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From The Best Democracy Money Can Buy
By Greg Palast
Stop by and visit Greg at www.gregpalast.com
Editor's Note: Greg Palast is one of a kind. He's an investigative reporter with an international reputation for painstaking research. Jim Hightower calls him "a cross between Sam Spade and Sherlock Holmes." Tribune Magazine said he's "the greatest investigative reporter of our time." On the other hand, Katherine Harris, Florida's former Secretary of State called him "Twisted." But we think you'll like his wonderful twists, turns, and acerbic remarks that make his work fresh and incisive. Greg has not only graciously given the Yurica Report permission to reprint Chapter 3 of his book, but he suggested we reprint this particular chapter because it goes hand and glove with Katherine Yurica's article, "Fraud Traced to the White House." Greg's work gives the reader a thorough understanding of not only the domestic side of California's energy crisis, but he gives us its antecedents by showing us the same players on the European stage. Subscribe to his writings for Britain's Observer and Guardian newspapers, and view his investigative reports for BBC Television's Newsnight, at www.GregPalast.com.
Deregulation and the Power Pirates
by Greg Palast
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 take-off, 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 Franciscos 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 portion 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 Jakes exploding plane to black-outs 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 multicontinental war over the ownership and control of $4 trillion in public utility infrastructuregas, water, telephone and electricity lines--a story that began a decade earlier with Jake Horton and continued through a coup detat 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 ledgersfound 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.
Take a look at a bit of what I saw (figure 3.1).
There's two sets of numbersone 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 expensedto use the accounting lingoand 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). Moving numbers from one account to the other cheated the IRS and bill payers out of millions.
Shortly after Hortons 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 Southerns 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 BUSINESS ORDER
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? Jakes 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.
Jakes 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, 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. Americas 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 Americans 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 illegalno 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 of Enron).
In early 2001, America's papers were filled with tales of the woes of 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 cold 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.
There have been some changes since the first edition of this book. 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-domain began with the senior Bush's crusade to eliminate Roosevelt's pesky rules, and crucially, the utility accountants' rule book, the a 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 prederegulation 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 deregulations 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 seems in March 2000, the Wylys paid back.
THE RANTINGS 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 1970's, 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, cold charge whatever the market could bear....or, more accurately could not bear.
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 England's consumers, who would, as a result of this market competition, benefit from lower bills.
That was the theory. I can's say whether the market scheme failed in minutes or days, but the Power Pool quickly became playground for what the industry called gamingbid 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.
Of 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.
TEXAS GETS LAYD
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 neoliberal reformand 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 gubernatorial race.
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.
Governor Bush 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 tabs. 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 an 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.
THE TEXANS GRAB CALIFORNIA BY THE BULBS
While Texas companies delayed deregulation to haggle over the spoils, their lobbyists, and the industry's, bored ahead in California.
Lincoln said you cant fool all the people all the timebut, then, you don't have to. To turn a quick buck, a slick line of academic hoodoo and some well-aimed campaign contributions will do the trick. Like Columbus bringing Indians back to the Old World for display, the power industry lobbyists brought Margaret Thatcher's professors and their wheezing fee market contraptions to California. In 1996, armed with the suspect calculations of well-compensated academics and inebriated with long droughts of utility political donations, the California legislature tossed out a regulatory system which, until then, had provided reasonably cheap, clean, reliable energy to the state.
Despite knowledge of the British disaster, the sun-addled legislators wrote into the preamble of the enabling legislation the lobbyists' line that a deregulated market would cut consumer prices by 20 percent.
In 1999, my parents sent me their bill from San Diego. Instead of the 20 percent savings promised by the law, in the first year of full deregulation, their energy charges rose 379 percent over the previous year. But before the big bills hit San Diego, the new planetary power merchants, using a combination of money, muscle and Americans' penchant to follow the Hula Hoop state, suckered twenty-three other states into adopting deregulation laws.
