[Congressional Record Volume 148, Number 56 (Tuesday, May 7, 2002)]
[Senate]
[Pages S3943-S3946]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
MANIPULATION OF ENERGY MARKETS
Ms. CANTWELL. Madam President, I rise today to discuss the documents
that were released yesterday, which illustrate how Enron has
manipulated energy markets in California and in many Western States.
Based on yesterday's revelations, I believe ratepayers deserve prompt
relief from Enron's trading practices. I think these documents show
Washington State electricity consumers what they have suspected all
along, that prices have been manipulated and they have, as a result,
paid higher energy prices, many up to double-digit rate increases.
Many of you may have seen the articles. I want to have several of
these printed in the Congressional Record. They emphasize the
information that is being provided in documents I think my colleagues
from California had printed in the Record.
The New York Times, the headline was:
Enron Forced Up California Energy Prices, Documents Show.
Another article that was printed in the LA times:
Memo Shows Enron's Role in Power Crisis. Energy: ``Smoking
gun'' document by company lawyers reveals tactics used to
create electricity shortage in California, then drive up
prices.
Another in the Washington Post:
Papers Show That Enron Manipulated California Crisis.
I ask unanimous consent these be printed in the Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:
[From the New York Times, May 7, 2002]
Enron Forced Up California Energy Prices, Documents Show
(By Richard A. Oppel Jr. and Jeff Gerth)
Washington, May 6.--Electricity traders at Enron drove up
prices during the California power crisis through
questionable techniques that company lawyers said ``may have
contributed'' to severe power shortages, according to
internal Enron documents released today by federal
regulators.
Within Enron, the documents show, traders used strategies
code-named Fat Boy, Ricochet, Get Shorty, Load Shift and
Death Star to increase Enron's profits from trading power in
the state--techniques that added to electricity costs and
congestion on transmission lines.
The documents--memorandums written in December 2000 by
lawyers at Enron to another lawyer at the company--also
describe ``dummied-up'' power-delivery schedules, the
submission of ``false information'' to the state, and the
effective increasing of costs to all market participants by
``knowingly increasing the congestion costs.''
The memos, which provide the first inside look at the
complex trading strategies Enron used in California, give
strong ammunition to state officials who have long argued
that Enron and other power marketers manipulated the state's
market and played a crucial role in the crisis that cost
California consumers and utilities tens of billions of
dollars in 2000 and 2001. The documents state that other
power companies used similar techniques.
Tonight, Senator Dianne Feinstein, Democrat of California,
said she would ask Attorney General John Ashcroft ``to pursue
a criminal investigation to determine whether in fact federal
fraud statutes or any other laws were violated'' by Enron's
energy-trading activities. Federal prosecutors are already
conducting an inquiry into Enron's accounting, which falsely
increased reported profits but ultimately led to the
company's filing for bankruptcy protection in December.
Enron agreed to sell its energy-trading unit earlier this
year to UBS Warburg, a division of UBS, Switzerland's largest
bank. Nearly all of Enron's senior executives, and most of
its board members, have departed in the last nine months.
Enron's senior management learned of the documents in late
April, and the company's board decided during a meeting on
Sunday to waive attorney-client privilege and turn the memos
over to investigators at the Federal Energy Regulatory
Commission, a person close to the company said. The company
has also informed the Justice Department, the Securities and
Exchange Commission and the attorney general of California
about the documents.
At a noon meeting today, lawyers for Enron gave the memos
to investigators from the regulatory commission, which is
examining whether Enron manipulated energy markets in the
West. The agency released the documents a few hours later.
Officials at the commission declined to comment, but they are
continuing their investigation into Enron's effect on power
prices and asked the company today to provide additional
documents on its electricity and natural-gas trading
activities.
In a letter sent by officials at the commission today to
Enron, investigators at the agency said the documents
described how Enron traders were ``creating, and then
`relieving,' phantom congestion'' on California's electricity
grid. The documents also detail what investigators described
as ``megawatt laundering,'' in which Enron bought power in
California, resold the power out of
[[Page S3944]]
the state and then bought the power back and resold it back
into California--allowing Enron to circumvent price caps
meant to clamp down on costs.
