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Deregulation - Page 12 - 2002
individuals who ask inconvenient questions. - Jeffrey E. Christian, executive recruiter
Make the Enron Gang PayBusiness Week by Ciro Scotti March 2, 2002
Execs who ruin companies need to suffer at least as much as the employees whose hopes and retirement funds they pillaged
If the names of the alleged schemers at Enron and Global Crossing ended in a vowel, the pack of them might be cooling their heels in federal detention centers awaiting trial and trying to make bail so steep even Bill Gates couldn't post it. All the while, a posse of prosecutors would be compiling a list of racketeering charges longer than a line of limos at a Mafia wedding.
Of course, there are two reasons that's not going to happen. The first is that these are preppie MBAs with Porsche bank accounts and hired lawyers whose hourly rate could feed a family of four for a month. The second is that their hides have likely been saved by the high-tech executives of Silicon Valley and their Washington lackeys, er, lobbyists.
If the portfolio-bruising dot-com bust wasn't reason enough to detest all those myopic Internet "visionaries," here's one more. Concerned about lawsuits brought by investors who grew tired of getting burned on high-flying stocks, the high-tech industry got behind passage of a law in 1995 that, among other things, went a long way toward protecting corporate executives from prosecution under the Racketeer Influenced & Corrupt Organizations Act.
SERVING SOFT TIME. RICO, as it is fondly called, was designed to snare mobsters running crime families, especially those who traffic in drugs and violence. But its value as a tool against those who would systematically hype stocks and bilk investors (and employees) is obvious. At least it must have been to the geeks who ended up lifting billions out of the wallets of American investors with little or no return.
Even without RICO, someone in the Enron scandal may be "going to the pokey," as House Energy & Commerce Committee Chairman Billy Tauzin has suggested. But, if it is proved that laws were broken, a few white-collar convicts eventually sleepwalking through a couple of years of minimum-security time and a lot of community service is hardly enough to bring justice to the alleged victims in this case.
Guilt or innocence aside in the Enron case, what is needed to deter greedy executives and restore the confidence of investors in the stock market game are harsh new consequences for high-level managers whose shenanigans -- or ineptitude -- take a company down. The fact is that the top brass of big corporations continues to be paid compensation packages so outlandish they would embarrass Anna Nicole Smith -- even in the face of drooping stock prices, failed visions (think AT&T), and gross mismanagement.
WHERE IT REALLY HURTS. It's time to bring radical accountability to the executive suite in the only language the gimme-guys of Corporate America understand: money. For starters, CEOs, presidents, COOs, CFOs, chairmen, members of the board, and other in positions of power within a corporation should be made liable for criminal prosecution under RICO. We're talking jail time and tripling the penalties. Members of a criminal enterprise -- whatever form it takes -- should not get a free pass because they went to Harvard Business School.
Putting aside the issue of criminal prosecution for a moment, when a public corporation declares bankruptcy, officers paid salaries in excess of $1 million a year should be forced to relinquish gains made through the exercise of stock options in the previous two years. If unable to cough up the cash, all assets -- save their home -- should be liquidated. And repricing stock options for executives after company shares have lost significant value should be outlawed.
Of course, the defenders of overpaid execs would scream that business will be badly wounded if the best and the brightest -- cowed by draconian reprisals for failure -- avoid careers in Corporate America. And innovation would suffer, they would moan and groan, if risk-takers feel a chill.
OTHER PEOPLE'S MONEY. But you could also argue that creating a real downside for outrageous or clumsy corporate behavior would lead to stronger management and more thoughtful decisions. The weak would be weeded out. Crazy mergers wouldn't get done. Fast-and-loose accounting would be unacceptable. And the stewards of shareholder value would be more cautious about throwing other people's money around.
Sure, life would be tougher at the top. But then maybe upper-level execs would have a legitimate reason for getting paid those big bucks.
Energy Donors Met Cheney PanelNew York Times by D. Van Natta, N. Banerjee March 2, 2002
WASHINGTON, Feb. 28 Eighteen of the energy industry's top 25 financial contributors to the Republican Party advised Vice President Dick Cheney's national energy task force last year, according to interviews and election records.
Critics of the Bush administration's energy policy have long suspected that many of the corporations that were invited to advise the White House were large energy concerns that had contributed heavily to President Bush's campaign and the Republican Party in 2000. The White House has refused to release the names of the companies and individuals consulted during the formulation of the administration's energy policy last spring. It has been sued for the information.
But interviews and task force correspondence demonstrate an apparent correlation between large campaign contributions and access to Mr. Cheney's task force. Of the top 25 energy industry donors to the Republican Party before the November 2000 election, 18 corporations sent executives or representatives to meet with Mr. Cheney, the task force chairman, or members of the task force and its staff. The companies include the Enron Corporation, the Southern Company, the Exelon Corporation, BP, the TXU Corporation, FirstEnergy and Anadarko Petroleum.
