[House Hearing, 107 Congress]
[From the U.S. Government Printing Office]



                               before the


                                 of the

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                           FEBRUARY 13, 2002

                           Serial No. 107-82

       Printed for the use of the Committee on Energy and Commerce

 Available via the World Wide Web: http://www.access.gpo.gov/congress/

77-988                       WASHINGTON : 2002
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               W.J. ``BILLY'' TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida           JOHN D. DINGELL, Michigan
JOE BARTON, Texas                    HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio                RICK BOUCHER, Virginia
CHRISTOPHER COX, California          FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia                 SHERROD BROWN, Ohio
STEVE LARGENT, Oklahoma              BART GORDON, Tennessee
RICHARD BURR, North Carolina         PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky               BOBBY L. RUSH, Illinois
GREG GANSKE, Iowa                    ANNA G. ESHOO, California
CHARLIE NORWOOD, Georgia             BART STUPAK, Michigan
BARBARA CUBIN, Wyoming               ELIOT L. ENGEL, New York
JOHN SHIMKUS, Illinois               TOM SAWYER, Ohio
HEATHER WILSON, New Mexico           ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona             GENE GREEN, Texas
Mississippi                          TED STRICKLAND, Ohio
VITO FOSSELLA, New York              DIANA DeGETTE, Colorado
ROY BLUNT, Missouri                  THOMAS M. BARRETT, Wisconsin
TOM DAVIS, Virginia                  BILL LUTHER, Minnesota
ED BRYANT, Tennessee                 LOIS CAPPS, California
ROBERT L. EHRLICH, Jr., Maryland     MICHAEL F. DOYLE, Pennsylvania
STEVE BUYER, Indiana                 CHRISTOPHER JOHN, Louisiana
GEORGE RADANOVICH, California        JANE HARMAN, California
CHARLES F. BASS, New Hampshire
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
LEE TERRY, Nebraska

                  David V. Marventano, Staff Director
                   James D. Barnette, General Counsel
      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel


                 Subcommittee on Energy and Air Quality

                      JOE BARTON, Texas, Chairman

CHRISTOPHER COX, California          RICK BOUCHER, Virginia
STEVE LARGENT, Oklahoma              RALPH M. HALL, Texas
  Vice Chairman                      TOM SAWYER, Ohio
RICHARD BURR, North Carolina         ALBERT R. WYNN, Maryland
ED WHITFIELD, Kentucky               MICHAEL F. DOYLE, Pennsylvania
GREG GANSKE, Iowa                    CHRISTOPHER JOHN, Louisiana
CHARLIE NORWOOD, Georgia             HENRY A. WAXMAN, California
JOHN SHIMKUS, Illinois               EDWARD J. MARKEY, Massachusetts
HEATHER WILSON, New Mexico           BART GORDON, Tennessee
JOHN SHADEGG, Arizona                BOBBY L. RUSH, Illinois
Mississippi                          TED STRICKLAND, Ohio
VITO FOSSELLA, New York              THOMAS M. BARRETT, Wisconsin
ROY BLUNT, Missouri                  BILL LUTHER, Minnesota
ED BRYANT, Tennessee                 JOHN D. DINGELL, Michigan
GEORGE RADANOVICH, California          (Ex Officio)
MARY BONO, California
W.J. ``BILLY'' TAUZIN, Louisiana
  (Ex Officio)


                            C O N T E N T S


Testimony of:
    Green, Richard C., Chairman, Utilicorp United, Incorporated..   112
    Hunt, Hon. Isaac C., Jr., Commissioner, Securities and 
      Exchange Commission........................................    46
    Hutzler, Mary J., Acting Director, Energy Information 
      Administration, Department of Energy.......................    56
    McCullough, Robert, McCullough Research, Portland, Oregon....   132
    Newsome, Hon. James E., Chairman, Commodity Futures Trading 
      Commission.................................................    39
    Norlander, Gerald A., Executive Director, Public Utility Law 
      Project of New York, Incorporated..........................   126
    Owens, David K., on behalf of the Edison Electric Institute..   118
    Plank, Raymond, Chairman and Chief Executive Officer, Apache 
      Corporation................................................   122
    Welch, Hon. Thomas L., Chairman, Maine Public Utilities 
      Commission.................................................    76
    Wood, Hon. Patrick H., III, Chairman, Federal Energy 
      Regulatory Commission......................................    30





                      WEDNESDAY, FEBRUARY 13, 2002

                  House of Representatives,
                  Committee on Energy and Commerce,
                    Subcommittee on Energy and Air Quality,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 1:30 p.m., in 
room 2322, Rayburn House Office Building, Hon. Joe Barton 
(chairman) presiding.
    Present: Representatives Barton, Largent, Burr, Shimkus, 
Pickering, Blunt, Bryant, Walden, Tauzin (ex officio), Boucher, 
Hall, Sawyer, Wynn, Doyle, John, Waxman, Markey, Rush, 
McCarthy, Strickland, Barrett, Luther, and Dingell (ex 
    Staff present: Jason Bentley, majority counsel; Sean 
Cunningham, majority counsel; Andy Black, policy coordinator; 
Peter Kielty, legislative clerk; Sue Sheridan, minority 
counsel; and Rick Kessler, minority professional staff.
    Mr. Barton. The subcommittee will come to order. I think 
that all of our witnesses are here. If we could get our 
audience to find their seats, we will begin. Today the Energy 
and Air Quality Subcommittee is going to hold a hearing on the 
effect of the bankruptcy of Enron on the Functioning of Energy 
    The full Energy and Commerce Committee has already held a 
hearing on the broader issues associated with Enron, and the 
Oversight and Investigations Subcommittee has an ongoing series 
of hearings to put the facts on the table as to any criminal, 
or unethical conduct by those associated within the company, or 
monitoring the company, or consulting with the company.
    Today's hearing is a little bit different. This 
subcommittee has jurisdiction over the energy industry in the 
United States, and we want to determine, if it is possible to 
determine in one hearing, is how did the energy markets 
function in general, and specifically the Enron on-line trading 
system as it reduced its share of the trading in energy 
commodities, how did that affect the broader energy market.
    There have been a lot of surprises as it related to Enron; 
many of them have been very unpleasant surprises. We had had 
employees testify how they lost their jobs, their savings, and 
their retirement accounts.
    We have had stockholders testify as to how they lost the 
value they had thought was in the stock that they had 
purchased. We have creditors who have testified and things like 
    So now we are going to see how the energy markets work, and 
if they work. There is some testimony on the second panel that 
perhaps the energy market didn't work as well as it was 
    We want to see if there are lessons that can be learned and 
if there are issues that need to be addressed in our ongoing 
and pending markup of the Electricity Restructuring Bill, which 
quite frank I had hoped to be marking up beginning last week, 
and continuing today.
    I would much rather be doing something substantive that 
could help the country and the President in the future, than 
holding a hearing on something that perhaps went wrong. But if 
we can discover what went wrong, perhaps we can put some 
amendments in on a bipartisan basis in our Electricity Bill 
that could prevent something like what has happened from 
happening in the future.
    I have a full statement, but in the interest of time, I am 
going to put that into the record. I would just hope that our 
panelists testify truthfully.
    I would now like to recognize the ranking member of the 
subcommittee, Mr. Boucher, for an opening statement.
    [The prepared statement of Hon. Joe Barton follows:]
Prepared Statement of Hon. Joe Barton, Chairman, Subcommittee on Energy 
                            and Air Quality
    There have been many surprises related to Enron, most of them 
unpleasant. Employees lost jobs and in some cases their retirement 
accounts, stockholders generally lost their investment, and creditors 
and other companies had to unwind deals or wait in hopes of payment. I 
am glad that the full Committee and the Oversight Subcommittee are 
doing all they can to explore the many issues surrounding the fall of 
    Not all of the surprises have been unpleasant. We knew energy 
markets worked, but I think we were all surprised by the strength they 
showed last fall. Even at the highest point of the crisis, the lights 
stayed on and consumers saw no real price increases. Electricity was 
delivered where it needed to go, and natural gas still arrived on time. 
The biggest market-maker in both electricity and natural gas left the 
market, and the result was nary a blip on reliability and prices. That 
is a testament to the strength of competitive markets.
    Today's hearing is about the effect of the bankruptcy on the 
functioning of energy markets. We will leave the autopsy of the Enron 
body to other subcommittees--we are here to discuss energy-related 
issues surrounding Enron's collapse. I welcome all of the witnesses 
here today, including a very distinguished first panel of Federal and 
State government witnesses.
    I ask each of the witnesses to tell us his or her perspective of 
the effect Enron's bankruptcy had on energy markets. Are there lessons 
we can learn from those amazing days when markets overcame tough 
obstacles? Do we have enough market transparency and disclosure? Do we 
need more? Are there some types of disclosure, transparency or 
regulation that would actually hurt markets? What is actually happening 
in the markets today?
    Some witnesses here today will say that energy markets actually 
work better today as a result of Enron's behavior before their 
downfall. I am glad that Chairman Wood has already said the FERC will 
review some of these specific allegations.
    I am not here to say that energy markets work perfectly. If they 
did, we would not need to improve them. H.R.4, still awaiting action by 
the Senate, seeks to improve both the supply and conservation of 
energy, with an eye toward a better long-term balance in supply and 
demand. During our experience last year on the Western electricity 
crisis, we learned about the lack of adequate generation in the West 
and the awful disparity in takeaway capacity from interstate natural 
gas pipelines into California.
    And since nearly everybody in town tells me that electricity 
markets are not operating at their maximum efficiency, we have drafted 
H.R.3406 to improve transmission, increase generation nationally, 
encourage renewable energy and conservation, and otherwise reduce 
barriers to wholesale competition. This Subcommittee will return to 
that legislation soon, after full committee Chairman Tauzin and I 
decide the time is right.
    Despite the good news of the past few months, this is a dangerous 
time in the real world of energy markets. The stock markets are 
spooked, fearful of new problems in other companies and accounting 
relationships. Credit-rating agencies have rightfully taken a new look 
at the complexity and business strategies of companies that trade 
energy and match buyers and sellers. Both factors cause companies to 
hunker down and ride out the storm.
    Our Nation needs energy companies to do more than simply show Wall 
Street and Congress that their house is in order. We need energy 
producers, energy traders, and energy utilities leading us toward a 
better future. We still need these capital-intensive projects to 
increase generation through new power plants, and we still need 
innovative companies promoting efficiency in the generation, marketing 
and consumption of energy. We got lucky in the West last summer and 
again this winter. Mild temperatures and economic concerns dropped 
demand, masking the still-present problem of demand outstripping 
    While Enron is on the front page, the real story is inside the 
paper. Every time a company cancels or postpones a power plant project, 
the future looks scarier. Every time our confidence in energy trading 
decreases, we take a step backwards. But the genie of wholesale 
competition cannot and should not be put back in the bottle. Now is not 
the time to re-regulate energy markets. But now is the time to learn 
what we can learn from Enron and make energy markets better. We always 
want the furnace to turn on, the pilot light to be lit, and the bill to 
be affordable, no matter what happens to participants in the energy 
market. That is the real reason we are here today.

