Enron's Trading Schemes
Enron's Trading Schemes
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 Enronâ€™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.â€
"There's really two--two things that happened--two areas... in terms of things blowing up," Belden told 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 Enronâ€™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 companyâ€™s questionable trading practices that set off Californiaâ€™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 Enronâ€™s questionable trading practices, he continued to lobby powerful Washington lawmakers urging them not fix the market problems in California saying the crisis was the stateâ€™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 Bushâ€™s National Energy Policy and Enronâ€˜s opposition to price controls in California.
The meeting between Shapiro and McNally came at a crucial time for Enron. The companyâ€™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 Californiaâ€˜s power market. Judging by the events that followed, it appears that Bush and Cheney were in Enronâ€™s corner.
Four days before Shapiro met with McNally and Abrahamâ€™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 â€œcartelâ€ and manipulating the California power market Cheney responded with a resounding â€œno.â€
"The problem you had in California was caused by a combination of thingsâ€”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 Enronâ€™s trading schemes been known to California officials it most certainly would have derailed Bushâ€™s energy policy, which called for keeping many of deregulationâ€™s key components in place, and forcing key players, like Cheney, to return to the drawing board to draft a new policy.
But thereâ€™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 stateâ€™s rich and famous to lobby the California Legislature about getting â€œderegulation right this time.â€ LLay 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.
Californiaâ€™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 stateâ€™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 Davisâ€™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 â€œbucketloads of cash,â€ 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 companyâ€™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.
Itâ€™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 Enronâ€™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.
Whatâ€™s surprising about those scams Enron traders pulled in California is how well-known it was within the companyâ€™s Houston headquarters, according to the transcripts. Indeed, one public affairs official at Enron instructed a trader based in the companyâ€™s Portland, Oregon trading division to lie to a Wall Street Journal reporter who wanted to write a story about Enronâ€™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 companyâ€™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.
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 Forneyâ€™s concerns, according to the transcripts, and Forney says he canâ€™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.
â€œI only want to go to jail once,â€ Forney says.
â€œYeah,â€ Belden says. â€œOnce in this country.â€
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.