Critics of the process said that President Bush and Mr. Cheney were quick to respond to executives from the energy sector not only because of campaign contributions but also because they share the philosophy of the oil patch, where both made fortunes.
"It's this bunch of guys in energy who say, `Boo! We don't like this,' and the Bush administration says, `Well, they elected us,' " said Eric Schaeffer, who was chief of regulatory enforcement for the Environmental Protection Agency until his resignation on Wednesday. "This is a natural alliance. The administration didn't need a lot of persuading."
Mr. Schaeffer, who worked at the E.P.A. for 12 years, resigned over what he called lax enforcement of clean air laws.
The energy task force produced a report on May 17, 2001, that sketched out a national energy policy that was largely favorable to the energy industry. The report recommended additional oil and gas drilling and made note of the nation's need to build 1,300 to 1,900 electric plants to meet the projected demand over the next two decades. Next week, the Senate begins deliberations on the Bush administration's energy bill, which has already been passed by the House.
The General Accounting Office, the investigative arm of Congress, sued Mr. Cheney last week to force him to turn over lists of the executives who had advised the task force. A federal judge has ordered the Energy Department to release 7,500 pages of documents related to the task force under a Freedom of Information Act request by the Natural Resources Defense Council.
The government sought to dismiss another suit today from Judicial Watch, a legal watchdog group here, which had requested thousands of pages of documents relating to the task force from federal agencies. A federal judge allowed the suit to go forward, and the group said it has received some of the documents. Two Congressional Democrats are trying to learn the level of influence that industry executives may have had on the White House's national energy policy.
Mary Matalin, counselor to Mr. Cheney, said the task force also consulted with trade groups and other organizations, including labor unions, that did not give money to the Republican Party.
"Not everyone who got access were contributors or supporters," Ms. Matalin said. "No one ever got on the schedule for any other reason than their expertise in the field of energy."
But energy industry officials expressed some wonderment at Mr. Cheney's adamant refusal to release the list of executives he met with. They said meetings between industry officials and the White House have long been routine, even in Democratic administrations, and that the list of corporations that advised the task force was hardly an industry secret. Several said a list of the top financial supporters of the Bush-Cheney ticket would reveal some, if not all, of the most influential voices on energy policy.
An oil industry executive suggested that as long as the White House withheld the list of those who talked to the task force, suspicion about secret agendas would tar the energy industry itself. "I understand philosophically why the vice president may be doing this," the executive said, "but this sure puts us in a pickle."
Mr. Cheney has argued that releasing the identities of outside advisers on energy policy would make it impossible to have confidential conversations and receive unvarnished advice from those outside the government.
More than 400 corporations and groups sought meetings with the energy task force last spring. About half that number were granted access, a group that included 158 energy companies and corporate trade associations, 22 labor unions, 13 environmental groups and a consumer organization, task force staff members have said.
Some environmental groups have complained that the process was tilted toward industry. The leaders of many groups have said Mr. Cheney's office turned down their requests to meet with him. Instead, midlevel staff members from the groups met with energy task force staff members.
The Sierra Club met with the task force before the report was released on May 17. Two weeks later, Carl Pope, the group's executive director, met again at the White House for 30 minutes with Mr. Cheney.
"After we met with the vice president that time, they just waltzed us out on the White House lawn and put us in front of the TV cameras," Mr. Pope said. There were no cameras waiting when corporate chief executives and senior vice presidents met with the task force, he said
Goodbye to the Invisible HandSan Francisco Chronicle by Marjorie Kelly March 1, 2002
Sometimes it's the little things that say it all. The little thing that lingers in my mind is the story about Enron's creation, when the original plan was to call it Enteron until somebody figured out this was the Greek word for "intestines." There you have it. In the end, the story of Enron's implosion is not about one diabolical company. It's about the guts of our economy.
It's about many gut-level issues that confront us: corporate control of politics, executives getting rich while their company sinks, employees laid off by the thousands, 401(k) plans tanking, messes left by deregulation, a corporate board asleep at the switch. All are themes in the Enron soap opera, yet not one is unique to Enron. The problems the scandal reveals are systemic. The individuals involved may have been uniquely greedy and unethical, but they were empowered by a system that exalted greed as it diminished ethics and accountability.
The most basic issues of Enron are system issues. These come down to two, not unrelated truths: 1) The ideal of the unregulated free market is flawed, and it's time we said goodbye to the invisible hand. 2) Managing a company solely for maximum share price can destroy both share price and the entire company. These are foundational flaws in theory, flaws in how we conceive of markets and how we define business success. They are system design flaws. For beyond the juicy tales of villainy at Enron, the deeper issue is why the system lent so much power to villainy, and why there were so few checks and balances to stop it.