    Mr. Boucher. Thank you, Mr. Chairman.
    The scheduling of today's hearing is timely, and the 
examination of the effect of the Enron collapse on the 
wholesale electricity market is highly appropriate.
    I believe that we have sufficient information to draw some 
conclusions. First, in the wake of the Enron bankruptcy filing, 
the wholesale electricity market functioned smoothly and 
effectively. It didn't miss a beat. There was no interruption 
in power delivery, and the lights stayed on, and electricity 
flowed. Even with the removal from the market of a major 
trading firm the market recovered immediately. Other firms 
quickly filled the void. The wholesale electricity market 
experienced the largest corporate bankruptcy in American 
history, and the fact that it didn't miss a beat is truly a 
testament to its strength.
    Second, I believe that the flexibility inherent in the 
largely deregulated wholesale market was the key to its rapid 
recovery. If the market had been inflexible, and if it had been 
tightly regulated, the ability of other trading firms to fill 
the void would have been substantially reduced. Now is not the 
time to consider measures that would limit market flexibility.
    As a third matter, the stock values of companies involved 
in energy trading, and in the construction of independent power 
plants, have fallen significantly in the wake of the Enron 
bankruptcy. Their ability to acquire capital for new power 
plant construction has been diminished. As a result, many power 
plant construction projects that had been announced have been 
delayed, and in some cases, canceled altogether. The Nation may 
in fact find itself without sufficient electricity as a 
consequence, and as the economy recovers, we may experience 
that reality.
    The major concern, Mr. Chairman, that I have, and the 
subject that I suggest be the primary focus of this 
subcommittee's inquiry, is what steps need to be taken to 
restore investor confidence in the wholesale market. And in the 
basic business model of the merchant energy companies that 
supply electricity to it, I have some suggestions.
    First, the point should be stressed that the wholesale 
market was largely unaffected by Enron's misdeeds. The drop in 
wholesale prices in one region of the Nation can be explained 
by the thin and illiquid nature of the market in that region, 
and by the long term downward trend in wholesale prices in that 
particular region of the wholesale market. In fact, a view of 
the long term price chart places the market decline well within 
the range of normal fluctuation.
    Second, we should encourage the taking of steps by the 
FERC, which will increase transparency, predictability, and 
reliability in the wholesale market.
    I congratulate the FERC for the steps it is now taking to 
stimulate the formation of large regional transmission 
organizations, and to require membership in the RTOs by 
entities that own transmission assets. I hope that the FERC 
will continue along this positive path which will make the 
market more reliable and more predictable. The same can be said 
for the FERC's proposed actions to establish uniform standards 
for interconnection. These are positive and helpful steps, and 
I hope that the FERC will move forward aggressively in both of 
these areas. I look forward to additional suggestions that 
today's witnesses may make for steps that can be taken at the 
FERC, or perhaps by this subcommittee, that will lead to 
greater wholesale market transparency, and to strengthen 
investor confidence in the companies that supply electricity to 
    This is our most important mission, and I am pleased that 
we have today knowledgeable witnesses who can comment on this 
subject. Thank you very much, Mr. Chairman.
    Mr. Barton. Thank you, Congressman Boucher, and I would 
associate myself with your remarks. I agree almost in totality 
with what you said. The gentleman from Tennessee, Mr. Bryant, 
is recognized for an opening statement.
    Mr. Bryant. Thank you. Mr. Chairman, I also want to thank 
you for holding today's hearing, and I look forward to hearing 
from the distinguished panel of witnesses on what effect, if 
any, Enron----
    Mr. Barton. Would the gentleman--if he wishes to be 
recorded for television posterity, he ought to come to this 
microphone right here.
    Mr. Bryant. That's okay.
    Mr. Barton. All right.
    I just want to let you know.
    Mr. Bryant. Thank you. I do support this panel's testimony 
on what effect, if any, Enron's collapse has had or will have 
on the competitive energy markets. According to Robert J. 
Michaels' December 10, 2001 essay in U.S. Today, and I quote, 
``The most important fact about the fall of Enron hardly has 
been noted in the media.
    ``The disintegration of such a large company that has so 
dominated this market should bring bedlam to suppliers and 
customers. Yet, power and gas prices remain low and stable. 
They continue to be driven by supply and demand, both where 
Enron traded and where it did not.''
    To my knowledge, Enron's collapse has had little effect on 
the consumer cost of electricity and natural gas. Judging from 
the lack of correspondence that my office has received, the 
Enron political scandal is not resonating outside the beltway.
    The politics seem to be overhyped and media driven, as 
reporters continue to try to connect the dots between Enron and 
campaign contributions, this White House, and the immediate 
past White House, as well as Congress.
    The media and some others appear to be obsessed with 
turning a despicable business scandal into a political scandal. 
This subcommittee should certainly fully understand the 
consequences of Enron's collapse before moving forward with 
electricity restructuring legislation.
    However, if this subcommittee doesn't consider electricity 
restructuring legislation, it will be because the majority 
believe that it is in the best interests of consumers and the 
American economy, and not due to any outside influences.
    There are certainly a lot of questions yet to be answered 
about the collapse of Enron, and questions about the role and 
responsibility of third-party auditors, the effects of Enron's 
collapse on pensions, and employee 401(k) investments, and 
current corporate financial disclosure practices.
    However, despite all of these questions that need to be 
asked about that, the lights are still on even without Enron. 
Again, Mr. Chairman, thank you for calling today's hearing, and 
I look forward to these witnesses. Thank you.
    Mr. Barton. We thank the gentleman. The full committee 
ranking member, Mr. Dingell, is recognized for an opening 
    Mr. Dingell. Mr. Chairman, I thank you for your courtesy, 
and I commend you for holding this hearing. It will help us to 
begin to understand the impact of Enron's bankruptcy on energy 
matters, and most importantly upon consumers.
    Today's hearing is a good start at peeling back the layers 
of what looks to be a rather large, and quite frankly, smelly 
onion. I welcome the participation of Federal Agencies today, 
and I note that they are responsible for protecting investors 
and consumers.
    I am pleased that both the Securities and Exchange 
Commission, the SEC, and the Federal Energy Regulatory 
Commission, FERC, are investigating Enron's activities. There 
is plenty to investigate there, and I trust that these 
inquiries will be conducted in a careful and thorough, as well 
as fair, manner.
    It is necessary to provide the agencies and Congress with 
the best information possible so that we can take whatever 
actions our respective responsibilities require to ensure that 
working people and investors are not victimized by this kind of 
a smelly mess again.
    With this in mind, I must express reservations about the 
apparent tendency of both the SEC and FERC to reach premature 
conclusions about important public policy questions posed by 
the hearing today.
    On the one hand, each agency has begun investigations into 
Enron in keeping with their statutory responsibilities. On the 
other hand, and this is most troubling to me, and I suspect 
also to the committee, both agencies already seem to have 
concluded that Enron's collapse raises no substantial question 
about regulation of the Nation's electricity suppliers.
    I differ very strongly with that view. Mr. Chairman, I 
would like to introduce into the record a response from SEC 
Chairman Harvey Pitt to a letter in which my colleague, Mr. 
Markey, and I asked whether, in light of the Enron debacle, 
that the Commission was reconsidering its position with respect 
to the appeal of the Public Utility Holding Company Act.
    Mr. Barton. Does the gentleman have a document that he 
wishes to put into the record?
    Mr. Dingell. This is such a good one that I would like to 
read it, Mr. Chairman.
    Mr. Barton. Oh, I thought you wanted to put it in the 
    Mr. Dingell. Since I have 5 minutes, I will just say this 
is an admirable statement, Mr. Chairman. I had hoped that my 
colleagues will read it, and enjoy it as much as I would.
    Mr. Barton. The Chair will accept it being put in the 
record if the gentleman would formally ask that it be put in 
the record. We are not trying to be extreperous. We are trying 
to follow the rules that you so ably enforced when you were 
    Mr. Dingell. Mr. Chairman, I ask for unanimous consent that 
my statement be put in the record in full, and also that the 
Securities and Exchange Commission's response to my 
communication, and another communication which I am going to 
send them, and in which I know they are going to answer 
quickly, although----
    Mr. Barton. We will accept the one that has already been 
sent and answered to. We can't accept one that has not been 
sent or answered to yet.
    Mr. Dingell. Well, I want the record kept open, Mr. 
Chairman. I know that is within your power.
    Mr. Barton. We will do so. Without objection, it is so 
    Mr. Dingell. Thank you, Mr. Chairman.
    [The prepared statement of Hon. John D. Dingell follows:]
    Prepared Statement of Hon. John D. Dingell, a Representative in 
                  Congress from the State of Michigan
    Mr. Chairman, I commend you for holding this hearing to help us 
begin to understand the impact of Enron's bankruptcy on energy markets 
and, most importantly, on consumers. Today's hearing is a good start at 
peeling back the layers of what looks to be a rather large and pungent 
    I welcome the participation of the federal agencies responsible for 
protecting investors and consumers. I am pleased that both the 
Securities and Exchange Commission (SEC) and the Federal Energy 
Regulatory Commission (FERC) are investigating Enron's activities, and 
trust that these inquiries will be conducted in a careful and thorough 
manner. This is necessary to provide the agencies and the Congress with 
the best information possible, so we can take action to ensure that 
working people and investors are not victimized again.
    With this in mind, I must express reservations about an apparent 
tendency of both the SEC and FERC to reach premature conclusions about 
the important public policy questions posed by today's hearing. On the 
one hand, each agency has begun investigations into Enron in keeping 
with their statutory responsibilities. On the other hand, and this is 
the troubling point, both agencies already seem to have concluded that 
Enron's collapse raises no substantial questions about regulation of 
the Nation's electricity suppliers.
    Mr. Chairman, I would like to introduce into the record a response 
from SEC Chairman Harvey Pitt to a letter in which Representative 
Markey and I asked whether, in light of the Enron debacle, the 
Commission was reconsidering its position with respect to repeal of the 
Public Utility Holding Company Act (PUHCA) of 1935. The agency 
acknowledges that it is appropriate for Congress to await the results 
of various Enron investigations to address PUHCA repeal--but in the 
same letter reiterates its support for PUHCA repeal ``at this time.'' I 
am curious to understand why the regulatory agency charged with 
protecting the interests of utility investors has concluded there is 
nothing to learn from its own ongoing investigation into Enron's 
behavior? Had PUHCA already been repealed, Enron might have bought 
utilities throughout the country. In that event, legions of state 
regulators would likely be combing the books of thousands of 
subsidiaries, both domestic and foreign, to determine whether affiliate 
abuses had occurred and what harm befell consumers. Moreover, these 
utilities might have met the same fate as Portland General Electric, 
which currently is being sold off by a cash-strapped Enron. Is this 
what we want for such a fundamental industry?
    Likewise, I am puzzled by FERC Chairman Wood's testimony, which 
concludes that Enron's collapse ``has not had any substantial spillover 
effects'' on ``energy markets.'' Perhaps this is a matter of 
terminology, but I wonder how Chairman Wood reached this conclusion 
when FERC still is in the early stages of a fact-finding investigation 
into allegations that Enron may have manipulated electric and gas 
markets? Chairman Wood indicates that, once the Commission receives the 
staff report, it will decide whether to institute formal investigations 
under section 206 of the Federal Power Act ``into long-term power 
contracts whose prices may have been influenced by any inappropriate 
Enron activities.'' Perhaps I fail to grasp an implicit distinction 
between impacts on ``energy markets'' and impacts on energy consumers. 
I assure you, however, such distinctions will mean little to the 
average consumer in the West or any other region where Enron is found 
to have used its market power to manipulate prices--a matter squarely 
within FERC's responsibility to ensure that wholesale power prices are 
``just and reasonable.''
    In conclusion, I caution both the SEC and FERC to resist the 
temptation to trump their own investigations and reach premature 
conclusions they may later have to retract. Enron's collapse is a very 
serious matter, and the public has no desire to shove the details aside 
and proceed as if nothing important has happened.
    I thank Chairman Barton for holding this hearing and look forward 
to our continuing to work together on these important questions.
            U.S. Securities and Exchange Commission
                                     Washington, D.C. 20549
                                                  February 12, 2002
The Honorable John D. Dingell
Ranking Member
Committee on Commerce
U.S. House of Representatives
2322 Rayburn House Office Building
Washington, DC 20515

The Honorable Edward J. Markey
U.S. House of Representatives
2108 Rayburn House Office Building
Washington, DC 20515
    Dear Congressmen Dingell and Markey: Thank you for your January 
30th letter, asking us to consider whether the Commission, in light of 
Enron's tragic collapse, should continue to support repeal of the 
Public Utility Holding Company Act of 1935. I very much appreciate, and 
share, your continuing interest and concern about this important policy 
issue. I have attempted to provide a comprehensive response to the 
concerns raised in your letter.
    First, in the face of Enron's collapse, the Commission is 
reconsidering its views on all matters, including our position on PUHCA 
repeal. As I am sure you are aware, Commissioner Isaac Hunt testified 
on behalf of the Commission before the Senate Committee on Energy and 
Natural Resources on February 6th. Before the Commission submitted its 
testimony, we carefully considered our longstanding position on PUHCA 
repeal and whether it needed to be modified. Ultimately, as the 
testimony demonstrates, the Commission determined that it should 
continue to support conditional repeal of PUHCA. As the investigation 
of Enron continues and we learn from the events surrounding Enron's 
collapse, however, we will continue to be open-minded about this issue 
and will reassess our views periodically.
    Second, as your letter points out the Commission's position an 
repeal has always been based an our conclusion that much of the 
regulatory structure required by PUHCA either duplicates other systems 
of regulation or is simply no longer necessary. As the Commission 
initially concluded in the early 1980s, the Commission's regulation of 
all issuers has been significantly enhanced since 1935. In addition, 
since 1935, state and federal regulators have been given additional 
authority and have become much more sophisticated in their regulation 
of utilities.
    Today, as I have pointed out in both my recent article in the Wall 
Street Journal and in recent testimony, there is a compelling need to 
improve and modernize our corporate disclosure and financial reporting 
system and to establish an effective and transparent system of private 
regulation of the accounting profession subject to the Commission's 
rigorous oversight. Specifically, in my testimony last week before a 
subcommittee of the House Financial Services Committee, I outlined a 
number of critical areas in which we must improve our system of 
regulation in order to ensure that all investors receive financial 
disclosure that is meaningful and intelligible.
    Nonetheless, the need to improve our regulation of corporate 
disclosure is not inconsistent with our longstanding view that much of 
the regulation required by PUHCA is duplicative and unnecessary. Needed 
reforms to our way of regulating corporate disclosure and accounting 
must be made on an across-the-board basis. Attempting to fix the system 
on an industry-by-industry basis is an inefficient use of resources and 
is potentially counterproductive. As we implement new initiatives in 
this area, and thereby add effectiveness to the securities laws 
administered by the Commission, the regulatory framework created by 
PUHCA in these areas will be increasingly duplicative and inefficient.
    The Commission continues to believe that repeal of PUHCA should be 
accompanied by legislation providing the Federal Energy Regulatory 
Commission and state regulators with effective tools to police against 
the risk of abusive affiliate transactions and cross-subsidization. As 
we have testified, as long as electric and gas utilities continue to 
function as monopolies whose rates are regulated by state authorities, 
state and federal regulators must be able to protect consumers from 
potentially abusive practices. At the federal level, FERC is the proper 
agency to have this type of authority. Moreover, if Congress chooses 
not to repeal PUHCA, we believe that Congress should transfer authority 
for administering it to FERC.
    The question whether Congress should act on PUHCA repeal now or 
wait until the various investigations of Enron are complete is not an 
easy one. It is certainly appropriate for Congress to await the results 
of various investigations of Enron's collapse and to apply what it 
learns from those investigations in a wide variety of areas, including 
in its consideration of reforming and modernizing the regulation of the 
natural gas and electricity markets.
    At the Commission, although we continue to support repeal of the 
Act, we also recognize that repeal is the prerogative of Congress. As 
long as PUHCA remains law, you have my assurance that we will continue 
faithfully to administer its letter and spirit. However, in order to 
reduce unnecessary regulatory burdens on America's energy industry, we 
continue to support repeal of PUHCA at this time coupled with necessary 
consumer protections.
    Almost 67 years ago, in response to the controversy surrounding 
PUHCA's enactment and the Commission's initial attempts to implement 
it, then-Chairman James Landis said, ``under these circumstances the 
discretion of silence might well be the better part of valor. But to 
me, silence would be a denial of a fundamental of democratic 
government.'' The same is true today. Although Enron's collapse is a 
tragedy for the innocent investors and innocent employees who have been 
injured by it, and although it has provoked needed discussions in 
Congress, at the Commission and elsewhere on a number of important 
policy issues, we cannot allow the fury surrounding its collapse to 
hinder our ability to make sound policy judgments. In the Commission's 
view, repeal of PUHCA, coupled with necessary consumer protections, 
remains sound policy.
    Again, I very much appreciate your continuing interest in the 
Commission's views on and administration of PUHCA. If you would like to 
discuss these matters further, I would welcome the opportunity to meet 
with you at your convenience. And, if you have additional questions or 
comments, please do not hesitate to contact me at 942-0100.
            Yours truly,
                                             Harvey L. Pitt
cc: The Honorable W. J. ``Billy'' Tauzin
   The Honorable Joe Barton
   The Honorable Rick Boucher

    Mr. Barton. The Chair would recognize the full committee 
chairman, the distinguished gentleman from Louisiana, Mr. 
Tauzin, for an opening statement.
    Chairman Tauzin. Thank you, Chairman Barton, and I want to 
thank you for working to coordinate this hearing with the other 
subcommittee hearings on the state of the Enron collapse, and 
its effect on this market, as well as others.
    And obviously you have all heard that tomorrow the 
Subcommittee on Oversight and Investigations will be continuing 
its work, and we will have Sherron Watkins, the Enron employee 
who tried to warn the President of Enron, Ken Lay, that there 
were questionable accounting practices going on behind these 
    And we will also have a Subcommittee on Commerce, Trade, 
and Consumer Protection, hearing that will look into the 
current financial accounting standards, and whether they are 
sufficiently informative to consumers and other investors in 
    So this subcommittee hearing is part of that 3-part 
process, the Oversight and Investigations Subcommittee taking a 
long look at any wrongdoing and violation of standards, and 
nevertheless, these two subcommittees to make sure that we 
understand the effect on the market, and the effect on our need 
to improve the laws and the rules by which people invest in 
markets like this one.
    The hearing also I think will highlight a good story in the 
face of all the bad stories that we have been hearing in this 
investigation. Despite Enron being the largest energy trader in 
North America, a sudden and dramatic departure from the energy 
markets took place with little, if any, impact on energy prices 
and supplies.
    That is a remarkable story, and that somehow the markets 
worked around the financial collapse, and still delivered 
energy to consumers at rational rates, and still delivered 
ample supplies of gas and electricity in those markets, and at 
a time when energy prices still remain significantly low.
    And no disruptions in supplies, and no disruptions in 
deliveries that we know of, and I think that is a testament to 
the maturity and success of these competitive energy markets 
today, and the stability and benefits that I think they will 
continue to deliver to folks in this country.
    We saw that in gas, and we also saw it in electricity, and 
hopefully, as a result of this hearing, we can get a better 
picture of how that happened, and how these markets are working 
in spite of this type of collapse, so that we might follow a 
very important rule when we go about trying to fix some of 
these problems, and that is do no harm.
    And that we not harm the good features of a marketplace 
that does in fact work. I want to make it clear that our 
committee intends to follow this investigation wherever it 
leads, and so we endorse the FERC's examination of issues 
raised in the Senate.
    At the same time, we also believe that in this market, as 
in other markets, that more disclosure, more transparencies, is 
probably a very good idea, and to the extent that you can shed 
some light on how this energy trading system can be perhaps 
more transparent and more informative to both consumers and 
investors in that market, we will be interested in hearing.
    I want to welcome again the FERC Chairman, Pat Wood, to the 
committee. Mr. Chairman, you know that you and I don't agree on 
all issues, and we are debating a few right now, but I want to 
commend your hard work and your tenacity.
    And I also want to welcome the CFTC Chairman, James 
Newsome. We appreciate your willingness to help us understand 
the role that your agency plays in these markets, and we 
certainly welcome Commissioner Hunt back, of course.
    And we look forward to the testimony which we feel strongly 
the House needs to follow the Senate's lead in the repeal of 
the Public Utility Holding Company Act, although my friend, Mr. 
Dingell, has a different view on that.
    But we want to hear more about it, and we also want to 
welcome the Acting Director of the Energy Information Agency, 
Ms. Mary Hutzler, back to the subcommittee for the first time 
with a new title, and we welcome you.
    And we certainly want to welcome the Maine Public Utility 
Commissioner, Chairman Welch. This is going to shed light on 
what we hope will be an understanding of how these energy 
markets function in today's competitive marketplace.
    I thank the chairman for the hearing.
    [The prepared statement of Hon. W.J. ``Billy'' Tauzin 
 Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee 
                         on Energy and Commerce
    Thank you, Chairman Barton for working to coordinate this vital 
hearing, which will consider the state of our Nation's energy markets 
following Enron's collapse. The effects of that collapse will remain in 
sharp focus for our Committee as we continue to investigate what 
happened and examine possible legislative action.
    Tomorrow, the Subcommittee on Oversight and Investigations 
continues its multi-day hearing into the transactions that toppled this 
company. The witness will be Sherron Watkins, the Enron employee who 
tried to warn Ken Lay about questionable accounting behind the 
transactions. The Subcommittee on Commerce, Trade and Consumer 
Protection will also hold a hearing tomorrow to see whether current 
financial accounting standards are sufficient to protect investors.
    This hearing today is especially important because it highlights a 
story that is not being told. Despite Enron being the largest energy 
trader in North America, its sudden and dramatic departure from the 
energy markets took place with little, if any, impact on energy prices 
and supplies. Energy prices generally remained low and stable around 
the country as parties unwound their positions with Enron. There were 
no disruptions in supply, and customers received their deliveries 
without interruption. This is a testament to the maturity and success 
of competitive energy markets and the stability and benefits they can 
deliver when structured properly.
    Natural gas markets provide another example of this fact. Federal 
policies that regulated wellhead gas prices and allowed for the 
existence of gas pipeline monopolies, which shut out competing 
suppliers and denied producers access to consumers, resulted in serious 
gas shortages in the late 1970s. Schools and hospitals closed down 
because they couldn't get gas to heat their buildings. Beginning with 
the passage of the Natural Gas Act in 1978, Congress and the Federal 
government worked to open the market up, by requiring pipelines to 
transport gas for others and finally by deregulating wellhead prices. A 
combination of failed regulatory policies and understanding of market 
forces pushed us back then to adopt competition as a policy in gas--not 
Enron lobbying.
    The same is true with electricity. Electricity markets have been 
maturing around the country. Beginning with the 1992 Energy Policy Act, 
we have increasingly opened up access to the transmission grid for 
competitively priced wholesale power. The result has been an overall 
decline in the price of wholesale power, and the advent of cleaner, 
more efficient generating plants.
    The bottom line is that policies encouraging competitive markets 
have deep roots in our regulatory structure, regardless of Enron. The 
need for more affordable, more efficient sources of energy and power, 
and the benefits that customers derive from this are what drives 
competitive markets and what has driven reform of regulatory policy--
not the actions of a particular company.
    That said, this Committee intends to follow our investigation of 
Enron wherever it leads. I understand that the FERC has undertaken a 
fact-finding investigation into allegations that came out of a Senate 
hearing, which is in addition to the other ongoing investigations. In 
our second panel, we will hear from the latest source of those 
allegations and one of the expert witnesses in that litigation; we will 
be able to discuss whether their arguments have any merit. If there 
indeed turns out to be a need for additional disclosure or transparency 
in electricity markets, this Subcommittee will be ready to address that 
legislatively in Chairman Barton's electricity bill.
    As for our other witnesses, I would like to welcome FERC Chairman 
Pat Wood back to the Committee. You and I don't agree on all the 
issues, but I commend your hard work and your tenacity. I would also 
like to welcome CFTC Chairman Newsome. We appreciate your willingness 
to help us understand the role your agency plays. We welcome 
Commissioner Hunt back before us. I look forward to your testimony 
since I feel strongly that the House needs to follow the Senate's lead 
and repeal the Public Utility Holding Company Act of 1935. I also 
welcome Acting Director of the Energy Information Administration, Mary 
Hutzler, back to the Subcommittee--but for the first time with her new 
title. Finally, welcome to Maine Public Utility Commission Chairman 
Welch. Thank you for coming, and I look forward to all your testimony.

