On July 26, 1989, George Herbert Bush signed a law that removed price controls on natural gas. However, the free market failed to produce enough natural gas to meet the demand. That created a shortage that led to more imports and higher prices. (Time, July 21, 2003)

On June 16, 2003, Bush said, “The problem is that we don’t have a policy that encourages the exploration for natural gas. So demand is going up for natural gas and supply isn’t, and that’s why we’re seeing the price rise.

Nevertheless, the gas industry drilled for more natural gas wells between 2000 and 2002 than in nay three-year period since 1950. Yet natural gas production remained flat. It averaged 19.3 trillion cubic feet – 2 trillion cubic feet fewer than 30 years earlier. (Time, July 21, 2003)



CHARGES OF PRICE-FIXING. During the 2000 campaign, Bush received $787,000 from El Paso. Other energy contributors included: Enron ($1.8 million), Exxon ($1.2 million), Koch Industries ($970,000), Southern ($900,000), BP Amoco ($800,000), Chevron ($780,000), Reliant Energy ($642,000), and Texas Utilities ($635,000).

In the mid-1990s, the California State Legislature voted unanimously to deregulate electricity. This was a huge victory for Southern California Edison and Pacific Gas and Electric (PG&E), since they were no longer required to stockpile about six months of electrical power. Furthermore, the state's Public Utilities Commission (PUC) permitted them to raise prices.

The cost of electricity began rising and rolling blackouts began in January. Southern California Edison eventually finally filed for bankruptcy. In early May, California's Democratically-controlled State Legislature passed legislation, opposed by GOP lawmakers, to issue $13.4 billion in bonds to repay the state's general fund to avoid making deep cuts in other state programs. As the power crisis continued to increase in California during the spring, Bush served notice that the federal government would not come to the state's aid. Bush could have mandated an investigation of California's energy crunch and soaring prices by the Energy Department. And he adamantly refused the pleas of California officials who wanted the federal government to impose caps on wholesale electricity prices.

Congressional Republicans began worrying that the Bush administration's refusal to offer relief to Californians could hurt the party in the 2002 elections. But the Bush-Cheney "oil ticket" remained hostage to the oil industry which had heavily supported them during the campaign. Their close to the energy industry had cost them credibility.

Since 1996, privately-owned utilities and the power producers as well as marketers spent more than $17 million in political contributions and lobbying expenses at the California state and local levels to influence energy policy-makers. California elected officials received more than $4 million in campaign contributions during the 1999-2000 election cycle from the very same energy interests whose fate they must decide. The state's three most powerful elected officials alone received nearly $1 million in campaign contributions from the investor–owned utilities and private power generators in the same 1999-2000 election cycle. In that cycle, energy interests contributed one-fourth of their total candidate campaign contributions to the three California elected officials who were likely to have the greatest influence over the state government's response to the crisis: the governor, the speaker of the Assembly, and the president pro tempore of the Senate. Governor Gray Davis received over $600,000 in contributions from investor owned utilities and power generators during the 1999-2000 election cycle -- a period during which he was not even on the ballot. The recipients of the next largest amounts reaffirm the adage that "money flows to power." The leader of the State Senator, President Pro Tempore John Burton received more than $250,000, and Assembly Speaker Robert Hertzberg received more than $220,000. (Common Cause, June 6,2001)

Energy special interest groups also gave contributions to other state lawmakers in Sacramento. Of the 118 state legislators elected in or holding office in 2000, 117 received campaign contributions from the investor owned utilities at the center of the crisis. Only Democrat Gloria Negrete McLeod received no utility contributions.

In the 1995-1996 election cycle, they contributed more than $1 million to state candidates and $246,011 to lobby the state government. During the 1999-2000 legislative session that amount skyrocketed to $3,141,064 -- a 12,000 percent increase. Enron led all energy producers and marketers in campaign contributions and lobbying expenses, giving more than $300,000 to state candidates and spending more than $345,000 in state-level lobbying. (Common Cause, June 6, 2001)

Southern California Edison, PG&E, and Sempra (the product of a merger between San Diego Gas & Electric Company and Southern California Gas) were the top political contributors during the 1999-2000-election cycle. These three utilities collectively gave $4.2 million in contributions to legislative candidates, state-wide candidates, political parties, other political committees, and statewide ballot measures. They spent an additional $5.9 million on lobbying state government. (Common Cause, June 6,2001)

Energy producers and marketers also contributed record amounts of soft money during the 1999-2000 cycle. They turned over $4.9 million in soft money to the Democratic and Republican parties and an additional $2.1 million to federal political action committees. Enron alone contributed over $2 million in soft money to the Democratic and Republican parties.

Alternative energy generators supplied over 20 percent of California's electricity. In the 1999-2000 cycle, these retailers spent only $13,500 on state campaign contributions and $229,726 on lobbying state government. That amounted to about 0.3 percent and 1 percent of what IOUs and producers and spent, respectively, on campaign contributions and 4 percent and 10 percent of what they spent, respectively, on state lobbying. In the 1999-2000 cycle, alternative energy generators spent only $139,343 on campaign contributions and $526,928 on lobbying state government. That amounted to about 3 percent and 14 percent of what IOUs and producers spent, respectively, on campaign contributions and 9 percent and 23 percent of what they spent, respectively, on state lobbying. (Common Cause, April 18,2001)

The profits of some energy and oil stocks skyrocketed by 50 percent in the first half of 2001. The price of crude oil averaged 26 per cent more in the fourth quarter of 2000 than a year earlier, helping oil companies to post record results. Exxon Mobil posted a $5.12 billion fourth-quarter profit that was a quarterly record for any American corporation. For the second quarter of 2001, Enron's profits jumped 40 percent, primarily as a result of its sales of natural gas and electricity in California.

The profits of some energy stocks skyrocketed by 50 percent in the first half of 2001. In one year, California's power crisis raised customer rates by $5.7 billion and dumped a $13 billion bailout bill on taxpayers. The president of California's Public Utilities Commission charged that the state's power plants shut down production for unnecessary maintenance. Loretta Lynch, working with the state attorney general's office, asserted that plant outages created "artificial shortages," particularly when the state issued emergency alerts because of seriously low levels of electricity. There were times, she said, when "plants could have produced, and they chose not to. And it is clear that there are instances that plants, when called to produce, chose not to produce." (Los Angeles Times, May 19, 2001)

Two legislative committees began investigating allegations that wholesalers created artificial supply shortages that drove wholesale electricity prices as high as $1,900 per megawatt hour. Before June 2000, wholesale prices for energy sold under similar terms rarely climbed above $150 per megawatt hour. (San Francisco Chronicle, June 1, 2001) But the Federal Energy Regulatory Commission ignored California's findings of $6.3 billion in gouging.

In May, the Justice Department launched an investigation into two California companies plotted to constrain the construction of power plants in the state in order to bolster their profits. The DOJ alleged that AES and Williams Energy agreed to limit the expansion or construction of new power plants near three facilities purchased by AES in 1998 from Southern California Edison under the state's deregulation plan. The plants -- in Long Beach, Huntington Beach and Redondo Beach -- were owned by AES, but the electricity was sold by William Energy. The three plants had a combined capacity of more than 3,900 megawatts, enough to supply about 3 million homes. AES agreed to bring another 450 megawatts on line for the summer by reactivating two mothballed generators in Huntington Beach. (Los Angeles Times, June 6, 2001)

Under a 3-year-old deal, known as a tolling agreement, Williams Energy essentially rented out the capacity of the plants for annual payments to AES. Williams Energy supplied natural gas to fire the plants and sold the electricity under long-term contracts and in the costly spot market. Williams Energy and AES had similar tolling agreements at plants in Pennsylvania and New Jersey. (Los Angeles Times, June 6, 2001)

When a select state legislative committee asked Enron for its financial papers, it brought a lawsuit charging that the committee's investigation went far outside the law. Acting five hours after Enron sued to stop a legislative investigation, the committee gave the electricity wholesaler a second chance to turn over documents and rid itself of a contempt citation. But Enron refused the offer, claiming that it was being singled out as a "political scapegoat" for the energy mistakes of California officials. (Los Angeles Times, July 12, 2001)

Every major study indicated that electricity generators and marketers manipulated the market. In March, economists at the California Independent System Operator, which managed the state's power grid, calculated that there was no other way to account for overcharges of some $6.2 billion between May 2000 and February 2001.