Not every economist was for sale. Dr. Eugene Coyle, an incorruptible expert, calculated that his fellow Californians were in for a multibillion-dollar fleecing. In 1998, in an extraordinary uprising of the lambs on the slaughterhouse ramp, Dr. Coyle and a band of community activists were able to get a referendum on the California ballot to overturn the legislature's deregulation vote. The power merchants didn't have to wait for the ballots to be counted to know the outcome. They had bought it. In what is unarguably the highest price ever paid to buy an election, Southern California Edison, Pacific Gas and Electric and their allies spent $53 million to defeat professor Coyle's proposal to slow deregulation.
From the get-go, California's new computer-controlled electricity auction system was a mess. The flow chart looked like a bowl of linguini thrown against the wall. In confusion is profit, in complexity more profit. I smelled Texans. Commissioner Carl Wood, appointed after the blackout disasters began, told me that Enron had little to do with the initial lobbying for deregulation, but much to do with writing these weird, knotted details.
In 2000, Beth Emory told me something quite astonishing. Emory had been vice president and general counsel to the agency that oversees California's auction house for kilowatts. It struck me that if Coyle and I knew the English-style system would lead to a price explosion and blackouts, certainly the Republican utility commissioners blessing the system knew it too. Politicians expressed pofaced shock when in 2002 they discovered an Enron memo that describes tricks used to manipulate the market--with filmic names like Get Shorty, Death Star and Ricochet. Yet every one of these tricks the power gang used on California had been well rehearsed in England. Even the players were the same: Enron, TXU, Duke, Southern California Edison (which owns England's dams) and Southern of Atlanta. Over there, market hucksters used stacking, cramming, and false scheduling, Get Shorty's crude progenitors.
So, I asked Emory, did the state go ahead with their deregulation plan knowing it would blow up? Oh yes, we knew it, Emory told me in 2000. Now an industry lawyer in Washington, she added, What happened [the blackouts and price explosion] was predictable. We knew last year we'd have serious problems. There was, she said, discussion of stalling deregulation but the political push was on, despite foreknowledge of disaster.
Insider Emory says the state was not surprised that on the first hot summer day after deregulation, when California needed every bit of juice it could find, the small coterie of plant owners held California's power system hostage. They could name their price for electricity and they did: $9,999 per unit of power--30,000 percent above the old regulated price of about $30. Californians were lucky, says Emory: The power pirates thought that the state's computer could only accept four-digit bids in the automated auction. In fact, the computers would have accepted seven digits, bankrupting half the families in Los Angeles in a day.
But one man's disaster is another man's windfall. And if that other man is someone like Ken Lay or Steve Letbetter of Reliant, one might expect some of the windfall to end up in the Republican Party pokey. The Typhoid Mary of deregulation was California Utility Commission chairman Daniel Fessler who, after an industry-sponsored junket to England, carried back this economic virus to California. Fessler didn't know a darn thing about electricity when Governor Wilson put him in charge of the state's power agency, but as a Republican functionary, he certainly knew how to get the party's bread buttered.
HOW THEY DID IT
Markets for electricity don't work and can't work. Electricity is not a bagel--that is, unlike your morning muffin, you can't do without it when it gets too pricey.
Enron knew that too. Shortly after the California market opened for business, for example, an Enron trader sold the state about 5,000 megawatts of power to go over a 15 megawatt line. That's like trying to pour a gallon of gasoline into a thimble--it can't be done. This forced the system operator, the agency that actually keeps our lights on, to make costly emergency purchases, blowing market prices through the roof. Enron, knowing in advance of the panic it would create, could earn a super-profit.
