is the most volatile commodity in the world and you're designing a system
where you're requiring the utilities to purchase all of their power in the spot
market? This is nuts. On the face of it, it didn't pass the smell test. ...
But it was good for the utilities at first. They made money.
The decision was made to move to this particular structure of a marketplace,
and I think the design of that marketplace was not an open competitive market.
It was a way of absorbing stranded costs.
You mean the obligations and the mortgages of the utilities in their nuclear
power plants and other facilities?
Right, and that bucket of money the utilities needed to recover. They call it
stranded costs. In any open competitive market, they call it bad decisions,
but we got a whole new nomenclature in the power business, so they needed to
recover stranded costs. ...
So if they go bankrupt, that's their problem, from your point of view? They
get what they deserve?
I wouldn't quite say that, because the deal with the devil was constructed by
the regulators and I think it was take it or leave it. ... I would not have
wanted to be in a position the utilities were in, because the utilities were in
the position where the legislature and the regulators were basically saying,
"Look, we have this hammer over your head. You guys have stranded costs.
We're not going to allow you to pass them through. We will allow you to pass
them through if you agree to this market structure." So the utilities said,
"OK, we agree to the market structure," and it got real close to working.
Unfortunately, they agreed to a market structure which was a bad market
structure, and I think anybody other than a regulator would have seen that
market structure as a bad market structure. This market structure, it was like
it was designed by the Politburo. Would you have gone to the Politburo in the
Soviet Union and said, "OK, we want you guys to design an open market system
for the emerging new Russian state?" You wouldn't go to the Politburo to
design that marketplace. You'd go to people that understand markets. It never
In California, they say, "[Deregulation] might have worked except what
happened was the state in this plan gave up control over wholesale rates to the
feds, to the FERC in Washington and they did nothing, they refused to
intervene." ... Isn't there a federal responsibility to enforce just and
No. I think if you believe that the market model is deregulation, which is the
model that we would have proposed, the role of the regulator is to ensure fair
practice in the market. ... It's a different form of regulation. They don't
influence the price; they don't do cost-plus pricing. They just make sure the
markets are functioning effectively. That's what the FTC does. ...
The California [Public Utilities Commission] is saying that they got gamed.
The generators gamed them and the natural gas suppliers, in the case of El
Paso, gamed them.
Personally, I don't buy it. I think people are looking for a scapegoat.
You don't think there was any exercise of market power last summer or this
No, I really don't think so.
And there's no evidence of that from your traders or from the people working
No, I think quite the opposite. When this thing was hitting, not only did
everybody have an incentive to, but I think everybody was working extremely
hard to get every possible electron into the California market.
The price was going through the roof.
That's what markets do. That's what people do. Again, coming back to this
issue of, should the feds have stepped in to put price caps on? Well, you put
price caps on, and you don't have an open, competitive market. And in the long
run, that will lead to interruptions and shortages.
Is there any analogy for the business that you're in here, the buying and
trading of energy, particularly electricity and gas? Are you a broker?
No. I think there's probably two analogies. If you cut through it all, we are
selling reliable delivery and predictable prices. The predictable prices--it's
like a bank. A bank borrows money from you as a consumer and they turn around
and they lend it. They try to balance those portfolios, so that no matter
which way interest rates go, they don't get into a liquidity squeeze. ...
For example, if General Motors wants to get a loan, I guess they could come to
me and say, "Hey, why don't you give us your checking account?" The problem
is, with my checking account, when I get my paycheck, it goes up and then it
goes down, all month long. General Motors doesn't want this. General Motors
wants to know they have the money there to finance their plants and finance
their inventories and all that sort of thing. So a bank aggregates lots and
lots of little accounts--so they smooth out in aggregate. They create a
portfolio, which provides a smoother supply of funds, which the bank can then
That's what we do. We aggregate thousands and thousands of producing wells,
thousands and thousands of electricity supplies to smooth them out. Then we
turn around and carve out what you want. ...
You say that you're into regulating the supply and keeping the prices
stable. But you do make more money when the prices are volatile, like in
Because what we sell is predictable delivery, predictable prices and reliable
delivery, when you have a period when prices are not predictable and people are
worried about delivery, the product we're selling has more value. So, yes, in
a period where there are unstable prices and people are concerned about
delivery, they come to someone like Enron. They know that when they sign a
contract with Enron, the gas or the power will show up when they want it at the
price they've contracted for. So that's what they pay us for.