At almost the same time, economist Paul Joskow at the Massachusetts Institute of Technology and economic analyst Edward Kahn in San Francisco concluded in a paper published by the National Bureau of Economic Research that there was "considerable empirical evidence ... that the high prices experienced in the summer of 2000 reflect the withholding of supplies from the market by ... generators and marketers."

A similar estimate was issued by Severin Borenstein, director of the University of California Energy Institute, and his colleagues, who "very conservatively" calculated the overcharges so far at $4.5 billion. Even more suspicious was the fact that exorbitant price increases occurred not merely at times of peak usage but at off hours and in cool months -- when no one had ever seen a price hike before -- and that there were unprecedented numbers of unscheduled plant outages during those times. The overcharges were not all attributable to suppliers under FERC jurisdiction. California's largest municipal utility often had surplus power and sold it back into the state's grid at equally outrageous rates. But it was the market leverage of a small number of generators and marketers in Texas and North Carolina, combined with a lack of effective retail price signals to decrease demand, that made those high wholesale rates possible. (The American Prospect, July 2, 2001 issue)

In the 2000 election cycle alone, energy companies -- including utilities and the older oil-and- gas sectors, many of them known for their close connections to Bush and Cheney -- contributed more than $64 million to political campaigns (double the $32 million they put up in 1992), of which 75 percent went to Republicans. Among the biggest donors were Enron (nearly $2.5 million), Southern Company ($1.4 million), El Paso Corporation ($843,000), and Reliant Energy ($822,000).

Investigative reporter Lowell Bergman (working both for the New York Times and the PBS program Frontline) reported a conversation between Enron Chairman Ken Lay and Curt Hébert, chairman of FERC. According to Hébert, Lay offered him a deal: If Hébert would support Enron in its effort to gain access to transmission lines controlled by Southern Company, Lay would use his influence with Bush to keep Hébert in the FERC chair. Lay's version had it that Hébert asked for his support -- but there was no doubt that the conversation took place. Bergman also reported that Duke Energy Corporation made a secret offer to Governor Davis to refund unspecified amounts, if the state would drop all investigations and lawsuits against the company. (The American Prospect, July 2, 2001 )



CHARGES OF PRICE-FIXING. Enron collapse was the worst corporate failure in history. The world's largest energy trader had 2,832 subsidiaries, of which 874 were registered in the Cayman Islands and other areas which provide tax exemption. Enron was founded in 1985 as a gas pipeline company and grew into the nation's seventh-largest corporation through an online energy trading system.

The California State Senate committee, investigating suspected price gouging in the California electricity market, found eight power sellers in contempt for failure to produce subpoenaed documents about their production and pricing practices. The committee subpoenaed Enron and seven other generators in April, insisting that they turn over millions of records relating to bidding strategies, prices, energy availability, and documents dealing with possible antitrust issues, including out-of-state transactions. Six of the companies sought to have the contempt citations cleared by agreeing to hand over the records. Two companies -- Enron Corporation and Reliant Energy -- refused to turn over documents. (Los Angeles Times, July 20, 2001)

Enron refused to let the committee inspect its records, contending that the Federal Energy Regulatory Commission was the only regulatory entity that can legally investigate and control the wholesale electricity market in California. Enron and other power suppliers also argued that their most closely guarded trade secrets would be put at risk of exposure to competitors if they were given to the committee, even under confidentiality agreements proposed by the panel.

The committee recommended that Enron be found in contempt and fined for refusing to disclose top-secret business records. The committee, investigating whether generators had manipulated prices to drive up profits during the state's energy crisis, urged that Enron be fined an initial $1,000 and that the cumulative sum be doubled for each day the company continues to defy the panel.

Enron officials tried to downplay the importance of releasing documents. Karen Denne said the committee's recommendations took the company by surprise. She said that Enron had been working in "good faith" with the committee to provide the information, but now was being exclusively targeted for punishment. Denne added, "No one else has been singled out by the committee. Why is Enron being singled out?" When asked about complying with the committee's request to hand over documents, Denne answered that the request had been honored, saying, "That's far more than anyone else has turned over." But she conceded that the records did not detail out-of-state transactions, which the committee also had subpoenaed. (Los Angeles Times, July 20, 2001)

ENRON'S POLITICAL CONTRIBUTIONS. The Bush-Lay friendship dated back to the 1992 Republican national convention when the elder Bush received the presidential nomination. Enron CEO Ken Lay served as the chair of the host committee. After Bush lost his bid for reelection to Bill Clinton, the Bush family switched its political ambitions to George W.'s prospects for governor, and Lay came up with the first of many contributions to that effort.

Enron received a gigantic boost as a result of the deregulation of electricity with the passage of the 1992 Energy Act through efforts by the elder Bush's administration. Lay publicly thanked Bush with a column in the Dallas Morning News a week before the 1992 election. Calling Bush "the energy president," Lay wrote that "just six months after George Bush became president, he directed Energy Secretary James Watkins to lead the development of a new energy strategy." (Los Angeles Times, January 15, 2002)

After Bush the elder's defeat in 1992, the ties between Enron and the Bushes grew even stronger. In March 1993, Enron hired Bush's Commerce secretary, Robert Mosbacher, and his secretary of State, James A. Baker III, to line up contracts for Enron around the world. In the 2000 election, George W.'s named Baker his Florida election strategist in a successful effort to halt the recount which would have given Al Gore the state's 25 electoral votes and would have propelled him into the White House. (Los Angeles Times, January 15, 2002)

As Enron's representative, Baker even went on a trip accompanying the ex-president to Kuwait to do big business in the nation Bush had fought the Gulf War to save. The trip was criticized by General Norman Schwarzkopf, who said that he had turned down millions in offers to do business in Kuwait after the war. (Los Angeles Times, January 15, 2002)

When Bush co-owned the Houston Astros and construction began on a new stadium, Lay agreed to spend $100 million over thirty years for rights to name the park after Enron. As Bush was running for president, Lay lent the candidate the Enron corporate jet fourteen times, and the Bush campaign reimbursed Enron a measly 60,000 for those flights. (The Nation, February 2, 2002)

Altogether, Enron and its employees have contributed $736,800 to Bush's political career -- far more than any other corporation. That included the $10,000 chairman Lay and his wife, Linda, donated to the Bush/Cheney 2000 Recount Fund, as well as the $300,000 Enron leaders spent on the Bush/Cheney post-recount-crushing inaugural party. When Enron Field opened in April 2000, Bush and Lay had the best seats in the stadium -- in the Enron box. (The Nation, February 2, 2002)

Bush administration economic advisers Lawrence Lindsey and Robert Zoellick each earned $50,000 a year as Enron advisers. Secretary of the Army Thomas White Jr., a former Enron executive, had to sell $25 million of Enron stock upon assuming his post. In addition, Lay enjoyed a cozy relationship with Commerce Secretary Donald Evans, whose previous job was as the Bush/Cheney campaign tapper of deep pockets. Attorney General John Ashcroft is another who has received Enron cash for past political campaigns, $57,499 to be exact, which is why he has recused himself from investigating. (The Nation, February 2, 2002)

