Enron Trading Gave Prices Artificial Lift, Panel Is Told
The New York Times
April 12, 2002
By RICHARD W. STEVENSON
W ASHINGTON, April 11 - A top
California regulator told
Congress today that the Enron
Corporation engaged in sham
transactions in late 2000 that drove up
electricity prices and helped worsen
the energy crisis that plagued the
West for more than a year.
Testifying to a subcommittee of the
Senate Commerce Committee, Loretta Lynch, president of the California Public
Utilities Commission, said regulators had studied Enron's actions in the fourth
quarter of 2000 and had determined that five subsidiaries traded large volumes of
electricity contracts among themselves in an effort to push up prices.
Ms. Lynch said the effect of the trading was to set prices throughout the wholesale
electricity market in California far above what was justified. "I believe these trades
were sham transactions," Ms. Lynch said. The company, she said, "would trade
among itself to drive the price up."
Enron said that it had not manipulated prices and that the problems in California
were a result of a flawed deregulation system combined with other factors like a
drought in the Northwest and a temporary decline in generating capacity.
"We have and we will continue to cooperate with the committee's investigation," a
spokesman for Enron, Mark Palmer, said. "We have cooperated with numerous
previous investigations, all of which found that the market structure was the cause
of California's energy crisis, not Enron." The committee did not invite Enron to
send a representative to the hearing.
Other witnesses from California, including S. David
Freeman, the chairman of the California Power Authority;
and Joseph Dunn, a state senator who is leading an
inquiry into the power crisis, concurred with Ms. Lynch
that Enron, with other energy companies, had
manipulated prices.
"We must recognize that the so-called invisible hand of
Adam Smith was Enron and their fellow gougers picking
the pockets of Californians to the tune of billions of
dollars," Mr. Freeman said. "Prices were skyrocketing in
California in late 2000 and early 2001 as a direct result of
Enron's influence and participation."
Today's hearing continued a battle between Enron and
many of California's most prominent officeholders and
appointees - most of them Democrats - over who is to
blame for the spike in electricity rates.
The crisis, which eased last summer after the Federal
Energy Regulatory Commission intervened, briefly
hobbled the state's economy, threw its politics into turmoil
and left California taxpayers and consumers with a
multibillion-dollar hangover.
Senator Barbara Boxer, Democrat of California, said Enron
"used us as a cash cow to keep that company afloat, to
keep the stock price high so insiders could cash out."
But some Republicans suggested that Enron was being
used as a whipping boy by Californians for their botched
effort at deregulating their electricity market. Senator
Peter G. Fitzgerald, Republican of Illinois, told the hearing
that he was "skeptical" that Enron had anything to do with
the problem, which also afflicted other Western states.
Some witnesses at today's hearing said it was difficult to
know precisely what Enron's role had been in influencing
prices because the data available about transactions in
energy markets was hard to interpret.
But they said there was considerable evidence that Enron
planned to drive prices up and profit in a variety of ways.
Robert McCullough, an energy analyst from Portland,
Ore., who has studied Enron's activities, told the panel
that the company sold a site for a power plant in Oregon
in 1999 in a deal that suggested the company knew
electricity prices would rise sharply.
Mr. McCullough said the deal ended with the site being
50 percent owned by LJM2, an investment partnership
managed by a senior Enron executive that is at the heart
of the problems that pushed the company into bankruptcy
protection last year. Internal Enron documents, he said,
showed that LJM2 anticipated a 22 percent return on
investment from the project even as Enron was telling the
Oregon Public Utilities Commission that it expected 15
percent.
"LJM2 apparently was able to either operate in the same
markets with vastly more expertise than Enron," Mr.
McCullough said, "or LJM2's estimate showed
foreknowledge of the events to come."
Ms. Lynch said an examination of electricity trading by
Enron affiliates and subsidiaries in the fourth quarter of
2000 showed that about 30 percent of the transactions
were among themselves. She said her analysis was based
on data supplied by Enron to the Federal Energy
Regulatory Commission. She did not address the
possibility that the trades reflected market pressures driving prices upward.
The Enron-related companies - the New Power Company, Enron Energy Services,
Enron Energy Marketing, Enron Power Marketing and Portland General Electric -
traded nearly 12 million megawatt-hours of electricity in the period at prices
ranging from 5 cents a megawatt-hour to $3,322 an hour, she said.
A megawatt-hour is enough to run 1,000 room air-conditioners for about an hour.
Before deregulation, utilities typically bought and sold electricity at around $30 a
megawatt-hour.
"Enron was selling the same megawatts back and forth to itself, causing the price
to rise with each sale, all under the rules it had helped to create," Ms. Lynch said
in her prepared testimony. "The selling back and forth also created the illusion of
an active, volatile market."
Because Enron booked as revenue the value of each trade, the transactions allowed
the company "to create false value," she said. And because Enron reported the
trades on its online trading system, she said, they created an artificially high
benchmark price for other companies buying and selling power. In addition to
benefiting directly from the trades at higher prices, she said, Enron profited by
creating the appearance that transmission lines would be overburdened by huge
flows of electricity among various power sources.
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