May 13, 2002
A number of Enron’s internal memos surfaced at a Senate subcommittee on May 7. They show how Enron consciously manipulated California’s energy markets during the winter of 2000 and reaped large profits in the process.
Interestingly enough, the politicians didn’t bother to extract these memos when electric prices were driven sky high in the winter of 2000. No, they woke up only because rich speculators – and particularly some of the biggest banks – lost money in the Enron collapse.
Enron executives certainly knew full well what they were doing – they even gloried in the scam they played on California. Look at the names they cynically gave their schemes: Death Star, Get Shorty, Ricochet and Fat Boy.
In Death Star, Enron arranged to deliver more power than the state’s grid could handle. The State of California then paid Enron to move power out of the grid. While power normally sells at $40 or $50 per megawatt, the state was willing to pay Enron congestion charges as high as $750 per megawatt. As an Enron memo put it, “Enron gets paid for moving energy to relieve congestion without actually moving any energy or relieving congestion.”
In operation Ricochet, Enron bought energy in California with the expressed purpose of sending it to another state where it sold it to another state for a small profit. Then Enron bought the same power back and sold it in California at a still higher profit. This is what energy traders call “megawatt laundering.” In fact, this was all on paper – Enron was simply buying and selling the right to a certain amount of energy to be delivered at a later date.
A December 5, 2000 Enron memo said, “Traders could buy power at $250 and sell it for $1,200.” Enron added, “It appears not to present any problems, other than a public relations risk arising from the fact that such exports may have contributed to California’s declaration of a State 2 Emergency yesterday,” where consumers were asked to cut back on energy use.
As a consequence of this market manipulation, in 2000 Californians paid four times as much for electricity as they paid in 1999. They spent an extra 30 billion dollars which went to companies like Enron, the power companies and speculators.
Jim Battin, a Republican state senator from California who took part in the investigation of the crisis there said, “The bogeyman here is not just Enron and the power companies, but the system itself.” He is right. In 1996, the lobbyist for Southern California Edison was loaned to the office of the Democratic state senator who wrote the electric deregulation bill. Both Democrats and Republicans unanimously passed this deregulation. Later during the 2000 energy crisis George W. Bush ordered federal regulators not to put in price restrictions.
Enron said in its memos that the tactics that it used were also used by other energy companies doing business in California. This is undoubtedly true. The energy companies and speculators saw their opportunities with deregulation and they took them. This is market capitalism at work. It’s the workers and poor consumers who paid massively for this speculation and the politicians’ connivance in it.