Enron May Have Influenced Probe On Calif Power Crisis

by Jason Leopold

About two dozen of the more than one million Enron emails dealing with California's energy crisis, recently released by the Federal Energy Regulatory Commission, appear to make a strong case that the one-time high-flying energy company had some role in influencing the FERC decision three years ago -- a major blow to California consumers and two of the state's investor-owned utilities that were teetering on the brink of bankruptcy. Utilities in California lost billions of dollars buying high-cost power on the wholesale market and selling it at a loss under a state mandated rate freeze.

The issue is of particular importance now because California's newly elected Republican Governor, Arnold Schwarzenegger, has indicated through aides that he would try and quickly settle a number of the lawsuits the state has pending before FERC and the 9th Circuit Court of Appeals, many of which name Enron as a defendant.

Schwarzenegger secretly met with Ken Lay at the Peninsula Hotel in Beverly Hills in May 2001 to listen to Lay pitch solutions for the state's energy crisis. During the recall campaign, Bill Forman, the news editor at the Sacramento News & Review asked Schwarzenegger about the meeting. Schwarzenegger said he didn't recall meeting Ken Lay because there were more than 30 people in the room. If Schwarzenegger plans to fix the state's budget he better brush up on his basic math skills. According to a list of attendees uncovered by the consumer group Foundation for Taxpayer and Consumer Rights, there were 13 people at the meeting, including Schwarzengger.

Moreover, Schwarzenegger met privately with Lay and former Los Angeles Mayor Richard Riordan for about 15 minutes to discuss ways Schwarzenegger and Riordan could help solve the state's power crisis, according to one of Riordan's former deputies, who spoke on condition of anonymity because he still works with Riordan. Riordan has been named to Schwarzenegger's transition team

The bigger issue, however, has to do with a ruling handed down by FERC on Nov. 1, 2000 related to the sky-high wholesale power prices that wreaked havoc in much of the state between May and October of that year. Then Gov. Gray Davis, along with dozens of other state officials, charged that energy companies conspired to drive up electricity prices in the state by using a variety of schemes to game the market. The November 2000 investigation by FERC was the first probe into California's power crisis. The commission conducted a second investigation in mid-2001.

During the 2000 investigation, the Republican dominated investigated the issue of high electricity prices and said the wholesale market structure in California is "seriously flawed" but FERC found no significant evidence that power sellers or providers manipulated prices. Instead, the report blamed the state's mandated market structure for the summer's power shortages and rising prices.

In some of the Enron emails FERC posted on its website (a href="http://fercic.aspensys.com/members/manager.asp" target="_top">LINK), Enron executives talk about meetings they held with FERC staff prior to the report on California's power crisis being released publicly and how they were unsure if "everything we want" will be included in the commission's report.

"We were very involved in the discussions of the report with FERC staff," said James Steffes, Enron's former Vice President of Governmental Affairs, in an email to Karen Denne, Enron's vice president of communications who still works at the company. "I am not sure, however, if everything we want will be in the report. We will monitor very closely."

During the months leading up to the FERC report, the commission received a presentation on from Timothy Belden, one of Enron's former top traders, who pleaded guilty in October 2002 to federal conspiracy charges that he manipulated California's electricity market to drive up prices and maximize profit for Enron.

After the Belden's presentation to FERC, Mary Hain, one of Enron's in-house lawyers, sent an email out to a dozen Enron executives (but not former Chairman Ken Lay or Chief Executive Jeff Skilling) saying Belden sent a presentation to Scott Miller, a FERC investigation who was in charge of the California power probe, and answered questions for Miller over the telephone.

"According to the head of the investigation Scott Miller, the staff got alot more out of this meeting than Staff's previous meetings with the (utilities) and the generators. Based on the numerous phone calls I've been getting, the Staff is looking into the data we provided," Hain's email says.

Hain also gave a presentation to FERC, based largely on Belden's presentation materials, advocating Enron's argument that the surging energy prices were due to scarcity of supply, the Financial Times reported in October 2002.

"I have also attached a revised version of the presentation that Tim sent to Scott Miller on Friday," Hain's email said. "Tim's version conveys the same message but takes a different approach to conveying the message. On Friday, Tim talked to Scott and answered some additional questions. Tim said that Enron is in favor of eliminating the mandatory (Power Exchange) buying requirement and would like the (utilities)to be able to buy from Enron Online. He also explained more fully the existence of scarcity.