    Mr. Barton. Thank you. We now want to recognize Mr. Waxman 
of California, who was the first member present at the hearing 
today, and we welcome your opening statement.
    Mr. Waxman. Thank you very much, Mr. Chairman. Thank you 
for holding this hearing. It is very timely. Yesterday, Ken Lay 
refused to testify about the Enron scandal, but it wasn't too 
long ago that Ken Lay testified before this subcommittee, and 
freely made a number of promises about deregulation.
    And I would like to spend a few moments reviewing these 
promises. Let's look at the first chart. Ken Lay told us to 
reform the electric power system and give American consumers 
the equivalent of one of the largest tax cuts in American 
    Well, many States took Mr. Lay's advice and restructured 
their electric utilities. So how accurate was Mr. Lay's 
prediction? According to a recent report by the Consumer 
Federation of America, ``Despite predictions of huge rate 
reductions in States that restructured electricity service, 
consumers there are paying higher prices, and receiving less 
reliable service than in those which have not restructured.''
    Now let's look at another prediction. Mr. Lay told us that 
deregulation would dramatically cut rates for consumers. He 
said that it is time to bring competition to the electric 
business, and in the process cut electricity rates by 30 to 40 
    Well, that sounds pretty good. Unfortunately, this 
prediction has not held up too well either. According to the 
Consumer Federation of America, ``In retrospect, claims of 
efficiency gains and price reductions of 40 percent or more for 
electricity restructuring seem silly. In fact, careful analysis 
showed that under the best of circumstances efficiency gains in 
generation could only be a fraction of that, while efficiency 
losses and new costs are far larger. It may well be that 
inefficiencies introduced into what has been a reasonably well 
managed network have increased overall costs by over 10 
    Mr. Lay promised the competition would bring rates down by 
30 to 40 percent, and in effect, it appears to have raised 
rates by over 10 percent, and things are worse in California.
    The Los Angeles Times reported that the typical homeowner 
in Southern California, Edison territory, now pays 18 percent 
more each month than in 1995.
    At no point during the deregulation process did residential 
consumers enjoy the sharply lower electricity rates prices that 
advocates of the policy had forecast. Now, another prediction.
    Mr. Lay told us that customer choice will allow the 
introduction of green energy options. Well, the American people 
want the environment protected, and this promise has appeal to 
    Unfortunately, the reality is that air pollution has gone 
up as a result of wholesale electricity competition. The North 
American Commission for Environmental Cooperation recently 
conducted a study on this issue and as the chart shows, found 
``U.S. Energy regulators underestimated the amount of increased 
pollution that arose after wholesale electricity competition 
rules were adopted in 1996.''
    ``Recent experience indicates that electricity competition 
is likely to increase air emissions from power plants. FERC 
underestimated by nearly 8 percent the amount of carbon dioxide 
and other pollutants that U.S. utilities emit under the worst 
case scenario.''
    Well, despite Mr. Lay's prediction that consumers and the 
environment would win under competition, these promises haven't 
been realized, but what about business? Let's look at the next 
    Mr. Lay told us that ``American industry will become more 
profitable, and become stronger competitors in an international 
marketplace.'' Well, this one may just be the biggest whopper 
of them all. According to the L.A. Times, ``The collapse of the 
Enron Corporation, so far a political, legal, and investor 
crisis, is now imposing widespread costs on the U.S. economy 
according to a range of companies, energy experts, and bankers. 
The very decline of Enron stock from more than $90 a share to 
50 cents a share in a single year has taken a massive $67 
billion of shareholder wealth out of the economy. Also, other 
energy companies have suffered losses in the hundreds of 
millions of dollars because of their relationship to Enron.''
    And I would like to also introduce into the record an 
article just from today's Washington Post, entitled, ``Enron-
Related Fears Take Toll on Other Firms' Stocks.'' Mr. Barton. 
Do you have an article?
    Mr. Waxman. Yes.
    Mr. Barton. Have we seen it?
    Mr. Waxman. Well, it is in the Washington Post, and I hope 
that you have seen it. We will provide it to you and you can 
take it under submission as to whether you will put it in the 
record, but I would request you do so.
    Mr. Barton. But I am sure that we will put it in the 
    [The article follows:]

            [Wednesday, February 13, 2002--Washington Post]

          Enron-Related Fears Take Toll on Other Firms' Stocks
               By Ben White, Washington Post Staff Writer
    NEW YORK, Feb. 12--Despite a handful of light-volume bargain-
hunting rallies, the markets are off to a rocky start for the year. 
After coming out of the blocks jazzed about an incipient economic 
recovery and certain of a rebound in stock prices, investors and money 
managers have instead pulled back. And after the spectacular collapse 
of Enron Corp., companies that carry even a hint of possible accounting 
problems have been hit hardest.
    As investigators probe whether Enron's byzantine accounting methods 
broke the law, investors have grown fearful that other companies may be 
massaging the books to inflate their stock prices or hide serious 
weakness. Such concerns have hurt the stock prices of big firms, such 
as Tyco International Ltd. and General Electric Co., as well as less 
well-known companies such as franchiser Cendant Corp. and Irish 
drugmaker Elan Corp.
    Others suffering from increased worries about accounting issues 
include the stocks of telecom giant WorldCom Inc., energy producer 
Reliant Resources Inc., power producer Calpine Corp., network-equipment 
maker Enterasys Networks Inc., energy services firm Williams Cos. and 
PNC Financial Services Group.
    Taken together, these companies, along with GE, Tyco and Cendant, 
lost $108 billion in market capitalization for the month beginning Jan. 
7 (just before the Justice Department launched its criminal probe of 
Enron), according to Markethistory.com, a research Web site.
    And the losses are by no means limited to those nine. While the 
pain has been widespread, no company has felt it more sharply than 
Bermuda-based conglomerate Tyco.
    On Jan. 7, the company's stock closed at $54.38. A month later it 
finished at $28.05, a drop of close to half and a paper loss of $50.9 
billion. The stock has recovered somewhat but closed today at $30.50, 
down $1.30.
    Money managers said Tyco shares might have slipped regardless of 
Enron; there have been questions about how the company accounted for 
its many acquisitions for years. But without Enron, and the attendant 
media frenzy, many managers believe there would have been no mad dash 
to dump the company's stock.
    ``We made a decision to sell Tyco not because there was anything 
fundamentally wrong with their accounting,'' said Timothy R. Stives, 
portfolio manager at Ashland Management Inc., which handles $2 billion. 
``But now we are in a situation where Enron has created a negative 
psychological environment and stocks like Tyco are underperforming. And 
we think this situation is likely to persist, longer than many 
    Meanwhile, General Electric has long been lauded as among the 
nation's best-run corporations. Yet shares in the company dropped as 
low as $35 on Feb. 4 before stabilizing recently. But GE is still 
trading well below its high of $53.50. And plenty of detractors remain 
who question how the conglomerate continues to produce such consistent 
    No one has accused GE of wrongdoing. Most of the questions center 
not on GE's well-known product lines, such as aircraft engines, but 
rather on its financing arm, GE Capital. Some analysts and investors 
have been putting pressure on the company to provide more information 
about GE Capital, which produced 40 percent of the company's $13.7 
billion in earnings last year. GE has said it will consider ways to 
make its credit arm more transparent.
    Shares of long-distance provider WorldCom, already suffering in the 
depressed telecommunications sector, have fallen as questions about its 
debt received more intense scrutiny because of Enron, analysts said. 
Those questions lead to speculation that the firm could wind up in 
bankruptcy court. WorldCom has repeatedly said it is in no such danger.
    Reliant shares dropped after the company said it would delay a 
fourth-quarter earnings report and restate 2001 profits because of 
accounting mistakes. Calpine shares dropped to a 22-year low earlier 
this month after the firm acknowledged that the Securities and Exchange 
Commission was investigating whether the company improperly disclosed 
information to analysts. Enterasys also delayed fourth-quarter earnings 
over accounting issues and said it was the subject of an SEC 
    Energy company Williams Cos. lost ground after saying it might have 
to pay as much as $2.4 billion to cover debt payments for Williams 
Communications, which the parent company spun off last April. The 
company has also struggled to stave off the kind of credit downgrades 
that helped seal Enron's fate. And PNC shocked an already nervous Wall 
Street on Jan. 29, saying it would reduce 2001 net income by $155 
million, or 27 percent, to address concerns raised by the Federal 
Reserve that the company had improperly accounted for some 
underperforming loans.
    In a normal environment, none of these announcements would have 
been good, financial observers said. But their potential to damage a 
company's stock price has been magnified.
    ``Anything that comes out now is having a serious ripple effect,'' 
said Kenneth A. Bertsch, director of corporate governance at TIAA-CREF, 
the investment firm that handles retirement money for educators.
    Bertsch cited a number of reforms necessary to restore investor 
confidence, including stricter accounting standards and more muscular 
corporate boards free from any conflict-of-interest problems. Bertsch 
also said among the most important ways to make corporate balance 
sheets more closely resemble reality, and thus more useful to 
investors, would be to change the accounting method used for stock 
    Currently, companies do not have to count options granted to 
employees against earnings. And, once the options are exercised, 
companies can use them to ease their tax burden. Corporations have 
fiercely and successfully lobbied against repeated efforts in 
Washington to end this practice.
    But Bertsch said Enron has created a new environment that threatens 
to expose politicians who in the past have blocked the changes without 
fear of public scrutiny. ``This really could have a positive impact 
down the road,'' he said, adding that the post-Enron drop in share 
prices could send a message to companies that the 1990s mentality that 
``corporate governance issues don't matter'' is over.
    Opinions remain mixed on Enron's potential long-term impact on the 
stock market. Some argue that the markets could drift slowly downward 
all year, reflecting a general pullback similar to what happened after 
the crash of 1929, when the middle class abandoned the capital markets 
for two decades.
    ``If you put it all together, I suspect this will have more of an 
impact on investor confidence than the fall of the Nasdaq technology 
stocks did,'' said Henry Hu, a professor of securities law at the 
University of Texas, noting that along with the collapse of Enron 
itself, investors may be scared off by the many conflict-of-interest 
questions raised in Enron's wake about accountants, Wall Street 
analysts and credit rating agencies--all of whom are supposed to 
provide investors with unbiased information about a company's 
    But others believe that Enron alone, without more splashy failures, 
will not be enough to reverse the trend of average Americans pouring 
their savings into stocks in recent years. Stock prices will pick up, 
these people argue, once the economy does.
    ``What will reverse this market,'' said Stives of Ashland Capital 
Management, ``is the first real evidence that the economy is turning 
around and corporate profits are improving. That, and when the media 
decides to move on to something else.''

