Memo Shows Enron Division Headed by Army Secretary Thomas White Manipulated
California Electricity Market
May 8, 2002
publiccitizen.org
Public Citizen Calls on White to Resign, Justice Department to Launch Criminal Probe
WASHINGTON, D.C. – In light of a memo indicating that Army Secretary Thomas White’s
former Enron division was involved in market manipulation and price-gouging during the
California electricity crisis, Public Citizen today called for White to resign immediately
and the Justice Department to initiate a criminal probe.
The internal company memo describes how White’s division, Enron Energy Services, lied
to California officials, enabling the company to charge prices far higher than should have
been allowed. As a direct result of his division’s fraud, White is a multimillionaire and
California consumers still are paying far too much for their electricity.
The Dec. 6, 2000, memo from Enron attorneys describes how Enron Energy Services
deliberately sought from the state’s power broker far more electricity capacity than it
needed. By doing so, Enron Energy Services, which was colluding with other Enron
divisions, deceived the state into thinking that transmission capacity was full, enabling
Enron to charge prices far higher than if capacity was not full.
That and other memos, released this week as a result of an ongoing investigation by the
Federal Energy Regulatory Commission (FERC), confirm charges Public Citizen has made
for more than a year in reports and in testimony before Congress. The memos are
available on the FERC Web site.
"These documents show manipulation and deception so extreme that it borders on
maniacal," said Public Citizen President Joan Claybrook. "Thomas White was in charge
when California was being gouged by Enron. If he directed this activity, he shouldn’t be
head of the Army. And if this was going on under his nose and he didn’t know, he’s a
terrible manager and also shouldn’t be head of the Army. He should resign immediately."
When the memos are combined with data available in Power Marketer Quarterly Reports
that Enron filed with FERC, it is clear that White’s division was colluding with Enron’s
power marketing divisions to fool state and federal regulators. In the first three months
of 2001 – the height of skyrocketing prices and rolling blackouts – White’s division traded
more than 11 million megawatts of electricity in the California market alone, making
nearly 98 percent of these trades with other Enron divisions at astronomical prices up to
$2,500 a megawatt hour (the standard price at the time was less than $340 a megawatt
hour).
By selling power to itself at inflated prices, Enron helped cause prices to skyrocket in
California’s deregulated market. Economists refer to this manipulation as transfer
pricing.
By trading such large volumes of electricity at such high prices with other Enron
divisions, White’s division was able to accomplish two things. First, it allowed the
company to charge California utilities and consumers astronomical prices, thereby
contributing to the Western electricity crisis. Federal and state regulators found it very
difficult to trace Enron’s trades because the company had four separate divisions
interacting in the wholesale and retail markets, and with each other.
Second, engaging in transfer pricing allowed these various Enron divisions to overstate
revenue and contribute to the accounting gimmickry that inflated the company’s share
price.
It is important to note that at the same time that Enron Energy Services was
manipulating the California energy market, Enron paid the Washington, D.C., lobbying
firm Quinn Gillespie & Associates more than half a million dollars in the first seven
months of 2001 to lobby the "Executive Office of the President" on the "California
electric crisis" according to the lobbying disclosure report filed with Congress on April 10,
2001.
The firm’s co-founder, Ed Gillespie, was the former communications director at the
Republican National Committee and a top Bush campaign advisor, and he ran the U.S.
Department of Commerce for the first 30 days of the Bush presidency. Enron was
lobbying against bipartisan efforts to re-regulate the Western electricity market by
imposing price controls. As Enron was spending this money lobbying Congress and the
White House against price controls, the Bush administration aggressively took Enron’s
position. On numerous occasions, President Bush, Vice President Dick Cheney, their
various spokespeople and Cabinet officials took an aggressive stance against price
controls.
White served as vice chairman of Enron Energy Services from 1998 until the Senate
confirmed him as Army secretary in May 2001. When Bush nominated White for the post,
he cited White’s 11-year experience as a top Enron executive as a primary qualification.
White earned tens of millions of dollars in salary, incentive-based bonuses and stock
options during his Enron career. He earned $5.5 million in salary and cash bonus his last
year alone.
As vice chairman, White was in charge of running day-to-day operations, including
managing and signing retail energy contracts. During White’s tenure, Enron Energy
Services became one of Enron’s fastest growing subsidiaries by using questionable
accounting practices, with revenues climbing 330 percent from 1998 to 2000 (from $1
billion in 1998 to more than $4.6 billion in 2000). Using "mark-to-market" bookkeeping,
Enron booked much of the revenue for long-term retail contracts up front — providing
the company with inflated revenues.
White’s former employees have publicly stated that he knew of the fraudulent accounting
employed by the division. Glenn Dickson, an Enron Energy Services director laid off in
December 2001, has been quoted in media reports as saying that both White and Vice
Chairman Lou Pai "are definitely responsible for the fact that [Enron Energy Services]
sold huge contracts with little thought as to how we were going to manage the risk or
deliver the service."
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