New Evidence of Enron schemes

Documents, tapes in Washington state case prompt lawmakers to demand regulators reopen probe into fallen energy company
- Zachary Coile, Chronicle Washington Bureau
PAGE ONE | San Fancisco Chronicle | Tuesday, June 15, 2004

Washington -- Newly released documents and audiotapes from a legal case in Washington state are providing some of the starkest evidence yet that Enron manipulated Western electricity markets -- including new revelations that traders for the giant energy company gamed the market on nearly nine out of every 10 days during California's 2000-'01 energy crisis.

The audiotape of one phone conversation released Monday showed a trader for the company's Western trading desk in Portland boasting about artificially creating congestion on the state's electricity transmission lines to drive up power prices.

"If the line's not congested then I just look if I can congest it," the trader said during the Aug. 8, 2000, phone call with two other Enron employees. "If you can congest it, that's a moneymaker no matter what."

The audiotapes, which were released by the Snohomish County Public Utility District near Seattle, were bolstered by 750 pages of accounting records detailing how Enron traders manipulated the market on 88 percent of the 537 days between January 2000 and June 2001 -- reaping profits of $1.1 billion, according to the utility's lawyers.

The new evidence is fueling calls by lawmakers in California and other Western states for the Federal Energy Regulatory Commission to reopen its investigation into the Houston firm and order larger refunds for Western ratepayers.

"Unfortunately, (the commission) has fallen down on the job by conducting an inadequate investigation of Enron's market manipulation," said Sen. Maria Cantwell, D-Wash., who hand-delivered the audiotapes to the commission's Washington, D.C., headquarters Monday. "You have to ask yourself, what has (the commission) been doing with all this evidence of illegal activity?"

The audiotapes and accounting records were obtained by the Snohomish County officials as part of a bitter legal battle with Enron.

As part of its bankruptcy proceeding, Enron filed a $122 million lawsuit against the utility, claiming it illegally broke a nine-year $214 million contract to buy electricity. The utility, which canceled the contract in November 2001 as the company was nearing financial collapse, argues the contract should be voided because of the company's fraudulent activity. The utility is asking federal regulators to retroactively strip Enron's market authority, which would nullify the contract.

If Enron wins the suit, it could cost the Northwest utility's average household $420 in higher bills.

Enron, which was once a natural gas pipeline company, expanded into virtually every aspect of the gas and electricity business by early 2000, and at its peak was the nation's seventh-largest corporation, with close ties to the Bush administration. But financial and accounting scandals drove the company into bankruptcy in December 2001.

The taped phone conversations unearthed by lawyers for the Snohomish County utility have provided some of the most explosive revelations about Enron's traders -- and angered California officials, who believed throughout the 18 months that market manipulation fanned the crisis that led to rolling blackouts, nearly bankrupted the state's largest utilities, and forced soaring power bills on California ratepayers.

In one phone conversation, first reported by CBS News earlier this month, the head of Enron's Western trading desk,

Timothy Belden, is overheard bragging about how one of his traders, Jeffrey Richter, had stolen money from California.

"He steals money from California to the tune of about a million...," Belden said in the Aug. 8, 2000, call.

Guilty of manipulation

Both Belden and Richter have pleaded guilty to federal charges related to market manipulation. A third man, John Forney, who managed the company's real- time trades on the West Coast, has also been indicted.

In another conversation on Nov. 30, 2000, two Enron traders joked about California's demand for $8.9 billion in energy refunds.

"So the rumor's true? They're (expletive) takin' all the money back from you guys? All the money you guys stole from those poor grandmothers in California," said one trader.

"Yeah, Grandma Millie, man. But she's the one who couldn't figure out how to (expletive) vote on the butterfly ballot," replied another trader, referring to the disputed presidential election results in Florida.

A spokeswoman for Enron declined to comment on the new audiotapes, but said the company was cooperating in providing all relevant documents and tapes to the FBI, U.S. attorney and others investigating the company.
"We've turned over everything," spokeswoman Karen Denne said.

The documents released by the utility provide new insight into schemes designed by Enron traders and given colorful names like "Donkey Punch," "Ping Pong," "Sidewinder" and "Russian Roulette." Many of the schemes had come to light over the past two years as federal and state regulators investigated why electricity prices rose so high, so fast during 2000-01, when California first deregulated the state's power market -- and fought over whether state consumers deserve money back.

In one case -- a "ricochet" scheme used on the first day of a Stage 2 power alert in California -- Enron traders were able to make $222,678 in three hours by buying electricity from California, shipping it to Oregon, then selling it back to California at $750 per megawatt hour.

Carefully plotted schemes

In some cases, the audiotapes reveal how carefully the traders plotted their schemes. In one phone conversation, a trader identified as "Smith" complained to Richter that his efforts to create congestion "really didn't do much." But he quickly added: "I got three more hours to congest."

Congestion involves more electricity flowing than the power grid had the capacity to handle.

Enron, according to documents, would schedule power deliveries for already busy transmission lines, then receive a financial bonus from the state for easing the crunch and a higher price by shipping the power elsewhere. In some cases, investigators said, Enron never actually shipped power, but manipulated the data to make it appear electricity had been moved.

