Enron: Shock to a System

Enron entered bankruptcy proceedings more than 15 months ago, but the headaches remain for former partners and employees.

PDF DownloadLast month, Texas’ El Paso Electric said it was facing a shareholder lawsuit over improper transactions with Enron and its subsidiaries. In December, the utility settled with the Federal Energy Regulatory Commission in an investigation over whether El Paso Electric colluded with Enron to manipulate power prices in the West in 2000 and 2001. In the deal, El Paso Electric agreed to refund $14 million in revenue from wholesale power transactions.

Meanwhile, former Enron employees are just starting to revisit the Enron debacle. After establishing an organization, Severed Enron Employees Coalition, for displaced Enron employees, tales of Enron’s inability to handle fundamental data are emerging.

Among them: an effort by a team of 11 data systems managers to find and fix billing errors created by Enron Energy Services (EES), which managed power and gas purchases for other companies.

This is the story of “Operation Clean Sweep,” a crash effort by Enron to identify and correct all the errors regarding Kaiser Permanente, America’s largest not-for-profit health maintenance organization.

The team’s mandate: identify all billing errors, correct those accounts and then create the tools and processes to ensure it would never happen again. The deadline: 30 days.

Joe Whittenburg, a former EES data manager and project leader for Operation Clean Sweep, and fellow data manager Rod Jordan, were two of the team members assigned to the project. They say it wasn’t until Kaiser Permanente executives threatened to stop paying their monthly bills that any EES executive realized how serious the billing problem had become.

Kaiser Permanente officials declined to comment.

“There’s no way to know just how many millions of dollars were either undercharged or overcharged,” Whittenburg says.

Both Whittenburg and Jordan say EES never really knew what it paid in late fees or how much it overcharged or undercharged its retail customers. Those details were buried when Enron filed for bankruptcy in December 2001.

EES sold multi-year, energy-management contracts to large customers. The pitch: use Enron’s energy-trading expertise to save money and minimize price volatility. In September 1999, EES signed a 10-year, $1 billion-deal with Owens Corning to provide “total energy-management services” for its U.S. manufacturing plants. Chase Manhattan also signed up, joining Owens-Corning and Kaiser to buy billions of dollars worth of power and gas.

EES sales representatives promised to reduce a company’s annual utility expenses by 10% a year. They’d back up that promise with cash—some large clients got 10% savings up front in the form of an interest-free loan.

“They were giving away the company,” Jordan says. “That was the culture at Enron. They’d even throw in lawn mowing services, window washing and floor sweeping at some of these facilities. It was ridiculous.”

EES didn’t have to make business sense. It was part of Enron’s plan to drive revenue growth—and its stock price—at any cost. Enron, which had a penchant for off-balance-sheet accounting, could boost revenue and hide the losses.

Business processes took a back seat. Owens, Chase and other clients found Enron was either losing bills or overcharging. Local utilities were sending termination notices, for lack of payment.

On the data-management front, EES’s staff struggled with disparate retail contracts and billing systems used by thousands of utility providers across the country. Tens of thousands of bills from utility providers piled up.

Some bills came from larger utility providers such as Edison Electric or Pacific Gas & Electric in California. Others came from municipal providers. Some bills were for gas; some electric; some coal. Some were based on monthly consumption rates, others on a flat rate and still others on an hourly basis.

Eventually, these bills arrived at EES’ accounts-receivable department to begin their voyage through the data-management system, into a customer database, a billing database, another database for the wholesale provider and, finally, to the accounts-payable department.

In theory, a small army of data-entry clerks would scan every bill into a Documentum file to create an electronic record. But each provider invariably used a different billing system and most bills were entered manually into FASER (Fast Accounting System for Energy Reporting), a utilities management and billing database used by EES.

FASER, however, wasn’t up to the task, according to analysts. “FASER was never equipped to handle transactions on a national level,” says Jill Feblowitz, an analyst at AMR Research. “Enron tried to offer services their systems couldn’t handle.”

The result? Account numbers were transposed. Billing amounts were overpaid … or underpaid.

Jordan said the data-entry errors would result in bills going unpaid, leading to interest charges and late fees that rolled into the next month’s bill.

The tracking process in the Kaiser Permanente debacle began in December 2000 in a storage closet at Enron’s headquarters. Whittenburg found hard copies of every utility bill sent to EES from providers servicing Kaiser Permanente’s 452 facilities scattered across nine states and the District of Columbia.

The bills were then compared to the incomplete data in FASER. Because FASER wasn’t designed with programs to check bill frequency or double billings, or to detect unreasonable or unpaid bills, the cleanup team used Microsoft Access, a database management tool typically used by small businesses, to write those programs into the back end of the database. Whittenburg said he chose Access because the job didn’t require a stronger tool.

By setting up parameters within the database, the team was able to flag any bills that were 50% higher than the last bill. After identifying and correcting those balances, the team would then reprogram the software to find bills that were 25% higher, and so on.

The team then went through various databases—customer, accounts payable, accounts receivable, etc.—and assigned one name for each client, eliminating the duplicate spellings and the like.

Finally, the program would spit out a summary that, after all the corrections were made, would tell EES exactly how much it owed to customers or had to collect.

Kaiser’s more than 300 accounts in Los Angeles went unpaid for months at a time, according to Ossie Cuevas, account manager for Kaiser Permanente at the Los Angeles Department of Power and Water.

Luckily, hospitals don’t get their electric cut off. “There was never a question of us cutting off power to Kaiser because they’re a hospital, but any other customer would have been cut off without question,” says Cuevas.

Operation Clean Sweep was completed in 45 days.