The Center for Public Integrity, a nonpartisan center that studied the finances and affiliations of the top 100 officials in the Bush Administration, revealed that fourteen executive-branch officials disclosed their collective value in Enron stock at from $284,000 to $886,000. Karl Rove alone held stock that was valued somewhere between $100,001 to $250,000. (The Nation, February 2, 2002)

The top 100 Administration officials have the vast majority of their financial holdings invested in the energy sector, some 221 separate investments worth up to $144.6 million. Meanwhile, corporate energy gave 75 percent of its $48.3 million in 1999-2000 campaign contributions to Republicans. Oil and gas gave $13 to candidate Bush for every $1 it gave to candidate Gore. (The Nation, February 2, 2002)

Throughout the 1990s Enron gave $5.8 million to political campaigns, 73 percent of it to Republicans. Among the biggest winners in the Senate have been Texas Republican Senators Phil Gramm ($97,350) and Kay Bailey Hutchison ($99,500). The Gramms also gained personally because Wendy Gramm, Phil's wife, was hired to the Enron board with significant compensation. With just six days left in her tenure as chair of the Commodity Futures Trading Commission, Gramm rammed through a surprising decision that Enron had asked her for: A surrender of the commission's authority over regulating energy futures contracts. Five weeks later, after leaving the commission, Gramm was working for Enron. (The Nation, February 2, 2002)

Between 1999 and 2001, Enron spent $4 million lobbying Congress and the White House. Over a decade, Enron and the Arthur Andersen auditing firm had contributed hard money to 51 of the 56 members of the House Energy and Commerce Committee, which began investigating the corporate giant in January 2002. Together, the two companies' political action committees and employees contributed more than $400,000 to the committee's members since 1990, Federal Election Commission records showed. (Los Angeles Times, January 18, 2002)

After the conservative United States Supreme Court blocked the Florida recount to assure victory for Bush, Vice President Dick Cheney was chosen to head an ad hoc energy committee which was composed of corporate giants who recommended drilling in Alaska. Lay met with Cheney's energy group six times. Bush called Pennsylvania Governor Tom Ridge and assured him that Lay -- eager to deregulate Pennsylvania's electricity market -- was an excellent businessman. (Los Angeles Times, January 15, 2002)

Forty-nine of the 70 members of the House Financial Services Committee, which held the first Enron in January 2002, had taken in a total of $300,000 in contributions from Enron and Arthur Andersen in the last ten years. And two-thirds of the Senate committee that held hearings into Enron and Arthur Andersen shared in a total of more than $70,000 in contributions from the targets of their investigation -- including the committee's chairman, Joseph Lieberman. (Los Angeles Times, January 18, 2002)

Enron's influence on the Hill extended beyond the contributions. Several lawmakers or their wives owned stock in Enron or in mutual funds that were heavily invested in Enron. Fifteen members of the Bush administration owned stock in Enron. Several Cabinet members acknowledged contacts from Enron but said they did not tell Bush or take any action. Bush himself denied speaking with "Kenny Boy" -- as he called him -- about the company's financial problems and said his administration would aggressively investigate the failure of the company. (Los Angeles Times, January 12, 2002)

Republican Tom DeLay, House majority whip whose district is in the Houston suburbs near Enron's headquarters, received $28,900 in donations from Lay's firm since 1989. Enron used as lobbyists two influential members of DeLay's informal kitchen cabinet, Ed Buckham and Karl Gallant. Buckham, a former chief of staff for DeLay, had worked closely on strategy with DeLay's political action committee, Americans for a Republican Majority. Gallant, who once served as that committee's director, went on to run the Republican Majority Issues Committee, a group widely considered close to DeLay. (New York Times, January 16, 2002)

According to the Center for Responsive Politics, Enron and its executives made sizable donations to each of the groups. Gallant's committee included a $50,000 contribution from Lay and a $25,000 contribution from Joseph Sutton, a vice chairman of Enron who left the company in November. Before that year, disclosure was not required for gifts to issues groups. (New York Times, January 16, 2002)

Americans for a Republican Majority received a $10,000 corporate contribution from Enron in 2000 in soft money. The group also received $47,250 in regulated contributions in 1995 through 2000 from Enron, its PAC, or individuals tied to the company. (New York Times, January 16, 2002)

Wendy Gramm, chair of the Commodities Futures Trading Commission in the Bush administration, granted an exemption that permitted Enron to begin lucratively trading energy derivatives. Gramm then joined the board of directors of Enron and served on its auditors committee. Meanwhile, her husband, Senator Phil Gramm of Texas, began pushing through legislation that further weakened government oversight of Enron's activities. Both Gramms made or modified government rules in order to allow Enron to conceal its deals from regulators.

According to Public Citizen, a Washington D.C. watchdog group, Wendy Gramm, chair of the federal Commodity Futures Trading Commission, moved to exempt Enron's energy-swap operation from government oversight. By then, the Houston-based Enron was a major contributor to Senator Gramm's campaign.

A day after she initiated action on the exemption, Wendy Gramm resigned from the commission. Enron soon appointed her to its board of directors, where she served on the audit committee which had control of the inner financial workings of the corporation. Enron paid her between $915,000 and $1.85 million in stocks and dividends since 1993, and she received as much as $50,000 in annual salary and $176,000 in attendance fees, according to a report by Public Citizen. In 1998, Wendy Gramm cashed in her Enron stock for $276,912.

Meanwhile Enron became Senator Gramm's largest corporate contributor. Public Citizen reported that he received just under $100,000 between 1989 and 2001. In June 2000, Senator Gramm co-sponsored the Commodity Futures Modernization Act, a measure aimed at deregulating certain kinds of futures trading, but not energy futures. That bill never made it to the floor, and thus quietly died. Six months later, on December 15, Gramm co-sponsored a bill with the same name, the Commodity Futures Modernization Act. This legislation deregulated energy futures and, without undergoing the usual committee hearings and preliminary votes, was immediately attached as a rider to an 11,000-page appropriations bill. It passed and was signed into law by President Bill Clinton six days later. (The Village Voice, January 16, 2002)

ENRON'S COLLAPSE. After the Gramm bill was passed, a series of rolling blackouts occurred on the West Coast. There were charges that out-of-state suppliers were withholding gas and running up the price. Finally, in June 2001, public pressure forced the Federal Energy Regulatory Commission (FERC) to reassert price controls. During the energy crisis, Enron's "wholesale services" revenues quadrupled, reaching the $48.4 billion mark in the first quarter of 2001. That gain came on top of an earlier jump in income, from $35.5 billion to $93.3 billion from 1999 to 2000. (The Village Voice, January 16, 2002)

According to the 28-page Public Citizen report, Enron was not losing money but stealing billions of dollars from California citizens while forcing on them 37 "rolling blackouts" after Senator Gramm rammed through a law that allowed Enron's energy trading desk "to manipulate supply" secretly. Gramm's bill was opposed by a Presidential Commission which included Treasury Secretary Robert Rubin and Federal Reserve Chairman Alan Greenspan. Enron lobbied on behalf of the bill so heavily that Washington insiders called it "the Enron point." It had been stalled in the Senate when Gramm renamed it and tacked it to a must-sign bill in December 2000. Few noticed the new provision.

In late 2001, the Federal Energy Regulatory Commission (FERC) concluded that California electric prices were not "just and reasonable," key wording meant to signal the price-gougers that the reluctant agency might cap electric prices. (The Village Voice, January 16, 2002)

Enron's financial future received a fatal blow when the FERC brought back price controls. Company executives began dumping stock. Enron's twenty-nine top executives cashed in a staggering $1.1 billion in stock in the three years before the firm tumbled into bankruptcy.

