New documents suggest Enron’s Lay, Skilling and Shapiro all knew about the company’s trading schemes in California
Recent news reports have cited lower-level Enron traders talking about ripping off “Grandma Millie” to the tune of about $2 million a day during the California energy crisis. But a complete reading of the 400 pages of documents, recently released by the Federal Energy Regulatory Commission (FERC), reveals something unreported yet ultimately more significant: namely, senior Enron executives acknowledging, for the first time, that they were breaking the law to make a buck.
In one smoking-gun conversation in August 2000 with Rick Shapiro, Enron’s vice president of regulatory affairs, Tim Belden, the head of Enron’s West Coast power desk, admits that he and his underlings have spent two years “exploiting the letter of the rules” in the California power market in order to make money. The tactics Belden employed created severe power shortages in the state and forced wholesale power prices to skyrocket to record levels.
In the transcripts, Belden provides the complete blueprints for manipulating the California power market, from instructions on how to artificially clog the state’s transmission lines and get paid to remove the bogus congestion to details on how to send power out of state and resell it to California at 10 times the price the company would have received had it kept the power in California.
The documents further suggest that former Enron Chairman Ken Lay and former Chief Executive Jeff Skilling both were aware that Enron’s West Coast traders may have broken the law by using manipulative trading tactics in California to boost Enron’s profits during the height of the state’s power crisis.
Shapiro, who also is one of Enron’s most powerful Washington, D.C., lobbyists, met with several members of the Bush administration in the spring of 2001 about Enron’s opposition to price controls on electricity sales in California. Less than a year earlier, he was told by Belden, the mastermind behind Enron’s notorious trading scams, that Belden and other traders working at the company’s West Coast trading desk in Portland, Ore., spent the better part of 2000 and 2001 breaking the rules governing California’s power market.
“There’s really two—two things that happened—two areas … in terms of things blowing up,” Belden told Shapiro in August 2000. “One is our day-ahead scheduling practices and then the other is our real-time operations. Um, we’ve been doing and have been doing for two years a lot of activity in, you know, there’s black, there’s white and there’s gray. Um, we have been endeavoring into the gray area when opportunities present themselves to make money. We have now moved out of the gray area into the clearly what’s legal area … not even legal, but what’s, um, there’s like the letter of the law, the letter of the rules and the spirit of the rules. Um, we’ve been exploiting the letter of the rules—or literally interpreted—interpreting the rules, um, in California when we can make money.”
Seized by the FBI from Enron’s trading offices in Portland, these recorded conversations between Enron traders, company attorneys and management provide the most vivid portrait to date of the company’s questionable trading practices that set off California’s power crisis. An additional batch of documents, released earlier this week, alleges that Enron traders manipulated the western U.S. power market nearly every day from May 22, 2000, to June 2001, resulting in more than $1 billion in ill-gotten profits for the energy company. (Access these online at http://elibrary.ferc.gov/idmws/search/fercgensearch.asp, enter date range 5/17/2004 to present, docket number EL03-180-, and submit.)
California’s electricity crisis wreaked havoc on consumers and businesses from the summer of 2000 to June 2001, resulting in three days of rolling blackouts, hundreds of emergency power alerts and the state’s largest utility, Pacific Gas & Electric, being forced into bankruptcy. The crisis cost the state more than $70 billion.
State Attorney General Bill Lockyer said last week that he expects to file a multibillion-dollar lawsuit against Enron as a result of the company’s manipulative trading practices detailed in the transcripts.
California also is seeking $9 billion in refunds from a handful of energy companies for overcharging the state during the power crisis. That issue is expected to be taken up by the 9th Circuit Court of Appeals in San Francisco because FERC said California was entitled only to about $3 billion in refunds.
In conversation, Shapiro urged Belden to pull back on the aforementioned trading schemes in California and to begin working more closely within the law because of the severe political risk to Enron and the billions of dollars it reaped from California’s electricity crisis.
Belden told Shapiro that he would continue to exploit the rules in California, as long as it didn’t cause the lights to go out in the state. He added that if Skilling were forced to testify before a commission about the inner workings of the West Coast trading desk, it could hurt Belden’s career.
“I know there’s a lot of political risk and I know that we got a ton of money in our book and then—if Jeff Skilling ah, has to go in front of some commission and explain the activities of the West Power Group, that’s probably not so great for my career,” Belden told Shapiro, according to the transcripts.
In spite of the fact that Shapiro clearly was in the know about Enron’s questionable trading practices, he continued to lobby powerful Washington lawmakers, urging them not to fix the market problems in California. According to public documents from the House Governmental Affairs Committee, he instead argued that the crisis was the state’s fault for not building enough power plants.
This is the first revelation that an Enron lobbyist was briefed on the company’s manipulative trading practices, and it’s likely that other executives also were in the know. Shapiro wielded enormous influence with members of the Bush administration. On May 23, 2001, he met with White House economic adviser Robert McNally and Energy Secretary Spencer Abraham’s chief of staff about Bush’s national energy policy and Enron’s opposition to price controls in California.
The meeting between Shapiro and McNally came at a crucial time for Enron. The company’s most senior executives recognized that Enron stood to lose hundreds of millions in profits and its standing on Wall Street if California lawmakers were successful in getting federal energy regulators to rewrite the rules in California’s power market. Judging by the events that followed, it appears that Bush and Cheney were in Enron’s corner.
