DAVID V. GOLIATH: SNOHOMISH COUNTY
PUD’S ROLE IN BRINGING DOWN ENRON
-OROur Journey Through the Media Funhouse
Presented to:
2005 APPA Legal Seminar
San Antonio, TX
November 16, 2005
Presented by:
Eric Christensen
Assistant General Counsel
Snohomish County PUD
PO Box 1107
Everett, WA 98206-1107
(425) 783-8649
elchristensen@snopud.com
2000-01 Western Power Crisis
HLH
LLH
Mid C Daily Spot Price
$/MWh
$1,000
$975
$950
$925
$900
$875
$850
$825
$800
$775
$750
$725
$700
$675
$650
$625
$600
$575
$550
$525
$500
$475
$450
$425
$400
$375
$350
$325
$300
$275
$250
$225
$200
$175
$150
$125
$100
$75
$50
$25
$0
/ 04
05/25
/ 04
04/05
/04
02/15
/03
12/27
/03
11/0 6
/03
09/17
/ 03
07/28
/ 03
06/08
/03
04/19
/ 03
02/28
/03
01/09
/02
11/2 0
/02
10/01
/02
08/12
/ 02
06/23
/ 02
05/04
/02
03/15
/02
01/24
/01
12/05
/01
10/1 6
/ 01
08/27
/ 01
07/08
/01
05/19
/ 01
03/30
/ 01
02/06
/00
12/1 6
/00
10/26
/ 00
09/06
/00
07/18
/ 00
05/29
/ 00
04/09
/00
02/19
/99
12/31
/99
11/1 0
/99
09/21
/ 99
08/02
/99
06/13
The Crisis, cont’d
…but some still denied it…
The Damage is Done
• Snohomish PUD Rates Increase ~ 60%
• Huge Impacts Across the West
– 589,000 lost jobs
– $35 billion in lost productivity (1.5% of
regional GDP)
– Helps tip region into deep recession
– Recurring blackouts in California
The Damage Is Locked In –
Long-Term Contracts
• Absurdly Inflated Terms and Conditions
– Enron contract:
•
•
•
•
•
$109/MWh
25 MW flat block
4/1/01 through 12/31/09
“Two-way” termination provision
Onerous collateralization requirement
• Many other similarly inflated contracts
But there were some advantages…
Late 2001:
Enron’s House of Cards Teeters
• October 2001: Financial Scandal Begins
to Come to Light
• November 27, 2001: Enron Demands
$94.5 million Collateral Payment
• November 28, 2001: Snohomish
Terminates Contract
December 2, 2001: Enron Files
Bankruptcy
Enron Sues Snohomish
• January 31, 2003: Enron sues the PUD
for $122 million termination fee
(In re Enron, Case No. 01-16034 (AJG),
Enron Power Marketing, Inc. v. PUD No.
1 of Snohomish County, Adv. Pro. No.
03-02064 (AJG) (Bankr. S.D.N.Y.))
Snohomish’s Defense Strategy
MEDIA
Coordinated Media
Strategy
POLITICAL
Pressure a Reluctant and
Insouciant FERC
LEGAL
Pursue every available remedy
FERC Proceedings
• 13-Month Staff Investigation (FERC
Docket No. PA02-2)
• El Paso proceeding (FERC Docket No.
EL02-113)
• Market-Based Rates Stripped
Prospectively (EL03-77)
• “Gaming” and “Partnership”
Proceedings (EL03-180 et al.)
The Enron Tapes
•
•
•
•
Seized by the FBI in 2002
Enron can’t produce tapes to FERC
Legal Fight to Get Access to the Tapes
Rush Job to Review the Tapes in 10
Weeks
The Tapes Show Enron in the
Act of… MANIPULATING THE
MARKET:
• “So if you guys on the desk you want to do some Fat Boys or –
whatever, man, um, you know, take advantage of it.” Ex. SNO-165
• “. . one of the first things I do is look at day ahead congestion and if
it’s big numbers, I throw – try and throw a perpetual loop around.”
SNO-175
• “. . . I’m doing some importin’ with a Fat Boy on El Paso.” SNO-202
•
“So technically Western will see it, but it’s bouncing out, just in and
out of their system . . .A ricochet I guess is a good way of putting it.”
SNO-180
• “Fire up the old Death Star.” SNO-351
The Tapes Show Enron in the
Act of… RAKING IN HUGE PROFITS:
• “Holden’s over there scraping money into buckets… He’s pretty huge
today.” Ex. SNO-202
• “. . Not a single megawatt generated for 15,000 bucks! … How can
you beat a deal like that?” SNO-188
•
“DIANA: Yeah do you know how much overage, um, John Forney
gave me for the ricochet deals and all that stuff?. . . For actually just
the ricochet deal he gave me 200 grand.
PERSON 1: . . .Oh, so you gotta be way over a million now.
DIANA: I’m at 1.1 and haven’t finished doing May or June.” SNO214
The Tapes Show Enron in the
Act of… HIDING THE BALL:
• “Hey Ryan, this is Forney. I didn't want to call you on my
recorded line. Ah, can you give me a call on my cell
phone? . . And I‘ll fill you in and get you ready for
tonight. Some little bit different things going on so, um,
give me a call.” Ex. SNO-200
• “BRENDAN: You want me to call you right now?
MIKE: Yeah on a non-recorded line on your side too.
BRENDAN: I love these phone calls. All right.”
SNO-229