Between 1999 and July 2001, Lay began selling Enron shares which ranged between $31 to $86. Lay eventually accumulated $101.3 million for himself. Jim Derrick, general counsel, sold 160,000 shares between June 6 and June 15, 2001. Former CEO Jeffrey Skilling had sold 500,000 shares as of September 17, 2001. A few weeks later, on December 2, their company filed for bankruptcy. (The Village Voice, January 16, 2002)

By August, after Lay and Skilling had cashed in more than $160 million in Enron stock, Skilling abruptly resigned. Lay personally e-mailed his employees to assure them that "our growth has never been more certain." Enron then maneuvered to prevent its employees from selling the Enron stock in their retirement accounts as its value plummeted, leaving thousands financially devastated.

The earliest signs of Enron's fragile infrastructure emerged as early as February 2001, when executives at Arthur Andersen discussed the company's financial problems. But two months later, its auditors gave Enron's books a clean bill of health. The February 5 meeting represented the earliest known date that senior Arthur Andersen officers -- including its head of United States operations -- knew about such issues as Enron's aggressive deal making, internal conflicts of interest, and huge compensation packages for its senior management. The meeting, held by telephone between Chicago and the Houston branch office that handled the Enron account, was detailed in an e-mail the next day. Arthur Andersen contended that it was unaware of serious problems until August. The e-mail memo reported that Arthur Andersen considered dropping Enron as a client, though it noted that the accounting firm could earn fees from Enron reaching $100 million a year. (Los Angeles Times, January 18, 2002)

Three months later, Arthur Andersen auditors signed off on Enron's financial statement for fiscal years 2000 and 1999, saying it "fairly represented" the company's condition. It was not until October 16 that Enron reported serious financial losses, although Arthur Andersen had the ability to rescind its approval of the company's financial statements at any time.

Enron reported a $618-million loss and a reduction in its shareholders' equity on October 16, and on November 8 it revised its earnings for the previous four years, although without public reference to its overwhelming debts or the financial peril it was telling Treasury officials about. In fact, Enron stock rose almost 20 percent in the four days after the November 8 disclosures as investment analysts anticipated its proposed merger with Dynegy Inc.-- later canceled -- and said most of Enron's troubles were behind it.

On December 2, Enron filed for bankruptcy, signaling the collapse of the nation's largest corporation in history.

The Bush administration first learned of the floundering corporate giant in the fall. Enron officials made several phone calls to White House officials. The White House conceivably was in a position to warn the Securities and Exchange Commission about the company's deterioration. But this close relationship between Enron and the Bush administration caused serious political embarrassment for the president.

In August -- shortly before Enron's collapse -- Enron vice president Sherron Watkins warned Lay in a seven-page letter that the energy company's financial practices might cause it to "implode in a wave of accounting scandals." In a letter to Lay, Watkins complained that a "veil of secrecy," surrounding the company's "funny accounting" of complex partnerships, had not been adequately disclosed to the public and merited further investigation. (Los Angeles Times, January 15, 2002)

In the fall, Lay called Treasury Secretary Paul O'Neill "to advise him about his concern about the obligations of Enron, whether they'd be able to meet those obligations." Press Secretary Fleischer said that "Lay expressed to O'Neill at that time of the phone conversation his concern about the experience the company Long Term Capital had. Long Term Capital was unable to meet its obligations and headed to bankruptcy, and he wanted Secretary O'Neill to be aware of that, the Long Term Capital experience as a guide. Secretary O'Neill then contacted Undersecretary (Peter R.) Fisher. Undersecretary Fisher looked at that and concluded there would be no more impact on the overall economy." In 1998, Long-Term Capital Management LP, one of the biggest U.S. hedge funds, almost collapsed after losing more than $4 billion in derivatives transactions. (Washington Post, January 10, 2002)

In addition, Lay had a telephone conversation with Commerce Secretary Don Evans on October 29 just prior to Enron's collapse. Lay expressed hopes that the government would intervene with a private credit agency that was threatening to lower its rating on Enron's debt, seriously jeopardizing the company's financial viability. Evans said the government did not intervene. This was the first sign that White House had been informed of Enron's desire for government intervention. (Washington Post, January 14, 2001)

Evans said he informed Chief of Staff Andrew Card of the October 29 conversation "several weeks" later, when Enron was negotiating a merger with Dynegy Inc. Evans said Card did not pass the information on to Bush, although the commerce secretary said he talked to the president in November about Enron's plight. (Washington Post, January 10 through January 14, 2001)

In October and November, Enron President Greg Whalley made a series of six to eight calls in which he asked Peter Fisher, Treasury undersecretary for domestic finance, to help secure loans from the company's bankers. Fisher refused. On November 8, Lay telephoned Treasury Secretary Paul O'Neill to tell him of Enron's financial crisis. Robert Rubin, head of Citigroup and a former Clinton administration Treasury secretary, also called Fisher on November 8 to suggest that Fisher take steps to prevent Enron's credit rating from being downgraded.

That same day, Enron filed documents with the SEC revising its financial statements back to 1997, evaporating $600 million in nonexistent profits and accelerating its stock plunge. (Los Angeles Times, January 13, 2002)

To give credit to the Treasury Department, it appeared as if neither Fisher nor O'Neill asked the SEC to demand that Lay tell stakeholders and investors about the firm's deteriorating condition. It was not disclosed how much shareholder value was lost between the time Fisher was first contacted and Enron stock plummeted. Shares dropped from $33.84 a share on October 16 to $8.41 on November 8. Company shareholders and employees lost more than $18 billion of market value in that decline. From that point, Enron stock fluctuated until the end of November, when its bonds were reduced to junk status, and the firm filed December 2 for protection from creditors under Chapter 11 bankruptcy. (Los Angeles Times, January 13, 2002)

In early January 2002, Arthur Andersen LLP disclosed that from September to November it had destroyed thousands of documents involving Enron. Two Republican House leaders, Billy Tauzin and James Greenwood, claimed that the documents were "knowingly destroyed" and asked Andersen to turn over additional records to congressional investigators. (Washington Post, January 9, 2002) Time (January 13, 2001) reported that Andersen ordered employees in an October 12 memo to destroy all Enron audit material except the most basic "work papers."

AN EMBARRASSMENT FOR BUSH. After a friendship that spanned over a decade, Bush finally tried to distance himself from Lay on January 11, 2002. The president said Lay actually "was a supporter of Ann Richards in my run in 1994." What Bush did not say was that Lay gave him three times as much money as he did Richards in the gubernatorial election. Bush also said that he did "know" Lay until after he won the governor's race. (Los Angeles Times, January 15, 2002)

However, the credibility of Bush's statement was questionable, to say the least. Two years earlier -- during the 1992 Republican national convention when the elder Bush received the presidential nomination -- Lay served as the chair of the host committee.

Enron's collapse also placed Bush in a precarious political dilemma. Always an advocate of deregulation, the president now was compelled to deal with a situation where deregulation proved to be a failure -- from federal rules governing private pensions, to securities law, to accounting standards, and even to campaign finance reform. He was also tied to the staffs of several key regulatory agencies -- including the Securities and Exchange Commission -- where he had appointed many key officials. It seemed certain that the Bush administration needed to place deregulation the backburner.

In addition to an embarrassed Bush, the future of numerous House and Senate members was on the line. Several were facing tough campaigns in 2002 and consequently began divesting themselves of Enron contributions. Many looked to credible charitable groups which provided support to displaced Enron employees.

