NEWSCASTER: California's power supply came up short today, and the lights went out.
ANNOUNCER: For the first time in 65 years, the electric power market is in chaos. Electricity rates are climbing, and not just in California, where the largest utility has gone belly-up.
JEFFREY K. SKILLING, President and CEO, Enron: It is the most volatile commodity in the world.
ANNOUNCER: The plague of blackouts that started on the West Coast could spread to New York by summer. And entire regions of the country are short on power.
Rep. RICHARD GEPHARDT (D-MO), Minority Leader: Guy at rally: This is an American problem! It's not just a California problem!
RICHARD B. CHENEY, Vice President: There's not a lot you can do. You can't manufacture kilowatts in the West Wing of the White House.
ANNOUNCER: Investigators claim that a handful of energy companies siphoned billions from consumers while the lights were out.
RICHARD PRIORY, CEO, Duke Energy: We took the market price. We didn't take any excess price, I can assure you of that.
LORETTA LYNCH, President, California PUC: These folks are going to bleed us to death like leeches unless we stop them.
ANNOUNCER: But the industry charges that regulators and politicians failed to act.
GRAY DAVIS, Governor, California: This is people taking advantage, and sticking it in as deep as they can.
ANNOUNCER: Tonight, in a joint production between FRONTLINE and The New York Times, correspondent Lowell Bergman investigates the energy storm that could soon engulf the nation.
LOWELL BERGMAN, Correspondent: [voice-over] If you want to understand the story of electric power in America today, you have to follow the money. It's a story that takes you here, to Houston, Texas. This is "Energy Alley," home to a new breed of power company run by electric cowboys who've pioneered radical ways of buying and selling energy.
On this downtown block alone stands a phalanx of new energy giants - Dynegy, El Paso, Reliant - and down the street. the biggest of them all, the Enron Corporation.
On this trading floor, young MBAs and Ph.D.'s trade everything from oil, gas and electricity to Internet bandwidth and hedges against the weather itself.
[on-camera] What's going here, hundreds of millions of dollars in-
[voice-over] Twice the size of its nearest competitor, Enron runs the largest e-commerce site in the world. Jeff Skilling is Enron's new CEO.
JEFFREY K. SKILLING: Our gas portfolio, we probably do- oh, probably close to $3 billion, $2.5 billion to $3 billion a day of purchases and sales. So that would be a notional factor. So, yes, big.
LOWELL BERGMAN: Enron's a new kind of company. It's not a big energy producer, but makes money instead as a middleman, buying electricity before it's made, then selling it to customers.
[on-camera] Do the weather guys get punished here if the weather is wrong? I mean, if they predict wrong?
JEFFREY K. SKILLING: No. Do have any whip marks on your back there, Mark?
LOWELL BERGMAN: [voice-over] The company relies on its own team of private weather forecasters to find the most profitable market to sell into. Who needs heating? Who needs cooling? And when?
ENRON FORECASTER: But we're looking for above-normal temperatures on all three coasts - Gulf Coast, East Coast and West Coast.
LOWELL BERGMAN: [on-camera] But it's going to be hot this summer.
ENRON FORECASTER: It looks like it'll be a hot summer, to the tune of about two degrees. That may not sound like a lot, but over a 91-day time period it is a considerable number of cooling-degree days.
LOWELL BERGMAN: This is all in-house, proprietary information.
JEFFREY K. SKILLING: Yes. This is done so that we can help get an understanding of what's going on in the marketplace, our understanding of what's going on in the marketplace-
LOWELL BERGMAN: Or may happen in the marketplace.
JEFFREY K. SKILLING: Or may happen in the marketplace. And that's what makes markets work. That's what makes markets efficient.
LOWELL BERGMAN: [voice-over] Take what happened last summer in California. It was unusually hot weather, and a drought in the Pacific Northwest drastically cut into imports of badly needed hydro-electric power. At the control room for the state's power grid, president Terry Winter normally could draw on his reserves. But now there were days when he found himself scrambling for power and paying whatever it took to keep the lights on.
TERRY WINTER, CEO, California ISO: It was a Monday. We had had a problem with one unit going out at 1:30 in the morning. We immediately then went into our reserves, pulled down our hydro. It became evident that nobody had energy for us. And by 11:00 o'clock, we dropped off around 500 megawatts.
LORETTA LYNCH, President, California PUC: At the end of May - in fact, on May 22nd - there was an unseasonably hot day. Power use went up some in California, but the price of power skyrocketed, much more than the demand for that day. The prices charged for power bore no relationship to the cost of producing that power.
LOWELL BERGMAN: [on-camera] So something funny was going on.
LORETTA LYNCH: I don't think it's actually funny. I think it's pretty appalling that the folks who sell us power can charge whatever they want. And on that day, they did. And then on subsequent days they did, such that last summer the price of power shot up from about 5 cents a kilowatt hour, on average, to about 18 cents a kilowatt hour on average, so more than tripling over last summer.
LOWELL BERGMAN: [voice-over] In spite of those wholesale price spikes, Loretta Lynch, head of the California PUC, refused to raise retail rates. And when she finally did, consumers reacted angrily, and so did industry, accusing Lynch of doing too little, too late. But Lynch believes the current crisis rests with those charging the state its high prices, and she accuses them of price gouging.
LORETTA LYNCH: You and I have to buy electricity every day, and we can't store it. So the people who make electricity know they have a fundamental economic necessity that people will buy at any price, and so they charge any price they want.
LOWELL BERGMAN: Economists call the ability to manipulate prices "market power," and electricity is especially susceptible when power supplies run short. It can take years to bring new plants on line. And in the meantime, prices are at the mercy of a handful of companies....