Enron Memos Prompt Calls for a Wider Investigation

Documents showing Enron Corp. sought to rig energy prices in California escalated pressure Tuesday for a wider investigation of energy market manipulation, sending tremors through the industry.

The Federal Energy Regulatory Commission on Tuesday ordered all energy trading companies to preserve documents dealing with their tactics, including internal memos. The action came a day after the release of an internal memo detailing Enron’s trading ploys, which said other companies had adopted similar tactics.

Despite denials of any market manipulation, energy companies saw their stocks plunge as much as 17% in anticipation of increased scrutiny of their operations.

On Capitol Hill, lawmakers called for a criminal investigation, more congressional hearings and new regulation of the kind of energy trades Enron conducted. White House spokesman Ari Fleischer expressed confidence that federal regulators would “vigorously” investigate the new revelations.

The Justice Department said in a statement that its Enron task force “is continuing to actively investigate a wide variety of matters concerning the conduct of Enron Corp. and individuals and entities associated with it.”

FERC on Monday released memos detailing strategies used by Enron traders to artificially inflate energy prices during California’s energy crisis in 2000-2001, when Enron traders operated in a newly deregulated market.

FERC officials declined to comment, citing the continuing investigation.

Some of the trading schemes discussed in the Enron memos could answer a long-standing mystery in the California power crisis, said Robert McCullough, an Portland, Ore.-based energy consultant.

In winter 2001, the California Independent System Operator--the agency running the power grid under deregulation--called for rolling blackouts in Northern California, citing a shortage brought on by congested power lines serving the area.

However, the Bonneville Power Administration, which co-owns lines from Oregon into Northern California, insisted that there was a large amount of unused capacity, McCullough said.

The newly released memos detail one Enron strategy that called for giving Cal-ISO false signals about Enron’s anticipated “load,” or the amount of power its customers would require.

The idea, roughly, was that on a day of high demand, Enron would exaggerate the amount of power its customers would need. Cal-ISO, worried about meeting demand, would then offer to pay a premium to energy providers that agreed to send extra power.

Enron would readily comply by reducing its usage--reaping the benefit of cutting back power it never really needed in the first place.

“Did this happen during the blackouts?” McCullough asked. “I don’t know, but by God, we need to investigate,” he said.

Enron officials had roundly denied any market manipulation, or “gaming,” during the energy crisis. The Houston company, under new leadership since its collapse last fall, released the documents to federal investigators Monday but said it could not vouch for their accuracy.

The company sold its energy trading operation early this year under its bankruptcy reorganization.

California Gov. Gray Davis said the memos vindicate his long-held position that electricity spikes during the energy crisis resulted from market manipulation by Enron and other energy marketers.

The governor sent a letter Tuesday to federal energy regulators urging them to release all other evidence of “Enron’s role in manipulating the energy markets in California and the West.” He specifically asked FERC for memos, e-mails and other communications between elected officials and Enron from 1996 to 2001.

Davis said he believes that market manipulation by energy companies cost California consumers at least $30 billion in electricity price hikes in 2000-2001.

The state had previously asked FERC to order Enron and other energy companies to repay $9 billion in alleged electricity overcharges. Manipulation of the spot market prices, Davis said, also had a negative effect on the negotiation of billions of dollars in long-term electricity contracts that the state has asked FERC to void or modify.

“I assume the companies we have contracts with may have manipulated the market as well,” Davis said. “They have to know the truth will out. It is to their advantage to renegotiate a fairer price.”

Davis said he was asking state Atty. Gen. Bill Lockyer to step into the Enron bankruptcy case and sue the company for fraud to assure that California gets reimbursement for extra electricity costs borne by consumers and the state.

One Enron memo, dated Dec. 6, 2000, said traders for other companies copied Enron’s aggressive pricing schemes. Wall Street reacted swiftly, with shares of Dynegy Inc. dropping 17% and Mirant Corp.’s falling 12%.

Energy companies were stunned by the claim of widespread manipulation, said Gary Ackerman, executive director of the Western Power Trading Forum, a group representing traders and plant owners.

“Our members were disheartened and disappointed because they feel they were doing the best job possible of holding the regulations both in spirit and letter,” he said.

Ackerman said he had never heard the terms used in the Enron memos, which he described as “purely endemic to Enron.” He said he believes that Enron may have violated the spirit of the trading rules but remained legally inside them while trying to maximize profit.

Cal-ISO board member Mike Florio, speaking as a senior attorney for the Utility Reform Network, a consumer group, said Enron was a driving force behind the state’s move to deregulate energy in the 1990s.

“There was a handful of us saying you could not have this loosey-goosey system and cowboys rule,” Florio said. “They [deregulation advocates] said, ‘Don’t worry. The miracle of competition will make people behave....’ From the beginning ... this was a market of the gamers, by the gamers and for the gamers.”

Four California Democrats on the House Energy and Commerce Committee called on Chairman W.J. “Billy” Tauzin (R-La.) to launch a full-scale investigation of Enron’s business conduct and pricing practices in the West.

“While Enron Corp. may have imploded, the structure that allowed the company to gouge Western energy customers remains in place,” they said in a letter Tuesday.

Current and former FERC officials, however, said it is too soon to say what role the memos ultimately will play in the agency’s sweeping investigation of alleged manipulation of Western power markets.

An immediate issue facing FERC investigators is how to resolve conflicts among the Enron memos. Two identical memos dated Dec. 6 and Dec. 8, 2000, detail various market manipulation strategies used by Enron traders, but a later memo challenges their accuracy.

“What kind of weight they are going to give this thing is yet to be determined,” said James Hoecker, a former FERC chairman who is now an energy lawyer. “Is this a smoking gun, or this an indication that there were a couple of bad actors who may not have reflected the general practices of the company? We don’t know that yet.”

“Some of it sounds like gaming, and some of it sounds like they were really beyond the pale,” said a FERC staff member who asked not to be identified. “But you automatically have several issues of fact to get to the bottom of. There are some conflicts between the memos, and you have to do more fact finding.”

FERC also could order refunds, but Enron has filed for bankruptcy. One FERC official who spoke on the condition that he not be named said the agency’s options are limited. Enron creditors would take precedence over any refunds the agency might assess.

“There’s not much we can do to them,” he said. “To a certain extent, it’s like trying to squeeze blood out of a turnip.”

The official said he believes the main effect of the disclosures in these memos will be how FERC sets rules for wholesale electricity markets from here on.

“How do we structure the rules so people don’t have the incentive to do these things?” he said.

He noted that the memos showed it would be in California’s interest to be part of a Western transmission grid, a remedy Davis opposes. One of the abuses detailed in the memos involved shipping electricity out of state and then selling it back to California at a markup. That would not have been possible if there had been a regionwide Western transmission grid.

Another FERC official said the memos are a reflection of what happened in the market when the federal regulatory cops walked off the beat. Under its previous leadership, the commission embraced a free-market ideology and remained aloof from intervening to resolve problems.

About the same time Enron officials were writing memos describing how to “game” the California market, FERC released a report saying it could find no evidence of manipulation.

Not until last summer did the commission intervene to impose price limits on wholesale electricity in the West. Prices dropped and demand stabilized.

“For most of us, this was not a surprise,” the second FERC official said. “Everybody knew that people were engaging in some of this activity. It’s just that the commission was in its laissez-faire phase.”

Times staff writers Eric Lichtblau in Washington, Thomas S. Mulligan in New York and Nancy Rivera Brooks in Los Angeles contributed to this report.