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July - Duke Energy Employee Advocate

Deregulation - Page 24 - 2002

How Energy Scam Worked

Wall Street Journal by John Wilke, Robert Gavin October 22, 2002

(10/21/02) - Beowawe, Nev. -- AT A SMALL POWER plant built atop a subterranean cauldron of steam in the desert here, night-shift operator David Gates was an unwitting participant in the Enron Corp. scandal. Most of the geothermal energy the plant makes flows over the mountains to power-hungry California. But in the midst of that state's electricity crisis two years go, the California utility that bought the power sometimes had to ask Mr. Gates to cut back, even as shortages caused blackouts and sent the price of power soaring

"It didn't make sense," Mr. Gates said. "They needed power, but ordered curtailments."

No, it didn't make sense -- except to an Enron trader named Timothy Belden, who pleaded guilty last week to a conspiracy to commit wire fraud by manipulating California power prices during the crisis. He told investigators that Enron made false trades to drive up prices and deliberately create congestion on the state power grid, sometimes forcing generators -- like the little plant in Nevada -- to divert power to other markets.

Mr. Belden's plea signals a new direction in the Enron investigation, which has so far focused on the failed energy firm's alleged use of phony bookkeeping to hide debt and inflate reported profit. Prosecutors are building the new case against Enron in secret grand-jury proceedings in San Francisco, investigating alleged fraud by Enron and other power traders that let them reap windfall profits while costing customers in California, Washington and Oregon billions of dollars in higher rates. Mr. Belden's testimony is expected to lead to criminal charges against other former executives at Enron, and some of its trading partners.

Investigators believe the little Nevada power plant may have been drawn into this drama in one of Mr. Belden's first-known trading schemes. Shortly after California's wholesale electricity market was deregulated, former Enron employees say, the 35-year-old trader began testing the limits of the state's transmission grid.

Early on, say former Enron employees, Mr. Belden, a vice president and its chief Western power trader, saw California's transmission bottlenecks as a weakness that could be exploited. Mr. Belden learned that by scheduling power deliveries over congested transmission lines, he could drive up the price. At the same time, he would have power to sell at the higher price on the other side of the bottleneck, reaping payments from the state authority by relieving the apparent congestion that he himself had created.

The Beowawe geothermal facility became an unwitting cog in Mr. Belden's scheme. At the plant, mile-deep wells draw superheated water into a huge turbine, which generates about 15 megawatts of electricity an hour, enough to run a small town. The power courses across Nevada to a terminal in the desert ghost town of Silverpeak, where Southern California Edison Co. lines carry it over the Last Chance mountain range into California.

At 6:10 a.m. on May 24, 1999, working from a computer on Enron's vast electricity-trading floor in Portland, Ore., Mr. Belden entered four bids to sell power to the California power exchange, according to records obtained by state and federal investigators. He proposed to sell a total of 2,900 megawatts for next-day delivery, at $18 to $29 a megawatt-hour. That's a river of power large enough to light up a midsize city. The power exchange soon approved Mr. Belden's offer.

At 7:29 a.m., Mr. Belden told the state power grid that he would use the Silverpeak line. Investigators believe he knew it was only big enough to handle the Nevada geothermal plant's output. Sending 2,900 megawatts across the line would cause transformers to explode, or even melt the power lines, so Mr. Belden's schedule obviously made no sense. It wasn't long before a confused duty officer at the California grid operator, identified only as "Karen" in a transcript obtained by investigators, phoned for an explanation.

The call was immediately put through to Mr. Belden.

Mr. Belden: "Um, there's a -- there -- we just -- we did it because we wanted to," he said. "And I don't mean to be coy."

Karen: "'Cause, I mean, it's -- it's a -- I mean . . . it's a pretty interesting schedule."

Mr. Belden: "It -- it's how we -- it makes the eyes pop, doesn't it?"

Karen: "Um, yeah. I'll probably have to turn it in [to power-grid regulators] because it's so odd."

"Right," Mr. Belden answers.

In the automated system that manages the state's electricity-transmission lines, run by the California Independent System Operator, the false bids caused congestion, which Mr. Belden could then be in a position to relieve by scheduling a complex series of counterbids. It also drove up the price of electricity by more than 70% that afternoon across the state, a potential windfall for Enron and other power producers and traders.

The brazen trade was indeed reported to the compliance unit of the state's power exchange -- and the result was a slap on the wrist, even though state authorities determined that California electricity customers were overcharged by $4.6 million to $7 million that day as a result of Mr. Belden's scheme.

It fined Enron only $25,000 for the incident, more than a year after it occurred, and accepted a promise from a senior executive that it wouldn't repeat the tactic -- a promise that had already been broken, according to Enron memos and records obtained by investigators. The San Francisco grand jury has already sought subpoenaed records of the Silverpeak trade.

