Enron linked to California blackouts
Traders said manipulation began energy crisis
By Jason Leopold
LOS ANGELES (CBS.MW) -- Two days of rolling blackouts in June 2000 that marked the beginning of California's energy crisis were directly caused by manipulative energy trading, according to a dozen former traders for Enron and its rivals.
The blackouts left more than 100,000 businesses and residential customers in the dark for parts of two days, trapped people in elevators and shut down some offices of high-tech companies such as Cisco Systems and Apple Computer, as well as chipmaking plants, costing millions of dollars in lost revenue.
The traders said that Enron's former president, Jeff Skilling, pushed them to "trade aggressively" in California and to do whatever was necessary to take advantage of the state's wholesale market to boost the price of Enron's stock .
"Skilling would say, 'if you can't do that then you need to find a job at another company,'" said one former senior Enron trader, who requested anonymity because of concerns about potential investigations. "He said we should go trade pork bellies if we can't be aggressive."
The traders also said that Enron's retail unit, Enron Energy Services, or EES, used the fear created by the blackouts to push large California businesses into more than $1 billion in long-term energy contracts.
The disclosures brought a harsh response from California Gov. Gray Davis, who said in an interview with CBS MarketWatch.com that Enron should be prosecuted for its actions.
"Someone at Enron should go to jail," Davis said. "Purposely putting people's lives in jeopardy in the name of greed is inexcusable."
The disclosures come as Congress turns up the heat on Enron and the energy industry over their involvement in the California electricity crisis of 2000 and 2001. Senate Democrats on Wednesday said they would ask Army Secretary Thomas White, who was vice chairman of EES during the energy crisis, to testify about the unit's role. See full story.
The senior traders, all of whom requested anonymity, now work at other energy companies including Duke Energy /quotes/comstock/13*!duk/quotes/nls/duk (DUK 16.49, -0.21, -1.26%) , Reliant Energy /quotes/comstock/10w!i:rei (REI 197.95, -2.07, -1.03%) , Dynegy /quotes/comstock/13*!dyn/quotes/nls/dyn (DYN 1.23, +0.02, +1.65%) , Williams Cos. /quotes/comstock/13*!wmb/quotes/nls/wmb (WMB 19.88, -0.32, -1.58%) and UBS Warburg /quotes/comstock/13*!ubs/quotes/nls/ubs (UBS 13.89, -0.03, -0.22%) . Warburg won Enron's trading unit in an auction earlier this year.
The traders said they agreed to speak after another former Enron employee, David Fabian, wrote a letter to California Sen. Barbara Boxer in February saying he overheard traders talk about manipulating California's power market during 2000.
The allegations Fabian made in his letter to Boxer in February matched details in internal Enron memos released last week by the Federal Energy Regulatory Commission. The memos -- written in December 2000 -- describe how Enron traders could reap enormous profits for the company by exploiting loopholes in California's flawed electricity market.
Skilling was named chief executive of Enron one week after company attorneys wrote a Dec. 6, 2000 memo describing the now famous "Death Star," "Ricochet," and "Fat Boy" trading strategies.
In an interview with several news organizations at the time, Skilling said Enron would be in an even stronger position in 2001 because of its "abundant" supplies of power and gas. But he said questions raised by other energy companies about California's ability to pay for power could result in Enron limiting its sales to the state.
"As the (utilities') credit exposure gets too high, we will limit the amount of power we deliver into California," Skilling said at the time. "Eventually, the state is going to have to provide these companies with the credit support from somewhere to support their purchases."
A spokeswoman for Skilling would not comment for this story. A spokesman for Enron also declined comment. Enron has consistently maintained that its trading strategies didn't violate any laws.
Phantom congestion
The traders and former traders, who traded electricity in the spot and forward markets, have retained lawyers in the event that the U.S. Department of Justice or congressional committees investigating Enron's role in California's power crisis subpoena them.
Gregg Fishman, spokesman for the California Independent System Operator, the state agency that manages the power grid, called the practice "phantom congestion," a reference made in the internal Enron memos released last week. "Phantom congestion" means power is being sent over a transmission line by the party holding the transmission rights simply to force others to pay more to use the line, according to Fishman.
The traders said Enron held the transmission rights on Path 26, a key transmission line connecting Northern California to Central California and also connecting to Path 15, a major bottleneck grid pathway in Northern California.
In fact, the dozen traders said they began manipulating California's power grid beginning in February 2000 and continued until the spring of 2001. The traders said the practices they engaged in resulted in two days of rolling blackouts in Northern California in the summer of 2000.
