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US: Internal Memos Connect Enron to California Energy Crisis

by Mark MartinSan Francisco Chronicle
May 7th, 2002

SACRAMENTO, California -- Energy traders for Enron used elaborate schemes with nicknames like "Death Star" and "Get Shorty" to manipulate California's electricity market and boost profits, according to internal company memos released by federal regulators Monday.

The memos -- jaw-dropping in their frank descriptions of how a sophisticated operation exploited California for financial gain -- enraged consumer advocates and state officials and prompted Sen. Dianne Feinstein to call for a federal criminal investigation of the company's behavior as the lights went out in California.

A state senator who has spent a year investigating the energy crisis called the documents "tremendous" proof that California's power debacle had been caused by companies looking to make money and not by energy shortages.

"The veneer has been broken," said Sen. Joseph Dunn, D-Santa Ana.

One memo, written by Enron lawyers a day after the state's first near-blackout in December 2000, details how company employees who bought and sold megawatts in California provided false information to officials running the state's power grid and played on loopholes in energy rules. Also discussed is whether Enron was violating laws governing electricity delivery.

"This strategy appears not to present any problems, other than a public relations risk arising from the fact that such (electricity) exports may have contributed to California's declaration of a Stage 2 Emergency yesterday" is the conclusion about one strategy nicknamed "Fat Boy." Under that scheme, Enron bought power in California under price caps and sold it into other states where it could get a better price. The company made nearly $1,000 on one megawatt through the "Fat Boy" technique.

Schemes Known by Others

Enron attorneys also suggest that the company wasn't alone in toying with the state's energy market and note that the short-hand names for various schemes were known and used by other companies.

The Enron documents were released by the Federal Energy Regulatory Commission, which launched an investigation in February into Enron's role in the California power crisis.

Reaction in California to the new evidence was swift. State officials said the memos would provide ammunition in their efforts to get federal regulators to refund the state money and overturn costly long-term contracts Gov. Gray Davis signed last year to keep power flowing.

The state was forced to spend more than $6 billion for power when utilities became financially crippled in late 2000. The crisis was eased when federal regulators enacted price caps on power last summer, but the state was left with $40 billion in high-priced energy contracts.

"These memos are Exhibits A, B and C in the case of California versus the power generators," said Steve Maviglio, a Davis spokesman. "They establish market manipulation beyond a reasonable doubt. How many more smoking guns does FERC need before it acts to refund the billions Californians are owed from overcharges directly linked to the generators' cartel?"

In Washington, Feinstein asked Attorney General John Ashcroft to open a criminal inquiry into the company focusing on fraud. Feinstein noted that power costs in the state had risen from $7 billion in 1999 to $26.7 billion in 2001.

In the memos, Enron details at least 10 strategies it used to make money in California. Among them was a scheme called "Ricochet," in which the company sold power outside the state and then resold it into California to avoid price caps that applied only to in-state megawatts. The practice also has been referred to as megawatt-laundering.

Another plan, called "Death Star," was explained in the memo like this: "The net effect of these transactions is that Enron gets paid for moving energy to relieve congestion without actually moving any energy or relieving any congestion."

Searching for Good Deals

A spokesman for an energy-company trade group said the documents showed little that was illegal. Enron, like other power companies, was merely exploring the state's energy system in search of good deals, said Gary Ackerman of the Western Power Trading Forum.

"They were probing different spots to see what worked," Ackerman said. "A lot of companies were doing that. Anytime there is a complex system like the energy market, people are going to stick their finger in and see what works."

A state official called that claim ridiculous.

"You don't call something the Death Star strategy if you think it's a positive thing," said Sean Gallagher, a staff attorney with the California Public Utilities Commission.

An Enron attorney said that a second memo the company turned over Monday noted that the first memo might not be entirely accurate. The memo, written after the December document, questions whether some of the strategies Enron employed were working and noted there was disagreement among some employees about how the schemes worked.

"Enron sold its trading unit, so a lot of the people with that knowledge are gone," said Robert Bennett, who is representing the embattled company as Congress picks apart Enron's business practices. "We do not know if any of the assertions in the memo are true. We'll let the government figure it out."

Bennett said the company's board of directors had voted Sunday to allow the documents to be released, even though it could have asserted attorney-client privilege because the memos are from lawyers.

"This was an act of corporate responsibility," Bennett said.

But Dunn, who heads a state Senate committee investigating the energy crisis, noted he had subpoenaed internal documents from Enron a year ago in his quest to dig into the causes of the energy crisis. Monday was the first time he had seen the memos.





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