    Mr. Bryant. What if we don't read the Washington Post?
    Mr. Waxman. Well, when you read the record, you will read 
this story if it is permitted to go in the record.
    Mr. Barton. We could get somebody to read it to you maybe.
    Mr. Waxman. For years, we have heard the promises about 
deregulation, but the reality of deregulation has meant more 
pollution and more costs to consumers. Mr. Chairman, we have a 
duty to protect consumers from gouging, to protect the 
environment from pollution, and to protect investors from sham 
accounting that hides huge losses in energy markets. It is time 
to take a deep breath and rethink this pending legislation.
    Mr. Barton. I thank the gentleman for his statement. I 
would simply say that it is heartfelt, but some of those 
promises may yet come true once we actually do it. We have to 
do it first.
    Mr. Waxman. That is a matter of faith and belief, but not 
    Mr. Barton. I am a very faithful person. The gentleman from 
Oregon, Mr. Walden, is recognized for an opening statement.
    Mr. Walden. Mr. Chairman, I am going to keep my remarks 
brief. However, I just think that we are darn lucky that the 
Enron collapse occurred, if it was going to occur, at the time 
that it occurred.
    Because I think that our economy is so far back on its rear 
end that demand is so low for energy products across the 
country, and the markets were not under the same pressure they 
were prior to that when we were having hearings a year ago.
    And the more I hear about what Enron has been up to, and 
was up to, the more it appears to me that perhaps their goal 
was to create chaos in the market so that they could then 
capitalize on it in trading before regulatory oversight would 
come to bear.
    And so I am not sure how eager I am to necessarily applaud 
the fact that the markets have gone along fine with or without 
Enron, because I am not sure that I am ready to admit that 
without the downturn in the economy that we would not be in a 
lot worse shape right now.
    And I think the market does have vitality to it, and I do 
think there is others that could fill the gap, but if it were 
going to happen, I think we are probably not suffering as 
mightily as we might have had it occurred when the markets were 
tighter. I don't know. We will see how that bears out.
    And as we look at this whole issue of regulation, coming 
from Oregon, which of course is the one utility, Portland 
General Electric, in Oregon that Enron owned, we were fortunate 
that frankly our Public Utility Commission was pretty strong, 
in terms of putting some boundaries around what Enron could or 
could not take out of Portland General Electric.
    One of the things that have been reported that they did, 
however, was take multi-millions of dollars in supposed Federal 
tax payments into the rate structure in Portland, and then 
basically bonus that up to the main company that apparently 
never did pay that in Federal tax.
    And so the rate payers paid what they thought--what the 
utility commission thought was going to be tax payments to the 
Federal Government that may never have been paid. So I think 
that there are some issues here that we need to cautiously 
approach. Thank you, Mr. Chairman, for this hearing.
    Mr. Barton. Mr. Luther was next on the Democrat side. Is he 
in the annex? If not, Mr. Luther, we will go to Mr. Sawyer. All 
right. We will recognize Mr. Sawyer for an opening statement.
    Mr. Sawyer. Well, thank you, Mr. Chairman, and thank you 
for holding this hearing. It is an important step in our 
exploration of the Enron debacle. Mr. Chairman, I know, and I 
share your dedication to removing as appropriate barriers that 
exist to healthy electricity markets that benefit customers.
    But I am sure that you would agree that it is best that we 
evaluate the causes and consequences of Enron's astonishing 
fall before we move forward on a electricity bill.
    Today's hearing will help advance that understanding, but I 
imagine that it will take more than what we can accomplish here 
today for us to unravel Enron's business practices, and their 
effects on energy markets.
    I would also add that I don't think we ought to allow Enron 
to derail our longer standing efforts to overcome the 
significant impediments to workable energy markets that still 
    We can look to California to see a cautionary tale about 
taking the time to get the market rules right before putting 
them into effect. And I would just simply add that I think we 
are heeding that lesson today.
    And another lesson from California is that government has 
the responsibility to craft clear rules to undergird a market 
and then enforce those rules on all parties. Right now the 
electricity industry and their consumers are stuck in the 
middle of a transition to competitive markets, and there is 
very little certainty about where those markets are heading.
    So I hope that today begins a renewed effort to ensure that 
the rules that we use to create viable regional electricity 
markets are both effective and enforceable.
    Just as an aside, I would add, Mr. Chairman, and repeat the 
interest that I have in which consumer protections and other 
elements in PUHCA, we must ensure and survive a possible repeal 
of that Act. With that, Mr. Chairman, I yield back the balance 
of my time.
    [The prepared statement of Hon. Thomas C. Sawyer follows:]
  Prepared Statement of Hon. Tom Sawyer, a Representative in Congress 
                         from the State of Ohio
    Thank you Mr. Chairman, and thank you for holding this hearing. It 
is an important step in our exploration of the Enron debacle. Mr. 
Chairman, I know and share your dedication to removing barriers that 
exist to healthy electricity markets that benefit consumers. But it is 
best that we evaluate the causes and consequences of Enron's 
astonishing fall before we can consider moving forward on an 
electricity bill. Today's hearing will help to advance our 
understanding, but I imagine that it will take a good deal more time 
for us to unravel Enron's business practices and their effects on the 
energy markets.
    But I will also add that we should not allow Enron to derail our 
longer-standing efforts to overcome the significant impediments to 
workable energy markets that still exist. We can look to California and 
see a cautionary tale about taking the time to get the market rules 
right before putting them into effect. I think we are heeding that 
lesson today. But another lesson from California is that government has 
a responsibility to craft clear rules to undergird a market, and then 
enforce those rules on all parties.
    Right now the electricity industry and their consumers are stuck in 
the middle of a transition to competitive markets, and there is very 
little certainty about where those markets are heading. We must measure 
twice, then cut once, but Congress cannot afford to do no cutting at 
all. So I hope that today begins a renewed effort to ensure that the 
rules that we use to create viable regional electricity markets are 
both effective and enforceable.
    It seems to me that one lesson that is emerging from our 
investigation of Enron's collapse is that it is primarily the product 
of an arrogant corporate leadership choosing to flaunt securities rules 
and exploit loopholes in standard accounting practices, not the 
inevitable product of electricity restructuring.
    I expect that we will hear testimony from today's panel about the 
possibility that Enron manipulated prices in the energy futures markets 
in which it was heavily involved. But the fundamental motivation for 
that behavior again goes back to accounting procedures. The ``mark-to-
market'' accounting standard allowed Enron to take the expected value 
of its long-term energy contracts, and place that expected income on 
its current income statements. In order to exploit this standard, 
implemented by FASB in 1993, Enron may have worked to hike the value 
that it ascribed to long-term contracts in order to allow it to inflate 
its current year's earnings statement.
    Congress must respond to the weaknesses in our regulatory system 
that Enron's activities have exposed. Part of that work will be trying 
to make energy trading markets more transparent, and ensuring that 
energy consumers continue to receive protection from the manipulation 
of prices on a product that is a necessity of modern life. I am 
particularly curious about which consumer protections from PUCHA we 
must ensure survive a possible repeal of the act.
    But I suspect we will obtain the most leverage on answering the 
questions raised by Enron's collapse by addressing the disturbing 
accounting and securities issues revealed by Enron's conduct. I am 
particularly concerned by the seemingly arbitrary quality of mark-to-
market accounting rules, as well as the standard by which Special 
Purpose Entities like Raptor and Chewco could have been unconsolidated 
with Enron as long as three percent of its assets were owned by outside 
equity holders. But I am especially interested in this panel's view on 
the continued exemption of over-the-counter energy derivatives trading 
from CFTC oversight. I thank the witnesses for being here, and look 
forward to their testimony.