"Tim Belden wanted to see what would happen if the state system operator went into an emergency" through the use of false power scheduling, said Robert McCullough, an economist for several of the Western utilities and power users that say they were victimized by Enron. "What happened was the price of power went through the roof. Silverpeak was a `proof of concept' showing that a single fraudulent trade could destabilize the entire market."

Mr. McCullough, in testimony submitted to the California Senate, estimated that Enron cleared as much as $10 million from the Silverpeak effort. Mr. Belden has declined to comment on the incident; his attorney on Friday also declined to comment, except to say her client was now cooperating with federal investigators.

As Mr. Belden honed his skills and his team of traders focused on new ways to game the system in the months after the Silverpeak test in 1999, Enron trading revenues soared. Federal investigators say that revenue for his Western states' power-trading operation rose from $50 million that year to $800 million by 2001.

Mr. Belden's team was responsible for Enron's previously disclosed "Death Star" and "Get Shorty" trading strategies, which were designed either to create congestion or exploit other loopholes in California market rules. Some of these strategies were simply legitimate arbitrage, or aggressive trading; but after Mr. Belden's guilty plea last week, it's clear that some were also illegal.

Mr. Belden and other former traders are now cooperating with federal authorities and are expected to identify former senior Enron executives as either being involved in the alleged schemes or seeking to conceal them, as well as to describe the role of other energy companies that did business with Enron during the crisis.

Investigators are closely examining the roles of at least three senior Enron executives, including John Lavorato, Mr. Belden's supervisor; former trading chief Greg Whalley, who was also Enron's president and chief operating officer before the firm sought bankruptcy protection in late 2001; and Enron's former chief executive, Jeffrey Skilling, who denied in congressional testimony that Enron had manipulated California's energy market.

Mr. Lavorato's lawyer, B. Michael Rauh, said his client didn't know the Portland office was using illegal tactics, and he said that Mr. Lavorato isn't a target of the probe. Lawyers for Messrs. Skilling and Whalley have both said their clients weren't involved in the alleged trading abuses; Mr. Whalley's lawyer, Zachary Carter, says his client is cooperating with investigators.

Mr. Belden, who earned a master's degree in public policy from the University of California at Berkeley, landed a job in Enron's Western trading office in 1998, just as California was opening its newly deregulated energy market. Despite his limited trading experience, the young trader was steeped in energy economics and the changing markets, having spent five years as a researcher at Lawrence Berkeley National Laboratory, in Berkeley.

He had co-authored papers on energy markets with a top researcher there, Dr. Steven Stoft, who says he stayed in touch with Mr. Belden over the years. He describes his former assistant as smart and talented, with a streak of idealism that led him in his Berkeley days to invest -- and lose -- money in environmentally-friendly wind-power projects. "Not your cookie-cutter Enron type," Dr. Stoft says. Even as he prospered with Enron, Mr. Belden defied the stereotype of the flashy, hard-charging trader, according to those who worked with him. He typically rode his bicycle to work, striding through the office helmet in hand. His car was a beat-up Honda Accord. He was the only executive in the Portland office who dressed in costume on Halloween, and when stress levels rose on the trading floor, he'd break the tension by tossing around a nerf football. Still, he soon came to fit into the Enron culture: smart and driven, and working 14-hour days, poring over tariffs, combing through market rules and concocting trading strategies.

Mr. Belden's run-in with the state power authorities resulting from the Silverpeak experiment didn't hurt his career. Despite his failure to explain the disputed trade to authorities, his Western trading desk was producing an increasing share of Enron's profits, and he was the most powerful executive in the Portland office. "Everything revolved around him," says a former Portland employee. "When Tim spoke, people listened and heads rolled."

His small group of traders were at the top of the hierarchy in the office, dining and drinking together, and once a year, jetting to Cabo San Lucas or other Mexican resorts for company-paid retreats. On the trading floor, there were no individual offices: Bosses sat among workers in a sea of desks, a roiling atmosphere of ringing phones, constant movement and nonstop din of conversation.

Mr. Belden was richly rewarded for his work, and Enron management gave him a total of $5.1 million in bonus payments in 2001, company records show. Part of the payment was made even after his trading schemes were identified by Enron lawyers, who said they ordered them stopped. In his plea agreement, Mr. Belden agreed to forfeit at least $2.1 million that was traceable to the fraudulent trading he admitted.

During the Silverpeak incident, operators of the geothermal plant in Nevada, which is owned by Caithness Energy LLP, New York, were never aware the lines they used had been effectively hijacked by Mr. Belden. The prices they were paid fluctuated wildly during the California crisis, and they worked to keep the plant humming to supply power, even if congestion on the grid meant that the plant sometimes had to sell its power in Nevada instead, where prices were usually lower.

Says Mr. Gates, the night-shift operator: "I'm glad I don't live in California."

Southern California Edison, whose lines carry power from Silverpeak, wasn't involved the incident, and a spokesman for the Edison International unit had no comment yesterday. Mark Palmer, Enron's spokesman, declined to comment on the Belden case, saying, "We have and will continue to cooperate with all investigations into the company's past." Gregg Fishman, a spokesman for the California Independent System Operator, said that the state's power grid "has been served subpoenas by the FBI, the U.S. attorney and state officials, and we're cooperating with all of these investigations."

