State's an Enron Subplot - the Sacramento Bee

State's an Enron subplot - The Sacramento Bee http://www.sacbee.com/content/business/v-print/story/14191138p-1501...

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State's an Enron subplot

Houston trial may shed light on how California got burned on energy.

By Dale Kasler -- Bee Staff Writer Published 2:15 am PST Wednesday, February 15, 2006

Enron Corp. played the perfect villain in the California energy crisis, a role that's been memorialized in an Oscar-nominated documentary.

But its actual contribution to the blackouts and price spikes was more complicated than that.

The crisis will become a subplot in the ongoing trial of Enron's top two executives, Kenneth Lay and Jeffrey Skilling. While the Houston courtroom drama is mostly about the accounting fraud that ruined their company, the world is likely to hear testimony from the mastermind of Enron's California strategy.

Ex-trader Timothy Belden was the man behind "Death Star," "Get Shorty" and other electricity-trading schemes that Enron deployed to drive up prices, bamboozle regulators and flood the California power market with Enron's anything-goes cowboy culture.

The trial does nothing to ease California's financial pain, which lingers years after the last rolling blackout. With Enron in bankruptcy reorganization, the company will be able to pay back only a fraction of the money it owes the state. But many residents take satisfaction in the criminal prosecution of ex-Chairman Lay and former CEO Skilling, both of whom confidently told Californians in 2001 that the energy crisis was their fault.

Enron was "the biggest and most culpable in the entire energy crisis," said state Sen. Joe Dunn, D-Santa Ana, who chaired a legislative investigation into the crisis.

Dunn and former Gov. Gray Davis were featured in "Enron: The Smartest Guys in the Room," which is up this year for an Academy Award.

Some experts say Enron, for all its notoriety, was really on the periphery of the crisis. That's because, unlike other key players, it didn't own major generating plants. It was just a trader.

"The big story wasn't (Enron) playing clever games with the rules," said Severin Borenstein, director of the University of California Energy Institute in Berkeley. "The big part of the rip-off was from (generators) just withholding power from the market to drive prices up."

State officials say ratepayers were overcharged by nearly $9 billion in 2000-01, of which about $5.3 billion has been refunded through negotiated settlements with energy suppliers. Millions of Californians continue to pay significantly higher rates as a result of the crisis.

State officials can't agree on how much damage Enron did.

Tom Dresslar, spokesman for Attorney General Bill Lockyer, said Enron made excess profits of $2.1 billion in California.

But Erik Saltmarsh, executive director of the California Electricity Oversight Board, said that's too high. He put the Enron effect at $875 million - the amount that prices rose as a direct consequence of the company's market manipulation.

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Enron agreed last fall to refund $1.5 billion to California ratepayers, including a $600 million fine. But with the company in reorganization, it probably will return only $225 million, Saltmarsh said.

Everyone, however, agrees that Enron's influence went beyond the direct effect of its tactics. It also played an indirect but crucial role as cultivator of a Wild West mentality that infected other power suppliers.

"In terms of other people's behavior, Enron is probably more significant than even we still fully appreciate," Saltmarsh said.

Enron lobbied harder than anyone for free markets when California restructured its electrical system in 1998. And it was among the first to test the new market for weaknesses.

It happened on May 24, 1999, when prices were low and the market seemed to be functioning well.

Robert McCullough, a consultant in Portland, Ore., said Enron's Belden arranged to send 2,900 megawatts - enough juice to light up Sacramento for a few hours - through a rural power line near the Nevada border capable of handling only 15 megawatts.

Belden, who later pleaded guilty to fraud, knew that state officials would cancel the transmission. That was fine by him; it left the state having to scramble for power at the last minute. The gambit sent prices up temporarily, costing California millions of dollars.

Enron was fined $25,000, but McCullough said it could have cared less. It was learning how to game the system. "It's a perfect one for the books," he said.

A fuller understanding of the Enron mentality surfaced in 2002, with the release of a memo detailing "Dark Star" and other Belden techniques. Two years later came the discovery of the "Grandma Millie" tapes, in which Belden and other traders bragged about stealing money "from those poor grandmothers in California."

Gary Ackerman, a spokesman for Western energy producers and sellers, disputes the notion that the crisis was the result of widespread lawbreaking. But he acknowledges Enron's attitude rubbed off on others.

"They were the leading edge," said Ackerman, head of a trade group called the Western Power Trading Forum. "They were making money; others were struggling to make money. There were a lot of followers of the Enron model."

In early 2001, Lay and Skilling publicly blamed California's market structure for the crisis. Lay said the state's residents should endure big rate hikes to encourage conservation.

Californians bristled at the advice, and Enron became a target for their scorn. Lockyer mused aloud about putting Lay in a jail cell "with a tattooed dude who says, 'Hi, my name is Spike, honey.' "

But such was Enron's influence that then-Gov. Davis quietly consulted with Lay more than any other energy executive.

Besides Belden's testimony, California could make another appearance at the trial. Andrew Fastow, the disgraced chief financial officer, may testify about setting up Chewco, a secret company designed to hide financial problems at a separate business called Jedi.

Jedi was a natural gas partnership between Enron and California Public Employees' Retirement System. CalPERS made millions on Jedi, but Enron suffered heavy losses on the deal. The public disclosure of the losses in late 2001 was one of the landmarks that sank Enron's stock price and led to the company's bankruptcy reorganization.

CalPERS hasn't been accused of any wrongdoing in the deal, which had nothing to do with the energy crisis.

About the writer:

The Bee's Dale Kasler can be reached at (916) 321-1066 or [email protected].

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