And with all of this brainpower here--all of the computers, the
meteorologists, the people almost 24 hours a day monitoring markets--Enron had
no clue that things were going to get back last summer in California and worse
in the winter?
If people had known, the price would have gone up. It's like the stock market.
In fact, the guy who used to run our trading organization in the old days,
every Friday, we got together and we put a dollar on the table and we bet what
the price of gas was going to be a week later and we did a real bad job. Who
knows? Things happen, and that's the role of markets. Markets balance. ...
So you see the movement toward functioning marketplaces as a learning
process, basically. California screwed up, but eventually they'll get it
I hope so. My concern at the time, back in 1995 and 1996, was that this was so
poorly designed that it could lead to a problem that would discredit
deregulation. Today, people put deregulation and California in the same
sentence. That's wrong. There was no deregulation in California.
You don't feel that consumers should be protected or at least guaranteed a
certain level of electricity service, no matter what the price is?
I know that consumers will do better in a deregulated market. There will be
more price volatility in a deregulated market, because you have to send price
signals. You have to tell people to build more power plants or reduce
consumption. But over the long term, it will be much less expensive for a
consumer if they're in an open competitive market than if they're in a
regulated market, and we've proved that. ...
If you're asking me which way I'd rather have--would I rather have a guarantee
of being fleeced? That is the system we had in place all over this country
three or four years ago. Or you give me an open competitive market--where I
know people like Enron and people like Southern California Edison and people
like Con Ed in New York are battling each other for market share and for
profitability--I guarantee you that I am better served and better protected by
that open competitive market than by having a regulator watching over the
system. We've proven it. ...
Should the language "just and reasonable rates" be stricken from the federal
I absolutely think so. "Just and reasonable" according to who? You have
consumers on Long Island paying 24 cents a kilowatt-hour. That would compare
in Los Angeles to a consumer probably paying 8 cents. And some regulatory
entity has decided that's just and reasonable. You must be kidding me! What
led to that [is that] a whole lot of bad decisions were agreed to by regulators
under the rubric of "just and reasonable."
In every place that there has been an attempt, whether you agree with the
way it happened or not, at deregulation--California, New England, Pennsylvania,
United Kingdom--there's been market abuse. The market's gone through the
No, that's absolutely not true. If you look at the prices in the U.K. since
they opened the market, the prices are probably down 40 percent. In Germany,
they opened the market; prices are down 60 percent. In Scandinavia; probably
down 40 percent. They were better market structures than we have in place.
So, no, I don't buy the premise. ...
Everyone calls California's rules "dumb regulation." I think they recorded
you and you've called it "dumb regulation." This economist says, "What
everyone forgets is that under regulation over a 50-year period, rates were
falling for the last 18 years, adjusted for inflation, and they would have
continued to fall."
I actually absolutely don't believe it. I mean, that was the regulatory system
that allowed us to build $10 billion nuclear power plants.
But the consumer advocate sitting out there is going to say, "We didn't want
the nuclear power plant and Homer Simpson running it. We wanted power. It was
industry. It was the privately owned utility. It was the construction
company. It was the nuclear power industry who wanted it."
It was a regulatory system that allowed the power plants to be built and said
it was just and reasonable, which meant that you could shove it through to a
captive ... consuming base. I have no ability to fire my electricity supplier.
They are monopolists. If they do something really stupid, like build a nuclear
power plant, I want to fire them. I can't do that in a regulated system. ...
Let me switch subjects for a minute to politics, which we didn't cover with
Mr. Lay yesterday. Politics gets involved in your business because you need
things from the government to deregulate markets, right?
... I'm not sure we need anything from the government. I think if you have a
list of what you would prefer, what you would prefer is the government would
get out of the marketplace and allow it to function effectively.
But you have to deal with politics.
You went to [former Secretary of Energy William] Richardson, for example, as I understand it, and asked him to help you get
eminent domain rights to build more transmission lines.
I'm not familiar with that. ...
You'd like to get more access to their transmission lines, but you
We would like the federal government to declare, as it has, that there are
certain facilities and activities that are monopolies--like pipes, distribution
pipes, transmission wires. They are a monopoly. There's only one set of
wires. If they'll allow us to build another set of wires, that's fine. Maybe
we'll build another set of wires. That's not economically efficient, so you
have to regulate those wires to give people access to them or allow us to build
parallel systems next door to their systems.