The slightest shortage on a hot or cold day and--whammo!the tight little wolfpack of electricity sellers can extract a limitless ransom. When the weather would not create a shortage, a monkey wrench could. Repairs were scheduled at peak times. Reliant employees say the company was running plants at odd hours, ramping them up and down, which whistleblowers at the company considered deliberate sabotage. Duke Power of North Carolina was less subtle. Its managers, say employees, simply threw away spare parts needed to keep the plants running. And San Diego's power distribution company told me that Duke Power of North Carolina ordered them to shut down a plant during a shortage periodan order the California firm refused.
Merely by holding back the power from a single generator, the power merchants could make the electricity from their other plants worth more than gold. In a report for California's purchasing agency, Dr. Anjali Sheffrin had evidence that California power companies used physical withholding and economic withholding to create false shortages in California 98 percent of the time between May and November 2000. Three giant companies (for which I have, frustratingly, only code names A1, A4 and A5) didnt put in a single honest bid in those months. Add in false congestion, false scheduling and megawatt laundering, and the overcharges add up, conservatively, to $6.2 billion in a single year.
In addition to the $39 million they paid to defeat Dr. Coyle's antideregulation referendum in 1998, the three big California power companies, PG&E, Edison and Sempra, spent another $34.8 million that year on lobbying and campaign contributions. It was a big payout, but the payback in billions proved again that investing in politicians has a consistently higher rate of return than investing in plants or products.
HELLO, I AM THE SON OF THE VICE PRESIDENT.
While America hesitated over deregulation, the rest of the planet dove headfirst into the power pool. Although the idea of allowing for-profit electricity companies to run free of regulation was a poor idea proved worse in practice, virtually every nation adopted England's goofy Thatcherite system. In California, deregulation's victory, though greased by political donations, was won chiefly through an expensive campaign of lobbying and propaganda. In poorer nations of the Southern Hemisphere, privatization and deregulation spread the old-fashioned way: threats, coercion and cash in offshore bank accounts.
Resistance was futile. The IMF and World Bank made the sale of electricity, water, telephone and gas systems a condition of loans to every developing nation. Since a loan cutoff meant economic death, it was sell or die.
The World Bank's former chief economist told me the Bank-dictated sell-off program wasn't privatization, it was briberization. Virtually every bid was bent. (I must grant, however, that the World Bank has its limits. The Bank forced the African nation of Ghana to cancel a deal with Enron in which the evidence of corruption became embarrassingly public.) The baksheesh flowed and power systems were sold off from Brazil to Pakistan.
The spoils are enormous: $4 trillion in public assets up for sale. More than electric systems were put on the block. Gas companies, phone companies and, with the most tragic consequences, water companies were handed over to American, French and British corporate buccaneers.
While there was a killing to be had in the free market in electricity, grabbing water systems was a sure bet: Governments had already paid for the pipes and the market is captive, customers undeserved and thirsty. Again, Thatcher's England led the way with the first privatizations. In Britain, water bills shot up to 250 percent of the U.S. price, water company stock prices quintupled, and in 1995, the system fell to pieces: In some parts of England, you could get arrested for watering your lawn. A big winner (and big political donor) was Wessex Water, 100 percent owned by Enron.
Argentina was first to offer up booty, beginning with the 1988 sale of a trans-Andean gas pipeline. The minister for public works at the time, now Senator Rodolfo Terragno, told me that in the fall of 1988 he received a strange telephone call in Buenos Aires from America from someone who identified himself as the son of the vice president. But which Bush? Terragno knew it wasn't Neil Bush, an acquaintance and big-time investor in Argentina; it had to be George W. (Terragnos assumption), or, my industry sources tell me, Brother Jeb. Whichever, the son of a Bush told the minister that giving the project to a newly formed company called Enron would strengthen ties between the U.S. and Argentina.
Coming from a son of the man about to enter the White House, this was not a light-handed pitch.
At that time, the Bush brothers were private businessmen, so using their father's name may have smelled a bit, but it was all quite legal. Therefore, I could not understand why the Bush brothers would not fess up to the call to Terragno. George W.'s spokesman denied he met with Terragno, and Jeb, who usually has a lot to say, inscrutably refuses to comment.