``These documents prove that these companies can manipulate
the market,'' said Loretta Lynch, the president of the
California Public Utilities Commission, ``Enron prevented
California from seeing these documents for years, and now we
know why.''
Ms. Lynch said the documents supported her argument that
FERC should leave in place temporary electricity price
restraints, introduced last June, which state officials say
have played a large role in reining in prices. ``I don't see
how FERC can remove the boundaries they put in place on our
market last June.''
An outside lawyer for Enron, Robert S. Bennett, said he
could not comment on the trading strategies described in the
documents. ``Because we have sold the trading unit and the
people with the knowledge of trading practices are no longer
with the company, we do not know what the true facts are, and
we do not know which parts of the memoranda are correct and
which parts are incorrect,'' Mr. Bennett said tonight.
But he emphasized that the company had agreed to waive that
attorney-client privilege because it was trying to cooperate
with the various investigations into Enron's business
practices. ``These memoranda came to the attention of the
board and current management in late April, and the board
instructed its counsel to not assert the attorney-client
privilege and produce these documents to the appropriate
government entities,'' Mr. Bennett said.
Another memo written by a separate group of lawyers for
Enron in 2001--apparently in January or February, after
soaring wholesale power prices in California pushed the
state's largest utilities to the brink of insolvency--tried
to play down the strategies described in the December 2000
memos.
In this later memo, which as written to prepare Enron for
the ``various investigations and litigation'' it faced
because of the California power crisis, the lawyers
repeatedly tried to play down or cast doubt on the
conclusions drawn by Enron's own lawyers in the earlier
memos.
``Some of the information'' in the earlier memos ``which
resulted in some erroneous assumptions and conclusions,
cannot be supported by the facts and evidence which are now
known,'' the later memo stated.
In one strategy described in the December 2000 memos, Enron
would buy power from a state-run exchange for $250 a
megawatt-hour--the maximum under the price caps--and resell
it outside California for almost five times as much.
``Thus, traders could buy power at $250 and sell it for
$1,200,'' according to one memo. In that document, the Enron
lawyers acknowledged that such activity could be playing a
big role in causing electricity shortages in the state, but
they suggested that was not a significant concern.
``This strategy appears not to present any problems,'' the
memo stated, ``other than a public relations risk arising
from the fact that such exports may have contributed to
California's declaration of a State 2 Emergency yesterday.''
The Death Star strategy, as described in the memos, allowed
Enron to be paid ``for moving energy to relieve congestion
without actually moving any energy or relieving any
congestion.''
And the Load Shift strategy allowed Enron to generate about
$30 million in profits in 2000 using techniques that,
according to the documents, included creating ``the
appearance of congestion through the deliberate
overstatement'' of power to be delivered.
In the past, Enron officials said the California power
crisis was caused by the state's deeply flawed electricity
deregulation plan, the lack of new power-generation capacity
and by temporary factors, like a drought that drastically
reduced available hydropower. Even some economists who think
price manipulation was widespread say these other factors
contributed to soaring prices.
But Enron executives always insisted that absolutely
nothing their traders had done contributed to the crisis. In
an interview last year, Enron's former chairman, Kenneth L.
Lay, dismissed accusations that manipulation was even partly
to blame for California's troubles.
``Every time there's a shortage or a little bit of a price
spike, it's always collusion or conspiracy or something.''
Mr. Lay said in the interview, Which was also taped for
``Frontline'' on PBS. ``I mean, it always makes people feel
better that way.''
______
[From the Los Angeles Times, May 7, 2002]
Memo Shows Enron Role in Power Crisis
(By Nancy Rivera Brooks, Thomas S. Mulligan and Tim Reiterman)
Enron documents released Monday show the company sought to
manipulate power prices in California, creating artificial
shortages through the use of aggressive trading tactics
during the energy crisis.
The disclosure by federal energy regulators marks the first
time that a company's own documents have provided clear
evidence of market manipulation, critics said, which
contribute to soaring prices and blackouts.
``What we have here is a blueprint of . . . manipulation,''
said Robert McCullough a Portland energy consultant and
economist. ``It's one thing for economists to state that
these things are happening. . . . It's another thing for
there to be internal documents on the table stating these
things are happening.''