So that's all we've asked. Let the markets function effectively. Allow no
monopolist to control a key feature of the entire chain. We're just asking for
fair trade practice. And if you think about the change in regulation, change
in regulation is going to move from cost-plus regulation--where the government
is worried about prices and what people can charge--to fair trade practice.
That's the conversion that we need to accomplish in this.
In a sense, old-fashioned anti-trust...
Old-fashioned anti-trust, yes. ...
You've been described as the Bush administration's biggest backer,
financially half a million dollars in contributions, gave George W. Bush
airplanes, and so on. The speculation was that your company would basically be
running energy policy in America.
Yes. Which is nuts, but...
It's nuts, absolutely. ...
The popular conception, at least in the press, has been that because you
guys are so tight with the Bush administration it would be expected that you
would get everything you want. And that, in fact, I think--as Mr. Lay said
yesterday--hasn't been working out that way.
I think the fundamental issue's a little different than that. For example, in
the electricity industry, we are arguing for open competitive markets. For the
incumbent utilities, we are their worst nightmare. There are, I think, 130
publicly owned electric utilities in North America. Add up their total
campaign contributions. What is that number? I'd imagine it's enormous.
We're a drop in the bucket compared to an entire industry that has the interest
of maintaining a monopoly.
So I hope we're effective in Washington. And I think we are, because we come
in with a pretty logical, rational argument, which is we've seen what
regulation will do. Regulation leads to high prices for consumers, and lack of
choice. Markets provide lower prices and more choice for customers. I think
that's where we win. If we can get our story in front of the legislators and
the regulators, I think they understand it. ...
The one thing that seemed to really get a rise out of Ken Lay yesterday was
when I said the words "Southern Company."
If you look around the country right now, where is the least progress toward
open competitive markets? It's in the heart of the Confederacy. The
monopolies are doing a good job there. They're keeping out the competition.
Mr. Lay even said that you go to the Southern Company and say, "Hey, we need
to send some electricity. We have a client." They say, "There's no room," and
then they try to sell it to your client.
That's not just the Southern Company. I don't think there is any electric
utility in North America that has not impeded movement on their transmission
grids at one time or another over the last five years. Not one. ...
What you're telling me [is that] there really is no conspiracy of the major
corporations in America to jack up utility rates in this country--which is the
way a lot of people talk about it in California. You guys are actually at war
with each other. ...
We're trying to compete. What I would like to do is I would like to have the
ability to serve customers. I'd like to put my product offering in front of
them and have them say yes or no. And there are broad areas of the marketplace
in electricity and natural gas where I can't do that. It is against the law
for me to make an offer to a customer.
And there are major corporations that stand in your way?
Yes, the entrenched monopolies.
Is the FERC an effective cop on the beat in Washington to maintain
I think if you compare or contrast gas deregulation to electricity deregulation
... the FERC, in those days [for the natural gas pipeline industry] exerted
very strong jurisdiction over the transmission grid. They basically said, "You
guys are going to open up to competition. Anybody that wants to use your pipes
uses them on an equivalent basis. You can't bias the use of the pipes to
In electricity, FERC has not pushed as hard. It's more complicated because
there are more jurisdictional issues and all the rest of this. But for
example, regional transmission organizations--RTOs, they're called--everybody
agrees they make sense. And FERC comes out with an order that says it's
voluntary. ... If you're the cop on the beat and somebody's stealing apples,
you tell them to stop it. You don't say, "I would like you voluntarily to stop
stealing apples from the shopkeeper."
So, yes, I think FERC has to exert more forceful jurisdiction on the system to
guarantee that people open up these systems to competition.
I'm going to quote the New York Times article about the FERC the
other day. It said that when the FERC went in to investigate whether or not
plants were taken offline, all they did was simply call up the plants. ...
Somebody at Southern California Edison said that's like calling up the burglar
and asking him how business is today.
I don't know what they did in the investigation. But I will tell you that
there is an organization in the gas markets that if somebody believes that the
rules are not being adhered to, they have an enforcement group that is very
effective. The industry knows that if they don't play straight up, they will
be subject to enforcement actions. ...
But as [FERC Commissioner] Pat Wood said to us, when he saw the price of gas
at, let's say, $5 here in Texas or Louisiana and it was $15 or more at the
California border, he said, "There's something wrong here, and there doesn't
seem to be anybody policing that."
I don't know that we've had that big a basis differential between California
and Texas. And if it was there, it might have been a short period of time.
Oh, no. It went up two or three times and more, and it stayed there for
quite a while.