In 2002, when I met with the Argentine, Terragno provided me a clue to the motive for the Bush boys tongue-tied response. Enron, he said, wanted a giveawaythe Texans would pay only one-fifth the world price for Argentina's natural gas, ridiculously below other bids. Enron's local lobbyist, said Terragno, indicated that if the Argentine minister greased the lowball Enron bid, the company would have shown its gratitude. I have no doubts that if I said yes at least part of that money would have ended up in my pockets. They didnt say that, but it was implicit. Terragno turned down Enron with a laughbut then called for investigation two years later when a close friend of the Bush family, Argentinas President Carlos Menem, stepped in to give Enron another natural gas pipeline on sweetheart terms. (A government inquiry was launched, then died when Menem fired the chief investigator.)
Enron culminated its Argentine shopping spree with the purchase of the water system of Buenos Aires province. It got the full Enron Treatment: Workers were fired en masse, allowing Enron to pocket their pay, in violation of the companys solemn promises to invest. Without maintenance workers, water mains were left broken. Enron's profitable neglect of the system left water contaminated.
But despite an economy flat on its back, Argentines had had enough from Enron, and they weren't going to take it anymore. In October 2001, the province forced Enron to clear out of town, dropping their thirty-year contract. While you may enjoy hearing of Enron's comeuppance, the Houstonians weren't playing with their own cash, but with yours. The majority of Enron's acquisitions flings abroad were subsidized by the U.S. taxpayer, in this case by the Inter-American Development Bank, a World Bank subsidiary half-owned by the U.S. Treasury. (See Daphne Wyshams Enron's Pawns: How Public Institutions Bankrolled Enrons Globalization Game Institute for Policy Studies, 2002).
A GOOD RESPONSIBLE DICTATOR
Before their assault on the California beachheads, the power pirates landed in Rio de Janeiro, South Americas City of Light. In 1999, I received a postcard from Rio, which was completely black. Cariocis (Rio residents) mailed them in protest against Light, Rio's electricity company, now nicknamed Dark.
Brazils government privatized Rio Light, selling it to Electricite de France and Reliant, the Houston company befriended by Governor Bush. Reliant and partners promised improved service for Riothen axed 40 percent of the company's workforce. Unfortunately, Rio's electricity system is not fully mapped. Rio Lights electricity workers had kept track of the location of wires and transformers in their heads. When they were booted out by the new Franco-Texan owners, the workers took their mental maps with them. Nearly every day, a new neighborhood went dark. The foreign owners blamed El Nino, the weather in the Pacific Ocean. Rio is on the Atlantic.
But for Reliant and the Parisians, not all was darkness. The windfall from reduced wages and price increases allowed the foreign owners to hike dividends by 1,000 percent. Rio Lights share priced jumped from $300 to $400.
And to whom had the World Bank turned over South Americas energy future? Governor Gray Davis of California named Reliant price gouger number one. And our federal government, in the 1980s, had ruled the company morally unfit to manage a nuclear power plant.
In its preglobalization incarnation as Houston Power & Light, the company managed construction of the South Texas nuclear station--or, more accurately, mismanaged the plant's construction. To reduce the number of negative safety reports, workers who wrote up safety violations were fired: John Rex for blowing the whistle on forged safety inspection documents; Thomas Saporito for exposing security violations; Ron Goldstein for flagging faked welding records. To hunt down the disloyal workers for Houston Power, the company's contractor, Brown and Root, now a Halliburton company, drilled tiny holes in the ceiling of the workers' locker room and placed a three-inch espionage-style camera to identify workers who ratted to the federal inspectors.
Let me not leave the wrong impression: Reliant can be honest when the need arises. In the fall of 2002, after the implosion of Enron, Global Crossing and WorldCom, the Securities Exchange Commission required big firms' CEOs to sign an oath that their company's books were accurate. Odd that: One liked to assume they already believed their reports. In the last days before signing, Reliant erased $2 billion in revenues from its pre-honesty books. They called it a restatement.