The documents, uncovered as part of investigation by the
Federal Energy Regulatory Commission into possible
manipulation of California's electricity market, are seen as
strengthening the state's hand in renegotiating costly long-
term contracts with electricity sellers that were reached
during the worst of California's energy crisis in 2001.
California Democratic Sens. Barbara Boxer and Dianne
Feinstein both called for a Justice Department investigation,
with Boxer saying the documents ``confirm what I've been
saying for months, that Enron manipulated the California
energy market and needs to be held accountable. It is high
time we see some indictments handed down in this case.''
Although Feinstein said the trading practices may violate
federal fraud statutes, energy experts saw the strategies as
infractions of market rules that are punishable by fines or
suspensions rather than criminal prosecution.
The state's grid operator has sought a variety of remedies
from FERC for such practices and received some relief in June
in the form of price caps throughout the West and other
mitigation measures.
Enron Lawyer Robert Bennett said company executives, under
new leadership after Enron's Dec. 2 bankruptcy filing, gave
the documents to the Government and waived attorney-client
privilege because ``they thought it was the right thing to
do. The truth of the matter is, we don't know what the
truth of the underlying facts are'' in the memos.
Power shortages sent prices skyrocketing in May 2000, which
pushed California's two largest privately held electricity
utilities to the edge of ruin, caused six days of statewide
blackouts and forced the state to buy power for more than 10
million utility customers.
Enron and other power sellers have denied that they
manipulated prices or power supplies, contending that the
energy crisis was caused by a shortage of power plants and
hydroelectricity.
``These documents make it clear that Enron was trying to
squeeze every dime it could out of the market. It's not
surprising that they violated [California Independent System
Operator] rules because the ISO don't provide much punishment
for violators,'' said Severin Borenstein, a UC Berkeley
professor and director of the UC Energy Institute.
One memo, dated Dec. 6, 2000, and prepared by an Enron
staff attorney and an outside lawyer in anticipation of
investigations and lawsuits, explained how Enron traders
exploited loopholes or market limitations to boost prices or
to wring special payments out of the agencies that operated
California's electricity markets.
Enron traders used such price-hiking techniques as sham
congestion on electricity lines or selling electricity to
out-of-state affiliates only to re-import it at higher
prices, the memo said.
One strategy, code-named Death Star, ``earns money by
scheduling transmission in the opposite direction of
congestion,'' the Dec. 6 memo said. ``No energy, however, is
actually put onto the grid or taken off.''
A second undated memo, written by a different law firm,
sought to cast a more favorable light on the strategies
discussed in the first memo.
The second memo defended the Death Star strategy, saying it
actually reduced congestion on electricity lines at times and
increased supply along underused electricity lines.
The Dec. 6 memo also claimed that other traders had begun
copying Enron's techniques, many of which have been
identified by California officials, although without
documented evidence.
``These are the smoking guns we always alleged,'' said
Public Utilities Commission President Loretta M. Lynch.
``These documents show their business plan was to game the
California market so they could suck every dollar out of
California.''
Department of Water Resources spokesman Oscar Hidalgo said
the department hopes the release of the Enron documents will
spur more companies to renegotiate dozens of long-term
contracts that DWR signed after it became the power buyer of
customers of financially troubled utilities.
The California Independent System Operator, which runs
California's last remaining official energy market, has asked
FERC to grant the state $9 billion in refunds because prices
charged in 2000 and 2001 were unreasonable, although the
regulators now are considering a lower payment.
The quirks of the California energy market presented Enron
and other market participants with myriad opportunities to
take profitable advantage.
California had two markets: a ``day-ahead'' auction market
through the California Power Exchange--``The PX,'' in trader
lingo--and the ``real-time'' market run by Cal-ISO.
Traders quickly found ways to play the two markets off each
other.
The day-ahead market was supposed to handle the bulk of the
electricity requirements, and the real-time market was meant
only to correct occasional imbalances.
When the crisis hit, the real-time market grew in
importance and was the locus of wild price swings.
