[Senate Hearing 107-1138]
[From the U.S. Government Publishing Office]
S. Hrg. 107-1138
EXAMINING ENRON: ELECTRICITY MARKET
MANIPULATION AND THE EFFECT ON THE WESTERN STATES
=======================================================================
HEARING
before the
SUBCOMMITTEE ON CONSUMER AFFAIRS, FOREIGN COMMERCE AND TOURISM
OF THE
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
APRIL 11, 2002
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
ERNEST F. HOLLINGS, South Carolina, Chairman
DANIEL K. INOUYE, Hawaii JOHN McCAIN, Arizona
JOHN D. ROCKEFELLER IV, West TED STEVENS, Alaska
Virginia CONRAD BURNS, Montana
JOHN F. KERRY, Massachusetts TRENT LOTT, Mississippi
JOHN B. BREAUX, Louisiana KAY BAILEY HUTCHISON, Texas
BYRON L. DORGAN, North Dakota OLYMPIA J. SNOWE, Maine
RON WYDEN, Oregon SAM BROWNBACK, Kansas
MAX CLELAND, Georgia GORDON SMITH, Oregon
BARBARA BOXER, California PETER G. FITZGERALD, Illinois
JOHN EDWARDS, North Carolina JOHN ENSIGN, Nevada
JEAN CARNAHAN, Missouri GEORGE ALLEN, Virginia
BILL NELSON, Florida
Kevin D. Kayes, Democratic Staff Director
Moses Boyd, Democratic Chief Counsel
Jeanne Bumpus, Republican Staff Director and General Counsel
------
SUBCOMMITTEE ON CONSUMER AFFAIRS, FOREIGN COMMERCE
AND TOURISM
BYRON L. DORGAN, North Dakota, Chairman
JOHN D. ROCKEFELLER IV, West PETER G. FITZGERALD, Illinois
Virginia CONRAD BURNS, Montana
RON WYDEN, Oregon SAM BROWNBACK, Kansas
BARBARA BOXER, California GORDON SMITH, Oregon
JOHN EDWARDS, North Carolina JOHN ENSIGN, Nevada
JEAN CARNAHAN, Missouri GEORGE ALLEN, Virginia
BILL NELSON, Florida
C O N T E N T S
----------
Page
Hearing held on April 11, 2002................................... 1
Statement of Senator Boxer....................................... 4
Statement of Senator Burns....................................... 4
Statement of Senator Dorgan...................................... 1
Statement of Senator Fitzgerald.................................. 30
Statement of Senator McCain...................................... 102
Statement of Senator Nelson...................................... 100
Statement of Senator Wyden....................................... 2
Witnesses
Dunn, Hon. Joseph, California State Senator...................... 33
Prepared statement........................................... 36
Freeman, S. David, Chairman, California Power Authority.......... 58
Prepared statement........................................... 59
Hauter, Wenonah, Director, Critical Mass Energy & Environment
Program, Public Citizen........................................ 62
Prepared statement........................................... 65
Lynch, Loretta, President, California Public Utilities
Commission; Accompanied by Gary M. Cohen, General Counsel,
California Public Utilities Commission......................... 44
Prepared statement........................................... 48
McCullough, Robert, Managing Partner, McCullough Research........ 67
Prepared statement........................................... 69
Appendix
Boxer, Hon. Barbara, U.S. Senator from California, legislation
submitted for the record....................................... 111
Filner, Hon. Bob, Congressman from California, prepared statement 109
EXAMINING ENRON: ELECTRICITY MARKET MANIPULATION AND THE EFFECT ON THE
WESTERN STATES
----------
THURSDAY, APRIL 11, 2002
U.S. Senate,
Subcommittee on Consumer Affairs, Foreign Commerce
and Tourism,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Subcommittee met, pursuant to notice, at 9:36 a.m. in
room SR-253, Russell Senate Office Building, Hon. Byron L.
Dorgan, Chairman of the Subcommittee, presiding.
OPENING STATEMENT OF HON. BYRON L. DORGAN,
U.S. SENATOR FROM NORTH DAKOTA
Senator Dorgan. The hearing will come to order. This is a
hearing of the Consumer Affairs, Foreign Commerce and Tourism
Subcommittee of the Commerce Committee, and we are meeting
today to discuss the Enron Corporation once again.
If I might have the door to the hearing room closed,
please. We'd ask the audience to please take seats.
We, on previous occasions, have held hearings with respect
to the Enron scandal, as it's described in the press and
elsewhere, and we had, in this room, testimony by the author of
the Powers Commission report. That investigative report was
empaneled by the Board of Directors of the Enron Corporation
itself.
We know that the Board of Directors found that what was
happening inside the Enron Corporation was to quote the report
``appalling.'' The Board of Directors' own report says that
this corporation booked $1 billion in income that it didn't
receive in a year. Let me say that again. This is a corporation
that claimed to have $1 billion in income in a given year that
it did not have. That's according to the Board of Directors'
own investigative report. They also disclosed that substantial
amounts of debt that the corporation had incurred were kept off
the books. The Enron Corporation is the subject at the moment
of a criminal investigation by the Justice Department.
Given all of that, the question that Senator Boxer and
others have asked--my colleague, Senator Wyden, as well--what
was involved with Enron's activities on the West Coast,
particularly California? Enron was a corporation that had a
climate of corruption inside of the company sufficient so their
own Board of Directors says they were booking a billion dollars
of income they didn't receive and keeping debt off the books
and so on. Did it play fair with the consumers on the West
Coast?
Well, Senator Boxer and Senator Wyden asked questions of
Enron executives in previous hearings on that subject. And, of
course, they insisted that things were just fine. There's other
evidence and other allegations that exist that this corporation
did to consumers on the West Coast what it was doing inside its
own company, and that is, they cooked the books. They created
partnerships, bought and sold from partnerships they controlled
and created, created sham transactions, effectively manipulated
the market price for electricity, and took billions of dollars
out of the pockets of consumers in California and in the West
Coast.
Enron was one of the largest participants in the
electricity markets and had an enormous amount of market power.
They helped create that market power and, some will say,
manipulated that market power in a way that cheated consumers
out of billions of dollars.
The testimony we will hear today from a number of witnesses
paints quite an appalling picture. I mentioned the word
``appalling'' was used by the Board of Directors looking inside
their own company. They said what they found was, quote,
``appalling.'' The testimony that we will receive today
suggests that there was some appalling behavior by this
corporation with respect to the manipulation and distortion of
markets for electricity in a manner that systematically cheated
the consumers and ratepayers in California and on the West
Coast.
So, I think this will be an interesting hearing. I
appreciate my two colleagues from Oregon and California in
pressing for this inquiry. I think that it is a reasonable
inquiry, given what the Board of Directors of this corporation
has said about the behavior of the corporation itself inside
the company. Would they have been cheating inside the company
and expected not to cheat with respect to what they were doing
with the manipulation of electricity markets? Well, we'll see.
I think the testimony today will bear on some of that, and it
will be interesting testimony.
This will not be the last hearing. We are scheduling a
hearing on this subject with respect to some pension funds. I
don't have a date on that. That's been set--I think it's in a
week-and-a-half or so from now. And, we will have some other
activities, as well.
But let me call on my colleagues, if they have statements.
Senator Wyden.
STATEMENT OF HON. RON WYDEN,
U.S. SENATOR FROM OREGON
Senator Wyden. Thank you very much, Mr. Chairman. I very
much appreciate your holding this hearing and giving us a
chance to examine issues that are so important to the consumers
of Oregon, California, and Washington. I particularly want to
commend our colleague, Senator Boxer, who has just been a
persistent advocate for the consumer on so many issues and
particularly has led the Subcommittee on these issues.
There's been considerable discussion, Mr. Chairman and
colleagues, about the matter of there being a ``smoking gun''
to prove that Enron manipulated West Coast energy markets.
Because of our requests, the request of West Coast senators,
the Federal Energy Regulatory Commission is looking into the
matter.
But one thing is very clear. In this effort to find a
smoking gun, what we do know is that Enron has clearly produced
a smokescreen that is designed to obscure its role and its
actions in this matter. For years, Enron was able to fly under
the regulatory radar screen. It traded power among its various
subsidiaries and divisions, in my view, specifically to make it
hard to track Enron's role in these energy markets. And, I
think what we ought to do as we begin this morning's inquiry is
talk for a moment about what we know for sure with respect to
Enron's role in the West Coast energy markets.
First, what we know for sure is that Enron clearly had the
power to manipulate these markets. It's been estimated that
Enron controlled 30 percent of the trades at West Coast trading
hubs, which gave Enron sufficient market power to influence
prices.
Second, we know for sure that Enron had a motive to use its
market power to manipulate West Coast energy prices. The former
CEO, Jeff Skilling, was even quoted in Business Week magazine
as saying that Enron benefits from volatility in the West Coast
market.
Third, we know that in the summer of 2000, the West Coast
energy markets experienced unprecedented volatility, with
prices soaring to ten times what they had been just the year
before. Enron capitalized on this volatility by developing and
marketing energy contracts that supposedly protected consumers
against the risk of skyrocketing prices. Meanwhile, the
subsidiaries were trading power among themselves at
extraordinary prices, and that clearly helped to drive up the
overall market.
Now, previously, under questioning that I and others asked
after Enron filed for bankruptcy, we've learned that forward
prices in West Coast electricity markets dropped 30 percent
that day. Now, absolutely nothing else was occurring in the
market at that time to explain that drop of 30 percent. The
clear implication was, and the question remains, were prices
artificially inflated by Enron's presence in the West Coast
market?
The evidence also indicates that Enron knew West Coast
energy prices were going to skyrocket even before the West
Coast crisis began. The evidence includes Enron's overall
hedging strategy and its efforts to sell off a power plant in
my home State of Oregon to one of its off-the-book
partnerships.
Finally, some have argued that the fact that there were no
energy supply problems or price spikes following Enron's
collapse means that markets were working. But what does that
say about the markets during the West Coast crisis when Enron
was a major player and rolling blackouts and record price
spikes were everyday occurrences?
The bottom line here, what we know for sure, is that Enron
had the market power and the motive to manipulate the West
Coast energy markets. Not all the facts are in yet. And one of
the reasons it's hard to get the facts is because of this Enron
pattern of setting up smokescreens and stonewalling to keep the
evidence from coming out, but certainly there's a lot of
circumstantial evidence that raises troubling questions about
whether market manipulation was taking place.
The last point I would make, Mr. Chairman, and I appreciate
your indulgence--given the fact that the derivatives measure, a
measure that Senator Boxer and Senator Feinstein and so many of
us worked for, does not look like it's going to be in the
energy bill--we need to examine this morning's specific
measures that are going to protect consumers. I was able to add
to the energy bill legislation that would set up a consumer
advocate within the U.S. Department of Justice so as to
regulate the kind of interstate wheeling and dealing that Enron
was engaged in. Right now, the states don't have any authority
over those interstate activities. It now is in the Senate
energy bill that goes to the Conference Committee.
Hopefully, with your support and Senator Boxer's, and
obviously we're anxious to work with our colleague from
Montana, we can add to that. But right now, that's one of the
few tools that we have in place or have an opportunity to put
in place to protect the consumer. I look forward this morning,
under your leadership, Mr. Chairman, to examine other ways in
which we can advocate for the consumer on these critical
issues.
Senator Dorgan. Thank you, Senator Wyden. Senator Burns.
STATEMENT OF HON. CONRAD BURNS,
U.S. SENATOR FROM MONTANA
Senator Burns. I have no opening statement, Mr. Chairman.
Thank you for holding this hearing. And we've come to listen to
the witnesses this morning and learn. I have drawn no
conclusion. I think we ought to caution ourselves not to draw
any conclusions until all the facts are known.
So thank you very much for this hearing. That's the purpose
of it.
Senator Dorgan. Senator Boxer.
STATEMENT OF HON. BARBARA BOXER,
U.S. SENATOR FROM CALIFORNIA
Senator Boxer. Mr. Chairman, I want to thank you so very
much on behalf of the people of California. This is the only
Senate hearing that ever looked at the role of Enron in the
California crisis. My colleague, Senator Wyden, his state
suffered from what occurred. My state is still suffering the
shock of what occurred. And I'm going to take, with your
indulgence, probably about five minutes to make my opening
statement.
I want to welcome our panel that's coming before us. Mr.
Chairman and members, these people are good people. They were
on the ground during all of this. They know what was happening,
and they're going to help us find the facts that Senator Burns
is looking for. I can assure him of that.
Just one year ago, California was suffering from an
incredible energy crisis. In April 2001, wholesale electricity
was selling for $201 per megawatt. A year earlier, before the
crisis, it was selling for $32 per megawatt. That is a 528
percent increase. The result was that everyone in my state was
paying more for electricity. Not only did prices go up, but
people in industry were facing rolling blackouts. Silicon
Valley clearly could not operate without electricity and a
short supply of electricity. The agriculture industry faced
great financial stress with the thought that they could lose
refrigeration. Elderly people could have died in the summer
without air conditioning. And, Mr. Chairman, from what I know
so far, I believe that Enron played a key role in what happened
to the people of California.
Over the last several months, in dribs and drabs and piece
by piece, we've begun to get a picture of exactly what Enron
did and exactly how Enron used its influence with this
Administration--and, by the way, the one before--to continue to
manipulate the California market.
I have, on several occasions, laid out many of the pieces
of the puzzle, and I'm not going to do that today, except for a
couple of new pieces. And today we'll get more pieces of the
puzzle. But based on what we do know so far and what today's
witnesses will help us see far more clearly, the financially
shaky Enron bled California dry, used us as a cash cow to keep
that company afloat, to keep the price of the stock up so that
the insiders could sell out.
I would say that Enron used its influence with this
government to ensure that it could continue to manipulate that
market. And the one entity that could have helped California,
the only one, FERC, they did not help us until almost a year
later.
At this point, I want to make sure the record of this
hearing is very complete. From the beginning of the crisis,
there were desperate calls for help, and I want this record to
be complete. I sent numerous letters to FERC asking for cost-
based pricing. Senator Feinstein did the same. Forty-one
members of the congressional delegation of California--this was
bipartisan, Mr. Chairman--wrote to the President and to FERC
asking for relief. The Governor asked for relief. The
California State Legislature asked this Administration for
relief. Mr. Chairman, I would like to submit for the record
letters from myself, Senator Feinstein, the California
delegation, the Governor, and the California State
Legislature----
Senator Dorgan. Without objection.
Senator Boxer.--put those in the record.
Senator Dorgan. Without objection.
Senator Boxer. Thank you.
[The information referred to follows:]
January 12, 2001
President-Elect George W. Bush,
Bush-Cheney Presidential Transition Foundation, Inc.,
McLean, VA.
Dear President-Elect Bush:
You recently commented about the current energy situation in this
country. One of the first opportunities you will have to address the
problem is through appointments to the Federal Energy Regulatory
Commission (FERC). There are two vacancies that need filling, and you
will also be charged with designating one of the Commissioners as the
Chairman.
Unfortunately, no current FERC Commissioner hails from further west
than Arkansas. Therefore, I ask that you appoint a Commissioner from
California to remedy this problem. Not only is California's economy
larger than all but five nations in the world, California is the site
of America's most acute energy problem. It is imperative that whomever
you appoint to the Commission and whomever you designate as its
Chairman fully comprehend the California crisis and fully understand
California's concerns.
The San Diego area was the first region to experience a crisis of
unprecedented proportions. In many cases, electricity rates doubled and
tripled there last summer. Small business owners and people on small or
fixed incomes, especially the elderly, were hit hardest. In recent
weeks, supply and demand problems have plunged the state into
emergencies that could result in brownouts or rolling blackouts.
Utility companies report that they have lost billions of dollars;
natural gas prices have quadrupled; and some suppliers may be taking
advantage of the situation.
This crisis threatens to have economic ramifications. If the lights
go out in California, there will be a brownout across the country. FERC
has taken partial, but not adequate, steps. Much work still lies ahead.
Thank you for your consideration, and please let me know your
thinking on this.
Sincerely,
Barbara Boxer,
United States Senator.
______
February 2, 2001
Hon. Curt Hebert, Jr.,
Chairman,
Federal Energy Regulatory Commission,
Washington, DC.
Dear Mr. Chairman:
I appreciated the opportunity to meet with you recently in my
Washington office.
I was encouraged to hear that you believe energy conservation is an
important part of the solution to our energy problems. As I mentioned,
I have introduced legislation, which would provide a refundable tax
credit to consumers who install conservation measures, grants to
schools for energy conservation retrofits and additional information
for consumers showing electricity use during peak and off-peak hours to
further encourage conservation. I have enclosed a copy of the
legislation for your review.
It was disappointing to hear directly from you, and from other
Administration officials, that there is currently no Administration
support for the concept of a Western Regional Price Cap. Both Senator
Feinstein and I have introduced legislation--my bill is the Filner-
Boxer bill--in support of such a cap. I have enclosed a copy of my
bill.
It is clear to me, given the outrageous profits of generating
companies and the suspicious supply shortage that we have been
experiencing, that a Western Regional Cap on wholesale electricity
prices would provide immediate relief for consumers and assist in
stabilizing a dysfunctional market.
California's problem has been receiving the most attention.
However, it is reported that utilities are imposing or asking for
double digit rate increases in Oregon, Washington, Idaho, Utah and
Montana as well. Western Governors, meeting today in Portland, are
suggesting ``cost-plus'' price caps as an immediate solution to protect
consumers.
In light of this growing bi-partisan support for a regional price
cap, I ask you to reconsider your objection and act as soon as possible
to spare consumers, both business and residential, the agony of
enormous increases in their bills.
Please do not hesitate to call me if you believe I can be of
assistance to you in your important work.
Sincerely,
Barbara Boxer,
United States Senator.
______
Congress of the United States
Washington, DC, February 21, 2001
Curt Hebert, Chairman,
William L. Massey,
Commissioner,
Linda Key Breathitt,
Commissioner,
Federal Energy Regulatory Commission,
Washington, DC.
Dear Mr. Chairman and Commissioners:
We are contacting you regarding the ongoing energy crisis facing
the Western United States.
As you know, the State of California is in the process of finding a
solution to the short-term problem of skyrocketing energy prices.
Currently, Governor Davis and the California Legislature are attempting
to allow the State to enter into long-term contracts with generators
and marketers which will eliminate the need for the California
Independent System Operator (ISO) to buy most of its power on the spot
market. Clearly, the current situation of the ISO buying enormous
amounts of power from the spot market is contributing to the extremely
high energy prices we face today. While we fully support efforts to
take the California ISO out of the spot market, we must recognize that
success in these efforts, at least in the short-term, is not certain.
The current energy regulatory system in California has created
unnatural and obviously dangerous market conditions throughout the
West. Under these extraordinary circumstances, we believe a temporary
``time-out,'' in the form of price caps in the energy market, is needed
until we can fix the underlying problems of this distorted market.
To avoid any future energy crisis, we are all looking for long-term
solutions, such as investments in renewable energy, serious
conservation measures, and appropriate construction of new generation.
Clearly, however, before any serious consideration can be given to
these proposals, we must deal with the short-term problem at hand.
We strongly urge you, as commissioners of the Federal Energy
Regulatory Commission (FERC), to use your authority to immediately
implement wholesale energy price caps for all Western states employing
the following conditions:
The caps are set at cost-based rates, plus a reasonable
level of return for the seller
The caps are temporary, with a finite time limit, or until
energy prices in the West stabilize
The caps are not applied to new generation, as doing so may
remove incentives for new generation
We are requesting this action recognizing that this authority must
be used in a very judicious manner and only in extraordinary
situations. We believe that the current energy crisis facing our region
qualifies for such action as intended by the authority vested in FERC.
Thank you for your attention to this matter, and we look forward to
hearing from you soon.
Sincerely,
Jay Inslee, M.C. Sam Farr, M.C.
Peter DeFazio, M.C. Brian Baird, M.C.
David Wu, M.C. Lois Capps, M.C.
Jim McDermott, M.C. Darlene Hooley, M.C.
Gary Condit, M.C. Bob Filner, M.C.
Adam Smith, M.C.
______
United States Senate
Washington, DC, February 28, 2001
Mr. Curtis Hebert,
Chairman,
Federal Energy Regulatory Commission,
Washington, DC.
Dear Chairman Hebert:
Since the Federal Energy Regulatory Commission experimentally
suspended a price cap on the cost of transporting natural gas to
Southern California, the prices have increased exponentially
dramatically escalating the state's electricity crisis. While the
suspension of this cap was meant to last for two years, the experiment
is clearly a failure and I ask that you end it immediately.
For your reference, I have enclosed a graph and chart that compare
natural gas prices in California with its neighbors, Natural gas prices
in Southern California reached $60 per decatherm in the middle of
December and last week still averaged more than $25 per decatherm,
almost five times higher than in the rest of the country. The result
has been winter gas prices for 18 million consumers of Southern
California that are more than 400% higher than last year.
I recently met with the President of El Paso Merchant Energy who
told me that the cost of transporting natural gas from San Juan, New
Mexico, to Southern California is only about 67 cents per decatherm.
Thus, if natural gas is selling for about $5 in San Juan it should be
selling for $5.67 in Southern California, not $25.
By issuing Order 637 in February 2000, FERC suspended for two years
the price cap for short term capacity release transactions for service
to the Southern California border and to points of interconnection
between interstate pipelines and California local distribution
companies.
Until last year, the maximum charge to transport gas to Southern
California from Texas and Oklahoma, where much of the production
capacity exists was about 50 cents per decatherm, which already
included a reasonable rate of return. Had FERC not engaged in this
questionable experiment, the price of natural gas in Southern
California would have more closely paralleled the prices everywhere
else.
I am also asking that FERC require natural gas sellers to declare
separately the transportation and commodity components of the bundled
rate for gray market transactions. These transactions are not covered
by Order 637.
This requirement would at least provide the necessary transparency
on the difference between the transportation and commodity prices for
natural gas at the border. If FERC were to rescind Order 637, provide
this transparency for the bundled rate and implement cost of service
based rates, California's electricity rates would return to ``just and
reasonable'' for the first time in ten months.
Thank you for your continued attention to this matter.
Sincerely,
Dianne Feinstein.
______
Congress of the United States
Washington, DC, March 6, 2001
Hon. George W. Bush,
President of the United States,
The White House,
Washington, DC.
Dear Mr. President:
We are writing to request an opportunity to meet with you and the
Administration's energy task force regarding a plan to address the
Western States energy crisis.
As this crisis deepens, and its economic impacts become more
pronounced, it becomes increasingly apparent that federal action is
necessary to prevent this problem from injuring our economy on a longer
term basis. We believe a wholesale price cap should be employed to
address this situation, and that such a cap can be structured to ensure
that it is short term and does not act as a disincentive for the
creation of new generating capacity. We also look forward to discussing
other aspects of a response plan to our energy crisis, including the
use of renewable energy, energy efficiency, and conservation action
that must be part of the solution.
This is an issue of great urgency in the Western States and among
the constituents we represent, and it is our hope that we can have an
opportunity at your earliest convenience to meet with you and the task
force to discuss our concerns.
Thank you for your consideration of this request.
Sincerely,
(Signed by 26 Members of Congress)
______
March 9, 2001
Hon. Curt Hebert, Jr., Chairman,
Hon. William Massey, Commissioner,
Hon. Linda Breathitt, Commissioner,
Federal Energy Regulatory Commission,
Washington, DC.
Dear Mr. Chairman and Commissioners:
This letter is to request on behalf of our three states,
California, Oregon and Washington, that the Federal Energy Regulatory
Commission take steps on an interim basis to restrain the unreasonably
high wholesale costs of electricity in our region. Specifically, we
would suggest something like the plan proposed by Commissioner William
Massey of the Federal Energy Regulatory Commission in a February 8
speech. He recommended:
``. . . a temporary cost-based price cap on spot market sales
in the western interconnection. Such a price cap could be
calculated on a generator-by-generator basis at each
generator's variable operating costs plus a reasonable capacity
adder perhaps in the range of $25/mwh. New generation sources
should be exempt. In addition, such a cap should have a well-
specified sunset provision, tied either to a date certain or
the attainment of certain specific conditions, such as some
measure or adequate reserves.''
Such a price cap would allow generators to recover all of their
operating costs plus a return. Of course, bilateral contracts and long-
term contracts would be exempt in order to encourage a long-term,
market-based solution.
We understand that some of the federal power marketing agencies
such as BPA, which are not controlled by the FERC, would voluntarily
adhere to such a plan.
While we fully recognize the benefits of a free market, our problem
is that we have a shortage of electricity. In spite of our aggressive
and urgent efforts, the problem will only get worse throughout the year
and particularly this summer. This shortage has enabled, and, is
enabling generators to receive ``unjust and unreasonable'' charges for
their wholesale energy. A report prepared by the California ISO's
Department of Market Analysis concluded that 21% of real time energy
costs during December 2000, and 63% of real time energy costs for
January 2001, represent charges that may exceed just and reasonable
levels. Indeed, last week the FERC determined that the wholesale prices
for some power purchased in California during January, 2001, were not
just and reasonable, and has ordered limited refunds.
These excessive charges have virtually bankrupted California's two
largest utilities, Pacific Gas & Electric and Southern California
Edison, while the generators have earned record profits which exceed
1999 levels by several hundred percent. The ISO report, which is on
file with this Commission, indicates these changes are significantly
above costs.
The reasons for the shortages are well known. These include lower
precipitation in the Northwest, a shortage of natural gas, a damaged
natural gas pipeline, inadequate transmission, and the failure
throughout the Western states over a period of years to build
sufficient generating capacity to meet the expanding demand.
We are taking aggressive actions in each of our states to deal with
the problem. For example, in California since April 1999, nine new
major power plants (eight of which will produce 500 MW or more) have
been licensed. Six are under construction. These plants, together with
new peaking and renewable facilities, will total approximately 5,000 MW
of new power production on line. By summer 2002, approximately 5,000
additional MW will be on line.
We are also taking aggressive actions on energy efficiency and
demand reduction. These actions include a $1 billion energy
conservation program in California. In California, we are also
creatively resolving environmental issues including emissions
requirements. We are attaching news releases which describe these
actions in more detail.
We will continue to implement every reasonable action to meet this
challenge. But in spite of our best efforts the present shortage may
get worse. The California ISO forecasted a shortage of 4,100 MW in its
report of November 30, 2000--before the drought of this winter further
diminishes supplies.
Under its new law California is seeking long-term contracts for its
energy supply and has had some real success in doing so. However,
short-term contracts signed by the Department of Water Resources have
required prices averaging $228 per MWh. A substantial portion of the
power necessary to serve load will still be required to be purchased in
the more expensive hour/ahead and spot markets. Of course, the relief
we are requesting will be necessary only in the event of a shortage and
only for this year.
The economy of our region depends, we believe, upon successfully
managing this energy crisis. As Chairman Alan Greenspan stated in
testimony before Congress in January, prolonged energy troubles in the
world's sixth largest economy could jeopardize the nation's economic
health. We urgently request your help.
Sincerely,
Gray Davis,
Governor of California.
Gary Locke,
Governor of Washington.
John Kitzhaber,
Governor of Oregon.
______
March 19, 2001
Hon. Dick Cheney,
Vice President of the United States,
Eisenhower Executive Office Building,
Washington DC.
Dear Mr. Vice President,
We are writing to confirm Steven Ruhlen's refusal, on behalf of
Vice President Cheney and the Energy Task Force, to grant a meeting
with the twenty-five bipartisan Members of Congress who requested an
opportunity to discuss energy price caps in the Western States in
writing on March 6, 2001.
We are extremely disappointed in Vice President Cheney's refusal to
meet with Members from the Western States about price caps. By refusing
to hear our thoughts and concerns about the energy crisis, the
Administration is sending an unfortunate signal to Americans about how
it intends to govern--based on ideological reaction, rather than
factoring in local input or the particulars of a specific situation.
President Bush told the nation today that he looks forward to
hearing the recommendations of Vice President Cheney's Energy Task
Force. We feel that the Task Force, by refusing to hear the viewpoint
of the states that are suffering the effects of the energy crisis, will
base their recommendations on incomplete information at best.
As a group representing California, Washington and Oregon, three
states that are inextricably tied together in this energy crisis and in
its solution, we repeat our disappointment in the Vice President's
decision not to meet with us.
We are requesting a confirmation, in writing, that Vice President
Cheney and the Energy Task Force refuses to meet with us as a group. We
do hope for a reversal of this decision.
Sincerely,
Jay Inslee,
Sam Farr,
Peter DeFazio.
______
California Legislature
State Capitol
Sacramento, CA, March 26, 2001
Hon. Spencer Abraham,
Secretary of Energy,
U.S. Department of Energy,
Washington, DC.
Hon. Curtis L. Hebert, Jr.,
Chairman,
Federal Energy Regulatory Commission,
Washington DC.
Dear Secretary Abraham and Chairman Hebert:
Although California was the first state to experience energy
shortages and skyrocketing prices, California's energy crisis is
neither just a ``California problem'' nor limited solely to ``energy''
in terms of negative fallout. Despite unique wholesale pricing problems
associated with its own dysfunctional market structure, California's
greater energy problem is part of a broader supply shortage throughout
the westernmost states. Furthermore, the problem is so severe that it
now threatens the very economic foundation of the state. And,
increasingly, the economic well being of the nation.
This is not just about California. Other states now have
deregulated or are in the process of doing so. They soon may suffer
similar problems if similar market conditions prevail. The Federal
Energy Regulatory Commission (FERC) and the U.S. Department of Energy
(DOE) have the power to stabilize the national energy environment by
guaranteeing a free, competitive electricity market characterized by
reasonable wholesale prices, and by supporting policies and programs
that promote energy infrastructure management, energy efficiency, and
renewables.
This crisis threatens Californians in many ways. If it persists in
driving capital and jobs out of the state, we face a serious economic
downturn--with the concomitant loss of revenues that threaten crucial
public programs such as education, health, and public safety. The
electrical grid's unreliability imposes high shutdown costs and
eliminates the certainty needed by industrial consumers to produce
goods and keep California workers on the payroll. The high-technology
industry that has fueled the national and state growth cannot maintain
its productivity without reliable, affordable power. Farmers and
ranchers will suffer greatly if irrigation and water-pumping machinery
cannot operate. Food cannot be processed if canneries are shut down.
California is not standing idly by. The state recognizes it must do
everything possible to solve its problems with all available tools. We
are undertaking bold initiatives to enhance reform and expedite power-
plant siting, expand the applications of innovative distributed energy
technology, and encourage conservation by residential and commercial
energy consumers. But responsibility for energy policy and regulation
is bifurcated between the state and federal governments.
Request for federal action. The federal government, especially the
Commission, must maintain a strong regulatory presence to discourage
price manipulation within California's admittedly dysfunctional market.
The Commission has acknowledged that some generators have overcharged
for electricity, and appropriately required refunds--or justification
for prices--on March 9 and 14.
The California State Legislature Requests:
That FERC aggressively pursue overcharges and order refunds
whenever appropriate.
That FERC use its authority to review wholesale electricity
prices in the recent past and future to ensure they are ``just
and reasonable and not unduly discriminating or preferential.''
That DOE take steps to promote strategic energy
infrastructure planning for electricity and natural gas, as
well as continued support for renewable energy projects and
energy efficiency programs and technologies.
FERC must take efforts to protect the integrity of wholesale prices
to avoid catastrophic outcomes in California, and powerful, harmful
ripples throughout the nation's economy. Continued strong policy
leadership by DOE and appropriate regulatory action by the Commission
will provide our state the time and opportunity to reform our market
structure before irrevocable damage is done to California's economic
and social well being.
Sincerely,
Robert M. Hertzberg,
Speaker of the Assembly.
John L. Burton,
Senate President Pro Tempore.
Signatories
1. Senator Mike Machado (D) 14. Senator Don Perata (D)
2. Senator Joe Dunn (D) 15. Senator Ed Vincent (D)
3. Senator Nell Soto (D) 16. Senator Dede Alpert (D)
4. Senator Wesley Chesbro (D) 17. Senator Liz Figueroa (D)
5. Senator Martha Escutia (D) 18. Senator Jackie Speier (D)
6. Senator Sheila Kuehl (D) 19. Senator Deborah Ortiz (D)
7. Senator Jack Scott (D) 20. Senator Richard Polanco (D)
8. Senator Jim Costa (D) 21. Senator Betty Karnette (D)
9. Senator Richard Alarcon (D) 22. Senator Gloria Romero (D)
10. Senator Byron Sher (D) 23. Senator Tom Torlakson (D)
11. Senator Jack O'Connell (D) 24. Senator Steve Peace (D)
12. Senator Debra Bowen (D)
13. Senator Kevin Murray (D)
______
Congress of the United States
House of Representatives
Washington, DC, March 30, 2001
The Hon. George W. Bush,
The President,
The White House,
Washington, DC.
Dear Mr. President:
We are writing because our constituents and millions of Americans
across the West need your intervention at the Federal Energy Regulatory
Commission (FERC) in order to address serious problems with the Western
energy market.
As you know, California has been experiencing an electricity crisis
that has resulted in blackouts throughout the state, inconvenienced
millions of citizens and businesses, and disrupted the state's and
region's economy. Indeed, this crisis seriously threatens to cause
long-term damage to the economy of California, the Western region, and
perhaps the entire country.
The crisis is the result of a dysfunctional energy market where
wholesale prices of electricity have spiked exorbitantly. For example,
wholesale prices on December 15, 2000, ranged from $429 per Mwh to $565
per Mwh, compared to prices from $12 per Mwh to $29 per Mwh one year
earlier. Wholesale prices have jumped as high as $1400 per Mwh. In
fact, the California Independent System Operator (ISO), the state's
power grid operator, has projected that electricity which cost $7
billion in 1999 will cost $70 billion this year. These skyrocketing
prices can only partly be explained by natural gas price increases and
increased energy demand.
These exorbitant price spikes have led FERC Commissioner William L.
Massey to state on February 8, 2001:
These high prices serve only to continue a massive wealth transfer
out of the region. Is it worth dragging down an entire regional
economy, or perhaps even the national economy, for the theoretical
purity of unfettered price signals? I say no. I call on my fellow
commissioners to consider a time out now. It's our statutory
obligation. . . . FERC's timidity and hands-off approach is eroding
consumer confidence and destroying the consensus that heretofore
supported a market based approach.
The dysfunctional nature of the market has apparently allowed it to
be manipulated. The California ISO last week presented FERC with
findings of a comprehensive study of pricing data in California's
wholesale electricity market over the last 10 months. According to the
Los Angeles Times, the ISO's study found ``evidence of market
manipulation and consistent patterns of bidding far above costs'' and
that ``suppliers commonly offered electricity at twice their costs.''
The ISO has estimated the cost of the potential overcharges between May
2000 and last month are high as $6.3 billion.
Unfortunately, FERC actions have fallen far too short. To date,
FERC has not aggressively worked to address market manipulations,
despite finding last fall that wholesale prices were not ``just and
reasonable.'' Nor is FERC apparently willing to seriously consider
addressing runaway wholesale rates.
The state of California is taking heroic measures, but this is an
issue California cannot address alone. In a February 28, 2001, meeting
with the California delegation, FERC Chairman Curt Hebert confirmed the
widespread understanding that the California market is not working. He
called the California market ``broken,'' and acknowledged the regional
problems posed by the market. Additionally, Chairman Hebert stated that
``I don't think there is any way California can pull itself out of this
thing alone.'' As Mr. Hebert knows, California has no authority over
wholesale electricity sales. These sales fall solely within the
jurisdiction of the federal government.
Despite FERC's recognition that California cannot address this
problem alone, FERC seems unwilling to assist California and the West.
FERC's March 9 order sets the arbitrary expectation that unjust and
unreasonable prices cannot occur in the absence of a Stage 3 Emergency.
