Enron Deals Were a 'Sham,' Regulator Testifies.

By Tom Detzel, The Oregonian, Portland, Ore. Knight Ridder/Tribune Business News

Apr. 12--WASHINGTON -- Enron used "sham" energy deals with Portland General Electric and its other subsidiaries to drive up prices during the West Coast electricity crisis, a top California regulator told Congress on Thursday.

"I believe this was truly a Ponzi scheme," said Loretta Lynch, president of the California Public Utilities Commission as she accused Enron of "selling the same megawatts back and forth to itself, causing the price to rise with each sale."

Because those prices affected market indexes and were reported on EnronOnline, the company's pioneering Internet trading site, they helped drive the crisis that gripped the West during 2000 and 2001, she said.

NTEnron and PGE, a subsidiary of the Houston energy company, strenuously denied participating in sham trades or transactions designed to artificially drive up the market prices or their revenues.

"These claims have been investigated over and over and over again by a host of state and federal agencies, and not once has any evidence turned up of what she is arguing today," said Enron spokesman Eric Thode.

"I have no idea what she means by sham transactions or a Ponzi scheme," said Pamela Lesh, PGE's vice president for public and regulatory affairs. "We transacted with Enron just as we transacted with everyone else in the market."

Lynch joined a panel of witnesses stacked with Enron critics as a Senate Commerce subcommittee launched an inquiry into whether the bankrupt trading firm manipulated West Coast wholesale power prices during the crisis.

Enron's bankruptcy and disclosures that company executives bent accounting rules to cover business losses has reignited the suspicions of West Coast Democrats such as Sen. Ron Wyden of Oregon and Barbara Boxer of California.

Both suggested Thursday that Enron's dire financial situation, undisclosed when rolling blackouts hit California and wholesale prices set records, could have provided a strong motive for Enron to manipulate markets in the West.

The subcommittee chairman, Sen. Byron Dorgan, D-N.D., said the issue was whether the same "climate of corruption" that led Enron executives to hide $1 billion in debts from shareholders extended to its energy trading activities.

"There's other evidence and other allegations that this corporation did to consumers on the West Coast what it was doing inside the parent company -- that is, they cooked the books," Dorgan said.

But Sen. Peter Fitzgerald, an Illinois Republican and strong critic of Enron, said he was "skeptical" that the company had any impact on California's crisis.

Fitzgerald said the company was nothing more than a "giant pyramid scheme."

Aggressive tactics Lynch said other energy sellers also sought to push up prices during the energy crisis, which began in May 2000 and didn't subside until after the Federal Energy Regulatory Commission instituted price controls in June.

But Lynch and other witnesses said Enron was the leader and the most aggressive in lobbying for freedom to do business without state or federal regulatory oversight, whether from Congress, the administration or the energy regulatory panel.

During the last quarter of 2000, Lynch said, five Enron subsidiaries traded nearly 12 million megawatt hours of electricity among themselves at prices that reached $3,322 per megawatt hour. The total included 855,741 megawatt hours of trades with PGE, according to a chart she provided outlining the deals.

"Just the month before, the price was $250 a megawatt hour," Lynch said. "These companies had the same employees. They were essentially trading with themselves, and those trades ratcheted up the price in the California market."

Thirty percent of Enron's trades that quarter were with affiliates, she said.

Lynch said the trades not only helped push up prices, but falsely improved Enron's financial picture because of accounting practices the company used that allowed it to book the full value of the trades, not just the profit earned.

In written testimony, Portland energy consultant Robert McCullough said the detailed trading data necessary to prove that Enron manipulated West Coast prices are not available to him and the public. But he told lawmakers other evidence suggested Enron was dominant enough to predict the market upswing and benefit from it.

McCullough said Enron was the only energy trader he could find that made money from its hedging operations in the second quarter of 2000. Hedges are financial transactions utilities and other companies enter into as protection from large swings in the price of power or other commodities. As such, Enron's profits suggest company accurately foretold the market rise.

Furthermore, McCullough said it was revealing that Enron offered two different estimates for the potential profitability of Coyote Springs 2, a PGE gas turbine plant it was trying to sell to another Northwest utility in 2000.

The company told Oregon regulators in August that the plant would earn a 15 percent rate of return. But internal documents from one of Enron's off-the-books partnerships involved in the $33 million sale estimated a 22 percent return.

McCullough also said Enron had strong financial motives to manipulate the Western market based on what now is known about the web of complex financial dealings that unraveled just before the company's bankruptcy last fall.

"This was a company with a tremendous need to succeed," McCullough said, comparing Enron to a gambler that kept raising the stakes. "They had more than doubled down -- they had financial schemes that were going to explode in crisis in 2003."

Enron had captured nearly 30 percent of the wholesale power market at four Western trading hubs by the fourth quarter of 2000, McCullough said. That was just before the high prices triggered rolling blackouts in California.

In February, the Federal Energy Regulatory Commission opened an investigation into Enron's role in Western power markets after McCullough said forward power prices dropped 30 percent immediately after Enron's bankruptcy.

But Lynch and Joseph Dunn, a Democratic state senator from California who's on a committee investigating Enron and other energy companies, said there's little evidence that the regulatory commission is aggressively pursuing the investigation.

Kregg Arntson, a PGE spokesman, said Lynch's assertion that Enron's energy affiliates have the same management is wrong. "Our trading operation is separately managed with its own leadership," he said.

Lesh, the PGE vice president, said all the company's trades with other Enron affiliates are based on market index prices.

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(c) 2002, The Oregonian, Portland, Ore. Distributed by Knight Ridder/Tribune Business News.

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