October 17, 2002
California Energy: The Courts Roll Forward

The people who said that the California energy crisis was due not to market manipulation but just to excessive pro-Green government policies seem to be very quiet these days...


Enron Trader Will Plead Guilty in California Power Case: SAN FRANCISCO (AP) -- A former top energy trader, considered the mastermind of Enron Corp.'s scheme to drive up California's energy prices, pleaded guilty Thursday to a federal conspiracy charge. Timothy Belden, the former head of trading in Enron's Portland, Ore., office, admitted to one count of conspiracy to commit wire fraud and promised to cooperate with state and federal prosecutors as well as any non-criminal effort to investigate the energy industry.``I did it because I was trying to maximize profit for Enron,'' Belden told U.S. District Judge Martin Jenkins. His sentencing was set for April 17, 2003.

U.S. Attorney Kevin Ryan said the guilty plea shows the rolling blackouts and huge price increases that rocked California last year were the result of illegal conduct.``These charges answer the question that has long troubled California consumers: whether the energy crisis was spurred in part by criminal activity. The answer is a resounding yes,'' Ryan said. Belden will help federal prosecutors in their case against higher ranking officials at Houston-based Enron, the energy giant whose collapse last year has roiled the energy industry, said Matthew Jacobs, the federal prosecutor handling the case.

Belden's attorney, Cristina Arguedas, said his client was following Enron's instructions as he handled his trades and will ``make amends for that by cooperating with the government.'' Belden, 35, who now lives in Houston, was released on $500,000 bail. He faces a maximum five-year prison sentence.``Tim Belden is not a high-level executive who was lining his pockets out of greed,'' Arguedas said. ``He did his job. Tim was always honest with others at Enron about his actions, and was never disciplined by Enron. ``He now realizes that what he was taught to do was wrong,'' she continued. ``He's going to make amends as well as he can by cooperating fully with the government and telling the complete truth about Enron's actions in the California energy trading market.''

Belden was ``the mastermind behind the strategies described'' in memos that spelled out how Enron manipulated the California market, said Chris Schreiber, an attorney working with California's Senate Select Committee to Investigate Price Manipulation of the Wholesale Energy Market. ``He's been on our radar for a long time,'' Schreiber added. Belden, the first person to be charged in the manipulation of Western energy markets, is the third Enron figure to be prosecuted. Andrew Fastow, Enron's former chief financial officer, is accused of devising the company's complex web of off-the-books partnerships used to hide some $1 billion in debt from shareholders and federal regulators and is charged with money laundering, fraud and conspiracy. A once-trusted Fastow aide, Michael Kopper, pleaded guilty in August to money laundering and conspiracy to commit wire fraud.

For months, federal investigators have worked with a California Senate panel investigating the state's energy crisis about evidence uncovered in its long-running investigation of market manipulation. A federal grand jury in San Francisco has been weighing criminal charges related to the energy crisis.Internal company memos, first released in May, describe how Enron took power out of California at a time of rolling blackouts and shortages and sold it out of state to elude price caps, according to documents obtained by investigators. Enron bought California power at cheap, capped prices, routed it outside the state, and then sold it back into California at vastly inflated prices, authorities said. The so-called ``ricochet'' deals were designed to circumvent the California-only price caps on wholesale energy. ``The conspiracy charged in this information allowed Enron to exploit and intensify the California energy crisis and prey on energy consumers at their most vulnerable moment,'' said Deputy Attorney General Larry Thompson, head of the Justice Department's Corporate Fraud Task Force, as he announced the plea deal in Washington, D.C., on Thursday. Thompson said revenues from Belden's trading unit rose from $50 million in 1999 to $500 million in 2000 to $800 million in 2001.The ``ricochet'' strategy ended when the Federal Energy Regulatory Commission implemented regional price caps last year.

State Sen. Joe Dunn, a Democrat who chairs the select committee on price manipulation, called Belden's plea ``the first of many dominoes that will fall, not only at Enron, but within other energy companies within the wholesale energy market. Tim Belden not only knows how Enron played, but how others played as well.'' Belden worked for UBS Warburg, which bought Enron's power trading operations early this year, but left the company in September, company spokesman David Walker said.