As for the Silverpeak incident, Mr. Fishman added, "It wasn't clear what their motivation was at the time -- but it was clear that you can't send 2,900 megawatts on a 15-megawatt line, and we reported them." The state's power exchange, which levied the $25,000 fine, has since been disbanded. But in an April 29, 2000, report, it found that "Enron knew or should have known" that the line couldn't handle the power, and in a settlement, Enron promised not to engage in "substantially the same conduct."

It was signed by the then-president of Enron North America, Mr. Whalley.

Power Grab

Tracing Timothy Belden's Silverpeak scheme

  1. Enron offers to sell 2,900 megawatts into California power exchange on May 24, 1999, for next-day delivery.

  2. Silverpeak, Nevada transmission line is scheduled as the point of entry, a line meant to handle only the 15 megawatt output of the Beowawe geothermal plant.

  3. The false trades cause congestion, and the California power grid is thrown out of balance. Enron gets a payment from the state for relieving that congestion, investigators find.

  4. Prices soar by more than 70% that afternoon, a windfall for power traders.

The Energy Trading Flop

Houston Chronicle by Michael Davis October 22, 2002

(10/20/02) - Energy trading companies are still trying to resuscitate their dormant trading operations with financial partners, but until the companies resolve their mounting legal issues, the prospects of any deals being struck soon appear bleak.

Some continue to hold discussions with financial companies with strong credit ratings and balance sheets for their so-called "book" of trading business, the various contracts the companies maintain in regions across the country.

Most of the companies already have trimmed their trading operations back to doing mostly deals that involve their own oil, gas and power supplies.

They have all been looking for strong financial partners since early this year, but only one real deal has been done: UBS Warburg's acquisition of the former Enron Corp. trading business.

Enron's old trading business has not flourished under its new ownership. UBS picked up about 630 employees from the former Enron trading operations but it has since had to lay off 130.

"We believe the market is recognizing the value of having stronger, better capitalized participants in the industry," said Jennifer Walker, spokeswoman for UBS in Houston.

Houston-based Dynegy threw in the towel on its search for a trading partner last week when it announced it was getting out of the business altogether. It will lay off the related trading staff as part of a larger move expected to chop more than 800 jobs in Houston alone.

Others are going to face the same pressure to bail out of trading soon as well.

"My gut feeling is that a lot of them won't make it," said Peter Bryant, president of TBC Consolidated Fuels Marketing, a Houston company that supplies natural gas, diesel and gasoline to large companies. "This business requires a lot of money, and there is not much margin. You have to do a lot of transactions to make money. If you don't, you're not going to have the income to sustain your operations and pay the rent."

With Dynegy out of trading, investors and analysts are now keeping a wary eye on Houston-based El Paso Corp. The company has seen its credit rating slashed to near junk and is facing an avalanche of litigation if the Federal Energy Regulatory Commission penalizes it for allegedly holding gas off the market during the California power crisis.

The company has not indicated it would like a partner for its trading operations. El Paso is one of the more liquid energy trading companies, with about $4.5 billion available in cash, bank lines and other credit facilities.

No one believes energy trading will disappear completely, but it will never again reach the frenzy it experienced in recent years before the collapse of Enron inflicted irreparable damage to the entire sector.

"I think this business will return to the early 1990s structure when you bought gas and sold it without all of the hedges and derivatives," Bryant said. "It used to be real simple; you could do it with a calculator and a Lotus spread sheet."

Hanging over any negotiations that energy companies are pursuing are investigations of their trading activity by FERC, the Securities and Exchange Commission and federal grand juries.

Until those matters are resolved, which could take months if not years, investors should not expect any financial institutions to want to get into energy trading, analysts say.

"Until we get over the litigation and investigations, no one is going to step up to the plate," said William Hyler, energy analyst with CIBC World Markets. "Dynegy had too many liquidity issues; they had to make a decision now. Williams can probably hold out a little longer, but we will probably see more people get out of the trading business before this is all over."

Tulsa, Okla.-based Williams Cos. narrowly avoided filing for bankruptcy in early August by cutting deals to sell $1.4 billion in assets and arranging $2 billion in loans. Company officials at the time said they were looking for a partner for their trading operations and that 30 to 40 potential buyers were eyeing the business.

They're still looking.

"We continue to pursue two possible routes, a joint venture or what is more likely, selling all or part of our book," said Kelley Swan, spokesman for Williams in Tulsa. "We have positions all over the country. We have a large position in California that would be very attractive but obviously we have to wrap up all of the legal issues before that is sold."

Calpine, of San Jose, Calif., announced it was looking for a financial partner for its trading operations in February. Now the company is undergoing a massive restructuring, and a spokeswoman said that search has been put on hold. Calpine is also in the middle of erecting a skyscraper in downtown Houston.