Another one of the big multicontinental players was Entergy International, once a division of a struggling regional electricity company, which grabbed London Electricity and other huge foreign assets following the election of their hometown boy, Bill Clinton, to the White House. Entergy used their Clinton connections to sign deals in China, whose totalitarian regime must have held a particular attraction for the company's chairman, Ed Lupberger. In hunting for assets in Peru, Lupberger said, Theyve got a good stable situation there, sort of a benevolent dictator, which means good responsible leadership.
Pakistan looked like another Entergy jackpot when, in 1992, the government of Benazir Bhutto, in a manner most strange, agreed to increase the amount Pakistan's power agency would pay for electricity from plants part-owned by Entergy (10 percent) and Britain's National Power (40 percent). But in 1998, Bhutto lost the election and the new Pakistani government discovered her secret ownership of posh properties in London. Putting her unexplained riches together with the crazy generous deal with U.K.-U.S. power companies, Pakistani prosecutors in October 1988 charged her and the Western consortium with bribery. Pakistan's new government then ended the high payments to the British-American consortium on the internationally accepted rule of law that contracts allegedly obtained by bribery are unenforceable.
Officially, the IMF and World Bank condemn bribery. Nevertheless, within days of Pakistan's filing corruption charges and cutting payments to the accused power combine, the IMF Bank, at the request of Bill Clinton and Tony Blair, threatened to cut off Pakistan's access to international finance.
Panicked by the threat of economic blockade, Pakistan prepared to collect the cash to pay off the U.K. - U.S. consortium. On December 22, 1998, Pakistan's military, under the direction of General Pevez Musharraf, sent thirty thousand troops into the nation's power stations. Peter Windsor, National Power's director of International Operations, told me, A lot changed since the army moved in. Now we have a situation where we can be paid, they've found a way to collect from the man in the street. Yes, at gunpoint, trade union lawyer Abdul Latif Nizamani told me after his arrest and release following mass demonstrations. (Windsor vehemently denied the bribery charges.)
With Pakistan's army in control of the nations infrastructure, and acting as guarantor of payment to the multinationals, General Musharraf's final takeover nine months later--a surprise coup to the Western presswas, in fact, a forgone conclusion to the power plant dispute.
In the months before he left office, President Clinton flew to Pakistan. Shocked U.S. congressmen could not understand why Clinton would place the American Eagle seal of approval on a notoriously unbalanced dictator with a Strangelovian affection for nuclear weapons and, at the time, a fondness for the Taliban. The answer was the real item on the agenda: higher electricity prices to pay the questionable contracts with the British-American power group.
Meanwhile, on the other side of the border in India, police were beating the daylights out of protestors marching against Enron's power plant project at Dabhol, a deal so costly to India that in 1998 the Maharashtra State government voided the contract on grounds of bribery. Clinton felt India's pain... and sent in collection agents: Secretary of State Madeleine Albright, and former power industry exec, Clinton's energy secretary Hazel O'Leary. The ladies beat the daylights out of Indian officials in their diplomatic way, threatening the nation with economic strangulation if Enron didn't get its pound of flesh. The more Chivalrous Bush would never send a woman to do a man's job: In 2001, the threats were repeated to the Indian government by Vice President Dick Cheney.
BRINGING IT ALL BACK HOME
Following Enrons declaration of bankruptcy in November 2001, its employees, creditors and bilked customers went on a hunt to secure any assets of the company and its sticky-fingered executives it could find. The Bushes also joined the Enron asset scavenger hunt, in their own way. Two months after the bankruptcy, Governor Jeb Bush of Florida traveled to the Texas home of Enron's ex-president, Rich Kinder, to collect a stack of checks totaling $2 million at the power pillager's $500-per-plate fund-raising dinner.
