Federal energy regulators have just released more than 400 pages of
documents that suggest former Enron chairman Ken Lay and former chief
executive Jeff Skilling were aware that Enron's west coast traders may
have broken the law by using manipulative trading tactics in California to
boost Enron’s profits during the height of that state's power crisis.
Moreover, one of Enron's most powerful Washington, D.C. lobbyists, who met
with several members of the Bush administration in the spring of 2001
about Enron's opposition to price controls on electricity sales in
California, was told by Tim Belden, the mastermind behind Enron's
notorious trading scams, less than a year earlier that Belden and other
traders working at the company's West Coast trading desk in Portland,
Ore., spent the better part of 2000 and 2001 breaking the rules governing
California's power market "when opportunities presented themselves to make
money.”
"There's really two--two things that happened--two areas... in terms of
things blowing up," Belden told Rick Shapiro, Enron's vice president of
regulatory affairs and one of the company's lobbyists, in August 2000.
"One is our day-ahead scheduling practices and then the other is our
real-time operations. Um, we've been doing and have been doing for two
years a lot of activity in, you know, there's black, there's white and
there's gray. Um, we have been endeavoring into the gray area when
opportunities present themselves to make money. We have now moved out of
the gray area into the clearly what's legal area... not even legal, but
what's, um, there's like the letter of the law, the letter of the rules
and the spirit of the rules. Um, we've been exploiting the letter of the
rules--or literally interpreted--interpreting the rules, um, in California
when we can make money..."
The documents released by FERC--more than 400 pages of transcripts of
recorded conversations between Enron traders, company attorneys and
Enron’s public and governmental affairs departments that took place at the
height of the California electricity crisis in 2000 and 2001--provide the
most vivid portrait to date of the company’s questionable trading
practices that set off California’s power crisis. A copy of the
transcripts can be found at
"
http://elibrary.ferc.gov/idmws/nvcommon/NVViewer.asp?Doc=10152323:0"
California's electricity crisis wreaked havoc on consumers and businesses
from the summer of 2000 to June of 2001, resulting in three days of
rolling blackouts, hundreds of emergency power alerts and forced the
state's largest utility, Pacific Gas & Electric, into bankruptcy. The
crisis cost the state more than $70 billion.
State Attorney General Bill Lockyer said last week that he expects to file
a multibillion lawsuit against Enron as a result of the company's
manipulative trading practices detailed in the transcripts..
California is also seeking $9 billion in refunds from a handful of energy
companies for overcharging the state during the power crisis. That issue
is expected to be taken up by the 9th Circuit Court of Appeals in San
Francisco because FERC said California was only entitled to roughly $3
billion in refunds.
In the conversation between Shapiro and Belden, Shapiro urged Belden to
pull back on his trading schemes in California, such as artificially
clogging transmission lines, sending power out of state and submitting
false data to the state's grid operator, and to begin working more closely
within the law because of the severe political risk associated with Enron
and the billions of dollars the company reaped from California's
electricity crisis to fill its coffers.
But despite the fact that Shapiro was in the know about Enron’s
questionable trading practices, he continued to lobby powerful Washington
lawmakers urging them not to fix the market problems in California saying
the crisis was the state’s fault for not building enough power plants,
according to public documents from the House Governmental Affairs Committee.
Belden, however, told Shapiro that he would continue to exploit the rules
in California, believing that he may be breaking the law as a result, as
long as it didn't cause the lights to go out in the state. He added that
if Skilling were forced to testify before a commission about the inner
workings of the West Coast trading desk that it could hurt Belden's career.
"I know there's a lot of political risk and I know that we got a ton of
money in our book and then -- if Jeff Skilling ah, has to go in front of
some commission and explain the activities of the West Power Group, that's
probably not so great for my career," Belden told Shapiro, according to
the transcripts.
This is the first revelation that an Enron lobbyist was briefed on the
company's manipulative trading practices and it appears likely that other
executives were also in the know. Shapiro wielded enormous influence with
members of the Bush administration. On May 23, 2001 he met with White
House economic adviser Robert McNally and Energy Secretary Spencer
Abraham's chief of staff about Bush’s National Energy Policy and Enron‘s
opposition to price controls in California.
The meeting between Shapiro and McNally came at a crucial time for Enron.
The company’s most senior executives recognized that Enron stood to lose
hundreds of millions in profits and its standing on Wall Street if
California lawmakers were successful in getting federal energy regulators
to rewrite the rules in California‘s power market. Judging by the events
that followed, it appears that Bush and Cheney were in Enron’s corner.
Four days before Shapiro met with McNally and Abraham’s staff, on May 17,
2001, Vice President Dick Cheney was interviewed by the television news
program Frontline. When asked if companies like Enron were behaving like a
“cartel” and manipulating the California power market Cheney responded
with a resounding “no.”
"The problem you had in California was caused by a combination of
things—an unwise regulatory scheme, because they didn't really deregulate.
Now they're trapped from unwise regulatory schemes, plus not having
addressed the supply side of the issue. They've obviously created major
problems for themselves . . ."
That same day, May 17, 2001, Cheney and Bush unveiled the details of the
National Energy Policy, in which Cheney adopted seven of Ken Lay's
suggestions, according to published reports. Had the intimate details of
Enron’s trading schemes been known to California officials it most
certainly would have derailed Bush’s energy policy, which called for
keeping many of deregulation’s key components in place, and forcing key
players, like Cheney, to return to the drawing board to draft a new policy.