Those severing relations with Enron included Republican Senator Tim Hutchinson and Democratic Senators Jean Carnahan, Max Baucus, and Tim Johnson. Republican Senators Mike Enzi and John Warner also returned Enron contributions -- $3,500 from Enzi and $277 from Warner. GOP Senator Gordon H. Smith said he would give away the $8,100 in Enron donations he had received since 1997. House Minority Speaker Richard Gephardt said the $1,000 that Enron donated to his Democratic Leadership Fund would go to the St. Louis Children's Hospital. Republican Congressman J. Randy Forbes gave his $1,000 in Enron donations to a charity helping Enron workers. Republican Congresswoman Deborah Pryce turned over all contributions from Enron to "help employees who were adversely affected." (Washington Post, January 17, 2002)

On the other hand, some prominent lawmakers chose to keep their Enron donations. They included Republican Congressmen Billy Tauzin, chairman of the House Energy and Commerce Committee, which was investigating Enron -- and GOP Majority Whip Tom DeLay. Rejecting Enron's contributions, they said, would amount to an admission that the money was accepted unethically. (Washington Post, January 17, 2002)

THE CONGRESSIONAL INVESTIGATION AND SHREDDED DOCUMENTS. On January 10, Attorney General John Ashcroft along with David Ayres, his chief of staff, recused themselves from the Enron criminal probe. Ashcroft received more than $50,000 from the company and Lay, for his 2000 Senate campaign. Additionally, virtually the entire legal staff of the United States attorney's office in Houston excused themselves as well. Michael Shelby, the United States attorney in Houston, and his staff were disqualified on grounds that they were acquainted with Enron employees. Shelby's brother-in-law was a lawyer for Enron North America and was among those Enron stockholders who lost substantial sums when the company's stock plummeted. Shelby said that several of his employees had ties to former and current Enron workers, some of whom could be witnesses in the case. (New York Times, January 16, 2002)

The investigation was handed over to of Larry D. Thompson, the deputy attorney general, and his subordinates in the department's criminal division. However, questions surfaced that Thompson also had ties to Enron. In Atlanta, he was a lawyer at the firm King & Spalding, which represented Enron, but he himself did no work for Enron. (New York Times, January 16, 2002)

Soon after the federal investigation of Enron began, company officials began shredding documents, according to William Lerach, attorney for shareholders. Paul Howes, an attorney working with Lerach, said text was legible in some of the shredded documents and included references to controversial partnerships such as Jedi II and Chewco. Losses by such off-the-book partnerships played a key role in triggering Enron's collapse. Based on statements from witnesses, Lerach estimated that possibly hundreds of thousands of documents were destroyed. Howes said fired Enron employees were told to gather their work papers in boxes and turn them over to company officials, who went through them and shredded numerous documents. He said the shredding began with the layoffs triggered by Enron's December 2 declaration of bankruptcy, and accelerated during the Christmas and New Year's holidays. He said the shredded documents were dated from at least 1994 through December 20, 2001. (Washington Post, January 22, 2002)

The claim that shredding took place in Enron's accounting offices was also made on January 21 by Maureen Castaneda, the former director of Enron's foreign investments section. After she was dismissed by the corporate giant, Castaneda wade allegations in an interview with ABC News that she witnessed the shredding of documents that began around Thanksgiving and continued at least until she left the company in the second week of January. (Washington Post, January 22, 2002)

Not surprisingly, Joseph Berardino, the chief executive of Arthur Andersen, said on NBC's Meet the Press (January 20, 2002) that he was unaware of any instance in which Enron broke the law, and he sought to focus blame for Enron's collapse on its business model rather than its poor accounting practices. (Los Angeles Times, January 21, 2002)

Another Enron spokesman, Mark Palmer, said the company did not "have any knowledge of the material that the plaintiffs' attorneys are parading in front of the media." But he said that if the allegations proved true, the people responsible would be fired. The company sent e-mails to employees on October 25, October 26, October 31 and January 14 instructing them to retain all documents dealing with "related-party transactions, SEC requests, or any Enron transactions or accounting for those transactions," he said. The January e-mail was sent as a reminder after it was revealed that Andersen had shredded Enron-related documents. (Washington Post, January 22, 2002)

After the story broke that Enron employees allegedly shredded documents, District Judge Melinda Harmon asked both parties in a lawsuit against the company to work out a plan to halt the destruction of documents. Meanwhile, FBI agents were ordered to Enron headquarters to investigate new allegations of document shredding. (Los Angeles Times, January 22, 2002)

On January 23, Lay resigned as chairman and chief executive of Enron. His resignation, on the eve of two congressional hearings, had been sought by a committee of major creditors who hold veto power over Enron's Chapter 11 bankruptcy reorganization efforts.

The House Committee on Government Reform began its probe of Enron in early January 2002. Congressman Henry Waxman, ranking Democrat on the committee, charged that Lay misled his 21,000 employees in August by painting a rosy picture of the company's financial health. Waxman released copies of e-mails sent by Lay to employees in August that suggested all was well with the company and that its stock would rebound. But Waxman said Lay must have known then that Enron was falling into deep financial trouble. The e-mails were sent as Enron shares tumbled after Jeffrey Skilling's abrupt August 14 resignation as company president. (Los Angeles Times, January 13, 2002)

On January 24, The House Energy and Commerce investigations subcommittee also investigated the Enron debacle. The subcommittee first called upon David B. Duncan, Arthur Andersen's lead partner on the Enron account until he was fired in January, to testify. GOP Congressman Jim Greenwood, chairman of the subcommittee, told Duncan that "Enron robbed the bank. Andersen provided the getaway car. And they say you were at the wheel." When questioned, Duncan refused to answer questions, citing his protection under the Fifth Amendment. (Washington Post, January 25, 2002)

Duncan was followed by senior Arthur Andersen executive C. E. Andrews, who acknowledged that documents were inappropriately destroyed. But Andrews objected vehemently to suggestions that the company sanctioned the shredding of documents because of the government investigations. He blamed Duncan for the trouble. (Washington Post, January 25, 2002)

Also testifying before the committee was Nancy Temple, an Arthur Andersen attorney responsible for document retention policy at the company. She had sent out a memo in the fall of 2001, reminding Duncan and other employees about the company's policy on the shredding of certain documents. Temple's November 10 e-mail suggested that Arthur Andersen's legal department did not explicitly tell auditors to start preserving documents related to Enron's audit until nearly three weeks after Enron had disclosed that the SEC was looking into its finances. (Washington Post, January 25, 2002)



California regulators, along with Pacific Gas and Electric and Southern California Edison, accused El Paso Merchant Energy affiliates of designing a strategy to boost natural gas prices by restricting access to space on the company pipeline into Southern California. On March 1, 2000, Texas-based El Paso Merchant Energy took over 1.2 billion cubic feet of space on the pipeline which imported natural gas from Texas and New Mexico. The pipeline supplied about half of California's gas.

California's Public Utilities Commission accused El Paso Merchant Energy of withholding its unused share of that capacity to reduce supplies and drive up prices. California's natural gas costs ranged from two to 10 times the rate in other states in the first half of 2001. The company controlled about 40 percent of the capacity to California on a pipeline owned by a sister company. It was accused of withholding gas shipments in 2000 to limit storage for winter, helping cause prices to soar to five times those in other parts of the nation.

El Paso Merchant Energy denied that it manipulated California's natural gas market to escalate prices, a federal administrative law judge said yesterday. The company may have improperly restricted space on its Southern California pipeline to boost the price of natural gas, according to Curtis Wagner Jr., chief administrative law judge for the Federal Energy Regulatory Commission. He said that the memo "certainly has statements in it that could lead one to believe there was an abuse" of the gas market and that it included documents he describes as "smoking guns." (San Francisco Chronicle, May 16, 2001)

The New York Times (May 15, 2001) reported that in the sealed memo, officials of an El Paso marketing affiliate said it would gain "more control" of gas markets under a contract it was seeking for space on El Paso's pipeline.