Six days before Shapiro met with McNally and Abraham’s staff, on May 17, 2001, Vice President Dick Cheney was interviewed by the TV news program Frontline. When asked if companies like Enron were behaving like a “cartel” and manipulating the California power market, Cheney responded with a resounding “no.”
“The problem you had in California was caused by a combination of things—an unwise regulatory scheme, because they didn’t really deregulate. Now they’re trapped from unwise regulatory schemes, plus not having addressed the supply side of the issue. They’ve obviously created major problems for themselves,” he said.
That same day, Cheney and Bush unveiled the details of the national energy policy, in which Cheney adopted seven of Lay’s suggestions, according to published reports. Had the intimate details of Enron’s trading schemes been known to California officials, it most certainly would have derailed Bush’s energy policy, which called for keeping many of deregulation’s key components in place, and would have forced key players, like Cheney, to return to the drawing board to draft a new policy.
But there’s more.
Also that same day, May 17, 2001, Lay called a secret meeting at the Peninsula Hotel in Beverly Hills in an effort to get some of the state’s rich and famous to lobby the California Legislature about getting “deregulation right this time.” California’s current governor, Arnold Schwarzenegger, who would go on to unseat Gray Davis in last year’s contentious recall election, attended the meeting at the Peninsula Hotel with Lay, as did former Los Angeles Mayor Richard Riordan, junk-bond king Michael Milken and other luminaries. Lay handed the attendees a seven-page document that contained so-called solutions to the state’s electricity crisis.
Later that month, Bush agreed to meet with Davis at the Century Plaza Hotel & Spa in West Los Angeles to listen to Davis’ plea for much-needed price controls on soaring power prices. Bush refused, saying the free market would correct the problems eventually.
But it was already clear within the company that Enron no longer would be able to earn what an Enron governmental-affairs employee referred to in the transcripts as “bucketloads of cash” from California. Under Davis, California signed $42 billion in long-term electricity contracts with more than two dozen energy companies, no longer buying the bulk of its power needs in the open market, where Enron earned its biggest windfall.
In June 2001, shortly after the details of the long-term contracts were revealed, Skilling and Lay summoned Belden to Houston to discuss the company’s West Coast trading division, which Belden said in one recorded conversation accounted for 80 percent of Enron’s profits in 2000 and 2001. They wanted to determine whether anything could be done to salvage the operation, according to one person working with the Justice Department on the investigation.
It’s unclear what came out of that meeting, but two months later, Skilling resigned from Enron. Ironically, on March 9, 2001, he had flown to Portland to take Belden and other senior traders out to dinner at Higgins Restaurant and Bar to celebrate Enron’s successful first-quarter earnings. On the transcripts released by FERC, traders said they made upwards of $10 million a day in 2000 by utilizing many of the trading scams developed by Belden.
What’s surprising about the scams Enron traders pulled in California is how well-known they were within the company’s Houston headquarters, according to the transcripts. Indeed, one public-affairs official at Enron instructed a trader based in the company’s Portland trading division to lie to a Wall Street Journal reporter who wanted to write a story about Enron’s lucrative trading desk.
“The thing is anything they’d ask you, you’d have to lie because you wouldn’t want to tell them the truth,” an unidentified Enron employee in the company’s governmental-affairs department said to an Enron trader. The governmental-affairs employee then attempted to talk the trader out of doing the interview with The Wall Street Journal: “I wouldn’t do it [the interview]. ’Cause first of all, you’d have to tell ’em a lot of lies, cause if you told ’em the truth …”
“I’d get in trouble,” the trader says, interrupting the governmental-affairs employee.
“You’d get in trouble,” the governmental-affairs employee said.
Still, on July 18, 2000, The Wall Street Journal printed a story under the headline “Energy Traders Reap Big Profits on High Prices,” which explained the excitement of being an energy trader during a period of volatile energy prices, apparently the same story that was discussed between the Enron trader and the governmental-affairs employee. It’s now known, according to the transcripts, that skyrocketing power prices discussed in that story were caused directly by Enron’s manipulative tactics and were not a result of regulatory restrictions that were left in place in California’s wholesale electricity market.
But none of these revelations have stopped Schwarzenegger from pursuing a so-called free-market solution to California’s lingering energy problems. Many of the schemes Belden and other traders discussed in the transcripts can happen still, according to a 90-page report released in April by Lockyer.
So, what will the future hold? Perhaps the most prescient part of the transcript is when John Forney, a senior Enron trader who worked closely with Belden and was indicted on conspiracy charges, fears that he may be sent to jail. In a conversation with Belden, Forney seems to have misgivings about one scheme he just pulled that involved California and Canada.
Belden appears to brush off Forney’s concerns, according to the transcripts, and Forney says he can’t believe that none of his Enron colleagues seem to be concerned about the possibility of going to jail as a result of the schemes he and other traders have pulled.
“I only want to go to jail once,” Forney says.
“Yeah,” Belden says. “Once in this country.”
Forney is expected to appear in federal court in San Francisco in October.
Jason Leopold’s article on Enron’s meeting with Arnold Schwarzenegger (“Total amnesia”; SN&R Essay; August 28, 2003) ranks No. 13 among Project Censored’s 25 “Most Censored News Stories of 2003-04,” which will be published in October. He is the former Los Angeles bureau chief of Dow Jones Newswires, where he spent two years covering the energy crisis and the Enron bankruptcy. He also has just finished writing a book about the crisis, due out in December through Rowman & Littlefield.