The Power Exchange reference relates to the now defunct California Power Exchange, the market where electricity was bought and sold in the state. It's interesting that Hain's email refers to the Power Exchange because when FERC issued its report on Nov. 1, 2000 it ordered the Power Exchange to shut down and told buyers of sellers of power to use EnronOnline, a trading platform operated by the energy giant that helped the company report record profits the following year. Those profits, however, were largely illusory.

Enron had long believed that the Power Exchange was a threat to its profits. In May 1999, during the infancy of dergulation in California, Enron first experimented with market manipulation by submitting a bid at the Power Exchange for 2,900 megawatts on a transmission line that only has a capacity of 15 megawatts.

The Power Exchange said Enron congested the Silver Peak Line, which runs from the Central Valley to San Diego. Deliberately congesting the transmission line produced higher prices for power during the time.

The Power Exchange spent a year investigating the issue and in May 2000 found Enron in violation of the state's rules for trading electricity.

Enron agreed to pay the Power Exchange $25,000 to settle the issue without admitting or denying the charges. However, Enron's Hain sent out an email in February 2000 to company executives saying Enron's scheme likely cost California upwards of $47 million.

The interesting thing about the conversations Enron had with FERC and vice versa in regard to the commission's probe of California's electricity crisis is that the communication may have been illegal. According to FERC's own governing rules, the commission is not permitted to discuss pending issues with anyone outside the commission.

"No member of the body comprising the agency, administrative law judge, or other employee who is or may reasonably be expected to be involved in the decisional process of the proceeding, shall make or knowingly cause to be made to any interested person outside the agency an ex-parte communication relevant to the merits of the proceeding. A member of the body comprising the agency, administrative law judge, or other employee who is or may reasonably be expected to be involved in the decisional process of such proceeding who receives, or who makes or knowingly causes to be made, a communication prohibited by this subsection shall place on the public record of the proceeding."

A spokesman for FERC would not return messages, first left at the commission on Oct. 6, seeking comment for this story, nor would a spokesperson for Enron.

It's unclear whether Enron had any correspondence with FERC commissioners about the investigation. However, Jeff Dasovich, an Enron government relations executive, said in a Sept. 12, 2000 email to Staffes, his boss, that FERC's Republican Chairman, Curt Hebert, went up to Dasovich after a panel discussion on California's power crisis and "lobbied me hard to support" FERC's proposal to break up the country's power grid into regional transmission companies, a plan that Enron abhorred.

Hebert resigned as FERC chairman in 2001. Hebert reportedly opposed a request by Enron's former Chairman Ken Lay to allow Enron greater access to interstate power grid, prompting Lay to say he would no longer support the Mississippian as FERC chairman. Hebert said he resigned after two of President George Bush's FERC appointees, Pat Wood and Nora Brownwell, came aboard at FERC and began to outvote him on the five-member panel. In 2001, Brownwell and Wood pushed through a regulation that would penalize electric companies that don't join multistate regional power grids, a proposal pushed by Enron but opposed by Hebert.

The correspondence between FERC and Enron in 2000 confirms what many of California officials said at the time, that FERC failed to do its job to keep a watchful eye on energy companies and protect consumers. Enron's influence at the highest levels in government may have cost California more than $3 billion in electricity overcharges between May 2000 and November 2000. California is currently fighting for those refunds at the 9th U.S. Circuit Court of Appeals.

Schwarzenegger is aggressively pursuing a plan to push California electricity market closer toward deregulation, which Gov. Davis halted two years ago when the crisis spiraled out of control. He said he plans to shut down at least one of California's energy agencies and will fire dozens of Davis' energy advisers in favor of his own handpicked team of free-market conservatives.

Unless Schwarzenegger eases California back toward a deregulated electricity market, the state could find itself saddled with skyrocketing power prices once again. According to a recent report by the General Accounting Office, In August, the General Accounting Office issued a report criticizing FERC because the agency doesn't have the power to protect consumers from the side effects of deregulation, such as soaring electricity and natural gas prices, which ended up costing California more than $70 billion and bankrupted the state's largest utility, Pacific Gas & Electric Co.