Most of the egregious abuses appear to have occurred at Enron's West Power Trading desk in Portland, which was headed by Belden. Lawyers for the Snohomish utility tracked the desk's "inc sheets," accounting records kept by its real-time trading desk, and said they were able to document fraudulent trading schemes nearly every day of its operations during the energy crisis.

"They were trained to get around the rules of the marketplace," said Neil Neroutsos, a spokesman for the utility. "You had some young people, in many cases, who were fairly intelligent in terms of how the markets were set up and they figured out a way to get around the rules so they could make more money."

Federal Energy Regulatory Commission officials said they would look into the new information, although many observers doubt the agency will reopen its investigation of Enron. The commission stripped the company of its ability to buy, sell or trade electricity in March 2003. The commission is expected to rule soon on an administrative law judge's finding that Enron should forfeit $32.5 million in unjust profits.

Commission Chairman Pat Wood "has told the staff to see if there's anything new there and report back to him," said Kevin Cadden, the agency's spokesman.

Transcript excerpts
Conversations among Enron energy traders in Portland were released in connection with a lawsuit there.

On demands for refunds and the disputed presidential election:
KEVIN: So the rumor's true? They're [expletive] takin' all the money back from you guys? All those money you guys stole from those poor grandmothers in California?
BOB: Yeah, Grandma Millie, man. But she's the one who couldn't figure out how to [expletive] vote on the butterfly ballot.

On wildfires harming electricity supply:
PERSON 2: The magical word of the day is ''Burn, Baby, Burn''
PERSON 1: What's happening?
PERSON 2: There's a fire under the core line it's been de-rated from 45 to 2,100.
TOGETHER: Burn, baby, burn.
PERSON 1: That's a beautiful saying.

On profit-taking from California:
TIM: He steals money from California to the tune of about a million -- - -
PERSON 2: Will you rephrase that?
TIM: O.K., he, um, he arbitrages the California market to the tune of a million bucks or two a day.

On their hopes that George W. Bush would be elected president.
MATT: Tell you what -- you heard this here first: When Bush wins -- --
TOM: Caps are gone.
MATT: That [expletive] (energy secretary) Bill Richardson, he's [expletive] gone. ...
TOM: Yeah.
MATT: Ken Lay's going to be secretary of energy..
Source: Snohomish County (Wash.) Public Utility District

Major Enron indictments

Jeffrey Skilling, former chief executive officer
Skilling was charged in February with nearly three dozen counts of fraud, conspiracy and insider trading. Prosecutors froze more than $66 million in assets..

Andrew Fastow, former chief financial officer
Fastow pleaded guilty Jan. 14 to conspiracy in a deal that called for a 10-year sentence and his help in the continuing investigation..

Richard Causey,
former chief accounting officer
Causey was charged in January with securities fraud and conspiracy to commit securities fraud..

Lea Fastow, wife of Andrew Fastow and a former assistant treasurer of Enron
Fastow pleaded guilty May 6 to filing a false income tax return. She received a 12-month prison sentence after admitting guilt to the misdemeanor tax charge.

'You getting rich?'

Transcripts of conversations among Enron Corp. energy traders in Portland have been released by the Snohomish County Public Utility District in Washington state as part of its defense against a $122 million lawsuit by the energy trading company against the utility for canceling a power contract. The utility also has filed the transcripts of these taped conversations with federal energy regulators as it seeks to gain refunds for money Enron charged to provide power during the 2000-2001 energy crisis in California and the Northwest.

The first conversation below, between two traders, was released Monday. The other conversations were released last week.

MALLORY: And mostly it's just like, if the line's not congested --
PERSON 1: Mm-hm.
MALLORY: -- then I just look if I can congest it, 'cause then it's worth -- the -- 'cause those are going to be your shoulder hours anyways, and that's when replacement is super cheap, right?
PERSON 1: Right, right.

MALLORY: So, like those hours, if you can congest it, that's a moneymaker no matter what, 'cause you're not losin' any money to move it down that line.
PERSON 1: Right, right.
On Nov. 30, 2000, two traders, identified as Kevin and Bob, discuss demands by California officials that electricity generating companies and traders pay refunds for price gouging. They also refer to the disputed 2000 presidential election.
KEVIN: So the rumor's true? They're [expletive] takin' all the money back from you guys? All the money you guys stole from those poor grandmothers in California?
BOB: Yeah, Grandma Millie, man. But she's the one who couldn't figure out how to [expletive] vote on the butterfly ballot.
KEVIN: Yeah, now she wants her [expletive] money back for all the power you've charged for [expletive] $250 a megawatt hour.
BOB: You know -- you know -- you know, Grandma Millie, she's the one that Al Gore's fightin' for, you know?

On Aug. 5, 2000, two unidentified traders discuss how a wildfire in California has reduced the ability of a transmission line to carry electricity, boosting the value of power and the profits on their electricity trades.
PERSON 2: The magical word of the day is ''Burn, Baby, Burn'' --
PERSON 1: What's happening?
PERSON 2: There's a fire under the core line. It's been de-rated from 45 to 2,100.
PERSON 1: Really?
PERSON 2: Yup.
TOGETHER: Burn, baby, burn.
PERSON 1: That's a beautiful saying.

