Grand Jury Probing Enron Role in Crisis

A federal grand jury has been convened in San Francisco to investigate whether Enron Corp. and other electricity sellers manipulated prices during the state’s energy crisis, causing blackouts and huge electricity debts for the state and its biggest power utilities.

The new grand jury represents a widening of the Justice Department’s probes into Enron and the costly California electricity debacle of 2000 and 2001. It joins a Houston grand jury probe into Enron’s financial collapse, as well as other state and federal investigations into the causes behind price spikes and energy shortages that plagued California for a year.

“We have been informed by our contacts with the U.S. attorney’s office that there is a grand jury underway with respect to Enron,” state Sen. Joe Dunn (D-Santa Ana) said Monday. Dunn heads a committee that has been investigating alleged manipulation of California’s energy market.

“In none of those conversations have they been specific about what with regards to Enron they’re looking at,” Dunn said. But, he added, it is clear that the U.S. attorney’s office is looking at Enron’s behavior in the California electricity market, as opposed to the company’s accounting techniques, which are under investigation by the Securities and Exchange Commission.

“It’s my understanding that they’re looking at all of Enron’s behavior in the California market, including congestion management issues,” Dunn said.

Houston-based Enron used trading strategies with names such as Death Star and Fat Boy to create the appearance of congestion on the state’s electricity grid. The profitable ploys were quickly adopted by other traders, according to a Dec. 6, 2000, internal Enron memo that created a furor when it was released in May by federal regulators.

Energy experts and politicians have hotly debated whether these trading strategies were illegal or merely clever ways to exploit loopholes in California’s market rules to extract congestion-relief payments from the state grid operator.

In recent months, some experts have assigned a darker role to the so-called congestion games. They assert that by creating power jams on transmission lines, or even the appearance of congestion, Enron and others may have been purposefully trying to reduce supplies to increase electricity prices without having to shut down any power plants.

The existence of the federal grand jury was first reported in Fortune magazine’s Sept. 2 issue. The Wall Street Journal reported additional details Monday, saying investigators hoped to determine whether former Enron Chief Executive Jeffrey Skilling and former President Greg Whalley were aware of the trading schemes.

Skilling and Whalley could not be reached for comment. Justice Department spokesman Bryan Sierra declined to comment.

The grand jury may be in the early stages of its investigation. Many industry participants who could expect to receive subpoenas have still not been contacted by the U.S. attorney’s office.

But the California Independent System Operator, or Cal-ISO, which runs the power grid and a market for electricity, did receive a subpoena last month from the U.S. attorney’s office in Sacramento seeking documents related to congestion payments in the California market between Dec. 1, 2000, and March 1, 2001--some of the darkest days of the state’s crisis.

The subpoena also sought trading records from May 25, 1999, the day that Enron first tested a congestion game by scheduling 2,800 megawatts of power on a transmission line that could accommodate only 15 megawatts. Power prices rose $15 per megawatt-hour because of the scheme, and Enron was fined by Cal-ISO for the ploy.

Federal investigators “are looking at what Enron knew and when they knew it with respect to manipulation of the California market,” said state Sen. Steve Peace (D-El Cajon), whose staff has been asked by the investigators to help them understand the players and terminology. “They have interviewed scores of people who are knowledgeable and involved in the process and have leads to provide the investigators.”

“I think [the Justice Department] ultimately will be able to demonstrate that Enron, as a conscious business practice, began to manipulate the California market in 1999,” Peace said.

In 1999, Enron “misdiagnosed the market by expecting price volatility, which did not happen because of unexpectedly mild weather plus the Cal-ISO’s re-imposition of price caps,” he said. “As a result, they lost their shirt and that put even more pressure on them to manipulate the market in 2000 and 2001.”

Times staff writer David Streitfeld contributed to this report.