Free Lunch (23 page)

Representative Kevin Bailey, a Houston Democrat,
voiced the loudest concern. “We've increased stranded costs considerably in this bill from the previous bill,” Bailey told Wolens,
doubling the figure to $9 billion. That was the equivalent of about $1,200 for each household in the state.

At one point Bailey suggested that Wolens, his fellow Democrat, was looking out for the bosses, not for the
working people who are the party's base.

“The big boys have been backing up the truck and
loading it up in this bill,” Bailey said, while “the little guys aren't able. They don't even have a car to back up, and they don't have a
trunk or the car to get anything in it.”

The hearing room audience erupted in
laughter.

Wolens was annoyed. “Mr. Bailey, you want to start discussing what the big boys
have done on this bill? Because I will spend the next two hours—”

“No, no,” Bailey quickly
interjected, again drawing a laugh from onlookers as he tried to defuse the situation.

“Mr.
Bailey, no, no, no, no, no, no, no,” Wolens persisted, trying to talk over his counterpart. “Mr. Bailey, I'll let you complete, but I'll let
you know I ain't taking that sittin' down or standing up. I have spent an enormous amount of time on this bill. I have spent more
time than I ever thought I was going to be spending on it. And for you to suggest what the big boys have been doing on my time
rubs me a certain way.”

Bailey raised the question of whether there was any need to change
the system for setting electricity prices at all. He cited a report by the Texas Office of Public Utility Counsel, the state's consumer
advocate in electric rate cases. It predicted that sticking with the existing system of regulating electric utilities would produce lower
prices, a drop of as much as 16 percent by the end of 2003.

It was unfair, Bailey argued, for
residential and small business customers to pay almost all of the stranded costs while the big industrial customers paid little. After
all, everyone had agreed that the big industrial customers would be the major winners in a competitive market for electricity
because as sophisticated volume buyers they could negotiate lower prices for themselves. Bailey pointed to a chart showing a
large purple area that designated how much residential ratepayers would pay in stranded costs. Then, he called everyone's
attention to a little red bar, the tiny share that was to be paid by the biggest industrial customers.

“I'm not against paying the stranded costs,” Bailey announced. It was how the burden was spread that
mattered to Bailey. His words set off a flurry of activity by lobbyists. Terral Smith, Governor Bush's legislative liaison, immediately
began twisting arms to kill the Bailey proposal. The industrial lobbyists joined in applying pressure to shove the costs onto
consumers and small business.

What Bailey never did was take on Enron. Eight years earlier
Bailey had learned how dangerous that could be for a Texas politician. Back in 1991, when he was a freshman in the legislature,
Bailey would not go along with a bill that Enron, then a natural gas pipeline company, wanted. Soon Bailey's campaign manager
was working for his opponent and Enron contributions were financing the opposition. Bailey eked out a narrow victory in the
primary, but two years later Enron and its allies were again financing his opponent.

By 1999 no
one in Texas politics with a lick of sense got into a fight with Lay or Enron. The company's coordinated drive to create a state
government to its liking had put the candidates it backed into every statewide office, Republicans all. Thanks to Enron's money,
Republicans controlled the Texas state senate for the first time since Reconstruction. Enron was not all-powerful, but it was not a
force to mess with unless, like Smith and Briesemeister, no one paid attention to your predictions.

As the final debate on the bill took place in the House chamber in Austin, Briesemeister joined the other
lobbyists in the gallery far above the floor. The stranded costs issue had gone through several permutations, but in the end
residential customers were stuck with the biggest share of the costs at 40 percent and the commercial and small business
customers had to pick up 30 percent. Still, the remaining 30 percent share placed on the industrial customers was better than their
original hopes as shown by the little red bar on Bailey's chart. As Briesemeister listened to that final debate, she thought how it was
not really a debate at all, just posturing.
How stage-managed this all seems,
she
thought.

Late that day Wolens received a standing ovation from his peers and the corporate
lobbyists in the gallery. The bill had not even passed, yet everyone was on their feet, congratulating Wolens, and themselves, for
overthrowing a system that was not broken in favor of what Enron and Governor Bush said was the better way of letting the market
determine the price of electricity.

When the vote was called, Senate Bill 7 passed by a tally of
142 to 4. Briesemeister felt sick. She was certain that the promises of lower prices would prove to be illusory, that for all of its flaws
the existing system was less costly to consumers.

Sure enough, by 2006, Texas electric rates
were more than 50 percent higher than four years earlier. Painful as that was, it was not the worst of it. For what the lawmakers in
Texas and other states had created was not a market that Adam Smith would recognize, but a system to manipulate prices. And
while the lawmakers mad with zeal remained deaf to the warnings, Enron knew it had enacted into law an economic Trojan horse.
So did Wall Street. The soldiers of Mammon were poised to emerge and take their spoils.

J
AY INSLEE
WALKED AS FAST AS DECORUM WOULD ALLOW. THIS WAS
the Capitol of the
United States, after all. The Washington Congressman was anxiously navigating the unfamiliar basement hallways located on the
other side, deep below the Senate chamber. Inslee searched for a room where he was to join the five Republicans and the dozen
other Democrats who comprised the Oregon and Washington delegations to Congress.

