How a Small Utility Exposed Enron Traders
It was a lot of money for a small public agency but a bright idea: spend $100,000 getting hundreds of hours of Enron Corp. traders’ conversations put down on paper.
The investment by the small Snohomish County Public Utility District paid off big, with bombshell evidence that could have been uncovered long ago -- profanity-laced recordings of Enron workers gleefully conspiring to steal money from “those poor grandmothers” in California during the energy crunch of 2000-01.
The district’s lawyers and expert witnesses also have analyzed hundreds of pages of accounting sheets that they say document how Enron gouged Western customers for $1.1 billion during that time.
Their efforts could go a long way to requiring Enron to give up those profits, saving people throughout the West hundreds of dollars on their energy bills. They also stole the spotlight from investigations by much bigger utilities and statewide agencies in places such as California and Nevada.
“Our hats go off to Snohomish,” said Roger Berliner, an attorney for Nevada Power Co.
“They have done a superb job of bringing to light the most outrageous conduct imaginable by an entity that was supposed to be regulated by the federal government.”
How did a public utility district with 290,000 customers nearly 2,000 miles from Enron’s Houston headquarters find itself at the forefront of such a complex legal battle, ahead of much larger utilities and state and federal regulators?
“We just happened to turn over the right rock that had this amazing trove of evidence,” said Snohomish lawyer Eric Christensen.
The story started in the latter half of 2000, when a drought had cut into the hydropower the utility normally uses, California’s effort to deregulate its energy industry was imploding and market prices for power were soaring.
For months, Snohomish resisted buying energy while it waited for the Federal Energy Regulatory Commission to cap prices.
In January 2001, it gave up, entering into a nine-year contract with Enron to buy power at $109 per megawatt-hour, more than four times as much as the utility had been accustomed to paying for such contracts.
That fall, as evidence of Enron’s extensive misdeeds surfaced and its stock price evaporated, Snohomish canceled the contract, saying it was voided by Enron’s fraudulent practices.
In 2002, as part of its bankruptcy proceedings, Enron sued, arguing it was entitled to the profits it would have made had the contract been fulfilled: $122 million.
Nevada Power found itself in a similar situation. Enron canceled its contract with Nevada Power and its sister company, Sierra Pacific Power Co. of Reno, citing a drop in the company’s credit rating. Then it demanded the $336 million it would have made had the contract been fulfilled.
As absurd as the claims seemed to officials in Nevada and Washington state, a federal Bankruptcy Court judge in New York last fall ordered them to pay -- a decision that is being appealed.
So earlier this year, Nevada Power obtained and transcribed tapes of conversations between Enron traders and executives at a Nevada agency -- the Colorado River Commission -- in which they spoke of manipulating the power market, Berliner said. Energy traders routinely tape conversations as a way of recording oral contracts.
Snohomish followed suit, obtaining -- over FERC’s objections -- tapes of 2,800 hours of conversations involving Enron traders. FERC spokesman Bryan Lee said the agency opposed the request for the tapes to protect criminal investigations of Enron by the FBI and the Justice Department.
FERC officials didn’t listen to the tapes themselves, incensing Sen. Maria Cantwell (D-Wash.).
“For a little PUD [public utility district] to spend $100,000 transcribing tapes that FERC and other people should have done, it’s just crazy,” Cantwell said.
Lee said FERC didn’t examine it because “it wasn’t our material.... It was the Justice Department that seized it from Enron.”
The Justice Department hasn’t reviewed the tapes because it would be too expensive, Assistant U.S. Atty. Matthew Jacobs of San Francisco wrote in a declaration to FERC. Other authorities passed for similar reasons.
In California, where ratepayers, taxpayers and local power companies were soaked for billions, the Legislature’s investigation into the causes of the crisis touched only briefly on the tapes.
“They are more evidence of the arrogance and the deliberate plan to steal money, but the revelations aren’t shocking,” said state Sen. Joe Dunn (D-Santa Ana), who led the investigation.
“We didn’t have the financial resources or manpower resources that the utility put into it. I credit them because it’s painstakingly slow to go through the tapes.”
Snohomish paid about $30,000 to have the tapes transferred to a standard audio format, then hired about a dozen temporary workers to transcribe slightly more than one-third of the tapes, all the utility could afford.
The transcriptions showed that Enron traders joked about lying in their negotiations with Snohomish and others and about stealing money from “Grandma Millie” in California. The traders also joked that President Bush wouldn’t stop them by imposing price caps because of his close relationship with Enron Chief Executive Kenneth L. Lay.
“This is more than a smoking gun,” said Russ Campbell, another Nevada Power lawyer. “It’s an audiotape of the gun being fired, the bullet hitting the victim and the murderer standing over the victim laughing.”
Snohomish went on to search hundreds of pages of Enron accounting sheets, documenting that as blackouts rolled across California, Enron pocketed more than $222,000 in three hours by shipping energy from that state to Oregon, masking its origin, and then sending it back to California at wildly inflated prices.
As for the expense, Christensen -- a former FERC staffer -- said it was worth it. If Enron were allowed to collect $122 million from Snohomish, it would probably cost each Snohomish ratepayer $420 on average -- on top of the $1,000 extra they’ve paid over the last 3 1/2 years because of market manipulation.