No, it's for very short periods of time, and it's probably come back completely
right now. There are logistics issues in this industry that can lead to
short-term price spikes. And you just expect that. It's a pretty rigid
industry. We need some more capital investment in the industry in transmission
and storage. But I think if you look at the gas market, it operates pretty
efficiently, and if there are price spikes, they tend to be for very short
periods of time ... and they come back again.
If I showed you the numbers in California and the basis differential stayed
at two, three, four, five times what it is here at the wellhead, would you
think there was something funny going on?
The only thing that that would suggest ... [is] that all the pipes are full.
So then my next question would be, are all the pipes full? And if it comes
back that all the pipes are full, I'd say, "OK. We've got to do something to
encourage more new construction." For example, we've just filed a capacity
expansion on Transwestern to California.
That's your pipeline into California?
Our pipeline into California.
Because it's always full.
It has been full. Our pipe is usually full out to California. But given the
fact that there is a clear need for gas out there, you let the markets operate
and you let people come in and try to expand the capacity. So if you see
persistent price increases, it's telling you something, right? It's telling
you that you need more capacity.
Or that the capacity is being manipulated in some way.
That's exactly right, so what you need to have is you need to have a cop on the
beat to ensure that there is fair trade practice being executed in the
Mr. Lay told us yesterday--and I wanted to clarify this--that he thought
that one of the reasons that energy spiked in California is that there are old
plants that had to go out for maintenance and that caused the problem. I went
back and I looked. And the situation was that in October of 1999, forced and
scheduled outages in California were, let's say, 1,000 megawatts. A year
later, in 2000, it's 8,000 megawatts. In November, it's 11,000. So there were
five times the amount of outages. Does that make sense?
I really don't know. It could be. We've been running those facilities really
hard ... this past summer. Demand in California was up 10 percent last year.
That is unprecedented in a developed economy. ... So last summer they were
running these things flat-out, and I would imagine they were deferring
maintenance on all of them at that time. So it might be catch-up time. ...
So when professors--like Professor [Frank] Wolak in Stanford who works with
some other professors at Berkeley at the Business School--say that their
calculations are that there is no real reason, given supply and demand and, I
assume, maintenance, for prices to have gone up as high as they did, then
there's manipulation going on. You dispute that?
Yes. I don't think that's the case. I don't know. I'd love to see their
numbers and see what they're saying. But I would be shocked if there was any
kind of price manipulation going on. ...
So people who are looking for an explanation for what happened in either a
cartel activity, they call it, or a conspiracy. You're here to say it hasn't
I don't buy it. ... I don't know what everybody else does. But I know when the
markets were getting tight, we were doing everything we could to get electrons
into the California market--everything. My guess is that everybody else in the
industry was doing that, too.
So when PG&E complains that they couldn't buy gas through El Paso when
they thought there was capacity open, they're wrong?
I don't know. I would be surprised. There are regulatory mechanisms in place.
If they had not made capacity available that was available, they're in
violation of their open access tariffs, and the FERC can come down on them very
hard. So I would imagine the FERC will look at it and decide if they were in
violation. If they were in violation, they're in trouble. ...
Some people have said that what Enron wants is to, in a sense, dismantle one
of the pillars of the New Deal. ...
We accept the need for regulation of monopoly enterprises. If you have a
monopoly, you need regulation. For example, in the electricity business, there
is only one owner of transmission wires--one--from any location to another
location, because they were granted a franchise, a monopoly franchise. In that
kind of a world, you need a regulator to ensure that everybody gets access to
So, then, it should be run by the federal government? ...
No, I would prefer that you would have a private entity operate the grid
because I think they'll do a better job. But it has to...
It's a private entity operating a monopoly in the public interest. Is that
really what you want?
Regulated to ensure that they get fair access and equal access to that facility
to all comers. ...
So really what you're talking about is changing the nature of
Yes. We're talking about moving from a cost-plus regulation to fair practice
It's interesting. The Republicans are going to take a more active stance
intervening in the marketplace?
Enforcement of fair trade practice. It was Teddy Roosevelt that broke up the
trust. Teddy Roosevelt was a Republican. People want to have open competitive
markets. They want fair competition. It's the American way. I think that's
as Republican as apple pie--fair trade practice. ...
I know you read the California press that calls you "pirates." ... When you
hear people say "pirate, loan shark, profiteer," what's your reaction?
... 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.
You are the good guys?
We are the good guys. We are on the side of angels. ...
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."
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. ...
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
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.
But you know what I mean--you play the game hard. You take it right down to
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
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