One fall day in 2000, in the midst of the California energy crisis, S. David Freeman found himself debating by telephone with Enron's Kenneth Lay, chief executive of the then highflying Texas energy firm.
Freeman, head of the Los Angeles Department of Water and Power at the time, had joined other California officials in pushing the federal government for price controls as a means to rein in a runaway wholesale market.
Government intervention, Lay warned Freeman by telephone, would not work. Extended price caps would keep the market from correcting itself, and frighten away future investment in power plants. Lay, as Freeman recalls it, ended the conversation with this parting shot:
"Well, Dave, in the final analysis, it doesn't matter what you crazy people in California do, because I got smart guys out there who can always figure out how to make money."
Looking back on it now, amid revelations about "Death Star" and "Get Shorty" and other colorfully named tactics concocted by Enron traders, Freeman figures he should have paid more attention: "What he was telling me, in a sophisticated way, was that they were going to game the system."
Over the last few weeks, internal memos, notes and other energy industry materials have kept popping into public view, suggesting in sometimes vivid detail just how the "smart guys," as Lay called them, worked to manipulate the California energy market in 2000 and 2001.
The paper flow, which began in early May with the release of a set of so-called "smoking gun" memos from Enron, has prompted regulators, politicians and other industry figures to begin reexamining the root causes of the crisis and even to consider anew that most fundamental of questions: Was there, in fact, a shortage at all?
Federal regulators, who long maintained that the mess was one of the state's own making--and who, in turn, were maligned by California leaders as cops asleep on the beat--seem to have executed an about-face.
Patrick H. Wood III, the former Texas regulator who late last year was appointed chairman of the Federal Energy Regulatory Commission by President Bush, said that initially he considered the California debacle the result of a flawed deregulation plan. Now he's not so sure.
"I didn't walk in here thinking we needed to do a names, numbers, times and dates and 'Who's your alibi?' investigation of the California market, and now I do," Wood said in an interview. "That kind of analysis is something that we really do need to do ... to get the definitive understanding of what happened in the California market."
