The Enron Debacle:A Glimpse Into Fraudulent Energy Trading

• Author: James M. Day
• Position: Professor Washington College of Law
• Pages: 12

Professor Day teaches Oil & Gas Law, the Regulation of Energy, and International Petroleum Transactions at the Washington College of Law and practiced in the fields for over thirty-seven years. His third book, Oilmen & Other Scoundrels, was published in June 2004. It includes a chapter "Enronians & Other Scoundrels," from which this chapter is taken.

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THE COLLAPSE OF ENRON revealed one of the worst corporate frauds in American history. Enron's MBAs, CPAs, lawyers, and other scoundrels were headed by Kenneth L. Lay, a Ph.D. economist who claimed he did not know what was going on. The chicanery ran the gamut from insider trading to defrauding shareholders and creditors by cooking the books, corporate officials and employees defrauding the company, and the manipulation of electric and natural gas prices. This article provides a glimpse into the trading subterfuges that raised every American's electric and gas bills. Enron was not alone in the sham trading.¹ The combined illicit actions of Enron and other sham traders raised electric and natural gas prices to dizzying heights in California and around the nation, partly because of California's grossly flawed energy regulatory system that invited fraud. The Federal Energy Regulatory Commission (FERC), Commodity Futures Trading Commission (CFTC) and state regulatory authorities, particularly the California Energy Commission and the California Public Utilities Commission (CPUC), were no match for the sophisticated energy companies. Representative Edward J. Markey, Massachusetts Democrat, summed it up: "We're in a supersonic-speed era of electronic trading with a horse-andbuggy system to protect consumers."

Patrick Wood III, former chairman of the Public Utility Commission of Texas and FERC chairman since September 2001, stated, "Enron's trading strategies involved deliberate misrepresentations" and Enron "exploited the flaws in California's market design." Mr. Wood also admitted that FERC has "a long way to go" in matching the sophistication of the energy companies it regulates. The issue was over-simplified by S. David Freeman, Chairman of the California Consumer Power & Conservation Financing Authority: "They can do all these sham transactions because no one's ever seen a kilowatt hour." In a way, however, Mr. Freemen is correct. Lawyers, accountants, and government regulatory officials generally lack the technological expertise not only in trading, but also in the electronic communication involved in the world of energy and its relation to electricity, oil, and natural gas. Justice William O. Douglas' dissent in Phillips Petroleum Co. v. Wisconsin admitted that the "[r]egulation of the business of producing and gathering natural gas involves considerations of which we know little and are not competent to deal."² Additionally, agencies lack the manpower to monitor trading and in turn react to protect the market, investors, and consumers.

The California Energy Crisis

UNDERSTANDING THE MARKETING AND TRADING of natural gas and electricity is complex. Like most technical regulatory issues, the lawyer must work hand-in-hand with engineers and accountants whom are qualified in that particular field. If you wanted to compute the rampant fraud and collusion that occurred during California's 2000-2001 energy crisis, it would require scores of paralegals and computer whizzes experienced in trading, and an amendment to the old adage to read, "Figures never lie." In 2002, FERC obtained admissions from over a half dozen major marketers stating they provided false information to the trade press for the purpose of manipulating prices. The...