Energy economist Severin Borenstein has stated that this expectation
``defies economic logic.'' The March 9 order is also inconsistent with
FERC's December 15 order and ignores the fact that when market power
exists, prices can be unreasonable even when supply is not within 1.5%
of demand.
Mr. President, you have the authority to rein in the impacts of
this dysfunctional market and protect the citizens of California from
exorbitant wholesale price spikes. In October 2000, when you were in
California, you stated, ``I believe so strongly that part of this
region is going to suffer unless you have a president who is willing to
tell the FERC to do what is right for the consumer.'' Now, we are
respectfully calling upon you to do just that.
This is not a partisan issue. There is widespread support in both
the U.S. House of Representatives and the U.S. Senate for wholesale
price caps throughout the region. Governor Davis of California,
Governor Kitzhaber of Oregon, and Governor Locke of Washington have now
requested that FERC implement a short-term pragmatic proposal that will
preserve adequate incentives to attract additional generation.
We believe that electricity generators should make a reasonable
profit and that these profits should be sufficient to encourage the
development of needed generation. Federal action to temporarily
intervene in California's failed wholesale market can accommodate these
needs. Governors Davis, Kitzhaber, and Locke have referenced
Commissioner Massey's suggestion of a temporary cost-based price cap on
spot market sales in the Western interconnection, combined with an
exemption for new generation sources to ensure that new sources of
energy are encouraged. Such an approach could reinstate consumer
confidence in wholesale sales, ensure generators receive sufficient
market signals, and prevent future economic hemorrhaging in the West.
Mr. President, we request that you help protect California's
economy, and indeed that of the Western region and the nation. Please
support the Governors' request on wholesale rates, investigate the
recent allegations of overcharges, and act to prevent a dysfunctional
electricity market from damaging our constituents and a major engine of
the nation's economy.
Sincerely,
Signatories to the March 30, 2001 letter to the President regarding
FERC
Henry A. Waxman Anna Eshoo
Lois Capps Jane Harman
Mike Thompson Jay Inslee
Joe Baca Barbara Boxer
Sam Farr Brian Baird
Robert Matsui Brad Sherman
Nancy Pelosi Susan Davis
Norm Dicks Gary Condit
Jim McDermott Zoe Lofgren
Hilda Solis Ellen Tauscher
George Miller Barbara Lee
Pete Stark Tom Lantos
Bob Filner Xavier Becerra
Lucille Roybal-Allard Adam Smith
Grace Napolitano Rick Larsen
Loretta Sanchez Lynn Woolsey
Peter DeFazio Juanita Millender-McDonald
Dianne Feinstein Howard Berman
Darlene Hooley Adam Schiff
Mike Honda Maxine Waters
Earl Blumenauer David Wu
______
Governor Gray Davis
April 10, 2001
The Hon. Curt Hebert,
Chairman,
Federal Energy Regulatory Commission,
Washington, DC.
Dear Mr. Chairman,
I cannot be with you and the western state representatives this
morning. Speaker Bob Hertzberg of the California State Assembly will be
present with a legislative delegation. However, I must submit this
letter to you to share my perspective on the energy crisis.
As you know, I have appeared before you in person, by video tape
and through letters submitted to the FERC over the last 10 months. Each
time I have asked you to impose real and effective price restraint in
what is obviously a dysfunctional electricity market in California and
throughout the West. And during that time, nothing has changed your
position against price controls . . . even when wholesale prices in
California and other western states have skyrocketed by over 1000% in
many cases.
The FERC has recently issued orders to refund overpayments to
consumers in California which I applaud. But these refunds, if
ultimately made, represent a tiny fraction, just 2% or less, of the
overpayments made in a wildly dysfunctional marketplace that, according
the California Independent System Operator, may exceed $6 billion.
Last month, Governor Kitzhaber of Oregon, Governor Locke of
Washington and I called on the FERC to adopt a temporary cost-based
regional price cap that would allow generators and marketers to recover
all of their costs plus a reasonable rate of return. We believe that
this plan would go a long way in protecting consumers and businesses
from the unpredictable nature of the current market and almost certain
disruptions this summer.
Under our proposal, the proposed regional price cap would be
temporary--no more than two years--and the generators would have the
ability to recover all of their operating costs and receive a return.
Such regional price relief would stabilize the market, reducing
uncertainty in planning for new generation development and would not
discourage the development of new generation facilities as some have
stated.
I want to reiterate that we are doing all we can to generate more
power in California. In the 12 years before I took office, not a single
major power plant was built in California. Since the start of my
Administration, we have licensed 12 major power plants. Four will be
online this summer. Three will be online next summer. Ten more are in
the pipeline. And we are doing all this while maintaining our
commitment to clean air and clean water.
We significantly streamlined the permitting process and established
an interagency Clean Energy Green Team to cut through state, federal,
and local red tape. We are also moving to establish a public power
authority. If the private sector fails to build all the plants
California needs, the state will build them.
Californians are conserving energy. We rank 49th in the nation in
per capita electricity consumption. California is the most energy
efficient state in the West, but we are doing even more to save energy.
In February, consumers exceeded my challenge to save 7% by reducing
electricity use by 8%. I am now asking everyone to conserve at least
10%. We are launching an aggressive $800 million conservation program.
We are retrofitting our government buildings for energy efficiency and
incorporating sustainable building designs into new state building
projects. We have adopted the strongest energy efficiency standards in
the world for residential and non-residential buildings and appliances.
We have established an innovative rebate plan, otherwise known as the
``20/20'' program, that rewards those who conserve 20% by a 20% rebate
in their energy bills. And we have adopted ambitious demand reduction
programs for the commercial sector.
Even with all these efforts, it has become increasingly clear that
the Federal Energy Regulatory Commission's failure to control costs has
precipitated an increase in rates to keep our lights on and our economy
strong. In this regard, last week I urged the California Public
Utilities Commission (CPUC) to adopt a proposed rate increase that will
protect average consumers, reward those who conserve and motivate the
biggest users to cut back. These rate increases will give Californians
some of the highest electricity rates in the nation.
We are reducing our reliance on the spot market through long-term
contracting. The state has more than 40 long-term contracts and
agreements with major power companies that will deliver a total of
629,000,000 megawatt hours over the next 10 years at prices 5-10 times
lower than what we are paying today in the day-ahead and real-time
markets.
Although we cannot fix 12 years of inaction overnight, we are
making real progress in California. It is critical that you fulfill
your legal obligation to the people of California and the entire West
to assure just and reasonable prices, and impose cost-based wholesale
price controls at the earliest possible time.
Sincerely,
Gray Davis.
______
Congress of the United States
House of Representatives
Washington, DC, May 4, 2001
The Hon. Spencer Abraham,
Secretary,
Department of Energy,
Washington, DC.
Dear Secretary Abraham:
We are writing to request your prompt action to direct the Federal
Energy Regulatory Commission (FERC) to address the serious problems
besetting electricity markets in California and other Western states.
As we all know, consumer prices are skyrocketing, electricity marketers
have reaped record profits, and Californians have endured repeated
service interruptions. The outlook for this summer is hardly cheering,
with forecasts of continuing price volatility and more blackouts.
Mr. Secretary, consumers in California and other Western states
need new electricity supplies. But until new supplies can be brought on
line, western consumers need protection from blackouts and spiraling
prices for this essential service. To make matters worse, the Chairman
of FERC has declined to use his authority to protect western consumers.
Last fall, the Commission found that electricity prices in California
are not ``just and reasonable.'' Yet FERC has refused to impose cost of
service prices that would fairly compensate suppliers without
permitting them to exploit consumers, despite the fact that the Federal
Power Act demands nothing less. In a recent series of orders, FERC has
taken only marginal actions which purport to solve the crisis but in
reality do little more than nibble at the edges.
Mr. Secretary, we recognize that FERC is an independent commission
and you are not authorized to take direct action on pricing matters.
However, there is one step you can take that would force the Commission
to do its duty to ensure just and reasonable prices. Under section 403
of the Department of Energy Organization Act, the Secretary of Energy
is authorized to initiate rulemakings at FERC, and to set time limits
for final action by the Commission. We respectfully request that you
initiate a rulemaking at FERC to reimpose cost of service prices for
all wholesale sales in California and the other twelve states in the
Western Systems Coordinating Council (WSCC), including full refunds
back to October 2, 2000, and to take final action by a date certain.
There is nothing novel about section 403 authority, which has been
available to the Department since its creation and used as recently as
November 15, 2000.
You can implement our request with no change to current law and
without changing the principles of the Federal Power Act. Should market
conditions change in the future, a later Commission could determine
that cost of service rates are no longer necessary to ensure just and
reasonable prices. Our proposal also avoids the dangers inherent in
Congress attempting to devise new standards through new law which would
have to be tested in the courts.
Mr. Secretary, it is regrettable that FERC did not take aggressive
action earlier, in time to avert problems in western electricity
markets this summer that now appear inevitable. However, since FERC
refuses to fulfill its statutory duty to ensure just and reasonable
prices, we urge you to use your power to direct it do so. Without this
action, further chaos will ensue and California and other western
consumers will continue to pay the price.
Sincerely,
Richard Gephardt,
Minority Leader.
John D. Dingell,
Ranking Member, Committee on Energy and Commerce.
Rosa DeLauro,
Co-Chair, Energy Task Force.
Martin Frost,
Chairman, Democratic Caucus.
Rick Boucher,
Ranking Member, Subcommittee on Energy and Air Quality.
Ed Markey,
Co-Chair, Energy Task Force.
and 38 other Members of Congress.
______
July 10, 2001
Hon. Curt Hebert, Jr.,
Chairman,
Federal Energy Regulatory Commission,
Washington, DC.
Dear Mr. Chairman:
I am writing to urge you to order $8.9 billion in refunds owed by
the power generators to California consumers.
I am very concerned about yesterday's statement by FERC Chief
Administrative Law Judge Curtis Wagner that California is owed no more
than $1 billion. Although this is not his official recommendation to
you under the June 18 FERC Order, I am concerned from his statement
that his recommendation will not adequately address price gouging by
the generators.
The evidence is clear that the generators gouged California.
Generators' profits increased on average by 508 percent between 1999
and 2000. One company, Reliant Energy, experienced a 1,685 percent
increase in profits in the same time period. This compares to a 16
percent increase in profits across the electric and gas industry and an
increase in demand of only four percent. FERC failed to act to correct
this part of the electricity crisis. Now you have the opportunity to
rectify this oversight.
I appreciate your consideration. I urge you to act strongly for the
California consumer and order $8.9 billion in refunds.
Sincerely,
Barbara Boxer,
United States Senator.
Senator Boxer. We were all ignored. I, as well as other
Members of Congress, also introduced legislation for cost-based
pricing and refunds to help California. In the House, the
legislation had Democratic and Republican support, with
cosponsors including Representatives Capps, Matsui, Cunningham,
and Issa.
Mr. Chairman, I would like to submit for the record these
various bills. May I do that?
Senator Dorgan. Without objection, they'll be put in the
record.
[The bills referred to are in the Appendix.]
Senator Boxer. The FERC and the Administration opposed that
legislation, as well. Why were all the efforts of all these
elected officials, both Republican and Democrat, ignored? I
believe because Enron did everything in its power to influence
the Executive Branch to do nothing. And that is what they did.
And let me state, Mr. Chairman, sometimes doing nothing is
an affirmative action. It is what Enron wanted. It is what they
got for almost a year. And we know this, because when Jeffrey
Skilling made his statement to The San Diego Union-Tribune,
once FERC did act, he stated in so many words, very clearly,
that Enron really went under when the California crisis was,
quote/unquote, ``solved.''
Enron lobbied FERC. We know there were at least 25 meetings
during that California crisis between Enron officials and FERC
decisionmakers. Mr. Chairman, I'd like to submit for the record
a letter from FERC listing its meetings with Enron executives.
Senator Dorgan. Without objection.
[The information referred to follows:]
Federal Energy Regulatory Commission
Washington, DC, February 21, 2002
The Hon. Barbara Boxer,
United States Senate,
Washington, DC.
Re: Meetings and Phone Calls with Enron Executives
Dear Senator Boxer:
This letter responds to your January 31, 2002 request for
information on the number of meetings and telephone calls between Enron
executives and FERC Commissioners and senior staff between August 2000
and June 2001.
Let me assure you that I do not think the Enron Corporation, or any
of its subsidiaries, has had any undue influence on the decisionmaking
process at the Commission. Although the period about which you have
inquired effectively predates my tenure at the Commission (having
arrived on June 5, 2001), I sincerely believe that the agency's
decisions have not been compromised or otherwise improperly shaped by
any communication with Enron executives. I also assure you that I have
not and will not countenance any effort by any company to influence
Commission action, outside appropriate agency regulatory procedures.
Indeed, as FERC Chairman, I have stressed strict compliance with the
Federal government's ethics rules, including the prohibition in the
Administrative Procedure Act, 5 U.S.C. Sec. 557, and the Commission's
own regulations, 18 C.F.R. Sec. 385.2201, against communication between
persons outside the agency and FERC decisional employees such as
commissioners and senior staff on the merits of any issue in a
contested FERC proceeding. To underscore my commitment to ethical
behavior, I ordered every Commission employee to receive ethics
training in the Fall of 2001, shortly after I became Chairman. I am
pleased to report the Commission's Designated Agency Ethics Official
ultimately trained 1,158 employees (out of a total 1,123 full-time
permanent employees and 56 part-time or temporary employees as of
November 1, 2001).
After we received your January 31, 2002 letter, we e-mailed, hand-
delivered, or FedEx'd a copy of the letter and a list of all Enron
companies to the Commissioners and senior staff (office directors) who
were at the Commission during the August 2000 to June 2001 period. A
compilation of their responses, organized alphabetically, with their
titles during this period, is enclosed. (Individuals who are no longer
at FERC are italicized.) In brief, for the relevant time, there were
nineteen (19) people who served as FERC Commissioners and senior staff
and over the eleven months in question, seven (7) report that they had
no contact with Enron executives and twelve (12) recall having
approximately twenty-five (25) meetings or telephone calls with Enron
executives, addressing a variety of issues. (We counted participation
in the same meeting or telephone call by more than one person as one
event)
As you can imagine, it is difficult to recall every chance meeting
or brief telephone call one may have had over a year ago. I believe,
however, that all of the respondents made a good faith effort to give
us the information so that we could respond meaningfully to your
request.
If I can be of any further assistance in this or any Commission
matters, please feel free to contact me.
Best regards,
Pat Wood, III,
Chairman.
Enclosure
______
responses to senator boxer's request
for number of meetings and telephone calls
between enron executives and commissioners
and ferc senior staff between august 2000 and june 2001
February 21, 2001
Note: Commissioners or Senior Staff no longer at FERC are indicated
by italics.
Name of FERC Commissioner or
Senior Staff Description of Meeting or Telephone Calls
Adamson, Daniel
Former Director of Energy
Projects
(1) Possibly met with Enron executives on natural gas pipeline matters.
Breathitt, Linda K. (1) On September 7, 2000, in a courtesy visit, along with staff assistant, met
Commissioner with Rick Shapiro, Managing Director, Government Affairs--Enron (Houston) as
well as Charles Bone, Nashville Attorney. General discussion of electric
deregulation.
Brownell, Nora Mead No meetings or telephone calls to report.
Commissioner
Chamblee, Donald A. No meetings or telephone calls to report.
Former Acting Director of
External Affairs
Ferguson, Walter L. No meetings or telephone calls to report.
Chief of Staff for Former
Chairman Hebert
Hebert, Curtis L. On February 9, 2001, spoke on the telephone with Ken Lay regarding remaining
Former Chairman FERC Chairman. This was the subject of the August 16, 2001 GAO Report, which
found nothing illegal about the call.
Hirning, Kathleen M. No meetings or telephone calls to report.
Former Director of the
Office of External Affairs
Hoecker, James J. (1) On January 19 and 13, 2001, attended meetings convened by White House
Former Chairman staff to arrive at a negotiated resolution of California's electricity
problems before Inauguration Day. General Counsel Doug Smith and electric
policy advisor Pat Alexander attended with me. The meetings were presided
over by Secretary of the Treasury Lawrence Summers and Secretary of Energy
Bill Richardson participated in the first meeting. In all, 30 to 40 persons
attended each of these meetings, although about half of the attendees
participated in the January 13 meeting by video conference from Sacramento,
California. Ken Lay attended the first meeting and probably attended the
second, although from California. He may have been accompanied by other Enron
executives. Among the other participants were Governor Gray Davis, members of
his staff, President Loretta Lynch of the California Public Utilities
Commission, leaders of the California legislature, senior executives of
California's three major utilities and other energy suppliers in the
California market, and members of the Council of Economic Advisors.
Herlihy, Thomas J. (1) On December 7, 2000, was present at a lunch with Jeff Skilling, seven
Executive Director and other FERC employees, and several other Enron employees participating in
Chief Financial Officer showing Enron's trading room.
Larcamp, Daniel L. (1) On July 18, 2000, met with Stan Horton and others in the Enron Pipeline
Director of Markets, Group, and toured the Enron trading floor and gas control center.
Tariffs, and Rates
Madden, Kevin P. (1) In Winter-Spring 2001, met with Stan Horton as INGAA Chairman to discuss
Former General Counsel pipeline safety, rate design, and the affiliate conference. Jerry Halvorsen
was also there.
Massey, William L. (1) On October 19, 2000, met with Stan Horton, Chairman and CEO, as Gas
Commissioner Industry Standards Board (GISB) Chairman 2000, for a courtesy visit and
briefing regarding the GISB Board. Steve Bergstrom, Jim Templeton, and Bill
Boxwell were also in attendance.
Robinson, J. Mark No meetings or telephone calls to report.
Director of Energy Projects
Smith, Douglas On January 9 and 13, 2001, attended two large meetings convened by senior
Former General Counsel Administration officials to try to arrive at a negotiated resolution of
California's electricity supply problems. Chairman Hoecker and Pat Alexander
were also in attendance. The meetings were chaired by Secretary of the
Treasury Lawrence Summers and National Economic Council Chairman Gene
Sperling. Participants included Secretary of Energy Bill Richardson, Governor
Gray Davis and energy officials from his administration, President Loretta
Lynch of the California Public Utilities Commission, leaders from the
California legislature, and senior executives from the California electric
utilities and a number of energy suppliers in the California market. One or
more Enron executives attended each meeting. Ken Lay attended the first
meeting, and may have attended the second meeting. In all, 40 or more persons
attended the meetings.
Strasser, Virginia No meetings or telephone calls to report.
Former Director of the
Office of Administrative
Litigation
Wagner, Jr., Curtis L. November 2000 to July 2001, as settlement judge, held regular meetings with
Chief Administrative Law Judge Enron officials and counsel during negotiations in the California Forward
Contract proceedings, the Midwest/Alliance ISO settlement discussions, and
California Refund case negotiations. No recollection of the names of the
people who participated.
Whitmore, Charles S. (1) On December 7, 2000, was present at a lunch with Jeff Skilling, seven
Former Director of Strategy and other FERC employees, and several other Enron employees participating in
Performance Staff showing Enron's trading room.
Wood, III, Patrick H. No meetings or telephone calls to report.
Chairman
Young, Fernanda F. (1) On December 7, 2000, was present at a lunch with Jeff Skilling, seven
Chief Information Officer other FERC employees, and several other Enron employees participating in
showing Enron's trading room.
Senator Boxer. And FERC did not help California. Enron
lobbied the White House in 2001 of April, Kenneth Lay had a 30-
minute meeting with Vice President Cheney about the California
electricity crisis and energy policy. And I'm just showing
quickly here a chart. We see that, without reading this, Mr.
Lay gave him the words that he should use, in terms of not
taking action on a cap. And there you go. The very next day, he
tells the Los Angeles Times that he doesn't see the cap as a
possibility.
So I'm going to submit for the record the eight-point memo
Mr. Lay gave to the Vice President, if I might.
Senator Dorgan. Without objection.
[The information referred to follows:]
National Energy Policy: Priorities
The 1992 Energy Policy Act (EPA) intended to introduce competition
into the wholesale market for electric power by providing transmissions
access. Events in California and in other parts of the country
demonstrated that the benefits of competition have yet to be realized
and have not yet reached consumers. To realize the vision set forth in
the EPA, the following actions need to be taken:
1. Fair Transmission Access
In Order No. 888, the FERC attempted to formulate fair terms and
conditions of access to the transmission grid for all users. However,
the FERC failed to extend its jurisdiction to transmission services
bundled together with retail sales. Consequently, distinct rules apply
to different parties for use of the same transmission asset and such
rules provide vertically integrated utilities the opportunity to use
their transmission assets to disadvantage independent third party
generators and wholesalers.
To achieve robust competition in wholesale power markets, the FERC
must actively exercise jurisdiction over all aspects of electricity
transmission in interstate commerce and place all uses of the grid
under the same rates, terms, and conditions. Moreover, FERC
jurisdiction must extend to the terms of access applicable to
transmission systems owned and operated by non-FERC jurisdictional
entities including Federal Power Marketing Associations (PMAs), states
and municipalities.
To improve reliability, the FERC has encouraged utilities to
combine transmission facilities into large Regional Transmission
Organizations (RTOs) and to assign the responsibility for operating
RTOs to an independent management team. Properly structured RTOs can
ease the movement of power between states and between users within a
state, and will enhance reliability, commercial activities, and
competition in the energy industry.
However, the FERC has refused to make RTO participation mandatory.
This, coupled with the lack of non-discriminatory open access terms,
has weakened the RTO initiative. Therefore, the Administration must
encourage the FERC to approve only those RTOs with sufficient size and
scope and with non-discriminatory terms and conditions for access and
to require that all transmission owners participate in an RTO. Finally,
the Administration should revise those tax provisions that prevent the
transfer of assets to new, stand alone independent, for-profit
transmission companies (Transcos).
2. Independent Energy Reliability Organizations
Governance of the North American Electric Reliability Council
(NERC) is cumbersome and places new market entrants at a competitive
disadvantage. There is a necessary role for FERC oversight of a new
Independent Reliability Organization (IRO).
Legislation to establish a new IRO is required. However, the
``consensus'' reliability language in the proposed Murkowski bill is
ineffective since it establishes an unsatisfactory procedure to resolve
conflicts between the IRO and the various RTOs established by the FERC.
Legislation that permits the FERC to delegate authority to develop
reliability standards and enforce those standards, establishes an
appropriate funding mechanism, includes a limited States' savings
clause and provides the IRO participants with anti-trust immunity will
accomplish the shared goal of establishing an effective IRO.
3. Wholesale Market Price Caps or Cost-Based Wholesale Rates
The Administration should reject any attempt to re-regulate
wholesale power markets by adopting price caps or returning to archaic
methods of determining the cost-base of wholesale power. Price caps,
even if imposed on a temporary basis, will be detrimental to power
markets and will discourage private investment by significantly raising
political risk. Similarly, a return to cost-based wholesale rates will
be extremely difficult to implement and will effectively negate
significant investments made by new market entrants made in reliance on
the presence of deregulated wholesale power markets.
4. Interconnection Policy
Competitive generation (including Distributed Generation ``DG'')
and wholesale power markets have been hindered by grid interconnection
policies and procedures that restrict new entry. The lack of a uniform
and effective interconnection policy creates uncertainty, delay and
unnecessary costs in development of new generation capacity and DG
technologies. To correct this problem, FERC must develop and enforce
standardized, non-discriminatory interconnection procedures.
5. Federal Transmission and Generation Siting Policy
An efficient and reliable interstate wholesale market requires
construction of new transmission and generation facilities. Siting and
permitting problems have frustrated construction of new facilities.
Consistent with rules for certification of natural gas facilities,
granting condemnation rights to private parties that have obtained
federal authorization to construct facilities can significantly reduce
these problems. In addition, Federal Agencies and Tribunal Governments
should streamline the regulatory processes to enable expedited
construction and efficient operation of energy infrastructure.
6. Demand Reduction Incentives
The Administration should mandate the creation of a regional demand
exchange (implemented by mandatory RTOs) that would allow large
consumers to post bids for the reduction of demand. If implemented
expeditiously, such a mechanism can have an immediate impact in
reducing demand this summer.
7. California Power Crisis
The political leadership in California has made limited progress in
solving its power crisis. All of the above items would mitigate this
crisis.
8. Natural Gas Supply Outlook
There are concerns that natural gas supplies may not be adequate to
meet market demand. Yet all studies indicate that remaining
economically recoverable resources in North America are ample for
decades to come. These supplies can be further supplemented by imported
liquified natural gas. This will allow natural gas to continue to
provide an increasing share of the total energy needs to the U.S.
Senator Boxer. Enron lobbied the Energy Department. On
March 29, Secretary Abraham held a meeting on the California
crisis with 16 industry officials, including two from Enron.
And there's more. Between February 14 and April 26, as the
electricity crisis continued in California and Enron insiders
sold stock, Energy Secretary Abraham also met with 36 energy
and business groups about energy policy, met with an additional
20 heads of oil companies and energy groups. And I ask that an
article about these meetings be included in this record.
Senator Dorgan. Without objection.
[The information referred to follows:]
Energy Contacts Disclosed; Consumer Groups Left Out, Data Show
The Washington Post, March 26, 2002
Dana Milbank and Mike Allen, Washington Post Staff Writers
Energy Secretary Spencer Abraham met with 36 representatives of
business interests and many campaign contributors while developing
President Bush's energy policy, and he held no meetings with
conservation or consumer groups, documents released last night show.
The information was released by the Energy Department just a few
hours before a court-ordered deadline, and after 11 months of
resistance by the administration to lawsuits by public interest groups
seeking to determine who influenced the writing of the administration's
energy plan.
A first review of the 11,000 pages of documents bolsters the
contention of Democratic lawmakers and environmental groups that the
Bush administration relied almost exclusively on the advice of
executives from utilities and producers of oil, gas, coal and nuclear
energy while a White House task force drafted recommendations that
would vastly increase energy production.
Of the corporations that met with Abraham, all but a few were large
contributors of unregulated soft money to the Republican Party during
the 2000 election cycle. A dozen of the companies that had meetings
with Abraham contributed $1.2 million to the GOP, mainly for Bush's
election. Ten of the 12 gave more soft money to Republicans than
Democrats. Large portions had been deleted from the documents released
last night by the Energy Department, the Environmental Protection
Agency, the Agriculture Department and the White House Office of
Management and Budget. Most attachments were missing and in many cases
documents were withheld except for the subject line. Thousands of other
documents were withheld entirely, and the groups that won release of
the documents through lawsuits said they may return to court.
Abraham's meetings, between Feb. 14 and April 26 of last year,
included groups such as the National Association of Manufacturers, the
Independent Petroleum Association of America and the Nuclear Energy
Institute. Top executives of Westinghouse Electric Corp., Duke Power,
Entergy, Exelon Corp., UtiliCorp United (now Aquila Inc.), American
Coal Co. and others sat down with Abraham.
Environmental groups said their efforts to meet with the energy
task force were rebuffed. The Energy Department has said that
environmental groups did not respond to its request for input, and the
administration has said it held at least one substantive discussion
with 10 environmental groups in late March, prior to the May release of
the energy policy.
Because of the deletions and omissions, there is little information
about what the donors and business interests were seeking in their
high-level meetings. The documents released include hundreds of
unsolicited suggestions from citizens, companies and lawmakers, most of
whom received form responses promising the ideas would receive ``close
and careful attention.''
Among the items released is a letter from the Alliance of
Automobile Manufacturers favoring tax credits for hybrid-fuel and fuel-
cell vehicles and similar incentives for fuel efficiency that were
included in the Bush energy report.
One company, Citgo, urged the administration ``to exercise federal
authority to prevent states'' from establishing separate fuel
standards. These ``boutique fuels'' cause distribution problems for the
industry, and Bush's energy plan directed the EPA to work with states
to eliminate them.
An Energy Department e-mail indicating close coordination with
industry notes that Texaco was seeking to help Bush's energy policy
rollout. Texaco ``has offered to try to produce an announcement on a
1500 megawatt facility at a TVA site in harmony with such a rollout,''
the May 7 e-mail said.
``Finally there is some evidence of who was actually shaping the
energy policy,'' said Sharon Buccino, senior attorney for the Natural
Resources Defense Council, which won the court order on Feb. 27
requiring the Energy Department's information release.
Buccino said the group plans to challenge many of the omissions in
court. The Energy Department released a chart suggesting Vice President
Cheney's task force had adopted nine NRDC recommendations, which
Buccino called ``an outright lie.'' Another 15,000 pages were withheld
for privacy, security and other reasons, Energy officials said.
Larry Klayman, chairman of Judicial Watch, the watchdog group that
won the court order requiring the OMB, EPA and Agriculture releases,
said the White House appeared to be ``playing games'' with the release.
He said he expects to ``go back to court to seek testimony as to why we
don't have the substantive e-mails.''
Trent Duffy, OMB's spokesman, would not explain the deletions
beyond saying, ``The items that were part of the deliberative process
were redacted.''
Abraham issued a statement calling the energy plan ``a balanced and
comprehensive energy plan for America,'' and said that the
administration ``not only sought but included all viewpoints.''
Several of the documents indicate that officials were aware of
efforts to obtain information about their actions under the Freedom of
Information Act, and they adjusted their correspondence to limit the
release of materials. ``We have an FOI request for all NEPP material,''
said one April 25 e-mail, referring to the task force. ``Keep in mind
that whatever I get I will have to include with it.'' Another e-mail
about the FOIA requests asked, ``Did you want me to include Kyle?''--an
apparent reference to Abraham's chief of staff, Kyle McSlarrow, whose
e-mails were not included in the release.
Abraham held meetings with more than 20 other heads of oil
companies and energy trade groups while the report was being written,
but the Energy Department said those meetings included other topics.
Abraham's staff had several meetings with Enron officials, the
documents showed. Enron, a major Bush donor that collapsed late last
year and is facing a criminal probe, met with other representatives of
the task force six times, the administration has disclosed. Energy
Department officials said most of their meetings with Enron were not
related to the energy policy. Abraham met with two Enron executives on
March 29 as part of a meeting of 16 industry officials about the
California electricity shortage. Energy officials said Abraham declined
requests for meetings with Jeffrey Skilling and Kenneth L. Lay of Enron
Corp.
The OMB materials that were released also indicate the energy task
force's emphasis on production over conservation. One e-mail from Feb.
22 listed seven chapters for the energy policy report: short-term
supply disruptions, consumers, economic impact, alternatives, increased
production, infrastructure and energy security. There was no mention of
conservation. An e-mail from March 22 made reference to an ``energy
efficiency'' chapter, and a March 27 e-mail indicates that an
``environment chapter'' had been included. By April 2, there were
``energy conservation targets.''
The Energy Department documents indicate a late surge of activity
to include more renewable fuels in the energy report. Karen Knutson,
the deputy director of the task force, wrote to the Energy Department
on April 27 seeking information about solar energy.
The OMB documents indicate Bush was involved in the shaping of the
report well before it was released May 16. The task force briefed him
on March 19, a schedule indicates, and a final report was circulated on
April 23.
The e-mails also indicate that the task force was involved in
Bush's March 13 decision to reverse a campaign pledge to characterize
carbon dioxide as a pollutant that should be restricted, a position
shared by environmental groups. A March 7 e-mail among task force
staffers refers to ``CO2 as a Pollutant.'' Ultimately, the
report did not take a position on whether to raise fuel economy
standards for vehicles, but the e-mails indicate there was extensive
work on making recommendations about the corporate average fuel economy
(CAFE) standards.
The EPA and Agriculture documents were also stripped of content
except for meeting and publication schedules and interoffice chatter
and bureaucratic fencing. ``Lots of typos and the like,'' said an EPA
official, ``but I assume they'll catch those.''
A long redacted section in one memo closed with a comment, ``just
kidding--Mona.''
Included among stacks of documents from the EPA and Agriculture
Department were a few position papers from industry groups, including
the Fertilizer Institute and the Clean Energy Group--a coalition of
electric power companies urging a ``reasonable time frame'' for
pollution control strategies. Their pitches to the administration
appeared to be familiar agendas the groups have lobbied for and
testified about many times.
The subject lines on thousands of pages of government e-mail
traffic described the wide horizon of energy and resource issues, from
``boutique'' gasolines blended for a particular region's needs to rules
on offshore drilling disputes.
The documents released indicated some dissension about how the
energy report was assembled. A March 28 OMB e-mail requests that ``if
you see any particularly egregious recommendations that you alert me to
by tomorrow 10:30 . . . . I could raise it in the meeting to highlight
the process problems.'' A Feb. 26 e-mail states: ``The agency/chapter
meetings got a little discombobulated.''
Bush's energy plan encourages increased production of fossil fuels,
including relaxed regulations and subsidies for the coal and nuclear
industries, oil and gas drilling in the Arctic National Wildlife Refuge
and construction of 1,300 to 1,900 power plants over the next 20 years.
Most of Bush's energy recommendations were incorporated in a bill
that passed the House in August after heavy lobbying from labor unions.
The Senate has begun debating its version and is expected to take up
the most controversial part, the Arctic drilling, when lawmakers return
from recess in two weeks.
Large donors meeting with Abraham included Duke Energy, which
contributed $61,500 in soft money, all to the GOP, according to figures
kept by the Center for Responsive Politics. Constellation Energy gave
$38,950, all to the GOP. Northeast Utilities contributed $43,580, all
but $2,000 to the GOP. UtiliCorp United gave $66,000, all to the
Republicans. American Coal Co. gave $20,500, all to the GOP. Kerr-McGee
gave $240,350, all but $20,000 to Republicans. Exelon Corp. gave
$454,305, 74 percent to the Republicans.
Senator Boxer. Department of Energy did not act to help
California. They actually started to blame California for the
crisis. In June 2001--and I've got about a minute left--the
Administration had a California message meeting. Attendees at
this meeting included Secretary Abraham, Mary Matalin, Karl
Rove, Lawrence Lindsey, Nicholas Calio, Karen Hughes, and Ari
Fleischer. Mr. Chairman, I want to submit for the record an AP
article on this political meeting.
Senator Dorgan. Without objection.
[The information referred to follows:]
Politics, policy mix in White House response to energy crisis
Associated Press, April 5, 2002
By Mark Sherman, Associated Press Writer
Washington--As the Bush administration resisted calls from
Democratic Gov. Gray Davis for electricity price caps during last
year's energy crisis, top officials met with past or future Davis foes
and key White House political operatives.
Administration documents released by a court order showed that
administration officials kept a close eye on soaring energy prices and
intermittent power blackouts in California. At least two of the
meetings included Karl Rove and Mary Matalin, the top political
advisers to President Bush and Vice President Dick Cheney,
respectively.
Records show that Energy Secretary Spencer Abraham participated in
at least 19 meetings during his first five months on the job, including
at least seven during the first three weeks of his tenure. While
Abraham didn't meet with Davis until late February, he huddled with
Republican Secretary of State Bill Jones and former Northwest Airlines
executive Al Checchi before then, records show. Jones unsuccessfully
sought the Republican nomination for governor in last month's primary,
while Davis had beaten Checchi in the 1998 Democratic primary.
Abraham and Checchi knew each other from when Abraham represented
Michigan in the Senate and Checchi was at Northwest, which has a hub in
Detroit, Abraham spokeswoman Jill Schroeder said.
Checchi had criticized Davis in newspaper opinion pieces at the
time. In a brief interview, he said he asked to meet with Abraham to
``put my two cents in'' on the energy issue.
Abraham, Cheney and other top administration officials repeatedly
and publicly criticized Davis for his handling of the situation. Cheney
called the state's power purchases--begun by Davis when investor-owned
utilities tottered on the edge of bankruptcy--a ``harebrained'' scheme.
Republicans also began a multimillion dollar television advertising
campaign--paid for in part by power-generating companies--trying to
blame the governor for the crisis.