In his
right hand, Inslee clutched a fax, its late arrival from the West Coast this March morning in 2001 the reason for his rush. When he
finally found the right door, the meeting had already been underway for a minute or two. Inslee, an inveterate basketball player,
quickly spotted the only open seat and slid his athletic frame into it. Directly across the table sat a man he had never met before, the
new vice president of the United States.

The bipartisan gathering was to seek relief from the
worst economic crisis to hit the West Coast in decades. Electricity prices had skyrocketed. A kilowatt of power that a year earlier
cost $30 was now priced at $600. The old price reflected the cost of generating power plus a profit. Since the costs of generating
electricity had changed little, the new price bore no such connection to costs. And strangely, even when the populace cut back on
its use of electricity after opening eye-popping bills, prices stayed high, defying the bedrock economic principle of supply and
demand.

California consumers and businesses saw their statewide electric bill rise from an
annual expense of about $6 billion to more than $60 billion. It was the economic equivalent of the state raising taxes on a family of
four by $7,000 a year. Electric bills were out of control in Oregon and Washington, too. But no one was there from the California
delegation. Cheney insisted on that.

Everyone in the room knew that electricity was an
industry in transition, from prices set by state utility boards to a competitive market, even if they had no grasp of how the new price
mechanism worked. The cause of the skyrocketing prices was a mystery to everyone but the few who understood what laws like
the one passed in Texas, as well as the one California enacted, meant for making the few rich at the expense of the
many.

Wasn't competition supposed to mean lower prices? And why would prices soar when
the amount of power people were buying had grown at normal, predictable rates? And why did prices stay high, even rise, when
people flipped switches off? To anyone with a basic understanding of economics it made no sense.

Some of the lawmakers worried that this was something far more ominous than an economic glitch that
would pass in a few weeks. Constituents were calling on the phone, demanding that somebody do something. The volume of calls
grew with each month's electric bills. And there was fear that the current March prices would soon look like bargains. Summer was
coming and, with it, increased demand for power to run air conditioning equipment. But what to do?

This deep sense of unease prompted unpleasant thoughts, a few lawmakers in both parties would say
privately many months later. They realized how easily this economic crisis could boil over into something much worse. California
was riven by rolling blackouts, as well as brownouts, in which power flows at reduced voltage. People had been stuck for hours in
elevators. Others could not get cash out of automated teller machines or even retrieve their debit cards. There had been accidents
when traffic lights failed, some of which led to nasty disputes. Thousands of poor families, the electric bill suddenly burning up half
their meager income, had their power shut off for nonpayment. It did not take much thought to realize that people would use
candles for light and this would, inevitably, cause fires that would kill small children.

In the
Capitol basement, the more senior delegates spoke first. They told Cheney about widows on fixed incomes who had to choose
between going hungry or going without their medications because the electricity bill ate all their money. Someone mentioned a
family whose electric bill was suddenly larger than their mortgage.

As one of the more junior
lawmakers, Inslee waited his turn. He watched Cheney. The vice president's movements and words indicated that stories about
little old ladies did not penetrate his steely resolve. What Inslee could not discern was whether the vice president did not believe
the stories or—and to Inslee this would be worse—that Cheney did not care.

Representative
Norm Dicks, a Democrat who represented Washington State's Olympic Peninsula, called electricity prices “the most serious
financial crisis facing Washington State since Boeing laid off 60,000 workers in 1970.” Back then things got embarrassingly bad for
America. People in Japan sent baskets of food to help families of laid-off workers in Renton, Seattle, and Tacoma. Americans
depending on charity as if they were third world peasants after an earthquake was a Cold War–era story that the Soviets and their
friends played big for its propaganda value.

The talk in that Senate basement turned to small
business. Grocers and ice-skating rink owners had complained that the cost of electricity to run their refrigeration units was
ruinous. Some electricity-intensive businesses simply shut down. Many employers who used power for nothing more than lights
and computers had stopped hiring. Some had laid off workers. Job losses in Washington State alone could reach 40,000, someone
said.

Cheney did not express any concern about rising electricity prices hurting small
business. Some in the room heard Cheney say “this is how markets work” and something about “froth in any market.” Inslee had
expected that the troubles of Main Street business owners would stir the vice president to action.
Old
ladies going hungry don't move him. Okay. But how can he not care about small businesses?
Inslee
thought.

What the legislators had asked for, at least some of them, was the imposition of price
caps so that the price of electricity would be related to the cost of producing it. That was how the traditional regulation system
worked. Utility rates were set based on the cost of producing power, including a generous amount of surplus capacity for peak
demand times like hot summer days, plus a profit. The Federal Energy Regulatory Commission had the power to impose such caps
if prices in any market, competitive or regulated, were not “just and reasonable.” Nothing had happened to make it cost more than
$30 a kilowatt or so to produce power, even if no one understood just why. Cheney said no to price caps. Period.

