In (Reluctant) Defense of Enron: Why Bad Regulation is to Blame for California's Power Woes, or Why Antitrust Law Fails to Protect Against Market Power When the Market Rules Encourage its Use

Abstract

The primary contention of this Article is that California's failed "deregulation" experiment arose largely from the failure of California to create properly functioning market rules, lack of diligence in market oversight, and the expectation that antitrust law would cure that which it was not designed to cure: market ills cultivated by regulatory rules that legitimized anticompetitive conduct and made that conduct the norm. In the context of the regulatory environment developed in California, this Article examines the merits of allegations that Enron exercised market power in violation of antitrust laws.

The article begins by examining the competitive conditions of markets and the history of the development of California's wholesale and retail markets. The article then describes how California's markets functioned, followed by a description of how the initial successes of market mechanisms later became serious market failures. The article then discusses the allegations against Enron, as well as other potential anticompetitive conduct that might have led to the collapse of the market. The article concludes that while evidence for the most part is lacking thus far as to antitrust violations by Enron, the evidence does point to failures by California's regulators, utilities, and the Federal Energy Regulatory Commission (FERC) to plan for and guard against exercises of market power. Moreover, some evidence points to potential antitrust misconduct by others, although that evidence, at the time of publication of the article, was far from conclusive. The article then suggests methods of regulation that would minimize market abuses, and what roles market regulators and antitrust enforcers would play in such a world.

The implication of this analysis is fourfold. First, regulation and antitrust are complements essential to sensible regulation of power markets. As such, a regulatory failure may expose market flaws that are not remedied by antitrust enforcement. Similarly, antitrust does not protect against exercises in market power in yet-to-be created markets, and regulation is an essential protection against such exercises. Second, the nature of the market structure governs and determines the nature of conduct that is illegal under the antitrust laws. Third, the concepts of "deregulation" and "competition" are seriously misleading, and the rhetoric of deregulation should instill a notion of regulated competition such that regulators, legislators, and antitrust enforcers understand their roles as being complementary. Finally, the points considered above have serious implications for not only the deregulation of the energy industry in the future, but also the deregulation of any industry where it is hoped that market mechanisms might supplant regulation.

Keywords: antitrust, deregulation, regulated industries, electricity, competition policy

JEL Classification: K21, K23, L1, L4, L5, L94