Enron: The Smartest Guys in the Room Page #9

asked to Tom White,

'how is it that

we made the numbers? '

And his answer was,

'One word, California. '

The first clues to

Enron's new strategy

hit California with a jolt.

It started at Noon

rolling across the state.

Sacramento, San Francisco,

Beverly Hills,

Long Beach, San Diego

Twenty six thousand miles of

California power lines.

Enough to circle the Earth.

But for the second day

in a row,

not enough electricity

for America's largest state,

and the world's

sixth largest economy.

The first thing we heard about

this energy crisis is well,

our lights are going to go off

in the middle of winter

when we're using half

the electricity

we normally use

during the summer.

The Bay Area got hit

by not one,

but two rolling blackouts.

We only need

twenty eight thousand

to thirty thousand

megawatts in December.

We have an installed capacity

in California at the time

forty-five thousand megawatts.

Plenty o' power to meet

our electric demand.

Of course,

we had blackouts in December.

The people who control

California's power grid

say once again they're worried

about having to blackout

the Northern half of the state.

When the rolling blackouts

started hitting California

there was definitely a lot of

excitement in the air.

It was something new.

It was something that hadn't

been encountered before.

It was,

'how is this event going to

effect the price of power? '

Control's rotating attitudes

are being implemented.

I knew.

I knew that there was

illegality going on.

I could feel it.

I could smell it.

I could sense it.

And there was

no other explanation.

Because the numbers

just didn't add up.

We had enough power

in California.

It was never

about lack of supply.

When I ran for Governor

in 1998,

not one human being asked me

about electricity.

This thing kind of

came out of the woods,

as far as I was concerned.

And I was trying

in the early days

to learn what was happening;

how we could fix the problem.

California was

selected by Enron

as the prime place

to experiment

with this new concept of

deregulated electricity.

Reducing electricity cost

is only one benefit

from choice and competition.

In 1996, under pressure

from energy companies,

Governor Pete Wilson and

the California legislature

passed a bill allowing for

the deregulation of electricity.

I wasn't in

the Legislature in 1996,

but I can tell you that there

isn't a legislator alive

that can tell you

with any sophistication

how a deregulated electricity

market ought to work.

Not a one.

California's deregulated system

was a bizarre compromise

between legislators

and free-market advocates.

The rules were complicated

and hard to follow.

Inside Enron,

California's system was

little more than a joke.

And once in place,

Enron made sure that the joke

would be on California.

I remember the conversation

I had with Ken.

At the end of it he says 'Well,

Dave, old buddy,

let me just tell you.

It doesn't matter really to us

what kooky rules you

Californians put in place.

I got a bunch of really

smart people down here

who will figure out how to

make money anyhow. '

One of the smartest guys

at Enron was Tim Belden,

who ran the west

coast trading desk.

Tim Belden was

a fervent believer

in the idea of free markets

and as such he spent hours

poring over the new rules

for the deregulation of

California's energy industry,

looking for loopholes that Enron

could exploit to make money.

He found plenty.

After the bankruptcy,

a confidential memo surfaced

revealing the names of

Belden's strategies to game

the California market

Wheel Out, Get Shorty, Fat Boy

Recently, audio tapes of the

Enron traders were discovered.

What do you want to

call this project?

Probably have a catchy

name for that.

How about, you know,

something friendly

like 'Death Star'?

The tapes revealed

Enron's contempt

for any values except one,

making money.

Hey John, it's Tim.

Regulatory's all

in a big concern

about is we're wheeling power

out of California.

He just steals money

from California

to the tune of a million

Can you rephrase that?

Okay, he arbitrages

the California market

to the tune of a million

bucks or two a day.

An arbitrage opportunity

has been defined to me

as any opportunity to

make abnormal profits.

So an abnormal profit would be

returns above

and beyond the norm.

I was told that a good trader

is a creative trader.

And a creative

trader is a trader

that can find

arbitrage opportunities.

One of those opportunities

was called Ricochet.

I'll see you guys.

I'm takin' mine to the desert.

In the midst of energy

shortages Enron's traders

started to export power

out of the state.

When prices soared,

they brought it back in.

So we f***in' export

like a motherf***er.

Getting rich?

Trying to.

Traders would stay after

a twelve hour shift

and pour over maps of

the western energy grid.

What are the permutations

and combinations of ways to

move power around the west.

And I think that's something

that Enron knew better

than any other Energy marketer

in the country, period.

We know all of

the California imports.

We know all of

the California load.

We're getting' pretty spoiled

with all this money.

You said you were

getting a little scared

we're making a little too much.

And I tend to agree with you.

These are two traders,

t- r-a-d-e-r-s.

This is what they say.

'What we did was overbook

the transmission line

we had the rights on and said

to California Utilities,

'If you want to use the line,

pay us. '

By the time they agreed

to meet our price,

rolling blackouts

had already hit California

and the price for electricity

went through the roof. '

Did you have any knowledge

that this was happening?

The only thing that

I'm aware of Senator,

is there was a,

there was

a difference of opinion

on the rules of the

independent system operator.

It was just set up,

the rules weren't quite clear.

We have traders here

from Enron

who were saying

they did something wrong.

But you don't see

anything wrong.

I have one last question

and then I am done.

Traders soon discovered that

by shutting down power plants,

they could create

artificial shortages

that would push prices

even higher.

Hey, this is David up at Enron.

There's not much demand

for power at all here.

If we shut it down,

can you bring it back up

in 3 or 4 hours?

Oh, yeah.

Why don't you just go ahead

and shut her down then,

if that's ok?

Okay.

When you see two

or three energy companies

with 30, 35 percent of

their entire capacity down

for maintenance on a single day

and as a result

the price of electricity is

skyrocketing three or

four hundred percent

and then a week later

someone else does it up

in Northern California

you begin to believe something's

not smelling right here.

We want you guys to get

a little creative.

Okay.

And come up with

a reason to go down.

Rate this script:0.0 / 0 votes