When Inslee's turn came he focused on the fax, whose late arrival had made him the last person to enter the
room. The fax had come from Robert McCullough, a utility economist who rose to become a vice president of Portland General
Electric in Oregon before he set out on his own. McCullough made his living as an expert witness in electric utility litigation, an area
requiring knowledge of arcane economic and legal details and an ability to translate them into plain English. To many in the power
business these skills made him a hated man. Overnight McCullough had gathered complicated official data from California and
then reduced it to a single fact so revealing that when the fax finally printed out in Washington, Inslee had a
Eureka!
moment.

McCullough had analyzed the status of
every electricity-generating plant in California the day before. Which ones were running, which were down for scheduled
maintenance, and which were offline due to an unexpected breakdown or other reasons. What he found was not what one would
expect based on textbook economic theory. Even though record prices were to be had for anyone with power to sell, the owners of
generating plants were not cranking up every boiler and diesel motor they owned. Instead, a third of the electric power–generating
capacity in California was offline.

To Inslee, a former small-town prosecutor, this cried out for
investigation. Normally a small percentage of power plants would be down for maintenance or offline because of unexpected
breakdowns. But a third? And when prices were running 10 to 20 times what they had been just a year earlier?

Some of those in the room would say later that what happened next was unlike any political negotiating
session they had ever attended.

Inslee quickly made his points as he slid the fax across the
table. Cheney, without reading it, slid the fax back, saying, “You know what? You just don't understand economics.”

Inside, Inslee began turning white hot with fury, but said nothing. He did not even tell the vice president that
his degree from the University of Washington was in economics, not that that would have changed anything. But while Inslee held
his tongue, the questions in his mind gelled.
It's clear we are wasting our time. He has a closed mind. I
understand economics; what I don't understand is letting people get screwed.

When the meeting ended after 45 minutes, Cheney left via a side door. The lawmakers went out to talk to the
few reporters present, including a Seattle television news crew. Representative Jennifer Dunn, a Washington State Republican
whom the party often relied on to deliver scripted messages, said, “We shouldn't look for a trendy and superficial answer and give
an artificial response like price caps.” And she said the administration was doing all that it could. Inslee could hold his tongue no
more. That is just not true, Inslee said—the administration plans to do exactly nothing.

Less
than a month later the vice president met with Ken Lay, whose Enron had spent all those years, and millions in campaign
donations, buying access to politicians so it could shape the new laws on competition to its liking. Cheney had many meetings
with energy-industry executives and he fought to keep them all as secret as he could. He argued that to even reveal with whom he
had met would somehow compromise the quality and independence of the advice he received.

At their April 17 meeting Lay gave the vice president a three-page memo that stated that “events in California
and in other parts of the country demonstrated that the benefits of competition have yet to be realized and have not yet reached
consumers.” Lay's memo urged the Bush administration to reject any limits on what Enron and others could charge for power.
“Price caps, even if imposed on a temporary basis, will be detrimental to power markets and will discourage private investment by
raising significant political risk,” the memo said, without specifying what political risk or to whom. The memo then made what
would turn out to be a revealing observation about just how the rules on competition had been written. “Similarly, a return to
cost-based wholesale rates will be extremely difficult,” Lay's memo said, as consumers would learn years later.

Throughout this time both President Bush and Vice President Cheney and their aides blamed the crisis on
California officials, whom they said had not allowed the construction of enough power plants and had mismanaged. They also
blamed Governor Gray Davis, a Democrat, even though he was not the cause of the problem. However, his hapless responses, and
his panicked decision to spend tens of billions of dollars locking in prices at what turned out to be the peak of the crisis, were
major reasons that voters later recalled him. The voters replaced him with one of the richest men in the country, Arnold
Schwarzenegger, an actor of such vast wealth that he is the only individual American to own a Boeing 747 jumbo jet (which he
leases to Singapore Airlines).

In the months that followed, the Northwest delegation, and
especially Inslee, pressed for an investigation. At every opportunity Inslee denounced the administration and attacked its integrity.
The Federal Energy Regulatory Commission did little at first, which was not surprising. Its chairman was Pat Wood. When Bush
was governor of Texas he had named Wood to the Texas utility commission at Lay's urging. When Bush became president, he
named Wood chairman of the Federal Energy Regulatory Commission, acting again at Lay's urging.

A few months later, Wood announced that the commission would impose price caps. That action, he
emphasized, was exactly what Enron did not want. In most places the news was played like Wood really was his own man. But the
price caps were modest and would allow prices to remain much higher than they had been, just not so high as to run a political risk
of voter revolt.

The following February, in 2002, almost a year after the basement meeting and
just weeks after Enron collapsed, Wood announced that the commission would investigate whether Enron had manipulated the
energy markets. Ultimately this supposed investigation would produce a brief report concluding that “in perspective, the crisis
remains an aberration from the competitive markets that have benefited customers both before and since.”

Wood was a sightless sheriff, standing in the middle of a busy brothel while observing only the piano player,
whose every missed note he claimed credit for pointing out. That Wood closed his eyes came to light only because someone else
was unwilling to ignore it. The Snohomish County Public Utility District, which provides electricity in that Washington State county,
was on the hook to pay $120 million to Enron for power it would never get. Its leaders suspected that Enron had manipulated
power prices. The district lacked proof because, under Wood, anything that might show criminality was ignored.