The Tapes Show Enron in the
Act of… WITHOLDING POWER:
“Bill: Ah, we want you guys to get a little creative.
Rich: OK.
Bill: And come up with a reason to go down.
Rich: OK
Bill: Anything you want to do over there? Any Rich: AhBill: Cleaning, anything like that?
Rich: Yeah, Yeah. There's some stuff we could be doing.”
SNO-525
The Tapes Show Enron in the
Act of… LYING TO
COUNTERPARTIES:
“GREG WOLFE: No, no, just tell ‘em . . . make it sound like we’re in a
competitive process. . . who have others been talking to or some shit
like that, you know.
SHARI STACK: [laughs]
GREG: Um, called lies, its all how well you can weave these lies
together, Shari. . . .
SHARI: I feel like I’m being corrupted now –
GREG: No, this is marketing.
SHARI: OK.
GREG: It’s not as bad as trading.
SHARI: Yeah, it’s true. Oh yeah, you’re right. OK, cool, I’ll – I’ll do it.”
The Tapes Show Enron in
the Act of… GOUGING:
“Well, man its like [expletive], if I can stick it to LA,
then [expletive] right…you also have to
understand there are certain people I will
gouge…OK, there’s two people I will gouge.
One’s LA and the other one’s Nevada.”
Lighting the Media Fuse
• Los Angeles Times, Seattle Times, and
trade press cover initial FERC filing
• Everett Herald
TV Reporters CAN Read
• Contacted by Vince Gonzales of CBS
News
• Public Records Request
• Story Aired June 1, 2004
…Setting off a nuclear chain
reaction…
• Electronic Gridlock
• Media beat a path to our door for weeks
• Dozens of national and local TV crews
• Even international press is interested
• Became a political cartoon topic
Quick Tour Through The
Documentary Evidence
• Beginning Even Before the Market Opened, Enron
Probed for Weaknesses
“Needs Work
• California gaming – we always say that we need to
increase this activity yet we never do. Need to work
more closely with cash, scheduling, and real time to
maximize opportunities.”
Belden’s 1998 Performance Review
Exploring the “Billion Dollar
Loophole”
• Perot Systems email advertises the “$1 billion
loophole”
“Sorry to bother you. Please treat this note as confidential. You did not
hear this from me!. …
The ISO has finally become aware of one of the $1B loop-holes in the
protocols (as I discussed at your conference). . . .[T]he $1B game
provides a very illegal "protection game" opportunity. If, for example,
"an ENRON," played the $1B game, the cost of energy would easily
go to 100+mills to all others. . . .”
The Billion Dollar Loophole, cont’d
• Enron Meets With Perot Systems, Identifies “Games”
The Billion Dollar Loophole, cont’d
• Enron Probes for Weaknesses as Market Opens
“Note for Tag# 155X
**This is a PHONY import we showed to the ISO, so we could sell to the Power
Exchange at the Day-Ahead price and show a balanced schedule to the ISO
(Import = Sale to PX).
We cut the LA schedule (Tim Belden called the ISO) and so now, we are effectively
"short our sale to the PX. Since the ISO will cover any imbalance (we refer to
this as the"imbalance market") at the Ex-Post price, LA agreed to this "game."
The ISO will call & tell us we're out of balance, so tell them we intend to correct the
imbalance in the "Hour-Ahead" market. In fact, we really intend to do NOTHING
in the Hour Ahead Market and let the ISO serve the imbalance at the Ex-Post
Price.
Our goal was to see if we could and take advantage of buying power at the Ex-Post
price (which has been much lower than the day-ahead price) and sell to the PX
at the Day-Ahead price.”
The Billion Dollar Loophole, cont’d
• Enron Uses “Game” Suggested by Perot
Systems to Overload Silver Peak Tie Line
• Overloaded 15 MW tie line to disrupt ISO
congestion management and pricing
• Silver Peak I: January 20, 1999 – Scheduled
1000 MW over 15 MW Silver Peak Line
• Silver Peak II: May 25, 1999 – Scheduled
2900 MW over 15 MW Silver Peak Line
Silver Peak Succeeds
Hour 18 on May 25, 1999
Actual Market Solution
60
Price ($/MWh)
50
1865
40
$15.1
2900
30
$5
20
10
0
19000
20000
21000
22000
23000
24000
25000
26000
27000
28000
29000
Quantity (MWh)
Supply (U)
Supply (U-2900)
Demand
CongestedPrice
UnconstrainedPrice
8 of 8
1999: Project Stanley
• Gamed the Alberta Power Pool
• Alberta system is a small version of
California ISO
• Result: “On average, trades appear to
have increased prices by over
$300/MWh”

