April 11, 2002
Enron Unit Headed by Army Secretary White Helped Manipulate California Market, Gouge Consumers,
Public Citizen Tells Congress
WASHINGTON, D.C. ? A division of Enron Corp. that was headed by Army Secretary Thomas White controlled as much as 25 percent of California?s wholesale electricity market during the state?s electricity crisis in 2001 and helped drive up consumer prices by trading power to other Enron divisions at astronomical prices, Public Citizen told Congress in testimony today.
“By selling power to itself at inflated prices, Enron helped skyrocket prices in California?s deregulated market,” said Wenonah Hauter, director of Public Citizen?s Critical Mass Energy and Environment Program. Hauter testified before the Senate Commerce Committee?s Subcommittee on Consumer Affairs, Foreign Commerce and Tourism.
White, named by President Bush to serve as secretary of the U.S. Army after serving as an Enron executive for 11 years, formerly headed Enron Energy Services, one of four Enron power marketing divisions. During the first three months of 2001 ? as California consumers suffered through rolling blackouts and skyrocketing prices ? White?s division traded more than 11 million megawatts of electricity in the California market, making nearly 98 percent of its trades to other Enron divisions at prices up to $2,500 a megawatt hour.
By trading such large volumes of electricity among various Enron units at such high prices, Enron was able to gouge California utilities and consumers, Hauter said. Engaging in so-called “transfer pricing” also allowed the company to overstate revenue and contribute to the accounting gimmickry that inflated its share price and eventually led to its downfall.
Hauter also noted that at the same time Enron was manipulating California?s deregulated electricity market, it paid the Washington, D.C., lobbying firm Quinn Gillespie more than half a million dollars in the first seven months of 2001 to lobby the White House on the “California electric crisis,” according to lobbying disclosure forms. One of the firm?s lobbyists, Ed Gillespie, former communications director at the Republican National Committee, was a top Bush campaign aide in the 2000 election. The Bush administration took Enron?s position, arguing strenuously against price controls in the California market and contending that higher prices were caused by a shortage of electricity brought on by environmental regulations.
Hauter said the deregulation of electricity markets and commodity trading allowed Enron to escape price regulations ? a key factor in the company?s meteoric, 1,750 percent increase in revenue over the past decade. Enron was an aggressive advocated of electricity deregulation, lobbying heavily for the transmission wheeling provisions of the Energy Policy Act of 1992 that allowed the company to gain a foothold into the wholesale market by registering as a power marketer.
“Enron?s business model was built entirely on the premise that it could make more money speculating on electricity contracts than it could by actually producing electricity at a power plant,” Hauter said. “Central to Enron?s strategy of turning electricity into a speculative commodity was removing government oversight of its trading practices and exploiting market deficiencies to allow it to manipulate prices and supply. So, when FERC (Federal Energy Regulatory Commission) finally fully re-regulated the California market last June, Enron?s business model was soon invalid and the company bankrupt.”
Enron was not alone, however, in gouging consumers. FERC has already levied fines and ordered refunds totaling tens of millions of dollars to be paid by other energy companies, such as Dynegy, Williams, Reliant and Mirant, for their role in manipulating prices in California. Enron has not yet been issued a refund order, though one is likely.
“Congress must mandate the Federal Energy Regulatory Commission to immediately investigate regulations of power marketers,” said Hauter. “Clearly, the current level of transparency allows companies to manipulate wholesale markets. Public Citizen urges Congress to make it clear to FERC that more scrutiny of power marketers must occur.”
To view Hauter?s testimony on the Web, click here.