At the time, Davis was viewed as a potential rival to President
Bush in the 2004 presidential election and California had for the third
consecutive presidential election gone solidly for the Democratic
candidate.
In late April, shortly before Abraham traveled to California,
Joseph Kelliher, a senior policy adviser, asked other staff members to
research Davis' assertions that conservation was helping the state
through the energy crisis.
Referring to a press release on the governor's Web site, Kelliher
asked, ``Can we assess the accuracy of his claims of conservation?''
Kelliher asked.
It's not surprising the administration worried about the politics
of the California energy crisis, said Davis spokesman Steve Maviglio.
``The administration was openly hostile to price caps much of the
winter and spring. And they were harshly critical of the governor's
decision to get the state in the business of buying power.''
Leon Panetta, former California congressman and chief of staff in
the Clinton White House, said he believes the new administration had
already decided ``they were going to hang California out there. It
would be an example to the rest of the country what not to do. It would
show the liberals that they better build new power plants or suffer the
consequences.''
Contrary to showing a lack of concern about California, Schroeder
said, the frequent meetings demonstrated that ``this was an immediate
priority.''
However, Sen. Barbara Boxer, D-Calif., said she's ``convinced that
politics played an enormous role in this.
``This was the period we were going through our worst troubles and
FERC had already found that prices were unjust and unreasonable,'' said
Boxer, who pushed for price caps and a federal investigation of
electricity prices. ``But the administration did not act.''
Bush and Abraham made separate visits to the state in May, touting
an executive order to reduce electricity use in federal facilities, but
remaining firm in their opposition to capping the price of
electricity--a move fiercely opposed by energy companies.
In early June, the administration convened what it called a
``California message meeting.'' The participants included Abraham,
Matalin, Rove, Lawrence Lindsey, Bush's chief economic adviser,
Nicholas Calio, the administration's chief congressional lobbyist,
presidential counselor Karen Hughes and press secretary Ari Fleischer.
The following week, Cheney went to the Capitol, where he held a
long-requested meeting with California's congressional delegation. The
message was the same: Expect no help from the administration on energy
costs.
California had been ``blown off'' by Cheney, Rep. Maxine Waters, D-
Los Angeles said after the meeting.
By this time, even some Republicans in California were pleading
with the administration for help.
Less than two weeks later, two Bush appointees to the Federal
Energy Regulatory Commission voted to impose limits on what energy
generators could charge for spot purchases of electricity in California
and other Western states, although they did not call that decision
price caps.
Senator Boxer. For this Administration, it appears the
California crisis was not about solutions, but about spin. In
fact, in June 2001, a series of ads, ``Gray outs from Gray
Davis,'' began running in California. These ads blamed our
Governor for this crisis. He has had to sue in an attempt to
find out who paid for these ads. We know they were made--the
ads were--by a Republican political operative. And, Mr.
Chairman, I'd like to submit for the record copies of the text
of one of those ads, as well as a newspaper article that talks
about the political operative.
Senator Dorgan. Without objection.
[The information referred to follows:]
Governor sues to ID sponsors of attack ads;
Group accused of violating campaign law
The San Francisco Chronicle, July 21, 2001
By Mark Martin
Sacramento--Gov. Gray Davis struck back yesterday at an
organization running television ads that trash his power policies,
asking a state court judge to force the group to reveal its donors.
Davis campaign officials say they believe big energy companies are
behind the ``Gray Out'' media blitz, financed by the American Taxpayers
Alliance, in Washington.
In a lawsuit filed in San Francisco Superior Court, lawyers
representing the governor's political committee say the alliance broke
state law by not registering as a political organization with the
secretary of state. They also say the group has until the end of the
month to file a campaign statement listing contributors and is asking a
judge to make sure it does.
``This committee has to tell the voters of the state of California
where they're getting their money,'' said Joseph Remcho, a San Leandro
attorney who prepared the lawsuit. ``The American Taxpayers Alliance
has totally refused to do so.''
Beginning in June, the alliance has spent $2 million on television
ads that end with the line, ``Gray outs from Gray Davis.''
Just what the alliance is remains something of a mystery. Headed by
Scott Reed, a Republican campaign consultant and the former campaign
manager for Bob Dole's 1996 presidential bid, it is registered with the
Internal Revenue Service as a nonprofit corporation. The group reported
to the IRS in April that it was inactive but shortly after began its
million-dollar media buy, according to the lawsuit.
Reed has refused to identify the group's contributors, but Time
magazine has reported that Reliant Energy Inc. is a major donor. Davis
political adviser Garry South suggested at a press conference
announcing the lawsuit yesterday that the White House had asked power
companies to go on the offensive in California.
Bush administration officials have previously denied that charge.
Reed did not return calls for comment yesterday.
The lawsuit comes amid a recent barrage of ads regarding the
state's energy crisis--an issue voters listed as the state's top
concern, well above any others, in a poll released this week by the
Public Policy Institute of California.
In response to the attack ads, Davis has dipped into his campaign
war chest to buy $150,000-a-week radio spots defending his handling of
the crisis.
The advertising battle is among the first skirmishes of the
California primary season, albeit eight months before the March
contest.
Remcho argues that the ads constitute campaign spots, and therefore
the alliance is required to register with the state and file a campaign
statement listing its contributors by July 31 under the Political
Reform Act of 1974.
``Even if it doesn't say `Vote against Gray Davis,' it's a classic
candidate ad,'' Remcho said. ``It clearly is an anti-Gray Davis ad.''
But Kim Alexander, president of the nonpartisan California Voter
Foundation, said that the lawsuit delves into state political
advertising laws that remain murky.
``If it's not mentioning a bill or urging people to do something,
maybe it's just free speech,'' she said.
______
Text of Grayout Advertisement
``He's pointing fingers and blaming others. Gray Davis says he's
not responsible for California's energy problems. After all, the Public
Utilities Commission blocked long-term cost-saving contracts for
electricity. But who runs the PUC? The people Gray Davis appointed--
Loretta Lynch and other Davis appointees who left us powerless. That's
why newspapers say Davis ignored all the warning signals and turned a
problem into a crisis. Grayouts from Gray Davis.''
Senator Boxer. Finally, on June 12, 2001, nearly five
months into this Administration, the Vice President met with a
California delegation. All he did was blame us for using too
much electricity. And I will tell you right now, California, at
that time, was the second-most energy-efficient state in the
country, behind only Rhode Island. California was not refusing
to build more power plants. It licensed at least 20. And, as
you know from other charts I have shown, we actually were
conserving.
So, the story makes one thing perfectly clear, and I want
to show one last chart here. This shows you--and it's very
small, the print is small--these are the meetings Secretary
Abraham had, and it shows you how many blackouts we endured
during the period of time of those meetings. And, the third
shows the stock that was sold by Jeffrey Skilling and Kenneth
Lay during that time. So, the meetings were going on with Enron
and the energy people, the blackouts were happening, the
insiders were trading. It is an ugly story, an ugly story for
the people of California.
So, I am very concerned about what has happened. I hope we
can--when we do have all the facts in the record--we will all,
in a bipartisan way, take action to make sure that this never
happens to my state again or to any other state in the union.
Colleagues, I wouldn't wish this on you. I want to help you
avoid it.
Thank you very much.
Senator Dorgan. Thank you, Senator Boxer. The ranking
member of the Subcommittee, Senator Fitzgerald.
STATEMENT OF HON. PETER G. FITZGERALD,
U.S. SENATOR FROM ILLINOIS
Senator Fitzgerald. Senator Dorgan, thank you very much.
And, Senator Boxer, thank you.
I will listen with interest to the testimony of today's
hearing, but I have to say that I come into this skeptical with
respect to whether Enron had any effect on California's energy
crisis or as to whether Enron's political involvement really
means very much.
I happen to believe, based on what I've seen so far, that
Enron was really just a gigantic pyramid scheme grafted onto an
underlying pipeline company. I think that they were essentially
borrowing money, and booking borrowed money as income. They
were able to do that by using the accounting rules to park the
borrowings on the books of partnerships that were off their
books and not consolidated with their books. And as the debts
of those partnerships became due, they borrowed more money to
pay off the earlier debts and booked more fictitious income.
I think Enron's political involvement was really a cover
for the confidence game that they were running. I don't really
even view it as--having been much of--a legitimate business. I
haven't seen evidence that they derived much in the way of
earnings from traditional energy-company services. I think that
almost all of their reported earnings at the end were simply
from their Ponzi operation or their pyramid scheme or their
shell game.
And I think my colleagues know me well enough to know that
I am fiercely independent. If I thought for a minute that
Enron's political involvement was substantial, I would be the
first to say so. But based on what I've seen so far, I don't
think it's all that significant, but I will listen,
nonetheless, with interest to the testimony today.
And I have to compliment my colleague from California for
her tenacity. She is a pit bull in fighting for her
constituents, and I have to take my hat off to her for that.
Thank you.
Senator Dorgan. Thank you. Senator Wyden, you had a
unanimous consent request?
Senator Wyden. I do. I wanted to put a document into the
record that I think reflects the timeliness of this hearing.
Right now, there are discussions going on involving the
Bonneville Power Administration's ability to cash out of $700
million in high-priced power-purchase contracts that BPA has
with Enron.
The reason that these discussions are so important and the
issues we're examining right now are so important is that if
fraudulent activity was taking place at the time that those
contracts were entered into, that then gives the Bonneville
Power Administration another opportunity to get out from under
those contracts.
I would just ask unanimous consent, Mr. Chairman, that the
article describing these negotiations and why these
negotiations are so critical for Northwest ratepayers and the
issues we're examining this morning are so important, be
entered into the record.
Senator Dorgan. Without objection.
[The information referred to follows:]
No easy escape from Enron; BPA may be stuck with costly contract
The Seattle Times, February 8, 2002
By Hal Bernton, Seattle Times staff reporter
The Bonneville Power Administration appears stuck with buying $700
million worth of electricity from Enron at a price nearly double the
current market rates for an equivalent amount of power.
By contrast, at least two other Western utilities have walked away
from expensive, long-term contracts with Enron.
Officials of the Snohomish County Public Utility District and the
Palo Alto, Calif., municipal utility both cited Enron's poor credit
rating as justification to invoke escape clauses that terminated the
deals. They now are preparing to defend those actions from any legal
challenges that might arise during bankruptcy proceedings. But
Bonneville Power Administration (BPA) officials say they have no easy
escape clauses in their power-purchase contracts. Even though Enron is
now fighting for survival in U.S. Bankruptcy Court, the Texas-based
energy-trading company has continued to deliver power to the BPA. As
long as Enron makes good on these deliveries, BPA officials say the
only exit appears to be through a costly buyout.
The 320 megawatts of Enron power, contracted for delivery through
2006, will cost an average of about $50 per megawatt-hour.
Earlier this week, a buyer could have purchased power for Northwest
delivery through 2006 for about $28.50 a megawatt-hour, said Keith
Kelly, a vice president of energy broker TFS Energy. That would be a
savings of about $300 million over the six-year contract negotiated
with Enron.
``We continue to look at our options, but just because a company
files bankruptcy doesn't mean that you can walk away from your
agreements,'' said Ed Mosey, a spokesman for the BPA.
Enron officials agree. Enron is trying to fulfill as many contracts
as possible, and the contracts remain in force, according to Eric
Thode, a company spokesman.
The BPA markets wholesale power from 29 federal hydroelectric dams
and a nuclear power plant to Northwest industries and utilities,
including Seattle City Light. It sells power in times of surplus but
sometimes ends up short and has to buy power.
Last year's drought forced the BPA to make big buys, and in October
the agency raised rates by 46 percent to help cover those costs. The
BPA is considering another rate increase this spring.
The BPA's power purchases with Enron represent about 3 percent of
the agency's total power load. The agency purchased most of this power
between fall 2000 and spring 2001, a period when Enron ranked as the
largest private market of Northwest power. Purchase prices ranged from
$30 to $85 but averaged about $50.
The terms of all power purchases are detailed in contracts, and
hundreds are signed each day in the West. Most of these deals are for
short-term deliveries and detailed in relatively standard contracts
developed by an industry group known as the Western Systems Power Pool.
But as contracts edge up toward multiyear deals, the standard
contracts in recent years often have been abandoned in favor of
contracts with more highly refined escape clauses, according to Michael
Small, general counsel for the power pool.
When Enron put on its buyer's hat and sought to purchase BPA power
in the late 1990s, the corporation appeared to have taken an active
interest in escape clauses. Enron insisted that the contracts include
clauses that voided the deals should either party become insolvent,
according to BPA spokesman Mosey.
The BPA last week announced it would cancel contracts to sell $285
million worth of power to Enron in deliveries scheduled through 2006.
In 2000 and 2001, when the BPA sought to buy power from Enron, no
similar escape language was included in the contract.
Instead, the BPA used the standard contracts of the Western Systems
Power Pool. Those contracts allow the BPA to declare Enron in default.
But to get out of the contracts, the BPA could be required to fork up
big dollars to compensate Enron for the loss of the contract.
Mosey said that it was standard procedure for the BPA to use the
Western Systems Power Pool contracts because the BPA was an active
member of the pool.
Small, the general counsel for the power pool, said members also
are free to use other contracts.
``What I've seen is that most people who are going into a multiyear
contract . . . don't use the standard contract,'' Small said.
Snohomish County PUD officials said they did not use the pool
contracts as they negotiated an eight-year, $192 million dollar deal to
buy Enron power. That deal was negotiated in January 2001 as power
prices neared record highs and the average cost per megawatt-hour
topped $100.
The Snohomish County PUD's long-term contract has more flexibility
in terminations than the standard Western pool contract, according to
Neil Neroutsos, a PUD spokesman.
The PUD canceled its Enron contract Nov. 27, five days before Enron
filed bankruptcy.
PUD officials say the contract was canceled because of Enron's lack
of credit, insolvency and failure to truthfully disclose its financial
situation at the time the contract was signed. Palo Alto utility
officials put forth some of the same justifications in canceling
contacts with Enron.
The utilities hope they are free of the costly contracts, which
Snohomish County PUD officials say were ridiculously overpriced.
But the utilities may yet face legal challenges in Bankruptcy Court
proceedings under way in New York. Enron's filing is the biggest
bankruptcy case in history, and creditors are hungry for assets to help
pay off debts. And they may press the bankruptcy judge to override the
escape clauses and reinstate the long-term contracts.
``In Bankruptcy Court, a lot of the contractual language often
doesn't mean a thing,'' said Jan Ostrovsky, a former Bankruptcy Court
trustee in Seattle. ``Those contracts are big enough money to trigger a
fight.''
Senator Dorgan. Let me just say, before I call the
witnesses forward, Senator Burns and I believe Senator
Fitzgerald, have made a suggestion that ought to be the guiding
principle for every Committee hearing, which is that we should
first receive the facts and the evidence, before coming to any
formal conclusions. Clearly this must be the case with respect
to these issues. It's a fair point, and we shall abide by it.
And let me restate again, when I began this hearing, why I
think it's an important hearing. That which we know to this
point tells us that the Board of Directors of this corporation
did an investigation called the Powers report. The Powers
report said that the Enron executives effectively cheated the
Board of Directors. The Enron executives cheated investors,
their investors. And the question then is did Enron executives
also cheat West Coast electric consumers?
I think those are very important questions to ask, given
what we now know about what Enron did inside its own
corporation. What did it do outside its corporation? And I
think the witnesses that we have today will have some
interesting testimony.
Let me call them forward: the Honorable Joseph Dunn,
Senator, State of California; Ms. Loretta Lynch, President of
the California Public Utilities Commission; and Mr. S. David
Freeman, Chairman of the California Power Authority. I would
ask that you all come forward to the witness table. Ms. Wenonah
Hauter, Director, Critical Mass Energy & Environment Program,
Public Citizen, and Mr. Robert McCullough, Manager Partner,
McCullough Research, who is from Portland, Oregon. So, if you
will all come forward, we will begin. Why don't we begin with
Mr. Dunn, and then I--we'll just do it in the order that I
called them.
Senator Dunn, my understanding is that you were involved in
this issue in the State of California. Why don't you proceed,
and we will include your entire statement as a part of the
permanent record, and you may summarize.
STATEMENT OF HON. JOSEPH DUNN,
CALIFORNIA STATE SENATOR
Senator Dunn. Thank you, Mr. Chairman, and good morning to
all the Committee members, particularly our home-state senator,
Senator Boxer. Thank you very much for the opportunity to
testify about Enron's role in deregulation and, in particular,
Enron's role in the California electricity crisis.
I am the Chair of the State Senate Select Committee to
Investigate Market Manipulation in the Wholesale Energy Market
in California. We began that committee over a year ago, and
we've had numerous hearings, depositions. We've issued document
subpoenas. We've received millions of documents that we've
reviewed in Portland and Sacramento and Houston and New York,
and we're not through yet.
Much of the written testimony that I've submitted to this
Committee comes from those documents that we've reviewed.
However, those documents are under confidentiality agreements,
and I plead with this Committee to make a formal request to the
California Senate for access to those documents so we can work
out the confidentiality provisions and give this Committee
access to those documents.
And each of us before you today hold a very similar view
with respect to Enron, and much of it is in my detailed written
testimony which I'll not read today. I'm going to focus on
Enron's conduct before our investigation committee through the
past year.
But before I do that, I'd like to make one statement with
respect to Enron's role in deregulation and the California
crisis, and let me state a very important premise.
We do not have a crisis in electricity in California. We
have a crisis in economics. The longer we focus on this problem
as one of electricity, the further from the solution we get.
Everyone's focus has to be on economics and the rules of market
behavior--in particular, the exercise of market power and the
philosophic question of whether electricity, because of its
unique characteristics, can work as a commodity. There lies the
cause, and there lies the solution.
Now, I personally support deregulation of most markets. I
believe competition does benefit the consumer. However, this
deregulation, led by Enron, has become perhaps the greatest
fraud ever perpetrated on the American consumer. It was done
with the promise of lower prices. And our review of the
internal documents of the market participants show they never,
ever intended to deliver lower prices to the American consumer.
And I know some of my colleagues here will dispel some of
the myths that have surfaced since the crisis befell
California. I won't spend time with those other than to say: Do
we have a shortage of electricity? No. Less surplus, yes.
Shortage, no. Unexpected increase in demand? No. Facts don't
bear that out. Just a California problem? No. It just happened
to first surface in California, as many things do, good and
bad.
But let me go directly to Enron's behavior with our
committee over the past year. We began in March of 2001. We
were given promises by every market participant, including
Enron, that they would cooperate fully with our committee. I'm
sure this Committee has received the same promises.
In reliance upon those promises, we served voluntary
document requests of over a hundred categories of documents
last April. After two months of receiving zero documents, but
all kinds of excuses, we were forced, in June of last year, to
do what the California Senate has rarely done, and that is
issue document subpoenas. We issued them to generators, to
traders, to municipal electricity systems, to financial
institutions, to the Cal ISO, to the PX, and many other
entities, requesting via subpoena over a hundred categories of
documents, embracing millions of documents.
We also asked, at that time, for each of the market
participants to enter into a voluntary non-destruct agreement,
because we were concerned about relevant documents
disappearing. They refused at that time. And every single one
today as I sit here still refuses to enter into a voluntary
non-destruct agreement with our committee.
Once those subpoenas were served in June, we did receive
documents from all market participants but one. That one was
Enron. Enron's response to our document subpoena was to file
civil litigation against our committee, requesting not only
that the subpoena be quashed but questioning the very authority
of the California legislature to look into the behavior of the
market participants in the California wholesale electricity
market.
They still did not produce after the court rejected that
lawsuit in August. And, thus, we, the California State Senate,
were forced to commence contempt proceedings against Enron. We,
in fact, found Enron in contempt. And, on the last day of our
legislative session, September 14, before the fall recess, we
had a motion on the Senate floor for sanctions for that
legislative contempt.
Those sanctions that were proposed in that Senate
resolution were $1 million per day until they resolved their
contempt. In addition, the resolution demanded that CALPERS,
the Public Employee Retirement System, one of the largest
retirement funds in the world, required them to divest
themselves of all stock holdings in any company in contempt of
the California legislature, in this case, Enron.
In response to that resolution, as it was pending on that
last day of our session, on September 14, Enron flew all kinds
of corporate executives to Sacramento who met with us
throughout the day. Our session went well into the night, as it
usually does on the last session, and we reached an agreement
whereby they agreed, finally, to produce documents. And, in
fact, in the fall, they started to produce documents, about
300,000 documents, to a Sacramento depository. We have been
through that depository. And they, except for a handful of
documents, are all but worthless to our investigation.
In addition, in late fall, as this Committee knows, reports
of document destruction by both Arthur Andersen and Enron
itself surfaced. We immediately began an inquiry into those
reports, because we wanted to know if any of the documents
under our June subpoena had been destroyed.
Enron and Arthur Andersen have refused to cooperate with
that part of our investigation. In fact, both of them have
refused to honor a deposition subpoena of both an Arthur
Andersen and an Enron--sorry, of an Enron individual about the
document destruction. The Arthur Andersen subpoena has not been
served yet. Enron refused to produce someone in response.
As a result, this January we started contempt again. And,
in fact, we voted for contempt and we're moving forward with
potential sanctions. We also did one other thing. We voted to
refer Enron over to local law enforcement officials for
purposes of criminal prosecution for the destruction of
documents under a legislative subpoena. California, like every
state in the nation, has it be a crime to destroy documents
that are under a subpoena.
Enron, in response to that move in January, finally agreed
to open up their files to us. And I have to say they have
opened up many, many files to us, in Houston and in Portland,
where their western trading floor exists--or existed. We were
pleased with their level of production and the level of access
that we have had. However, one of our requests was for all e-
mails from Ken Lay, Jeff Skilling, Steve Kean, and other
corporation executives. We received those e-mails on nine disks
about a week-and-a-half ago.
Our IT team has now reviewed those disks, and we've come to
the unfortunate conclusion that prior to the production of
those nine disks, there was willful destruction of key e-mails
on those disks. We're about to go to war with Enron one more
time in the California legislature.
I implore this Committee in its investigation to pursue
this aggressively and to use the full weight of the law that
you have available to you. Otherwise, I can assure you from our
experience in California, you will get many promises, but you
will get nothing delivered.
I'd like to end by dispelling one more myth about the
California energy crisis, and that myth is, this whole mess was
caused by the deregulation scheme that was adopted by the
California legislature in 1996. There is no question that what
the California legislature did in 1996 wasn't perfect, but the
legislature relied heavily on the industry, particularly Enron,
and we trusted their representations at that time.
That trust proved to be misplaced. And so the analogy I
oftentimes draw is, while the California legislature may have
left the car unlocked, the energy industry, led by Enron, stole
that car. And that is the real crime. And, unfortunately, the
cop on the beat, FERC, won't do anything about it. I ask that
this Committee and the entire U.S. Congress assist us in
California to once and for all bring resolution to the energy
crisis.
Thank you, Mr. Chairman.
[The prepared statement of Senator Dunn follows:]
Prepared Statement of Hon. Joseph Dunn, California State Senator
Good morning, Chairman Hollings, Ranking Member McCain, Senator
Boxer and members of the Committee on Commerce, Science and
Transportation. Thank you for the opportunity to present testimony to
the Committee on Enron's role in influencing the structure and function
of California's deregulated energy market and its role in the energy
crisis.
Since last March I have chaired the California State Senate Select
Committee to Investigate Price Manipulation of the Wholesale Energy
Market. The Committee is conducting an extensive investigation into all
aspects of the California energy crisis. We have held numerous
hearings, taken countless depositions, conducted various interviews and
meetings with experts and interested parties and reviewed millions of
documents throughout the United States.
Our Committee has had protracted and at times, acrimonious,
dealings with Enron. I hope my experience in dealing with Enron and my
intimacy with the California energy crisis will provide insight into
decisions your Committee and Congress must address.
I preface my testimony with the admonition that my Committee has
documents to prove the claims made herein. Because of confidentiality
agreements reached with market participants, however, I am limited in
my ability to share many of these documents without a formal request by
you or your Congressional investigators. I encourage you, Senators, to
make a formal request if you wish to view these documents.
My comments today speak to the pivotal role Enron played in
influencing the design of California's deregulated wholesale market,
its behavior as a market participant as the market grew more and more
dysfunctional in 2000 and 2001 and the part Enron's conduct played in
the huge price spikes California experienced.
Let me begin by saying that there has never been a ``power
shortage'' in the state of California. The state has always had a
sufficient supply of electricity to meet its need. That some have said
the state experienced periods where demand outstripped supply is one of
the many myths of the energy crisis. What California experienced in
2000 and 2001 was not a crisis in electricity, it was a crisis in
economics. Enron and its team of economists knew this better than most.
Enron's Early Foray into California
Enron was involved in the California electricity market well before
the inception of the deregulated market. In fact, Enron was the most
pivotal (future) market participant in shaping the regulatory and
political environment that gave birth to the commoditization of
electricity.
Enron testified before and submitted comments to the California
Public Utilities Commission (CPUC) more than a dozen times before 1996,
the year legislation was passed that authorized ``deregulation.'' This
is a critical point--Enron's sophisticated lobbying efforts helped
create the very market it would later exploit. To be clear: I do not
believe there is anything wrong with lobbying public officials on
behalf of one's business interests. Done properly, it is good business
and a democratic right. However, Enron's lobbying consisted of
hyperbolic promises that its internal predictions do not appear to
support.\1\
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\1\ To the extent that Enron knowingly published any false
statement to affect the wholesale electricity market is worthy of
further investigation, as it is a violation of California law (Penal
Code Sec. 395).
---------------------------------------------------------------------------
For example, former Enron CEO Jeff Skilling, then the President of
Enron Capital & Trade, told the CPUC on June 14, 1994, that California
would save billions in a few short years under a deregulated market.
In this industry in California, the potential savings are
enormous. . . More specifically, in California, our view is
that California is an industry run amok. If California
consumers were paying even the same costs as surrounding
states' consumers are paying, the state would save about $8.9
billion per year. If you had $8.9 billion that you wanted to
spend, let me tell you what you can buy every year. You can
triple the number of police in Los Angeles, San Francisco,
Oakland and San Diego, and you could double the number of
teachers in Los Angeles, San Francisco, Oakland and San Diego.
You could pay all the interest on the California state debt.
You could pay full interest in debt service for all three bond
issues that failed last year [1993] and you'd have enough pin-
money left over to cover the CPUC's budget. And you'd have
another billion dollars a year left over.
With California facing a more-than $15 billion budget deficit this
year, the hollowness of this prediction is not wasted on anyone in my
state.
Beyond what some might label insignificant grandstanding, Enron
lobbied for very specific market rules that stood to benefit its
business at the expense of consumers. Two months after giving that
testimony, and again in October 1994, Mr. Skilling appeared before the
CPUC to argue for the superiority of an ``OpCo'' electricity market
versus a ``PoolCo'' market that was modeled on similar markets in other
countries, including the United Kingdom.
OpCo and PoolCo refer to competing approaches of market management.
In each model, the respective guardians of each approach--a Power
Exchange for the PoolCo method and a Power Marketer for the OpCo
method--promise an optimization of market efficiency. Efficiency is
achieved by the PoolCo method through a transparent ``pool'' system in
which buyers and their ``bids'' are pooled and sellers and their
``asks'' are pooled. The two pools are then overlaid, and buyers and
sellers are matched. The ultimate price is posted, and participants in
the ``auction'' use this pricing information to make ``efficiency
decisions'' on their own, such as the when and where of committing
their generation units.
The OpCo method championed by power marketers relies on a different
underlying assumption: i.e., ``competitive markets need help in
performing efficiently.'' \2\ The ``value-add'' of a marketer lies
primarily in its risk management, founded on superior understanding of
market fundamentals, including price, bidding and demand history. Enron
argued that the resulting efficiency wrought by power marketers, in the
end, benefits consumers.
---------------------------------------------------------------------------
\2\ Steven Stoft's April 29, 1997 study, ``What Should a Power
Marketer Want?'' I ask whether this is an unintentional concession that
a deregulated model does not work.
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Many economists have noted that this premise is faulty.
``Generators wish for a high price paid to generators, and consumers
want to see low prices paid by loads, but power marketers want the
opposite of both. They want to buy low (from generators) and sell high
(to consumers). Power marketers are a new breed and they have different
objectives. . . they are mistakenly viewed as market makers. . .
Currently power marketers often find themselves in the position of
trading wholesale power while adding very little value. In this case
their principle opportunity for profit exists at being a better
speculator in the market.'' \3\ Speculating for profit is not what
California consumers needed to ensure an efficient delivery of energy.
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\3\ Stoft.
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In arguing for the OpCo approach, Mr. Skilling referred to Enron-
generated forward price curves.\4\ Enron confidently predicted that the
benefit of a liquid futures market for electricity would bring
stability, efficiency and competition--but only in an OpCo-modeled
market. A PoolCo method would lead to volatile and unpredictable
prices, which was bad for the consumer, he told the CPUC. Ironically,
Enron would later create volatility for profit.
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\4\ Despite a subpoena compelling their production and specific
conversations about this data, our Committee has never received copies
of these price curves or the staff work that gave rise to them. Mr.
Skilling has also refused to testify before the Committee to address
this and other issues.
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But in the early days of deregulation, Enron's apparent losses were
always mitigated by subtle gains: California instituted a modified-
PoolCo approach by creating the California Power Exchange (CalPX) and
the California Independent System Operator (CAISO), but made key
concessions to Enron in the process. For example, the CalPX was
required to follow a strict set of protocols in its auction procedure
that no power marketer was similarly saddled with. The result in every
instance was to make Enron and other power marketers more nimble, more
flexible to buyers and sellers in ways the CalPX could not be.\5\
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\5\ In fact, consider the decision to separate ISO and PX as an
example of the concession. One of the most important advantages of a
PoolCo system is the historic database available to the PoolCo of pool
prices and demand, information that is not available to any single
power marketer. In creating a separate ISO to manage this information,
the CalPX was stripped of an inherent advantage. ``If equal treatment
includes taking away PoolCo's ability to make use of its advantage,
then the experiment has been rigged,'' Stoft wrote.
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Needless to say, economists characterize OpCo and PoolCo as
incompatible and to this end, the two models are seen as
competitors.\6\ As early as 1997, a number of economists, including
Steven Stoft, correctly predicted that these concessions would give
Enron and other power marketers the tools to bankrupt the CalPX.\7\
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\6\ Enron later explicitly acknowledged this during an
investigation of misconduct by the CalPX. ``We are mystified that our
competitor, the CalPX, believes that it has the authority to be judge
and jury . . . Enron and the CalPX are direct competitors.''
Ironically, the Committee heard testimony from a CalPX executive who
denied that Enron was viewed as a competitor.
\7\ Stoft predicted the CalPX's demise ``less than a year after the
requirement is lifted on January 1, 2003 that the three major IOUs must
trade through the CalPX.'' The FERC effectively moved the January 2003
date forward with its December 15, 2000 order. (The order spelled out
in detail the FERC's elimination of the mandatory buy-sell requirement
into the CalPX.) The CalPX ceased trading six weeks later on January
31, 2001.
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Given this, it is not surprising that the success of the CalPX
seemed to be inversely correlated with the success of Enron, and, not
coincidentally, the success of the CalPX was directly correlated with
low wholesale electricity prices. When the CalPX teetered on the edge
of solvency, Enron thrived and wholesale prices skyrocketed.
On May 13, 1998, the California Senate Committee on Energy,
Utilities and Communications issued a statement that demonstrated this
relationship. The committee credited the CalPX with ``buying
electricity at substantially lower prices than expected.'' Shortly
before the release, Enron announced that it ``suspended'' its
involvement in the California residential service market, though it did
not publicly acknowledge the relationship between the success of the
CalPX and its own failure.
Enron and the Deregulated Market
The state's deregulated market opened on March 31, 1998. Enron's
misconduct in the day-ahead market was first discovered in May 1999.
Through the CalPX day-ahead auction, Enron successfully purchased the
right to sell 2900 megawatts over a 16-hour time period. The company
then proceeded to schedule all 2900 megawatts over a line with a 15-
megawatt capacity. Enron unabashedly admitted that the company
intentionally congested the line.\8\
---------------------------------------------------------------------------
\8\ Undated internal Enron memorandum, ``Main Messages.''
---------------------------------------------------------------------------
Despite claims from Enron CEO Ken Lay that Enron ``believes in
conducting business affairs in accordance with the highest ethical
standards,'' \9\ the company maintained internally that the intentional
congesting of the power line was a ``test'' and was ``not a big deal.''
\10\ The CalPX maintained that the ``test'' resulted in a $6 million
detrimental impact on the market. Amazingly, Enron was fined just
$25,000 for the incident.
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\9\ November 23, 1999 letter to the CalPX.
\10\ Internal memo provided to the Committee.
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The CalPX was not the only regulator to cite Enron for market
misconduct. In 2001, CAISO released a study about market behavior
between May and November 2000. The report asserted that Enron Energy
Services strategically bid into the market with the intent of
manipulating the price of electricity. The company's ``economic
withholding'' of megawatts resulted in excessive profits of nearly $28
million in ISO's real-time market.\11\ The cost of this behavior among
all the companies implicated in the report was over $1 billion.
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\11\ Dr. Anjali Sheffrin, Ph.D., ``Empirical Evidence of Strategic
Bidding in California Real Time Market,'' March 21, 2001.
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CAISO asserted that Enron was able to charge ``excessive rents''
because it was able to exercise market power, an anti-competitive
behavior in which a single company can determine a price the market is
compelled to accept. I maintain, as I have since the beginning of the
crisis, that market power is at the heart of California's dysfunctional
market. The astronomical prices of 2000 and 2001 have been blamed on
many things, and I agree that a confluence of factors contributed to
the crisis. However, California spent billions of dollars on
electricity because a cadre of companies led by Enron were, in industry
parlance, ``price makers.'' \12\
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\12\ In a functional market, participants serve as ``price
takers,'' indicating that the price is dictated by what the market will
bear. In a dysfunctional market, participants act as ``price makers,''
indicating that they have the ability to set the market price above a
competitive level. This is a common test for market power by
economists.
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Market Power and the Role of Trading
How did Enron acquire and exercise market power? As I mentioned
earlier in my testimony, this is a question of economics and is not
easily sorted out. I believe that Enron's fiscal improprieties, still
the subject of numerous federal probes, drove Enron's strategy and
behavior in the California electricity market. Thus, it is impossible
to dissect Enron's manipulation of the California market without
understanding its aggressive culture and potentially fraudulent
accounting practices.
There are three important prongs to Enron's business in California
as: 1) a direct access provider to large commercial and industrial
entities, such as the University of California; 2) a trader and
marketer of electricity; and 3) an unregulated auctioneer in the
electricity and, more importantly, the natural gas market.
I have already discussed the relationship between Enron and the
CalPX, but I will add another distinction between the two: the role of
volatility.
In theory, Enron would not necessarily need volatility in the
market to succeed as a trader of electricity. Bond traders, for
example, make money trading and speculating in a very stable, liquid
commodity. In fact, Enron VP Steve Kean told our State Senate Energy
Committee in January 2001 that Enron ``sell[s] protection from price
volatility to both producers and end users. Consequently our interest
in California's power market is to ensure that the market works
effectively . . . Enron has no interest in high power prices.'' \13\
---------------------------------------------------------------------------
\13\ Jeff Skilling echoed this view at various points in time.
Skilling told Business Week that, Enron benefits from volatility, not
high prices (Feb. 12, 2001). And Enron's 2001 Q3 earnings release
points to a direct relationship between ``a low level of volatility''
and ``flat'' profitability. Generators also benefit from volatility.
Duke, Dynegy and Williams executives have all acknowledged the
correlation between company profits and market volatility.