Buyers and sellers who wanted to participate in the real-
time market were required to submit to Cal-ISO daily
schedules of their production and their ``load,'' or the
amount
[[Page S3945]]
of power they intended to use. The two were supposed to be in
balance.
But sometimes when power supply was tight, Cal-ISO paid
participants a premium when they happened to provide more
power than Cal-ISO required.
One of Enron's basic strategies, according to the memo,
involved deliberately overstating its load. It would deliver
as much power as promised but then use less than scheduled
and get a premium for the difference.
Another Enron stratagem was to take advantage of congestion
in the real-time market that Enron had helped create in the
day-ahead market, the memo said.
During the energy crisis, the amount of power scheduled for
delivery into the California market sometimes exceeded the
capacity of the system's transmission lines.
At such times, Cal-ISO would make ``congestion payments''
to market participants that either schedule transmission in
the opposite direction or reduce their generation/load
schedule.
``Because the congestion charges have been as high as $750/
MW [per megawatt], it can often be profitable to sell power
at a loss simply to collect the congestion payment,'' the
memo said.
Enron traders, acknowledged as among the industry's most
creative, worked a number of variations on these two themes.
In addition to Death Star, other colorful nicknames for
trading methods included Get Shorty, Ricochet and Fat Boy to
identify them in discussions with traders from other firms.
California imposed price caps to cope with the emergency,
but even these offered an opportunity for clever traders who
realized that prices weren't capped in neighboring areas that
were affected by the crisis.
On Dec. 5, 2000, for example, prices soared to $1,200 per
megawatt-hour in the Pacific Northwest, while a $250 cap was
in place in California.
Enron traders saw that they could lock in an instant $950
profit for each megawatt-hour of electricity by buying power
on the California PX and selling it up north, according to
the memo.
``This strategy appears not to present any problems, other
than a public relations risk from the fact that such exports
may have contributed to California's declaration of a Stage 2
emergency yesterday,'' the memo said.
Cal-ISO spokeswoman Stephanie McCorkle said some of the
behaviors probably caused prices to rise, but the grid
operator does not believe they contributed to the six days of
blackouts in early 2001. The reason, she said, is that the
blackouts were caused by a severe shortage of power, not by
phantom congestion.
Cal-ISO has asked FERC to extend market protections that
are due to expire Sept. 30, including a price cap on
electricity in the West.
____
[From the Washington Post, May 7, 2002]
Papers Show That Enron Manipulated Calif. Crisis
(By Peter Behr)
Enron Corp. manipulated the California electricity market
with such maneuvers as transferring energy outside the state
to evade price caps and creating phony ``congestion'' on
power lines, according to internal Enron documents released
yesterday.
The techniques described in two memos written by lawyers
for Enron in December 2000 were given names such as ``Fat
Boy,'' ``Death Star,'' ``Get Shorty'' and ``Ricochet.'' The
company turned the documents over to federal regulators, who
made them public.
The evidence of their use contradicts denials Enron made at
the time and provides impetus to several investigations of
the bankrupt energy giant's role in the California crisis.
Operators of California's power system ordered rotating
blackouts on six days early in 2001. That followed a tenfold
surge in power prices that began the previous summer, hitting
the state's utilities with billions of dollars in excess
electricity charges.
Details of Enron's financial problems came to light months
after the California crisis. ``These documents confirm what
we have known for some time, through circumstantial evidence:
They show internal corporate strategies for manipulating the
market,'' said California state Sen. Joseph Dunn (D), who
heads a legislative committee investigation into the power
crisis the state suffered a year ago.
U.S. Sen. Dianne Feinstein (D-Calif.) said she will ask the
Justice Department to launch a criminal investigation of
power sales in California.
The ``ricochet'' strategy was used to evade wholesale price
controls on California electricity by transferring power out
of the state and then back in.
Another maneuver took advantage of dramatically higher
prices that California energy officials were willing to pay
to get emergency supplies during shortages, the Enron
documents say.
The ``Death Star'' strategy is described as permitting
Enron to be paid ``for moving energy to relieve congestion
without actually moving any energy or relieving any
congestion.''
The reports were sent to Richard Sanders, Enron's vice
president and assistant general counsel, in preparation for
lawsuits arising from the California crisis. Sanders, who is
still with Enron, could not be reached for comment yesterday.