Posted by DeLong at October 17, 2002 03:27 PM | Trackback

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I'd say that California suffered energy-wise from both the Pleistocene Liberation Organizaation (my nickname for radical leftist greenies) and market manipulation. Ecoluddism = fewer power sources, and as any Beanie Baby collector knows, rarity = higher prices. Determining who played the greater role - PLO, Enron officials, Califrnia state officials - is another matter entirely.

If CA energy production over the past decade or so had increased proportionally with the population, would the Enron price-fixing scandal have occurred? If so, would it have impacted the energy market as greatly as it did?

Posted by: Alan K. Henderson on October 17, 2002 07:21 PM

If more power sources had existed, the crisis may not have happened, but that capacity would have been excess -- its only purpose would to reduce the market power of the generating companies, not to provide power that was needed. One must ask is such a use of investment dollars is really optimal?

Posted by: chris bond on October 17, 2002 08:14 PM

Chris -- precisely. It would have made them harder for them to rig the game, but there was no capacity problem. And, since there was no capacity problem one wonders what the incentive for investment would have been for companies to build those power plants.

Give it up people, jeez.

Posted by: Atrios on October 18, 2002 03:46 AM

One count of conspiracy to commit wire fraud caused the CA energy price crisis. Please come back to reality. Conspiracy is a tough charge to defend against. It's cheaper to plead guilty.

I have yet to see what conspiracy he was part of. One count means that the trader in one instance picked up the phone and participated in a fraud. There must have been Thousands of trades over the period in question.

Clearly rules were broken. Bidding non-firm power as firm is a big no-no. Certifying ancillary services when you can not provide them is wrong and undermines system reliability.

There is enough blame to go around. The market was designed poorly, supervised poorly, regulated poorly, energy firms had an incentive to arbitrage the control areas to the detriment of system performance and consumers have poor price signals.

Posted by: Jon A. on October 18, 2002 04:59 AM

Alan,

May one infer from your post that the Ten Commandments cause sin? Just wondering.

Posted by: Tim on October 18, 2002 05:37 AM

Never, ever will we hear the words - 'I was wrong, others were right'.

In the increasinbgly shrill name calling that passes for public debate, there is no room to be just 'wrong'. There are no absolutes, anything can be spun into anything else.

I am just tired of it all, whether it is the California energy crisis or the Bush Tax cuts or Torricelli's 'ethical lapses' or kelly's name calling of Gore.

Posted by: Suresh Krishnamoorthy on October 18, 2002 08:51 AM

Well said Suresh!

Sam Waksal's comments were actually refreshing. Humility is a virtue that seems to be lost.

Posted by: Dan Murphy on October 18, 2002 11:00 AM

Belden pled guilty to one count of conspiracy with the stipulation that he will cooperate with investigators. Sammy Gravano murdered at least 19 people but did virtually no time because he testified against Gotti. The feds have a long history of letting small fry off the hook to catch bigger fish.

Posted by: News Abuse on October 18, 2002 11:48 AM

Tim,

My question was aimed not at what makes people want to do bad things but at what situations make certain crimes difficult and at what situations would-be criminals seek to exploit.

Let me try rephrasing it: If CA energy production over the past decade or so *had existed within the framework of a free market* and had increased proportionally with the population, *would there have been opportunity and motive* for the Enron price-fixing scandal to take place? Four points:

1. Competitive markets make price collusion reeeal difficult, since such collusion requires control over a huge percentage of that market's producers.

2. Anyone who wants to engage in price collusion will look for less competitive markets such as intesely regulated industries (such as power utilities) or nationalized industries (like the petroleum industry in most if not all OPEC nations). If you want control over a huge chunk of a market, the best road to take is to find one under the thumb of government and lobby your way to theft.

3. CA is a tightly regulated market, and therefore offers the potential opportunity for price collusion. However, the mark has to have a motive for wanting to do business with the con man. In this case, the con man has something the mark is sorely lacking - power production. No shortage = Enron crook wannabes look for someone more vulberable to victimize.

4. What if CA were a tightly regulated market with many suppliers, and Enron officials could still find some opportunity to scam the utilities - and could get away with it? More suppliers = more of the product available at non-racketeered prices = less economic damage to the market as a whole. (This, of course, assumes that CA does not force all its utilities to sell at the way-above-market prices that Enron is charging.)

Posted by: Alan K. Henderson on October 19, 2002 12:35 AM
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