"Our restructuring is taking priority over our previous activity of seeking a trading partner," said Gail Petersen, a Calpine spokeswoman in Houston.

Reliant Resources has not been looking for a partner and does not intend to do so, said Richard Wheatley, spokesman for the company.

"We have realigned our trading business and reduced it by about 35 percent, but our focus has not changed," Wheatley said. "We are centering our trading and marketing around our own assets."

Atlanta-based Mirant is still trying to find a trading partner, and as it does it is paring down its trading operations, said David Payne, spokesman for the company.

"We don't have any update," Payne said. "We are reducing our natural gas trading and will be reviewing our book and our entire business market by market. We expect to have a smaller but stronger trading operation."

Duke Energy Corp. has had one of the strongest credit ratings and is viewed as a likely survivor among the traders, but it is still suffering along with the rest of the sector.

Prudential Securities analyst Carol Coale issued a recent report saying she expects Duke's third quarter results will likely be affected by "a marked deterioration in energy trading in July and August."

Tip of the Energy Manipulation Iceberg

Contra Costa Times by George Avalos October 22, 2002

(10/19/02) - SAN FRANCISCO -- Federal authorities left no doubt Friday that this week's guilty plea by an ex-energy trader with Enron Corp. is only the tip of the iceberg in the government's fast-moving prosecution of criminal manipulation of California's energy markets.

Prosecutors and FBI agents flatly stated that the conspiracy involving Timothy N. Belden, a former Enron official who pleaded guilty to wire fraud, didn't stop with him.

"This is the beginning, not the end, of this investigation," said Kevin Ryan, the U.S. Attorney in charge of Northern California.

The conspiracy to rig the state's energy market through a series of schemes could involve other Enron officials or other energy companies.

"Mr. Belden represents a window into the upper levels of management at Enron," Ryan said. "He did not act alone. He did not act without help and approval from others." Belden was Enron's chief energy trader in California.

Officials wouldn't specify targets for their probe. But they made it clear they believe they are operating in fertile territory as they attempt to unravel various schemes to rig the state's broken energy markets in recent years.

"To Mr. Belden's co-conspirators, they know who they are, and they should be very concerned about this investigation," Ryan said. "I am making a personal commitment to pursue corporate wrongdoers in this district. We will act, and we will act quickly."

It's also possible other companies could be snared in the federal dragnet, although prosecutors wouldn't confirm or deny that possibility.

"We will look at all actors who may have manipulated the California energy markets," said Patrick Robbins, an assistant U.S. Attorney in the Bay Area. Robbins added that Belden's cooperation is "a significant breakthrough for the investigation."

Separately, Sen. Dianne Feinstein scrapped for this year her legislation to boost government oversight to guard against transactions such as those involving the former Enron trader. Feinstein said she would float the legislation again in 2003.

"As things like this become better known, it increases the case for my legislation," Feinstein said. "Because there is no oversight of any kind, no records kept, all done in secret, it becomes a prime place for this kind of sham trading."

The legal proceedings involving Belden mark the first guilty plea stemming from the federal government's probe into activities of companies engaged in power trading during a time when electricity prices skyrocketed and shortages of energy resulted in rolling blackouts.

"You're looking at a huge, complex case here," Robbins said. "You will see more good things, I predict." A team of federal prosecutors, FBI agents and government analysts who are familiar with the mechanics of corporate financial records have joined forces in the Bay Area to advance the investigation.

The attorney for Kenneth Lay, former chairman of Enron, did not return a phone call seeking a comment about a wider investigation. Officials with some energy traders active in California during the 1998 through 2001 period said they are cooperating with federal investigators.

"To date, none of the investigations have found that we have done anything other than conduct appropriate business operations," said Pat Mullen, a spokesman for Duke Energy Corp. of Charlotte, N.C. "We continue to conduct our business with integrity. We believe our practices are within the tariff and the market rules."

Dynegy Inc. of Houston was subpoenaed a few months ago by the Department of Justice, Dynegy spokesman David Byford said. "We're continuing to work with these investigative agencies," Byford added.

The prosecutors didn't have an estimate about the dollar amount in losses for consumers. But they pointed out that prices during the worst of the electricity crisis skyrocketed in just seven months. In May 2000, prices ranged from $24 to $40 a megawatt; by December 2000, prices soared to $1,500 a megawatt hour -- an average 46-fold increase from the spring.

Someone May go to Jail

Associated Press October 22, 2002

(10/18/02) - SACRAMENTO - State officials, battered and blamed for last year's energy crisis, expressed vindication Thursday at the guilty plea of a former Enron trader to charges of market manipulation - and said it will help the state recoup its losses.

``It's about time,'' said Steve Maviglio, spokesman for Gov. Gray Davis. ``For two years, the governor has been saying that someone ought to go to jail. Finally, it looks like someone is.''

Davis has faced criticism for 2001's soaring power prices and the $43 billion in long-term contracts he signed to curb them.

