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FERC Staff Wants More Time to Probe Enron Trader Tapes

Saying FERC staff has only "scratched the surface of the amount of material in hand," a FERC staff member last week used prepared testimony to recommend further review of Enron Power Marketing Inc. (EPMI) energy trader audio tapes of telephone conversations [EL03-180, et al.].

The Commission on Tuesday posted on its website the filed testimony of several FERC staff members related to the audio tapes. Since early 2002 FERC has been examining possible manipulation of California's energy markets in 2000-2001 and Enron's relationships and practices in the West during that time frame.

The filings numbering about 4,000 pages provide a detailed report on conversations pertaining to manipulative tactics such as "ricochet," "Death Star," "load shift" and selling nonfirm as firm capacity, tactics which were identified in the Commission's initial report on Enron. A FERC spokesman, however, said "the jury is still out as to what degree [the published reviews] provide anything new." The publication of material from the phone transcripts may simply "provide in a callous voice what we have known all along."

FERC previously found that Enron violated its market-based rate authority by failing to notify the Commission of its expanded de facto control of El Paso Electric Co.'s generation assets and load requirements. The Commission further recognized that the El Paso Electric-Enron relationship was just one of several such arrangements with generators in the California and Western markets. FERC directed a Commission administrative law judge (ALJ) and Commission trial staff to review the totality of evidence from various consolidated dockets and determine an appropriate remedy.

FERC staff has been taking a closer look at EPMI audio tapes as part of the proceedings. In preparation for his testimony, FERC Staff Member Patrick Crowley, among other things, listened to and assessed over 300 hours of EPMI audio tapes, perused over 300 boxes of internal EPMI memoranda in the Enron warehouse in Houston and over 200 boxes of internal EPMI memoranda at FERC headquarters in Washington, DC. He also examined handwritten trader daily diaries and EPMI's various accounting databases (EnPower, CAPS, Inc Sheets and Reconciliations Sheets).

The EPMI audio tapes are magnetic recording tapes known as digital data storage (DDS) that were used on digital audio tape (DAT) recorders at Enron's trading offices in Houston and Portland, OR. DAT is used only for audio recording, while DDS tape is used for both audio and data storage.

Crowley said FERC trial staff investigated 129 DDS audio tapes, excluding those mentioned by the Snohomish (WA) PUD in its Jan. 31, 2005 supplemental testimony. "These 129 DDS tapes represent approximately 47,730 hours of real-time audio recordings," said Crowley. These tapes were recorded in both the Houston and the Portland Enron offices. He said 74 recoverable tapes (i.e., the sound was audible) came from Houston and 55 recoverable tapes came from Portland. The 55 Portland tapes constitute approximately 23,971 hours of recorded audio material.

The 74 Houston tapes (27,380 hours) recorded nonwestern energy trades and nonenergy commodity trades, which are not the subject of the activities set for investigation by FERC, and the trial staff devoted no staff resources to reviewing these tapes.

The Portland office tapes recorded all the western energy market energy trades covering marketing transactions in Arizona, California, Colorado, Idaho, Montana, Nevada, New Mexico, Oregon, Washington and Wyoming.

Crowley noted that since the investigation relates only to the western markets pursuant to prior FERC gaming and partnership orders [Docket No. EL03-137-000, et al. and Docket No. EL03-180-000, et al.] and a FERC order consolidating various dockets, "only the Portland tapes are relevant to the investigation and, accordingly, were the only audio tapes investigated by the trial staff."

He also noted that 13 additional tapes reside in the Houston Enron office and are not yet accessible by trial staff. Crowley also said there are other tapes that FERC staff did not investigate. "In addition to the 74 Houston tapes, there are another 74 digital tapes that were either blank, duplicates of other tapes, unrecoverable, or are listed in indexes but do not appear to exist. Furthermore, there are 34 analog cassette tapes; 18 from Houston offices and 16 from Portland offices. Of the 16 Portland cassettes, 13 were recoverable and contained conversations related to the negotiations of a specific contract not relevant to the trial staff investigation."

Crowley confirmed that trial staff looked for patterns of behavior over time by creating an "Observation Matrix." Audio assessment sheets reflect the examination of 48 channels of information over a two-year period. To determine whether there were "hot spots" of suspect activity over that period, Aspen Systems constructed an Observation Matrix to highlight days and channels on which suspect conversations took place. "It was hoped that such a matrix would direct further investigatory efforts towards days and channels most likely to reveal suspect behavior most efficiently, given the weight of evidence to sort through," said Crowley.

Crowley said FERC trial staff has begun a targeted investigation "that was at the center of its investigation strategy from day one."

He said trial staff "has found numerous specific conversations that lead to clarification as to the intent of the EPMI energy traders when they entered into the deals." Trial staff believes it can have a "substantial and significant compendium of documentary evidence inhand in a short time" to connect the audio files with transaction databases "to establish that the transactions were indeed intended to be violations of the CAISO MMIP [market monitoring and information protocol] regulations."

