Army Secretary Thomas White appears to be inching closer to becoming the first Bush Administration casualty of the Enron scandal. Senators Dianne Feinstein and Barbara Boxer of California have asked Attorney General John Ashcroft to launch a criminal probe into Enron’s role in manipulating California’s electricity market, after Enron memos released by the Federal Energy Regulatory Commission showed how Enron boosted electricity prices in California and created shortages.
People close to Feinstein and California Congressman Henry Waxman said the lawmakers will ask Ashcroft to direct that the criminal investigation include White and whether the unit he helped lead, Enron Energy Services, played a part in California’s two-year energy crisis. “We believe we have evidence, based on our conversations with former Enron employees, that Mr. White and other executives from Enron Energy Services may have worked side by side with Enron’s traders and supplied inside information about the amount of electricity California needed,” an aide to Feinstein said. “We believe, based on this information, that the traders were then able to create shortages and manipulate the price of power in the state.”
Neither a spokesman for White nor for Enron returned calls for comment. Enron is already under investigation by California Attorney General Bill Lockyer for allegedly manipulating the price of electricity and natural gas. White is being investigated by the FBI on the timing of his sale of Enron stock last year and by the Inspector General’s office on his use in March of a government airplane to fly to Aspen to sign papers on the sale of a $6.5 million house he owned, prompted by Enron-related financial problems. Separately, he engaged in a dispute with Defense Secretary Donald Rumsfeld over the Crusader weapons system; Rumsfeld continued to express support for him.
Former employees of EES have come forward saying that the retail unit, under White’s leadership, played a role in California’s power crisis and that White told his staff that EES would earn millions in profits because of the crisis. In addition, former employees are coming forward with information about White that indicates that his involvement with Enron’s suspect accounting was far deeper that he has let on. White has said that EES was a legitimate operation and not a house of illusory profits.
John Olson, an analyst now with Sanders Morris Harris, recalls asking White in 1999 how EES, a relatively small operation, could show millions of dollars in profit with barely a shred of business. “I did not believe Mr. White, nor any of the other Enron executives I spoke with, were being honest or forthcoming about EES’s profits,” Olson said. “When I pressed Mr. White for an answer he said, ‘One word: California.'”
White told EES’s sales team in 1998 that they could earn hefty bonuses by signing energy contracts with large businesses in California to manage their electricity needs for a substantially cheaper price than these companies had been paying through their local utilities. But promising customers a discount at the beginning of the contracts meant EES wasn’t earning enough money to cover what the local utilities were charging for gas and electricity. Moreover, EES was spending much more than anticipated setting up the infrastructure for the contracts, said Lee Jestings, a former EES executive who worked directly with White.
Jestings said he told White that EES would actually lose money this way, but White said Enron would make up the difference by selling electricity on the spot market in California, which Enron had bet would skyrocket in 2000. Jestings said he continued to complain to White that the profits declared by the retail unit were not real. “Tom told me those are the orders,” Jestings said. “He said he never questions a direct order. This man spent thirty years in the Army and was a four-star general. His life was based on taking orders.” Jestings said he resigned from EES in 2000 because he did not agree with the way EES reported profits. He is now working as an energy consultant.
The ex-employees, more than a dozen interviewed, said White often clashed with Lou Pai, chairman of EES, over the company’s use of “aggressive” accounting methods to make the unit appear profitable when it wasn’t but that ultimately White agreed that EES would have to use such methods because the unit was hemorrhaging cash right from the start. Steve Barth, a former EES vice president of special projects who attended meetings with White and Pai, said White’s job was that of cheerleader–he was supposed to motivate the EES sales force to show, by any means necessary, that the retail unit made a profit. “That meant lying to Wall Street,” Barth said. “White did it, and so did I.” Barth, who transferred from EES to Enron’s broadband unit in 1999 and left last July to start a broadband firm, said his experience at the company had been positive.
Enron reported that EES, founded in 1997, became profitable during the fourth quarter of 1999 and had steadily rising profits every quarter thereafter. Those reports helped send Enron’s stock price to $83 by the end of 2000, from $43 at the beginning of the year. As part of his employment contract with Enron, White was given a small financial stake in EES, later converted into Enron stock, which he sold for more than $50 million.
Eventually, with Enron becoming a target of California lawmakers, White may have decided it was time to get out. In early 2001, according to Barth, when then-Enron chairman Kenneth Lay was under consideration to be Energy Secretary, Lay met with George W. Bush and urged him to appoint White as Secretary of the Army. Barth said White told him that the California energy crisis was hurting EES and that the unit’s profits would never materialize. White “just wasn’t happy with his role at the company anymore,” Barth said.