Trader can seek to increase prices by
bidding up prices in the Pool or
withholding capacity

Profitable if the increase in Pool price
over marginal cost is greater than the
lost quantity



Price-quantity relationship for each
trader described by a “reaction function”
Reaction function is steep when supply
is highly inelastic or when there are few
other sellers
Profitability increased if a trader has
other infra-marginal capacity offered to
market
MWh
Exercising market power in a clearing pool
Reaction function
P’
P’
MC
Q’
Q
MW
Conclusions - Impact on Pool prices

1,000
Pool price
900
"But for bid" price
800
Based on a simplified initial
analysis, there was an impact
on Pool prices:
600

raised Pool revs by ~ $45
million in 22 hours on total
Pool volume

actual financial impact
would likely be under
$7million after accounting
for legislated hedges
500
400
300
200
100
Date and hour of transaction
Sep 02 HE16
Sep 02 HE15
Sep 02 HE14
Sep 02 HE13
Aug 23 HE15
Aug 23 HE12
Aug 20 HE17
Aug 20 HE16
Aug 20 HE15
Aug 05 HE15
Aug 05 HE14
Aug 05 HE13
Jul 12 HE13
Jun 18 HE16
Jun 18 HE15
Jun 18 HE12
Jun 17 HE15
Jun 17 HE13
Jun 07 HE16
Jun 07 HE14
Jun 01 HE14
0
Jun 01 HE13
Price ($/MWh)
700