The sampling of the Enron tapes "suggests we can expect to find almost 1,550 conversations in which the traders may have engaged in or discussed violations of the CAISO MMIP regulations."

Crowley said that although trial staff and an EPMI audio team "have spent thousands of hours auditing and analyzing the EPMI audio tapes, we have only scratched the surface of the amount of material in hand. I believe there is sufficient public benefit to be garnered from further review to warrant the time and resources required."

Crowley anticipates that trial staff could complete its investigation by mid-March 2005. "The trial staff would then submit its selection of audio tapes found to be relevant to the FERC western markets investigation to the Justice Department for review. When permission to incorporate the audio files into this proceeding is granted, trial staff would provide the presiding judge with a complete listing of all relevant files and the associated supplemental testimony explaining the import of the audio files as they may relate to the CAISO databases and other evidence in hand."

Supplemental testimony based on the targeted investigation would be filed with sufficient time for Enron to respond without changing the hearing date, he added.

Meanwhile, FERC Staff member Barry Sullivan filed testimony addressing specific excerpts of audio tapes concerning the "Death Star" market manipulation trading strategy which were produced during the Enron audio tape investigation.

The audio tapes were processed under the direction of Crowley from EPMI audio tapes that were originally seized by the Department of Justice.

Sullivan in 2002 filed testimony at FERC explaining specific evidence related to Enron's Death Star market manipulation trading strategy which was designed to collect congestion charges from CAISO, even though the Death Star scheme did not relieve congestion.

He noted this week that due to the overwhelming amount of audio tape evidence, his goal in this latest round of testimony has been to find specific audio tapes that support evidence that he previously filed concerning the 17 days of Death Star transactions between EPMI and Portland General Electric Co. (PGE).

Sullivan said that during the targeted part of the investigation, "I have been able to find a significant number of Death Star related audio files but staff has not received permission from the Department of Justice to use these files in this round of testimony. I would like to present this additional material once our targeted investigation is complete and the Department of Justice has given staff permission to release these audio files."

Another staff investigator, Natalie Tingle-Stewart testified as to schemes described as "ricochet," "load shift" and selling non-firm as firm capacity, which were designed to collect higher prices for power sold into the California market. She did not find that Enron successfully completed any ricochet transactions -- that is selling power to a party outside California, then buying it back and selling it to CAISO as imported power not subject to the in-state price cap.

However, Tingle-Stewart said Enron should be forced to disgorge profits made from the practice of "load shift," and buying non-firm power outside of California and selling it in the state as firm. The load shift maneuver refers to the underscheduling power in one zone and overscheduling in another to create the impression of congestion. The manipulator then collects congestion relief payments for alleviating congestion that didn't exist.

In yet further testimony, David W. Savitski of FERC's Office of Administrative Litigation (OAL) said that of the 168 tapes of conversations involving traders from Enron's Houston and Portland office, FERC staff zeroed in on the 54 tapes from the Portland trading desk since it was involved in the California crisis and found evidence of "suspicious behavior" of the one-time energy giant.

A sample of 1,082 observations was randomly drawn from the Enron tapes, and FERC trial staff evaluated the sample for evidence of suspicious behavior, he said. FERC opted for sampling because a complete review of the 168 tapes would have taken approximately 60 man-years, while an evaluation of just the Portland tapes would have taken about 20 man-years.

Staff's review revealed that a "statistically significantly 3.3% to 5.9% of the sample observations contained suspicious behavior," Savitski noted. "Since sampling was random, the results apply to the Enron tape population. Hence, 3.3% to 5.9% of all observations in the Enron tape population are also expected to contain suspicious behavior."

Separately Edward A. Gross of OAL, who reviewed Enron Power Marketing trader tapes, said he uncovered "new evidence proving that Enron traders were aware that ancillary service games, such as 'Paper Trading' and 'Double-Selling,' caused reliability concerns" for the CAISO.

"Three things are clear. First, Enron traders were knowledgeable of the importance of ancillary services. Second, as is clear from the EPMI trader tapes, Enron pursued ancillary service strategies without having the required capacity to support its ancillary service bids. These strategies are frequently referred to as 'being short' or 'shorting' the service under discussion. Finally, the EPMI trader tapes provide evidence that Enron traders actively tried to engage other wholesale market participants in playing these same ancillary service games," he said.

"The taped conversations I listened to...demonstrated Enron's active involvement in ancillary service games and its knowledge that such games were contrary to ISO requirements and were potentially harmful to reliability," Gross noted. The taped conversations between Enron traders also "clearly indicated that such games were profitable on a net basis" for the company.

FERC staff has initiated a "targeted investigation" into the Enron audio tape filings, Gross confirmed. "I have begun this process for the ancillary services gaming strategies but I have not finished. In addition, in this targeted part of the investigation, I have been able to find a significant number of ancillary service game audio files, but staff has not received permission from the Department of Justice to use these files in this round of testimony."

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