Search the Internet          Tips  Sites: Finance, Investment

Enron lawyers warned trading practices may be illegal

Enron Corp's own lawyers said on Wednesday they had warned the company that some of its energy-trading practices might be illegal, and a key senator called for a special counsel to investigate the tactics as well as those of other companies.

Sen Byron Dorgan, chairman of the Senate Commerce subcommittee on consumer affairs, urged the Bush administration to appoint a special counsel to probe West Coast energy pricing by Enron and other companies, saying they had cheated consumers out of billions of dollars.

Documents cited at a hearing of Dorgan's subcommittee and later distributed at a Senate Energy Committee hearing linked at least two other firms with questionable trading practices that Enron used to maximize its profits during the California energy crisis.

Dorgan, a North Dakota Democrat, also said his subcommittee would call Army Secretary Thomas White, a former Enron executive, to testify about what he knew about the company's behaviour.

Enron's electricity trading practices, carrying nicknames such as "Death Star" and "Get Shorty", were "disgusting corporate behaviour," Dorgan declared at a hearing on alleged inflation of energy prices by energy traders while California was crippled by energy shortages in late 2000 and early 2001.

Enron lawyers, whose recently released memos described the trading shenanigans, testified that they had warned Enron back in December 2000 that some of these practices were deceptive.

Stephen Hall, who was an outside counsel to Enron, said he advised the company that some of the practices might violate California state laws as well as the rules of the Independent System Operator, which runs the state power grid.

"We did tell them to stop these practices," Hall said. "I understood they were stopped."

Documents detailing some of the Enron staff meetings in 2000 to discuss the strategies suggested pointing the finger at other energy firms that engaged in similar tactics, and named Coral Energy, a trading subsidiary of Royal Dutch/Shell Group and Powerex Corp, a unit of Canada's BC Hydro.

Coral dismissed the allegations as "hearsay," and Powerex denied any wrongdoing.

Dorgan said that in addition to the ongoing Justice Department probe of Enron Corp, a special counsel was needed to focus on energy pricing.

"I expect we will want to see a special counsel of some type investigate West Coast pricing, and not just this company, but West Coast pricing of this company and others," he said.

"This was a corporate strategy to cheat West Coast consumers out of billions of dollars," the senator said.

A Justice Department spokesman refused comment on Dorgan's call for a special counsel, noting simply the department's probe of Enron had started in January, a month after Enron filed for bankruptcy.

No one from Enron has been charged, although the company's auditor Andersen is on trial for obstructing federal investigators.

In California, Gov Gray Davis called on the Federal Energy Regulatory Commission to expand its probe of Enron's role in the power crisis to look at other generators -- in particular Dynegy and Reliant, who have admitted to bogus power trades.

Wholesale power prices rose more than ten-fold during California's crisis, costing the state billions of dollars in extra charges and tipping a major utility into bankruptcy.

The Houston-based Enron, which once ranked as the world's largest energy trader, declared bankruptcy last December after its stock collapsed amid allegations that Enron accountants hid corporate debt to boost overall profits.

Elections this November and Enron's status as a major backer of President George W Bush's 2000 campaign have injected a strong undercurrent of politics into the task of assigning blame for California's crisis and Enron's collapse.

Dorgan said he would call Army Secretary White to testify sometime in the next two weeks "about what he knew, and what his involvement was" in Enron's trading strategies.

White said, through a spokesman, that he would be happy to testify if called.

The former division where White belonged, Enron Energy Services, was mentioned in one of the lawyers' memos describing the company's trading ploys. White, who was vice chairman there, said last week he had no knowledge of the strategies.

Richard Sanders, an Enron vice president and lawyer, said he met in June 2001 with then-Enron chief executive Jeffrey Skilling to inform him of the trading strategies, which were devised by employees in the Portland office.

"He was surprised at the nicknames," Sanders said.

The strategies included such techniques as moving wholesale electricity briefly outside California borders to evade the state's price cap, then reselling it back inside the state. Enron traders also received payment premiums for supplying power after creating a phantom surge in demand.

California's crisis abated after FERC, under a new chairman, Patrick Wood, imposed a cap on West Coast wholesale electricity prices last year. But Wood told the committee that FERC had not decided whether to keep the cap when it expires on Sept 30, noting it was just one tool for regulating markets.

Dorgan said there also needed to be an investigation of why FERC, which oversees interstate electricity markets, did little about California's plight until the price cap was imposed.

Wood said the agency was aggressively investigating West Coast electricity pricing practices.

"Although the Enron memos clearly are very serious, we cannot and should not indict either a single company or an entire industry based on three memos," Wood said. "Once the facts are clear, FERC will take appropriate actions."

California politicians have demanded that FERC take a new look at California's request for nearly $9 billion in refunds from dozens of energy firms, including Enron.

ALSO READ:
The Enron Saga
The Rediff Budget Special
Money

Tell us what you think of this report