    Mr. Barton. We thank the gentleman from Ohio for that 
statement, and seeing no one on the Republican side, next is 
Mr. Wynn. Did he just leave? Is he out there, because he was 
here. If not, then it will be Mr. Hall. We will start with Mr. 
Hall for an opening statement.
    Mr. Hall. Mr. Chairman, thank you, and members of the 
committee, I of course thank you, Joe Barton, for holding this 
hearing today on market issues and questions that have been 
raised in the wake of the collapse of Enron.
    I think that I would like to begin by saying that it is my 
most sincere wish that we take from this unfortunate event a 
list of improvements that we make in our energy markets so that 
we might not see a catastrophe like this and of this proportion 
again. That remains to be seen.
    And while it is important that we understand fully what 
happened at Enron so that we might carry out our obligations to 
make whatever changes are needed in law and policy, we need to 
recognize that ultimately the courts and the regulatory 
agencies are going to deal with what happened there.
    And I guess it is our duty to point up the facts, and I 
think that bears on each party that are doing their very best 
to do that. Evidence has come to light that energy markets may 
have been manipulated, especially during the Western energy 
crisis of 2000.
    I remember that we were well on track to give aid to our 
most populous State that was having a lot of problems then, and 
a mild summer kind of came to their aid, and September 11th 
changed a lot of it, because it diverted money to a war that we 
are going to have to support and fight, and that we need 
desperately to help some of the States that are having 
    And to work on prescription drugs, and to correct a lot of 
the Medicare and Medicaid. So that is a reality. We have got a 
young Commander-in-Chief that is doing a good job, and is 
working day and night, and I think it is our duty to support 
    Now, consequently, FERC investigations may nullify some of 
the long term contracts that States thought they were stuck 
with, and if this is the case, it will provide some relief for 
countless utility customers.
    And it will also provide further testament to the 
instability and the malleable nature of energy markets, which 
all of you are very aware of. And I see Pat Wood out there, who 
is of my own State, and a young man for whom I have the highest 
respect and regard.
    And I was very pleased when he was appointed and when he 
accepted, and when you read the papers, it sounds like Ken Lay 
is the only guy in the world that recommended him, but that's 
not true.
    I know that I wrote letters and made calls, and I think 
many of the Texas delegation did, and others from other State 
delegations that knew of Pat Wood, and knew of his dedication 
and his knowledge.
    So I think that as these facts are all uncovered, obviously 
there is going to be a need for more hearings of this type by 
this committee. The distinguished witnesses that we have before 
us today have a great deal to teach us based on what they have 
observed thus far, and I trust that we are going to benefit 
greatly from their observations and their experience.
    Mr. Chairman, perhaps we ought to have them back in 6 
months or 4 months from now, and ask them how their views may 
have changed as the Enron story continues to unfold, and the 
markets react accordingly.
    And it may in fact be much longer than that before we see 
the true effects of such a radical change in the market. 
Restating earnings has a very negative effect on the credit 
worthiness of a company, and we have to be realistic when 
assessing the future of the energy markets if the major players 
don't have access to the capital enabling them to proceed with 
generation progeny.
    We are not here to ensure the future of major corporations, 
but it is our duty I think to ensure the future of our 
citizens, and in closing, Mr. Chairman, as a member from the 
oil patch, let me urge my colleagues, as did Mr. Sawyer, who is 
exactly right in his assessments, not to tar all other energy 
companies with an Enron brush.
    There are many, many well-run energy companies that are 
conservatively managed, and treat their creditors, their 
employees, their shareholders, and those that expect to retire 
with a pension, treat them fairly.
    Oil and natural gas, and, yes, electricity markets, are 
evolving, but let's be careful that we don't act hastily and 
undo the progress that these markets have made, and as problems 
are uncovered, let's correct them, but don't throw out the 
premise that competitive markets are innately.
    At the very least, we owe it to ourselves to tread 
cautiously, but not falter in our commitment to utility 
restructuring, and I yield back my time.
    Mr. Barton. We thank the gentleman from Texas. The 
gentleman from Illinois, Mr. Rush, is recognized for an opening 
    Mr. Rush. I want to thank you, Mr. Chairman, for holding 
today's hearings on the effects of the Enron bankruptcy on 
energy markets. In the wake of the Enron collapse, several 
House and Senate committees have been left to take inventory of 
the laws and regulatory schemes that were open to abuse by 
    And indeed remain open to abuse by all of corporate 
America. At the center of that discussion lies the Public 
Utility Act of 1935, and enacted at a time when big business 
proved itself to be completely untrustworthy and dangerous to 
investors and consumers alike.
    PUHCA assumed that the nature of big business is to grow 
and prosper, even when that growth and prosperity comes at the 
expense of the consuming public.
    Thankfully that wisdom lives on through the words of 
officials like former Governor Bush of Texas, who stated in 
1999, ``The invisible hand works many miracles, but it cannot 
touch the human heart.''
    Indeed, opponents of PUHCA repeal argue that without firmer 
consumer protections to take its place, repeal may replace the 
miracle of the free market with the nightmare of market 
manipulation and monopoly.
    Still, many, including Enron, were unconvinced; playing a 
tune of free and efficient markets, Enron was the pied piper of 
stand alone PUHCA repeal, and while many in government were not 
swayed by its song, there were many more in positions of power 
and influence who listened and marched blindly forward, 
following the songs of Enron.
    Mr. Chairman, if there is a silver lining to the tragedy of 
Enron, it lies in the fact that it has forced Congress to 
rethink its stance on the role of the Federal Government and 
regulation of corporate activity in the public's interest.
    Supporters of PUHCA repeal argue that the serious 
reconsideration of how Congress moves toward electricity 
restructuring is unnecessary, even in light of the Enron 
    Time and time again, they point out that despite the 
political and regulatory shock waves sent out by the collapse 
of Enron, energy markets barely flinched in response. This 
observation is well noted. However, we need only to look to the 
West Coast brownouts of 2001 for possible evidence of a 
connection between Enron's financial misdeeds and the wallet of 
unsuspecting consumers.
    That said, I am convinced and encouraged by FERC's 
willingness to launch an investigation into whether Enron used 
its long term energy contracts to manipulate energy markets in 
the West.
    And as that investigation continues, I will be eager to 
learn whether Enron, as it struggles for its own survival, 
attempted to save itself from going under by pushing firmly 
down on the shoulders of California's consumers.
    If that turns out to be the case, the fact that States like 
New York and Pennsylvania, and Florida, and indeed my own State 
of Illinois, were not used as lifesavers for Enron, will 
ultimately serve as testament to the effectiveness of PUHCA. 
Thank you, Mr. Chairman, and I yield back the balance of my 
    Mr. Barton. I thank the gentleman from Illinois, and I go 
to another distinguished gentleman from Illinois, Mr. Shimkus, 
for an opening statement.
    Mr. Shimkus. Thank you, Mr. Chairman. I will be brief. I 
know that we are here today to talk about what happened to the 
markets after the Enron collapse, and I think that is an 
important thing to discuss.
    A company that controlled 20 percent of the energy 
contracts disappeared overnight and what happened. Illinois, 
the last two winters ago, we experienced a shock of what 
happens when natural gas prices go skyrocketing.
    We heard from our constituents, and that did not happen 
here, and I think it is worth investigating why. And in the 
whole guise of the energy debate issue, I look forward, and I 
think it is timely, Mr. Chairman, and I will just yield back my 
time. Thank you.
    Mr. Barton. Good. We now hear from the gentleman from 
Pennsylvania, who normally gives stellar and exemplary opening 
statements, and his is usually one of the most stellar and 
exemplary. And so let's see if he can match his normal standard 
of excellence.
    Mr. Sawyer. Talk about the burden of high expectation.
    Mr. Doyle. Flattery will get you everywhere, Mr. Chairman. 
Mr. Chairman, thank you for convening this hearing to examine 
the effect of the Enron bankruptcy on the functioning of energy 
markets. Like all members of this committee, I am seriously 
concerned about the actions of Enron and its management.
    We must continue to thoroughly investigate the facts of the 
matter and institute appropriate remedies. The hearings in the 
House and Senate, in conjunction with the insight and clarity 
provided by the Powers report, have demonstrated that various 
types of reform appear to be warranted to prevent others in the 
marketplace from causing the level of undo harm that Enron has 
inflicted upon its shareholders, employees, and our financial 
    What is significantly less clear at this point is the 
effect of Enron's practices and subsequent bankruptcy had on 
the functioning of energy markets. I recognize that many of the 
witnesses that we will hear from today assert that there has 
been no noticeable disruption to the functioning of energy 
markets, in terms of price fluctuation, generation, or trading.
    If further investigations by FERC and others confirm this 
initial impression, what does this tell us about the state and 
structure of our energy markets given the collapse of Enron, a 
major energy trader, whose transactions comprised an estimated 
15 to 25 percent of wholesale energy trades, seemingly has had 
such a negligible effect.
    Furthermore, I am particularly interested in looking at how 
these initial impressions might be skewed within the context of 
a falling energy price market. Obviously, we need to examine 
this dynamic further before reaching conclusions about the 
entire wholesale electricity market.
    Competition, if structured and implemented appropriately, 
has brought benefits to electricity consumers. This is a new 
marketplace and deserves our scrutiny, but it is my hope that 
we will continue to move forward with our efforts to preserve 
and improve competition.
    And, finally, Mr. Chairman, as a member of the committee 
who did not have the opportunity to weigh in on the Commodity 
Futures Modernization Act, I am eager to hear more about how 
the major changes regarding the regulation of exchanged traded 
futures contracts, over-the-counter derivatives, and securities 
futures, have fared.
    I look forward to today's discussion, Mr. Chairman, and I 
yield back my time and thank you.
    Mr. Barton. As I said, it was a good statement, and your 
staffer who helped prepare it is smiling. So she thinks it is 
    We now want to hear from the vice chairman of the 
committee, or the subcommittee, Mr. Largent. This will be his 
last official act as a member of this subcommittee. He is 
resigning from Congress tomorrow to go to the great State of 
Oklahoma and put his name up for election to be the Governor of 
    We are going to miss you, and you have been a good member. 
You have worked extremely hard on the issue of electricity 
restructuring, and I had hoped to move the bill out of the 
subcommittee before you left so you could participate in that 
markup. That is not going to happen.
    But as you are running for Governor, watch the press, 
because we still hope to move that bill, and we will have some 
amendments in it that will be entitled, ``The Largent's 
Amendments,'' I'm sure.
    So we would welcome you for an opening statement on this 
issue and any valedictory statements that you wish to make as a 
soon-to-be retired member of the subcommittee.
    Mr. Largent. Thank you, Mr. Chairman. It has been an honor 
to serve on your subcommittee. You have done an outstanding 
job, and I was thinking about my Congressional career 7 years 
here in Washington, DC.
    I came in and the first vote I cast was on GATT, and the 
last vote of the 103d Congress was my first vote, and now my 
last vote in Congress is going to be on campaign finance 
    And it reminded me of Samuel Clemens, alias Mark Twain, who 
has said that he was born when Haley's comet passed the earth, 
and was visible from the earth, and then died on Haley's comet.
    And that is sort of my career; it began with GATT, and end 
with campaign finance reform. Mr. Chairman, my only statement 
is that one of the real highlights for me of my time in 
Congress is having gotten the opportunity to serve on the 
Commerce Committee.
    It is a great committee, and we deal with a number of 
really significant issues for our country, and I really believe 
that in the near future dealing with the electricity 
restructuring that we need so desperately in this country, is a 
very important issue, in terms of establishing a really sound 
national energy policy.
    You know, frankly, I think that everything evil has now 
been attached to the word Enron, but the fact is that the 
markets have worked. The markets worked when it punished a bad 
actor in the form of Enron, and the markets have continued to 
work when you take a major player like Enron out of the market, 
and you see the electricity.
    Markets have consistently and seemlessly moved forward, and 
I think that is something that we all should be very proud of. 
Free markets really do work. And I look forward to hearing the 
testimony of our distinguished panel, and thank you for calling 
this hearing, and I would yield back the balance of my time.
    Chairman Tauzin. Would the gentleman yield for a second?
    Mr. Barton. But we still have Mr. Markey to give an opening 
    Chairman Tauzin. I will just take a statement, because we 
will not have a full committee process before we see the 
departure of our friend, Steve Largent. I wanted to say, Steve, 
how much we have all appreciated your service to the committee.
    Mr. Dingell, who was formerly Chair of this committee, and 
I both share a fierce love and devotion to the work of this 
committee, and the one thing we always tell people on and off 
this Hill, is that only the best and the brightest make it 
here, and you were one of the very best and brightest.
    And I want to thank you for your service, not only to this 
committee, but to the country, and I wish you well in your new 
ventures in Oklahoma.
    Mr. Largent. Thank you, Mr. Chairman.
    Mr. Barton. Mr. Doyle, who has been on the receiving end of 
your fastball in the Congressional baseball games, said he is 
not terribly disappointed that you are going to Oklahoma. Mr. 
Markey is recognized for an opening statement, welcomed and 
recognized for an opening statement.
    Mr. Markey. I thank the chairman very much, and I will miss 
the gentleman from Oklahoma. Many of the amendments which he 
was going to make in the subcommittee markup were Largent-
Markey amendments, and I am not sure that I will be able to 
score as frequently without Steve Largent carrying the ball.
    And particularly when it comes to the Tennessee Valley 
Authority, which was a particularly interesting subject for the 
both of us, in terms of their structure inside the electricity 
    Mr. Barton. Let's not get personal now.
    Mr. Markey. No, no, no, no, no. It is not to be facetious. 
I was going for the jocular vein, and not the jugular vein 
there. So he is a great member, and I am sure that the people 
of Oklahoma are very happy that he is coming home to serve them 
in that larger capacity.
    I thank you for holding this hearing. Some have rushed to 
say, Mr. Chairman, after the Enron scandal broke that this has 
nothing to do with electricity on natural gas markets. They say 
this is merely a matter of accounting and securities fraud, and 
that Enron could have just as easily been trading widgets as 
natural gas or electricity.
    Clearly, there has been securities fraud, and clearly there 
has been massive accounting fraud. Clearly, there has been 
shredding of documents and possible obstruction of justice. But 
I simply do not know how anyone can say right now that Enron's 
demise has absolutely no implications for the energy markets.
    Last week, I asked Jeff McMann, Enron's new president and 
chief operating officer, how many special purpose entities 
Enron created, and what they were used for, and whether any of 
them involved other Enron insiders, and what types of financial 
arrangements Enron had with them.
    He did not know the answer to any of those questions. The 
powers committee of Enron's board, which reported to us in its 
internal investigation, told us that it only looked at the LJM, 
Raptor, Jedi, and CHUCO transactions.
    So right now all we know about is the tip of the iceberg. 
Sherron Watkins' memo mentioned market-to-market valuation 
problems with Enron Energy Services and other investments.
    What were they? When I asked Enron officials last week, no 
one had looked into the concerns she raised in these areas. How 
many secret deals and long term contracts are still out there 
like ticking time bombs waiting to explode?
    How big is the iceberg of fraud and deceit?
    We simply do not know. The fact is that Federal regulators 
appearing before us today either waived oversight over Enron's 
activities, or had it taken away from them. The CFTC's 
authority to regulate Enron's energy trading was gutted by the 
Futures Trading Practices Act of 1992.
    The exemptive rules adopted by former CFTC Chair and 
current Enron board member Wendy Graham, and the additional 
loopholes adopted by the Commodities Futures Trading Act of 
    The SEC's ability to restrict Enron's diversifications and 
limit its self-dealing practices has been constrained by the 
fact that it has decided to administratively repeal the Public 
Utilities Holding Company Act of 1935 through a policy of non-
enforcement and neglect, including application of this Act to 
    Press reports have also revealed that the SEC waived 
application of the Investment Company Act of 1940 on Enron. Of 
course, the SEC did have authority to review Enron's annual and 
quarterly filings under the Securities Act of 1933, and the 
Exchange Act of 1934, but apparently didn't fully do so from 
1997 until it actually began its enforcement action last fall.
    And finally the FERC had the authority to regulate many of 
Enron's trading activities, including setting accounting 
standards, and regulating its electricity rates, but choose not 
to use these authorities until the California meltdown began to 
force action.
    Enron clearly had great success in largely avoiding any 
meaningful Federal oversight of its core businesses for many 
years. So just what was it doing in the natural gas and 
electricity markets? Some of the prepared testimony we have 
received today suggests that Enron's trading activities may 
have contributed to increased volatility in the natural gas and 
electricity markets.
    And that Enron may have even manipulated prices in these 
markets. I have received written testimony from a witness that 
the majority staff declined to accept. This testimony suggests 
that Enron's on-line trading activities had a negative impact 
on electricity markets and significantly increased volatility 
in those markets.
    I would like to ask for unanimous consent that this 
testimony be included in the record of this hearing. I have 
long been supportive of moving toward competitive energy 
markets, but I have repeatedly emphasized that I favor 
demonopolization and not deregulation.
    The tragedy of what has happened in our energy markets is 
that the old regulatory structure of regulated monopolies is 
being torn down. Unfortunately, it has not yet been replaced 
with a new regulatory structure that serves the public 
interests by protecting consumers from abusive sales and 
trading practices, assuring fair and orderly, and transparent 
markets, and eliminating excessive and artificial levels of 
    Replacing regulated monopolies with unregulated megalopies 
is not competition. It is a formula for allowing a few big 
players like Enron to gain the markets to the detriment of both 
producers and consumers.
    I look forward to the hearing today, and again I renew my 
unanimous consent----
    Mr. Barton. We took one of the witnesses the gentleman from 
Massachusetts recommend, and that witness is here, and that 
testimony. The other witness the gentleman recommended we did 
not accept, and we looked at the testimony and had some 
problems with it, and we will take another look at the 
testimony during the hearing.
    And if we can accept it, we will. But we took one of your 
witnesses as you well know, and is going to add to the hearing.
    Mr. Markey. I will do this, Mr. Chairman. I will withdraw 
right now and I will renew the unanimous consent request later 
in the hearing.
    Mr. Barton. We are going to go vote, but we want to hear 
from Congresswoman McCarthy, and her opening statement.
    Ms. McCarthy. I will be very brief in deference to the 
committee and the vote. I just want to thank you, Mr. Chairman 
for this hearing and also extend a special greeting to my 
constituent, Richard Green, who is the Chairman of UtiliCorp.
    And I would encourage you to consider after his testimony 
that we take a trip and visit his subsidiary, Aquila, which is 
one of the power marketing firms that I went on the trading 
floor to better understand the task before us as we take a look 
at electric utilities and restructuring, and the future of 
power in this country.
    So I am glad that he is here today. He is a success story 
that I am proud to represent, and I thank you for this hearing, 
and I will put the extent of my remarks in the record.
    Mr. Barton. Seeing no other members present, we will accept 
all opening statements into the record.
    [Additional statements submitted for the record follow:]
Prepared Statement of Hon. Roy Blunt, a Representative in Congress from 
                         the State of Missouri
    Mr. Chairman, thank you for holding this hearing today in an effort 
to shed light on the Enron bankruptcy and the functioning of energy 
    I would like to introduce to the committee a witness from Missouri, 
Mr. Richard Green, Chairman of UtiliCorp United Inc. Mr. Green is here 
to testify on behalf of the Electric Power Supply Association.
    Mr. Green is accompanied by: Jeff Ayers, Senior Vice President and 
General Counsel for Aquilla Inc.; Laurie Hamilton, Vice President of 
Regulatory Affairs for Aquilla; and Lynn Wilson, Issues Strategist for 
    I would like to welcome them all here today.
    I look forward to reviewing the testimony presented here today, as 
well as subsequent hearings and investigation into Enron. It is the 
responsibility of this committee to oversee many of the energy, 
accounting, consumer protection and pension issues raised by Enron. The 
availability of timely and credible information for consumers is a key 
factor in the investigation conducted by this committee.
    The testimony presented today will help shed light on the context 
within which the core business of Enron was supposed to function. Mr. 
Green's testimony will address the energy market's reaction to the 
Enron failure, the use of derivatives, and suggest actions to make the 
markets more transparent.
    The failure of Enron is a tragedy for the families of thousands of 
employees and investors, and the impact is not limited to Enron. In my 
hometown of Strafford, Missouri, one of our largest employers went out 
of business because their owner had a contract and a loan with Enron, 
and Enron couldn't hold up their end of the bargain. Now 130 Southwest 
Missourians are looking for work. It's clear that we need to shine some 
light on corporate practices and enact, and then enforce, corporate 
disclosure requirements.
    Let's get to the bottom of what changes need to be made and then 
enforce them, so that workers aren't left trading years of service for 
empty promises and uncertainty in their retirement years.
    Thank you, Mr. Chairman.
   Prepared Statement of Hon. George Radanovich, a Representative in 
                 Congress from the State of California
    Mr. Chairman, thank you for holding this hearing today on the 
effect's of Enron's bankruptcy on the functioning of energy markets. As 
a Californian, I am very concerned about the failure of restructuring 
in my state, and I look forward to hearing testimony on the 
irregularities at Enron and if they played a significant role in the 
price spikes and supply disruptions my state experienced last year.
    The collapse of Enron Corp. has caused the nation's electricity 
markets to be surrounded by many scandalous rumors. It is our job today 
to find out if there is any solid evidence to prove that Enron's 
collapse was related to rules, or the absence of rules, governing 
trading in energy contracts. We must also thoroughly investigate 
allegations that Enron may have manipulated electricity and gas markets 
in order to build investor confidence.
    With respect to consumer confidence, I believe people can take 
comfort knowing our nation's energy markets have remained solid 
throughout the Enron debacle. Given the size of Enron's activity within 
the gas and electricity markets, the absence of a massive disruption in 
energy markets reiterates the stability of the marketplace. Supplies of 
gas and electricity have continued to be delivered to consumers 
throughout the collapse of Enron. The bottom line is that the energy 
delivery system has remained reliable. Since there is no proof that the 
growing trend toward competition caused or contributed to Enron's 
collapse, we must continue to support fair and effective wholesale 
competition in electricity and gas markets.
    Thank you, Mr. Chairman, for holding this hearing today. I look 
forward to the witnesses' testimony.
 Prepared Statement of Hon. Bill Luther, a Representative in Congress 
                      from the State of Minnesota
    Thank you Mr. Chairman for holding today's hearing on the effects 
of the Enron bankruptcy on national energy markets. It is a very timely 
issue and something that should be explored as this committee and FERC 
continue to consider various proposals that move us further toward 
restructured markets.
    At this point, most conclude that the Enron bankruptcy did not 
result in mass wholesale energy price disruptions. However, there are 
many aspects to the Enron debacle, as it relates to the overall state 
of energy transmission, selling and generation businesses, that need to 
be examined. Especially troubling are reports that energy prices in 
Western markets dropped due to Enron's absence in the region. It must 
also be noted that Enron, with the exception of the Oregon utility 
Portland General Electric, did not own generation facilities. To a 
certain extent this can explain why, especially in regions closed to 
competition at the state level, the company's collapse did not cause a 
reliability problem. These items must be further examined before any 
conclusions can be reached, and specifically I urge this committee to 
address the troubling reports of reduced energy prices in Western 
markets following the bankruptcy.
    Furthermore, I don't believe we can make the argument that simply 
because energy markets did not collapse in the wake of the Enron 
debacle, this is a sign that we need to pass aggressive federal 
restructuring legislation. The fact remains that the root of the 
current Enron mess can be traced to a lack of transparency and 
oversight over Enron's day to day partnerships and transactions. 
Therefore, I would urge this committee to proceed extremely cautiously 
with proposals to repeal the Public Utility Holding Company Act and 
eliminate federal merger review authority that have the potential to 
decrease even further federal oversight of energy sales to our nation's 
energy consumers. I would also urge this committee to focus more 
attention on Enron's creation of numerous questionable energy-related 
partnerships that led to employees and investors losing significant 
portions of their retirement savings.
    Thank you Mr. Chairman and I look forward to the testimony.