He and other state officials now believe Timothy Belden's guilty plea to conspiracy, and his agreement to help federal and state prosecutors, will help California win its case for an $8.9 billion refund from energy companies for alleged overcharges.

Belden, former head of trading in Enron's Portland, Ore., office, admitted to a federal judge he was trying to maximize profits for his Houston-based firm.

``We certainly hope that this further evidence of market manipulation would compel FERC (Federal Energy Regulatory Commission) to order refunds for the state,'' said Sandy Michioku, spokeswoman for Attorney General Bill Lockyer.

She said the office continues investigating Enron and other firms, and added, ``The latest enforcement action signals that there were improper things done to jack up prices in California.''

Michioku's comments came one day after Lockyer's office filed claims for damages against Enron in U.S. Bankruptcy Court in New York. The claims, for an unspecified dollar amount, were also filed on behalf of the California Energy Commission and the California Department of Water Resources, she said.

Sen. Joe Dunn, D-Santa Ana, chair of the Senate Select Committee to Investigate Price Manipulation of the Wholesale Energy Market, said Belden's plea ``is the first of many dominoes that will fall'' within Enron and other energy companies. ``Tim Belden not only knows how Enron played, but how others played, as well.''

Committee attorney Chris Schreiber lashed back at Bush administration officials, including Vice President Dick Cheney, who said in 2001 the crisis was California's fault.

``Blaming this on California has been totally debunked,'' Schreiber said. ``From my perspective, nearly all of it can be ascribed to market manipulation.''

David Freeman, the governor's chief energy adviser and head of the California Power Authority, said Belden's plea also signals the demise of a costly experiment in energy deregulation.

``Those that are advocating that we continue to move toward a deregulated market electricity economy need to have their heads examined, and need to face up to the fact that the system breeds crooks who have stolen our money.''

Freeman also said the process of negotiating long-term power contracts that he and Davis turned to last year ``looks better with every indictment.''

Energy Manipulation Conspiracy Guilty Plea

New York Times by K. Eichenwald, M. Richtel October 22, 2002

(10/18/02) - A former senior trader at the Enron Corporation pleaded guilty yesterday to engaging in a conspiracy that illegally manipulated the California power market during the state's energy crisis, driving up prices and generating millions of dollars in excess profits for his employer.

In the plea, Timothy N. Belden -- the former head of trading in Enron's office in Portland, Ore. -- admitted to working with others on trading tactics that effectively transformed California's complex system for buying and transmitting energy into a fictional world, complete with bogus transmission schedules, imaginary congestion on power lines and fraudulent sales of ''out of state'' energy that in fact came from California itself.

Mr. Belden's plea established for the first time that traders engaged in crimes to take advantage of the energy crisis that began in California in 2000, worsening an already bleak situation for the state's consumers. The possibility of such criminal activity has long been suggested by politicians in the state, including Gov. Gray Davis, who said the plea vindicated his stance. The plea also prompted calls for reimbursement and greater regulatory scrutiny.

''Belden and others conspired to defraud California electricity consumers and customers through a variety of schemes designed to artificially increase payments from the California power manager to Enron,'' Larry D. Thompson, the deputy attorney general, said at a news conference announcing the plea deal. He added that the conspiracy ''allowed Enron to exploit and intensify the California energy crisis and prey on energy consumers at their most vulnerable moment.''

But the plea has ramifications that reach outside California. Because Mr. Belden has agreed to cooperate with the government in continuing investigations, the plea opens up a new avenue of inquiry for prosecutors who are seeking to determine the role that crime played in the collapse of Enron last year.

Indeed, the Belden admissions, coupled with those of others at Enron in related cases, establish that criminal activity infused several parts of the company, from the way it conducted trading to the methods it used to obtain financing.

Mr. Belden has already been interviewed by prosecutors and agents with the F.B.I. about his role in the illegal trading strategies as well as other areas of investigation, people involved in the case said. For example, he was questioned about the operations of Enron's broadband unit, as well as the potentially improper use of reserves established out of the the company's huge profits in its energy trading during the California energy crisis, these people said.

In his statements yesterday and in court filings, Mr. Belden made clear that other Enron executives, whom he did not identify, participated in the conspiracy, which began in 1998 and lasted through much of 2001. And in a statement yesterday, Cristina C. Arguedas, a lawyer for Mr. Belden, said that the crimes were simply the way her client was trained by Enron to do business.

Mr. Belden ''did what was expected of him,'' Ms. Arguedas said, adding that he took his actions ''in accordance with Enron's policy, expectations and training.''

Ultimately, though, the conspiracy proved immensely valuable to Mr. Belden, internal Enron documents and court records show. Data from Enron show that in 2001 alone Mr. Belden received two bonus checks totaling about $5 million -- the seventh-highest amount of bonuses paid to any executive at the company that year.