---------------------------------------------------------------------------
This simply is not true. Enron was like a glass-repair business
that advertises on bricks thrown through windows: ``Buy protection from
the volatility we create!'' In practice, Enron did require high prices,
because high prices were a symptom of a volatile market. Not only did
Enron need high prices, it worked to ensure them, in order to do two
things: 1) SELL ``protection from volatility'' and 2) undermine the
CalPX, in order to establish itself as the primary market maker.
Let me state this another way. In a regulated electricity industry,
protection from the impacts of unexpected price movement is the
responsibility of regulators. Since Enron sold volatility management
products, anything that increased volatility was good because it
created a demand for Enron's products. Thus, during the height of the
energy crisis when California was requesting that the Federal Energy
Regulatory Commission (FERC) impose price caps, Enron and its sister
traders opposed them because price caps would staunch volatility and
undermine the trading operation, which provided 90 percent of Enron's
revenues.\14\
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\14\ Thus, the FERC and California's combined Spring 2001 efforts
to reduce Western price volatility had a significant negative impact on
Enron's 3rd quarter 2001 financial results, confirming the claim by
Anderson's CEO that Enron's demise was at its heart a business failure.
This paragraph (including footnote) is taken directly from a February
6, 2002 letter from California State Senator Steve Peace to Rep. Henry
Waxman.
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The success and stability of the transparent CalPX market worked
against Enron. Market participants did not need to buy or sell
``protection'' from Enron when the CalPX was already operating
efficiently enough to mitigate volatility. Enter the traders.
Enron argued to the CPUC that in an OpCo model, power marketers
would make the market more efficient. This was supposed to be because
``risk management'' trading companies like Enron were better able to
interpret market fundamentals than other market participants.
Generators, for example, would pay a premium for Enron's expert
analysis of the market instead of relying on their own interpretation
of the neutral information in a transparent pool. Once the CalPX was
operating, however, the point was moot. The CalPX handled the vast
majority of the trades, so no matter how brilliant Enron's
interpretations were, they were based on a small percentage of the
overall transactions done in the market.
This created a dilemma. How could Enron, as an individual company,
compile a larger database of price, bidding and demand history than the
CalPX? The simple answer was to book more trades. Since the price of
energy in each bilateral contract was a proprietary secret, the more
Enron traded, the greater its market share became, and the more its
traders became the resident experts about the future price of
electricity.
The dimension of trading is critical in understanding market
manipulation because markets are manipulated by influencing traders'
expectations about the future. Those expectations establish the forward
price curves, which in turn affect the cost of long-term electricity
contracts. Since the future is uncertain, an electricity user trying to
minimize costs must decide whether to buy a long-term contract or
commit itself to costs that might be higher in the spot market.
Traders themselves have a preference for long-term contracts
because ``mark-to-market'' accounting rules benefit a company in the
near term, an issue I will discuss later. Enron attempted to transfer
the long-term contract trading approach it developed in natural gas to
marketing electricity. In natural gas, Enron had already developed
innovative long-term contracts, modeled on financial hedge contracts,
that allowed customers to purchase ``insurance'' against future price
and quantity risks, a.k.a. ``risk management.'' The cost of this
``insurance'' was based upon traders' perception of the risk that the
future could be different.
Its ability to sell the concept of risk management was limited by
the success of the CalPX market. So Enron had to beat the CalPX price,
which was published daily. This is the reason why contracts such as
those signed with the University of California called for a discount to
the CalPX price. In order to profit from such deals, Enron had to be
able to purchase electricity at an even greater discount to the CalPX
price. This meant finding suppliers willing to sell to Enron power for
less than they could receive selling it to the CalPX. Since this was
virtually impossible, Enron's California operations as a direct access
provider were a big money loser as long as the Power Exchange was in
business. That was all the motivation Enron needed to find ways to
discredit the CalPX and the market it operated.
Enron's desire to undermine the CalPX meshed with a well-documented
pressure from management to show profits on its books. Enron traders
found that the way to do both was to extend the ``liquidity'' of the
futures market in California.\15\ It took to trading ``bundled energy''
as far out as 2020, a market so far in the future that many wondered
how it was possible to predict the price of electricity that far in
advance--especially because the more established natural gas market was
liquid only to about five years.
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\15\ Liquidity in markets means the degree of ease and certainty of
value with which a security can be converted into cash. Liquid markets
are heavily traded, meaning it is easy to find a buyer or seller for
your position. Imagine you have a desire to sell energy tomorrow. There
would be many buyers willing to offer you money to buy that energy.
Tomorrow is a liquid market. Now imagine you want to find a buyer for
energy you want to sell in 30 years. There are fewer interested buyers,
if any, making the market for such a transaction illiquid.
---------------------------------------------------------------------------
In order to make it work, Enron did two things. One, it leveraged
its intellectual capital and marketing expertise to sell itself (and
specifically, its traders) as the ``experts'' on the long-term future
price of electricity. This was no small feat, since the future price
was uncertain--economist Robert McCullough called such predictions
``highly subjective.'' Two, it booked thousands of trades. The company
developed a reputation for buying and selling everything it could, with
price justifications based exclusively on Enron's mysterious,
omniscient price curves, each used to justify thousands of trades.
We now know the folly of many of these trades, which propped up
Enron's gross misstatements of earnings. Enron traders would sell
``bundled energy,'' multi-year agreements for the future delivery of
power, booking uncollected future revenues as collected revenues in the
current quarter. This process, called ``mark-to-market accounting,''
has been labeled ``an incentive to abuse'' by recognized economist
Robert McCullough.
In 2000, however, Enron's accounting practices had not yet been
exposed. The company may have been losing money on these trades--the
traders called it ``selling negatives''--but the market only recognized
at that time that Enron was a willing and active trader of electricity.
If you wanted to buy it or sell it, Enron was there. We know from the
Daily Position Reports, which Enron provided our Committee, that as the
summer of 2000 approached, Enron's traders had taken increasingly
``long'' positions in the market, meaning they had a growing amount of
electricity to sell.
Diminishing reserve margins expected for 2000 caused some
consultants to encourage such long positions. One consultant was
unequivocal: ``Go long with every dollar you have in the West.'' \16\
As Enron acquired control of more and more energy through trades, it
gained a commensurate amount of control of the market. By May 2000,
Enron already controlled enough of the market to withhold power until
the ``last minute,'' i.e., the spot market.
---------------------------------------------------------------------------
\16\ ICF Consulting offered this advice in July 1999.
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By offering to sell its electricity only at unacceptable, high
prices in the CalPX day-ahead market, Enron effectively forced buyers
(primarily the investor-owned utilities) to take a pass on the CalPX
market and seek a better deal at a later time. The better deal never
came. As real-time approached, Enron's leverage increased, and in real-
time, it was CAISO buying power--without regard to price.
We heard testimony from CAISO executives who acknowledged that the
directive of the CAISO did not include a consideration of price. The
CAISO Board in 2000 disagreed. It repeatedly voted to ratchet down the
price cap on electricity in order to mitigate the exercise of market
power by Enron and other market participants. The board's final vote on
the subject, in October 2000, prompted Ken Lay himself to write to the
FERC imploring a reversal of the board's edict. The FERC ruled to
overturn the board the following day.
By December 2000, Enron's goals clicked off like a falling row of
dominoes. Enron got the tacit buy-in of complicit generators, the
counter-parties involved in Enron's money-losing, long-term trades.
None of them blanched at the notion of a liquid electricity market
because they were getting sweetheart deals; the energy bundled in those
deals that was to be delivered in 2000 helped establish Enron's market
power, which in turn allowed Enron to force the market out of the now-
irrelevant CalPX, which in turn raised the price of electricity, which
in turn created volatility, which in turn created the very condition
from which Enron said all along it was in the market to protect buyers
and sellers.
Enron's culture of aggressiveness permeated the company no matter
if there were sound business fundamentals underlying the endeavor or
not. Its electricity plan was waiting to be replicated in other markets
as well. ``The Opportunity,'' one memo reads, is that ``there is a lack
of liquidity'' in the credit risk market. ``Our response: We offer to
transact on more companies than anyone else by a significant margin.''
Enron took pride in the aggressiveness that helped drive it to
bankruptcy. I do not think it is a stretch to argue that this same
aggressiveness dictated its behavior in the California market to the
detriment of California.
Natural Gas and Enron Online
My Committee has heard repeatedly from generators and other market
participants, as well as regulators and market managers such as CAISO,
that the price of natural gas was largely responsible for the run-up in
electricity prices in Fall and Winter 2000. The crisis reached its
nadir, they testified, in early December 2000 when natural gas prices
at the California border were running five times higher than prices at
Henry Hub. Henry Hub usually provides the country's most accurate
baseline for natural gas prices in the spot market.
During the course of our investigation, I have been appalled at the
lack of skepticism employed by those regulators and market managers in
simply accepting this relationship as gospel truth. Why was the price
of natural gas so high? Could expensive natural gas justify expensive
electricity so completely? Was there a certainty that generators
``passing on'' the cost of natural gas into the wholesale price of
electricity were actually paying the spot market price? Had generators
failed to hedge natural gas by entering into long-term contracts for
gas?
These questions were answered in December 2000 when the price of
electricity and the price of natural gas stopped tracking each other.
With price caps lifted by CAISO request and the FERC order, electricity
prices continued to rise. Meanwhile, the natural gas market stabilized
and ultimately prices returned to historic norms. I ask you to consider
whether it is unrealistic to consider the possibility that gas prices
were artificially high in order to ``justify'' a regulatory decision to
remove electricity price caps. Evidence suggests this possibility.
First you must understand the regulatory environment Enron
negotiated in order to operate as it did in the natural gas market.
Enron was the benefactor of a momentous regulatory ruling in its favor
by the Commodity Futures Trading Commission (CFTC). I will not delve
into the details of the political processes and money trail implicated
in these rulings except to say that the cozy relationship between CFTC
commissioners and Enron provides, at a minimum, the appearance of
impropriety.
The import of the legislation and CFTC ruling must be acknowledged.
The first, in 1992, exempted Enron's trading of futures contracts in
response to a request for such an action by Enron that same year. The
second, an amendment to a Senate banking bill in December 2000, allowed
Enron to operate an unregulated power auction--EnronOnline--that gained
market share in the natural gas market almost overnight.\17\
---------------------------------------------------------------------------
\17\ Public Citizen, ``Blind Faith: How Deregulation and Enron's
Influence Over Government Looted Billions from Americans,'' December
2001.
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Internal documents provided to the Committee by Enron indicate a
colossal reversal of traditional market share over the span of just
five quarters. In Q4 1999, Enron was responsible for trading roughly
23% of the natural gas and power transactions in North America. One
year later, in Q4 2000, EnronOnline claimed to have a 74% market share,
easily outpacing the ``traditional'' market. Competitors independently
claim that Enron was involved in somewhere between 50-75% of the trades
in the natural gas market.\18\
---------------------------------------------------------------------------
\18\ Interviews conducted with an Enron competitor also revealed
that Enron was on the opposite sides of many trades.
---------------------------------------------------------------------------
The reason this is so important is because of Enron's admitted role
as a speculator/trader in this market. Imagine if you will if the New
York Stock Exchange were a for-profit company that operated the NYSE as
an unregulated exchange. Every bid, every ask, every market trend,
every individual stock trade, would be viewed by the omniscient company
responsible for making the market. If the NYSE was trying to generate
revenue, it would be logical to use this information to speculate on
market trends.
This is precisely what Enron was allowed to do, and what it used
EnronOnline to accomplish. EnronOnline was the de facto exchange and
Enron was the market maker. Enron's traders logically used the ``inside
information'' available to them from facilitating these trades to
speculate on natural gas futures.
Thus, when El Paso Natural Gas (El Paso) ``went long'' on gas in
2000, Enron spotted the movement in the market and mirrored the move.
Staggering shifts--a veritable sea change--from short to long positions
are found in Enron's own books. Enron clearly had the motivation to
ensure demand for natural gas, though we do not know the extent to
which the company was able to restrict pipeline capacity or delivery.
Was Enron merely profiting on speculation or was it aiding and abetting
physical withholding?
El Paso is under investigation for this very thing. When natural
gas capacity is purchased, the process is regulated. But when unused or
unneeded capacity is returned, the capacity can then be sold to
unregulated subsidiaries of the same company that can use the capacity
as they wish. The subsidiary distinction is a paper distinction only.
The subsidiary is housed in the same building, on the same floor and
the employees ``play on the same softball team,'' as one witness
describes the relationship. The question for investigators is, given
the motivation of a long position, did these unregulated subsidiaries
have the ability to restrict capacity? And did they do that in Fall
2000?
The natural gas market is a pivotal piece to understanding price
manipulation in the California market, and I believe the deregulated
gas market is itself in dire need of oversight and investigation into
past abuse. Alleged misconduct has been the subject of investigation by
the FERC, but no investigation has provided an adequate description of
Enron's ability to speculate on gas prices and to buy back unused
capacity as an unregulated entity.
Political Sophistication
It is impossible to deny that Enron had a keen grasp of the
political and regulatory environments necessary to carry out this plan.
As the first state to deregulate, California was the laboratory for
Enron's plan to trade energy in a destabilized energy market, a model
they wanted to replicate in more states across the country.
An Enron memo from October 1996 indicates the obvious import: ``The
California market is the largest in the nation and California is the
sixth largest country [sic] in the world. If Enron doesn't do well in
California, Enron will have a difficult time convincing anyone outside
California that they are capable of and committed to providing power
services.''
To accomplish this, the company had a comprehensive and well-
executed strategy to gain political influence when and where it was
necessary to: a) create new markets; and b) be left alone in those new
markets. A memo from Ken Lay and Jeffrey Skilling in October 1998
codified what was already a standing practice in the company: ``Our
activism in the political and regulatory process is essential to our
continued success. . . .''
Media reports and campaign finance disclosures have revealed the
close relationship between President Bush, members of Congress and
Enron. The company lobbied successfully at the highest levels for
regulatory change that would further its strategy. For example, Enron
was responsible more than any other company for the provisions of the
1992 Energy Policy Act that altered the historic structure of the
nation's electricity industry. Enron was also responsible for sweeping
deregulation approved by the Commodity Futures Trading Commission
(CTFC) that paved the way for Enron to trade electricity futures.
Enron was even part of the very commissions responsible for
oversight. For example, Enron was a sitting member of the CAISO board
in November 1999, when the board decided to set CAISO's damage control
price cap at $750. When the price cap was lowered during a series of
votes in Spring and Summer 2000, Enron lobbied to have the cap remain
at $750. That a $750 cap provides a much larger window for volatile
pricing than the $250 cap ultimately adopted during its board tenure
was not wasted on Enron.
Enron executives had unprecedented access to high-ranking public
officials at both the federal and state levels. We know from our
document review of Enron's government affairs department how much the
company relied on political relationships. On the one hand,
California's legislative leaders appealed directly to Enron for
contributions and on the other received explicit instruction about
specific legislation. It remains to be seen how close Enron executives
were to the California Legislature, but documents seem to suggest the
two were very close.
Enron Uncooperative with State Investigation
My Committee's experience with Enron has been contentious, at best.
Enron has engaged in delay tactics, arrogant displays of defiance and
unabashed non-compliance. Enron has defied the state's authority to
investigate and has continued to stand in the way of lawful
investigations of its business, including a probe by the California
attorney general.
When our investigation was launched last April, we asked Enron to
produce voluntarily several categories of documents. It refused. We
then requested that Enron enter into a non-destruct agreement with the
Committee to ensure that documents critical to the investigation were
preserved. Enron again refused.
This issue has been a prominent problem for my Committee since well
before Enron and Arthur Andersen were ever implicated in reports of
document destruction. In a typical display of Enron's hubris, the
company's counsel represented ``as an officer of the court'' that my
Committee had entered into a non-destruct agreement with Enron. This is
patently false. The claim, made before a San Diego judge during a civil
proceeding against the company, was intended to deter a court-ordered
imposition of a non-destruct agreement.
When the Committee served Enron with a document subpoena in June
2001, Enron told the Committee it still would not hand over documents.
Enron sued the Committee, arguing that my committee ``had no authority
to investigate'' Enron and its role in the energy crisis. The company
relented only when threatened with a contempt finding and a substantial
financial sanction by the California State Senate.
Enron has openly defied the Committee in numerous ways. Enron has
failed to produce documents pursuant to our June 2001 subpoena and did
not produce a company representative pursuant to a January 2002
deposition subpoena. Nor has Enron explained its role in the
destruction of documents by Arthur Andersen or by its own employees as
reported in the media.
Even in bankruptcy, Enron has managed to stand in the way of our
investigation. Multiple visits to Enron's Houston headquarters resulted
in inadequate document production and inappropriate assertions of
privilege.
The most troubling behavior, however, has been Enron's deliberate
destruction and/or concealment of documents. The Committee has not been
provided documents it has compelled since June 2001. Coupled with
reports that Enron documents have been destroyed, I believe Enron has
committed criminal obstruction of justice.
This belief has been affirmed by our latest review of electronic
documents provided to my Committee in the last week. Our technical
consultant confirmed this week that emails, schedules, correspondence
and other electronic documents have been overwritten in order to
destroy evidence we presume is relevant to our investigation. We can
only assume the destroyed documents demonstrate at best information
unhelpful to Enron's case and at worst, criminal activity. In either
case, Enron should be subject to criminal prosecution if this is true.
In light of the many reports of shady accounting practices exposed
in the last few months, Enron's conduct over the last year should come
as no surprise. From my perspective, however, Enron's recently exposed
shady accounting practices come as no surprise in light of Enron's
conduct over the last year.
Conclusion
Electricity deregulation has engendered heated debate since the
first seeds were sown for an end to utility monopolies in the 1980s. I
cannot recommend a complete reversal of the deregulation concept at
this time. However, the current model is untenable.
Electricity is a unique commodity. It cannot be stored, demand is
inelastic and the barriers to entry are sizable. There has been no
worthwhile oversight of the industry by the federal agency charged with
policing its bad actors. ``This'' deregulation, borne of Enron, adopted
by regulators and foisted on the public, has proven to be the greatest
fraud ever perpetrated on the American consumer. The public interest is
not being served. Until there are fundamental changes in the present
approach, I believe we are simply biding time for the next Enron to
emerge.
Senator Dorgan. Senator Dunn, thank you very much. We will
be in touch with you with respect to the records that you have
in your possession and appreciate that offer.
Next, let us call on Ms. Loretta Lynch, the President of
the California Public Utilities Commission. Ms. Lynch.
STATEMENT OF LORETTA LYNCH, PRESIDENT, CALIFORNIA PUBLIC
UTILITIES COMMISSION; ACCOMPANIED BY GARY M. COHEN, GENERAL
COUNSEL, CALIFORNIA PUBLIC
UTILITIES COMMISSION
Ms. Lynch. Thank you, Senator. And I would like to thank
this Committee for the opportunity to discuss with you how
Enron's activities in California have affected the regulatory
structure of our markets and the pricing in our markets. I have
with me the General Counsel of the Public Utilities Commission,
who has been the lead in investigating Enron from the
regulatory perspective.
I'd like to comment on the linkage of what Enron's been
doing throughout the nation with the linkage of what Enron was
doing in California. The economic and financial structures that
were put in place in California and also nationally enabled
Enron to plunder not only investors and consumers but also
ultimately its own employees. Those structures need to be
dismantled similarly to the way this Congress dismantled
similar structures in the 1920's and 1930's through the passage
of the Public Utilities Act of 1935.
Traditional regulation after the passage of the Public
Utilities Act of 1935 has depended on three interrelated
concepts. One is cost transparency. Two is financial
transparency. And three is maintaining an appropriate nexus as
the Federal Power Act requires, a just and reasonable linkage
between cost and prices.
Enron and its political allies, including, I'm sorry to
say, both politicians and regulators in California and at the
Federal Energy Regulatory Commission, have systematically
dismantled those mechanisms for assuring the three pillars of
traditional regulation and for assuring that they work.
I have, as our first slide, a time line of Enron's
activities in California before the California Public Utilities
Commission and before the legislature. Enron pushed for the
creation of a wholesale electricity market in California that
would have absolute government or regulatory oversight of its
activities in the market. As early as 1994--and I know that the
slide is a long way from you--Enron pushed for a bifurcated
market between an independent system operator and a power
exchange which would enable Enron to gain the California market
successfully.
In 1995, Enron objected to any state government market
structure--any state government establishment of a market
structure, preferring a non-governmental entity which the state
could then not control. And throughout that year of 1995 and
1996, Enron objected to the PUC's placing of any consumer
protection rules in that wholesale electric market.
Enron was active in shaping the deregulation of the
California generation industry, both at our state regulatory
commission and at the state legislature. When they were
successful, Enron then participated in the creation of a
wholesale market with rules that were enabled by the FERC. And
those rules enabled both the FERC and the California
independent system operator to allow further gaming and gouging
by Enron in California.
Enron's methods were consistent in every venue it entered.
Both in California, it would try to make the rules and then use
those rules to exploit the government and the system for short-
term advantage.
After Enron shaped the California market, starting in 1994
and extending through 2000, Enron came nationally, as we all
know--as you know well, Enron first lobbied the Congress and
FERC to kill rules and to obtain special status for its trading
activities. In fact, Enron was before the Commodity Futures
Trading Commission and this Congress in December of 2000, at
the very time the FERC lifted the price caps in California, at
the very same time Enron was reaping maximum profits out of the
California market, and at the very same time that the
California market was spinning out of control.
Enron continues its activities at the FERC, and it's really
quite troubling. As we speak, the FERC staff is attempting to
create opportunities for marketers like Enron to set prices and
to make markets in contravention of the FERC price mitigation
order that makes marketers price takers and not market makers.
Further loosening of the rules by FERC makes California's job
all the more difficult to contain its market.
FERC, for decades, published a Uniform System of Accounts,
which has provided a template for state-level accounting and
disclosure proceedings of costs and profits. FERC in every
state has required annual reports by regulated entities in
which detailed financial disclosures and disclosures of
operating statistics, assets, and liabilities and particular
categories of expenditures are disclosed to the public and used
by state regulators to control the markets.
FERC, over the past few years, at the urging of Enron and
others, have diluted those reporting requirements, loosened the
accounting rules and exempted large classes of energy sellers
from making these required disclosures. FERC does not even
require minimal quarterly reports in the natural gas area,
which makes it virtually impossible for the State of California
to either track Enron's natural gas trades or to link their
natural gas trading with their electricity trades and actions.
As we know, they are so interrelated. This makes our job much
more difficult, because it eliminates cost transparency for
large segments of the energy sector.
But related to the issue of cost transparency is financial
transparency. We have, on the next slide, Enron's affiliate
relationships and how they operated in California. Enron's use
of complex corporate structures, affiliates, partnerships,
assets, and liabilities transfers among all of these entities
have led to a further erosion of not only investor and consumer
confidence, but also has given them the ability to manipulate
financial disclosures and ultimately the costs and the prices
in the California market.
The temporary monopoly positions that Enron's trading
suggests appear to have been accomplished, at least in part,
through the complex chain of self-dealing among these
affiliates of Enron and a few of the other Enron compatriots.
In 1999, Enron created the first and largest electricity
energy trading forum called Enron Online, becoming not just a
customer in the market, but a market maker in both electricity
and natural gas. With Enron Online, Enron became, by far, the
largest trader of energy. According to Gas Daily, Enron sold
nearly double the amount of natural gas as any other
competitor. And Enron Online itself reported over $330 billion
worth of electric trades in 2000. Those trades total more than
the cost of electricity produced in the United States in total.
How did Enron do this? We have, for your consideration,
just an example of Enron's affiliate trading activities just in
the fourth quarter of 2000. This quarter is key and critical
because this is the quarter when FERC blew out the price caps
in California's wholesale markets and when the California
market spun out of control. In the fourth quarter of 2000, five
Enron affiliates--Enron Energy Services, Inc., Enron Power
Marketing, Inc., Enron Energy Marketing Corp., The New Power
Co., and Portland General Electric Co.--bought and sold over
11,900,000 megawatt hours of electric power to and from each
other in the way that is demonstrated with those circles.
They were purchasing among each other at prices as high as
$3,322 a megawatt hour. Just the month before, in October, the
price cap in California's market was $250 a megawatt hour.
These trades were not only among the affiliated companies. In
fact, the same individuals were managing all of these
companies. The next slide shows that all of those people who
are listed below were, in fact, employees or directors or
managers of all four of these Enron-related companies. So the
companies had the same employees. They were essentially trading
with themselves, but those trades racheted up the price in the
California market.
I believe that these trades were actually sham
transactions. Enron was selling the same megawatts back and
forth to itself, causing the price to rise with each supposed
sale, all under the rules they had helped create both in
California and nationally. The selling back and forth, though,
also is more pernicious. It created the illusion of an active,
volatile market, appearing to the rest of the world as though
massive trading was occurring on Enron's online trading floor.
In fact, Enron has reported that 30 percent of those trades in
Q4, 2000, were among Enron's own affiliates. Since Enron used
accounting methods that let them book as revenue the value of
every trade, not just the profit, they were able to create
false value in their company with every affiliate trade.
I believe this was truly a Ponzi scheme. The effect of
these trades was to increase the wholesale price of electricity
in the California market. These transactions which Enron was
engaging in, and with itself and its affiliates, caused
wholesale prices to rise both because they directly influenced
various price indices and because the prices that were reported
on Enron's Internet-based trading site, Enron Online, became
the benchmark in the market for wholesale bids into the
California Power Exchange and the California ISO.
These purchases and sales were only possible between those
affiliates because there was no regulation of this market.
There were no rules imposed by the CFTC or the FERC to prohibit
this kind of sham transactions between affiliated entities.
And, moreover, the California entities had little ability and
no appetite to discipline Enron in these markets.
This stopped only on June 19 of last year when the FERC put
a stop to it with its historic action that brought order,
albeit temporarily, to California's market. The FERC did three
things that are critical. It set a must-offer order that
required sellers to sell into California to creditworthy
buyers, which reduced Enron's ability to game prices by
withholding power and reduced other sellers' ability to do
that, as well. And it prevented those who were not generating
power, like Enron, from setting the price throughout the
market, as they had been doing so successfully in the fourth
quarter of 2000, preventing those who trade over and over
internally from driving the price up above the price cap.
The problem with the FERC market mitigation measures is
that they expire. They're temporary. And they expire September
30 of this year. They will expire unless there is a clear
signal from this Congress to keep these basic minimal
boundaries on California's market. These boundaries should be
kept until FERC can assure you and the people in businesses in
California that the transgressions of Enron and others will not
reoccur in this market.
We know from bitter experience in California that more
regulation is needed, and specifically I believe this Congress
needs to tell FERC to ensure that market participants cannot be
also market makers as Enron did and exploited so successfully
in California and throughout the West.
Exemptions for online and electronic trading under the
Commodity Futures Modernization Act of 2000 must be curtailed
and must be improved so that we can have improved reporting and
oversight. I believe all energy traders should be regulated as
a utility subject to the control of FERC. Clear, detailed
transaction reporting for natural gas and electricity trades
must be required and enforced, at least on a quarterly basis,
so that we can all know what's going on at the time instead of
digging it out a year after the fact. And FERC should also be
directed to strengthen its role in providing accountability and
disclosure of costs and finances of energy sellers.
Until then, until FERC can assure you that the market is
fixed and that sons of Enron cannot perpetuate these kinds of
shady and affiliate transactions again, the protective measures
that are now keeping a lid on California prices and prices
throughout the West must be continued.
At the turn of the 21st century, the nation needs again to
strengthen its regulation of energy companies. These companies
have morphed into even more complex entities, as you have seen,
and they are selling more complicated and risky products both
on the wholesale market and to investors. We've seen this
before in the 1920's and the 1930's. Congress must keep it
simple, keep it clear, and keep regulation and enforcement of
utility companies and energy traders strong, unlike the
conditions that we still face today in California.
Thank you.
[The prepared statement of Ms. Lynch follows:]
Prepared Statement of Loretta Lynch, President, California Public
Utilities Commission; accompanied by Gary M. Cohen, General
Counsel, California Public Utilities Commission
Thank you for the opportunity to testify about the effect Enron had
on the California electricity and natural gas markets. Enron has become
emblematic of a pervasive regulatory failure in the energy markets in
the United States. In a sense it has supplanted California on the front
page but, as we all understand, the failure that was the California
energy market and the failure that is Enron are intimately linked. I
would like to comment on the linkage from the standpoint of a state
regulator and to warn the members of this panel that the forces that
caused the Enron debacle are still at work and must be effectively
curbed at the state and federal level if we are not to see many more
failures.
It is crucial that we not view Enron as an outlier or outlaw in an
otherwise working market. The economic and financial structures that
enabled Enron to plunder investors and consumers and ultimately its own
employees need to be dismantled, much as similar structures were
dismantled by the Public Utilities Act of 1935, which included both the
Federal Power Act (FPA) and the Public Utilities Holding Company Act
(PUHCA). This landmark statute preserved to the greatest extent
possible local authority to regulate local service. It has served us
well for over sixty years, until very recently.
The utility scandals of the 1920's and early 1930's involving
watered stock, out-of-control prices, shady accounting and financial
and consumer abuse are being reprised today. It is time to say,
``Enough is enough.'' The army of lobbyists for ``PUHCA reform,''
laissez faire electricity pricing, grid federalization and the like are
essentially asking you to unleash a horde of Enrons on the consumers of
America. I respectfully suggest that we learn from history and the
gaming and gouging that took place in the teens and twenties when I
say, ``Don't go there.''
Consumers expect that utility service and costs will be stable and
reasonable. Federal law requires that wholesale electricity prices be
just and reasonable. Enron and its emulators want instability and high
prices. The California experience suggests that the Enron approach is
bad economics and bad policy.
Traditional regulation as practiced since the New Deal has depended
on three interrelated concepts:
Cost transparency
Financial transparency, and
Maintaining an appropriate nexus (a just and reasonable
linkage) between cost and prices.
That system served consumers and legitimate long-term investors
well. The only people it did not serve well were the energy
speculators, like Insull and the cartels of the 1920s and Enron and its
ilk at the turn of this century, seeking a fast buck. They have worked
hard to undermine it.
Enron and its political allies, including, I'm sorry to say,
politicians and regulators in California and at the Federal Energy
Regulatory Commission, systematically dismantled the mechanisms for
assuring these three pillars of traditional regulation. Enron pushed
for the creation of a wholesale electricity market in California that
would have no government or regulatory oversight of its activities in
that market. Enron was active in shaping the deregulation of the
California electric generation industry, both at the state Commission
and at the State Legislature. Not surprisingly, with a legion of
lobbyists at the Commission and before the Legislature and a business
plan bent on taking advantage of deregulation and a bifurcated market,
Enron got what it asked for in California. Enron then participated in
the creation of wholesale market rules used by FERC and the California
Independent System Operator further enabling their trading and gaming
activities.
Enron itself has been active through a phalanx of organizations,
and has facilitated activity by others. In California, Enron
Corporation participated in numerous business ventures through its
affiliates Enron Energy Services, Zond Wind Power, Enron Trade and
Capital, Enron Oil and Gas, Portland General Electric, Transwestern
Pipeline, The New Energy Company, and many more. Enron helped shape the
policies of industry trade groups such as the Independent Energy
Producers and Western Power Trading Forum and others. In addition, it
spawned front groups such as the Alliance for Retail Markets (ARM) that
purported to be coalitions of organizations but received the bulk of
its funding from Enron. ARM and the Enron affiliates would both appear
before the CPUC on electric restructuring matters, frequently
represented by former high level PUC employees.
Enron was represented on the original board of the California
Independent System Operator (ISO) directly and indirectly where it
actively opposed price caps and other market power mitigation
initiatives and--in an infamous episode--demonstrated the efficacy of
``phantom congestion'' in raising prices and then sought to prevent an
antidote. After Enron demonstrated the tactic, others used it to
manipulate prices ``according to the rules.''
The incremental creation and exploitation of loopholes and
``opportunities'' has been effective at least in part because FERC has
been so slow to act to counteract them, once discovered. For example,
it has long been known that a significant weakness in the ISO tariff is
the practice of paying twice for an electric generation unit--once when
it ramps up and again when it ramps down--that is inappropriately
scheduled. The ISO has been attempting for nearly a year to change this
feature of the tariff, only to be rebuffed by the FERC, who says simply
that such a change is ``premature.'' Meanwhile, Enron and others are
exploiting this weakness for big dollars.
Enron actively sought business alliances with and takeovers of
public and municipal entities. For example, it ``partnered'' with the
City of Palm Springs to create direct access and ``muni-lite''
relationships with residential customers, only to leave the City
program in the lurch when its attention wandered elsewhere. After Enron
dumped its program without any appreciable downside to itself, others
followed suit--as we learned to our dismay last Spring when the
California DWR had numerous ``direct access'' customers dumped back on
it when FERC-deregulated wholesale prices were at their highest.
California went from 16% of its overall electric load served by non-
utility providers in October 2000--the lion's share of which was Enron-
provided--to 2% of all customers served by non-utility sources in June
of 2001. Enron creamed off lucrative customers when prices were low
then dumped those customers back on the utilities when natural gas and
electricity prices rose so that it could sell its gas and electricity
for the highest price--perhaps even back to the very same utility that
was serving Enron's dumped customers!
Enron's methods were consistent in every venue it entered--it would
try to make the rules--rules that it would then exploit for short-term
advantage. After Enron shaped the California market to take maximum
advantage of nonexistent government regulation and lax ISO rules, Enron
turned its sights nationally. As we now know, Enron lobbied Congress to
kill rules proposed by the Commodities Futures Trading Commission which
would have provided at least some federal oversight of Enron's trading
activities. Enron also obtained special status for its trading
activities in December 2000--at the same time it was reaping maximum
profits in the California markets.
Enron continued its strategic manipulation of public processes to
create business opportunities through the dismantling or modification
of accepted approaches: you are seeing this approach in action today at
the FERC, where as we speak, the FERC staff is attempting to create
opportunities for marketers to set prices and make markets in
contravention of the FERC price mitigation order that makes marketers
price takers. The incentives and rewards for such behavior are being
described by others. I want to make you aware of its pervasiveness.
Every state has a regulatory body whose charter includes specifying
the accounting procedures for utilities operating in its state. FERC
for decades published a Uniform System of Accounts which has provided
the template for state level accounting and disclosure procedures. FERC
and every state have required annual reports by regulated entities in
which detailed financial disclosures and disclosures of operating
statistics, assets and liabilities and particularly categories of
expenditures are disclosed to the public. FERC has over the past few
years at the urging of Enron and others diluted the reporting
requirements, loosened the accounting rules and exempted large classes
of energy sellers from making required disclosures. FERC does not even
require the same data to be filed in its quarterly reports, allowing
companies like Enron to hide the true nature and extent of activities
through skeletal public reporting and not be called to account by FERC.
FERC does not require even these minimal quarterly reports in the
natural gas area, making it virtually impossible either to track
Enron's natural gas trades and activities or to link gas trading with
electricity trades and actions. This makes the state regulator's job
much more difficult, because it virtually eliminates cost transparency
for large segments of the energy supply sector.
In the case of Enron and many other energy supply companies the
lack of cost transparency, prescriptive accounting rules and regular or
detailed public reporting has undermined investor confidence in both
traditional regulated utilities and in new cadre of speculator energy
companies. Congress should require that the FERC ensure the primacy of
promulgating and enforcing appropriate reporting and accounting
procedures.
Related to the issue of cost transparency is financial
transparency. Enron's use of complex corporate structures, affiliates,
partnerships, asset and liabilities transfers among these entities has
led to a further erosion of investor and consumer confidence and an
ability to manipulate financial disclosures and, ultimately, cost and
prices. The temporary monopoly positions that Enron's trading
statistics suggest appear to have been accomplished at least in part
through complex chains of self-dealing among affiliates of Enron and a
few of Enron's compatriots.
