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We watch one documentary a month for our Econ Extra Credit project, and this month it’s “Enron: Smartest Guys in the Room” – about the accounting scandal that exploded in the public eye 20 years ago. next month.

But part of Enron’s story that we still see echoes of today is the company’s involvement in the 2000-2001 California electricity crisis, where energy companies manipulated markets and caused large-scale blackouts after pressuring the state to deregulate energy markets.

David Brancaccio of Marketplace spoke to Vijay Vaitheeswaran, editor-in-chief of Global Energy and Climate Innovation at The Economist and host of their new podcast “To a Lesser Degree”. Below is an edited transcript of the conversation.

David Brancaccio: When you think of Enron, you think of creative accounting. But Enron is also famous for extracting an estimated $ 30 billion from California’s population by gambling in that state’s electricity market. Don’t you blame Enron for this?

Vijay Vaitheeswaran: Absolutely – the way I blame Lehman Brothers or any crook who breaks the law. But I would like to stress that there are more blames to be made than mere greedy capitalists seeking some form of deregulation, which Enron was advocating, along with other energy companies at the time. The question is: what have regulators and politicians done in response? The rules that were put in place in California were stupid rules. If you are a selfish, greedy energy trading company looking for a loophole – which Enron surely was – you see this as an opportunity. And they created crazy projects with names like “Get Shorty,” where they would round-trip electricity and artificially raise prices in order to benefit from it.

Brancaccio: Are the regulators just not too fast? Because at the same time, they are heavily used by the industry, so the rules are in part an expression of what the industry has asked for.

Vaitheeswaran: Remember that there is no such thing as a free energy market. When we talk about deregulation what we are really talking about is changing the rules to allow more or less competition in different parts of production, transmission, etc. So what California chose to do is change some of the rules, but they did it wrong – and almost every serious assessment of California’s energy crisis also calls into question how deregulation has gone. been carried out. This does not mean that all market reform has to be bad; we can look at a lot of other parts of the world that have improved it. In particular, if we look at another energy market for natural gas in America, which is a deregulated market, but it’s a federal market, and it’s overseen by federal authorities – unlike the electricity market. , which is balkanized and regulated state by state. So we can see, immediately, that just saying “deregulation, because it was in the back pocket of Enron paying the politicians, man, that’s where they went wrong” – that’s one way. simple to broach this subject. There are always degrees of deregulation in any energy market. The question is, how vigilant are your regulators in monitoring the predictable behavior of the bandicoots, that is, the capitalists of the system, in this case the energy traders? We could look at short sellers, or we could look at Wall Street players like Lehman Brothers and say, is the SEC watching? And the answer is yes, America’s financial regulators are very good. They’re watching. And yet, from time to time, they get it wrong.

Brancaccio: Do you see any echoes of the Californian mess all those years ago with what happened in Texas during the sudden cold of last winter?

Vaitheeswaran: I think the correct way to compare California and Texas is a market that got its rules wrong. Keep in mind that Texas is not a free energy market. But they have a more competitive market than some other markets like the Northeastern United States. They allow prices to skyrocket in order to send a signal to encourage more production. But what they don’t have is any sort of … in other markets, they encourage companies, or reward them, to have back-up capabilities online when the weather hits bad. times a century, allegedly, but now we get it once every 10 years. They did not encourage weatherization, for example, even though in Texas they had had previous episodes where the lack of wintering had led to electricity crises. We know it from history. So in this case, I would say yes, the regulators didn’t quite understand the rules. And they still haven’t taken action to address these issues.

Brancaccio: Now I understand your point that there is no such thing as a free market in the case of energy markets. But you also strongly argue that there is an important role for government; that the private sector does not regulate these things naturally without the participation of regulators.

Vaitheeswaran: There is no doubt that electricity is not like bananas or copper. Electricity is a precious resource; it is, to some extent, a public good. We could not have the modern economy without electricity; I can go without bananas for a while. So there is a reason why the government is interested. But more than that, the way the energy markets are organized, if you don’t have coordination between the suppliers, the producers, the distribution cables coming into your house – it’s not some kind of scenario. where you can have hundreds of companies trying to dig the streets to install wiring in your house to get electricity. You need coordination. This is the legitimate role of government. So yes, we have to regulate that. It’s just a matter of degree: what are the rules? Are they sane? And at the end of the day, we anticipate in a capitalist economy that corporations will try to lobby for their own benefit and look for loopholes, as companies like Enron have done. The role of the regulator is therefore to monitor these abuses.

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