CEO William Wise denied the allegation, saying that his company did not violate federal rules in an attempt to boost profits by slowing the flow of natural gas to the state to drive up gas and electricity prices. But in his testimony before Administrative Law Judge Curtis Wagner Jr. of the Federal Energy Regulatory Commission, Wise gave somewhat conflicting accounts of who made key decisions at the company. He testified that two of the firm's subsidiaries -- one overseeing pipelines, the other trading energy -- did not join in an illegal scheme to slow the flow of natural gas to the state to drive up gas and electricity prices. Under federal law, pipeline operators and energy traders are required to maintain a separate relationship, even if they are part of the same parent company. Wise first said that he ran the parent company and the two subsidiaries reported to him. Then he stressed that the top executives of the two subsidiaries -- El Paso Natural Gas and El Paso Merchant Energy -- operated largely on their own. In earlier testimony, Wise acknowledged that as head of the parent company, he approved the El Paso Merchant Energy decision in February 2001 to bid on a contract reserving a huge block of capacity on a major California pipeline owned by El Paso Natural Gas. This contract was the centerpiece of the dispute between El Paso, among the largest natural gas suppliers to California, and the California Public Utilities Commission and the state's two largest utilities. (New York Times, May 26, 2001)

Over a year after the California energy crisis, a federal judge ruled that El Paso helped drive up prices for natural gas in 2000 and 2001. It was the first time any federal regulatory official determined there was widespread manipulation of energy supplies. (New York Times, September 24, 2002)

Judge Curtis Wagner Jr. said in his ruling, “Paso Pipeline withheld extremely large amounts of capacity that it could have flowed to its California delivery points.” In doing so, Judge Wagner validated the allegations of California officials that the nation’s largest natural gas company withheld natural gas from the state, thus driving up the cost of electricity that was generated by gas-fired turbines.

Some El Paso documents showed senior executives discussing a plan to give them more control of gas markets, including the “ability to influence the physical market” to benefit the company. One document discussed how a deal in which one subsidiary, El Paso Natural Gas, sold pipeline capacity to a sister company, El Paso Merchant Energy, would allow the company to “wden: the difference between what gas could be bought for in Texas and New Mexico and what it could be sold for in California. (New York Times, September 24, 2002)



California lawmakers investigated whether Duke Energy manipulated prices during three days in January, when the company at one point offered a single megawatt of power for a record-shattering $3,880, when it repeatedly turned its generators on and off during those three days. Duke Energy acknowledged that it sold electricity in California for as much as $3,880 per megawatt hour. The company imposed the charges in January, when California began suffering from rolling blackouts. But Duke Energy tried to downplay the price-gouging, claiming that just 5,000 megawatt hours was less than 0.1 percent of the total electricity that the company sold in California during the first three months of 2001. In addition, Duke Energy tried to justify its prices by claiming that there was no assurance that it would get paid in full for its electricity. Company officials said that its wholesale electricity prices in California averaged $136 per megawatt hour during that period, below the rates charged by other merchants selling power at the minute. (New York Times, June 1, 2001)

In late June, three former San Diego power plant workers accused officials of Duke Energy of manipulating California's crippled electricity market for higher profits. However, records and interviews showed that the company was responding partly to state instructions. The former employees told a legislative committee investigating alleged price gouging that the power plant decreased production in an attempt to drive up profits. They showed logs showing that Duke Energy constantly increasing and decreasing generation during power emergencies over three days in mid-January. (Los Angeles Times, June 23, 2001)

Two more former employees at Duke Energy made allegations that the company manipulated the energy market to drive up prices, although they offered no hard proof and little new information. E. Robert Edwards, an electrician, said that he "asked the foreman why Unit 4 wasn't running. We had a 225-megawatt generator sitting there, and he just shrugged his shoulders and said, ‘I really can't tell you. I'm not privy to that information.' " The other employee, Richard J. Connors, said, "It is true units were taken offline, mostly on the weekends for whatever reason. It got to the point as an operator that you were dreading working swing shifts on Sunday or graveyard Monday morning because you knew you were going to be running around putting units back online." Edwards said that he had seen a company warehouse eventually emptied of parts that are used to repair broken generators, although he did not know where the parts went. (San Francisco Chronicle, July 6, 2001)

Duke Energy maintained that it was following orders from the Independent System Operator, which ran the state's power grid. Public records obtained by the Los Angeles Times confirmed that at least part of that activity was directed by the California Independent System Operator Cal- ISO). Moreover, Cal-ISO, which in the past had accused power firms of withholding electricity to boost prices, stressed that it regularly directed generators to adjust output to keep the grid humming. (Los Angeles Times, June 23, 2001)

But January logs from the Cal-ISO and the generators did not offer an explanation for every allegation of price manipulation, since Duke Energy refused to release a detailed list of the prices it offered and paid during that period. (San Francisco Chronicle, July 6, 2001) On January 17, for example, records showed that Cal-ISO called on one unit to increase output by 62 megawatts at 6 a.m. and reduce it by that same amount two hours later. Then at noon, the agency ordered 71 more megawatts, cutting it back to 20 at 3 p.m. By the end of the day, the agency had asked for an additional 38 megawatts. A second unit was instructed to add 50 or more megawatts four times on the same day. A third unit was ramped up or down 12 times, bouncing from zero to as high as 221 megawatts. The records showed only power that ISO actually needed. The agency refused to disclose how much reserve power it had under contract with Duke that it had not called on. (Los Angeles Times, June 23, 2001)



In May 2001, the Justice Department launched an investigation into two California companies plotted to constrain the construction of power plants in the state in order to bolster their profits. The DOJ alleged that AES and Williams Energy agreed to limit the expansion or construction of new power plants near three facilities purchased by AES in 1998 from Southern California Edison under the state’s deregulation plan. The plants -- in Long Beach, Huntington Beach and Redondo Beach -- were owned by AES, but the electricity was sold by William Energy. The three plants had a combined capacity of more than 3,900 megawatts, enough to supply about 3 million homes. AES agreed to bring another 450 megawatts on line for the summer by reactivating two mothballed generators in Huntington Beach. (Los Angeles Times, June 6, 2001)

Under a three-year-old deal, known as a tolling agreement, Williams Energy essentially rented out the capacity of the plants for annual payments to AES. Williams Energy supplied natural gas to fire the plants and sold the electricity under long-term contracts and in the costly spot market. Williams Energy and AES had similar tolling agreements at plants in Pennsylvania and New Jersey. (Los Angeles Times, June 6, 2001)

Over two years after California’s power crisis, evidence surfaced that AES Corporation and Williams Company conspired to squeeze electricity supplies to California in early 2000. Federal regulators released documents that indicated the companies conducted bogus power plant shutdowns.

The FERC reported that Williams, which had a contract to market the electricity from AES electricity plants in California, earned more than$10 million by selling more expensive electricity from other AES plants to the California Independent System Operator during the outages at the Long Beach and Huntington Beach plants totaling 17 days.

AES and Williams settled the inquiry in April 2001, without admitting wrongdoing, after Williams agreed to refund $8 million to Cal-ISO -- $2 million less than the profit Williams made. Cal-ISO ran electricity markets for last-minute power and operated the long-distance transmission grid serving about 75 percent of the state.

The state of California agreed to drop lawsuits accusing Williams of price gouging during the energy meltdown of 2000-01 in exchange for concessions by Williams on long-term electricity contracts.