In 1999, Enron created the first and largest electronic energy
trading forum called Enron On-Line, becoming not just a customer in the
market but a market maker--in both electricity and natural gas. With
Enron On-Line Enron became by far the largest trader of energy--both
electricity and natural gas. According to Gas Daily, Enron sold nearly
double the amount of natural gas of any competitor. Enron On-Line
reported over $330 billion dollars worth of trades in 2000. That is
more than the cost of all electricity produced in the United States.
How did Enron do this and what effect did it have on California? As
an example, I will discuss just one period of time--the fourth quarter
of 2000, as California's wholesale energy market spiraled out of
control with the lifting of the wholesale price cap by FERC, at the
instigation of Ken Lay, Jeff Skilling and the former conflicted
California ISO board. What we find is that Enron's trading with its own
affiliates was the major way that Enron did business and constituted a
major factor contributing to the California energy crisis. In the
fourth quarter of 2000, five Enron affiliates--Enron Energy Services,
Inc., Enron Power Marketing, Inc., Enron Energy Marketing Corp., The
New Power Co., and Portland General Electric Co.--bought and sold
10,167,782 MWh of electric power to and from each other, at prices as
high as $1,100 MWh. These trades were not only among affiliated
companies; the same individuals were managing all of these companies.
These ``trades'' were actually sham transactions--Enron was selling the
same MWs back and forth to itself, causing the price to rise with each
``sale''--all under the rules that it had helped to create. The selling
back and forth also created the illusion of an active, volatile market,
appearing to the rest of the world as though massive trading occurring
on Enron's online trading floor. By creating the excitement of a busy
market place, they could entice other traders to come into their market
(online). (What we would really like to know is how many of the trades
Enron reported were actually real trades with parties other than their
affiliates.) Since Enron used accounting methods that let them book as
revenue the value of every trade (not just the ``profit''), they were
able to create false value in their company with every affiliate trade.
This was truly a Ponzi scheme.
The effect of these trades was to increase the wholesale price of
electricity in the California market. These transactions, which Enron
was engaging in with itself, caused wholesale prices to rise both
because they directly influenced various price indices and because the
prices reported on Enron's Internet-based trading site, EnronOnline,
became the benchmark for wholesale bids into the PX and ISO.
These purchases and sales between affiliates were only possible
because there was no regulation of this market; there were no rules
imposed by the CFTC or the FERC to prohibit sham transactions between
affiliated entities. Moreover, the CA ISO and PX had little ability and
no appetite to discipline Enron in the market.
In addition to trading among themselves, a number of these
affiliates were scheduling coordinators (SCs) with the ISO. SCs serve
as the link between retail buyers, generators and the ISO. SCs have
access to electricity market information from many sources not
generally available to average investors and are in a position to
manipulate the market. For example, SCs can game the market by
scheduling non-firm power to cover their needs, forcing the ISO to buy
reserve power in the spot market to back the SC. As a market maker
Enron also had the ability to influence the bids and costs of other
Coordinators as well.
The consequences of this and similar activities by Enron's
imitators--the sons of Enron--were devastating. The huge volumes of
internal trades created volatility in the market from which Enron
profited. Enron could create transmission congestion through
meaningless trades with itself, and then get paid to eliminate that
congestion or re-route electricity within California. Enron's internal
trading could affect accepted market indices, thereby increasing the
prices paid to generators and suppliers that are tied to those indices.
Enron could also use the rules and their internal trading to commit
power that was made in California out of the state, thereby
artificially creating the appearance of shortages of electricity
generated in California that could only be remedied through
``imports.'' This is a practice known as ``megawatt laundering,'' and
is a pervasive feature of the west-wide electricity market. It is the
reason that mitigation measures must be West-wide. Experts have
estimated that exports quadrupled from California from 1999 to 2000.
Enron's moving of California-generated power out of state--through
internal and other trades--raised prices and contributed to blackouts
that were in fact unnecessary. At the times of the blackouts that
California experienced, there was never any physical, real world
shortage of generation capacity in California.
While Enron's failed ventures and accounting practices may have
brought them to financial ruin, its energy trading enterprise was
exorbitantly profitable--accounting for over 90% of Enron's overall
revenues in 2000. The gravy train did not stop nor did the underlying
systemic problems become apparent until the FERC put a stop to it on
June 19, 2001, with its historic action that brought order,
temporarily, to California's market. FERC imposed price caps that
conservatively estimated costs of generating electricity in California,
setting the effective price first at $92/mwh and modified it upward
slightly. It set a ``must-offer'' order that required sellers to sell
to creditworthy California buyers, reducing the ability to game prices
by withholding power, although ISO management actions have reduced the
effectiveness of this requirement. And it prevented those who were not
generating power from setting the price throughout the market,
preventing those like Enron who traded the same power over and over
internally or with others solely to drive the price up by the time it
was sold to the utilities, to the ISO or to the state. FERC intends to
terminate these key and critical protections on September 30 unless
there is a clear signal from this Congress to keep these basic, minimal
boundaries on California's market until FERC can assure you and the
people and businesses of California that the transgressions of Enron
and others will not re-occur.
We know from bitter experience in California that more regulation
is needed. Specifically, to fix this market Congress needs to ensure
that:
Market participants should not also be market makers.
Exemptions for online and electronic trading under the
Commodity Futures Modernization Act of 2000 must be curtailed
to improve reporting and oversight.
All energy traders should be regulated as a utility subject
to control by FERC.
Clear, detailed transaction reporting for natural gas and
electricity trades must be required and enforced on at least a
quarterly basis.
Statutory affiliate rules are necessary to limit the
proliferation of related trading entities that skew and game
the market, gouging consumers--or outlaw these trades and
interrelationships outright.
FERC should be directed to strengthen its role in providing
accountability and disclosure of costs and finances of energy
sellers.
FERC must update its systems and its ability to keep up with
the games. For example, the FERC database needs to be updated,
streamlined and made truly accessible to regulators and the
general public.
As I conclude these remarks I am mindful that my role as a
regulator doesn't end in the energy arena. Congress also has a real
opportunity now to help insulate telecommunications consumers from
these same types of accounting and reporting schemes executed so
effectively by Enron and other energy companies. With cross-country
mergers, bankruptcies, high technology affiliates and other changes
rampant in the telecommunications industry, Congress and the Federal
Communications Commission must ensure that the FCC strengthens uniform
national reporting requirements for telecommunication companies and
their affiliates about costs, profits, revenues and service quality.
Instead, the FCC is leaning away from requiring such national reporting
just at a time when we need more information to monitor our information
infrastructure. This data is critical to the states' ability to
meaningfully protect telecommunications consumers, from basic service
to broadband, from the kinds of manipulation I've discussed today.
At the turn of the twenty first century, the nation needs again to
strengthen its regulation of energy companies--which have morphed into
even more complex entities--selling more complicated and risky products
than what the nation experienced in the 1920s and 30s. Congress must
keep it simple, keep it clear and keep regulation and enforcement
strong--unlike the conditions California and the nation face today.
Senator Dorgan. Ms. Lynch, thank you very much. Next, we
will hear from----
Senator Burns. Begging the indulgence of the Chair, Ms.
Lynch, do you have--I didn't notice in your testimony that you
had copies of these slides that you presented there. We can't
see them over here.
Ms. Lynch. Oh, sure, we can get you those.
Senator Burns. And those slides, I think it would be very,
very helpful to us who keep this testimony and help us
understand what--this whole thing. So I thank the Chair.
Senator Dorgan. That's a good suggestion. You will make
those available, Ms. Lynch?
Ms. Lynch. Sure.
[The information referred to follows:]
Senator Dorgan. Next we will hear from Mr. S. David
Freeman, Chairman of the California Power Authority. Mr.
Freeman, you may proceed.
STATEMENT OF S. DAVID FREEMAN, CHAIRMAN,
CALIFORNIA POWER AUTHORITY
Mr. Freeman. Thank you, Mr. Chairman. It's a special
pleasure for me to be here. I was a staffer to this Committee
back in the 1970's when Chairman Hollings was really the junior
Senator from South Carolina.
[Laughter.]
Mr. Freeman. I have been in this business a long time. I've
worked the old Federal Power Commission and run utilities and
I've been with the Governor of California for the last year
through this crisis and was involved in the creation of the ISO
and the Power Exchange that started us down deregulation road.
If I could offer this observation, in terms of the
California situation, I don't believe the real story is about
whether Enron broke the law or not. The real story is about the
influence they had on the lack of law enforcement by FERC, the
influence they had on the detailed rules for deregulation, both
in California and in Washington, and most importantly their
invisible role in the ripoff of California consumers.
Enron was by far--and I was there and saw it--the leading
advocate for the most extreme deregulation at every step of the
road, and they were the most active participant in that
volatile market they helped create and profited from. It's time
that we faced up to a harsh fact. The invisible hand of Adam
Smith was Enron, and their fellow gougers having their hands in
the hip pocket of the consumers of California to the tune of
billions of dollars. And we're now beginning to connect the
dots.
While the prices were skyrocketing in California in late
2000 and early 2001, as a direct result of Enron's influence
and participation, at the same time, Enron was here in
Washington, granted special attention, special privileges to
advise a new administration to oppose the price controls that
California and the delegation was literally begging for to
protect consumers from the enormous profits that they and
others were making. And it's not that we were asking for
something special. We were simply requesting that the Federal
Energy Regulatory Commission do its job.
The Federal Power Act was not abolished. There's a Texan
named Sam Rayburn that got that law passed back in 1935. I
worked to enforce the law back in the 1960's. Just and
reasonable rates have been the law of the land, and they didn't
just all of a sudden disappear, be repealed. They weren't. It
was a lobbying effort led by Enron that persuaded FERC to just
take the cop off the beat at the time we needed them worst of
all. And it wasn't until the California delegation and the
Governor of California and people from all over the West
brought this to the attention of the American people, the
Congress generally, and the new Administration that they helped
us. I want to give them credit. They did name Chairman Pat Wood
and Norma Brownell and came in and finally, in June, put in
some measure of relief.
I must say, though, that the Federal Power Act does not end
on September 30 of this year. They put some temporary controls
in place that expire. Very interesting that they expire just
before October of an election year. I am very concerned that we
go back to a situation where folks that have no responsibility
to keep the lights on, no responsibility to sell electricity,
are able to artificially create shortages and problems for us.
And so our main plea here today, if there's no other point
that I make to this Committee, that this Committee unanimously
inform the Federal Energy Regulatory Commission that their
mandate does not end on September 30. The law is on the books.
It says that the rates ``shall''--not ``may,'' but ``shall''--
be just and reasonable.
I say to FERC don't become summer soldiers and quit on us
just when we need your help the most, because we do not have a
functional market in California that's competitive. Everyone
knows that. FERC has said so. And until they can make a finding
on a record and show that there's real competition that will
protect the consumer, they have an obligation to continue what
they put in place so well last June and continue it until they
can make a finding that it's not needed.
I think the thrust of my written testimony is that what we
have here before us is an example that a wealthy, famous
company can just be dead wrong. And it's important, those of
you who have the responsibility and are lobbied intensively by
people, that just because someone with a lot of money and a
good reputation comes to you, you have to examine their
arguments just as thoroughly as anyone else's.
And this deregulation scheme that was concocted and put
into effect just has been the most terrible economic disaster,
in terms of electric power, in the history of the industry. And
it's pretty clear, I think, to everyone in California at least,
that electricity is different from anything else. We can't do
without it, and everyone knows that, for even a nanosecond.--
Reliability, smooth power, in the computer age is more
essential than ever.
We cannot let private companies who have an interest in
creating artificial or even real shortages be in control. The
Congress needs to reexamine the Federal Power Act and look at
the 21st century and set down some rules. Enron stands for
secrecy and lack of responsibility. But in electric power, Mr.
Chairman, we've got to have openness and we've got to have
companies that are responsible for keeping the lights on.
Thank you.
[The prepared statement of Mr. Freeman follows:]
Prepared Statement of S. David Freeman, Chairman,
California Power Authority
I appreciate the opportunity to appear before this Committee. I
thank you for devoting your time to this issue, which, I believe, is
fundamental to the future of the electric power industry as far as
consumer protection is concerned.
On a personal note, I am especially pleased to be here since I
served as a staff member to this Committee in 1974-76 when Chairman
Hollings was really the junior Senator from South Carolina. My
testimony reflects my personal views only. It is based on 40 years of
experience with the electric power industry as a regulator, an official
in federal and state government, and as the manager of large public
utilities.
In my view the real story about Enron is not whether or not they
broke the law, but about the influence they had on the lack of law
enforcement by the FERC, on the rules for deregulation in California
and Washington D.C. and, most importantly, their invisible role in the
rip off of California consumers. Enron was by far the leading advocate
for the most extreme deregulation of the electric power industry in
California and they were the most active participant in the volatile
market that resulted.
The fact that Enron's activities in California may have been legal
is a most troublesome and lasting concern. It is all the more
frightening because their profit-making role was largely secret.
We must recognize that the so-called invisible hand of Adam Smith
was Enron and their fellow gougers picking the pockets of Californians
to the tune of billions of dollars. And now we are beginning to connect
the dots. Prices were sky rocketing in California in late 2000 and
early 2001 as a direct result of Enron's influence and participation.
At the same time Enron was granted special attention to advise a new
administration in Washington to oppose the price controls sorely needed
to protect consumers from the enormous profits they and others were
making.
All this happened despite the fact that the Federal Power Act
requires that the FERC assure just and reasonable rates. Even the FERC
admitted the market was not functioning properly. Enron may not have
broken the law but they encouraged the new Administration to fail to
enforce the law which in my view was just as bad.
It was only after Governor Davis and the California delegation
repeatedly called attention to the fact that the FERC was on a sit down
strike that the President appointed new Commissioners who helped
Governor Davis bring that market under a measure of control. But that
happened only after Californians had been overcharged at least $9
billion.
Some may suggest that I am singling out Enron and ``piling on''
just because they are in trouble for other reasons. That is not true.
It is important that Congress understand that a rich and famous company
can succeed in achieving terrible results for consumers. This Congress
and the several states have before them serious questions inherent in
the deregulation of electricity. Is the removal of controls on the
price of electric power at wholesale a good idea? Does it make sense to
remove the legal obligation of a utility to build or buy enough power
to provide reliable electricity?
The words competition and deregulation are seductive. They sound
great but the reality we found in California was quite different. A
public utility industry whose books are open to public inspection, who
are legally responsible for providing reasonably priced electricity,
and who did just that for decades, were replaced by companies that
operated in secrecy, are accountable to no one (apparently not even
their shareholders or employees), could sell or withhold power as they
pleased and had no obligation to build new plants.
Let us be clear about what is at stake. Having been intimately
involved in what California experienced in recent years, I feel the
need to convey to you the enormity of this issue. If we don't recognize
why it all happened then history will surely repeat itself.
Electricity is unlike anything else in our economy. It is truly the
lifeblood. Ordinary consumers and businesses alike cannot do without it
for even an instant. It can't be stored by customers. Reliable, smooth
electricity at a reasonable, predictable price is an absolute
necessity.
We found out in California, the hard way, that even the tiniest of
shortages literally stops the economy. And without price controls, the
prices shoot up to obscene levels. No one has yet suggested that in a
drought we allocate water to the highest bidder (Enron did try moving
into the water business) but that is exactly the scheme created in
California by religious believers in the market combined with Enron's
influence and persistence.
Proponents continue to talk of the potential benefits of
deregulation. In California we learned who got the benefits--it was the
power marketers. As for the consumers, in 1996 when deregulation was
launched, the consumers were promised a 20% rate reduction by April,
2002. Instead the consumers are paying rates that are 40% higher!
Even proponents of deregulation such as the Hoover Institution
Fellow and Noble Laureate Gary S. Becker concede that Enron encouraged
``further and faster deregulation of electricity markets at State and
Federal hands especially when it would help its own power trading
companies''. Mr. Becker also concedes that the collapse of Enron and
California's bad experience ``are further evidence deregulation has
many pitfalls''.
It is true that Enron did not invent deregulation. Indeed because
deregulation had been carried out with airlines and telecommunication
companies it had considerable momentum. But we must not forget that
electricity is different from other products and services. We can't do
without it and it can't be stored.
It is important to take note that at every step of the rulemaking
for deregulation in California from 1996 until today Enron, more than
anyone else, used their enormous resources to urge the most extreme
positions that resulted in maximum secrecy and lack of accountability.
And Enron was a major participant taking advantage of the volatility in
prices during the ``Perfect Electrical Storm of 2001'' while
simultaneously waging an intensive, successful campaign that in six
crucial months stopped a new Administration in Washington from doing
its job of controlling prices.
Let me be specific about Enron's role:
Secrecy
California created a power exchange (PX) where power could be sold
and bought openly with the public knowing the price. Enron stubbornly
opposed the PX, claiming power contracts should all be secret. In the
middle of the crisis in January of 2001, the PX closed down and then
Enron had its way.
Transmission Rights
Enron wanted only companies that owned physical rights on
transmission lines to be able to reserve capacity on the lines in
advance. This would allow those with deep pockets, such as Enron once
had, to monopolize the transmission of electricity. They were partially
successful in California. That crucial issue remains a legacy of Enron
as the FERC and the DOE continue to encourage market participants in
generation to own and possibly gain control of transmission. Remember
``gridlock'' on the electrical highway means it becomes a heavy toll
road for those who don't own it but must use it.
Price caps
The battle over price caps is perhaps the most glaring example of
Enron's role in shaping the rules of deregulation in their favor. The
basic idea of deregulation is that if competition is working, you don't
need price caps. In California in 2000 and beyond even the FERC has
admitted that the wholesale electric power market was dysfunctional.
Yet Enron was the poster child for opposing price caps.
The California ISO imposed price caps in 1999 and as the head of
the city of Los Angeles power system, I supported the price caps and
indeed supported lowering the caps. Those caps were effectively
abolished by the FERC and prices skyrocketed beginning in 2000.
I have personal experience with the persistent nature of Enron's
lobbying efforts and attitudes. After a long phone argument with Ken
Lay on the subject of price caps during which I rejected his arguments,
he said to me at the end, not harshly but gleefully, that no matter
what we ``crazy people in California did that Enron had people working
for him that could figure out a way to make money.'' And they did.
All through the fall of 2000 and the first six months of 2001 as
prices at wholesale were at their gouging worst, Enron was the loudest
and most persistent voice opposing price caps. They were vocal and
persistent at the California ISO, at the FERC, with California public
officials, the Clinton Administration, the Congress, and the Bush
Administration. It was ``all Enron all the time'' against price caps.
Because Enron as a trader could hide behind a curtain of secrecy no
one knew the full extent of how much they profited, and we may never
know. But it is now clear that as the largest trader they were
profiting big time.
It is beyond dispute that Enron lobbied hard for a system that
permitted them to be a huge player in California with no physical
assets in the state, just the equivalent of an electronic phone book.
Enron then succeeded in keeping the federal cop (FERC) off the beat
while the gougers were taking our money. Analysts \1\ have estimated
that Enron was a party to 40% of the transactions in the California
market during the height of the crisis when the big money was made. No
one will ever know for sure because they had no obligation to tell.
---------------------------------------------------------------------------
\1\ Robert McCullough--Testimony before the House Subcommittee on
Energy and Air Quality, February 13th, 2002.
---------------------------------------------------------------------------
It is worth pointing out that the decline in Enron's fortunes
coincides rather closely with California's programs that Governor Davis
and the Legislature put in place that brought prices under control. I
refer to the construction of new power plants, massive conservation,
long-term contracts and in June 2001 getting some controls when
President Bush appointed Chairman Pat Wood and Nora Brownell to be FERC
commissioners. Obviously Enron had many other problems, but it is
beyond dispute that as a trader (with no power of its own to sell)
Enron made money buying and selling when market prices were high, and
as prices settled down so did their profits.
The open question then is whether the policies that Enron
successfully engineered will be continued. That question is very real
for California.
After belatedly recognizing last June that keeping a just and
reasonable lid on prices was their statutory duty, those controls
finally established in June 2001, are set to expire on September 30 of
this year. The FERC has not found and cannot find that the wholesale
market in California is competitive enough to produce just and
reasonable rates. The reason is simple. The market is not competitive.
Despite California's progress, we haven't yet achieved enough of a
surplus. California is still vulnerable. The serious test is whether
the new Commissioners, who helped California last year, will recognize
that the Federal Power Act doesn't expire on September 30 and they are
duty-bound to keep the controls in place. The FERC must extend their
controls until such time as they can conclude that a competitive market
exists that produces just and reasonable rates. Otherwise the situation
that Enron so blatantly promoted will linger on.
In California we are continuing a strong conservation effort, we
are encouraging private investment in new power plants which are being
added, and we are promoting renewable energy projects as well. And we
have created a California Power Authority that can step in if private
companies fail to keep up with future demand.
There are some fundamental lessons to be learned from this
experience:
Electricity really is different and the system of public
utilities with a duty to keep the lights on at just and
reasonable rates set by regulators served this country rather
well during most of the 20th century.
Competition thrives in a surplus. But the private generators
thrive in a shortage.
It would be a mistake to assume that Enron was unique and
its demise means that deregulation is ``cleansed'' and there
are no remaining concerns.
The Congress should recognize that consumers of all sizes cannot be
well served by blind faith in the market. Any market for electric power
generation must be combined with sufficient governmental participation
to assure that the lifeblood of our society doesn't operate in ups and
downs. Such volatility and shortages may be acceptable for oranges or
stocks but society simply can't tolerate it for electricity.
I thank you for this opportunity to testify before a committee that
brings back fond memories to me. I will be glad to try to answer any
questions.
Senator Dorgan. Mr. Freeman, thank you very much. Next, we
will hear from Ms. Wenonah Hauter, the Director of Critical
Mass Energy & Environment Program from Public Citizen.
STATEMENT OF WENONAH HAUTER, DIRECTOR, CRITICAL MASS ENERGY &
ENVIRONMENT PROGRAM, PUBLIC CITIZEN
Ms. Hauter. Thank you, Mr. Chairman and Committee members,
for having me testify today.
Public Citizen has worked on electricity issues since the
mid 1970's, and I've watched Enron since the early 1990's when
I first read about it in the trade press when the debate up to
the Energy Policy Act of 1992 was occurring. And Enron, of
course, had been formed from two natural gas companies. Under
Ken Lay's leadership, it acquired too many assets and was
nearing bankruptcy and hired Jeffrey Skilling, who came up with
the great idea of a gas bank and energy commodity trading.
And so I think that from observing Enron for many years,
that we've been very concerned that the company didn't use the
tried and true business strategy of incorporating innovations
and improving the delivery of a product at a competitive price.
And, instead, they increased their profits over the last decade
by 1,750 percent, by basically speculating and treating the
market as if they were a drunken gambler in a giant casino.
And central to this strategy was removing the government
oversight that the previous speakers have talked about, but I
think that it's worth going through some of the history of how
they did that, because Enron was the most aggressive promoter
of electric utility deregulation from the passage of the 1992
Energy Policy Act, when they lobbied for transmission--wheeling
provisions, and after that time, when they were very active in
all of the meetings and the debate that happened in electricity
circles, like at the National Association of Regulatory Utility
Commissioners where they basically advocated this really
reckless scheme for deregulating electricity markets under the
guise of competition.
We all know competition is good, but the scheme that they
were promoting isn't competition. It's basically rigging the
market. And we were very concerned when, in 1996, A.B. 1890
passed in California. In fact, I put out a press release that
day, because we had watched Enron's tactics in lobbying for
that legislation and were aware that they were basically not
telling the truth about electricity markets.
So after the 1992 Energy Policy Act was passed, they were
very influential with the Commodity Futures Trading Commission
that was chaired by Dr. Wendy Gramm. And just a few days before
she left office, she pushed through the Commission an exemption
for Enron's trading of future contracts that really began to
help revolutionize the way energy could be traded.
Then, in 1994, Enron became the first power marketer to
become exempted by the Securities and Exchange Commission from
the Public Utility Holding Company Act. And they continued to
push at the federal level for deregulation and at the state
level. Many states where we were present--in fact, I testified
in Pennsylvania--there would be an Enron lobbyist. They would
send somebody from Houston, and then they'd hire a local law
firm to go in and to advocate for the most type of radical
deregulation.
Then Enron continued to push to escape government oversight
for its speculative activities by successfully using their
relationship with Senator Phil Gramm to muscle a bill through
Congress that deregulated energy derivatives. Then they were in
a position aided both by this deregulation of electricity and
derivatives, to command significant market share and to
coordinate the purchase of large volumes of short-term future
electricity contracts with spot control over key transmission
capacity and natural gas supplies.
And the way they would do this, for instance, is in
California--the company would negotiate with an owner of a
power plant to buy electricity at a guaranteed price at a time
very near to the future delivery, like the day before or a few
hours before.
And because they were entering this market and into these
contracts in a recently deregulated over-the-counter market,
Enron was in a very good position to manipulate and to control
a chunk of the market, just as Ms. Lynch has described. This
enabled them to predict and to set short-term and spot energy
prices for the Western electricity market.
And we should be clear that Enron wasn't alone in this
scheme, and that other companies, like Dynegy and Williams and
Reliant were using some of the same tactics. But what's
different is that Enron's exact role is just a lot more
difficult to clarify because the documentation just isn't
there. Enron didn't own power plants or the physical
infrastructure.
And you know how a traditional utility market share is
determined. It's by how many power plants a company controls in
a given market. But with a power marketer like Enron, there's a
big loophole, because there's no way to really tell what the
market power is because the power marketer is free to negotiate
as many wholesale contracts as they wish. And there's no
government oversight. In a competitive market, competition
doesn't exist if you don't have oversight and if the rules are
rigged.
So attempting to really look at their role in California is
hard, because they left this web of just thousands of trades
that's already been referred to in earlier testimony.
But what's really clear is that Enron, through their
lobbying, through their relationships with federal agencies, at
the state level, was basically trying to escape scrutiny and to
purchase enough electricity contracts a day ahead on the spot
market to secure a large part of the market share so that they
could set prices.
And Ms. Lynch has already talked about the information
that's available. The forms that are given to the Securities
and Exchange Commission, the Derivative Study Center has
calculated that Enron claimed a $500 billion electricity and
natural gas derivatives business in the months before the
company declared bankruptcy. And, of course, we know that many
of the reasons for this were the aggressive accounting games
that were being played.
But the disclosure forums that can be accessed on FERC's
website show that there is an alarming missing amount of data
from the forms. And I think what's really important to
remember, and I know that this is a sensitive area, but the
division--Enron's Energy Services--was headed by Secretary of
the Army Thomas White, until May of 2001. And this particular
division was best known for its retail end of services. They
were providing electricity to retail clients like Quaker Oats
and Saks and U.S. Army installations. And this particular
subsidiary was not doing well. And Enron Energy Services
controlled about 25 percent of the wholesale market by trading
electricity contracts.
So in the first three months of 2001, electricity prices
went way up, as Ms. Lynch indicated, and there were rolling
blackouts. And that's the time that this 11 million megawatts
of electricity in the market alone was traded by this division,
and 98 percent of these trades were with other Enron divisions
and at astronomical prices.
So by what we can extrapolate from this is that by selling
power to itself at inflated prices, Enron helped both push up
prices in California's deregulated energy market and to
accomplish two other goals. First----
Senator Dorgan. Let me ask that you summarize, Ms. Hauter.
Ms. Hauter. Yes, I am. I'm almost done.
By trading such large volumes of electricity at high
prices, they made the prices go up. And, second, Enron was able
to move money from its profitable division of the Power
Marketing Division to the unprofitable division of Enron Energy
Services and make it seem as if the company were more stable.
And so it's important to note that, if there had been
proper disclosure and scrutiny at FERC, this could all have
been prevented. And so our recommendation is that, at the very
minimum, Congress must mandate that the FERC immediately
investigate regulation of power marketers and that in the
short-term it would be very prudent for FERC to evoke market-
based rates authority for all power marketers until there's
been a very thorough investigation of these types of practices.
Senator Dorgan. Ms. Hauter, thank you very much.
[The prepared statement of Ms. Hauter follows:]
Prepared Statement of Wenonah Hauter, Director, Critical Mass Energy &
Environment Program, Public Citizen
Good morning. Mr. Chairman and Members of the Committee, my name is
Wenonah Hauter. I am Director of Public Citizen's Critical Mass Energy
& Environment Program. Public Citizen is a national consumer rights
organization founded in 1971. As Director of the energy program since
1997, I have spearheaded Public Citizen's investigations into the
problems and abuses of electricity deregulation. Due to Enron's early,
active and prominent role pushing for deregulation, the company became
a focus of our research.
Deregulation not only allowed Enron to become one of the most
powerful corporations in the world, but it also directly led to the
company's downfall. Deregulation of both energy markets and commodity
trading allowed Enron to escape price regulations--a key factor in the
company's meteoric, 1,750 percent increase in revenues over the past
decade. Enron could not attribute its brief success, therefore, to such
traditional models as incorporating innovations to improve the delivery
of product at competitive prices. Rather, Enron's business model was
built entirely on the premise that it could make more money speculating
on electricity contracts than it could by actually producing
electricity at a power plant. Central to Enron's strategy of turning
electricity into a speculative commodity was removing government
oversight of its trading practices and exploiting market deficiencies
to allow it to manipulate prices and supply. So when FERC finally fully
re-regulated the California market in June 2001, Enron's business model
was soon invalid and the company bankrupt.
Enron spearheaded electricity deregulation, lobbying heavily for
the transmission wheeling provisions of the Energy Policy Act of 1992
that allowed the company to gain a foothold into the wholesale market
by registering as a power marketer. Weeks later, Enron embarked on its
strategy to transform itself from an energy producer to an energy
trader when it was the first company to petition Wendy Gramm's
Commodity Futures Trading Commission asking that agency to not regulate
energy trading contracts (five weeks after granting Enron the exemption
in January 1993, Wendy Gramm joined the company's board at the request
of Ken Lay). Enron was the first power marketer, on January 5, 1994,
that the Securities and Exchange Commission exempted from the Public
Utilities Holding Company Act. Enron successfully lobbied for the
continued deregulation of over-the-counter energy derivatives trading
when long-time Enron supporter Senator Phil Gramm helped muscle the act
into law (and Gramm leads current efforts to oppose re-regulation of
derivatives trading). In between, Enron spent millions of dollars
influencing deregulation plans on the state level--most notably in
California.
But before FERC enacted the price controls which saved California
but suffocated Enron's revenue stream, the company had inflicted severe
damage on west coast consumers by manipulating supplies to drive prices
up. How did they do this in California, even though the company never
owned any power plants in the state?
Aided by deregulation of both electricity and derivatives, Enron
was able to command significant market share simply by coordinating its
purchases of large volumes of short-term future electricity contracts
with spot control over key transmission capacity and natural gas
supplies. Because Enron was entering into these electricity and natural
gas contracts in the recently deregulated over-the-counter market,
Enron was in a strong position to engage in trade-based manipulation by
controlling a significant chunk of the market, thereby enabling the
company to predict and set short-term and spot energy prices for the
Western electricity market.
While Enron played a significant role in helping to manipulate
supplies and prices in California, it is important to note that the
company was not alone. Indeed, the Federal Energy Regulatory Commission
(FERC) has already levied fines and ordered refunds on several
occasions totaling tens of millions of dollars to be paid by other
energy companies, such as Dynegy, Williams, Reliant and Mirant, for
their role in manipulating prices in California. More fines and
investigations by FERC are forthcoming, as are separate state lawsuits.
FERC has not yet issued a refund order to Enron, although one is likely
imminent. But Enron's exact role in manipulating prices in California
has been harder to track due to its business structure that was far
more opaque than other energy firms. In contrast to other energy
companies, Enron did not own any power plants or other physical
infrastructure, leaving only a complex web of thousands of trades with
multiple partners--including significant trading between Enron
subsidiaries--leaving practically no trail for investigators to follow.
Enron worked this way in California: the company would negotiate
with an owner of a power plant to purchase the electricity generated
from the facility at a guaranteed price at a time very near in the
future (usually the next day). Traditionally, a company's electricity
market share has been measured by the number of power plants the
company owns in a given market (that's why Southern California Edison,
PG&E and San Diego Gas & Electric sold most of their power plants--so
the utilities would not still control the wholesale market under
deregulation). But power marketers represent a huge loophole: they have
been free to negotiate as many wholesale energy contracts as they wish
with little to no government oversight. So Enron was able to escape
scrutiny and purchase enough electricity contracts in the day ahead and
spot market to secure significant enough market share, where the
company was in a strong position to set prices. Indeed, before the
energy crisis hit the state in May 2000, Enron paid a $25,000 fine to
the now-defunct California Power Exchange in May 1998 for the company's
early attempts at manipulating the day-ahead wholesale electricity
market. But after that, either government regulators were no longer
interested in holding energy firms accountable or Enron became more
sophisticated in its ability to manipulate markets, because FERC failed
to intervene until it was too late.
From the scant information Enron makes available in its disclosure
forms to the Securities and Exchange Commission, the Derivatives Study
Center calculates that Enron claimed a $500 billion electricity and
natural gas derivatives business in the months before the company
declared bankruptcy. Of course, among the many reasons the company was
forced into bankruptcy was that its executives played aggressive
accounting games, utilizing so-called ``mark-to-market'' bookkeeping,
where Enron booked much of the revenue for long-term contracts up
front--providing the company with inflated revenues.
Therefore, additional documentation is necessary to shed some light
into how the company played a role in controlling supply and prices of
energy in the California market. The only detailed publicly available
information is contained in Power Marketer Quarterly Reports that Enron
and other power marketers file four times a year with FERC. These
disclosure forms are intended to force regulation-shy power marketers
to disclose the volume and price of their trades, along with whom the
trades are conducted.
But in reality, FERC does a miserable job of enforcing its
disclosure requirements, as the Power Marketer Quarterly Reports are a
poor excuse for government oversight. FERC allows power marketers to
exclude so many crucial details about these trades that the porous
disclosure forms raise more questions than they answer. Nonetheless,
these disclosure forms provide enough of a window on Enron's operations
to highlight significant problems.
The documents indicate that Enron's western trading operations
focused entirely on the California market. This contradicts multiple
public statements the company made during the California energy crisis,
when company representatives argued that Enron's California operations
were minimal.
Enron was making 100 percent of its west coast trades at four
delivery points: COB (California-Oregon border); Path 15 (northern
California); Palo Verde (California-Nevada border); and ZP26 (central
California, near Bakersfield). According to many different reports,
Enron was engaged in a certain amount of transmission capacity
manipulation at all of these points at key times during the California
energy crisis. The Nevada Public Utilities Commission has been
investigating allegations that Enron was gaming the daily capacity
auctions at the Palo Verde delivery point. And although Enron only had
limited firm transmission rights over COB, Path 15 and ZP26, trading
insiders allege that Enron was able to manipulate capacity enough to
leverage its wholesale energy trading activities. By utilizing their
dominance over the Palo Verde capacity (connecting CA to Nevada) with
complicated spot clogging of capacity at ZP26 and Path 15, Enron's
power marketing subsidiaries were better able to utilize its day ahead
positions to charge inflated prices.
Enron had four registered power marketing divisions: Enron Power
Marketing, Enron Energy Marketing Corp, The New Power Co, and Enron
Energy Services. All were engaged in heavy trading all across the
country. Because of FERC's poor regulatory requirements, however, Enron
was able to hide significant details. For example, the Quarterly
Reports for Enron Power Marketing are unintelligible; the division
lumps trades conducted in every region of the country, so it is
impossible to isolate their California trading operations from their
New York trades.
