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Show Enron May Have Influenced FERC Probe
On
California Power Crisis, Refunds
by
Jason Leopold
October
14, 2003
Did
bankrupt energy company Enron Corp. influence a controversial decision federal
energy regulators made in November 2000, saying California wasn't entitled to
more than $3 billion in refunds from power companies who allegedly gamed the
state's wholesale electricity market?
About
two dozen of the more than one million Enron emails dealing with California's
energy crisis, recently released by the Federal Energy Regulatory Commission,
appear to make a strong case that the one-time high-flying energy company had
some role in influencing the FERC decision three years ago--a major blow to
California consumers and two of the state's investor-owned utilities that were
teetering on the brink of bankruptcy. Utilities in California lost billions of
dollars buying high-cost power on the wholesale market and selling it at a loss
under a state mandated rate freeze.
The
issue is of particular importance now because California's newly elected
Republican Governor, Arnold Schwarzenegger, has indicated through aides that he
would try and quickly settle a number of the lawsuits the state has pending
before FERC and the 9th Circuit Court of Appeals, many of which name Enron as a
defendant.
Gov.
Schwarzenegger secretly met with Ken Lay at the Peninsula Hotel in Beverly
Hills in May 2001 to listen to Lay pitch solutions for the state's energy
crisis. During the recall campaign, Bill Forman, the news editor at the
Sacramento News & Review asked Schwarzenegger about the meeting.
Schwarzenegger said he didn't recall meeting Ken Lay because there were more
than 30 people in the room. If Schwarzenegger plans to fix the state's budget
he better brush up on his basic math skills. According to a list of attendees
uncovered by the consumer group Foundation for Taxpayer and Consumer Rights,
there were 13 people at the meeting, including Schwarzengger.
Moreover,
Schwarzenegger met privately with Lay and former Los Angeles Mayor Richard
Riordan for about 15 minutes to discuss ways Schwarzenegger and Riordan could
help solve the state's power crisis, according to one of Riordan's former
deputies, who spoke on condition of anonymity because he still works with
Riordan. Riordan has been named to Schwarzenegger's transition team
The
bigger issue, however, has to do with a ruling handed down by FERC on Nov. 1,
2000 related to the sky-high wholesale power prices that wreaked havoc in much
of the state between May and October of that year. Then Gov. Gray Davis, along
with dozens of other state officials, charged that energy companies conspired
to drive up electricity prices in the state by using a variety of schemes to
game the market. The November 2000 investigation by FERC was the first probe
into California's power crisis. The commission conducted a second investigation
in mid-2001.
During
the 2000 investigation, the Republican dominated investigated the issue of high
electricity prices and said the wholesale market structure in California is
"seriously flawed" but FERC found no significant evidence that power
sellers or providers manipulated prices. Instead, the report blamed the state's
mandated market structure for the summer's power shortages and rising prices.
In
some of the Enron emails FERC posted on its website, http://fercic.aspensys.com/members/manager.asp,
Enron executives talk about meetings they held with FERC staff prior to the
report on California's power crisis being released publicly and how they were
unsure if "everything we want" will be included in the commission's
report.
"We
were very involved in the discussions of the report with FERC staff," said
James Steffes, Enron's former Vice President of Governmental Affairs, in an
email to Karen Denne, Enron's vice president of communications who still works
at the company. "I am not sure, however, if everything we want will be in
the report. We will monitor very closely."
During
the months leading up to the FERC report, the commission received a
presentation on from Timothy Belden, one of Enron's former top traders, who
pleaded guilty in October 2002 to federal conspiracy charges that he
manipulated California's electricity market to drive up prices and maximize
profit for Enron.
After
the Belden's presentation to FERC, Mary Hain, one of Enron's in-house lawyers,
sent an email out to a dozen Enron executives (but not former Chairman Ken Lay
or Chief Executive Jeff Skilling) saying Belden sent a presentation to Scott
Miller, a FERC investigation who was in charge of the California power probe,
and answered questions for Miller over the telephone.
"According
to the head of the investigation Scott Miller, the staff got alot more out of
this meeting than Staff's previous meetings with the (utilities) and the
generators. Based on the numerous phone calls I've been getting, the Staff is
looking into the data we provided," Hain's email says.
Hain
also gave a presentation to FERC, based largely on Belden's presentation
materials, advocating Enron's argument that the surging energy prices were due
to scarcity of supply, the Financial Times reported in October 2002.
"I
have also attached a revised version of the presentation that Tim sent to Scott
Miller on Friday," Hain's email said. "Tim's version conveys the same
message but takes a different approach to conveying the message. On Friday, Tim
talked to Scott and answered some additional questions. Tim said that Enron is
in favor of eliminating the mandatory (Power Exchange) buying requirement and
would like the (utilities)to be able to buy from Enron Online. He also
explained more fully the existence of scarcity.