A key reason is that we are told and, more incredibly believe that checks and balances are bad, because free markets are good. Unregulated markets are ideal. Left free to work its magic, self-interest (ie. greed) ostensibly leads things to work out to the benefit of all, as though guided by an invisible hand. This myth is taught in Economics 101 as gospel truth, trumpeted routinely in the business press, and sold abroad as the cure for what ails all economies. The lie of it has been exposed many times. Think of the Great Depression, the savings and loan crisis, or the collapse of Asian economies in 1997-98. Unregulated free markets often lead to disaster. Self-interest is an insufficient regulator for a complex economy. (Duh.) Yet we seem to have to learn this lesson again and again.
Enron is the latest case in point. Consider California's experiment with electricity deregulation. At an Enron Senate hearing, Sen. Barbara Boxer demonstrated how the experiment left the state "bled dry by price gouging." Jeffrey Skilling, as CEO of Enron, had predicted deregulation would save California $9 billion a year. But as Boxer noted, the state's total energy costs instead soared from $7 billion to $27 billion in a single year. Prices rose a gut-wrenching 266 percent.
Not coincidentally, Enron's stock also shot up. Total return to shareholders in 1998 was a remarkable 40 percent. The next year, a miraculous 58 percent. And in 2000, a jaw-dropping 89 percent. Deregulation did indeed work the magic it was designed to work, by turning Skilling's stock options into a gold mine just before it turned the company into rubble.
California wasn't the only one duped by the magical thinking of deregulation. Enron helped convince Massachusetts, New York, and Pennsylvania to deregulate energy markets. And it did the same with Washington.
In 1993 Enron persuaded the SEC to grant it an exemption from the Public Utility Holding Company Act (PUHCA), a Depression-era law that prevented utilities from diversifying into unrelated risky businesses. Enron pursued this diversification, to its disaster. As Rep. Ed Markey (D-Mass.) put it, "If Enron had been regulated under PUHCA, I seriously doubt that the types of transactions that brought this company down would have occurred."
Strike two against the myth of deregulation came in 1997, when the company won exemption from the Investment Company Act of 1940, allowing it to leave debt from foreign power plants off its books. This led to dubious offshore partnerships, which contributed to the firm's undoing.
Strike three came in 1999, when Congress killed the Glass-Steagall Act of 1933, which had separated commercial from investment banking. This allowed J.P. Morgan, to use one example, to entangle itself with Enron in dangerous conflicts of interest. It underwrote bonds for Enron, traded derivatives contracts with the company, bought stock in the firm, and had a research analyst covering the company (recommending it as a buy until last fall), even as the bank risked billions in loans to Enron. Lured by millions in investment banking fees, J.P. Morgan was left holding the bag on $2.6 billion in Enron debt. And that's what Glass-Steagall was designed to prevent.
One could go on. Enron successfully opposed regulation for derivatives trading, then used such trades to mask debt. Arthur Andersen helped defeat a proposal to separate auditing and consulting practices, which left it reluctant to challenge a client. Businesses across the board opposed truthful accounting for stock options, which led to over-reliance on options and in some cases inflation of stock prices.
Piece by piece, protections that might have prevented the debacle were defeated. Layer by layer, existing protections were removed. The result was the train wreck of Enron.
What's astonishing is not that this wreck occurred, but that time and again we bought the deregulation myth that led inexorably to it. We swallowed this absurd fairy tale about some invisible hand.
An earlier generation wasn't so credulous. Those who lived through the Depression saw the absurdity of economic faith healing ("only believe in free markets and all ills shall be healed"). They knew what we have forgotten. Even the editors of Fortune magazine acknowledged, in a June 1938 editorial, that what failed in the Depression "was the doctrine of laissez-faire." They wrote, in language that would get a business editor fired today: "Every businessman who is not kidding himself knows that, if left to its own devices, business would sooner or later run headlong into another 1930."
Or an S&L crisis. Or Medicare fraud. Or Enron.
As though under mass hypnosis, we have denied what we know in our gut: the theory of laissez-faire is bankrupt. It's a hoax. Why were there so few checks and balances to stop the villainy of Enron? Because we pretended we didn't need them. We believed the hucksters who sold us the elixir of unregulated free markets.
Of course, unregulated markets are never really unregulated. Complex economic interactions need rules. The question is who makes those rules: elected representatives serving the public good, or a financial elite serving only itself.
With Enron, the rules were made by folks like CEOs Kenneth Lay and Jeffrey Skilling, and chief financial officer Andrew Fastow, as well as the financial powers entangled with them. Like all elites, they preferred to run things without public oversight. This is why the invisible hand keeps rising out of the grave. As I show in my book The Divine Right of Capital (Berrett-Koehler, Nov. 2001), free market mythology is a smokescreen that disguises the real nature of elite power much like the divine right of kings. It allows elites to run our economy to suit themselves, without interference, and with a veneer of legitimacy.