But disclosure forms submitted by Enron Energy Services provide
region-specific data that is alarming. This division, headed by
President Bush's Secretary of the Army Thomas White until May 2001, was
better known for its high profile retail contracts with such clients as
Kaiser Permanente, Saks, Quaker Oats, JC Penny, Owens-Illinois, and
U.S. Army installations. But Enron Energy Services controlled as much
as 25 percent of the California wholesale market by trading electricity
contracts. In the first three months of 2001--at the height of
skyrocketing prices and rolling blackouts--White's division traded more
than 11 million megawatts of electricity in the California market
alone, making nearly 98 percent of these trades with other Enron
divisions at astronomical prices--up to $2,500 a megawatt hour (the
standard price at the time was less than $340 a megawatt hour). By
selling power to itself at inflated prices, Enron helped skyrocket
prices in California's deregulated market. Economists refer to this
manipulation as transfer pricing.
By trading such large volumes of electricity at such high prices,
White's division was able to accomplish two goals. First, trading
electricity at high prices with other Enron divisions allowed the
company to charge California utilities and consumers astronomical
prices, thereby contributing to the Western electricity crisis. Federal
and state regulators found it very difficult to trace Enron's trades,
since the company had four separate divisions interacting in the
wholesale and retail markets, and with each other. Second, engaging in
transfer pricing allowed these various Enron divisions to overstate
revenue and contribute to the accounting gimmickry that inflated the
company's share price.
These prices were far above what other power marketers were
charging at the time, and far above what Enron had been charging prior
to May 2000 (when the crisis began). It is important to note that at
the same time that White's Enron Energy Services division was
manipulating the California energy market by charging inflated prices,
Enron paid the D.C. lobbying firm Quinn Gillespie more than half a
million dollars in the first 7 months of 2001 to lobby the ``Executive
Office of the President'' on the ``California electric crisis''
according to the lobbying disclosure report filed with Congress on
April 10, 2001. Ed Gillespie, former communications director at the
RNC, was a top Bush campaign advisor and ran the U.S. Department of
Commerce for the first 30 days of the Bush presidency. Enron was
lobbying against bi-partisan efforts to re-regulate the Western
electricity market by imposing price controls. And just as Enron was
spending this money lobbying Congress and the White House against price
controls, the Bush Administration aggressively took Enron's position.
On numerous occasions, President Bush, Vice-President Cheney, their
various spokespeople and cabinet officials took an aggressive stance
against price controls.
At a minimum, Congress must mandate the Federal Energy Regulatory
Commission to immediately investigate regulations of power marketers.
Clearly, the current level of transparency allows companies to
manipulate wholesale markets. If it were not for FERC's continued
regulation of the Western electricity market, other power marketing
firms would have incentive to pick up where Enron left off. Public
Citizen urges Congress to make it clear to FERC that more scrutiny of
power marketers must occur. In the meantime, it would be prudent for
FERC to revoke market-based rate authority for all power marketers
until a thorough investigation is concluded.
Senator Dorgan. Next, and finally, we will hear from Mr.
Robert McCullough, Managing Partner, McCullough Research, in
Portland, Oregon. Mr. McCullough, you may proceed.
STATEMENT OF ROBERT McCULLOUGH, MANAGING PARTNER, McCULLOUGH
RESEARCH
Mr. McCullough. Thank you, Mr. Chairman. Thank you,
Senators of the Committee. I'll be very brief.
Our firm has had a leading role in looking at both the
California crisis and the Enron collapse. We're practitioners,
not policymakers like many other of the witnesses on the panel.
I'm going to do a brief overview of the chronology and a couple
of the facts.
I'm going to start a hundred years ago to note this is not
the first time we've been through a critical issue in our
infrastructure. It's always amusing how many of the same
parties occur again and again. A hundred years ago, J.P. Morgan
was attempting to monopolize the nation's railroads. That also
was a critical infrastructure. We did not, in fact, nationalize
the railroads to fix it. What we did was we imposed regulatory
controls over market power, and it's worked very well.
FERC came out of a 1932 collapse of a company almost
identical to Enron, the Insull Trust. Again, we did not throw
the baby out with the bath water. We imposed controls, many of
which Enron worked hard to eliminate over the past few years.
In 1986, we had the merger of two not very exciting
companies. From the beginning, Enron was cash poor. All through
their history, they had a ruinous run of bad luck in
investments. They failed in oil trading. They failed in
emission control fuels. They failed in foreign investments. In
a sense, their investment history was like a gambler that
continued to double down.
There were a couple of serious techniques that they used
throughout all of this. Partial spinoffs to subsidiaries that
would then, in fact, be used for valuation to support their
financials started all the way back in 1994 with Enron Global
Power and Pipelines. Now, we've seen that go all the way
through. That was the model for Nighthawk, their methodology in
1997. Then for the infamous Raptors of the last year or two. We
saw this same series of techniques support what appear to have
been a failing enterprise.
At the beginning of the decade of the 1990's, they were
averaging earnings and cash-flow of approximately ten percent
of revenues. That's not an unusual amount. That makes good
sense. By the end of the decade, they were down to \1/2\ of one
percent. Now, that represents a company that was running twice
as fast simply to stay where it was.
In 1995, they invested in Dabhol, one of the largest and
most controversial power plants in the history of the world.
Oh, and by the way, I left an important date out--1994. We've
seen now two years of explanation that California's environment
policies blocked energy production and caused this crisis. It's
important to remember 1994 was our last drought--71 percent of
flows--a reserve margin in the WSCC of 15.4 percent. That, by
the way, is at the edge of the practical level. David Freeman,
who's run more utilities than, I think, any other man in
America, can talk to that number. At 15 percent, you begin to
get worried.
In 1998, they went to Azurix and Elektro--those were
failing investments in England and Brazil--2000, Broadband--
it's, in fact, too polite to even call that a failing
investment, because we're not even certain there was any real
business transacted.
Then the critical issue for this Committee--we're in the
winter of 1999/2000. LJM2, one of these partnerships, a
financial partnership, reaches out from Houston, comes to
Portland, Oregon, and proposes transacting a power plant. In
all of these transactions, the financial end of these don't own
power plants. Why would Andy Fastow want a power plant in
Eastern Oregon? They approached the Oregon PUC. They asked for
exemption from traditional regulation. The Oregon PUC, with all
of our compliments, refuses to ask for a large part of this
transaction if it occurs.
Now, the important thing is in that winter, a power plant
was not a good investment. Enron's own internal documents
indicate such an investment could not have returned more than
12 percent at the prices we saw before May 22, 2000. However,
LJM2's documents indicate that they were going to return 22
percent. Now, clearly, either LJM2, a group of financial
experts in Houston, were much smarter than the electric
industry as a whole, or, number two, they had some insight into
May 22, 2000. Now, that, of course, was the first of 125
emergencies we saw over the next 14 months.
We were astonished. Flows in the summer of 2000 were 92
percent of normal. The reserve margin was 22.9 percent. All of
those, by the way, are official numbers coming directly from
the Bonneville Power Administration or the Western Systems
Coordinating Council. We now have these as historical numbers.
There are no calculations. There are no debates. There are no
special models. These are the actual historical facts.
Over the period from May 22, 2000, to June 3, 2001, we saw
a 5,812 average megawatt reduction in thermal generation in
California, below what we would have expected from traditional
mathematical models.
By the way, after the last emergency, those models returned
to having almost a 100 percent correlation with client
dispatch. Once FERC had eliminated the abilities to gain this
market with their must-offer rule and their price caps, the
markets returned to normal dispatch. And, of course, in August,
Skilling resigns.
The bottom line of this short story is very simple. This
was a company with a tremendous need to succeed. They had gone
to more than doubling down. They had financial schemes that
were going to explode in their faces in 2003. The entire
Whitewing structure was going to cash out at this point,
leaving them with billions of dollars of exposure. The Raptors
also had an explicit time limit. There had to be a success.
Looking through their risk-management assets, we notice
that they were very prepared for the May 22 crisis. In fact,
they were the only entity that I know of that was prepared and
made money in those risk-management assets over that period.
And the interesting side is that with the shift in FERC
policy, they took a loss in risk-management assets almost as
great as the profits they had made before. Interestingly, they
were more able to predict the unpredictable than the simple
political response.
Thank you very much, Mr. Chairman.
Prepared Statement of Robert McCullough, Managing Partner, McCullough
Research
Thank you for your invitation to testify today.
The year 2001 witnessed two surprising events. First, California,
the leading example of electricity deregulation, experienced rolling
blackouts during the winter (2000-2001)--a season when electric loads
are normally at their lowest. Second, Enron, the leading proponent of
electricity deregulation, in a matter of months shifted from
exponential growth to massive collapse. We now know that California's
electricity market was deeply flawed. A complex and secretive structure
provided the ideal framework for the exercise of market power. Contrary
to the extensive public affairs campaign waged by the beneficiaries of
the California energy crisis, actual data shows neither a resource
shortage nor the presence of underlying cost changes. We now understand
that Enron itself was a paper tiger. Its impressive show of trading
strength masked more than a decade of bad business decisions and
accounting legerdemain.
It is natural to sense a connection between these two events and to
conclude that Enron used its considerable clout to manipulate Western
electricity prices. As Hal Bernton of the Seattle Times has asked,
``How far down in Enron do you have to go to find ethical behavior?''
However, the institutional structure and opacity that made the
California market easy to manipulate also makes tracing Enron's
activities difficult. Certainly, Enron had the means, motive, and
opportunity. Twenty-three months after the onset of the California
crisis and ten months after it suddenly ended, we still have little
access to the relevant data. Two of the California investigations have
only recently received access to basic discovery. FERC finally began
its investigation into the broader implications just two months ago.
Our public policy response to these two events has been slow and
faltering. FERC still finds it difficult to apply its rate-making
powers. Recent requests for Federal Power Act 206 review of long term
contracts forced upon purchasers during the crisis have not been
granted.\1\ The onslaught by marketers who continue to argue for the
withdrawal of data from the public eye continues.\2\ And despite
substantial questions about the theories that underlie centralized
markets administered by the California ISO, FERC continues to support
the development of similar institutions throughout the U.S. and
Canada.\3\ At the current rate, the commodity market in electricity
will continue to be both the most troubled and the most secretive for
years to come.
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\1\ In addition to California, a number of utilities in the Western
U.S. have asked FERC to review one sided contracts forced upon them
during the crisis. FERC has not yet responded to these requests.
\2\ Moves are still underway at FERC, the Energy Information
Administration, and the North American Electric Reliability Council to
restrict market information from the press, public, and policy makers.
Ironically, the participants, themselves, now have access to almost all
``market'' data through FERC cases and ongoing litigation.
\3\ The California ISO operates a number of centralized markets for
capacity and energy. This same basic model has been adopted in the
regional transmission organizations mandated by FERC across the
continent. The contradiction in terms--open competition only within
highly centralized and opaque administered markets--has seemingly been
lost on FERC and the advocates of these schemes, despite problems in
California, New England, Pennsylvania and Alberta.
---------------------------------------------------------------------------
Moreover, the analysis of the issues posed by the California crisis
and Enron's collapse has been drawn into a deeper debate about the
appropriateness of consumer choice in electricity. This debate is often
confused with how to maintain the currently uneasy balance between
business and consumer interests.
While the costs borne by California's residential ratepayers were
high, even higher costs to the economy have been shouldered by major
industrial customers throughout the western U.S. and Canada. Outside of
California many, if not most, large industrial customers have enjoyed
open market access to electricity, based upon the natural gas model of
simple bilateral trading arrangements. When prices suddenly increased
without notice in California, it directly raised prices throughout the
region, shutting down major industries from Washington to Utah. Even
ten months after the California crisis, many of these industrial
facilities remain padlocked. Some of these industries will never
reopen.
The debate about the lessons of California and Enron is really
about protecting our economy against the exercise of market power. As
Theodore Roosevelt said:
``Combinations in industry are the result of an imperative
economic law which cannot be repealed by political legislation. The
effort at prohibiting all combination has substantially failed. The way
out lies, not in attempting to prevent such combinations, but in
completely controlling them in the interest of the public welfare.''
\4\
---------------------------------------------------------------------------
\4\ Theodore Roosevelt at Ossawatomie, Kansas, August 31, 1910.
We should not abandon our efforts to create a wholesale electricity
market. Nor should we ignore our responsibility to both consumers and
business. However, if the goal of equitable restructuring is to be
realized, FERC must vastly improve its record of monitoring,
preventing, remedying, and punishing market power abuse.
The facts are this simple. At the onset of the crisis in
California, if FERC had implemented its order of May 16, and its June
follow up a year sooner, industries throughout the Western U.S. would
not be closed today. If FERC had exercised its review powers on long
term contracts that are priced at two and three times the cost of the
new resources required to serve them, the lingering effects of
California would soon fade away.
This isn't a partisan issue. When the events of 2000 destroyed
paper mills in Washington, as well as other paper, chemical, and metals
industries throughout the West, our country took its first steps into
the current recession. Like regulation of the market power of railroad
trusts at the turn of the century, the question is efficient pricing,
not the elimination of a customer's right to choose.
The California Crisis
Twenty-three months ago the California market erupted in a
fourteen-month long series of emergencies, price spikes, and financial
crises. For a short while, a well-fueled public relations campaign had
much of the world convinced that the state had run out of electric
generating capacity as a result of its own unrealistic
environmentalism.\5\ Now that the storm has seemingly passed, the more
dispassionate view that this was market failure rather than resource
shortage is gradually gaining the upper hand.
---------------------------------------------------------------------------
\5\ The phrase, ``Ten years of rapid load growth without new
resources,'' was a hallmark of an excellent public affairs campaign
waged by marketers and generators in the California crisis.
Interestingly, both parts of the phrase were strikingly untrue. The
West Coast had a better load resource balance in 2000 than in previous
years and peak loads actually were lower in the ISO's control area than
they had been since 1997.
---------------------------------------------------------------------------
From the beginning, the electric industry was poorly prepared to
handle a major market failure. The Western Systems Coordinating Council
(WSCC), the body tasked with the electric reliability of the West Coast
of Canada, the U.S., and Northern Mexico, never did take an effective
role in the crisis. Indeed, most of the debaters never even noticed
that the West Coast had a reliability council that had been studying
electric reliability issues since 1967.
The crisis in California ended with a whimper, not a bang. Although
predictions for the summer of 2001 were catastrophic, the last
California emergency took place soon after the implementation of a
regional price cap. Simply stated, the crisis turned out to be a
problem in institutions and not resources.
California's restructuring was characterized by six words--``bad
design, bad incentives, bad results.''
AB-1890, the law that launched California on this path, was complex
and difficult to understand. Its unanimous passage was evidence that
every interest group had gotten its every desire. When every party to a
negotiation leaves the table happy, there is a strong implication that
they have been promised far more than can be delivered. It is useful to
remember the optimistic language of the law:
It is the intent of the Legislature that a cumulative rate
reduction of at least 20 percent be achieved not later than April 1,
2002, for residential and small commercial customers, from the rates in
effect on June 10, 1996. In determining that the April 1, 2002, rate
reduction has been met, the commission shall exclude the costs of the
competitively procured electricity and the costs associated with the
rate reduction bonds, as defined in Section 840.\6\
---------------------------------------------------------------------------
\6\ Section 220(a) of AB 1890.
Reality proved far more complex.
The basic design involved turning all power decisions over to an
hourly market. This decision was so audacious and so mis-informed, that
regional utilities and industries are still having to explain to FERC
that the hourly market has little to do with the industry years after
the design failed. Further, reliability, the historical strength of the
North American supply system, was only considered as an afterthought.
The crisis started with the announcement of a Stage 1 and Stage 2
emergency on May 22, 2000.\7\ The crisis ended on July 3, 2001 with the
final emergency declarations. The catastrophic summer of 2001 actually
saw declining prices and increased thermal generation. Every warning
that price controls would reduce generation and contribute to the
crisis turned out to be wrong.
---------------------------------------------------------------------------
\7\ The ISO issues emergency notices when its forecasted hourly
reserves fall below set levels--7% for Stage 1, 5% for Stage 2, and
1.5% for Stage 3. In practice, this mechanism has never worked.
Emergency declarations have tended to reflect the need for additional
operational rights for the ISO rather than hard and fast standards.
---------------------------------------------------------------------------
Politically, the response to the onset of the crisis was like a
scene from a frontier bar in an old western. Once the first punch was
thrown, every interest group leaped into the fray with its own two
fisted agenda. Generators launched preemptive attacks on air pollution
agencies, the California governor accused marketers and generators of
price fixing, Secretary Richardson moved to seize scarce Pacific
Northwest reservoirs, and municipals like L.A. and federal agencies
like the Bonneville Power Administration were accused of profiteering.
Within minutes, the bar was a roiling mass of punching, kicking, and
screaming special interests. Policy responses were especially hopeless.
The ISO spent months tinkering with price controls that always
contained fatal loopholes. FERC dithered in appalled indecision for
seven months, only to gun down one of the victims of the crisis--the
California Power Exchange--on December 15. Governor Davis' contribution
was to negotiate deals with the marketers and generators that
effectively fixed the unfair prices for years to come while
simultaneously assailing them for price fixing. Only after the
composition of FERC was changed, were substantive steps taken--the
adoption of a must offer rule and WSCC-wide price caps.
While pundits from San Diego to Maine opined daily during the
crisis, the truth is that under the California ISO's rules, no one was
certain exactly where the region stood. The WSCC had published, as they
had done for the preceding thirty-three years, a summer load/resource
appreciation that indicated that while California supplies for the
summer might be tight, that there was no immediate cause for alarm if
1,642 megawatts were available for import during June.\8\ In May, for
example, they projected a reserve margin of 29.2% for California.
---------------------------------------------------------------------------
\8\ Assessment of the Summer 2000 Operating Period, Western Systems
Coordinating Council, Spring 2000, page 3.
---------------------------------------------------------------------------
When the California ISO announced its first emergency on May 22,
the industry was completely taken off guard. Under the complex
structure of the California system, an emergency did not require a true
shortage. The definition of an emergency is when the capacity offered
the previous day in the computerized markets of the Power Exchange and
Independent System Operator was less than 107% of forecasted demand. At
the time, the ISO had no mechanism in place to determine if they were
actually facing an emergency, or whether the phone had just stopped
ringing.
For some time the WSCC had been constructing a real time generator
data base. The data from the WSCC (supplied to them from the ISO) did
not support the hypothesis that California plants were out of service.
Instead, the data showed that the plants tended to be operating during
the ISO system emergencies, but were not being fully dispatched--even
during the hours when actual emergency operating conditions were in
place.
We were very surprised to learn that overall thermal operations in
the California ISO's control area were running at levels far below the
levels of comparable plants elsewhere in the WSCC. Comparing the
dispatch rates with price data, our preliminary conclusion was that the
California PX and ISO had suffered a one time supply curve shift of
8,000 megawatts leftwards towards the origin. In simpler words, the
crisis looked like 8,000 megawatts had simply been removed from
service. Eighteen months later, this is still our conclusion.
Enough time has passed that we now know that the WSCC was not
facing a capacity shortage at the time. On an annual basis the WSCC
publishes a ten year forecast of resource sufficiency. This forecast is
usually named the ``10-Year Coordinated Plan Summary.'' One important
part of the report describes the ratio between resources and loads for
the previous year.
The following chart shows this data from the WSCC reports from 1980
to 2001.\9\
---------------------------------------------------------------------------
\9\ Since the 2002 report isn't available, we have used the
forecasted levels from last year's report for 2001.
In describing this chart to the House Energy and Commerce
Committee, I used the metaphor of assuring a happy household by
ensuring that the ratio of snacks to teenagers always stayed high. In
the utility industry, this ratio is called the reserve margin. A
reserve margin of 15% means that the area has 15% more resources than
requirements. This level--15%--is generally regarded as an acceptable
margin, since one power plant in six would have to fail for an
interruption in service to take place.
As the chart shows, the WSCC has fallen near to this level
frequently in the past decade. From 1991 through 1998 reserve margins
routinely fell below 20% during the summer. In each case actual
interruptions of service were unnecessary, since we always had enough
resources to meet load.
The situation in 2000 was far better than the situation that the
WSCC faced from 1991 through 1998. In 2000 it was able to get through
the summer with a reserve margin above 20%.
Pundits have identified the real problem in 2000 and 2001 as the
serious drought that afflicted the Pacific Northwest during this
period. As it turns out, this argument is wrong theoretically (reserve
margins are always calculated assuming drought conditions) and
factually (the serious drought started in 2001, not 2000.)
It would not be prudent to announce an ability to meet load that
could not be delivered during a drought year. In 1974, the WSCC
recognized this fact by issuing instructions that the capacity of
hydro-electric projects should always be calculated assuming drought
conditions.\10\
---------------------------------------------------------------------------
\10\ Criteria for Uniform Reporting Of Generator Ratings, Western
Systems Coordinating Council, June 20, 1974.
---------------------------------------------------------------------------
Thus, the reserve numbers reported above have always assumed
drought conditions. Even if the flows on the Columbia River were only
at 92% of normal, this would not have affected its ability to meet peak
loads.
As it happens, Columbia River flows during 2000 did not represent a
drought. Flows in 2001, did. The emergencies within 2000 took place
during a period of roughly average water. Put succinctly, there was a
drought, but it started after the first summer of the California
crisis. When the California crisis ended, the WSCC was in the grip of a
major drought.
The following chart shows the January through July flows on the
Columbia since 1980.
The very straightforward conclusion that comes from the reserve
margin chart when combined with the Columbia River flows is that 2000
was both a better year in terms of resources--22.9% reserve margin
compared with 15.4% in June 1994--and Columbia River inflows--92% of
normal compared to 71% in 1994. If these facts explained the
emergencies in 2000, how did the lights stay on in 1994? The answer is
that the organization of the industry rewarded meeting load in 1994. In
California's complex structures, this incentive had been changed in
2000 and 2001.
The major difference between the relatively stable conditions we
experienced in 1994 and the emergencies in 2000 was in large part the
difference in the operations of traditional utilities and the structure
of the California market. In 1994, the generating plants belonged to
the utilities. In 2000, the generating plants were dispatched according
to the complex incentives hidden in the rules of AB-1890.
Starting in 2000, the WSCC had established a database showing the
hourly plant operations of many of the plants on the West Coast. The
California ISO provided plant data to the WSCC which, in turn, provided
it to any interested WSCC member. While secrecy of operating data is a
cornerstone of the California market design, the practice of secrecy at
the ISO was unusual. The ISO provided this secret data in contravention
of its FERC-filed tariff throughout the summer and fall of 2000.\11\
Any market participant equipped with this data would be able to easily
adjust its operations to accentuate the California ISO's problems
during an hour when demand was high. Curiously, Portland General
Electric, Enron's subsidiary, did not contribute data to the database.
Enron had access to the data of others, but did not welcome access to
its own plant operations.
---------------------------------------------------------------------------
\11\ California ISO Information Availability Policy, originally
dated October 22, 1998, modified November 1, 2001.
---------------------------------------------------------------------------
The California ISO has provided numerous charts that show that as
its system approached peak, supplies offered to the California PX would
begin to drop off. The resulting deficit would become an operating
problem at the ISO. Once emergency conditions were declared, prices
would skyrocket and supplies would reappear.
Ironically, the hourly data is public outside of California--even
today--as part of the EPA's emissions database. Unfortunately for
consumers and policymakers in California, access to this data is
usually delayed from three to five months.
The following chart shows the monthly operations of the units owned
by Duke, Dynegy, Mirant, Reliant, and AES over this period. While plant
operations in the rest of WSCC reached 100%, plant operations for the
groups who have primarily profited from the crisis averaged 50.3% from
May 2000-June 2001. Interestingly, plant operations were actually
slightly higher for the three months that followed price controls, even
though market prices were significantly lower.\12\
---------------------------------------------------------------------------
\12\ This chart was based on data provided by the EIA. The EIA has
faced substantial pressure to reduce the amount of such data available
to public, as has FERC, the WSCC, and the North American Electric
Reliability Council.
We have been unable to explain the hourly operations of these five
generators even after enormous effort. Frequently, plants went
undispatched during system peaks and even during ISO declared
emergencies. Whistleblowers from the plant operations staff have
indicated that their directions from management were inexplicable.
Operations at plants outside of California have shown none of these
problems. In fact, outside of the plants in the chart above, operations
have been as close to 100% of capacity as the owners could reach.
Many analysts break the California crisis into two periods. The
first, economic withholding, represents the period when generators
either did not bid resources into the PX and ISO or made bids at
unrealistic prices. A second period--physical withholding--took place
from November through June. While it is possible that the decision to
take 50% of California's thermal units down simultaneously for planned
outages was simply coincidental, an alternative explanation is also
possible. After the ISO stopped providing operating data to the WSCC,
generators may have simply switched to communicating their operating
levels through planned and forced outage announcements. Regardless of
the explanation, operations in the second part of the crisis roughly
mirrored operations during the first portion.
From November until the onset of price controls, the five
generators reported massive plant outages. The ISO did not reliably
solicit or record plant outage data until 2001, so it is difficult to
compare the outages in November 2000-May 2001 with previous years for
the same plants. Detailed historical data on the performance of similar
plants--by age, size, technology, and fuel--are accumulated by the
North American Electric Reliability Council. Its data shows vastly
lower outage rates on similar equipment.\13\
---------------------------------------------------------------------------
\13\ NERC's Generation Availability Data System (GADS) can be used
to review the history for any type of plant. It is available on NERC's
web site.
---------------------------------------------------------------------------
While predictions of widespread blackouts were common through the
spring of 2001, FERC's decision to implement a WSCC-wide price cap
appears to have had a significant impact on plant outages, short-term
prices, and long-term prices in the late spring.
As always, shifts in long-term prices are the most interesting,
since they are not affected by weather or other operating problems.
The onset of price caps in June led to the larger of the West
Coast's two long-term price reductions in 2001. The second major price
reduction--in percentage terms--took place over the weekend Enron
declared bankruptcy.
The success of the price caps can be seen immediately. The
presence of a counterweight to California's fragile power markets
almost immediately returned long-term prices to the levels we have seen
for the past twenty years. As FERC's recent report notes, ``the average
price (both simple and weighted) at which the Western utilities sold
power in the daily spot market was significantly below the price cap of
$92/Mwh.'' \14\ This is quite an understatement--by the end of June,
prices had fallen to $43/MWh at Palo Verde.
---------------------------------------------------------------------------
\14\ The Economic Impacts on Western Utilities and Ratepayers of
Price Caps on Spot Market Sales, January 31, 2002, page 4.
While price caps are unlikely to work in a competitive market, the
California market was hardly competitive. The incentives under AB-1890
rewarded shortages. Once the ISO entered an emergency, it offered
prices five to thirty times higher than normal levels for emergency
supplies. Once FERC eliminated the ISO's ability to pay such distorted
prices, generators in California were rewarded by producing more rather
than less electricity. All of the data indicates that once the
incentives were repaired, plant operations improved and prices fell.
The shift in generator behavior is even more significant when each
plant's operations are modeled on an hour-by-hour basis from January 1,
1997 through December 31, 2001. The following table shows the
forecasted operations of the plants based on market prices for energy,
natural gas, and NOx RECLAIM credits.\15\
---------------------------------------------------------------------------
\15\ The model uses heat rates derived from EPA hourly generation
and fuel use data, MWh/Nox data from the same source, and
market natural gas and electric prices. RECLAIM prices are the monthly
average for coastal and inland markets.
Southern
Northern California
California (Outside SCAQMD Total
of SCAQMD)
Forecasted
Jan-97 to Mar-98 125.63 467.31 486.69 1,079
.63
Apr-98 to Apr-00 2,097.07 2,145.22 2152.9 6,395
6 .24
May-00 to Jul-01 4,055.36 4,623.28 4812.7 13,49
6 1.40
Aug-01 to Dec-01 2,504.16 2,524.25 1202.3 6,230
7 .78
Actual
Jan-97 to Mar-98 973.99 1,157.25 1060.7 3,191
2 .96
Apr-98 to Apr-00 1,250.30 1,349.55 952.43 3,552
.28
May-00 to Jul-01 2,603.83 2,665.89 2408.8 7,678
4 .57
Aug-01 to Dec-01 2,351.52 2,031.62 2163.1 6,546
4 .27
Difference
Jan-97 to Mar-98 848.37 689.93 574.03 2,112
.33
Apr-98 to Apr-00 (846.77) (795.67) (1,200 (2,84
.52) 2.97)
May-00 to Jul-01 (1,451.53) (1,957.38) (2,403 (5,81
.92) 2.83)
Aug-01 to Dec-01 (152.64) (492.63) 960.77 315.5
0
Actuals are significantly lower than forecasted levels from May
2000 through July 2001--the duration of the California crisis. After
FERC's intervention in the market the deviation between actual
operations and forecasted operations changed from an under-generation
of 5,813 megawatts to a slightly higher than predicted production of
315 megawatts.
Overall, the standard model of economic dispatch of these plants
fits very well before the crisis and after the crisis. During the
crisis, the plants generated 5,813 megawatts less than a market model
would have predicted.
Motive, Means, and Opportunity: Enron's Role in the Market
From its inception, Enron, the combination of the Houston Natural
Gas and the InterNorth pipeline companies, was a turbulent and troubled
entity. While the public relations skill of Ken Lay and the financial
skills of Jeff Skilling portrayed the company as a surging force in
energy markets, the revelations of the past year indicate that it had
lurched from failure to failure. The cycle of Enron triumphs--
optimistic announcements followed by accounting adjustments, temporary
boosts by artificial valuations, and finally closure or sale--was
repeated time and time again. After each cycle, the deadweight loss of
previous disasters placed a heavier burden on the next announced
triumph to overcome.
----------------------------------------------------------------------------------------------------------------
Year Enterprise Outcome
----------------------------------------------------------------------------------------------------------------
1988 Oil trading Large scale embezzlement caused the abandonment of the business.
----------------------------------------------------------------------------------------------------------------
1990 Long Term Shifts in natural gas pricing made many early transactions uneconomic.
Natural Gas
Contracts
----------------------------------------------------------------------------------------------------------------
1994 Brazil A variety of Brazilian projects including the pipeline from Bolivia to
Brazil and associated power plants were delayed, cancelled, or
eventually devalued by Brazil's economic problems and a persistent
drought.
----------------------------------------------------------------------------------------------------------------
1995 Dabhol Enron's one sided contracts faced every possible obstacle from the
state of Maharashtra.
----------------------------------------------------------------------------------------------------------------
1997 PGE While PGE has retained its value, Enron's high purchase price depended
upon proposals to free valuable assets from Oregon regulation. None
of these were approved by the Oregon PUC.
----------------------------------------------------------------------------------------------------------------
1998 California Retail Enron withdrew from the retail market after a month at a cost of
Markets hundreds of millions of dollars in startup costs.
----------------------------------------------------------------------------------------------------------------
Azurix Enron's troubled investment in England is followed by failed water
investments throughout the world.
----------------------------------------------------------------------------------------------------------------
Elektro Enron purchases a Brazilian distribution utility now troubled by
drought, devaluation of the Brazilian currency, accounting
investigations, and devaluation.
----------------------------------------------------------------------------------------------------------------
2000 Broadband Enron's broadband revenues prove largely illusionary.
----------------------------------------------------------------------------------------------------------------
2001 EnronOnline Enron's business to business web site achieves $195 million dollars in
notional transactions in its final quarter--roughly four times
Enron's total revenues. No impact on actual revenues, earnings, or
cashflows is apparent.
----------------------------------------------------------------------------------------------------------------
TNPC Enron spins out a troubled retail operation and profits through the
complex mechanics of Raptor 3. Actual revenues are low and earnings
are non-existent.
----------------------------------------------------------------------------------------------------------------
The central theme in Enron's growth was its desperate search for
purchasers in its schemes. Each cycle promised enormous growth. Each
cycle faltered on the absence of realistic markets. Each cycle fell to
creating buyers where none really existed. We now know that many of
Enron's past failures involved--in one way or another--the creation of
artificial demand for their commodities and assets.
From the beginning of the decade when Enron began to treat asset
sales as ``merchant investments'' to the mid-1990s when an increasing
proportion of Enron's earnings began to be based on questionable ``mark
to market'' estimates, the actual quality of Enron's earnings have
faltered badly.
Since 1994, Enron has always obscured its frequent market setbacks
with affiliated entity transactions. From 1994 through 1997 the major
buyer for many of these troubled assets was Enron Global Power and
Pipelines. In 1997, the buyer was Nighthawk. Nighthawk evolved into
Whitewing in December 1997. As Enron's problems expanded, the
affiliated entities also expanded in number. By 1999, Whitewing was
joined by a variety of structures including Sundance, Hawaii, LJM1 and
LJM2, not to mention the infamous Raptors.\16\
---------------------------------------------------------------------------
\16\ Understanding Whitewing, McCullough Research, January 20,
2002, and Understanding LJM, McCullough Research, February 2, 2002.
---------------------------------------------------------------------------
The chart below summarizes fifteen years of Enron's announced
earnings and operational cashflows as a proportion of announced
earnings.
Even these figures are amenable to manipulation. The relatively
strong figures for the early 1990s depended upon the sale of future
receivables--another example of borrowing from Peter to pay Paul.
Ironically, some of the most important evidence we have on Enron's
deteriorating financial position over time comes from materials only
made available to the partners of LJM2. The following chart represents
data on off-balance sheet assets provided to select limited partners:
By any standards, Enron entered into 2000 in desperate conditions.
We now know that earnings in 2000 and 2001 were primarily taken from
financial maneuvers like LJM2's Raptor subsidiaries and comparable
affiliated party transactions like Osprey and Sundance.
Clearly, enormous concentration in California markets was required
for Enron to affect prices. FERC does not accumulate the data necessary
to show the degree of concentration on a systematic basis. FERC does
require energy marketers to file quarterly reports. Enforcement of this
provision is weak. Some marketers fail to file their reports. Others
file their reports in illegible or illogical formats. Still others,
like Enron, do not specify any detail on the hubs where they bought and
sold electricity.
The following chart shows Enron's share of the major California
hubs over time. The data used to generate this chart was taken from
sales and purchases of major Enron trading partners who do show where
Enron's transactions take place.
This chart matches our detailed research on Enron's trading
activities.\17\ Enron's market share--for both sales and purchases--
increased dramatically in 2000. By the fourth quarter of 2000, the
evidence from FERC's quarterly marketing reports indicated that its
sales were nearly 30% of the market. As Enron entered 2001, the growth
of its wholesale operations appears to have stalled. Overall statistics
indicate that Enron's physical sales declined after 4th quarter 2000.
---------------------------------------------------------------------------
\17\ Deconstructing Enron's Collapse, McCullough Research, January
10, 2002.
---------------------------------------------------------------------------
In almost any other commodity market a 30% market share is clearly
sufficient to exercise price leadership. Pacific Gas and Electric's
share of California wholesale markets before April 1, 1998 was similar
and its ability to use its scale to affect prices had long been
observed.
Enron's sales directly to the California ISO were not large.
Enron's sales at the hubs were vastly greater than its sales to the
ISO. This may simply reflect the fact the market leader need not show
up in every transaction. Price leadership sets the prices for all
participants. Each transaction would reflect the price leader's price
even though the price leader only had 30% of the market.
Enron's transactions with Pacific Northwest generators may have
tended to obscure its sales to the ISO. During the California crisis,
Enron approached a number of Pacific Northwest utilities offering to
purchase ancillary services for sale to the ISO. Disentangling these
transactions may be difficult.
Do we know whether Enron exercised its market power in an attempt
to increase prices during the market crisis that occurred between May
2000 and July 2001? No.
Publicly available data simply isn't that detailed. And while the
California ISO continues to restrict availability of such data through
its aggressive use of confidentiality agreements, the public debate
will not become much clearer. The irony of the situation is that the
ISO, the victim, has restricted market information to the market
participants since they must have access to participate in the FERC
refund cases and ongoing litigation, but has taken the same data out of
the hands of the public, the press, and policy makers.