On June 14 and June 15 that summer, when a heat wave swept through Northern California and pushed temperatures above 100 degrees, the traders said Enron clogged Path 26 with power, essentially creating a bottleneck that would not allow power to be sent via Path 15 to Northern California.
"What we did was overbook the line we had the rights on during a shortage or in a heat wave,'" one trader said. "We did this in June 2000 when the Bay Area was going through a heat wave and the ISO couldn't send power to the North. The ISO has to pay Enron to free up the line in order to send power to San Francisco to keep the lights on. But by the time they agreed to pay us, rolling blackouts had already hit California and the price for electricity went through the roof."
Enron was paid tens of millions of dollars in 2000 by the ISO to free up the congested line in order to allow electricity to be sent to Northern California, the traders said.
The traders said this was one of the ways Enron allegedly manipulated the price of power in California and continued to do so until mid-2001, when power prices sharply declined.
Gary Stern, the director of market monitoring for Southern California Edison /quotes/comstock/13*!eix/quotes/nls/eix (EIX 32.91, -0.35, -1.05%) , said he has long suspected that Enron manipulated power flows in the state to reap enormous profits.
"In February 2000, Enron acquired the 1,000 megawatts of the 1,600 megawatts of available transmission capacity on Path 26 from north to south in an ISO-run auction," Stern said. "SCE and my group had argued for position limitations so that no party could acquire so much" capacity as to be able to manipulate the market. The ISO board refused, however.
Enron paid a modest price for the transmission capacity because it was a new transmission path with no pricing history, he said. "After Enron acquired the capacity, we began seeing significant levels of congestion in the day-ahead market on that path and the congestion revenues accumulating for Enron began to mount. We estimated that in the first six months of 2000 Enron profited $30 million to $50 million on Path 26 by buying the firm transmission right at a low price then receiving the revenue from high levels of transmission congestion. It appears that the congestion was, in part, created by Enron's own traders."
Information available from the ISO shows that congestion revenues on Path 15 and 26 within the first six months of 2000 increased tenfold, from about $20 a megawatt-hour to more than $200. But there is no evidence that an increase in electricity consumption in California is the reason for the transmission line congestion, according to the ISO.
"The number of hours congested decreased on most paths in 2001, compared to 2000, with the exception of Path 26," according to a January 2002 report from the grid operator's department of market analysis.
Joe Wagner, a former Enron power trader said he is "sure Enron did use the market rules to their advantage in California" but he believes the state's troubled power market also played a part in exacerbating the crisis.
"Enron found legal ways to make money given the market rules that were in place and these strategies probably did influence prices somewhat," Wagner said. "Enron did game the transmission rights market, but so did many other companies. Enron sent a letter to the state of California in 2000 telling them the market was flawed. Enron offered to help the state set up a good market. This letter was sent out to all Houston Enron employees so they could see that we had nothing to do with the crisis."
New business
The former Enron traders said skyrocketing power prices enabled Enron Energy Services to sign contracts with large businesses whose owners feared they would be hit with expensive electricity bills. The crisis in California also helped the retail unit sign contracts with large businesses in other states because business executives feared deregulation of the electricity markets there would result in a California-like crisis.
"This was like the perfect storm," said former EES executive Steve Barth. "First, our traders are able to buy power for $250 in California and sell it to Arizona for $1,200 and then resell it to California for five times that. Then EES was able to go to these large companies and say 'sign a 10-year contract with us and we'll save you millions.'"
During the height of the crisis, EES signed more than $1 billion in long-term energy deals with companies such as Compaq Computer Corp., Starwood Hotels & Resorts, Rich Products Corp. and Prudential Insurance of America, all of which have operations in California.
Army Secretary Thomas White was vice chairman of EES during the time of California's power crisis.
Barth said White got EES' sales team to take advantage of the California crisis by offering large businesses a break on their electricity bills if they would sign lucrative deals with EES.
"Thomas White told us the California electricity crisis was our chance to turn EES into a profitable unit of Enron," Barth said. "He said the energy crisis in California would put EES on the map."
A spokesman for the Pentagon said White has cooperated with all official inquiries into the Enron situation and that he has consistently maintained that EES was not engaged in any "shenanigans."
The Enron traders said their competitors at other rival energy companies learned of their tricks through word of mouth at local bars in Houston and soon everyone was buying power in California for $250 and selling to Nevada or Washington for $1,200.