Need to model legislated
hedge and price impacts more
precisely
Project Stanley, The Tapes
• Valerie Sabo: “This is on a taped line but don’t tell anyone we’re like
trying to screw with the Pool price.”
• Bill (Powerex) & Valerie (Enron):
– Valerie: “You are rigging the market are you?”
– Bill: “It’s a gong show”
– Valerie: “You good boy. I’m proud of you, man. You make us proud .”
• John (Enron): “I proposed that he give me this power for, like, one hour
today and let us pay him $200 plus the upside of the Pool price and, why don’t
you guys just think about why it’s a good idea, and I can’t spell it out
(laughing), for fear of jail, but he should do this deal with us.”
Institutionalized Corruption
2000: Enron’s Attack on the
Market
Number of Days with Evidence of Enron Schemes by Month
(Project Stanley, Silver Peak, Wheel Out, Non-Firm Export, Load Shift, Death Star,
Ricochet, Non-Firm as Firm, Get Shorty, Spread Play, Donkey Punch, Ping Pong)
30
25
20
15
10
5
0
May-98
Jan-99
May-99
Jun-99
Jul-99
Aug-99
Sep-99
Dec-99
Jan-00
Feb-00
Mar-00
Apr-00
May-00
Jun-00
Jul-00
Aug-00
Sep-00
Oct-00
Nov-00
Dec-00
Jan-01
Feb-01
Mar-01
Apr-01
May-01
Jun-01
Jul-01
Aug-01
Sep-01
Oct-01
Nov-01
Dec-01
Number of Scheme Days
35
Month
Legal Developments
State of California ex rel. Lockyer v. FERC, 383
F.3d 1006 (Sept. 9, 2004), reh’g pending.
– Market-based rates are not per se illegal
BUT
– “With FERC abdicating its regulatory responsibility,” “market was
subjected to artificial manipulation on a massive scale”
– There was a “patent failure” to comply with reporting requirements
– FERC abused its discretion by treating these violations as a “mere
punctilio”
– Market-based rates are illegal unless accompanied by effective means
to assure proper market function
Legal Developments, cont’d
– Bonneville Power Administration v. FERC,
9th Cir. No. 02-70262 (issued Sept. 6,
2005)
– Holds that FERC has no power to required
consumer-owned utilities to disgorge
profits
– Affirms that Sections 201(e) and (f) of the
FPA mean what they say
Legal Developments, cont’d
– A number of civil cases brought under California law
– Electric Cases Rejected on Filed Rate Doctrine
Grounds: PUD No. 1 of Snohomish County v. Dynegy
Power Marketing, Inc., 384 F.3d 756 (9th Cir. 2004),
cert. denied, 125 S.Ct. 2957 (2005).
– BUT, California Court refuses to reject civil suits on
natural gas price manipulation, and FERC refuses to
interfere See Sempra Petition for Declaratory Order,
FERC Docket No. EL05-130.
Legal Developments, cont’d
– PUD No. 1 of Snohomish County v. FERC,
9th Cir. Nos. 03-72511, 03-74208 (argued
12/8/04)
– Challenges FERC refusal to provide relief
on long-term contract with Morgan Stanley
Capitol Group, Inc.
– Decision expected any time
Legal Developments, cont’d
• California Spot Market
– FERC Docket No. EL00-95
– Appeals Pending in the 9th Circuit: CPUC v. FERC,
No. 01-71051 (staged briefing)
• Pacific Northwest Spot Market Proceeding
– FERC Docket No. EL01-10
– 9th Cir. Appeal: Port of Seattle v. FERC, No. 0374139 (Pet’rs briefs filed 1-14-05)
ENRON RESOURCES: BOOKS
•
•
•
•
•
•
Kurt Eichenwald, CONSPIRACY OF FOOLS (2005)
Bethany McLean & Peter Elkind, SMARTEST GUYS IN THE ROOM:
THE AMAZING RISE AND SCANDALOUS FALL OF ENRON (2003).
Lynn Brewer, HOUSE OF CARDS: CONFESSIONS OF AN ENRON
EXECUTIVE (available at virtualbookworm.com)
Mimi Swartz & Sherron Watkins, POWER FAILURE: THE INSIDE
STORY OF THE COLLAPSE OF ENRON
Robert Bryce, PIPE DREAMS: GREED, EGO AND THE DEATH OF
ENRON (foreword by Molly Ivins) (“If [George W.] Bush had been any
more simpatico to Enron, he could’ve been charged with a misdemeanor
under the State of Texas’s buggery laws.”)
Tim Barry, THE TOTALLY UNAUTHORIZED ENRON JOKE BOOK
(“Why do the bury Enron executives 20 feet underground? Because deep
down, they’re all really good people.”)
ENRON RESOURCES
• THE MOVIE: “Enron: The Smartest Guys in
the Room,” directed by Alex Gibney (2004)
• WEBSITES:
– www.snopud.com (“Our Fight Against Enron” tab)
– www.enrontapes.com
– www.llrx.com/features/enron.htm (legal document index)
– www.chron.com/cs/CDA/ssistory.mpl/business/2605425
(Houston Chronicle archive)
– news.findlaw.com/legalnews/lit/enron/index.html#documents
(Findlaw document index)