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Interview: jeff skilling
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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.
Electricity was not something that was traded before you came along? You invented that.

Right. ...

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 pay.

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. ...

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. 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 happened. ...

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 reasonable rates?

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 winter?

No, I really don't think so.

And there's no evidence of that from your traders or from the people working here?

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 lend out.

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 California?

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 right?

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 statutes?

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 ceiling. ...

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 can't.

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?

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 competition?

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 yourself."

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 marketplace. ...

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 been happening?

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 them. ...

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 regulation.

Yes. We're talking about moving from a cost-plus regulation to fair practice enforcement. ...

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 buck.

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 the--

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. ...

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