If arrogance was a clue to the exercise of market power, Enron's
behavior during this period was legendary. During one transaction we
were involved in, a junior Enron trader simply hung up on a senior
executive of a Fortune 500 company because he could not move fast
enough. This is market power with a vengeance.
What little evidence we can access concerns Enron's ``price risk
management activities.'' This typically elliptical phrase was used by
Enron to describe its hedging activities. Enron's 2000 Annual Report
describes this area of its business as:
Enron engages in price risk management activities for both trading
and non-trading purposes. Instruments utilized in connection with
trading activities are accounted for using the mark-to-market method.
Under the mark-to-market method of accounting, forwards, swaps,
options, energy transportation contracts utilized for trading
activities and other instruments with third parties are reflected at
fair value and are shown as ``Assets and Liabilities from Price Risk
Management Activities'' in the Consolidated Balance Sheet.\18\
---------------------------------------------------------------------------
\18\ 2000 Enron Annual Report, page 36.
If Enron had knowledge of market power in advance, we would have
expected its hedging operations to be quite profitable. If not, the
surprising and unanticipated events of May and June 2000--2nd Quarter
2000--should have posed a substantial economic risk.
Enron's financials show a dramatic shift in the net value of price
management assets in the 2nd Quarter of 2000. This would be consistent
with foreknowledge of the onset of the California crisis:
This chart also provides ample reason for Enron's energetic
attempts to postpone the advent of price controls in the 2nd Quarter of
2001. As prices fell, Enron faced enormous losses in the net value of
their hedging assets.
On a smaller scale, at least one of the investments of LJM2 shows
the same canny prescience on future events. In the winter of 1999, six
months before the onset of the California crisis, Enron approached the
Oregon Public Utilities Commission with the proposal to sell a minor
PGE asset in the market while reserving much of the profit for Enron.
PUC staff reviewed the proposal carefully and successfully preserved
the majority of the profits from the transaction for Oregon ratepayers.
A number of aspects of the transaction were not known to Oregon
regulatory staff at the time. Significantly, LJM2 took a major role in
this transaction, receiving a difficult to understand $3.5 million
profit in the transaction.\19\ Even more surprisingly, LJM2 planned to
take a 50% ownership in asset.\20\
---------------------------------------------------------------------------
\19\ Powers Report, page 147.
\20\ June 14, 2000 letter from Kathy M. Lynn to LJM2's limited
partners, page 4.
---------------------------------------------------------------------------
Enron's testimony before the Oregon Public Utilities Commission on
August 14, 2000 showed that its market perceptions before the crisis
was that such investments would have been unable to earn even a 15%
return on the investment.\21\ LJM2's internal documents indicated a 22%
return on this investment. LJM2 apparently was able to either operate
in the same markets with vastly more expertise than Enron, or LJM2's
estimate showed foreknowledge of the events to come.
---------------------------------------------------------------------------
\21\ Understanding Recent Power Prices, August 14, 2000, page 15.
---------------------------------------------------------------------------
Both sets of evidence--the larger picture of Enron's hedging
position and the smaller example of a single plant transaction--
seemingly indicate that Enron was prepared for the explosion on May 22,
2000. If so, it was among a very select group. As mentioned above, May
was not considered a month in which an emergency was even remotely
possible.
The California Crisis and Enron's Collapse
Were these two events related? Enron had means, motive, and
opportunity. Substantial evidence now exists that Enron was able to
exercise market power in forward markets. The firm had the means. We
now understand the motive very well. Enron stood on the brink of
bankruptcy. Jeff Skilling's unanticipated exit from Enron soon after
the end of the California crisis is powerful evidence on how dangerous
FERC's imposition of price controls were to Enron. Finally, they had
opportunity. If the firm's market share was as high as FERC's quarterly
market reports indicate, it was in an excellent position to affect
hourly markets.
Data also suggests that Enron's management were able to plan ahead
for the onset of the crisis. The event they could not predict was a
shift in the regulatory climate that brought the crisis to a close
years ahead of the schedule the firm had predicted.\22\ The FERC orders
that ended the California crisis may well have spelled the end to the
last gamble to preserve Enron from bankruptcy.
---------------------------------------------------------------------------
\22\ ``Tim Belden of Enron, a major energy marketer, predicted that
prices would remain high for another two to four years as demand
approaches the region's capacity to produce electricity.'' Experts Try
To Explain Run-Up In Energy Costs, Associated Press, July 19, 2000.
---------------------------------------------------------------------------
While we know that the California crisis did not reflect market
fundamentals, the final word on Enron's role in the crisis will depend
on investigations now underway. We can draw lessons from the crisis
even before the final word on Enron arrives.
First, secrecy and opacity are simply too expensive. Open
markets require open information.
Second, market power is always a problem in commodity
markets. Steps are underway to reverse many of the exemptions
that Enron received from regulatory controls.
Third, FERC's role is more important in a deregulated market
than it ever was before. Arguments that FERC should surrender
its power to review long term contracts and avoid an active
regulatory role are as wrong today as they were at the turn of
the century when the U.S. faced the same arguments concerning
the railroads.
Thank you for this opportunity to appear before you.
Senator Dorgan. Mr. McCullough, thank you very much. Ms.
Lynch, I understand that you have to depart at 11:30. Is that
correct?
Ms. Lynch. Yes, Senator.
Senator Dorgan. Why don't we begin a series of questions. I
also have to go to an Appropriations Committee at the request
of Senator Byrd at 11:15. I'm going to ask Senator Boxer to
chair at that point.
Let me begin. Let me try to ask about the 11 million
megawatts. I think two or three of you have discussed this
issue, 11 million megawatts being traded. Ms. Lynch, could you
amplify on that again so that we can ask some questions about
that?
Ms. Lynch. Certainly. We studied one quarter's worth of
trades by Enron and its trading affiliates, and that is the
fourth quarter of 2000. And what we found was of the trades
that Enron and its affiliates, over 11 million megawatt hours,
almost 12 million megawatts, were actually trades among its own
entities. And, in fact, certainly 30 percent of the trades that
Enron accomplished in that fourth quarter were with itself or
its related entities so that it inflated the market,
essentially.
Senator Dorgan. Now, those are not arms-length
transactions, as you suggest. That's why you call them ``sham
transactions,'' right?
Ms. Lynch. Exactly.
Senator Dorgan. Well, let me try to understand. I
understand that more will be traded than will be used in order
to provide liquidity in the marketplace. But if you have a
marketplace that is obscure, you can't see who the participants
are or what the participants are doing, and a company like
Enron has partnerships that are trading with each other and
creating an artificial price, was there not a mechanism in
California that could determine this and take action to prevent
it?
Ms. Lynch. Not that I know of. California had essentially
handed off its price controls, because these were trades in the
wholesale electric market, and those would have been covered by
FERC.
Senator Dorgan. Now, all of you have made the point that
Enron was hip deep in the proposition of how California would
restructure. And they had a powerful influence on how the
restructuring occurred. Every company, every citizen has a
right to be involved in the political process by which they
nudge or urge or try to force decisions in a certain direction.
But creating the groundwork on which one may be able to cheat
is actually different than actually cheating and I want to get
to the question not of whether Enron was a big political player
in California and in Washington in helping restructure, for
example, California in an image that it wanted, but did it then
use that in a manner that bilked or cheated or rigged the game
against California consumers? And if so, why were there no
mechanisms? Is FERC the only mechanism available to deal with
that? I mean, I understand that--I said it at a couple of
Energy Committee hearings that FERC was doing its best
imitation of a potted plant. And it finally seemed to come
alive from the neck up and took some action, but it just
essentially sat on its hands and did nothing for a long period.
The question is, if one believed that a company came into
the marketplace and began rigging the marketplace, were there
no mechanisms and no handles at all, save for FERC making an
ultimate decision at some point to resolve this on behalf of
the consumer?
Senator Dunn.
Senator Dunn. Mr. Chairman, thank you. I'll take the first
crack at that one. I want to underscore, however, that I agree
with you that certainly it's everyone's right to lobby for a
particular new set of laws, or statutory layout. Remember,
however, that the promise of deregulation, as it was pushed at
both here and Washington, D.C., and at every state level, was
to bring in a deregulated format and the consumers will receive
lower prices.
The fact of the matter is the internal documents for most
of these companies show that was never the intent, although
that was the promise that was made in virtually every
legislative and regulatory body, including by, in California,
Mr. Lay and Mr. Skilling directly, starting in testimony before
the CPUC in 1994.
But getting specifically to the question of whether, in
fact, they manipulated the market, the first evidence of that,
although the question is whether they did it before it, that's
still outstanding, but the first evidence surfaced in May 1999
when Enron artificially congested one of the transmission lines
in California. That resulted in about a $6 million hit on the
California consumers at the time.
And the California ISO attempted to take action. They found
that there were many obstacles in their way, including the
enormous political legal power of Enron in preventing its
taking aggressive response to this and ultimately it resulted
in a settlement agreement of which I believe fined Enron
$25,000.
Unfortunately, every time any, in my view at least, any
time any California regulatory body, be it ISO, the PX, the
CPUC, has attempted to take aggressive action in that wholesale
market, they've been stopped by FERC as a result of the
industry's request of FERC to prevent further regulatory
activity at the state level.
Senator Dorgan. Mr. Freeman.
Mr. Freeman. Mr. Chairman, I just want to make clear that
California did not sit idle and do nothing. We were a hundred
percent in the spot market in January of 2001, and FERC has
exclusive jurisdiction over that spot market, but we moved to
enter into long-term contracts, even though they had us over a
barrel at the time, but we got a lot of the power out of the
spot market with long-term contracts. We initiated the most
effective conservation program in the history of this country.
And it was the combined actions of our long-term contracts, our
conservation program, and, finally, in June, FERC beginning to
do its job that brought this tiger under control, so to speak.
So we did everything we could do, including building new power
plants and completing them as fast as we can. We completed
almost 3,000 megawatts of new plants over the last year.
But the part of the job that the state has no authority to
deal with is the sale of electricity at wholesale in interstate
commerce, and that's been FERC's responsibility for decades,
and they've exercised it for decades. And this business of all
of a sudden deciding unilaterally, without any findings, that
they can kind of go home and not do their job--to my mind,
lobbying for new laws is one thing, but lobbying agencies not
to enforce the law that's on the books is something else.
Senator Dorgan. You're correct about it, that's quite
different.
Mr. Cohen. Mr. Chairman?
Senator Dorgan. Yes?
Mr. Cohen. Just in response to your question about whether
FERC was the only agency that could have done anything.
Actually, the Commodity Futures Trading Commission also has----
Senator Burns. Excuse me. Who are you?
Mr. Cohen. I'm sorry. Gary Cohen. I'm General Counsel for
the CPUC.
Senator Burns. Thank you very much.
Mr. Cohen. And the Commodities Future Trading Commission
issued proposed rules in June of 2000, and then final rules in
December 2000, which were to become effective in February in
2001 that would have regulated the online trading that Enron
was conducting. But when Congress passed the Commodities
Futures Modernization Act amending the Commodity Exchange Act,
those rules were withdrawn. So during this time period that
we've been talking about, there were no rules in effect
whatsoever that governed the online trading that Enron was
engaged in.
Senator Dorgan. Thank you very much.
Let me make a point, ask one additional question, and then
I'll call on Senator Burns.
Senator Dunn, you talked about the lack of cooperation that
your committee has received from Enron. Let me tell you that we
have experienced the same with respect to Enron.
Senator Dunn. I'm sorry to hear that, Mr. Chairman.
Senator Dorgan. This Subcommittee has been involved in an
investigation. We have, for example, repeatedly asked for
records dealing with partners, the investors, and all of the
partnerships. We hear from the corporation that they want to
cooperate. Their attorneys say they want to cooperate. But the
fact is, they never do cooperate. And I have spoke to the
Chairman and the Ranking Member of the full Committee about
issuing additional subpoenas, but we have experienced exactly
the same thing. A little cooperation would go a long way here.
Senator Dunn. Agreed.
Senator Dorgan. But we've received precious little.
Now, let me ask a final question. There is a criminal
investigation ongoing. We know that. There are congressional
investigations ongoing with respect to Enron. I said when I
started, the reason that we are focusing on Enron today with
respect to this hearing and we're not tackling the larger
question of restructuring and, you know, California's mistakes
in restructuring, et cetera, et cetera, is we're trying to
understand, did people who ran the Enron corporation and
cheated their Board of Directors and cheated investors--that
comes from the Board of Directors' own report--did they also
cheat consumers in California and consumers in the West Coast
by manipulating prices and creating sham trades and so on and
so forth? Because that is a very serious question and is not
petty crime. We're talking about billions of dollars. These are
big issues.
I'm wondering, are any of you aware of, for example, FERC
investigators investigating out in California the questions
that we're tackling today, are you aware of investigators from
the Justice Department who are engaged in a criminal
investigation of Enron in California, looking at these
questions with respect to Enron?
Ms. Lynch.
Ms. Lynch. I know that FERC has an open investigation
proceeding regarding the generation market in general, and I
have had several conversations with Chairman Wood about how we
could assist in a joint state/federal effort. Those have not
borne fruit.
Senator Dorgan. In your judgment, is the FERC investigation
an active, aggressive investigation?
Ms. Lynch. I just don't know. I haven't seen them where
we've gone. I haven't seen them where Senator Dunn has gone. I
haven't seen them where the Attorney General has gone, because
we are coordinating with the California Attorney General. That
doesn't mean they're not there. I would hope that we could
coordinate more effectively with the federal investigators.
Senator Dorgan. Is there any evidence that FERC is involved
in an active, aggressive, robust investigation? Ms. Lynch.
Ms. Lynch. I haven't seen it.
Senator Dorgan. Senator Dunn.
Senator Dunn. If I may, Mr. Chairman, just add on to Ms.
Lynch's testimony, we actually called before our committee one
of the FERC commissioners early last summer. They resisted and
instead sent one of their litigation counsel to testify before
our committee, an individual by the name of Robert Pease. He
was very cooperative, very open. I was very impressed with his
testimony.
We asked him that very question. But now we're dealing with
mid-summer of last year. The best that Mr. Pease and--outside
of the--at direct testimony that we've been able to gain is
when there was suspicions about planned--or, excuse me, outages
that were done deliberately to create a shortage, FERC
indicated that it would investigate. And it did, by making
several phone calls to a few of the plant operators asking them
if they turned down their plant in an effort to manipulate the
market. The answer was no. FERC concluded there was no
manipulation of the market.
Since that time, at least as far as our committee is
concerned, we have seen, to be perfectly frank, Mr. Chairman,
zero from FERC in its investigation in California.
Senator Dorgan. Senator Dunn, I am disgusted by those who
would take advantage of consumers. And we're talking now about
the Enron Corporation in this investigation. But I'm also
disgusted about that group I call the ``grateful dead'' that
assumed public office in a regulatory role and failed to
regulate. They do no service to this country. Best, in my
judgment, they not accept a role in public service if they're
not interested in using the opportunities they have on behalf
of the American people to make sure the marketplace is a fair
marketplace and people are not cheated.
So I shouldn't even disrespect the name of a band in this
country by calling them the ``grateful dead,'' but I was so
angry with FERC during this period when they were running up
prices and everyone understood something was amiss, and FERC
nonetheless sat and sat and sat and did nothing. And finally
they took action, and I suppose we should not fail to be
grateful for small favors. But having taken action billions of
dollars late, I think many people in California and on the West
Coast wonder if they need to say thanks to someone who took
action that late.
But, at any rate, let me call on my colleague, Senator
Burns, for questions.
Mr. Freeman. Chairman Dorgan, could I just thank you for
your anger and hope that you will persist in the question that
you asked, because having worked at the predecessor to FERC,
these agencies do respond to the Congress, and I believe that
you and your colleagues, if you persist, can have an influence
that's in the public interest, and I thank you for this hearing
and for that interest.
Senator Dorgan. Well, rest assured that we're going to try
to build a fire, and I'm going to be one carrying wood.
Senator Burns.
Senator Burns. Thank you very much. That's a bad
illustration of the Grateful Dead. I can remember in 1994, they
came to Montana to play a big fund raiser for my opponent.
[Laughter.]
Senator Burns. They had come up there and done a big
concert for my opponent.
Mr. Freeman. And he was grateful, even though he wound up
being dead, in terms of----
[Laughter.]
Senator Burns. He knocked him out.
Mr. Freeman. Apparently, Mr. Burns, it wasn't good enough.
Senator Burns. He didn't make it.
Enlighten me a little bit on the California law whenever
you deregulated the power industry. You deregulated
transmission. Is that correct?
Mr. Freeman. Not exactly, Senator. The transmission was
restructured--but it's still a cost-plus regulatory----
Senator Burns. OK. How about generation?
Mr. Freeman. It was. Yes, sir. It was--that was the part of
the industry that was clearly deregulated.
Senator Burns. How about the prices that could be passed on
to the consumer?
Mr. Freeman. Well, the retail rates are still under the
jurisdiction of President Lynch and her colleagues, so they're
still regulated.
Senator Burns. I would--I'm just looking over things. You
had other companies there that showed great profits, too, and
I'm not--this whole thing with Enron is fascinating to me as to
how they put that all together. And there's no doubt about it
that there's going to be some people go to jail and ought to go
to jail. There is no question about that.
But there's also some flags along the way those who are
serving in our legislature--now, I didn't vote for deregulation
here, and I've always been sort of leery of it, because you
cannot dereg an industry when you have not--when you do not
have a national grid to where you can move power to anywhere
you wanted to go. In other words, we, in Montana--now, we've
heard a lot of bad things said about cooperatives and REA and,
you know, and they wanted to take those in, but I'm one of the
guys that believe it had not--'cause I'm come out of
agriculture--had it not been for the REA, we'd be watching
television by candlelight out there on the ranch.
And when you talk about being hammered by big companies,
I'm telling you what. You want to come and try to sell grain or
fat cattle? Now, that's a perishable product, just like
electricity is. I mean, it's those things--and we fight those
battles every day, and we've fought it under every
administration, every Justice Department, and whatever we could
look at it.
But here it looks like that you piecemealed deregulation
and it caused this mischief to happen. Because those costs, in
a purely deregulated market, could not be passed on to the user
who usually is the people that demand regulatory or legislative
people to take action. The consumer of California.
As long as they had the protection of their PUC, and that
could not be passed on to them, everything was going on back
here behind them, they didn't worry about it. The public really
didn't worry about it. The only thing they worried about was
reliability. But it wasn't coming out of their billfolds until
it was done blanketly among everyone through taxes--increased
taxes.
Now, tell me if I'm wrong there, Mr. Freeman, and put me on
the right track. But this just seems like I'm----
Mr. Freeman. Well, the one thing that you're certainly
right on is the REA, because I grew up in the Tennessee Valley.
We had the first co-op in the country there. And, if it weren't
for the co-ops, there wouldn't be electricity in rural America.
Senator Burns. That's right.
Mr. Freeman. So that's a fundamental point. Frankly, the
people of California and the California legislature did not and
could not repeal the Federal Power Act. And we had every right,
every reason, to believe that the wholesale price would not
have gone through the ceiling. President Lynch, in her
commission, would pass on reasonable wholesale rates. They do.
That was not the problem. The problem is the Federal cop just
went off the beat and let those wholesale prices go up to the
sky and turned their back on it. That was the nub of the
problem.
And, frankly, I don't think anybody thinks that
deregulation was a great and wonderful thing. Matter of fact,
if it weren't for the honor of it all, we'd just as soon skip
the whole last four years, but----
[Laughter.]
Senator Burns. Well, I'd go for that. I'd go for that. But
it just looks like, to me, that you had all this area of
mischief, and it could not--and you just hit a wall as far as
passing some of those costs along of that mischief. Now, that
mischief would have gone away as soon as the public--whenever
they start writing those high power checks, there would have
been something happen, I think. Maybe I'm wrong here.
Mr. Freeman. Senator Burns, President Lynch is perfectly
capable of defending her commission, but I want to say that
they did raise the rates. They raised the rates a healthy three
cents a kilowatt hour. And Californians are paying rates that
are among the highest in the nation. So----
Senator Burns. Well, you affected my state, too, you know.
I'm----
Senator Dunn. This myth that somehow California consumers
have not felt the impact of these rate increases--they're the
ones that are paying these outrageous rates. They're the ones
that got ripped off. And they know it.
Mr. Freeman. If I may, Senator Burns.
Senator Burns. You bet.
Mr. Freeman. Let's drive the point home with three quick
figures. And those three quick figures are the last year in
which we experienced regulated wholesale rates, or at least the
tail of it, was 1999. The entire cost of wholesale electricity
in the state of California in 1999 was $7 billion. The first
real year of wholesale deregulation, 2000, or at least when its
impact was first--most experienced, that year, when demand from
1999 to 2000 only went up four percent. Calendar year 2000, the
cost of wholesale electricity in the State of California was
$27 billion.
Now let's go to calendar year 2001, when demand has
actually gone down from 2000 to 2001. Now, while the figures
are still being calculated, it's roughly in the neighborhood of
$50 billion. All of that, not due to increased demand. One
thing--increased wholesale cost. And the call early on was
simply to pass on those high wholesale costs to the retail
customer. When you go from $7 billion to approximately $50
billion, you can imagine the impact on the average retail
payer, whether it's residential or small, medium, or large
businesses. That would have been fatal, not only to the
California economy, but elsewhere, as well, Senator Burns.
Ms. Lynch. Senator, nonetheless, we did pass on some of
those costs. In May of 2000, the costs started to rise in San
Diego. And San Diegans, throughout 2000, experienced those
higher prices, until the state legislature stepped in and
stopped the hemorrhaging. And then last March, a year ago
March, my commission raised retail rates to a historic level in
California. So we have been passing those costs on. But I agree
with Senator Dunn, a sevenfold increase in electric costs month
over month or year over year would not have been able to be
sustained by the California economy.
Ms. Hauter. Senator Burns, I'd like to address your issue
around deregulation, because we're skeptical as to whether even
good regulation by FERC could really prevent higher prices for
residential consumers. One of the reasons that we've been
skeptical about the state deregulation bills is that the way
the bills have been crafted, it puts large industrial customers
who can buy a lot of energy in the driver's seat and in a
position to buy energy cheaper. And when you take those large
industrial customers away from the other sellers of energy,
then costs go up. And small consumers, small businesses, don't
have the market power to go out in the market and compete. And,
in fact, Enron, in California, promised a vigorous retail
market, that they would sell to small consumers. And they
almost immediately pulled out, because they recognized that
they weren't going to make enough money. So that cherry picking
is one of our concerns.
Senator Burns. I would agree. I would agree with your
premise on some of those. And I thank the chairman for holding
this hearing. I've got to go to the same place he's got to go.
But I'm going to go through this testimony, and I'll probably
write you some questions or something, you know, if you would,
but--and I noticed there were some other folks that made
terrific profits this year also that we should look at. You
know, you had Dynegy in there, Duke was in there, Reliance,
Williams, AES, West Coast Power, all those people were
profiting from this same situation, and I'd--you know don't
whether it might be a situation of Lucy playing--pulling away
the football or something, but I thank you for coming today,
and I thank you for your testimony.
Thank you.
Senator Dorgan. Senator Burns, thank you. Senator Wyden.
Senator Wyden. Thank you, Mr. Chairman.
Just one current matter for you, Mr. Dunn. You described
evidence of willful destruction of documents. I'd like to know
if you can tell us anything about what documents you believe
were destroyed, and particularly whether you believe any of
those documents involved matters affecting Oregon, whether they
come from the Portland trading floor, that kind of thing. What
can you tell us, based on what you now know, with respect to
the destruction of the documents?
Mr. Dunn. Senator, I will zero in specifically on the disks
of e-mails that I referenced as opposed to the Arthur
Andersen----
Senator Wyden. Right.
Senator Dunn.--and the reports of late last fall of Enron's
own destruction. We had requested, after January, when we moved
for contempt again and voted for the criminal referral of Enron
for its destruction of documents, Enron came to us and said,
``Look, Senator, we want to get out from under this contempt
and this criminal referral. We'll open our doors to you, save
attorney-client privilege documents. But other than that, we're
in bankruptcy, we're exiting the market, we don't care about
trade secrets anymore, and all the other traditional privileges
which could be used to be prevent the production of
documents.''
We were really after two broad categories from Enron and
other companies, as well. First, what we call their policy
documents or their strategy documents in setting up--my
editorial now--their attack on California and elsewhere, as
well as the micromanipulation, the trading manipulation. That
would have primarily occurred in their facility in Portland,
Oregon.
When we went after the larger, more macrostrategic
documents, we wanted all of Mr. Lay's, Mr. Skilling's, Mr.
Kean--and for those unfamiliar with Mr. Kean, Steve Kean is the
head of their governmental affairs department on a national
basis based in Houston, an individual by the name of Jeff
Dasovitch, who's based in San Francisco, takes care of all the
Western U.S. government relations for Enron, or did--he has
since departed--as well as some key other governmental affairs
individuals.
We asked for all e-mails associated with those individuals
that relate to anything relevant to the Western United States
energy markets, particularly their lobbying efforts, their
business designs for that area of the country, et cetera. It
was those requests that led to the production of approximately
nine disks of information in which they assured us that all the
documents, save attorney-client privilege, were contained on
those documents.
We then--first, you're dealing with an individual who's not
the most computer-literate person in the world. We retained an
IT team to go in who has tremendous expertise, as I know much
of the committee's expertise in that area as well.
They spent, as oftentimes experts in IT do, about four
straight days, 24 hours a day, analyzing those nine disks,
breaking through all kinds of codes and other--what they
believe were deliberate obstacles for us gaining access to the
actual documents on those disks.
Once we got through all of those obstacles, we began to
review the various e-mails from Mr. Lay and Mr. Skilling and
Mr. Kean, et cetera. And it was through that review that the IT
team discovered what they referenced as certain mechanisms that
were utilized to blank out key e-mails from each of those
individuals that they said could not have been done in any way
but a deliberate manner to block out those e-mails.
Now, the first blush would be, well, maybe that was
attorney-client privilege. No. We were referenced that all
documents on those disks were non-attorney-client privilege, so
that we should have had access to all of them.
We'll be frank with you, Senator. Our IT team is trying to
break through those deliberate efforts to eliminate the
documents. We're having some success.
We are not demanding of Enron--as a result of this
conduct--absolute, complete, unfettered access to the main hard
drives and the other information that we need to go through at
our discretion to really get to the core of this, because this
is just one other example, in my view and the committee's view,
of Enron's deliberate attempt to preclude us from gaining
access to the information we consider critical.
Back to your very basic question: Does it also involve the
State of Oregon? Yes, unfortunately, Senator, it does.
Senator Wyden. Well, I thank you for that information, for
your thoroughness. I would also ask that you make that
information available to Oregon's Attorney General and Oregon's
U.S. Attorney, certainly in a fashion that doesn't compromise
your inquiry. And my assumption is, already, the Attorney
General and the U.S. Attorney of your state are looking at is,
and I think that we ought to maximize our efforts with our two
states. That's what Senator Boxer and I have sought to do on
this Committee. And we appreciate your thoroughness.
A question for your, Mr. McCullough, with respect to LJM2
and their efforts to get into the State of Oregon. LJM2, as you
know, is one of the most questionable of the whole operation
surrounding Enron that led to the restatement of Enron's
earnings and basically the house of cards started falling. And
my sense is, and I'd like to get your sense of this as well,
that when you look at the LJM2 effort to get into Oregon, it
indicates that Enron knew prices were going to go up or that
they were working actively to try to raise the prices. And this
goes, of course, right to the heart of what we need to know in
this investigation.
And let me begin by saying you point to Enron's efforts to
sell off one of the plants as evidence that Enron had reason to
expect that prices would be going up. Can you tell us which one
of PGE's plants Enron approached the Oregon Public Utility
Commission about selling?
Mr. McCullough. Yes, Senator Wyden. In the early 1990's, a
power plant was built in the eastern part of the state called
Coyote Springs I. The practice in the industry is to build the
infrastructure, water and fuel delivery, for two plants so you
get a synergy. You would halve the cost of that infrastructure.
Coyote Springs II was on the boards since that date. Because
power prices were lower than the trigger required to start
Coyote Springs II, the plant had simply sat on the drawing
boards from the early 1990's to the winter of 1999. At that
point, Enron approached the PUC and said, ``We can sell this.
So pull the plant out from the utility, turn it over to us, and
we'll be able to make a profit from it, and we'll provide a
small margin back to the ratepayers.''
Senator Wyden. Well, we now understand that LJM2 was going
to be a partner to the transaction with a 50 percent stake of
the equity. We know that they were expecting a return of
substantially more than one would expect in this area.
And I just want you to know very much first that we
appreciate your expertise. The questions that I asked you at
the earlier hearing with respect to the precipitous market drop
did more than anything in my view to finally get FERC off the
sidelines to look at this. We're going to ask you some more
questions, perhaps in writing, with respect to LJM2, but I
thank you particularly for your analysis on that point.
One other question for you, Mr. McCullough. Before the
onset of the huge price spike, Enron was also seeking to sell
off PGE to Sierra Pacific Resources, having filed applications
with the SEC and FERC in February and March of 2000. Are there
any documents associated with that proposed sale of PGE to
Sierra Pacific that, again, indicate Enron had some advanced
knowledge that these West Coast electricity markets were going
into the stratosphere?
Mr. McCullough. I had my staff review that, and we've not
found anything clear in that, though the complexity of those
calculations are so great that I wouldn't call the book closed.
Senator Wyden. Alright. Ms. Hauter, you state in your
written testimony that Enron divisions paid up to $2,500 per
megawatt hour for electricity markets when market prices were
less than $340. Why in the world, short of the kinds of more
ominous analyses that suggest circumstantial evidence of
manipulation--why in the world would Enron's traders, these
very sophisticated people, have paid such high prices to buy
from their own company when they could buy the same power at
cheaper prices on the market?
Ms. Hauter. Well, I think that the circumstantial evidence
is very good that their motives were to really cause a price
increase, because then they would make more of a profit in
their other trading divisions, and because with their energy
services division doing so poorly, that they could hide its
financial difficulty in more of their accounting tricks. I
mean, that's the only--obviously, this is circumstantial
evidence, but this is the only rationale that we can come up
with.
Senator Wyden. Now, Ms. Hauter, in the spring of 2000,
Enron filed an application with the SEC to enable it to compete
in what's called the Qualifying Facility Market and an
application that would allow them to compete even before the
sale of PGE was completed. If the proposed sale of PGE was
approved, Enron would no longer be a holding company under the
Public Utility Holding Company Act and obviously out from under
a number of regulations. But even before the sale was approved
and Enron was no longer under the Public Utility Holding
Company Act, Enron was seeking to get out from under the
holding company restrictions in order to compete in this
particularly lucrative market, the qualifying facility market.
At the time Enron was saying it expected the PGE sale to be
completed in the second quarter of 2000, but it appears Enron
wanted a bigger than 50-percent share of the ownership and
profits from qualifying facilities investments, and it wanted
it now. It didn't want to go through the regular process.
Do you see any connection between Enron's urgent interest
in this precipitous effort to get into qualifying facility
investments in the spring of 2000 and this overall West Coast
energy crisis?
Ms. Hauter. Well, again, an educated guess based on
circumstantial evidence is that they wanted to make use of that
baseline power, that power that would be there all the time and
available to them, so that when they were doing trading on the
spot market, that they would have it as a backup, as a
protection, so to speak.
Senator Wyden. Madam Chair, I know my time is up. I would
like to just make two points. First, I'd like to submit for the
record a letter dated April 13th, 2000, from Enron's attorney
to the SEC about Enron's interest in getting expedited approval
of its application for exemption from the qualifying facility
restrictions so it could compete in the Qualifying Facility
Market before the second quarter of 2000 when the sale of PGE
was expected to occur.
Senator Boxer [presiding]: Included in the record.
[The information referred to follows:]
LeBoeuf, Lamb, Greene & Macrae L.L.P.
Washington, DC, April 13, 2000
Catherine A. Fisher,
Assistant Director,
Office of Public Utility Regulation,
Division of Investment Management,
Securities and Exchange Commission,
Washington, DC.
Re: Enron Corp. Application under Sections 3(a)(3)/3(a)(5)
Dear Cathie:
I am writing to provide some background information with respect to
an application (``Application'') that Enron Corp. (``Enron'') is filing
under Section 3(a)(3) or, in the alternative, Section 3(a)(5) of the
Public Utility Holding Company Act of 1935 (the ``1935 Act'' or
``Act''). Briefly stated, Enron is seeking relief, similar to that
granted AES Corporation, to enable it to compete effectively in the
developing QF market, pending completion of the sale of Portland
General Electric Company (``Portland General'') to Sierra Pacific
Resources, Inc. (``Sierra Pacific'').
Enron is currently a holding company that claims exemption pursuant
to Rule 2 under Section 3(a)(1) of the Act, by reason of its ownership
of all of the outstanding voting securities of Portland General. As you
know, Enron has entered into a definitive agreement to sell Portland
General to Sierra Pacific Resources, Inc., and applications for
approval of that transaction were filed with this Commission on
February 3, 2000 (SEC File No. 70-9619) and with the FERC on March 3,
2000. The Sierra Pacific/Portland General transaction, which is subject
to customary regulatory approvals, is expected to close in the second
half of 2000. Upon completion of the sale, Enron will cease to be a
holding company within the meaning of the Act.
Pending Commission action on the Sierra/Portland General
transaction or issuance of a final order on the instant Application,
Enron will rely on the good-faith exemption granted by Section 3(c) of
the 1935 Act as a means of obtaining relief from the QF ownership
restrictions under the Public Utility Regulatory Policies Act of 1978
(``PURPA''). Briefly stated, the regulations under PURPA generally
limit an electric-utility holding company to no more than 50% equity
interest in a QF.\1\ There is, however, an exception (relied upon by
AES) for holding companies that are exempt ``by rule or order'' under
Section 3(a)(3) or 3(a)(5) of the 1935 Act.\2\ The Federal Energy
Regulatory Commission (``FERC'') has interpreted this language to apply
as well to entities that have filed a good-faith application for
exemption under Section 3(a)(5) and, by extension, Section 3(a)(3) of
the 1935 Act. Doswell Limited Partnership and Diamond Energy, Inc., 56
F.E.R.C. para. 61,170 (July 31, 1991) (a copy of the order is [not]
attached).\3\
---------------------------------------------------------------------------
\1\ A QF cannot be owned by a person primarily engaged in the
generation or sale of electric power. 16 U.S.C. Sec. 796(18)(B) (1996).
The PURPA regulations provide that a facility ``shall be considered to
be owned by a person primarily engaged in the generation or sale of
electric power, if more than 50 percent of the equity interest is held
by an electric utility, or utilities, or by an electric utility holding
company or companies, or any combination thereof.'' 18 C.F.R.
Sec. 292.206(b) (1999).
\2\ 18 C.F.R. Sec. Sec. 292.206(c)(1) and (c)(2) (1999).
\3\ The FERC explained: ``Although section 292.202(n) specifically
utilizes the phrase ``rule or order,'' reliance on the statutory PUHCA
section 3(c) ``safe harbor'' is not inconsistent with our regulations.
In our view, treating a pending good faith SEC application differently
than the SEC ``rule or order'' language in the regulations concerning
granting an exemption would be inconsistent with the intent of section
292.202(n).'' The FERC noted that it had made a similar finding with
respect to a company's filing of an application under Section 2(a)(3)
of the 1935 Act, and the pendency of the exemption from the definition
of ``electric utility company'' during the pendency of a good faith
application. See Long Lake Energy Corporation, 51 F.E.R.C. para. 61,262
(1990).