Already, the government and Mr. Belden's lawyers have calculated the amount of his compensation that can be traced to the illegal conspiracy. As a result, under his plea deal, Mr. Belden has agreed to forfeit $2.1 million he maintained in two brokerage accounts at Charles Schwab. That money is earmarked for Californians who paid too much for their energy because of the scheme.

Mr. Belden formerly worked as a researcher at a federal energy laboratory, and several times was listed as a co-author on scholarly papers about the energy markets. From there, he went to the Portland General Electric Company and joined Enron when it bought that company. By the time of the collapse, Mr. Belden -- who devised many of the trading strategies -- headed a trading unit of more than 100 people.

Mr. Belden, 35, pleaded guilty to one count of conspiracy to commit wire fraud before Judge Martin J. Jenkins of Federal District Court in San Francisco.

He faces a maximum of five years in prison and a $250,000 fine. Because he is cooperating with the federal inquiry, however, any sentence is likely to be significantly lower.

''I knew at the time I was submitting false statements,'' Mr. Belden said. ''I did it because I wanted to maximize profits for Enron.''

Such an admission raises the chance that Enron itself could be charged with a crime. In the other criminal cases involving Enron, a majority of the suspected wrongdoing involved actions by executives working to enrich themselves, often at the company's expense. But under federal law, a corporation can be charged only if an important executive commits a crime with the purpose of benefiting the company, as Mr. Belden said he did.

Enron did obtain huge revenues from the trading in California. According to the charges filed against Mr. Belden, West Power -- Enron's electric trading arm -- generated about $50 million in revenue in 1999, the year before the California energy crisis. By 2000, the document says, that amount jumped to $500 million. The next year, revenue spiked again, climbing 60 percent, to $800 million. Of course, much of that increase could be attributed to the huge rise in electricity prices in California, which would have occurred even without the criminal activity.

According to the documents filed with the court, the criminal conspiracy began soon after California revamped the state's electricity industry, making it more responsive to market forces. In 1998, the year the new rules became effective, Mr. Belden and others at Enron ''agreed to devise and implement a series of fraudulent schemes through these markets.''

The schemes took advantage of the structure in the newly deregulated markets. Under the rules, energy marketers like Enron had to schedule their deliveries of electricity to customers. Within that system, the marketers could also be paid for altering their delivery schedules if a particular transmission line became congested. In addition, there were ways to profit from power emergencies -- by selling power to California from more expensive out-of-state areas and by making commitments to deliver a fixed percentage of power in such an emergency to prevent the collapse of the system.

But those methods proved to be ways Enron could increase its revenue with little additional work. By filing bogus electricity schedules, Mr. Belden and his co-conspirators could artificially increase congestion on California transmission lines; then, they would be paid to ''relieve'' the congestion, which did not exist. The company shipped power out of California, then sold it back into the state, in turn getting the higher prices for out-of-state electricity. And Mr. Belden and the others made commitments to deliver energy they did not have and did not intend to supply.

The accusations themselves were first made public in May, when the Federal Energy Regulatory Commission disclosed internal Enron documents that showed the company had engaged in such practices, giving the trading strategies names like Death Star, Ricochet and Fat Boy. But yesterday's plea is the first time that a participant has acknowledged that the activities were illegal.

Ultimately, though, state and federal officials said that these actions did not cause California's energy crisis, but merely worsened an already deteriorating situation. In essence, Enron was in the role of the pickpocket who lifts the wallet of an unconscious man, not of the mugger who knocks him to the ground in the first place.

Patrick H. Wood III, chairman of the Federal Energy Regulatory Commission, said yesterday that the manipulations described in Mr. Belden's plea played ''some role'' in the energy crisis but added that other factors like a drought in the Northwest and a lack of public investment in power plants also appeared to have played a part.

Regardless of the effect of the crimes, the guilty plea had immediate political ramifications in California. Staff members working for Mr. Davis said that the Belden plea demonstrated that the governor had been right all along about there being wrongdoing in the California markets during the energy crisis.

''This is vindication for the governor, who was accusing Enron of market manipulation way back when,'' said Steven Maviglio, a spokesman for the governor. ''He had said a long time ago that someone from Enron needed to go to jail.''

Mr. Maviglio said that the admission of wrongdoing by Mr. Belden would also be used by California in its case before the energy regulatory commission. The state is trying to obtain reimbursements of $9 billion in charges from energy marketers during the power crisis.

Federal elected officials from California also reacted to the news of the plea with satisfaction and calls for reform. Senator Barbara Boxer, a Democrat, said she thought Mr. Belden ''will bring down other officials who were in on the process'' and also called on federal energy regulators to act on the state's demands for reimbursement.

Senator Dianne Feinstein, also a Democrat, said she did not believe that ''this fraudulent activity begins or ends with this one individual,'' and called for Congress to adopt a bill she has proposed to create greater federal oversight of energy

Another Energy Trading Failure

New York Times by Jonathan D. Glater October 22, 2002

(10/17/02) - Dynegy announced yesterday that it would close its energy trading operation and revamp its business as part of an effort to cope with declining prices, a junk credit rating and a stock price that has fallen more than 98 percent over the last year. The company also announced that its president and chief operating officer, Steve Bergstrom, who was a candidate to become chief executive, would resign. Dynegy's announcement warned of layoffs in the coming months but did not provide details.