Which brings us to our second question about Enron: Why did the system design lend so much power to greed? Because doing so was in the interest of the financial elite, including Enron executives and Wall Street. Lay and Skilling both were "laser-focused" on shareholder gain, which led to their own option gains. They succeeded at this so well -- with annual gains of 40, 60, 90 percent -- no one asked questions. Those who did were brushed aside, like Sherron Watkins and her memo to Lay. Why disturb the goose laying so many golden eggs?
In the wake of Enron, some have called for closer alignment between executive and stockholder interests. But this close alignment was itself the problem. When we define business success as maximum share price, a soaring price makes it impossible to see problems. What could be wrong? The business is succeeding beyond anyone's wildest dreams. We fail to recognize that managing a corporation with the single measure of share price is like flying a 747 for maximum speed. You can shake the thing apart in the process. It's like a farmer forcing more and more of a crop to grow, until the soil is depleted and nothing will grow. It's like an athlete using steroids to develop more and more muscle mass, until the body itself is destroyed.
The problem with Enron was not a lack of focus on shareholder value. The problem was a lack of real accountability to anything except share value. This contributed to a kind of mania, a detachment from reality. And it led to a culture of getting the numbers by any means necessary.
If maximum share price is an irresponsible management theory, and deregulation a flawed economic theory, there are better theories already at hand. It's intriguing that the movie "A Beautiful Mind" is up for Academy Awards during the Enron scandal because its protagonist John Nash won a Nobel Prize for proving Adam Smith's theory was incomplete. Self-interest alone can lead to disaster for all, Nash demonstrated mathematically. Self-interest coupled with concern for the good of the group is most likely to lead to the benefit of all.
Nash's mathematics revolutionized "game theory" and is central to the "evolutionary economics," which emphasizes that cooperation is as vital as competition. It's a more evolved theory than the invisible hand, more appropriate for an economy that has become more humane than the aristocratic world of Smith.
Viewed through the lens of Nash's theory, the Enron scandal can lead us to question our fundamental assumptions. Do we really believe corporations are only about making money? Or do we care how they make their money? Do we really care about ethics and public accountability?
If we do, then we need real accountability. We need actual sanctions for ethical infractions, not a flimsy ethics code that the Enron board could waive on a moment's notice, as it did in allowing Fastow to earn millions from off-balance sheet partnerships.
We need checks and balances not only on the side of shareholder value, but on the side of public accountability. That means changing the system design. What a new design might look like is explored at length in The Divine Right of Capital, but the concept most appropriate to Enron is the idea of graduated penalties for unethical conduct. Firms caught cooking the books, for example, might lose all government contracts. A federal contractor responsibility rule could prohibit the government from contracting with egregious corporate law-breakers. Such a rule was put in place by President Clinton as he left office, but was overturned by President Bush. It should be reinstated and made permanent through legislation.
If Enron had faced the prospect of losing millions in revenues, it wouldn't have waived its ethics rules so blithely. Watkins might have been empowered to approach the board, and the board might have been inclined to listen since real financial consequences were at stake.
A more serious penalty was suggested by the attorney general of Connecticut, who recommended pulling the license of Arthur Andersen, so it could no longer do business in the state. If all accounting firms and all corporations knew they faced this ultimate sanction, they would be less inclined to push the limits.
We would start to see ethics and accountability with real teeth.
The ultimate lesson of Enron is that effective system design requires our conscious choice. It cannot be left to some invisible hand. It's time we sent that creepy appendage back to the grave where it belongs.
Marjorie Kelly (MarjorieHK@aol.com) is publisher of Minneapolis-based Business Ethics magazine and author of the recently released The Divine Right of Capital (Berrett-Koehler, Nov. 2001, www.DivineRightofCapital.com), from which portions of this are adapted.
Enron Name GameEmployee Advocate DukeEmployees.com February 26, 2002
More bonuses are in store for Enron executives, according to ABC News. For those not getting bonuses, there will likely be more layoffs!
The new chairman has determined the crux of the disaster and is going to make everything all better. He somehow realized that the name - Enron - was somewhat tarnished. No problem. He intends to rename the company. Well, that should certainly solve all of the problems! (Enron? Never heard of them.)
Enron started out with name problems. Their first name choice was Enteron. They dropped it when they found out that it was the Greek word for "intestines." Now, the name Enron has earned its own definition, which is much worse than intestines!
Interim Chairman Stephen Cooper said: ``there's something of a taint with the Enron name. In fact, I've noticed in the press, when anything is bad now, it's because somebody's been Enronized or Enronated or Enroned.''