---------------------------------------------------------------------------
As explained more fully in the Application, Enron believes that it
is entitled to an exemption under either Section 3(a)(3) or 3(a)(5),
based on the precedent, the nature of its primary nonutility business
and the relative and absolute size of its utility operations. Indeed,
if the Sierra Pacific/Portland General transaction were to fall
through, Enron would ask the Commission to rule on the merits of the
Application. We do not anticipate any problems, however, with the
Sierra Pacific/Portland General transaction and so, would simply rely
on the good-faith exemption provided by the instant filing (as it
affects Enron's QF ownership rights), pending the outcome of the
Commission's review in File No. 70-9619.
To address any concerns during the pendency of this Application, we
would offer the following additional safeguards for the public interest
and the interest of investors and consumers so long as Enron continues
to own Portland General:
Enron, which is currently exempt pursuant to Rule 2 under
Section 3(a)(2) of the Act, will undertake to continue to file
Form U-3A-2 during the pendency of the exemptive Application or
until Portland General is divested.
Enron will not rely on the temporary good faith exemption to
facilitate the growth and extension of a holding company
system. Once the sale of Portland General is complete, Enron
will cease to be a 1935 Act-jurisdictional entity and so, will
withdraw the instant Application.
Finally, in the event that the sale of Portland General is
not completed in a timely manner and if it appeared that it
would ultimately be determined that Enron was not entitled to
an order of exemption under either Section 3(a)(3) or 3(a)(5),
Enron would undertake to restructure its QF interests within a
reasonable time and thereafter withdraw the request for
exemption.
We would be happy to meet with you and to provide any additional
information. If you have any questions, please call me at (202) 986-
8281.
Sincerely,
Joanne C. Rutkowski.
Senator Wyden. And, I will also say, Madam Chair, and I
think it's going to be interesting to talk to some of the
Californians, as well, about Enron's interest in getting into
the qualifying facility business, because clearly this is
another area where certainly there is substantial
circumstantial evidence indicating that this is another effort
to hot-wire the market and get in and make cash profits quick
without having to go through the regulations. And hopefully we
can get into that on another round.
The only other point that I wanted to mention--Ms. Hauter,
I want to thank you for the support that you've given me in
this effort to get a strong ratepayer advocate in the Justice
Department to deal with these issues. As you know, given the
fact that FERC has been on the sidelines for so long, the
biggest and most constructive force for consumer and ratepayer
advocacy comes from the states.
The states have no authority, folks, over virtually
everything you all have been talking about this morning. And
one of the things that we can do in the energy bill, because
our proposal was accepted, is set in place a ratepayer advocate
within the Justice Department with subpoena power, with full
power to get at these interstate transactions. And I thank you
for the support you've given us and look forward to examining
particularly the qualifying facility issues in the future.
And I thank you, Madam Chair.
Senator Boxer. Thank you so much, Senator. It is just most
unfortunate that we have to go in that direction. I'm
supporting you, because FERC is supposed to do all this. And so
it's a little unnerving that they're not.
I'm really sorry that Senator Fitzgerald had to leave,
because he said that he didn't think Enron had anything to do
with the California crisis, and I want to make sure that I
heard you all loud and clearly. I believe all of you said they
did play a role, a pretty large role. And if I could summarize
it--tell me if I did not summarize it correctly.
For the record, what you basically told our Subcommittee--
and, by the way, I want to welcome Senator McCain, because he
has been so strong in his efforts to protect consumers, and we
really were at a crunch time whether this Committee was going
to move forward with these kind of hearings, he was the voice
to say yes. I want to thank him publicly for that.
The message that you gave us was that, in fact, you felt
that Enron did play a large role in our crisis in this way.
First, in working aggressively to change the regulatory
environment at the state level and at the federal level. And
then when there was only one regulatory agency left, FERC, they
worked very hard to stop them from doing anything for quite a
long time and, third, by manipulating the market. Does that sum
up what I heard? Does anyone disagree with that summary?
OK, because what I want to hone in on is this. I have a
total grip on what they did to get themselves out of
regulation. I understand what they did with FERC, and I've put
a lot of documentation in the record, Senators, on how they
actually staved off any move by FERC for almost a year. And, as
Mr. Freeman told us, that was the only thing that could have
been done to save us. And, finally, when they acted, they did
save us. And we have a good market, a good functioning
situation right now in California.
And I'm going to ask about what should happen if they don't
renew the order, the must-offer order and the cost-based
pricing in a moment. But I want to make sure senators
understand and I understand the way they manipulated the
market. And all of you spoke to that. But I've picked up a few
ways, but then I want you to tell me if I'm missing some of the
ways.
One, they kept selling the same electricity over and over
again driving up the price along the way until it finally got
to the consumer. I suppose you call that ``derivatives.''
Senator Feinstein tried to get a handle on that. We were
unsuccessful in our reform measure on the floor of the Senate,
but we'll fight another day on it. But that's one way. They
kept selling the same electricity and upping the price along
the way. The reasons for it, Ms. Hauter and I think Mr.
McCullough also said they wanted to get--make that look like a
profit-making operation to hide other problems. But, be that as
it may, the California consumer was hit, and hit hard. One way.
The second way, and we didn't talk about it, but, Senator
Dunn, you do have it in your testimony is that they jammed,
they had a way of jamming transmission lines. So when they
jammed the transmission lines, it set off a crisis. And I want
you to explain, any one of you who understands it, how that
would push up the costs when they did that.
And the third thing I didn't hear anyone say, and I--my
understanding is this happened. I don't know if Enron was
involved in it or not, but more and more plants were taken
offline for quote/unquote ``maintenance'' then we ever saw
before. I have the charts, and I wonder whether that was--if
any of you know that that was used.
So I've come up with three ways the market was manipulated
by Enron and others. I wonder if any of you have any thoughts
about whether I'm wrong on any of those three, and what other
ways was the market manipulated. Ms. Lynch, I'll start with
you.
Ms. Lynch. Certainly. I completely agree with you, Senator
Boxer, that Enron would trade among itself so that it could
drive the price up. And not only would it drive the actual
price of the electricity it was trading among itself on, but
its internal trades could also affect the market indices on
which other people traded. So if they kept trading essentially
in sham transactions, the indices would reflect that, thereby
allowing other people to start trading at that level, as well.
Senator Boxer. They pushed the price up.
Ms. Lynch. Exactly. Because the prices that are paid to
generators and suppliers in some transactions are tied to those
indices, so when they went up, everybody else's prices went up
and it was just a race to the top.
Certainly, in terms of transmission congestion, the
internal trading could affect that. Enron company one could
trade power to company two, supposedly transferring where that
power was going to go. So from North to the South or they could
trade the power so that a southern entity would have to send it
north creating congestion.
The interesting thing would be, then they would be paid to
eliminate the congestion, but the congestion was always phantom
congestion to start with. It never was going to go from the
North to the South, because they were trading among themselves.
Senator Boxer. Who paid them to eliminate the congestion?
Ms. Lynch. The ISO would then pay----
Senator Boxer. Oh.
Ms. Lynch.--an additional price to eliminate the
congestion, which was called phantom----
Senator Boxer. So that upped the price more and more.
Ms. Lynch. It would up the price more and more. And, in
fact, I believe that Enron was one of the earliest, if not the
earliest, creators of phantom congestion in California's lines.
Senator Boxer. Phantom congestion.
Ms. Lynch. Yes.
Senator Boxer. Wonderful way to explain it.
Ms. Lynch. And as to the power outages, we certainly have
been tracking the physical withholding of power in California,
as you know, although in 2000 we had 45,000 megawatts of power
that could be produced by California power plants. In the
winter of 2000, up to 16,000 of those megawatts were off line.
So a third of the power in California that could have been
produced, wasn't produced. We haven't yet come to the bottom of
how Enron was involved in that.
Senator Boxer. OK. Anybody else? Yes, Senator?
Senator Dunn. Senator, I'd like to add a fourth area.
Senator Boxer. Please.
Senator Dunn. And that's what has come to be known as
``megawatt laundering.'' What occurred under those
circumstances is that when the Cal ISO imposed price caps in
the year 2000, one of the exemptions from those price caps was
power coming from out of state. And so many of the market
participants, including Enron, who had legal control over many
of the megawatts would, in a theoretical sense, transfer them
out of state, or legal ownership out of state, then resell them
back into California unrestricted by the price caps that the
ISO had put in place in the year 2000.
Senator Boxer. You call that ``megawatt laundering.''
Senator Dunn. Correct.
Senator Boxer. This is good. We're having a whole new
lexicon here. Before we get to you, Mr. Freeman, do you have
anything else. Those were four ways that----
Mr. Freeman. Yes, ma'am.
Senator Boxer. Yes?
Mr. Freeman. Enron--I negotiated longer-term contracts with
many of these generators to try to get out of the spot market.
Enron was the company I could not come to an agreement with.
And they--among all of the folks that were taking advantage of
us, they just would not agree to a long-term contract. And the
irony of it all was, they questioned our credit. Their argument
was----
Senator Boxer. Oh.
Mr. Freeman.--that our credit was not good enough. That was
their excuse. They made out in the secrecy of the short-term
market where there was no evidence of what went on. And, of
course, many of the transactions did not even have their name
on it, because they simply brought together someone in the
marketplace that had power to sell and someone who bought it.
They made their profits off of the volatility. And it's very
interesting, and I think Mr. McCullough and others have pointed
out, that as we brought things under control in California,
Enron's profits came under control----
Senator Boxer. Oh, yeah.
Mr. Freeman.--and their demise. The other point I want to
make is, this issue of transmission is a huge issue. Just think
of the highways. If you have gridlock on a highway, then people
would obviously pay to get by. And if you have gridlock, on the
transmission system, it creates higher costs.
Now, you have going on at the FERC today what I would say
the, kind of the remains of the Enron syndrome where there is a
concerted effort to turn transmission over to merchants, to the
same people that were marketing generation. And if they are
able to buy up pieces of the transmission system, you've got a
new set of problems on our hands throughout the country. That
needs to be nipped in the bud before it really gets rolling.
But that is the big issue that Ken Lay was pushing. It was the
subject of his conversations about the new FERC employees, and
it's one that deserves the attention of this Committee.
Senator Boxer. Ms. Hauter?
Ms. Hauter. Yes, I wanted to address that issue of phantom
congestion, because we've been looking at the FERC rims site
and these disclosure forms that are really a disgrace. And
there were basically four paths where Enron was making a
hundred percent of its West Coast trades. And one of those
paths was between Nevada and California. And the Nevada Public
Utilities Commission is investigating the allegations around
Enron's daily capacity auctions at this Palo Verde place where
there would be congestion. And I think that FERC--these forms--
we'd be happy to make them available to you----
Senator Boxer. Please.
Ms. Hauter.--really demonstrate how outrageous the lack of
information is.
Senator Boxer. Thank you. Mr. McCullough, did you have
something to add? And then I'm going to call on Senator Nelson
and then Senator McCain.
Mr. McCullough. I'd like to comment on two of the issues
that you've raised and then add a fifth.
The first is on the spot pricing and potential sham
transactions. We don't have much transparency in this market.
In fact, what little transparency we have now comes from third-
party indices. And President Lynch made this point, but it
needs to be made more clearly.
The principal one is the Dow Jones indices. If one can add
transactions to the Dow Jones indices in the proper way, one
raises the price by contract from one end of the West Coast to
the other--literally from Alberta to Mexico. This goes far
beyond California. Most of the industries outside of California
actually had their rates tied to this. So every one of those
transactions had an impact, and those transactions directly
were the cause for paper mills closing in Washington, metals
firms throughout the Northwest, chemicals. So there was a
tremendous opportunity in that one area. And there has been no
oversight in that.
On outages, John Robinson, at FERC, as you noted, did his
study early in the process. We've really not had a return to
that study. The plants in California, the ones that were
averaging a 50 percent outage rate, as you noted, they're not
unusual in the U.S. In fact, we have a data base run by the
North American Electric Reliability Council that follows that
type of plant by age, by fuel, by size. They average an 80-plus
availability rate everywhere, outside of these few short months
in California when they averaged a 50 percent availability
rate. And that was something FERC never addressed and probably
should revisit.
But last and most importantly is long-term contracts.
California focused on hourly markets. That surprised most of us
who had spent our lives in the industry, because most end-user
supplies are monthly or yearly contracts. With the California
crisis, the number of players fell dramatically. The market
power of those players increased dramatically, and that left a
trail of high-power, long-term contracts that are of vastly
more value than the day-to-day hourly transactions. In fact,
those are the ones that are going to last for the next ten
years. Moreover, those contracts are currently being sold
quietly by Enron today. The auction starts next week. And
that's one of the primary sources of value left in the shell of
Enron.
Those are incredibly valuable long-term assets that came
out of this, and that's what, of course, has been the fight.
Your constituents and constituents elsewhere throughout the
West Coast have been fighting to get FERC to review.
Senator Boxer. Of course, we are deep in that fight. I have
to move on to Senator Nelson and then to Senator McCain, and
then I will come back for another round.
STATEMENT OF HON. BILL NELSON,
U.S. SENATOR FROM FLORIDA
Senator Nelson. Thank you, Madam Chairman. Madam Chairman,
I remember the crisis in California. It affected virtually
every one of your constituents. Everyone was outraged. The
state government had to step in and start doing all kinds of
things--and I assume the state legislature, as well--and
ultimately your state got the price caps.
Now, what I'd like to ask is, under that kind of crisis
atmosphere, how could this kind of manipulation have been
disguised so that it was not discovered back in the middle of
the crisis?
Ms. Lynch. Senator, I'd like to note that there was no
regulation at the federal level of either the online trading,
although the--certain commissions were trying to regulate it,
but Enron was really fighting that. There was no regulation at
the SEC. And, frankly, although there should have been, there
was no regulation at the Federal Energy Regulatory Commission.
So because it was happening in the wholesale market, which
is the responsibility of the federal government, the states
could not even get access to information. For instance, one of
the tariffs that our independent systems operator has filed at
the FERC is a confidentiality tariff which requires the ISO to
fight document requests by state government. So when we, the
PUC, and the Attorney General and I believe the Senate, tried
to get documents, we had to formally subpoena them. We fought
with this non-governmental entity that was answering to FERC,
not the state.
So for the first year, the state was severely handicapped
by both the lack of regulation, the lack of documentation, and
affirmative confidentiality tariffs which required that non-
governmental entity to operate in the best interests of the
market participants and not state governments.
Senator Dunn. Senator, if I could add real quickly----
Senator Nelson. Please.
Senator Dunn.--as well. I want to give credit to a certain
number of individuals. Mr. McCullough is one of them. The other
one is state Senator Steve Peace in California. There are a
number of individuals who, from the very beginning of this
alleged competitive market, as dysfuctional as it is, that
raised red flags from the very beginning.
But in the political process--I wasn't there in 1996, but I
certainly understand, as an elected official representing
almost a million constituents, that there really was an earnest
desire on every elected official across the political spectrum
to deliver to their constituents lower rates for electricity.
And that was the promise. And it was only the industry and,
save a handful of individuals, like Mr. McCullough, that really
had the sophistication to understand that what was being set up
was, in fact, not to the benefit of consumers but to the
detriment of consumers.
Mr. Freeman. Senator Nelson, if I could just add, I was
there with the Governor during this crisis. And as an elected
public official, I'm sure you understand when the house is on
fire, your job is to put the fire out. The legislature was up
until 3 o'clock in the morning passing bills to put the state
in the business of buying electricity, because the utilities
were out of money, and we were facing massive blackouts. The
last thing in the world was that we had any time to be
investigating what FERC ought to be doing, except we just kept
blasting away that they needed to get back on the job. And it
was--I would imagine that the Governor, the state, and the
members of the legislature spent on the average of 18 hours a
day working on this subject all through those months. And,
frankly, we just didn't have the resources or the data to
figure this out at that time.
Senator Nelson. So the solution to this problem is more
disclosure at the federal level so that this kind of non-
disclosure shenanigans can't go on in the future. Is that the
solution?
Ms. Lynch. But also limiting or eliminating trades between
affiliates for no other purpose than to raise the price.
Senator Nelson. Were the other utilities in California
doing the same thing as Enron? Was there any complicity there,
or was this just Enron?
Ms. Lynch. It's certainly not just Enron. Enron was kind of
the best at it and the earliest. But there were other market
participants and other merchant generators and sellers who were
doing the same thing. And the unregulated affiliates of PG&E
were also doing the same thing.
Senator Nelson. Which affiliates?
Ms. Lynch. Unregulated affiliates. So the trading arm of
PG&E, the unregulated utility, its sister subsidiary, was
engaging in the same kinds of behavior.
Senator Nelson. Have you, as the Public Service Commission,
called to answer PG&E?
Ms. Lynch. Well, actually, the unregulated--well, the non-
state-regulated trading arm is, in fact, regulated by FERC,
because it trades in the wholesale market and is not the
regulated utility. So they answer to FERC, not the PUC.
Senator Nelson. But they're owned by PG&E.
Ms. Lynch. They're owned by PG&E, the holding company, not
PG&E, the utility.
Senator Nelson. Boy, I'd see if you couldn't get the long
arm of control some way through the Public Service Commission
there. Senator.
Senator Dunn. I just want to add one thing, Senator, to be
fair. If you called before this Committee representatives of
the major traders and generators and asked them the question
about whether the primarily three California utilities--PG&E,
Edison, and SDG&E--contributed to the dysfunction that beset
the California wholesale market, they would, of course, answer
that question yes. And what they will say is, as they have said
to our committee, is that early on in the newly deregulated
market, each of those three utilities had an incentive to see
higher costs for purposes of recovering what's called their
stranded costs, and that, as a result, they accuse those three
investor-owned utilities in California of attempting to
manipulate the market early on in the formation of that new
market.
Senator Nelson. When you look at all of this unconscionable
activity that affected every Californian, do you find in the
management--let's take in the case of Enron--do you find a
particular person who holds the smoking gun of this
manipulation?
Mr. Freeman. Well, I'm just an old-fashioned guy that
believes the top dog needs to take responsibility.
Senator Nelson. Well, that would be Ken Lay. He was the
Board Chairman and the CEO, and it seems to me that he's the
responsible person. I don't know whether he broke any laws or
not, but he was certainly the leader or the poster child, in
terms of deregulation, and he and his people were there every
step of the way urging us to give them maximum freedom from any
oversight and maximum secrecy and no responsibility and, at the
same time, making the pitch here in Washington to persuade the
law enforcement agency, FERC, not to enforce the law. That's
what so galling about it.
Senator Boxer. Senator McCain.
STATEMENT OF HON. JOHN McCAIN,
U.S. SENATOR FROM ARIZONA
Senator McCain. I want to thank the witnesses for being
here today, and I want to thank you for this hearing, Senator
Boxer.
There are many aspects of this issue that average citizens
and average senators don't understand. So maybe I could just
ask some simple questions. Ms. Lynch, what do you mean by
saying that Enron was trading amongst themselves?
Ms. Lynch. We had a packet of slides where we used, as an
example, in the fourth quarter of 2000 all the Enron related
affiliates which had substantially the same personnel, so their
directors were the same, the chairman was the same, their
officers were the same----
Senator McCain. I understand the chart.
Ms. Lynch. Right, all those----
Senator McCain. But I'd like it in English.
Ms. Lynch. That all the related Enron affiliates were
trading energy with each other, and so they traded over 11
million megawatt hours of electricity in the California market.
Senator McCain. How much money did it come to?
Ms. Lynch. You know, we don't know, because we only know
the ranges at which it was traded. It traded at prices up to
$3,300 a megawatt hour. But since they don't have to report
that data to the FERC, we don't know how much money they made
among themselves, just driving the price up and affecting the
market indices that then drove the price up throughout the
West.
Senator McCain. Senator Dunn, was the original legislation,
that was passed by the California legislature and signed by the
Governor, a bad piece of legislation?
Senator Dunn. Senator McCain, in retrospect, it was.
Senator McCain. Why?
Senator Dunn. I don't imply an ill will on behalf of any
legislature at that time. As I had stated before, the
California legislature trusted the industry in how to craft
those rules to really achieve a free and competitive market.
Fortunately, there were many tricks of the trade buried in that
language that was proposed directly by the industry.
Senator McCain. Senator Dunn, suppose that they can't
renegotiate those contracts, that are so expensive. Let's just
assume worst case. How much does that cost the State of
California?
Senator Dunn. I'll probably leave it to Mr. Freeman, who
actually negotiates those.
Senator McCain. Either Mr. Freeman or Ms. Hauter could
answer that question.
Mr. Freeman. Well, the total dollar of revenue from all
these contracts is about $43 billion. Those contracts are all
in a state of intensive renegotiation. They also are before the
FERC on a just and reasonable basis. In other words, those
contracts were entered into at the height of the crisis because
we were paying 35 cents a kilowatt hour, and we got long-term
power for about seven. We certainly had to get that much of a
reduction. The seven, though, was not based on costs, and it
reflected the market power they had at the time.
We're in the process of both renegotiating and suing, going
to FERC because we have a right to. And the excess profits in
those contracts, you know, I wouldn't want to just throw a
number around, but it's obviously some percentage of a $43
billion number. I think, as Senator Dirksen used to say, ``a
billion here, a billion there, pretty soon it's real money.''
Senator McCain. Well, a rough number would be $15 billion
or $20 billion?
Mr. Freeman. That would be a rough number. Yes, sir.
Ms. Lynch. Senator, we have actually put a number down on
the table at FERC.
Senator McCain. What is it?
Ms. Lynch. The PUC sued on those contracts and alleged 17
to 20 billion dollars of excess profits that are unjust and
unreasonable.
Mr. Freeman. The Senator's math is really quite good, then,
isn't it?
[Laughter.]
Senator McCain. Mr. Freeman, suppose it's a matter of
record that Enron was lobbying FERC not to intervene.
Mr. Freeman. Oh, yes, sir. That's off the record, on the
record, and in the record.
Senator McCain. Is it a matter of record that FERC
eventually reversed its previous positions?
Mr. Freeman. Yes, and I want to give credit to President
Bush, who put two new people on the FERC, Pat Wood and Nora
Brownell, who came in with Mr. Massey and, finally, in June,
provided some orders that they must sell and some cap--they
didn't call it a cap, and that's fine--but a mitigation. And it
is to those two people and--those three people that I'm
appealing to their integrity that they continue to help us.
Senator McCain. What was the time delay?
Mr. Freeman. Well, it was the six-month period where we got
taken to the cleaners, sir.
Senator McCain. So, that period of six months was really a
critical time when the Governor felt that he had to sign long-
term contracts because of FERC's unwillingness or inability to
act. Is that your view?
Mr. Freeman. Well, certainly. Getting the prices down from
30 to 35 cents down to 7 was an improvement even though the 7
was higher than what it ought to be. We had the equivalent of a
gun to our head, and we were also faced with rolling blackouts,
and the cop just wasn't on the beat.
We mounted a massive conservation program in addition to
the long-term contracts. We started building power plants.
We've actually completed a number of them, 3,000 megawatts this
year. We're doing everything we can. But the Federal Energy
Regulatory Commission, which had a crucial role to play, just
copped out, if you'll pardon the expression.
Senator McCain. It's hard to understand, isn't it?
Mr. Freeman. Hard to understand, from a public-interest
point of view, but recognizing the seductive nature of the word
``competition'' and ``deregulation.'' Remember, we deregulated
the airline industry. We deregulated the telephone industry.
And everybody----
Senator McCain. Sort of.
Mr. Freeman. Sort of, yeah. But the word, in 1996 to 1997,
is, ``This is going to reduce the price.'' They promised a 20
percent rate reduction in 1996 when they lobbied this bill
through. And, Senator, you know that when a bill is passed
unanimously by any legislative body, there's something wrong.
[Laughter.]
Mr. Freeman. And the 1890----
Senator McCain. I think there were only three votes against
the Telecommunications Reform Act, But that's a different
issue. Do you really believe that activity was carried out
solely by Enron, or did they have----
Mr. Freeman. Oh, no, they----
Senator McCain.--co-conspirators?
Mr. Freeman. Oh, they had fellow travelers, I guess is the
way to put it. They were the leader. They were the poster
child. But everyone in the generating business was kind of with
them, in the sense that they all wanted to make a bunch of
money. I mean, there's--we're not testifying that they were
alone. We're testifying that they were the most persistent, the
most active, the most contributory, if I might put it that way.
Senator McCain. My time has expired.
Senator Dunn. Thank you, Senator McCain. I just want to--if
I may add to Mr. Freeman's comments, the California ISO has
both what's called the Department of Market Analysis and a
Market Surveillance Committee. Both of these entities are
primarily driven by economists whose sole role is to watch the
behavior of market participants in the markets--in this case,
the California Wholesale Electricity Market. Both of those
entities, the Market Surveillance Committee and the Department
of Market Analysis within ISO, have concluded from the very--
almost the very beginning of this market in 1998 that there
were numerous players, including the large generators and
traders--in particular, them--that had been exercising market
power since almost the very beginning of the market. There is
little dispute, at least in my humble opinion, as to that fact.
The real question is, from the generators and traders, when you
ask them, ``Were you exercising market power in the California
Wholesale Electricity Market,'' their response is simply,
``Well, how do you define market power?'' That's their defense.
Senator McCain. Thank you very much, Madam Chair.
Senator Boxer. Thank you so much.
Senator Nelson. Madam Chairman?
Senator Boxer. Yes.
Senator Nelson. I'd just be curious in the mathematical
computation of what the average California electricity consumer
lost by having to pay that 17 to 20 billion dollars extra that
was as a result of running up the price.
Senator Boxer. Well, the bottom line of the way it worked
was, we did have some increases in our prices, which we'll put
in the record for you. But the state went into the power-buying
business and it's the taxpayers of California that got stuck
because their utilities went under. That's why we're fighting
for Mr. Wood and friends to keep that price cap on. That's why
we're fighting to make sure that there's a must-offer on the
table, and that's why we're fighting for renegotiation of the
contracts. But we'll give you the details. This is a
multibillion dollar scam that hit the people in my state.
I want to just show--I'm sorry Senator McCain had to leave,
but I was glad he was here--but I just wanted to say, what Mr.
Freeman explained on the prices and maybe the media could take
a look at this, because here's the wholesale price of
electricity--Bill, can you see this?--in 2000 October. Here it
is. And look at how it shoots up all the way there, and as soon
as the rate caps went in, it came back down to normal. And it's
eight months--eight months of sheer hell for the people of my
state. And I want to make it clear, the Governor that signed
that legislation was not Governor Davis. Am I correct?
Senator Dunn. That's correct.
Senator Boxer. It was Governor Wilson.
Senator Dunn. Right.
Senator Boxer. So I just want to make sure that people get
it straight. I'm sorry. OK, you have to leave, Loretta, don't
you? I know you have to catch a plane.
Ms. Lynch. I apologize.
Senator Boxer. Senator Dunn, you have to leave? No, yes,
you do? Let me just ask one question then, and then we'll
excuse the Californian folks. This idea of making sure that we
renew the cost-based pricing, I mean this is something we have
to hone in on, because September 30, you know how life goes
very fast when you're having fun, and it's going to go fast,
and it's going to be September 30. If they don't renew this, we
could be back in deep trouble. So I just want to say to Mr.
Freeman, who was very complimentary of Mr. Wood, as well he
should be, eight months late this FERC finally did something
when Mr. Wood came on. OK? So they did nothing, which was
disastrous. They finally did something.
This is a from a San Diego Union-Tribune article, February
23, ``Federal price caps on electricity, which many believe
played a role in taming California's power crisis, will expire
as planned on September 30 if Pat Wood, head of FERC has his
way. Speaking to a congressional subcommittee in Sacramento,
Wood said the price controls need to expire to encourage market
reforms in the state. `The incentive is to get the market
structure back in place,' Wood said. He could not be reached
for followup comments.''
Mr. Freeman, if this kind of attitude prevails, will you
speak, because I know you're a straight shooter. Tell us what
you see happening in our state or what could happen.
Mr. Freeman. Well, it is impossible for California alone to
control how power plants throughout the West operate. And the
fallacy in assuming that California can develop mitigation or
rules to govern these out-of-state generators is, indeed, a
fallacy.
Now, the Federal Power Act does not have a California
exemption in it. We're still part of the United States. And
it's been in effect, and there is nothing in the act that says
that FERC can stop on September 30. And having put in place
some controls over the market that have worked reasonably well,
in the situation where everyone knows that the market is not
inherently competitive all by itself, that those controls are
needed, at the very least, there has to be a hearing on the
record and some findings by this agency that the marketplace is
competitively functional. They can't make those findings,
because it's not true. And for them to have decided last summer
that they're going to put the cop on the beat for a year is
arbitrary, capricious, and, in my view, contrary to their
duties under the Federal Power Act.
And, you know, for a while it looked like when we were
yelling for price caps, we were whistling in the dark. But
after a while, the folks, even in the White House, heard us.
California is a big state. And it seems to me that Chairman
Wood, Ms. Brownell, Mr. Massey are intelligent people, and they
realize that their job is to keep the prices under reasonable
control until there is real competition. They have done some
good. They have no basis for stopping on September 30. And,
quite frankly, I believe that their minds have to still be
open. You know, I'm kind of an optimistic fellow. We kept
plugging away last year and finally won, and I think if we're
persistent in making the point that there's still a hope over
there. You know, I remember in the Cold War when President
Kennedy ignored the first letter from Khrushchev and just
accepted the second letter, and it ended the Cuban Missile
Crisis. So I'm willing to just ignore what Chairman Wood may
have said in February and hope that he'll give us a better
answer if we are persistent.
Senator Boxer. Senator.
Senator Dunn. Thank you, Senator Boxer. I want to just add
the catch-22 we are now in in California. When the prices spike
so high, as referenced on your chart, the private sector was
very interested in building lots of new generation plants in
California to maximize profits from those high prices. And, in
fact, there was a hew and cry about us, at the state
legislative level to reduce the environmental regulations, make
it easy to permit these new generation units that were being
planned because of the high prices. As a result of the move by
FERC last June, the long-term contracts, we now have a stable
market. Many plants, the permits were granted. They started
planning for construction.
Once the markets stabilized, they've walked away from all
of--well, not all, but many of those planned plants for which
they obtained permits because they can't get the high prices.
Yet it's those new plants that will provide excess capacity
that has the possibility of introducing true competition to
that market.
Senator Boxer. Well--Ms. Lynch.
Ms. Lynch. If the price caps come off on October 1 without
further reform of the markets, it will endanger the health of
the utilities. The utilities will not be able to get back into
the power procurement business, and someone will need to
continue to be the provider of last resort. The problem, of
course, is too many of the generators and sellers have learned
Enron's lessons very well. And Enron and its followers will
roar back with a vengeance on October 1 and destabilize both
the reliability of the market, meaning blackouts, and the
prices, meaning price increases.
Senator Boxer. Well, let me thank our California witnesses,
and I'm going to let you go in two minutes. I think you were
absolutely terrific, all of you, this whole panel. You have
shone a light on what happened on the ground in California
while a lot of us were begging FERC for help, for that eight-
month period when nothing was done, the billions of dollars
that were transferred from ordinary folk, the taxpayers of our
state, to these generators.
Mr. Skilling said, you know, ``We were kind of like the
Titanic, but when the Titanic went down, it had its lights on
and we weren't going to have our lights on.'' Well, we have our
lights on, and they went down. Let there be a lesson in that.
And you folks under the gun there day after day, just--you
get my thanks. I know how hard it was for the whole
legislature, Democrats and Republicans back there working 18
hours a day. I was on the phone to a few of them myself.
We will continue to put tremendous pressure on FERC. We are
going to send them the transcript of today's hearing, because I
think there are a lot of lessons learned. My colleagues leaned
over to me during your testimony and said, ``They're ready to
keep the pressure on.''
And so I want to thank all of you. The picture is really
clear now of what went on there. Enron led the pack, got out of
regulation, manipulated the market, and wined and dined FERC so
they did nothing for too long a period of time. If there's
anything I know it's that I'm going to try to make sure
something like that never happens again.
I want to thank you for adding so many intelligent ideas
and concepts and facts to the picture, to the story. Thank you
very much, and we stand adjourned.
[Whereupon, at 12:09 p.m., the hearing was adjourned.]
A P P E N D I X
Prepared Statement of Hon. Bob Filner
Congressman from California
Good morning. Thank you Senator Dorgan for welcoming my testimony.
I also want to thank my California colleague, Senator Boxer, for
pushing for this hearing to get to the bottom on Enron's manipulation
of our California energy market.
When the whole Enron mess hit, my constituents and I were not
surprised. We knew our energy markets had been criminally manipulated
during the summer of 2000 and through the winter of 2001. Paying up to
10 times what they had for electricity in the months before was
ludicrous and criminal. What would you think if you suddenly had to pay
$20 for a loaf of bread?
The agency that was supposed to protect our consumers, the Federal
Energy Regulatory Commission, FERC, did nothing. They found that the
prices were ``unjust and unreasonable'' and continued to let the energy
companies charge them. Why?
Could the $2 million in contributions that Enron contributed to
Republican candidates from 1999 through 2002 have anything to do with
FERC's inaction? It certainly seems suspect. It guaranteed Enron a
place at Vice President Cheney's energy task force--not for one, but
seven visits! And the result of this access and Enron's investment? Not
only White House energy plans wholeheartedly supporting deregulation,
under which Enron was reaping such huge windfall profits in California,
but I suspect FERC's inaction.
You see, during the energy crisis, FERC investigated--or so they
say--the situation, and they found no wrongdoing! Now that the
spotlight is burning brightly on Enron, FERC has suddenly announced
that they are going to look into this matter again. Why, if the first
investigation was not just smoke and mirrors, do they say, ``Let us
look again''?
That is why I have introduced legislation calling for a special
prosecutor to be named to look into the whole Enron mess. My
legislation asks for a special prosecutor to look into the relationship
between Enron and the manipulation of the stock market and its value
per share; to look into the relationship between contributions by Enron
to the President, the Vice President, Cabinet officers, other
administration officials, and Members of Congress.
I am asking the prosecutor to look into the influence of Enron on
Federal and State legislation, including, in particular, the effort to
deregulate energy markets, both in States and in the Nation as a whole.
The legislation also asks for the prosecutor to look into the
relationship between Enron and our whole Federal and State regulatory
system.
This special, hopefully impartial, investigation is necessary to
restore confidence in our political process and to clearly discern
where Enron's tentacles were in the energy crisis that hit California
in the summer of 2000. I hope that you will get closer to the truth in
today's hearing. But we must involve a prosecutor who has the latitude
to bring criminal charges.
The special prosecutor will look beyond the business scandal that
screams for reforms of our auditing practices and the strengthening of
the safety of pension plans. She or he must conduct a criminal
investigation into the pervasive corruption of American politics.
I believe the prosecutor will find, and you may discover a hint of
it today, that California's so-called electricity crisis, was not a
problem of supply and demand, but in fact, a crisis resulting from the
manipulation of our market. That criminal manipulation of our market
resulted in the theft of anywhere between $20 billion and $40 billion
from California ratepayers. Enron was not only making energy policy, it
was carrying it out in California. The CEO of Enron, Ken Lay,
personally submitted names and interviewed candidates to be members of
our Federal Energy Regulatory Commission. Thus FERC became, in my
words, the ``Federal Enron Rubber-stamping Commission.''
We know the connections, close connections, between this
Administration and Enron and the people who came directly from Enron to
work in this Administration. It was those connections that caused this
scandal, and it was the connections between Enron and State
legislatures and State legislators and State regulatory commissions and
Federal regulatory commissions that caused their success.
That is what I am asking you to investigate today and to join me in
calling for a special prosecutor who can go even deeper into the sordid
dealings of Enron. We must discover why Enron flew so high for so long
and stole so many billions from so many people.
The American people do not want this investigation to stop with
only a few business reforms instituted and maybe one or two folks
thrown into jail. They are demanding the investigation of the whole
corruption of our political system so we can discover who beyond Enron
and a small group of energy insiders perpetrated the crime!
Legislation Submitted for the Record by Hon. Barbara Boxer, U.S.
Senator from California