The moves come weeks after Dynegy settled a civil lawsuit brought by regulators that accused the company of using off-balance-sheet partnerships and bogus trades to hide its true financial condition from investors. A former Dynegy executive who filed a separate lawsuit against the company said Mr. Bergstrom had asked him to help doctor the company's financial statements; the company said that accusation had nothing to do with Mr. Bergstrom's resignation.

''We've been looking at this restructuring for a period of months,'' said Blake Young, an executive vice president. Closing the trading business in power and natural gas, which will take about six months, will significantly reduce the amount of capital and cash the company will need, he added.

As part of the revamping, the company's remaining businesses will be organized into four units -- power generation, natural gas liquids, a regulated utility in Illinois and a communications venture -- each with a chief executive with the authority to make investment and personnel decisions with more independence from Dynegy's headquarters, Mr. Young said. The company will continue to buy and sell power directly, he added.

But Dynegy's decision to close its trading business, which employs about 450 people worldwide, calls into question the viability of the business, at least as it has been practiced by the company and its rivals, like Mirant, Aquila and El Paso, industry analysts said. In the future, financial companies like UBS, which took over Enron's trading business, will be major players, these analysts said.

''The marketplace is going to lean on the better credit quality,'' said Karl W. Miller, a senior partner at Miller McConville & Company, a private firm that invests in distressed energy assets. A trading operation's creditworthiness matters because energy buyers and sellers want some assurance that it can meet its obligations to buy power from one company, for example, before selling it to another.

''Typically, trading is priced off your credit quality,'' Mr. Miller said, and because the credit ratings of many energy companies have plummeted in recent months, the cost of borrowing to make good on commitments -- to satisfy jittery buyers and sellers -- has soared.

That does not mean that energy trading cannot be profitable, said Paul Patterson, an analyst at Glenrock Associates, an independent research firm in New York.

''Somebody wants to buy 50 megawatts on peak and someone wants to sell 200 megawatts of power on peak,'' he said. ''A trader can take that power and break it up and sell it to other people. It makes sense that there should be a middleman.''

Dynegy's exit from the trading business is unlikely to have much of an effect on energy markets, analysts said. But it is further evidence of the precarious financial condition of many companies that do trade power, Mr. Miller said.

Dynegy is ''marginally staying alive,'' Mr. Miller said. ''Their parent is not supporting them,'' he added, referring to ChevronTexaco, which has a 27.5 percent stake in Dynegy.

ChevronTexaco's chief executive, David J. O'Reilly, said in an interview yesterday that he regretted some of his company's moves with Dynegy. ''When you make an investment, you assess the downside risk,'' he said. ''I think we fell short of assessing the downside risk.''

The success of future energy trading operations will depend on how the industry is regulated, Mr. O'Reilly said. ''Partial deregulation doesn't work,'' he said, ''and deregulation without some sort of governance structure doesn't work, either.''

The announced changes and pending layoffs at Dynegy are only the latest of the company's troubles. Last month, it paid $3 million to settle accusations by the Securities and Exchange Commission that it used secretive partnerships to hide debts, as well as so-called round-trip trades to mislead investors about its business volume.

The company's share price has dropped from a high of $47.50 in November, about the time that Dynegy backed out of a plan to buy Enron for $9 billion, to 81 cents yesterday.

FERC May Reopen Energy Contracts

Dow Jones by Mark Golden October 22, 2002

(10/17/02) - WASHINGTON (Dow Jones)--The Federal Energy Regulatory Commission is undermining the merchant power industry by considering reopening contracts energy companies signed during the electricity crisis in the West, an industry group said Thursday.

"The industry is predicated on contracts," said Julie Simon, vice president for policy at the Electric Power Supply Association, who was speaking a Power Marketers Association conference. "If all a complainant needs to do to get a hearing from FERC is to show that spot prices have fallen, we're in big trouble."

The effort to reopen contracts has been led by California, which signed $43 billion in power supply deals in 2001 to keep the lights on after the state's two largest utilities became insolvent.

For distressed companies like Calpine Corp. and Williams Cos., the contracts to supply power to California are some of their best assets.

Those contracts also helped break the spot market, but at tremendous political cost to Gov. Gray Davis, who has been criticized for unwisely negotiating long-term deals at the height of the market. Power prices in the West have since plunged.

California asked FERC to intervene and modify the terms of the contracts. In late August, a FERC judge set a Dec. 2 date for hearings into California's request.

Following the state of California's successful petition for intervention, virtually every buyer of long-term power in the West that signed a contract between the summers of 2000 and 2001 has petitioned FERC for relief or plans to do so, Simon said.

EPSA has intervened in 34 such cases and expects to intervene in more, she said.

