Duck Test

If it looks like a scam, swims like a scam, and quacks like a scam, then it probably is a scam; for heaven’s sake they were called Fat Boy, Death Star, Get Shorty, and Ricochet. I know we beat these deals like a dead horse, but I am still a little fired up.

Tim Belden, besides his age was not the typical Enron trader. He was thin and slightly balding, he favored the rumpled look of the academic researcher, and he rode his bike to work; looks can be deceiving though. In late spring of 1999, Belden, with his intriguing idea of manipulating the deregulation of energy, became a walking time bomb to California.

Enron’s EES made a dangerous investment in order to make itself a premier energy retailer. Jumping into the energy market in California was risky. If California were to fail, Enron would have a difficult time convincing anyone outside of California that they were capable and committed to providing power services. Belden took the bull by its horns in order to test the deregulation rules and ensure to his company that maneuvering through loopholes could bring success in the risky market.

Belden’s original experiment was named Silverpeak. He made a deal with Cal PX to sell a total of 2,900 megawatts of energy and identified his route through an energy facility in Silverpeak, Nevada in order to get the electricity to California. The catch – Silverpeak transmission lines could only carry 15 megawatts at a time, only a fraction of the required amount.

Note: Limitations to the amount of power that is able to pass through a
transmission line are related to the length of the line.

1. Short Line – heating of conductors (material which contains
moveable electric charges) sets a thermal limit. If too much current isdrawn, conductors may sag too close to the ground or the equipment may be damaged by overheating.

2. Intermediate Line(60 miles) – the limit is set by the voltage drop in the line (reduction in voltage in an electrical circuit between source and load)

3. Long Line – system stability which helps maintain frequency sets the limit

Belden’s ploy resulted in a 70% price increase in California, costing users about $7 million. Soon an investigation was under way and Belden claimed he was “doing the state a favor by pointing out a huge flaw in its regulations –” hell is paved with good intentions! As the investigation dragged out, Belden was chomping at the bit to devise similar plots. I have tried to breakdown the schemes that followed in simpler terms:

Death Star – shuffling energy around the California power grid to receive payments from the state for “relieving congestion.”

Fat Boy – over scheduling power transmission to a company that didn’t really need it and then selling the excess power to the state at a premium

Ricochet – buy in-state power cheaply, flip it out-of-state to an intermediary, and then re-sell it to California at a highly inflated imported price

Get Shorty -selling power to the state at high prices in the day-ahead market and then buying it back the next day for much lower prices

I was astounded when I was reading that Enron management swept Belden’s actions under the carpet. Though he was hardly upholding the companies “standards of morality,” he was making them money hand over fist and that is all that mattered. I believe that deregulation could have worked in California if companies weren’t so eager to abuse the rules.

And finally, I will end with one more cliché: What goes around comes around.

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