A third, undated memo, prepared by different lawyers in
consultation with a senior Enron trading executive, took
issue with the first two reports, concluding that some of the
trading strategies ``may have increased'' power supplies.
Energy analyst Robert McCullough said the memos indicate
that Enron traders deliberately tried to create the
appearance of shortages and congestion, prompting
declarations of power blackouts that need not have been
ordered in some cases.
State officials complained during the crisis that
electricity suppliers were manipulating the state's
deregulated power markets. Under political pressure last
spring, the Federal Energy Regulatory Commission imposed
temporary electricity price ceilings on California and
neighboring western States.
That action, coupled with favorable weather and an economic
slowdown, sent electricity prices plummeting last summer,
ending the power crisis.
FERC officials and energy companies are still locked in a
battle over the amount of refunds owed to California because
of overcharging.
Enron said the documents released yesterday were spotted
recently by company officials who took office after Enron's
Dec. 2 bankruptcy filing, the largest such filing in U.S.
history.
As correspondence between Enron and its attorneys, the
documents has previously been marked confidential and had not
been given to Federal and State investigators.
Enron attorney Robert Bennett said Enron managers concluded
that the documents should be turned over, and in a telephone
conference call Sunday, Enron's board agreed.
``This board and the current management wants to be fully
candid with Congress and other Government entities and to do
the honorable and responsible thing,'' Bennett said.
Ms. CANTWELL. Madam President, these articles show what consumers in
my State have thought all along, that these prices were being
manipulated. That is why in January of this year I asked the Federal
Energy Regulatory Commission to investigate these high prices that have
literally cost people jobs, made consumers pay as much as 60-percent
rate increases, and have made it tough for our economy in Washington
State to continue to thrive with these high energy prices in some
industries such as aluminum and other intensive energy businesses.
Yet what has happened--I do not know if other people in the country
realize this--is our consumers may end up paying these high rates for
many years, even though Enron has gone bankrupt. The reason is that the
contracts these companies have had with Enron are as many as 5-year to
7-year--in some cases 8-year--contracts which were negotiated at the
time of this crisis and very high prices. In fact, energy prices--the
rates were as much as 1,000 times higher during this crisis.
Consumers hear there were memos with names such as Fat Boy or Death
Star or Get Shorty or Ricochet that were really plans by this company
to manipulate prices. The Federal Energy Regulatory Commission should
act upon these memos and basically find that these rates have, in fact,
been manipulated. That is right, on the west coast, both in California
and in Washington and in Oregon, prices were manipulated and because of
those unjust and unreasonable rates these Northwest entities should be
let out of these long-term Enron contracts.
I believe that is critically important for us in the Northwest, who
may face even further rate increases in the future because of these
high energy costs, and the fact that the Bonneville Power
Administration, for example, would be let out of these contracts, it
might save as much as $250 million to $300 million just in the costs
that BPA has to pay. Instead, they would be able to go out on the
market, not paying the high Enron prices, but go out on the market
today and get cheaper electricity prices.
I cannot tell you how important it is for us. My colleague from
Washington, Senator Murray, and Senator Feinstein, Senator Boxer,
Senator Wyden, and Senator Smith--we have all spoken on this issue and
how it impacts the whole west coast. It is critically important that
the Federal Energy Regulatory Commission take the information they have
discovered in their investigation and make this decision on unjust and
unreasonable rates as soon as possible.
I believe the Federal Energy Regulatory Commission ought to use its
power to void long-term contracts with unjust and unreasonable rates. I
also believe we need new Senate hearings to review these findings and
to explore all available options for ratepayer relief under federal
law.
[[Page S3946]]
I would also like to add my voice to that of my colleague from
California, Senator Feinstein, and my colleague from Washington,
Senator Murray, in calling for a criminal investigation by the
Department of Justice into allegations that Enron has manipulated
prices in the Western electricity markets.
