Enron memos show Calif power trading schemes
By Chris Baltimore
Reuters Company News
May 6, 2002
|WASHINGTON, May 6 (Reuters) - California's two senators called for a criminal probe into Enron Corp.'s trading activities on Monday after Federal energy regulators released documents describing how the bankrupt energy giant used trading strategies with names like "Death Star" and "Fat Boy" to manipulate electricity supplies and boost profits in the state.
The Federal Energy Regulatory Commission (FERC) said Enron turned over three documents discussing how it reaped $30 million in profits from one trading scheme in 2000, leading up to California's power blackouts which began in January 2001.
California's two Democratic senators immediately urged the U.S. Justice Department to launch a criminal investigation of Enron's California trading activities.
FERC began investigating Enron in February after California officials complained the firm used its market power during the past two years to inflate wholesale electricity and natural gas prices, costing the state billions of dollars.
On Monday, FERC said Enron turned over a pair of memos from December 2000 and an undated memo by an Enron lawyer analyzing the company's trading strategies. Donald Gelinas, head of the FERC's office of markets and rates, gave Enron until Friday to submit all documents about its electricity trading activities.
An Enron lawyer was not immediately available for comment.
Enron filed for bankruptcy protection five months ago amid revelations it used off balance sheet deals to hide billions of dollars in debt and inflate profits. The firm, once ranked the world's largest energy trader, no longer trades electricity.
"DEATH STAR," OTHER STRATEGIES
The memos described Enron's aggressive efforts to boost profits and evade detection by the California Independent System Operator (ISO), which manages the state grid.
For example, in one memo Enron described how its traders bought power in the price-controlled California market as the state suffered from critically low supplies and sold it in the Pacific Northwest, where prices were uncapped.
On Dec. 5, 2000, the memo said Enron bought power at $250 per megawatt in California and sold it at the Mid-Columbia trading hub in the Pacific Northwest for $1,200 per mwh.
Enron lawyers acknowledged in the memo the strategy presented "a public relations risk arising from the fact that such exports may have contributed to California's declaration of a Stage 2 emergency." A Stage 2 emergency is issued when electricity supplies are critically low.
The memos also spelled out how Enron used a strategy it called "ricochet" -- known in the industry as megawatt laundering -- in which it sold electricity across state boundaries in order to buy it back and resell the same power at a higher price within California.
In yet another technique, known by the slang terms "Inc-ing" or "Fat Boy," Enron traders created phantom congestion on the California grid, which led to higher prices. The memos described that strategy as "the oldest trick in the book" to improve profits.
Enron used another strategy it nicknamed "Death Star," to take advantage of California's inability to easily move power between northern and southern areas of the state.
The Death Star technique meant that Enron scheduled transmissions in the opposite direction of the congestion, then off-loaded less energy than its contracted level. In that way, Enron was paid for "moving energy to relieve congestion without actually moving any energy or relieving any congestion," one memo said.
"The (California) ISO probably cannot readily detect this practice," Enron said in a memo.
Death Star, an apparent reference to the "Star Wars" trilogy of movies, was similar to the colorful names Enron gave some off-balance sheet projects like "Chewco" and "JEDI" which have spurred federal and congressional investigations.
Two of the Enron memos also noted that if the California ISO discovered unfair electricity trading practices, it could impose fines or refer the case to antitrust investigators.
SENATORS DEMAND CRIMINAL PROBE
Release of the Enron documents prompted California's two Democratic senators to demand a Justice Department probe.
"In the wake of this new information from FERC, I am asking the attorney general to pursue a criminal investigation to determine whether in fact federal fraud statutes or any other laws were violated by Enron," said Sen. Dianne Feinstein.
Sen. Barbara Boxer added, "It's high time we saw some indictments handed down in this case."
Both have repeatedly urged FERC to take tough action against Enron for alleged market manipulation during California's power crisis. The state has claimed that Enron, along with a dozen other power generators, owe $8.9 billion in refunds for alleged overcharges.
After FERC's investigation is complete, the agency's five commissioners could launch a formal hearing. However, current federal law limits the agency's ability to order refunds retroactively. "It's purely political because there's nothing we can do to Enron," one source close to the agency said.
The Enron probe is also seen as a hot issue in the state's elections in November, where Democratic Gov. Gray Davis is up for reelection. "These memos are exhibits A, B and C in the case of California versus the power generators," said Steve Maviglio, a spokesman for Davis.