"I am optimistic that we will win, but that is almost beside the point," Simon said. "Power companies' contracts with fuel suppliers, contracts with lenders, etc., start to unravel."

Even so, the value of those long-term contracts to the suppliers shouldn't be discounted too much, said Donna DiDonato, Fitch Ratings' director for North American power.

"We don't believe FERC will violate the sanctity of the contracts," DiDonato said.

Fitch, however, does discount cash flow from the contracts with the highest prices or in cases where management has indicated its willingness to renegotiate the deals.

FERC has warned it will set a high bar for arguments to violate the sanctity of contracts. If a judge determines California's power market was so dysfunctional that contracts must be modified, a second hearing will then be required to set the terms of those modifications.

The Puzzling Case Of the Guilty Trader

Forbes Magazine by Dan Ackman October 19, 2002

(10/18/02) - NEW YORK - The case of Timothy Belden, the top Enron energy trader who pleaded guilty yesterday to fraud charges in federal court in California, is like one piece of a giant puzzle. But it's hard to say where it fits--or even which puzzle it belongs to.

Belden ran Enron's marketing operation and supervised the company's sales of electricity to western states from 1997 to early this year. The government alleges that he and others at Enron used a series of schemes to reap unjustified payments and cause higher prices in California and adjoining states. The schemes were given colorful names--part of the Enron way--like Death Star and Fat Boy. Belden, 35, earned more than $5 million in a 2001 bonus for his work.

"These charges answer the question that has long troubled California consumers: whether the energy crisis was spurred in part by criminal activity. The answer is a resounding yes," said U.S. Attorney Kevin Ryan in a statement.

But the charges leave open larger questions, such as what role--a small part or a large part--"criminal activity" played in the California "energy crisis," who else was involved and what factors allowed manipulation in parts of the Golden State as nowhere else.

The government promises that the investigation will continue. But Belden could lead investigators to others in the Houston-based Enron or he could lead them to other companies altogether.

The conspiracy "allowed Enron to exploit and intensify the California energy crisis and prey on energy consumers at their most vulnerable moment," Deputy Attorney General Larry D. Thompson said at a Washington news conference. But no one says Enron created the crisis.

Indeed, when the crisis was unfolding Enron was not even considered a prominent player in California. Other energy companies--Duke Energy, Southern Company, Reliant Resources and Dynegy --were the major power generators. These companies sold to Southern California Edison, a unit of Edison International, and Pacific Gas and Electric, which suffered huge losses for which they blamed the state. Pacific Gas and Electric declared bankruptcy as did the California Power Exchange.

The state is still seeking roughly $9 billion in refunds from the generators in proceedings before the Federal Energy Regulatory Commission, though they might wind up settling for a fraction of that amount.

The crisis caused rolling blackouts in parts of the state in late 2000 and early 2001 and led to massive state intervention. Belden has now been convicted of actions taken in exploiting that crisis. But it's impossible to say that Enron caused it.

At the time, the Bush Administration said California's own regulatory policies were to blame. This view may be correct: California's energy deregulation scheme allowed wholesalers to charge whatever the market would bear but capped the amount consumers could be billed. It also created differential prices for energy produced in-state and out-of-state. Enron's scheming seems to relate to efforts making in-state electricity look like out-of-state electricity so it could then be sold at a higher price. Enron was neither a generator nor utility in California, but it did act as a middleman--along with many other companies.

Enron's Belden is the first to be indicted on criminal charges. But his precedence likely has more to do with the fact that Enron has been so intensively investigated than his actual importance in the California crisis.

Belden pled guilty to conspiracy to commit wire fraud. He said his trading unit lied to California authorities by exaggerating the amount of power it planned to ship and then collecting state payments not to send the power to avoid overloading transmission lines. On other occasions Enron shipped electricity out of the state and then back in to avoid state price controls.

The supreme irony is that Enron always proclaimed itself a key to making energy markets more efficient. Here it profited, it seems, from exploiting inefficiencies. But there is no sense it created them.

Belden now joins his company's former chief financial officer, Andrew Fastow, and his deputy, Michael Kopper, on the police blotter. Kopper has pleaded guilty to financial fraud charges and has agreed to cooperate with authorities. Fastow has been indicted and pleaded not guilty.

Senior Enron executives at the company's Houston headquarters were reportedly told late in 2000 about energy trading practices in California. But the plea agreement does not indicate the practices were guided by higher-ups. Enron's lawyers have said that when they learned about Fat Boy and Death Star they ordered the traders to stop.

Belden indicated he was merely a good soldier: "I did it because I was trying to maximize profit for Enron," he told U.S. District Judge Martin Jenkins. Well, naturally that's what he wanted to do. But it's not even clear if he succeeded. It is clear he profited himself and he will now pay a fine of $2.1 million and face a jail term. The maximum length of that term is five years but will likely be much less depending on his cooperation with Enron investigations going on all over.

Deregulation - Page 23 - 2002