'Smoking gun' Enron memos
'Death Star,' 'Get Shorty' strategies
show how firm manipulated
energy to state in attempt to boost
profits
Mark Martin, Chronicle Sacramento Bureau
Tuesday, May 7, 2002
Sacramento -- Energy traders for Enron used
elaborate schemes with nicknames like "Death Star"
and "Get Shorty" to manipulate California's electricity
market and boost profits, according to internal
company memos released by federal regulators
Monday.
The memos -- jaw-dropping in their frank descriptions
of how a sophisticated operation exploited California
for financial gain -- enraged consumer advocates and
state officials and prompted Sen. Dianne Feinstein to
call for a federal criminal investigation of the
company's behavior as the lights went out in
California.
A state senator who has spent a year investigating
the energy crisis called the documents "tremendous"
proof that California's power debacle had been
caused by companies looking to make money and
not by energy shortages.
"The veneer has been broken," said Sen. Joseph
Dunn, D-Santa Ana.
One memo, written by Enron lawyers a day after the
state's first near- blackout in December 2000, details
how company employees who bought and sold
megawatts in California provided false information to
officials running the state's power grid and played on
loopholes in energy rules. Also discussed is whether
Enron was violating laws governing electricity
delivery.
"This strategy appears not to present any problems,
other than a public relations risk arising from the fact
that such (electricity) exports may have contributed
to California's declaration of a Stage 2 Emergency
yesterday" is the conclusion about one strategy
nicknamed "Fat Boy." Under that scheme, Enron
bought power in California under price caps and sold
it into other states where it could get a better price.
The company made nearly $1,000 on one megawatt
through the "Fat Boy" technique.
SCHEMES KNOWN BY OTHERS
Enron attorneys also suggest that the company
wasn't alone in toying with the state's energy market
and note that the short-hand names for various
schemes were known and used by other companies.
The Enron documents were released by the Federal
Energy Regulatory Commission, which launched an
investigation in February into Enron's role in the
California power crisis.
Reaction in California to the new evidence was swift.
State officials said the memos would provide
ammunition in their efforts to get federal regulators to
refund the state money and overturn costly long-term
contracts Gov. Gray Davis signed last year to keep
power flowing.
The state was forced to spend more than $6 billion
for power when utilities became financially crippled in
late 2000. The crisis was eased when federal
regulators enacted price caps on power last summer,
but the state was left with $40 billion in high-priced
energy contracts.
"These memos are Exhibits A, B and C in the case
of California versus the power generators," said Steve
Maviglio, a Davis spokesman. "They establish market
manipulation beyond a reasonable doubt. How many
more smoking guns does FERC need before it acts
to refund the billions Californians are owed from
overcharges directly linked to the generators' cartel?"
In Washington, Feinstein asked Attorney General
John Ashcroft to open a criminal inquiry into the
company focusing on fraud. Feinstein noted that
power costs in the state had risen from $7 billion in
1999 to $26.7 billion in 2001.
In the memos, Enron details at least 10 strategies it
used to make money in California. Among them was
a scheme called "Ricochet," in which the company
sold power outside the state and then resold it into
California to avoid price caps that applied only to
in-state megawatts. The practice also has been
referred to as megawatt-laundering.
Another plan, called "Death Star," was explained in
the memo like this: "The net effect of these
transactions is that Enron gets paid for moving
energy to relieve congestion without actually moving
any energy or relieving any congestion."
SEARCHING FOR GOOD DEALS
A spokesman for an energy-company trade group
said the documents showed little that was illegal.
Enron, like other power companies, was merely
exploring the state's energy system in search of
good deals, said Gary Ackerman of the Western
Power Trading Forum.
"They were probing different spots to see what
worked," Ackerman said. "A lot of companies were
doing that. Anytime there is a complex system like
the energy market, people are going to stick their
finger in and see what works."
A state official called that claim ridiculous.
"You don't call something the Death Star strategy if
you think it's a positive thing," said Sean Gallagher, a
staff attorney with the California Public Utilities
Commission.
An Enron attorney said that a second memo the
company turned over Monday noted that the first
memo might not be entirely accurate. The memo,
written after the December document, questions
whether some of the strategies Enron employed were
working and noted there was disagreement among
some employees about how the schemes worked.
"Enron sold its trading unit, so a lot of the people
with that knowledge are gone," said Robert Bennett,
who is representing the embattled company as
Congress picks apart Enron's business practices.
"We do not know if any of the assertions in the
memo are true. We'll let the government figure it out."
Bennett said the company's board of directors had
voted Sunday to allow the documents to be released,
even though it could have asserted attorney-client
privilege because the memos are from lawyers.
"This was an act of corporate responsibility," Bennett
said.
But Dunn, who heads a state Senate committee
investigating the energy crisis, noted he had
subpoenaed internal documents from Enron a year
ago in his quest to dig into the causes of the energy
crisis. Monday was the first time he had seen the
memos.
E-mail Mark Martin at markmartin@sfchronicle.com.
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