As my colleagues are aware, the Western electricity crisis of 2000
and 2001 has taken a tremendous toll on the economy of my state, and of
Oregon and California. As a result of electricity prices that spiraled
to as much as 1000 times the normal rates, consumers throughout the
West have paid dearly. They have paid in their utility bills--which
have been raised as much as 60 percent--and they have paid with job
loss in communities that have seen entire industries shut down.
Madam President, throughout the Western electricity crisis, I joined
with many of my Western colleagues in asking the Federal Energy
Regulatory Commission (FERC) to step in and do its job--to ensure just
and reasonable rates. For many months, FERC refused and assured many of
us that the Western power crisis was simply the result of drought and a
shortage of electricity--a shortage that many of us raised questions
about, given that it seemed to materialize over night.
FERC and this administration repeatedly denied what many of the
impacted citizens in Washington state knew intuitively to be true--that
our Western markets were being manipulated by a handful of companies
that drew enormous profits directly from their pockets and from the
coffers of their businesses.
With the collapse of Enron, Senator Bingaman, chairman of the Senate
Energy and Natural Resources Committee, wisely called a hearing to
assess the bankruptcy's impacts on the energy markets. At this hearing,
on January 29, I asked FERC Chairman Pat Wood to take a close look at
allegations that Enron have been manipulating markets. In a letter sent
that same day, I wrote:
Congress and our nation's consumers-particularly those of
the Pacific Northwest, who have suffered through retail rate
increases of up to 50 percent over the past year-deserve to
know whether Enron was manipulating Western power markets at
their expense. After Enron collapsed, prices in the West's
forward energy markets plummeted by 20 to 30 percent. Where
there's smoke there's often fire, and we must investigate
whether we have a simple coincidence here, or something more.
The public deserves answers and, if appropriate, corrective
action.
In response to my request, FERC opened a staff investigation on these
allegations. And late yesterday, this investigation revealed the first
real smoking gun. Now posted on the Commission's Website, you will find
memos in which attorneys from Enron outline their strategies for
manipulating prices in Western markets.
This has real, direct impacts on consumers in my state. During the
height of the crisis, many utilities in my state signed long-term
contracts with Enron at prices that looked like deals at the time--in a
severely dysfunctional market--but today, are two to three times
current market rates. The Bonneville Power Administration, for example,
which provides 60 percent of all the power consumed in my state, is on
the hook for $700 million worth of Enron contracts over the next few
years. In today's market, these contracts would be half as costly.
Nevertheless, Bonneville and the consumers of the Northwest continue to
be held hostage. They continue to pay Enron. At the conclusion of this
investigation, I hope that FERC will see to it that justice is done. If
markets were manipulated--as the evidence now suggests--Washington
State consumers should be given relief from these contracts.
In addition to these ongoing FERC proceedings, I do hope the Justice
Department will open a criminal investigation into Enron's actions to
manipulate electricity prices and defraud consumer-ratepayers.
But I also look forward to this body exercising what I believe is
necessary continued oversight. This morning, at an Energy and Natural
Resources Committee hearing, Senator Bingaman and I discussed the
possibility of a hearing on these issues. I also believe that the
Judiciary Committee may be an appropriate forum for discussing the
antitrust component of these allegations.
But in addition, I hope my colleagues--and particularly those who
will serve on the Energy bill conference committee--will pay close
attention to what this means for our nation's electricity markets.
During the debate on that bill, I offered a consumer protection
amendment to the electricity title that I believe would have prevented
a recurrence of the Western energy crisis and incorporated many of the
lessons we have learned--and continue to learn--from Enron's collapse.
My amendment suggested that before FERC was allowed to open up markets
like California to deregulation, it should have to establish clear
market rules, have in place the mechanisms necessary to monitor markets
to detect manipulation. It would have directed FERC to take decisive,
corrective action to protect consumers when abuses do occur. And it
would have given FERC and state utility commissions the access to books
and records they would need to discover evidence like the memos we have
now found in this Enron investigation, almost two years after the
energy crisis began and after months of business closures and rate
hikes across the West.
I hope Attorney General Ashcroft will heed our call today. I look
forward to continuing our oversight of this issue in the Energy
Committee, and I hope our conferees will consider this new evidence--
that Enron has been manipulating power markets--as they consider the
energy bill.
I yield the floor.
____________________