In November, the FERC released a previously sealed investigation showing Williams employees cutting deals in April and May 2000 with AES employees to shut down one Southern California power plant that AES operated for Williams and prolong a maintenance closure at another. The FERC investigation found that Williams employee Rhonda Morgan, in two taped telephone conversations, told an AES worker on April 27 that “Williams wanted the outage to run long” at a Long Beach power plant that had closed for repairs two days before. (Los Angeles Times, November 16, 2002)

Williams and AES denied wrongdoing, and Williams said the state was aware of the FERC findings when it negotiated the settlement announced Monday. That deal required $417 million in concessions from Williams, including a $147-million cash payment.

The FERC investigation concerned the operation of the AES-owned Alamitos power plant in Long Beach and AES’ Huntington Beach plant -- both large facilities containing several smaller plants. Both plants had generation units under contract with Williams to provide electricity to Cal-ISO at $63 a megawatt-hour -- enough power to supply about 750 typical homes for an hour. The shutdowns allowed Williams to sell power to Cal-ISO from other AES plants at a premium price -- $750 a megawatt-hour, FERC documents showed.

At Huntington Beach, an unnamed AES worker told a Williams employee that AES wanted to shut down one of its generation units on May 6, 2000, because Cal-ISO was not paying enough for the unit’s electricity to cover the air pollution credits that AES would have to buy to run the unit, the documents showed. The request was unusual because the unit in question was required to operate under contract to Cal-ISO to provide a reliable source of electricity.

In a later conversation, a Cal-ISO coordinator objected to shutting the unit to conserve pollution credits. In a taped conversation with Morgan, who monitored AES outages for Williams, the Cal-ISO coordinator said: “So take some of that money that you just raped us out of Alamitos 4 and buy some damn credits.” Morgan laughed and said, “Good answer, man,” the report said. Morgan later confirmed to the Cal-ISO official that there was nothing wrong with the unit.

Williams subsequently changed its reason for the outage, saying the company needed to dredge mussel shells and other debris that were clogging cooling seawater tunnels that fed the power plant.

The Cal-ISO coordinator refused to accept that reason, saying he had worked at the plant when Southern California Edison owned it and mussel shells had never been a problem because Edison routinely flushed the tunnels with hot water. AES did not take that precaution, the FERC report said.

Williams later changed its explanation again for the outage, saying it was not for maintenance but was instead an unspecified “forced outage,” which Cal-ISO accepted.



In July 2003, two of the nation’s largest banks -- J.P. Morgan Chase & Co. and Citigroup Inc. -- agreed to pay over $300 million to settle charges that they helped bankrupt Enron by manipulating its balance sheet by disguising billions of dollars in loans. The settlement included $255 million in payments to settle enforcement cases brought by the SEC and $50 million to settle allegations lodged by the Manhattan district attorney’s office.(Washington Post, July 28, 2003)

Both banks earned steep fees from Enron in return for financing “prepays,” transactions in which companies were paid to deliver products, such as oil, at a later date. Enron increased its revenue more than $8.5 billion by using prepays in the six years before its collapse into bankruptcy. Regulators said the deals should have been treated as loans.(Washington Post, July 28, 2003)



In February, the Bush administration flatly rejected imposing caps on the soaring price of electricity in California. Two months later, when the Federal Energy Regulatory Commission imposed "soft" price controls in power emergencies, Vice President Cheney denounced the decision as "counterproductive." (Los Angeles Times, June 19, 2001)

California Governor Gray Davis led the attack as the Democratic Party's point man against Bush's energy plan. Davis blasted the president's energy plan and Texas energy companies and accused the administration of "turning a blind eye to the bleeding and hemorrhaging that exists in this state." He repeated his plea for the federal government to impose caps on wholesale energy prices that he said have driven the state's largest investor-owned utility into bankruptcy and two others to the brink of collapse. "If he wants to be helpful to California, he could send a strong signal that the Federal Energy Regulatory Commission should grant some kind of relief," he said.

Davis also criticized Bush's plan, saying the president is allowing energy generators to "get away with murder." The Democratic governor said Bush's pledge to speed up power plant permits and conserve at federal facilities offers no short-term relief for California's rolling blackouts and record power bills. Davis charged that by not doing anything, Bush was "allowing the price gouging energy companies many of whom reside in Texas to get away with murder. ... We are literally in a war with energy companies, many of which reside in Texas. Californians wants to know if (Bush) is going to be on their side." (San Francisco Chronicle, May 17, 2001)

Cheney bluntly rejected Davis' claim for failing to address California's energy problems and instead attacked the governor for refusing to act quickly enough. The vice president told Tim Russert on "Meet the Press" (May 20, 2001), "They've bankrupted the biggest utility in the state, destroyed the state's credit rating and squandered a significant portion of the state's financial surplus in a harebrained scheme to try to use the state to purchase power. ... They knew over a year ago they had a problem, and Gray Davis refused to address that problem. They kept putting it off and putting it off and putting it off, with the notion that somehow price caps could be maintained." (San Francisco Chronicle, May 21, 2001)

Davis spokesman Steve Maviglio said that Cheney's remarks were "grossly misinformed" and meant to divert attention from the administration's neglect of the state and its power woes. Maviglio added, "The Bush administration has refused to address California's problem, and now they're washing their hands of it."

At the end of May, Davis and Bush met for 40 minutes. The governor repeated his denunciations of the Bush administration's attitude toward California's power crisis. The Bush- Davis argument centered around price caps for wholesale electricity. Davis pointed out that generators had been charging astronomical prices for power recently: In the first three months of 2001, they pocketed more than five times the amount they were paid in the first quarter of 1999. Moreover, the spring and summer inflated prices wreaked of manipulation by suppliers. Davis argued that the state of affairs justified temporary price caps.

However, Bush objected to price caps on principle, claiming that they would lead to shortages. Energy companies, so he claimed, would not be inclined to build new power plants, and a scarcity of electricity would follow. But the electricity market was different. For one thing, retail prices were set separately from wholesale ones, so high wholesale prices did not stimulate conservation directly. Additionally, it takes about two years to build a power plant, so high wholesale prices could not stimulate increased supply in the short term. If prices were capped at a level high enough to ensure a decent profit, California's shortages would not worsen.

As the energy crisis was threatening to expand, the Federal Energy Regulatory Commission in June extended controls beyond California to 10 other western states. Then in June, the FERC reversed itself. The commission said it would restrain wholesale prices at all times, thus stepping beyond its current policy of restraining them only during emergencies. In addition to making the plan apply at all times across the West, the FERC moved to eliminate "megawatt laundering." Generators could no longer circumvent California price curbs by transmitting power out of state and then importing it back at higher rates. But the FERC stopped short of satisfying demands by Governor Davis and others for hard price caps on wholesale power.

Under the FERC's plan:

**The formula for calculating the price limit was simplified in a way that experts predicted would save the state money. The new formula was based on the cost of fuel, plus an allowance for operations and maintenance. Emission costs and plant start-up charges, included in the previous formula, were treated differently.

**Generators received a 10 percent add-on to the maximum price that could be charged during power emergencies.

**The price limits remained in effect during times when there was no power emergency. During such times, the maximum price would be 85 percent of the highest hourly price in effect during Stage 1 of the previous emergency. Stage 1, the onset of a power emergency, occurred when reserves fell below 7 percent of anticipated need.