A Duke employee offers a suggestion for the new name: Watergate.
Enron Juicing ProbeDow Jones by J. Leopold, B. Lee February 26, 2002
(2/21/02) - WASHINGTON (Dow Jones)--The U.S. Federal Energy Regulatory Commission will investigate new allegations that Enron Corp. caused power-grid congestion in California to reap windfall profits in the state's electricity market, agency officials said Thursday.
"Once those issues have been raised, we have to look into them," said FERC Commissioner Nora Mead Brownell. "We need one comprehensive, complete investigation to bring this chapter of history to closure." FERC "absolutely" will delve into the allegations, "no ifs, ands or buts," said Kevin Cadden, director of FERC's external affairs office.
In response to concerns of congressional lawmakers, FERC last week formally launched a probe to answer allegations that Enron could have manipulated Western-state energy markets. The new allegations will be delved into as part of that probe, FERC said.
The allegations also have caught the attention of the House Energy and Commerce Committee, which is conducting the most aggressive of some dozen congressional committee probes of Enron's historic collapse into bankruptcy last December.
"We've heard the accusations but we have not uncovered any evidence to support them. We're checking into them," said Ken Johnson, spokesman for Rep. Billy Tauzin, R-La., the committee's chairman.
"I have not heard of these allegations before and I am certain FERC will do a thorough job, as always, of investigating the charges and we will, as always, cooperate," said Vance Meyer, an Enron spokesman. Several former Enron electricity traders alleged Thursday that Enron took part in a yearlong campaign to cause power-grid congestion in California so the Houston energy-trading giant could reap huge profits on electricity sales.
The traders came forward after another former Enron employee wrote a letter to Sen. Barbara Boxer, D-Calif., offering "hearsay" allegations that Enron manipulated power flows on California's power grid to drive up prices.
Congested transmission lines constrain power flows and create artificial shortages that drive up wholesale electricity prices.
Wholesale power costs in California were about $7 billion in 1999, but skyrocketed to nearly four times that amount in 2000 as prices spiked to unprecedented levels. The state is demanding nearly $9 billion in refunds from power providers in a proceeding under way at FERC.
The traders, all of whom requested anonymity because they work for other Houston-based energy companies, including Dynegy Inc. and Reliant Energy Inc. said the practices they engaged in resulted in two days of rolling blackouts in Northern California in May 2000. Those blackouts crippled Silicon Valley's high-tech industry causing tens of millions of dollars in lost revenue.
The traders said Enron held the transmission rights on Path 26, a key transmission line connecting Northern California to Central California and also connecting to Path 15, a major bottleneck grid pathway in Northern California, owned by PG&E Corp. unit Pacific Gas & Electric.
In May 2000, when a heatwave swept through Northern California, they said Enron clogged Path 26 with power, essentially creating a bottleneck that would not allow power to be sent via Path 15 to Northern California.
Enron used its transmission rights to create congestion on the line during certain periods in 2000 and 2001, potentially causing power prices to spike in the state, the traders said.
Enron was paid tens of millions of dollars by the California Independent System Operator, the state's power-grid administrator, to free up the congested line in order to allow electricity to be sent to Northern California, the traders said.
"What we did was overbook the line we had the rights on and said to California utilities, 'If you want to use the line, pay us,'" one trader said. "By the time they agreed to meet our price, rolling blackouts had already hit California and the price for electricity went through the roof."
The traders said this is how Enron allegedly manipulated the price of power in California and continued to do so until mid-2001, when power prices sharply declined.
Power prices spiked in California beginning in May 2000, shortly after the rolling blackouts hit Northern California. The state's investor-owned utilities were rendered insolvent by year's end because the price for power exceed the amount the utilities were allowed to charge its customers.
By the time FERC agreed to impose price caps last summer, PG&E's Pacific Gas & Electric utility unit had filed for Chapter 11 bankruptcy protection and Edison International unit Southern California Edison teetered on the brink of collapse.
Information available from the state's grid administrator shows that congestion revenues on Path 15 and 26 within the first six months of 2000 increased tenfold, from about $20 a megawatt-hour to more than $200/MWh. But there is no evidence that an increase in electricity consumption in California is the reason for the transmission line congestion, according to the ISO.
"The number of hours congested decreased on most paths in 2001, compared to 2000, with the exception of Path 26," according to a January 2002 report from the grid operator's department of market analysis.
Beginning as early as 1998, the traders said, Enron started congesting transmission lines in California by scheduling power over transmission throughout the state and exceeding the amount of capacity a certain power line could handle.
"This started out as a test," one trader said. "We would overbook the lines, which would cause congestion. The price of power would go up on the other end of the line where power is being delivered to."
