Last July, I wrote a post on how Enron’s free market views influenced the original design of the California electricity market and contributed later to its collapse. I pointed out the parallels between Enron’s flawed market designs and the debate over the public option in the proposed health insurance reforms.

It’s worth revisiting, because matters are now much worse than they were then.

So what kind of structure and rules did Enron demand? First, it needed to eliminate competing institutions that might be able to connect producers and consumers more directly and efficiently. It argued for, and got, a structure that tended to require middlemen.

There was a proposal for a quasi-government "power pool" — a public pool in which producers could sell and consumers/buyers could purchase power directly without a middleman. For a year of debates, Enron and other marketers did their best to eliminate that "socialist," government-controlled concept, but the small band of bureaucrats and allies convinced the state to keep the pool.

Second, once the pool was accepted, Enron’s next tactic was to limit access to the pool. Enron argued for rules that required all non-utility buyers to arrange private contracts to cover their needs, instead of relying on the public pool. That would result in many more opportunities for Enron to be the middleman in those private contracts. The small band of bureaucrats argued against that limitation with some success, but Enron got concessions that tended to discourage many parties from using the public pool.

Enron’s third tactic was to demand operating rules that would force the public pool to operate at higher costs. The bureaucrats objected to these rules and took the dispute all the way to the Governor’s office, but they lost to the Governor’s largest campaign contributors (he still had debts from a failed Presidential run). It was an important defeat.

The Power Pool was eventually created, but it’s rules hobbled it and forced it to operate at higher costs. One particular rule required the public pool to ignore feasible cost-savings and instead deliberately choose higher cost energy when serving customers of the public pool. That made non-pool contracts more attractive and drove non-utility buyers/sellers to Enron’s traders.

Enron and its gullible supporters convinced state and federal regulators that since they were market competitors, their competition would always achieve the lowest cost results, so the public plan should be deliberately forced not to achieve the lowest cost, because that would drive marketers out of business, and they should be protected. California’s largest electricity customers, and federal regulators, bought this ridiculous argument.

Finally, Enron demanded, and got, rules that required the grid system operator to be separated from a part of the public pool — the market separation fallacy. When combined with other ill-advised rules, this meant that the public plan and system operator were often flying "blind," unaware of grid conditions when Enron and other parties were manipulating the market. The result: Enron and others manipulated the market with virtual impunity, raking off hundreds of millions (and some claim billions) of dollars.

If you recognize this pattern, it’s because we’re seeing analogous tactics and strategies in the current health care reform debates.

We see a powerful group of middlemen, the insurance industry, trying to structure the market to require that they remain in the middle of, and extract a rent from, all money flows between providers and patients, as though that’s the only logical structure, even though it’s not.

We see efforts to eliminate any public alternative — the public plan (operating inside a public exchange) — that might be more efficient in reducing and covering costs.

And we see the middlemen and their political supporters in Congress deliberately hobbling the public plan, raising its costs, and restricting access to that public option, on the theory that we shouldn’t do anything to undermine the current private insurance industry. After all, they argue, private markets are always more efficient than a government operation.

That was how I saw the parallels last July, when the public option was still a possibility, but I warned that differences between products, markets, institutions, etc, made such comparisons risky. Yet the sad and astonishing part is that as the health care debate has evolved, the Enron free market view from 15 years ago has triumphed in the proposed health insurance reforms.

There is no public option, so there will be no public insurance altenative and safety net to protect consumers from private insurance discrimination, excessive rates, and other abuses. The insurance market now embedded in the Senate bill is worse that what Enron and its political allies helped design for California’s electricity markets.

We can now see other parallels and predict what might occur in this new insurance market. In California, state and federal regulators failed to pay attention to the concentration of producers — only a few large firms controlled most of the generation, even after the utilities were induced to divest much of their generation monopolies. The predictable problem of market power would then combine with the ability of Enron and other financial marketers to manipulate Enron’s flawed rules. They would then create artificial shortages, exacerbate real shortages (from droughts, nuclear outages, etc) and then bilk consumers for hundred of millions of dollars. And on top of that, state regulators imposed a mandate on utilities to purchase all their residual power from the new flawed "exchange" market. Sound familiar?

Will something analogous happen in health insurance markets? We don’t know, and all crises are different. But we know the health insurance and provider markets are egregiously concentrated — one or two mega-firms control most of the market in most states. We know the industry is still protected from anti-trust laws; until that’s fixed, there’s no way for state or federal governments to bust up the firms with the most market power or prevent collusion to fix prices. And we know consumers will be forced to purchase insurance within this concentrated market and given subsidies to help them do it.

We know there won’t be any meaningful rate regulation. That is what the demise of the rate regulator means. Insurers and providers are essentially free today to raise rates at will; there is nothing to change that. This Administration and Congressional leaders are apparently content to throw up their hands and have this important public policy decided by a virtually unknown "parliamentarian," but it’s their sin, not his.

And we know that the very nature of health insurance is such that the theories of efficient competition and competitive pricing simply do not apply. Economists since Ken Arrow have told us this. Yet we still have governments and institutions enthralled by the virtues of free enterprise.

Without rate regulation, without anti-trust enforcement, without a viable public option as escape hatch, without a credible theory of competition, and with virtually no constraints on the industry’s ability to bribe and control the Congress and the White House, there is no way consumers can win in the new health insurance markets. Only an idiot [e.g., a member of the Texas School Board] would believe this will turn out well.

The only question we have left is how the inevitable market collapse, consumer crisis and government bailout will occur. And they will occur.

A reconciliation bill could have fixed much of the Enron-designed market structure in the Senate bill, but the White House didn’t want that. It cut its deals, just as California’s Governor cut his deals in 1996. But no one remembers Pete Wilson.


Updates: And now a word about Dr. Jekyll:
Ezra Klein, Democrats get the bill, and the score, they needed
Jonathan Cohn, Guilty of practicing good government
Brad DeLong, on Marjorie Margolies . . .