**Energy marketers -- freewheeling traders who emerged in the era of deregulation -- would not be allowed to charge more than the maximum price set. (Los Angeles Times, June 19, 2001)

In addition to the federal regulations, the California state government negotiated a series of long-term supply contracts, thereby ending the controversial policy of buying all the state's power on the volatile spot market. These federal and state actions gave California more time to implement long-term solutions such as building new generators and transmission lines. (Washington Post, June 19, 2001)

Bush had been outspoken in refusing to intervene and to implement caps on wholesale electricity. And he feebly claimed that he was consistent in his opposition, saying that the FERC did not administer lids. When Bush flip-flopped on his position, the White House immediately issued "talking points," maintaining that they were not price caps. In an attempt to make the public believe that he did not reverse himself, the president said that the FERC did not impose caps but that the executive agency merely was "talking about a mechanism ... to mitigate any severe price spike that may occur, which is completely different from price controls." (Washington Post, June 19, 2001) In addition, the vice president's spokeswoman Mary Matalin contended, "He (Cheney" is not against what FERC did, because they are market-based incentives. To the extent anything is a price cap, he's against them. But these are not price caps." (Los Angeles Times, June 19, 2001)

Several factors influenced Bush to switch his position. First, the power crisis was spreading to other Western states, most of them governed by Republicans. But in California, a Democratic majority ran the state government, so Bush was inclined to play politics, claiming that it was a Democratic problem. Second, Republicans in Congress warned that the administration's opposition to price caps was a political blunder that could endanger GOP control of the House. Consequently, the GOP leadership on Capitol Hill appealed to the White House to change its policy. And third, Davis, by demanding tough price caps, gave Bush something he could continue to denounce even as he embraced limited price controls. (Los Angeles Times, June 19, 2001)



The gasoline crunch also showed signs of price-fixing. While gasoline prices hovered around the $2-per-gallon mark in the spring of 2001, California refineries had 10 percent more fuel in storage than they had 12 months earlier. Will Woods, executive director of the Automotive Trade Association of California, said that supplies of fuel in California were so high that refiners could run out of room to store gasoline in 10 days to two weeks. "All the market forces are out there to drop the price, but we don't see the price dropping," he said. Yet, data complied by the California Energy Commission showed the percent of each gallon price that gas station dealers kept for costs and profits was up significantly in May 2001 -- 16 cents per gallon, compared with a loss of nine cents per gallon a month earlier. The wholesale price of fuel is $1.10 per gallon, compared with 41.4 cents per gallon a year ago. (Orange County Register, May 22, 2001)

In May 2001, the Federal Trade Commission closed a three-year antitrust investigation by concluding that Western and Midwestern oil refiners had not engaged in illegal activity. The commission concluded that it "found no evidence of conduct by the refiners that violated federal antitrust laws." (

But in June, Oregon Senator Ron Wyden suggested that oil companies had little interest in building new refineries because of low profit margins and discussed the need to curtail refinery output to boost profits. He accused major oil companies of working together in the mid-1990s to reduce refinery capacity in order to drive up gasoline prices in California and other states. He released oil company memos and other documents suggesting that Arco, Chevron, Texaco, and other firms sought to boost their profit margins by orchestrating the shutdown of refineries and thus curtailing gasoline supplies. But Wyden stopped short of contending that the oil companies broke the law. Wyden said his investigation undermined the Bush administration's argument that refining capacity had been restricted by government-imposed environmental regulations and that regulatory reform was needed to ensure adequate gasoline supplies. (Los Angeles Times, June 15, 2001)

Texaco, Chevron, and BP (owner of Arco) all denied any wrongdoing, and all three pointed to California Supreme Court and Federal Trade Commission rulings as evidence that market forces are behind the trends in refining and gasoline prices. The oil giants claimed that they lacked the backup generating power to keep their refineries operating at full capacity in the event of a blackout.

Among the documents released by Wyden were internal communications from the mid-1990s suggesting that oil companies wanted to scale back refinery capacity to boost their profits. The November 1995 memo by Chevron also cited warnings about refinery profits by a senior analyst from the American Petroleum Institute, the industry trade group, at an industry conference that year. API spokesman Jim Craig said, "We don't know about these alleged internal company memos, but the idea that the API would warn member companies on profits is ludicrous." (

In a memo dated March 7, 1996 marked "highly confidential," a Texaco official said surplusrefinery capacity was "the most critical factor" facing the refinery industry because it resulted in "very poor refining financial results." The memo concluded that "significant events" were required to deal with the excess refinery capacity problem and suggested that one solution might be to get the government to lift clean air requirements for an oxygenate in gasoline. Removal of the additive would have required more gasoline to be used in each gallon of fuel, thereby tightening supplies. (

Afrer reviewing a study by the Federal Energy Regulatory Commission issued in February, the General Accounting Office faulted federal regulators for claiming that there was no evidence to support accusations that power companies manipulated California's electricity market. In late June, the GAO found no evidence that companies withheld power to drive up prices.

The GAO said the agency's work looked only at physical reasons for outages and did not explore the possibility that generating companies used bidding strategies to withhold supplies. Moreover, the office found that the study did not prove that cutoffs had occurred for unavoidable physical reasons. The office said that industry experts it consulted agreed it was "practically impossible" to determine whether cutoffs were justified merely by examining physical evidence because plants frequently ran with some physical problems. (New York Times, June 30, 2001)



While Bush lobbied for his energy plan, over half of the country's 152 oil refineries were believed to be violating air-pollution laws. The Bush administration needed to decide how hard to deal with them. Cheney's energy task force released a report on May 17, ordering the EPA and the Justice Department to review their enforcement of the pollution laws.

The review came after about 30 percent of the refining industry agreed to spend hundreds of millions of dollars to reduce illegal air pollutants from several dozen refineries. Another 25 percent of the refineries were believed to be violating the law and were targets of investigation. And the other 45 percent never met with federal officials and continued to operate in violation of the pollution laws. Among those was Exxon Mobil, the largest of the refinery owners. Officials of that company argued that the EPA's interpretation of the laws were too strict and that uncertainty over enforcement of the pollution standards had deterred refineries from expanding. In testimony before Congress in April 2001, D.H. Daigle, director of Americas refining for the Exxon Mobil Refining and Supply Company, urged that enforcement of the rules be suspended "to prevent enforcement policies from interfering without tangible benefit to industry's ability to meet our energy and fuel supply needs." (New York Times, May 19, 2001)

Under the Clean Air Act, refineries and power plants that make changes resulting in an increase in pollutants must seek permits from the EPA, requiring that plants offset additional emissions with cuts elsewhere. That provision, which was enacted in the late 1970s, had routinely been ignored.



As gasoline prices soared in 2005, the oil and gas industry made record profits. According to data reported by the Energy Information Agency (EIA), the price of a gallon of regular gasoline increased by 174 percent from January 2002 through September 2005.

ExxonMobil broke the profit record for all American companies with $25.33 billion. The world’s largest oil company had profits soar by 75 percent to $9.92 billion in the third quarter of 2005. Its profit in the first nine months of this year -- $25.42 billion -- equaled its full-year earnings for 2004. Its sales for the quarter skyrocketed to $100 billion. (New York Times, October 28, 2005)

ChevronTexaco, ConocoPhillips, Shell, and BP also profited. These companies funneled the profits to their own CEOs -- whose median compensation has increased by 215 percent between 2002 and 2005. Another oil giant, Royal Dutch Shell, reported a 68 percent jump in profits to $9.03 billion. Chevron’s profits increased by more than $4 billion. (American Progress Action, October 8, 2005; (New York Times, October 28, 2005)

At the same time, damaging White House documents were released. They showed that executives from big oil companies met with Cheney’s energy task force in 2001. Officials from Exxon Mobil, Conoco, Shell Oil, and BP America met in the White House complex with the Cheney aides to develop a national energy policy. (Washington Post, November 16, 2005)

As a result of the sharp spike in gasoline prices -- coupled with record profits of Big Oil -- CEOs from Exxon Mobil, Chevron, and ConocoPhillips testified before in a joint hearing before the Senate Energy and Commerce committees. The chief executives said their firms did not participate in the 2001 task force. The president of Shell Oil said his company did not participate “to my knowledge,” and the chief of BP America Inc. said he did not know. (Washington Post, November 16, 2005)