A yearlong investigation by the now-defunct California Power Exchange, the market where utilities bought, sold and scheduled electricity, concluded in 2000 that Enron violated the rules for trading power in California's day-ahead market in May 1999 by submitting a bid for 2,900 megawatts on a transmission line with a rated capacity of 15 MW, according to documents obtained in 2000 by Dow Jones Newswires.
"On April 28, 2000, the CEO of the CalPX issued an order accepting an offer of settlement from Enron Power Marketing, Inc., ... which finds that Enron's conduct in the Day Ahead Market for May 25, 1999, constituted a violation of CalPX Scheduling and Control Protocol," the documents say.
Enron agreed to pay CalPX $25,000 to settle the issue without admitting or denying the charges. Enron spokesman Mark Palmer said at that time the settlement wasn't an admission of guilt, but rather a "contribution to CalPX costs for investigating the incident."
Price Manipulation WhistleblowerDow Jones by Jason Leopold February 26, 2002
(2/20/02) - LOS ANGELES -- A former Enron Corp. employee has written a letter to U.S. Senator Barbara Boxer claiming that he has knowledge the company's trading arm manipulated wholesale electricity prices in California.
For more than a year, California Gov. Gray Davis and other state officials have alleged that energy companies, including Enron, manipulated the price of electricity and natural gas in the state by withholding supplies to create an artificial shortage and gouging utilities by charging prices for power that were 10 times higher compared with previous years.
PG&E Corp. unit Pacific Gas & Electric Co. filed for bankruptcy protection last April because electricity prices were higher than what the utility was allowed to charge its customers. Edison International unit Southern California Edison was on the verge of bankruptcy but struck a deal with state regulators last year that will allow the company to begin paying its creditors in March.
The letter, sent to Sen. Boxer (D., Calif.), last week by David Fabian, a former employee for Enron's trading unit who wrote the company's trading software for electricity and natural gas sales, claims Enron congested the state's transmission lines and then resold the power in the state's wholesale electricity market at skyrocketing rates. Mr. Fabian worked at the unit from 1997 until the end of 2000.
"I never witnessed this but this is what the traders talked about," Mr. Fabian told Dow Jones Newswires. "I spent a lot of time with traders writing the software programs and they discussed how they could use tricks to get high prices for electricity."
Enron held the so-called "firm" transmission rights for North Pass and South Pass, California transmission lines that carry electricity north to the south and south to north. Firm transmission rights, which are auctioned to energy companies, give holders the right to reserve space on lines, and rent out that space. "Enron would clog up NP and SP and then gouge people when they needed to use the line to ship power," Mr. Fabian said in an interview.
Mr. Fabian also alleged in his letter that Enron had a "cozy" relationship with the federal Bonneville Power Administration and knew when the agency had an abundant supply of water, used to produce hydroelectricity.
"BPA would tell Enron traders when they would dump water in order to make power," Mr. Fabian said. "Once the dams got full they would have to dump water, then Enron could get it for a low bid and they would resell it at a markup."
A spokesman for BPA denied claims that the agency gave Enron advance notice of the agency's activities. Sen. Boxer's office confirmed that the senator has received the letter, but a spokeswoman said Ms. Boxer hasn't responded to it yet.
An Enron spokesman wouldn't return calls for comment.
The California Independent System Operator, manager of the state's high-voltage power grid said that the kind of congestion Mr. Fabian described in the letter may be what the ISO calls "phantom congestion." The grid operator uses the term to indicate that an entity is sending power over a line simply to congest it. A spokesman for the grid operator said he couldn't say specifically if Enron engaged in this type of behavior, but there is evidence that "phantom congestion" took place during the height of the state's power crisis, which caused electricity prices to skyrocket.
California is seeking $9 billion in refunds from generators, including Enron, for allegedly gouging utilities. The Federal Energy Regulatory Commission is investigating Enron's role in California's power crisis and expects to issue a decision on the refund case in the summer.
Allegations that Enron manipulated the California power market in order to boost prices first surfaced in May 1999.
The now-defunct California Power Exchange spent a year investigating the case, the first of its kind since California deregulated its power sector in 1998.
CalPX found in 2000 that Enron violated the state's rules for trading power in May 1999 by submitting a bid for 2,900 megawatts on a transmission line that has a rated capacity of 15 MW, documents obtained in 2000 by Dow Jones Newswires show.
"On April 28, 2000, the CEO of the CalPX issued an order accepting an offer of settlement from Enron Power Marketing, Inc., ... which finds that Enron's conduct in the Day Ahead Market for May 25, 1999, constituted a violation of CalPX Scheduling and Control Protocol," the documents say.
Enron agreed to pay CalPX $25,000 to settle the issue without admitting or denying the charges. Enron spokesman Mark Palmer said in 2000 when the story was initially covered that the settlement wasn't an admission of guilt, but rather a "contribution to CalPX costs for investigating the incident."
