Memo Shows Enron Division Headed by Army Secretary Thomas White Manipulated California Electricity Market
May 8, 2002
Memo Shows Enron Division Headed by Army Secretary Thomas White Manipulated California Electricity Market
Public Citizen Calls on White to Resign, Justice Department to Launch Criminal Probe
WASHINGTON, D.C. ? In light of a memo indicating that Army Secretary Thomas White?s former Enron division was involved in market manipulation and price-gouging during the California electricity crisis, Public Citizen today called for White to resign immediately and the Justice Department to initiate a criminal probe.
The internal company memo describes how White?s division, Enron Energy Services, lied to California officials, enabling the company to charge prices far higher than should have been allowed. As a direct result of his division?s fraud, White is a multimillionaire and California consumers still are paying far too much for their electricity.
The Dec. 6, 2000, memo from Enron attorneys describes how Enron Energy Services deliberately sought from the state?s power broker far more electricity capacity than it needed. By doing so, Enron Energy Services, which was colluding with other Enron divisions, deceived the state into thinking that transmission capacity was full, enabling Enron to charge prices far higher than if capacity was not full.
That and other memos, released this week as a result of an ongoing investigation by the Federal Energy Regulatory Commission (FERC), confirm charges Public Citizen has made for more than a year in reports and in testimony before Congress. The memos are available on the FERC Web site.
“These documents show manipulation and deception so extreme that it borders on maniacal,” said Public Citizen President Joan Claybrook. “Thomas White was in charge when California was being gouged by Enron. If he directed this activity, he shouldn?t be head of the Army. And if this was going on under his nose and he didn?t know, he?s a terrible manager and also shouldn?t be head of the Army. He should resign immediately.”
When the memos are combined with data available in Power Marketer Quarterly Reports that Enron filed with FERC, it is clear that White?s division was colluding with Enron?s power marketing divisions to fool state and federal regulators. In the first three months of 2001 ? the height of skyrocketing prices and rolling blackouts ? White?s division traded more than 11 million megawatts of electricity in the California market alone, making nearly 98 percent of these trades with other Enron divisions at astronomical prices up to $2,500 a megawatt hour (the standard price at the time was less than $340 a megawatt hour).
By selling power to itself at inflated prices, Enron helped cause prices to skyrocket in California?s deregulated market. Economists refer to this manipulation as transfer pricing.
By trading such large volumes of electricity at such high prices with other Enron divisions, White?s division was able to accomplish two things. First, it allowed the company to charge California utilities and consumers astronomical prices, thereby contributing to the Western electricity crisis. Federal and state regulators found it very difficult to trace Enron?s trades because the company had four separate divisions interacting in the wholesale and retail markets, and with each other.
Second, engaging in transfer pricing allowed these various Enron divisions to overstate revenue and contribute to the accounting gimmickry that inflated the company?s share price.
It is important to note that at the same time that Enron Energy Services was manipulating the California energy market, Enron paid the Washington, D.C., lobbying firm Quinn Gillespie & Associates more than half a million dollars in the first seven months of 2001 to lobby the “Executive Office of the President” on the “California electric crisis” according to the lobbying disclosure report filed with Congress on April 10, 2001.
The firm?s co-founder, Ed Gillespie, was the former communications director at the Republican National Committee and a top Bush campaign advisor, and he ran the U.S. Department of Commerce for the first 30 days of the Bush presidency. Enron was lobbying against bipartisan efforts to re-regulate the Western electricity market by imposing price controls. As Enron was spending this money lobbying Congress and the White House against price controls, the Bush administration aggressively took Enron?s position. On numerous occasions, President Bush, Vice President Dick Cheney, their various spokespeople and Cabinet officials took an aggressive stance against price controls.
White served as vice chairman of Enron Energy Services from 1998 until the Senate confirmed him as Army secretary in May 2001. When Bush nominated White for the post, he cited White?s 11-year experience as a top Enron executive as a primary qualification. White earned tens of millions of dollars in salary, incentive-based bonuses and stock options during his Enron career. He earned $5.5 million in salary and cash bonus his last year alone.
As vice chairman, White was in charge of running day-to-day operations, including managing and signing retail energy contracts. During White?s tenure, Enron Energy Services became one of Enron?s fastest growing subsidiaries by using questionable accounting practices, with revenues climbing 330 percent from 1998 to 2000 (from $1 billion in 1998 to more than $4.6 billion in 2000). Using “mark-to-market” bookkeeping, Enron booked much of the revenue for long-term retail contracts up front ? providing the company with inflated revenues.
White?s former employees have publicly stated that he knew of the fraudulent accounting employed by the division. Glenn Dickson, an Enron Energy Services director laid off in December 2001, has been quoted in media reports as saying that both White and Vice Chairman Lou Pai “are definitely responsible for the fact that [Enron Energy Services] sold huge contracts with little thought as to how we were going to manage the risk or deliver the service.”
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