In an Aug. 8, 2000, conversation, the head of Enron's West Coast trading desk, Tim Belden, describes to an unidentified person how much one of his colleagues, Jeffrey Richter, was personally taking from California.
TIM: He steals money from California to the tune of about a million --
PERSON 2: Will you rephrase that?
TIM: OK, he, um, he arbitrages the California market to the tune of a million bucks or two a day.

Two traders, Matt and Tom, discuss on Aug. 3, 2000, the subject of California's attempt to cap the price of power sold in the state.
TOM: You getting rich?
MATT: Tryin' to. I just, you know, you know what [expletive] me off so bad about -- the [expletive] caps?
TOM: You ca -- it limits your profit.
MATT: Yeah. Completely [expletive] you.

In the same conversation, Matt and Tom discuss their hope that then-Texas Gov. George W. Bush will win the 2000 presidential election because he opposes price caps.
MATT: When this election comes, Bush'll [expletive] whack that [expletive], man. He won't [expletive] play this price cap. ... I bet they impose a national price cap at a thousand dollars.

Matt and Tom also describe their dislike of President Bill Clinton's energy secretary, Bill Richardson, as well as rumors that Enron's chairman and chief executive officer, Kenneth Lay, will be Bush's pick for the same job.
MATT: Tell you what -- you heard this here first: When Bush wins --
TOM: Caps are gone.
MATT: That [expletive] Bill Richardson, he's [expletive] gone. ...
TOM: Yeah.
MATT: And who's the biggest, ah, single contributor to the Bush campaigners?
TOM: You.
MATT: Enron.
TOM: Enron. What?
MATT: Enron.
TOM: Is it Enron?
MATT: Yeah.
TOM: The biggest single contributor.
MATT: Yeah, the biggest corporate contributor to the --
TOM: Holy -- really? That's huge.
MATT: And No. 1.
TOM: That's huge.
MATT: Ken Lay's going to be secretary of energy..
Source: Snohomish County Public Utility District

The California energy crisis

A public utility in Washington State argued in court filings that energy trading company Enron Corp. fraudulently manipulated electricity markets on the West Coast almost 90 percent of the time between Jan. 1, 2000, and June 18, 2001, when federal regulators capped the price of a kilowatt hour. Here are some of the key dates and events during that time:

2000

May: Wholesale electricity prices begin an unprecedented rise.

Mid-June: A Southern California Edison Co. official meets with Gov. Gray Davis and several of his top advisers and warns that electricity prices in San Diego could soon go sky high and that his company could take on significant debt.

June 14: 100,000 Bay Area residents experience rolling blackouts.

Aug. 2: PUC and Electricity Oversight Board report to Davis about the Bay Area power blackout and high San Diego electricity prices, which have doubled as San Diego becomes the first community operating under California's new deregulated energy system. The report calls the problems "a precursor of what lies ahead for California's economy over 30 months."

Sept. 14: Moody's Investors Service changes the outlook for PG&E and its parent corporation to negative from stable.

Oct. 16: PG&E files a document with the Federal Energy Regulatory Commission stating that it has "astounding" cash flow shortfalls.

December: Federal regulators issue emergency orders forcing energy companies to provide electricity to California in the face of blackouts and rising prices.

Dec. 7: The Independent System Operator issues Stage 3 alert because of a dwindling power supply and warns of rolling blackouts.

Dec. 16: Davis calls a special session of the Legislature and reserves $1 billion in his 2001-02 budget to deal with the power crisis.

2001

Jan. 4: PUC announces three-month rate increase of 10 percent for PG&E and Edison customers.

Jan. 9: Davis, federal officials, lawmakers, utility executives and power generators meet at the White House for a summit on energy.

Jan. 17-18: Rolling blackouts are ordered in California for the first time. Davis declares a state of emergency.

Jan. 20: George W. Bush is sworn in as president. Enron and its chief executive, Kenneth Lay, each contribute $100,000 to help pay for the inauguration.

Jan. 24: New Energy Secretary Spencer Abraham extends the emergency order forcing power companies to supply electricity to California, but says he will not renew the emergency order after Feb. 7.

Feb. 22: Lay and other Enron company officials meet with Vice President Dick Cheney's energy task force.

March 14: Federal regulators vote 2-1 to streamline rules aimed at boosting power supplies in California and the West, but make no moves to cap the price power generators may charge for electricity.

April: PG&E, California's largest utility, files for bankruptcy with $12 billion in debts.

May 3: Abraham, speaking in San Francisco, says California's energy crisis is "the center of our attention."

May 17: Cheney's energy task force issues its report endorsing many, but not all, proposals favored by Enron. Later, Rep. Henry Waxman, D-Los Angeles, says 18 of the specific points in the plan were proposed or endorsed by Enron executives.

June 18: The Federal Energy Regulatory Commission imposes limited price caps on wholesale energy.

E-mail Zachary Coile at zcoile@sfchronicle.com.
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