The
Power Exchange reference relates to the now defunct California Power Exchange,
the market where electricity was bought and sold in the state. It's interesting
that Hain's email refers to the Power Exchange because when FERC issued its
report on Nov. 1, 2000 it ordered the Power Exchange to shut down and told
buyers of sellers of power to use Enron Online, a trading platform operated by
the energy giant that helped the company report record profits the following
year. Those profits, however, were largely illusory.
Enron
had long believed that the Power Exchange was a threat to its profits. In May
1999, during the infancy of deregulation in California, Enron first
experimented with market manipulation by submitting a bid at the Power Exchange
for 2,900 megawatts on a transmission line that only has a capacity of 15
megawatts.
The
Power Exchange said Enron congested the Silver Peak Line, which runs from the
Central Valley to San Diego. Deliberately congesting the transmission line
produced higher prices for power during the time.
The
Power Exchange spent a year investigating the issue and in May 2000 found Enron
in violation of the state's rules for trading electricity.
Enron
agreed to pay the Power Exchange $25,000 to settle the issue without admitting
or denying the charges. However, Enron's Hain sent out an email in February
2000 to company executives saying Enron's scheme likely cost California upwards
of $47 million.
The
interesting thing about the conversations Enron had with FERC and vice versa in
regard to the commission's probe of California's electricity crisis is that the
communication may have been illegal. According to FERC's own governing rules,
the commission is not permitted to discuss pending issues with anyone outside
the commission.
"No
member of the body comprising the agency, administrative law judge, or other
employee who is or may reasonably be expected to be involved in the decisional
process of the proceeding, shall make or knowingly cause to be made to any
interested person outside the agency an ex-parte communication relevant to the
merits of the proceeding. A member of the body comprising the agency,
administrative law judge, or other employee who is or may reasonably be
expected to be involved in the decisional process of such proceeding who
receives, or who makes or knowingly causes to be made, a communication
prohibited by this subsection shall place on the public record of the
proceeding."
A
spokesman for FERC would not return messages, first left at the commission on
Oct. 6, seeking comment for this story, nor would a spokesperson for Enron.
It's
unclear whether Enron had any correspondence with FERC commissioners about the
investigation. However, Jeff Dasovich, an Enron government relations executive,
said in a Sept. 12, 2000 email to Staffes, his boss, that FERC's Republican
Chairman, Curt Hebert, went up to Dasovich after a panel discussion on
California's power crisis and "lobbied me hard to support" FERC's
proposal to break up the country's power grid into regional transmission companies,
a plan that Enron abhorred.
Hebert
resigned as FERC chairman in 2001. Hebert reportedly opposed a request by
Enron's former Chairman Ken Lay to allow Enron greater access to interstate
power grid, prompting Lay to say he would no longer support the Mississippian
as FERC chairman. Hebert said he resigned after two of President George Bush's
FERC appointees, Pat Wood and Nora Brownwell, came aboard at FERC and began to
outvote him on the five-member panel. In 2001, Brownwell and Wood pushed
through a regulation that would penalize electric companies that don't join
multistate regional power grids, a proposal pushed by Enron but opposed by
Hebert.
The
correspondence between FERC and Enron in 2000 confirms what many of California
officials said at the time, that FERC failed to do its job to keep a watchful
eye on energy companies and protect consumers. Enron's influence at the highest
levels in government may have cost California more than $3 billion in
electricity overcharges between May 2000 and November 2000. California is
currently fighting for those refunds at the 9th U.S. Circuit Court of Appeals.
Schwarzenegger
is aggressively pursuing a plan to push California electricity market closer
toward deregulation, which Gov. Davis halted two years ago when the crisis
spiraled out of control. He said he plans to shut down at least one of
California's energy agencies and will fire dozens of Davis' energy advisers in
favor of his own handpicked team of free-market conservatives.
Unless
Schwarzenegger eases California back toward a deregulated electricity market,
the state could find itself saddled with skyrocketing power prices once again.
According to a recent report by the General Accounting Office, In August, the
General Accounting Office issued a report criticizing FERC because the agency
doesn't have the power to protect consumers from the side effects of
deregulation, such as soaring electricity and natural gas prices, which ended
up costing California more than $70 billion and bankrupted the state's largest
utility, Pacific Gas & Electric Co.
Jason
Leopold spent two years covering California's
electricity crisis and the Enron bankruptcy as bureau chief of Dow Jones
Newswires. He is writing a book about California's electricity crisis.
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