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Presented to: 2005 APPA Legal Seminar San Antonio, TX November 16, 2005 Presented by:

DAVID V. GOLIATH: SNOHOMISH COUNTY PUD’S ROLE IN BRINGING DOWN ENRON -OR- Our 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

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Presented to: 2005 APPA Legal Seminar San Antonio, TX November 16, 2005 Presented by:

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  1. DAVID V. GOLIATH: SNOHOMISH COUNTY PUD’S ROLE IN BRINGING DOWN ENRON-OR-Our 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

  2. 2000-01 Western Power Crisis

  3. The Crisis, cont’d

  4. …but some still denied it…

  5. 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

  6. 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

  7. But there were some advantages…

  8. 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

  9. December 2, 2001: Enron Files Bankruptcy

  10. 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.))

  11. Snohomish’s Defense Strategy

  12. 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.)

  13. 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

  14. 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

  15. 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.” SNO-214

  16. 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

  17. 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:    OKBill:      Anything you want to do over there? Any - Rich:    Ah- Bill:      Cleaning, anything like that?Rich:    Yeah, Yeah. There's some stuff we could be doing.” SNO-525

  18. 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.”

  19. 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.”

  20. Lighting the Media Fuse • Los Angeles Times,Seattle Times, and trade press cover initial FERC filing • Everett Herald

  21. TV Reporters CAN Read • Contacted by Vince Gonzales of CBS News • Public Records Request • Story Aired June 1, 2004

  22. …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

  23. “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 Beginning Even Before the Market Opened, Enron Probed for Weaknesses Quick Tour Through The Documentary Evidence

  24. 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. . . .”

  25. The Billion Dollar Loophole, cont’d • Enron Meets With Perot Systems, Identifies “Games”

  26. 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.”

  27. 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

  28. Silver Peak Succeeds

  29. 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”

  30. Exercising market power in a clearing pool • 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 Reaction function P’ P’ MC Q’ Q MW

  31. Conclusions - Impact on Pool prices • Based on a simplified initial analysis, there was an impact on Pool prices: • 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 • Need to model legislated hedge and price impacts more precisely

  32. 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.”

  33. Institutionalized Corruption

  34. 2000: Enron’s Attack on the Market

  35. 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

  36. 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

  37. 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.

  38. 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

  39. 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. 03-74139 (Pet’rs briefs filed 1-14-05)

  40. 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.”)

  41. 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)

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