    [Brief recess.]
    Mr. Barton. The subcommittee will come to order. We are 
going to reconvene the hearing.
    We are ready to hear from our expert witnesses or 
panelists, but we have one more member who wishes to make an 
opening statement, and normally I would say no, but since he 
was so nice to me at the Mardi Gras party that the State of 
Louisiana put on 2 weeks ago, and made a point to throw me some 
special beads, I am going to say yes.
    So if Mr. John wishes to make a very brief opening 
statement, then we will begin our panel.
    Mr. John. Thank you, Mr. Chairman. I must come clean----
    Mr. Barton. If we could have the attention of the audience 
so we can hear the statement.
    Mr. John. I must come real clean and as the chairman of the 
subcommittee, I appreciate the latitude to give an opening 
statement, and it was me that threw the moon pie that hit you 
in the head at the Madri Gras party. I'm sorry.
    Mr. Barton. Which I ate later actually.
    Mr. John. Thank you very much for allowing me to give a 
brief opening statement, and I appreciate the leadership that 
you have shown on this issue, which is very, very important.
    First, I believe that there are many lessons that we can 
learn from the Enron's collapse that took down the seventh 
largest corporation in America. However, while the solutions 
may be broadly applied, I don't believe that it is very 
reasonable to conclude that the problems with Enron are 
universally applied to other energy companies around the 
    I think it is appropriate for this committee, regulators, 
and also investors, to take a closer look at the company's that 
engage in similar business practices. But I think we should be 
very, very careful, and not rush to judgment, or rush to indict 
all of the wholesale energy companies as being possibly the 
next Enron.
    You know, it hasn't been very long ago--it was right at a 
year--that we had a lengthy debate in this committee and on 
full committee about the electricity crisis in the West, and 
the challenges that we must overcome to ensure a reliable and 
affordable supply of electricity.
    A lot has changed over the past year, but I think the 
fundamental issue remains. Should the economy begin to recover, 
many of the problems that we faced last year will emerge again 
unless we continue to expand the wholesale energy markets.
    I also believe that if we do not overcome some of these 
crises in confidence that currently exist with regards to 
companies engaged in wholesale power in the power markets, that 
consumers will be faced once again with high prices and 
brownouts in the next couple of years.
    This hearing today, I believe, is a very positive step in 
setting the record straight about what we should learn from 
Enron and California so that we can restore what I think is so 
precious to the American people, and that is public confidence.
    Mr. Chairman, my second observation is that I support the 
recommendations of my colleague from Chackbay, Louisiana, when 
he recently said at this subcommittee that we should be very 
careful in proceeding with a mark-up of electricity legislation 
until we really have a very good handle on the conclusion and 
investigations, and rendering a judgment about what we can 
learn from what has happened over the past few months.
    The policy issues surrounding electricity restructuring are 
very complicated, and they are complicated enough that I don't 
believe that it would be constructive to allow a legitimate 
debate on legislation become confused with Enron's collapse.
    And so, Mr. Chairman, thank you very much for allowing me 
to say an opening statement, and I look forward to the 
testimony before us.
    Mr. Barton. Thank you. The Chair would ask for unanimous 
consent that all members not present have the requisite number 
of days to submit their written statement for the record. Is 
there an objection? Hearing none, it is so ordered.
    The Chair would also announce that he has reviewed the 
testimony that Congressman Markey of Massachusetts had 
proffered to put into the record by a witness who was not going 
to be on the panel of testifiers, the second panel.
    And the staff has reviewed that testimony and it appears to 
be sufficient and adequate in nature to be put into the record, 
and so the Chair would ask for unanimous consent that that 
testimony be put into the record at the appropriate point. 
Without objection, so ordered.
    [The prepared statement follows:]
  Prepared Statement of David J. Tudor, President and Chief Executive 
                   Officer, ACES Power Marketing, LLC
    My name is David J. Tudor, and I am the President and Chief 
Executive Officer of ACES Power Marketing, LLC (``APM''). APM is an 
energy risk management company headquartered in Indianapolis, Indiana. 
APM is owned by seven Generation and Transmission Electric Cooperatives 
(``G&Ts'') which operate in five National Electric Reliability Council 
(``NERC'') Regions. Because these G&Ts are themselves controlled by 
electric distribution cooperatives, the ultimate owners of APM are more 
than 2.4 million consumers located in 13 states. APM also provides 
services to twelve other cooperative G&T clients whose focus is on risk 
management related to the delivery of energy to ultimate consumers.
    My entire professional career has been spent in the energy 
industry. I first became involved in energy trading with the 
deregulation of natural gas during the early 1980s, and I have remained 
involved with energy trading and risk management since that time. I 
have held numerous management positions in the energy business prior to 
joining APM, including Chief Operating Officer of PG&E Energy Trading, 
one of the largest trading and marketing companies in the industry.
    APM supports open and competitive energy markets. The primary 
business focus of APM, unlike other energy trading and marketing 
companies, is managing and mitigating the price risk associated with 
delivery of energy to consumers. For most energy trading and marketing 
companies, the pricing and physical delivery of energy to consumers is 
only a small part of their portfolio.
    Because APM is concerned with the reliability and delivered cost of 
energy to consumers, we also are vitally concerned that energy markets 
operate efficiently and competitively. This too sets APM apart from 
many other marketers. The legitimate business objective of energy 
trading and marketing companies is realizing a profit on the 
transactions that they undertake. It should be recognized that higher 
profits can be made in a market environment that is characterized by 
price volatility, inefficiency, and a general lack of vigorous 
competition. APM believes that it is not in the best interest of 
consumers to permit such conditions to prevail. While profitable to 
some market participants in the short term, over the long term, 
recurring price volatility will erode consumer confidence in the 
ultimate value of gas and electricity deregulation.
    The specific question before this Subcommittee is what effect the 
demise of Enron will have on the future energy market. I define the 
term ``energy market'' as the environment that sets the price and 
reliability of energy available to consumers. Answering this question, 
however, requires a review of the market conditions that prevailed both 
prior and subsequent to the fall of Enron. There were and there 
continue to exist market conditions which Congress needs to address 
even after Enron's demise. These systemic problems need to be dealt 
with through legislation to assure that they will not distort or 
otherwise adversely affect the energy marketplace in the future.
. All Energy Trading Exchanges Must Be Independent and Subject to 
        Regulatory Oversight.
    Understanding the energy market requires recognition of the 
different physical and financial energy products that are traded on the 
various exchanges. A ``physical'' product is a contract for the 
purchase or sale at a defined price of a stated quantity of gas or 
electricity and for its delivery at a specified time and location. A 
``financial'' product is a contract that provides for the payment of 
money, with the amount determined by the difference between the price 
specified in the financial product for a defined quantity of 
electricity or gas at a specified future time and location, and the 
actual price that prevails in the future period. A financial product 
does not provide for physical delivery of either gas or electricity.
    The New York Mercantile Exchange (``NYMEX'') is a regulated 
``financial'' exchange. It offers market participants a venue to hedge 
or speculate in energy and other commodities. A robust and transparent 
financial exchange can serve the valuable function of enhancing price 
stability and competitiveness. The attainment of affordable and stable 
prices for electricity and natural gas supplies is a laudable energy 
policy objective. This is extremely important for residential and other 
temperature-sensitive consumers because electricity and natural gas are 
essential, and their requirements to a great extent are inelastic.
    The value of a regulated financial exchange can be undermined when 
an unregulated physical and financial derivatives exchange controls a 
large component of the overall energy trading market. Under these 
circumstances, the unregulated exchange can influence pricing on the 
regulated exchange.
    EnronOnline, was an unregulated, private exchange created by Enron 
for the trading of gas, electricity, and other commodities. Ownership 
of this exchange allowed Enron access to significantly more market data 
than other participants, and this knowledge translated to enhanced 
market power. The combination of market information and market power 
gave Enron the opportunity to create self serving price volatility.
    The magnitude of recent price volatility is demonstrated by the 
movement of natural gas prices from the 2000-2001 winter to the current 
2001-2002 winter. Last winter gas prices rose to levels of $10 per 
Dekatherm and above, while this winter gas prices have plummeted to 
levels in the low $2 per Dekatherm range. Price volatility can be 
downward as well as upward because speculative trading results in more 
profit for the trading companies as the movement of prices, in either 
direction, becomes greater. Furthermore, price volatility in gas and 
electricity is significantly greater than the price volatility of other 
    EnronOnline provided a platform for trade speculation which 
contributed to price volatility. However, in sharp contrast to the 
NYMEX, EnronOnline was not subject to any oversight or regulation. In 
the future, an energy trader should not be allowed to own, operate, 
manage, and participate in its own electric and gas trading exchange. 
This is counterproductive to a fair, open access market and creates an 
unfair advantage in the market. It is a natural conflict of interest.
    This problem does not go away with the demise of Enron. EnronOnline 
has been purchased by UBS Warburg, which, as of yesterday (see attached 
Newsday.com article) is conducting business under the name 
UBSWenergy.com, and will now hold the same capability to generate 
excessive profits through creating, in a totally unregulated setting, 
price volatility to the potential detriment of consumers.
    Given the tremendous earnings potential of operating private, 
unregulated trading exchanges, it is likely that a number of other 
large integrated energy companies which previously operated in the tier 
beneath Enron, may, absent a legislative prohibition, create or expand 
their own private electricity and gas trading exchanges.
2. Energy Trading And Marketing Companies Should Be Precluded From 
        Engaging In Certain Affiliate Transactions.
    Energy trading and marketing companies that are affiliated with 
regulated public utilities should not be permitted to own contracts for 
firm gas transportation, firm electric transmission, and firm gas 
storage capacity on affiliates' electric transmission or interstate gas 
pipeline systems. Such contractual arrangements invite abuses whereby 
the unregulated trading and marketing companies are able to earn 
excessive returns through the rebundling of the unregulated commodity 
with the regulated capacity services at great cost to consumers served 
by these assets.
    Moreover, with the significant vertical and horizontal integration 
and convergence between gas and electric within these major energy 
companies, which also own unregulated energy trading and marketing 
companies, anti-competitive concerns certainly are raised regarding 
these giant companies' activities in the marketplace when they are 
allowed to engage in unregulated, speculative trading supported in part 
with regulated assets.
    In conclusion, there is a need for Congress to take action to 
assure that the structure and activities involved in energy trading and 
pricing are not permitted to create an environment where electric and 
gas consumers, particularly those with inelastic demands for human 
needs, are left unprotected. The consumer cannot protect himself, and 
therefore, certain safeguards must be developed to allow the energy 
trading and marketing industry to thrive, but not through excessive 
profits paid by consumers.

                 [Associated Press--February 12, 2002]

                 UBS Warburg Launches Trading Business

                By Kristen Hays, Associated Press Writer

    HOUSTON--UBS Warburg's new online energy trading platform may be 
named for the Swiss investment bank, but the staff is almost all Enron 
    Make that ex-Enron.
    UBS Warburg Energy on Monday cranked up the online trading 
operation it acquired from the fallen energy giant and saw some action 
from traders buying and selling natural gas and electricity.
    ``We're up and running and open for business,'' UBS Warburg 
spokesman David Walker said Monday of UBSWenergy.com, staffed by about 
650 former Enron traders and support staff. The operation is backed by 
credit from UBS Warburg parent UBS AG.
    ``We are excited to launch UBSWenergy.com and believe that the 
capabilities of UBS Warburg Energy, backed by the credit rating of UBS 
will provide a competitive and liquid energy market to our customers,'' 
said Lawrence G. Whalley, managing director and head of the new 
    Several traders in Houston and elsewhere on Monday couldn't gauge 
trading volume on the new site because they had yet to finalize 
logistics to use it, such as getting their assigned passcodes.
    ``We haven't been able to trade,'' said Charlie Sanchez, energy 
markets manager for Gelber & Associates in Houston. ``it sounds like 
they're putting out feelers today.''
    ``We definitely are trading. We are doing transactions,'' said UBS 
Warburg Energy spokeswoman Jennifer Walker. ``Certainly there is a 
process of getting in your credit information and legal approvals, and 
certainly a ton of that is taking place today.''
    Sanchez and traders with El Paso Corp., Tulsa, Okla.-based Williams 
Cos. and Entergy-Koch Trading in Houston said they had submitted needed 
paperwork and planned to trade on the new site when given the necessary 
    ``We'll be set up to trade with them later this week,'' said Chuck 
Carlton, a natural gas trader with Williams.
    U.S. Bankruptcy Judge Arthur Gonzalez, who is presiding over 
Enron's bankruptcy case in New York, approved UBS Warburg's offer to 
take over the trading business three weeks ago. The bank paid nothing 
but agreed to give Enron and its creditors one-third of the new 
venture's pretax profits.
    Whalley resigned as Enron's president and chief operating officer 
last month to lead UBS Warburg's new venture.
    Enron filed for bankruptcy Dec. 2. Its trading operation, once 
purported to reap most of the company's profits, traded energy as well 
as other commodities, such as paper, pulp, bandwidth and weather 
    The new operation is on the fifth and sixth floors of Enron's new 
40-story glass tower across the street from the former energy giant's 
50-story downtown Houston headquarters.
    Michael Barbis, an analyst with Fulcrum Global Partners LLC in New 
York, said the new organization faces a tough challenge to succeed 
given its association with Enron.
    ``No one expects them to be what they were,'' Barbis said. ``It 
will be a tougher time for them to get going, is my bet''

    Mr. Barton. The Chair would now recognize the Honorable Pat 
Wood, the Chairman of the Federal Energy Regulatory Commission, 
and immediate past chairman of the Public Utilities Commission 
of Texas; and a proud Texas Aggie,soon to be father of another 
child within the next 5 weeks, to the committee.
    Your statement is in the record in its entirety, and we 
would recognize you to elaborate on it, and we are going to set 
the clock at 7 minutes, but that is purely for informational 
purposes only. If it take a little bit longer, that would be 
    Mr. Wood. Shorter?
    Mr. Barton. Shorter would be even more fine.