There are a lot of workers in Florida who will wish they had a chance to lick those plates, because that's all that's left of the one-third of a billion dollars Floridas state pension fund invested in Enronthree times as much as any other of the fifty states.
After the December 2000 blackouts and Enron charges of half a billion dollars bankrupted Pacific Gas & Electric, not many officials wanted to be seen getting up close and personal with Enrons Ken Lay. But not Jeb. The Florida governor sent a personal message that he'd love to meet with Lay. Despite this statement of affection, Jeb says he doesn't remember speaking to Ken Lay, but his diary does: a half-hour phone call between the governor and Enron chief on April 17, 2001, to discuss deregulation.
Like his presidential father and brother, Jeb remains a fan of Lays deregulation nostrums. But the Florida governor has more urgent issues that would have interested Lay. Sugar plantations leach phosphorus into the Everglades causing, with the help of other agribusiness polluters, $867 million in damage a year. Simple-minded souls may think the solution is easy: Tell the planters to stop crapping in the 'Glades. But while dumping phosphorus in the water, plantation owners also dumped big money into political parties coffers, nearly $1 million coming from the Fanjul family alone. Sugar magnate Pepe Fanjul was a member of Bush Sr.s Team 100, Team players raised $100,000 each for the elder president.
Rather than demand that his sugar daddies stop polluting the Everglades, Governor Bush encouraged a scheme by a company called Azurix to repipe the entire Southern Florida water system with new reservoirs that would pump fresh water into the swamps. From the view of expert hydrologists, such a mega-project is a crackbrained and useless waste of gobs of money. As part of the deal, Azurix would be handed the right to sell the reservoirs water to six million Florida customers. Azurix was the wholly owned subsidiary of Enron that had recently been kicked out of Buenos Aires.
MONEY FOR NUTHIN
The media wants us to shed tears for the po widdle stockholders blown to pieces by Enron's bankruptcy. Count me out. Enron did not survive on watered stock and magic bookkeeping alone. The company's stock flew high, fueled by cash filched from consumers and workers on five continents.
Enron was the Rosemarys Baby of the frightening coupling of deregulation and campaign cash. But Enron wasnt the devils only child. I looked into the December 2000 blackouts in Southern California. The wholesale price of electricity there jumped 1,000 percent over the previous year and the price of natural gas, fuel for the power plants, rose 1,000 per cent in one week. Power shortage? Nope. Take a look at Figure 3.2, Natural Gas Prices. Note that at the Henry Hub gas pipeline switching center in Texas, you could buy plentiful gas for $1 a therm. Yet, down the pipe at the California border, the price was $10.
It turns out the Texas merchant who controlled the biggest pipeline into California, El Paso Corporation, simply blocked access to part of the tube. Result: panic, price spikes, blackouts. Market speculators made an estimated half a billion dollars on that cute little maneuver. In other words, California didn't run out of energy, it ran out of government.
There are glimmers of justice. Pacific Gas & Electric, the company that crushed Dr. Coyles referendum, wrote a price freeze into that deregulation law. The sly codicil permitted the San Francisco outfit and its L.A. counterpart, Edison, to stuff their pockets with a $20 billion windfall as oil prices fell. They earned even more selling off their power plants to the out-of-state power merchants--who then used all those English tricks to beat the two California companies financially senseless. Their $20 billion windfall soon became a $12 billion loss--and PG&E declared bankruptcy at the end of 2000.
But we didnt have long to enjoy PG&Es comeuppance. Californias governor Gray Davis moved to bail out the companies. Davis signed off on long-term contracts to buy electricity for PG&E and Edison, some of it priced at $500 per megawatt hour, more than ten times the old regulated tariff. The state is paying for these pricey contacts by issuing several billion dollars in government bonds. As Sam Wyly said, the Bushes hard work has paid offand now, California will pay back at the rate of $2 billion a year for thirty years.
Copyright by Greg Palast, 2002, 2003
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