CalPX said Enron had congested the Silver Peak Line, which runs from the Central Valley to San Diego. Deliberately congesting the transmission line could have congested other transmission lines in the area and produced higher prices for power, including that sold by Enron, according to the documents. Mr. Fabian is a resident of Houston.
Gov. Davis, who has been criticized for his handling of the state's energy crisis, said Mr. Fabian's letter and his allegations of market manipulation by Enron appears to be a smoking gun.
"For more than a year, I charged the energy companies with manipulating the market to drive up energy prices," Gov. Davis said in a statement. "Now we have what appears to be a smoking gun from an ex-Enron employee. This may be just the tip of the iceberg. This is just one more reason why I won't let California go back to its flawed deregulation scheme."
Sen. Boxer asked FERC earlier this month to determine if the $43 billion in long-term power contracts California signed with several energy companies can be voided if an investigation determines that Enron manipulated the electricity and natural gas markets in California.
California Energy DealsNew York Times by James Sterngold February 26, 2002
LOS ANGELES, Feb. 24 In an effort to force power-generating companies to lower prices on billions of dollars' worth of contracts signed just several months ago, California officials said today that they would file two complaints with a federal agency charging that the prices were excessive because of manipulation and failed federal policy.
State officials have been arguing for more than a year that the big power generators had illegally manipulated the market which the generators deny sending prices soaring last year by withholding supplies and using other tricks. The state attorney general has initiated an inquiry. Last fall the agency that oversees the power market, the Federal Energy Regulatory Commission, said it could respond only if California filed a formal complaint.
The officials said they would do that on Monday in Washington. The complaint focuses on 32 contracts with 22 energy sellers.
The state's expensive power purchases now look like a costly burden, both financially for a state facing an enormous budget deficit and politically for Gov. Gray Davis in a tough re-election campaign.
Renegotiating the contracts could lower energy bills and thus help Mr. Davis's campaign, a point not lost on Richard J. Riordan, the former mayor of Los Angeles and a Republican candidate for governor. Mr. Riordan dismissed the plan today as "another typical Gray Davis ploy to put the blame on somebody else."
Officials in the governor's office, the Public Utilities Commission and the Electricity Oversight Board today blasted the federal agency under the Bush administration for what they considered inaction and failing to ensure, as the law requires, that "just and reasonable" prices were available on the electricity market.
They added that the $43 billion in contracts the state signed were overpriced by up to $21 billion, and called some of the other terms in the contracts absurd. They added, though, that the state had no choice because of the turmoil in the markets created by the power generators.
Several of the power companies said they not only acted properly but also were eager for a federal investigation as a way to settle the issue.
"We would welcome such a review," said Doug Kline, the spokesman for Sempra Energy Resources, which has a big contract with the state. "The contract was negotiated vigorously by the state, and it is mutually beneficial."
Katherine Potter, a spokeswoman for Calpine Energy, another big generator, said, "We have binding and enforceable contracts and we are confident the FERC will find they are at just and reasonable rates."
But the state officials also made it clear that they did not want all the contracts terminated, in fact, far from it. The effort is part of a complex negotiating strategy to keep most of the contracts in place while cutting their costs and reducing their length now that the crisis is over.
Some of the contracts last up to 20 years and force the state to buy electricity that some experts now argue it does not need and at prices up to three times market prices.
Mr. Davis once hailed the contracts, 56 in all, as critical in the state's efforts to secure long-term supplies and stabilize the wildly fluctuating markets. In the first half of last year, the state had to step in as the principal buyer of power on the wholesale market and has now spent more than $13 billion to keep the lights burning.
But the construction of power plants, surprisingly effective conservation measures and mild weather have sharply reduced demand.
The state asked the generators to discuss new terms last fall, but no deal has been concluded. So the state has decided on a tougher approach.
Bush Advisor Offered to Help EnronWashington Post by Joe Stephens February 23, 2002
Just before the last presidential election, Bush campaign adviser Ralph Reed offered to help Enron Corp. deregulate the electricity industry by working his "good friends" in Washington and by mobilizing religious leaders and pro-family groups for the cause.
For a $380,000 fee, the conservative political strategist proposed a broad lobbying strategy that included using major campaign contributors, conservative talk shows and nonprofits to press Congress for favorable legislation. Reed said he could place letters from community leaders in the opinion pages of major newspapers, producing clips that Reed would "blast fax" to Capitol Hill.
"We are a loyal member of your team and are prepared to do whatever fits your strategic plan," Reed wrote in an Oct. 23, 2000, memo obtained by The Washington Post.
"In public policy," he wrote, "it matters less who has the best arguments and more who gets heard -- and by whom."