But there’s more.
On May 17, 2001, Enron Chairman Ken Lay called a secret meeting at the
Peninsula Hotel in Beverly Hills, Calif., in an effort to get some of the
state’s rich and famous to lobby the California Legislature about getting
“deregulation right this time,” according to the four-page memo,
"Comprehensive Solution for California," Lay handed the attendees.
Lay apparently paid close attention to Enron's trading profits. A few
months earlier, Sue Mara, an Enron governmental affairs employee phoned
Bob Badeer, an Enron trader, with a question from Ken Lay. Following
public comments by Davis about the state of California's energy crisis,
Mara said Lay personally wanted to know if Davis's comments had affected
the price of power in the forward market, That Lay would be interested in
such minute details contradicts the former chairman's public statements
that he had no idea about the shenanigans taking place inside of Enron.
California’s current Governor, Arnold Schwarzenegger, who unseated Davis
in a contentious recall election last year, attended the meeting at the
Peninsula Hotel with Lay as did former Los Angeles Mayor Richard Riordan
and junk-bond king Michael Milken and other luminaries. Lay handed the
attendees a seven-page document that contained so-called solutions to the
state’s electricity crisis.
Twelve days after Lay met with Schwarzenegger and Cheney was interviewed
by Frontline, and eight days after Shapiro met with McNally, President
Bush agreed to meet with Gray Davis at the Century Plaza Hotel in West Los
Angeles to listen to Davis’s plea for much-needed price controls on
soaring power prices. Bush refused saying the free-market would eventually
correct the problems.
But it was already clear within Enron that the company would no longer be
able to earn, in what Enron governmental affairs employee referred to on
the transcripts as “bucketloads of cash,” from California. Weeks earlier,
California, under Davis, signed $42 billion in long-term electricity
contracts with more than two-dozen energy companies and no longer bought
the bulk of its power needs in the open market, where earned its biggest
windfall.
In June 2001, shortly after the details of the long-term contracts were
revealed, Skilling and Lay summonded Belden to Houston to discuss the
company’s West Coast trading division, which Belden said in one recorded
conversation accounted for 80 percent of Enron's profits in 2000 and 2001,
to determine if anything could be done to salvage the operation, according
to one person working with the Justice Department on the investigation.
It’s unclear what came out of that meeting, but two months later Jeff
Skilling resigned from Enron. Just three months earlier, on March 9, 2001,
he flew to Portland to take Belden and other senior traders out to dinner
at Higgins restaurant to celebrate Enron’s successful first quarter
earnings. On the transcripts released by FERC, traders said they made
upwards of $10 million a day in 2000 by utilizing many of the trading
scams developed by Belden.
What’s surprising about those scams Enron traders pulled in California is
how well-known it was within the company’s Houston headquarters, according
to the transcripts. Indeed, one public affairs official at Enron
instructed a trader based in the company’s Portland, Oregon trading
division to lie to a Wall Street Journal reporter who wanted to write a
story about Enron’s lucrative trading desk.
"The thing is anything they'd ask you, you'd have to lie because you
wouldn't want to tell them the truth...," an unidentified Enron employee
in the company’s governmental affairs department said to an Enron trader.
The governmental affairs employee then attempts to talk the trader out of
doing the interview with the Journal. "I wouldn't do it (the interview).
'Cause first of all, you'd have to tell 'em a lot of lies, cause if you
told 'em the truth..."
"I'd get in trouble," the trader says, interrupting the governmental
affairs employee.
"You'd get in trouble," the governmental affairs employee said.
Still, on July 18, 2000, The Wall Street Journal printed a story under the
headline Energy Traders Reap Big Profits on High Prices, which explained
the excitement of being an energy trader during a period of volatile
energy prices, apparently the same story that was discussed between the
Enron trader and the governmental affairs employee. It's now known,
according to the transcripts, that skyrocketing power prices discussed in
that story were directly caused by Enron's manipulative tactics. and was
not a result of regulatory restrictions that were left in place in
California's wholesale electricity market.
What's more, the documents provide the complete blueprints for
manipulating the California power market, including instructions on how to
artificially clog the state's transmission lines and get paid to remove
the bogus congestion and details on how to send power out of state and
resell it to California at ten times the price the company would have
received if it kept the power in California.
Perhaps the most prescient part of the transcript is when John Forney, a
senior Enron trader who worked closely with Belden and was indicted on
conspiracy charges, fears that he may be sent to jail. In a conversation
Forney had with Belden, Forney seems to have misgivings about one scheme
he just pulled that involved California and Canada.
Belden seems to brush off Forney’s concerns, according to the transcripts,
and Forney says he can’t believe that none of his Enron colleagues seem to
be concerned about the possibility of going to jail as a result of the
schemes he and other traders have pulled.
“I only want to go to jail once,” Forney says.
“Yeah,” Belden says. “Once in this country.”
Forney is expected to appear in federal court in San Francisco in October.
Jason Leopold is the former Los Angeles bureau chief of Dow Jones
Newswires where he spent two years covering the energy crisis and the
Enron bankruptcy. He just finished writing a book about the crisis, due
out in December through Rowman & Littlefield.