The memo offers a glimpse into the relationship between Enron and the influential conservative, who was first recommended to the company in 1997 by Karl Rove, now a senior adviser to President Bush. Reed, head of the Atlanta-based consulting firm Century Strategies, is the former executive director of the Christian Coalition and current chairman of the Georgia Republican Party.
Reed has drawn criticism for his 1997 work on one Enron issue, a Pennsylvania deregulation matter, but Century Strategies Vice President Tim Phillips said yesterday the firm's relationship with Enron continued until October 2001, when it ended by "mutual agreement."
Phillips said Enron never finalized the specific lobbying job outlined in Reed's memo, but he declined to answer questions about what tasks Reed did carry out for the Houston company. Reed did not return phone calls.
Last month Judicial Watch, a conservative watchdog group, asked for a federal investigation into whether Rove arranged the 1997 Enron contract to avoid paying Reed from Bush campaign funds. Others have questioned whether the Bush camp had hoped to ensure Reed's allegiance during the early days of the campaign.
Enron has offered little information about its dealings with Reed, one of many prominent political figures and commentators the company cultivated ties with before it collapsed in bankruptcy late last year. Rick Shapiro, the Enron vice president to whom Reed addressed the memo, declined to comment.
Reed's influence has escalated over the last decade. He claims credit for helping Bush win several key presidential primary victories, and he has served as an adviser to members of Congress. Since 1997, when Reed opened Century Strategies, his consulting clients have included political candidates and corporations with interests in Washington. He dropped Microsoft Corp. as a client in 2000 after charges that he had lobbied Bush on behalf of the software company while Bush was governor of Texas.
The seven-page memo to Enron illustrates for the first time how Reed pitches his services to major corporations and how he draws on alliances he forged during ideological battles fought alongside conservative religious leaders. It also shows how political consultants have increasingly brought tactics once seen only in campaigns into the legislative arena.
Enlisting Reed's aid would have been in character with Enron's strategy of aligning itself with high-visibility political figures and pundits. Those who have accepted pay from Enron for their advice and other help include Bush economic adviser Lawrence B. Lindsey, Weekly Standard editor William Kristol, economist Paul Krugman, CNBC commentator Larry Kudlow, U.S. Trade Representative Robert B. Zoellick and incoming Republican National Committee chairman Marc Racicot.
Reed referenced his previous Enron work in the October 2000 memo, noting Enron had seen his "capabilities at work in the 1997 effort in Pennsylvania," where Reed helped Enron build support for electricity deregulation. "Since that time, we have built a formidable network of grass-roots operatives in 32 states," he wrote.
Reed offered to mobilize that network in an effort to deregulate the electricity market. At the time, Enron was seeking open access to the nation's power grid so it could compete with traditional utilities.
Reed's memo stresses that his firm's "long history of organizing these groups makes us ideally situated to build a broad coalition" benefiting Enron. He said Enron's arguments for deregulation were less important than commanding attention by enlisting the aid of elected officials' friends and supporters.
"There are certain people -- a friend or family member, key party person, civic or business leader, or major donor -- whose correspondence must be presented to the [elected] official for his personal reading and response," Reed wrote.
Such prominent figures could act as surrogates for Enron while pressing lawmakers to rewrite statutes, Reed said.
"We have the capacity to generate dozens of high-touch letters from an elected official's strongest supporters and the most influential opinion leaders in his district," he wrote. "Elected officials and regulators will be predisposed to favor greater market-oriented solutions if they hear from business, civic, and religious leaders in their communities."
Reed's memo said his organization had a record of harnessing the "minority community" and the "faith community" to support his clients.
Reed proposed two lobbying strategies, one costing $177,000 and the other $386,500.
"I will assume personal responsibility for the overall vision and strategy of the project," he wrote. "I have long-term friendships with many members of Congress."
Reed proposed sending 20 "facilitating letters" to each of 17 members of the congressional commerce committees that handle deregulation. Under the proposal, Enron would pay Reed's firm $170,000 for generating the letters, each signed by a third party.
Reed asked Enron to pay his firm $25,000 to generate letters to the editors of newspapers, each signed by a prominent figure. "These op-eds and letters are then blast faxed to elected officials, opinion leaders and civic activists for use in their own letters and public statements." He said his firm had recently "placed" opinion pieces in The Washington Post and the New York Times.
A $79,500 telemarketing campaign would have cold-called citizens and offered to immediately patch them through to Congress.
"For one recent client, we generated more calls to a U.S. Senate office than had been received since impeachment" of President Bill Clinton, he wrote. "The result was a major victory for the client."
Finally, Reed said he had enjoyed "great success" in using conservative news-talk programs to spread his clients' message to "faith-based activists."
"Our public relations team has extensive experience booking guests on talk radio shows, and has excellent working relationships with many hosts," he wrote, proposing a $30,000 fee.
"We look forward to working with Enron," he said.