    Mr. Wood. To cut to the chase, Mr. Chairman, and members, 
Mr. John met with the Sabine River flow and a little bit more 
to the west, you could be my Congressman from back home, and so 
it is a pleasure to be here with you as well.
    The bankruptcy of Enron was a significant event in 2001, 
and the energy industry certainly had a tremendous impact on 
the investor community on its own employees and retirees. But 
the focus of your hearing today is what is the effect of that 
event on the Nation's energy markets.
    And so looking specifically at the removal of Enron from 
the Nation's energy markets, it is pretty safe to conclude that 
there has not been any significant damage from the exit of the 
largest power and gas marketer in the country.
    The prices in the energy markets remain stable, and 
importantly there have been very few disruptions in the 
deliveries of the actual electricity or gas to customers. There 
have been a few, however.
    And it is important to know that it is not an absolute 
perfect picture. It has been helpful that it was in an down 
economy, or has prices were trimming downward that this 
happened, so that customers that had locked in higher prices 
with Enron were actually able to exit those contracts and go 
get cheaper power off the market, or cheaper gas, and that is 
certainly fortunate.
    The resilience of these markets following the collapse is a 
true testimony to the robustness and efficiency of these 
markets, ruthless efficiency as it may be. The kind of counter-
question is then did the energy markets and the growing trend 
toward competition in those markets cause or contribute to 
Enron's collapse, which is a separate question.
    The answer is no. I think because of Enron's business 
strategies certainly being explored by your sister committee, 
but I think certainly from all that we have available to us at 
the Commission and that we reviewed, the energy market strategy 
that Enron had was successful in a rising price market.
    But it wasn't really attuned toward a cyclical market such 
as we have with these sort of commodities, and it is 
unfortunate for them that that strategy did not work. But it 
has not in my mind certainly caused a questioning of whether 
energy markets themselves caused their collapse.
    However, based on recent allegations that Enron in its 
better days may have manipulated electric and gas markets, the 
FERC Commission staff has begun a fact finding investigation.
    The staff team has been given by the full Commission access 
to whatever resources, including subpoena power, that are 
necessary to investigate whether there was in fact manipulation 
in the electric and gas markets over the past 25 months.
    And we expect that hopefully this complete picture of what 
has happened in the--particularly in the west, but in the 
energy markets in the recent past will inform broadly, and 
specifically both, the debates that this committee is having 
and that energy customers are asking questions about across the 
    And I think that we owe it to them to do that in the most 
professional and thorough manner possible. We will be working 
with our sister agencies that have expertise in areas where we 
don't, such as Chairman Newsome's agency, and Mr. Hunt's 
agency, as well as the Federal Trade Commission, to develop and 
get the expertise that we need to really provide a full picture 
of how energy markets have worked, and may have been 
manipulated or could have been manipulated, and in fact try to 
draw some conclusions as to whether they were or were not 
actually manipulated.
    And so if there is a problem, we can fix it; and if there 
is a bad actor, we can punish it; and if things are doing just 
fine, we can report that affirmatively to the customers of 
    To prevent or mitigate Enron-like problems in the future, I 
would recommend that Congress continue to support and enhance 
fair and balanced competition in the electric/gas markets.
    I think as Mr. Markey points out, that is a different 
concept than going straight to deregulation. You have got to 
have competition first, and that is certainly our goal, and 
will be more crisply our goal in a going forward basis.
    I think the separate, but equally important, decision about 
whether to open retail markets to competition is one that I 
think is appropriate to leave to the State level, because it is 
really separate from whether wholesale power markets work to 
deliver efficiencies and innovation at the generation of power 
    Finally, I think certainly support of the committee for the 
Commission's efforts to encourage regional transmission 
organizations would be very helpful and making sure that that 
effort goes forward.
    I was pleased in today's Commission meeting which we held 
earlier this morning that reports from PJM, or excuse me, the 
Pennsylvania-Jersey-Maryland Interconnect, and the Midwest RTO, 
to create a single energy market over some 26 States.
    As well as a separate, but also uplifting, report from 
participants in a Southeast United States RTO, which would be 
primarily the footprint covered by Entergy, Clico, and the 
Southern Company, as well as a number of other public power 
entities, gives me a lot of hope that the Commission's approach 
toward voluntary compliance with regional transmission 
organization order of the Commission 2 years ago, will move 
forward and result in a good wholesale, workable market for 
benefits to be flowed through to customers.
    A final thought about what can Congress do, because 
Chairman Barton asked that in the invitation letter, is on 
transparency. We have heard a lot about this phase, 
transparency. It is kind of a motherhood-apple pie shoot, but 
what transparency means is, is the information that is back and 
forth given to the public marketplace about a sale or a 
purchase of gas, or power, is that information out there.
    And quite frankly I would say the answer today is a muddled 
no. The Commission in July, I am pleased to report, did put 
forward in its data requirements that are proposed to the 
public, and that has created a significant amount of comment 
from the industry and from people on both sides who want to 
make this information public, or who don't want to make this 
information public.
    But when we talk about transparency, it is a pretty 
granular issue about can we really get the information out 
there that a buyer and a seller knows that the deal he just did 
is actually in the market.
    That is an important fact and it helps a lot to discipline 
the markets as we have seen in other entities. To close, and I 
have heard it from a number of members, this is an industry 
that--the energy industry requires a tremendous amount of 
capital on a daily basis to build power plants, to build power 
lines, to put up distribution lines, to hang meters on 
customers' houses.
    And so to do an accurate bill to a customer every 30 days, 
and I think I would just ask on behalf of those customers of 
those industries, and those people who are trying to decide 
where to invest capital, because we need it in those 
    The lull in the economy has just given us time to catch up, 
but we need to get back on track to continue the pace and 
investment on both supply and demand that were moving on pretty 
well in the year 2000, and that it is that we keep these issues 
focused on what is wrong, and not try to paint with a broad 
brush the industry that has served to keep the lights on very 
adequately over the years.
    And I would just say that the energy markets in fact are 
what I think saved this country from the collapse of a large 
company. They digested Enron efficiently, and ruthlessly so, 
and I think it is a testimony to the efficiency of the market 
that Enron and so many, many others advocated over the years 
that it worked as it did.
    Mr. Barton. Thank you, and let the record show that the 
Chairman took a minute, over 7 minutes, despite the promise to 
speak less than 7 minutes.
    [The prepared statement of Hon. Patrick H. Wood III 
  Prepared Statement of Hon. Pat Wood, III, Chairman, Federal Energy 
                         Regulatory Commission
                      i. introduction and summary
    Mr. Chairman and Members of the Subcommittee: Chairman Barton has 
asked me to answer three questions: Did Enron's collapse shake energy 
markets? Conversely, did energy markets contribute to Enron's collapse? 
And is there anything that Congress should do, relating to energy 
markets, to repair or prevent such problems in the future? I thank you 
for the opportunity to address these questions with you today.
    The bankruptcy of one of the largest energy providers in the 
country has stunned both the energy and investor communities, and many 
employees and retirees saw their savings accounts all but vanish. But 
the collapse of Enron has not caused significant damage to the nation's 
energy trading or energy supplies. In the aftermath of Enron's 
collapse, prices in energy markets remained stable, trading within 
expected trading ranges. And most important, there have been few 
disruptions to the deliveries of electricity and gas, except for a few 
isolated incidents where Enron subsidiaries have not been able to honor 
their delivery commitments to end use customers. The Federal Energy 
Regulatory Commission (Commission or FERC) has monitored the effects of 
Enron's collapse on energy markets and has not found any substantial 
spillover effects. The nation's electric and natural gas markets' 
resilience following the swift collapse of one of its major 
participants indicates a high degree of robustness and efficiency.
    Did energy markets and the growing trend toward competition cause 
or contribute to Enron's collapse? No. Enron was trying to bring its 
strategy of asset-light, trading platform leverage beyond energy 
markets into a variety of commodities and markets, including broadband, 
water, and others. While Enron may have developed the strategy first in 
gas and then in electricity markets, it is not the fault of the energy 
markets that Enron's business strategy may only have been successful in 
markets with rising prices. Prices are cyclical in most commodity 
industries, and an effective strategy must be designed to work in the 
rain as well as the sunshine. Similarly, it appears that Enron made a 
number of misjudgments and misrepresentations in its financial and 
accounting practices which undercut investor confidence and led to its 
failure. Enron's actions cannot be blamed upon the energy industry.
    I disagree with those who claim that the Enron collapse sounds the 
death knell for competition in energy markets or justifies nationwide 
reimposition of traditional cost-based regulation of electricity. The 
facts available to date indicate that Enron's failure had little or 
nothing to do with whether energy commodities and their delivery to 
customers are monopoly regulated or competitive. Rather, Enron appears 
to have failed because of its questionable non-core business 
investments and the manner in which it reported on its financial 
position to its owner-investors and to the broader business community. 
Based on the facts as they appear now, Enron's actions would have led 
to the same result whether its core business focused on energy, grains, 
metals or books.
    You may be aware that members of the Senate Energy and Natural 
Resources Committee have asked the Commission to formally investigate 
allegations that Enron may have exercised inappropriate influence on 
the nation's electric and gas markets. A comprehensive staff fact-
finding investigation has begun. The staff team has access to whatever 
resources they will need to conduct an independent investigation, 
including many of our best people and whatever consulting assistance 
they determine is necessary. Because the FERC's responsibility and 
jurisdiction lies primarily in the physical assets markets rather than 
in the financial assets markets where so many of Enron's activities 
occurred, we are also consulting with our colleagues at the CFTC, SEC, 
DOJ, and FTC to gain their insights into how to understand and analyze 
these markets. An investigation of this magnitude is neither easy nor 
fast, so it may take several months before staff has completed its work 
and presents its results to the Commission, the Congress, and American 
energy customers. Based on the information in the fact-finding report, 
the Commission will determine how to proceed on any pending or future 
FPA section 206 complaints, or whether to institute formal section 206 
investigations on our own motion, into long-term power contracts whose 
prices may have been influenced by any inappropriate Enron activities.
    Last, what should Congress do, related to energy markets, to ensure 
that a future Enron disaster is prevented or mitigated? You can support 
and enhance the initiatives you have already encouraged to promote fair 
and effective wholesale competition in the electric and gas markets, 
because such competition lowers costs and improves reliability for all 
customers. To achieve this goal, you could clarify the Commission's 
authority over transmission utility participation in RTOs and over 
greater disclosure and transparency of market information in these 
emerging competitive markets.
    I will address all these matters in greater detail in the comments 
             ii. enron's impact on gas and electric markets
    Enron's collapse had little perceptible impact on the nation's 
physical commodity (wholesale) electric and gas markets, which are 
FERC's primary regulatory responsibility. Energy markets have adjusted 
quickly to Enron's collapse. The Commission's monitoring of the 
physical energy markets indicates that there has been no immediate 
damage to energy trading or energy supplies. Although Enron 
transactions comprised 15 to 20 percent of wholesale energy trades, its 
demise has had negligible effects on trading. With a few exceptions, 
parties were generally able to rearrange the deals they had executed 
with Enron.
Market Monitoring and Reactions
    From late October 2001, when news of a likely formal investigation 
of Enron and its auditors by the SEC first became known, to early 
December 2001, after Enron's declaration of bankruptcy, spot market 
data indicates that there was no change in natural gas or electric 
wholesale prices that could not be attributed to weather or other 
fundamentals. As may be expected, Enron's swift exit from trading may 
have increased volatility somewhat. Our staff is currently 
investigating this concern more thoroughly.
    Following the news of a formal SEC investigation of Enron in 
October 2001, Commission staff contacted market participants to learn 
whether any supply obligations might be in jeopardy. Staff began 
monitoring EnronOnline more closely, particularly any changes in the 
margins between the bid-ask prices on EnronOnline, as a widening of 
these bid-ask spreads might signal less liquidity in the market; but 
there was no significant change in the margin between the bid and ask 
prices on EnronOnline.
    Commission staff also contacted counterparties and received 
assurances from them that they were adjusting to Enron by 
``shortening'' their positions and not entering into longer-term 
arrangements with Enron. In mid-November, when it appeared that the 
Dynegy merger with Enron might be jeopardized, staff observed no 
significant change in the margin between the bid and ask prices on 
EnronOnline; at the same time, there was a marked increase in the 
volume traded on other online trading platforms, such as Dynegydirect 
and Intercontinental Exchange (ICE). Commission staff again contacted 
energy traders to determine whether major supply disruptions in 
wholesale markets were occurring, and was informed that Enron had 
``flattened its books,'' i.e., made its portfolio of trades neither 
long nor short so that it could more easily ``step out'' of 
transactions and not cause disruption. As events unfolded in late 
November and early December, other market participants stepped into 
these deals. With the exception of certain lightly-traded points, it 
appears that Enron's competitors have filled the void left behind by 
    The reason for this overall calmness in commodity prices is basic. 
Although Enron was a significant player in electric and gas markets--as 
a pipeline, as a commodity trader, as a futures contract trader, and as 
a market maker--there were many other players in these large, 
established commodity markets, and a great deal of market diversity. 
Once it became apparent that Enron might not be a stable counterparty, 
its trading partners began to systematically adjust their positions and 
practices in the marketplace, moving to other trading platforms and 
partners. A similar process occurred among the counterparties to 
Enron's longer-term, untraded gas and electric contracts. Thus, over 
only a few weeks time, the gas and electric markets systematically 
minimized Enron's role in the marketplace and the likelihood that a 
company-specific failure could significantly affect the underlying 
commodities. I believe the calm but vigilant reaction of the CFTC, 
among others, during this period allowed time for this unwinding to 
take place.
    The flexibility of today's energy markets allows a buyer losing its 
supply to replace the energy in real-time (at least briefly) through 
imbalance services offered by transportation providers. With more time, 
such as an hour or more before a supply will be lost, a buyer generally 
can arrange alternative supplies from a wide range of sources. Thus, 
the risk of a buyer having insufficient energy because of a seller's 
default appears to be manageable, as evidenced by the recent experience 
with Enron.
    The more substantial risk in these circumstances is the loss of an 
advantageous contractual price for energy. Even this risk, however, 
depends on market conditions. When a seller defaults, market conditions 
for buying energy may be better or worse than when a buyer entered into 
its contract with the seller. If better, the buyer actually may benefit 
from not having to buy under the existing contract and instead being 
able to buy at lower prices elsewhere.
Enron's market role
    Enron's role in the gas and electric markets was primarily in the 
trading of financial assets (commodity and futures contracts) rather 
than physical assets (with the exception of its natural gas pipelines, 
which continued operation relatively untouched by the events affecting 
the parent and affiliated companies). Less than 10 percent of the 
contracts traded in these markets involve the initial producer or final 
wholesale customer for the physical product, whereas well over 90 
percent of commodity contracts and futures are between intermediate 
holders who are managing risk and facilitating connections between 
initial producers and ultimate customers. Adjustments in the financial 
asset marketplace--as to the length of a contract or the identities of 
the counterparties--rarely affect the flow of the physical gas and 
electricity underlying those contracts. Thus, while the commodity 
markets were shortening the length of contracts and moving more trade 
to non-Enron partners, gas and electric deliveries continued 
    Enron controls a number of natural gas pipelines, but its financial 
failure has had little apparent impact on their operations. But even if 
it had, it is worth noting that the gas and electric markets have 
demonstrated their ability to react to and manage around problems that 
could affect their ability to deliver electricity and gas. When a 
pipeline breaks, a compressor station fails, a transmission line 
collapses, or a large power plant goes off-line, the parties in the 
market adjust immediately to acquire other supplies and delivery 
routes. A sufficiently robust energy infrastructure makes this 
possible. In these instances, prices may well rise and, occasionally, 
deliveries to retail customers may be slowed but the wholesale market 
reacts swiftly and minimizes the impact to wholesale and retail 
customers alike.
    In response to the Enron crisis, Moody's has raised the credit 
standards for generators and traders. This has forced energy concerns 
to rebalance their debt-to-asset ratios, forcing many to reduce debt 
and cut back investments in new gas processing, pipelines and power 
plants. During December 2001, stock prices of several energy companies 
hit yearly lows. Enron's problems, in combination with the recession 
and reports of potential overbuilding, appear to have eroded 
confidence, making investors more cautious about putting money into the 
energy industry. This slowdown in infrastructure investment could be 
problematic in some regions as the economy recovers and demand for 
energy grows. For that reason, the Commission has accelerated its 
efforts to complete the transition to a more competitive wholesale 
power market in order to provide investment certainty.
Enron and Competition
    The markets' reaction to Enron's collapse demonstrates what good, 
working competitive markets do best: a diverse group of market 
participants with adequate market information about the players and 
commodities act individually to produce a result that works for all. 
The nation's wholesale electric and gas markets showed great resilience 
and swift reaction time, and demonstrated that they are much stronger 
than any individual player in the marketplace.
    Some claim that Enron's demise is due to the failure of 
deregulation and competition in the electric industry, of which Enron 
was one of many supporters. I strongly disagree. Wholesale competition 
in the gas industry has spurred gas production, encouraged pipeline 
construction, driven down commodity prices for the past decade and 
lowered retail prices accordingly. In the electric sector, wholesale 
competition, although still in its infancy, has enabled the 
construction of thousands of megawatts of new power plant capacity 
across the country, producing lower commodity and retail electric 
prices in most regions, and in a cleaner generation fleet.
         iii. the commission's regulation of enron subsidiaries
    The Commission does not regulate the parent corporation, Enron 
Corporation, as it does not engage in activities which are under FERC 
jurisdiction. FERC does regulate a number of Enron's subsidiaries. Our 
authority with respect to the Enron subsidiaries subject to our 
jurisdiction is described below.
    The Commission has jurisdiction over sales for resale of electric 
energy and transmission service provided by public utilities in 
interstate commerce. The Commission has interpreted the Federal Power 
Act to include energy marketers as well as traditional vertically 
integrated electric utilities in its definition of public utilities. 
The Commission must ensure that the rates, terms and conditions of 
wholesale energy and transmission services by public utilities are 
just, reasonable, and not unduly discriminatory or preferential. FERC 
also is responsible for reviewing proposed mergers, acquisitions and 
dispositions of jurisdictional facilities by public utilities, and must 
approve such transactions if they are consistent with the public 
interest. We also regulate the issuance of securities and the 
assumption of liabilities by public utilities not regulated by States.
    The Commission also has jurisdiction over sales for resale of 
natural gas and transportation. However, FERC jurisdiction over sales 
for resale is limited to domestic gas sold by pipelines, local 
distribution companies, and their affiliates (including energy 
marketers). Consistent with Congressional intent, the Commission does 
not prescribe prices for these sales.
A. Energy Marketers
    Competitive trading of energy by ``marketers'' generally began 
about two decades ago. Marketers do not usually own physical 
facilities, but take title to energy and re-sell it at market-based 
rates. Natural gas marketing began with the deregulation of the price 
of natural gas in 1978 and expanded with the Commission's 1992 open 
access rule for natural gas pipelines, Order No. 636. In the decade 
since Order No. 636, natural gas marketing has developed into a large, 
robust activity with many marketers. The Commission lacks jurisdiction 
over sales of natural gas by many gas marketers. To maximize 
competition we have granted ``blanket authorization'' for those 
marketers under FERC jurisdiction so they do not have to file for and 
obtain individual approvals to sell gas at wholesale.
    In the electric arena, wholesale power marketers began selling 
electric energy as early as 1986. The Energy Policy Act of 1992, and 
the Commission's 1996 open access rule for electric transmission owners 
and operators, Order No. 888, further spurred the development of 
competitive electric power trading.
    The Enron-affiliated power marketers regulated by the Commission 
include: Enron Power Marketing Inc., Enron Sandhill Limited 
Partnership, Milford Power Limited Partnership, Enron Energy Services, 
Inc., and Enron Marketing Energy Corporation.
    Before its collapse, Enron was the largest marketer of natural gas 
and electric power. Enron's Internet-based trading system, EnronOnline, 
was until recently the dominant Internet-based platform for both 
physical energy (electricity and natural gas products) and energy 
derivatives. (Derivatives are financial instruments based on the value 
of one or more underlying stocks, bonds, commodities, or other items. 
Derivatives involve the trading of rights or obligations based on the 
underlying product, but do not directly transfer property.) Although 
EnronOnline was the leading Internet-based trading platform for natural 
gas and electric power, it faced competition from other Internet-based 
trading platforms, such as Dynegydirect and Intercontinental Exchange 
    Traditional exchanges, like the NYSE and the NYMEX, determine price 
by matching the buy and sell orders of many traders in a many-to-many 
trading format. In contrast, EnronOnline uses a one-to-many trading 
format, where an Enron affiliate is always on one side of each energy 
transaction, either as a seller or a buyer. The price of a commodity or 
derivative on EnronOnline is determined when a buyer or a seller 
accepts an offer or bid price posted by an Enron trader. In the wake of 
Enron's downfall, the many-to-many platforms such as ICE have helped to 
fill the void, and create a more robust market by reflecting the bid 
and offer values of myriad different energy buyers and sellers.
Market-based Rate Authorization
    To sell electricity at market-based rates, public utilities 
(including power marketers) must file an application with the 
Commission. The Commission grants authorization to sell power at 
market-based rates if the power marketer adequately demonstrates that 
it and its affiliates lack or have mitigated market power in the 
relevant markets. FERC conditions market-based rate authority on power 
marketers submitting quarterly reports of their purchase and sales 
activities and complying with certain restrictions for the protection 
of captive customers against affiliate abuse. There are currently 1200 
electric power marketers authorized to sell energy at market-based 
    The Commission generally grants waiver of certain regulations to 
power marketers which receive market-based rate authorization. For 
example, these marketers do not need to submit cost-of-service filings 
because the rates they charge are market-based. The Commission also 
exempts power marketers from its accounting requirements, because those 
requirements are designed to collect the information used in setting 
cost-based rates. In addition, unless others object, FERC grants power 
marketers' requests for blanket approval for all future issuances of 
securities and assumptions of liability.
    Because the Commission's reporting and accounting requirements are 
designed to address a limited set of concerns, and apply only to the 
jurisdictional subsidiary at issue, it is unlikely that requiring power 
marketers to comply with these requirements could prevent a future 
Enron-like failure. Nevertheless, in our current rulemaking proceeding 
on accounting rules, we have invited comments on whether the current 
exemptions for power marketers from such requirements remain 
B. Traditional Electric Utilities
    A few years ago Enron acquired Portland General Electric (PGE), a 
vertically-integrated utility subsidiary of Enron that handles 
electricity generation, purchase, transmission, distribution and sale 
in eastern Oregon. PGE's retail rates and practices are under the 
jurisdiction of the Oregon Public Utility Commission. PGE also sells 
energy to wholesale customers in the western United States. FERC has 
granted market-based rate authorization to PGE for certain wholesale 
sales. Although the Commission waives some of its reporting 
requirements for power marketers, it requires continued reporting from 
franchised electric utilities such as PGE, so we can monitor whether 
its wholesale transactions are inappropriately favoring its affiliates 
or harming its captive customers. Although Enron's collapse has had 
tragic impacts upon PGE employees' retirement accounts, we have not yet 
seen any negative impacts on PGE's ability to meet its obligations to 
customers as a result of the Enron bankruptcy. I should also observe 
that the sale of PGE to Northwest Natural, announced prior to Enron's 
collapse, is pending before FERC and other regulatory bodies.
C. Gas Pipeline Subsidiaries
    The Commission has limited jurisdiction over sales for resale of 
natural gas in interstate commerce. The Commission has jurisdiction to 
regulate only sales for resale of domestic gas by pipelines, local 
distribution companies (LDCs), and their affiliates. Consistent with 
the Congressional goal of allowing competition in natural gas markets, 
the Commission does not prescribe the prices for these sales.
    The Commission has authority over the rates, terms and conditions 
for pipeline transportation in interstate commerce of natural gas and 
oil. The Commission-regulated natural gas pipeline affiliates of Enron 
include: Florida Gas Transmission, Midwestern Gas Transmission, 
Northern Border Pipeline Company, Transwestern Pipeline Company, and 
Northern Natural Gas Company.
D. Transactions and Activities Not Regulated by the Commission
    The Federal Power Act does not give the Commission direct, explicit 
jurisdiction over purely financial transactions, such as futures 
contracts for electricity or natural gas. The Commission has asserted 
jurisdiction over such transactions only when they result in physical 
delivery of the energy which is the subject of the financial contract, 
or when such transactions or contracts affect or relate to 
jurisdictional services or rates (e.g., financial contracts affecting 
firm rights to interstate transmission capacity or the pricing of such 
capacity).1 While Enron and its subsidiaries engaged in many 
electricity futures contracts and other energy-related derivatives, it 
does not appear that these transactions have played a significant role 
in Enron's demise.
    \1\ In 1996, the Commission addressed the issue of whether an 
electricity futures contract approved for trading by the CFTC would 
fall under its jurisdiction, pursuant to the FPA. New York Mercantile 
Exchange, 74 FERC para. 61,311 (1996). The Commission found that the 
CFTC possessed exclusive jurisdiction over the trading of such futures 
contracts, and that the Commission would assert jurisdiction, pursuant 
to the FPA, only if the electricity futures contract goes to delivery, 
the electric energy sold under the contract will be resold in 
interstate commerce, and the seller is a public utility. Id. at 
61,986.I89iv. FERC Initiatives in Energy Markets
    In response to rapidly evolving energy markets, the Commission has 
implemented a number of new initiatives to improve its market-
monitoring abilities. The Commission's new strategic plan, adopted 
September 26, 2001, encompasses three major areas of activity in 
overseeing the energy industry:

 Infrastructure--working with others to anticipate the need for 
        new generation and transmission facilities, determining the 
        rules for cost recovery of new energy infrastructure, 
        encouraging the construction of new infrastructure, and 
        licensing or certificating hydroelectric facilities and natural 
        gas pipelines;
 Market rules--ensuring clear, fair market rules to govern 
        wholesale competition that benefits all participants, and 
        assuring non-discriminatory transmission access in the electric 
        and natural gas industries;
 Market oversight and investigation--understanding markets and 
        remedying market rule violations and abuse of market power.
    This third strategic goal is new, and reflects the present 
Commission's commitment to ensuring that markets continue to work for 
customers. The strategic plan is available on our website at 
    To give substance to this third strategic goal, the Commission is 
creating a new Office of Market Oversight and Investigation (MOI), 
which will concentrate the Commission's market-monitoring resources 
into one workgroup and enable the Commission to better understand and 
track wholesale energy markets and risk management by analyzing market 
data, measuring market performance, investigating compliance 
violations, and, where necessary, pursuing enforcement actions. MOI's 
work will provide an early warning system to alert the Commission of 
potentially negative market developments and let us act more 
proactively to address any problems that may arise. We are currently 
taking applications for the Director of this Office, who will report 
directly to me and the other commissioners.
    In mid-2001, the Commission created the Market Observation Resource 
Center (MOR) to better observe market developments and to enable us to 
grasp quickly the significance of changes in market conditions. MOR's 
computer hardware, software and subscription web services give us 
access to historical and real-time data about energy markets.
    The Commission has launched several other initiatives within the 
past year to ensure vigilant and fair oversight of the changing energy 
markets. In July 2001, the Commission proposed in a rulemaking to amend 
the filing requirements for public utilities. The proposal would 
require all generators, public utilities and power marketers to file 
electronically with the Commission and post on the Internet an index of 
customers with a summary of the contractual terms and conditions for 
market-based power sales, cost-based power sales, and transmission 
service. These companies would also have to report transaction 
information for short-term and long-term market-based power sales and 
cost-based power sales during the most recent calendar quarter. This 
proposal will give the Commission and the public more complete and 
accessible information on jurisdictional transactions.
    In September 2001, the Commission proposed in a rulemaking to 
revise its restrictions on the relationships between regulated 
transmission providers (such as Portland General Electric) and their 
energy affiliates, broadening the definition of an affiliate to include 
newer types of affiliates, such as affiliated trading platforms (e.g., 
    Also, in September 2001, the Commission staff began a comprehensive 
review of the information the Commission needs to carry out its 
statutory obligations in the current and evolving markets in 
electricity and natural gas. Presently, much of the information we 
require relates to the historic rate-setting functions of the agency. 
The review so far indicates that some of this may no longer be 
necessary, while other information is now more essential to provide 
transparency in a competitive marketplace. This is a high priority 
    In December 2001, the Commission proposed in a rulemaking to update 
the accounting and reporting requirements for jurisdictional public 
utilities, natural gas companies and oil pipelines. FERC proposes to 
establish uniform accounting requirements and related accounts for the 
recognition of changes in the fair value of certain security 
investments, items of other comprehensive incomes, derivative 
instruments, and hedging activities. The proposal is aimed at improving 
the visibility, completeness and consistency of accounting and 
reporting changes for these items. It invites comments on whether 
entities that are currently exempted from these accounting and 
reporting requirements, such as power marketers, should be subject to 
these proposed regulations.
    While I have an open mind on whether the Commission should continue 
to exempt power marketers from its accounting requirements, our 
accounting requirements are not aimed at the kind of activities 
allegedly undertaken by Enron. Based on our historical 
responsibilities, FERC's accounting requirements are focused on 
providing useful and accurate information for determining cost-based 
rates. Cost-based ratemaking encourages utilities to maximize their 
claimed costs and minimize their expected revenues, to justify the 
highest possible rates. The Commission's accounting rules and auditing 
are designed to ensure that utilities with cost-based rates do not 
overstate costs or understate revenues. On January 22, 2001, the SEC 
proposed additional accounting-related disclosures from a broad 
universe of companies, including those exempt from FERC's reporting 
requirements. Adoption of that proposal could eliminate the need for 
the FERC to alter its reporting requirements in this regard.
                   v. additional statutory authority
    Before we can understand how to prevent another Enron-like 
collapse, we must first understand what internal actions and external 
events caused Enron to fail. That effort is now underway by this 
Subcommittee and elsewhere. Then we must ask whether those actions and 
events can and should be prevented in the future.
    Whether the Commission needs any additional statutory authority 
depends on the role Congress intends for the Commission. Historically, 
the Commission's economic regulation has focused on ensuring that 
energy markets deliver adequate energy at reasonable prices. The demise 
of Enron has had little or no effect on the supply or price of energy. 
Instead, Enron's collapse has primarily harmed its investors and 
employees. Since it appears that few of Enron's problems affected the 
narrow scope of wholesale energy markets, it is not clear that giving 
the Commission additional authority within its current scope would 
prevent further Enron-like problems.
    To encourage greater efficiencies in the energy markets and to 
ensure that wholesale competition expands its ability to deliver 
reasonably priced, adequate energy supplies to more customers, the 
Commission is moving forward to complete its effort to create 
competitive national wholesale power markets as it did with natural gas 
markets in the late 1980s and early 1990s. Congress endorsed wholesale 
power competition in the Energy Policy Act of 1992 and further 
endorsement of this effort would certainly be helpful. In particular, 
Congress should give the Commission explicit authority to require RTOs 
where it finds them to be in the public interest. RTOs will broaden 
regional energy markets, allowing greater market efficiencies and 
limiting possible discrimination in grid operations. Congress should 
also remove tax disincentives to transferring transmission assets to 
RTOs and to use of public power transmission lines.
Price Transparency
    Greater price transparency will help improve the efficiency of 
energy markets, by providing buyers and sellers with better information 
about market conditions. The creation and operation of broad regional 
energy markets with a widely-traded set of energy products will do much 
to make this happen. Once RTOs over broad regional markets are 
established, operating under fair, clear, stable market rules, price 
transparency will improve significantly, even without a Congressional 
mandate. This has already happened to an extent in the regions now 
served by Independent System Operators (ISOs) in the Northeastern part 
of the country.
    The Commission is moving forward with greater transparency, as 
discussed above. Without question, Congressional endorsement of this 
effort would be helpful. I support adoption of an appropriate 
transparency provision.
    The responsibility for ensuring creditworthiness of participants in 
wholesale energy trades lies primarily with the parties involved in 
those trades. Creditworthiness provisions are included in some 
contracts or tariffs filed at the Commission to date, and the 
Commission is likely to include some broad creditworthiness provisions 
in the standard tariffs that will be developed for all transmission 
providers and customers (to prevent the use of individual 
creditworthiness terms as discriminatory measures in narrow geographic 
areas or against specific players). However, market participants seem 
best equipped to develop sophisticated risk management measures and 
narrow creditworthiness concerns, and those provisions may be subject 
to Commission review for justness and reasonableness.
    To the extent creditworthiness issues are raised before the 
Commission, we act expeditiously. For example, shortly after Enron 
declared bankruptcy, the Participants Committee of the New England 
Power Pool (NEPOOL) sought to implement alternative payment and 
financial assurance arrangements with Enron Power Marketing Inc., Enron 
Energy Marketing Corporation, and Enron Energy Services, Inc. Within a 
week of the date of filing, the Commission accepted and suspended these 
arrangements (subject to review of the finalized agreement), to protect 
NEPOOL participants while enabling the Enron subsidiaries to stay in 
the market and continue serving their customers.
    I do not think there is any need to legislatively address 
creditworthiness issues specific to energy markets.
                             vi. conclusion
    As always, I will be happy to provide further information or answer 
any questions you may have and offer the services of my colleagues and 
staff to the Subcommittee's efforts.

    Mr. Barton. We will now hear from the Honorable Chairman of 
the Commodities Futures Trading Commission, Mr. James E. 
Newsome. And he has already asked if he may be given a little 
additional time, which certainly we will agree to.
    Mr. Chairman, your testimony is in the record in its 
entirety, and you are recognized to elaborate on it.


    Mr. Newsome. Thank you very much, Mr. Chairman. I 
appreciate the opportunity to appear before you and the 
subcommittee to testify on behalf of the Commodity Futures 
Trading Commission, and I do appreciate those couple of extra 
minutes, since this is not a committee that we normally testify 
in front of.
    And I think that there are some relevant comments, in terms 
of how we do things that are important to the committee. I 
would like to say first that both as a financial regulator and 
as a citizen, I have great sympathy for those who have been 
harmed, and who are harmed by incomplete and inaccurate 
financial information.
    I share the concern of many that appropriate inquiries be 
made to ensure that investors, creditors, and others who rely 
on the accuracy and completeness of financial disclosures by 
publicly held companies can continue to do so with full 
    Today, I would like to share with you the important role 
that the futures markets play in our economy, and the CFTC's 
role in overseeing these markets, particularly with respect to 
energy-based contracts.
    And then how our role changed under the Commodity Futures 
Modernization Act. I will also describe how we responded to the 
Enron situation last fall, and then finish with some thoughts 
about how the Commission might contribute as we move forward.
    The CFTC perceives its mission as two-fold; to foster 
transparent, competitive, and financially sound markets, and to 
protect market users and the public against fraud, 
manipulation, and abusive sales practices.
    While the stockmarket provides a means of capital 
formation, a way for new and existing businesses to raise 
capital, the futures markets perform a different role, that of 
providing producers, distributors, and users of commodities 
with a means to manage or to hedge their exposure to price 
    Futures contracts based on non-agricultural physical 
commodities, like metals or energy products, and on financial 
commodities, such as interest rates, foreign currencies, and 
stockmarket indexes, now serve the risk-management needs of 
businesses in virtually every sector of our economy.
    Although the primary purpose of the futures market is to 
facilitate the risk management efforts of hedgers, futures 
markets also play an important price discovery role, in which 
businesses and investors that are not direct participants in 
the futures nonetheless refer to the quoted prices of futures 
market transactions as a reference point, or a benchmark, for 
other types of transactions and/or decisions.
    To fulfill its mission the commission focuses on issues of 
market integrity, and pursues a multi-pronged approach to 
market oversight. We seek to protect the economic, the 
financial, and the operational integrity of markets in several 
specific ways.
    I explain our approach in greater detail in the written 
comments, but for the sake of brevity, will not go into detail 
in these oral comments. We oversee on-exchange trading of 
futures and options contracts based on such things as crude 
oil, natural gas, heating oil, propane, gasoline, and coal.
    The overwhelming majority of these on exchange contracts 
are executed on the New York Mercantile Exchange or NYMEX. The 
CFTC does not regulate trading of energy products on either the 
spot, or rather the cash markets, or the forward markets, which 
are excluded from our jurisdiction by the Commodity Exchange 
    Because Enron was a large trader on the NYMEX, its on-
exchange activities have been regularly monitored by our staff. 
At this time, we have no indication that manipulation of any 
futures market was attempted by Enron.
    However, the rapid financial deterioration of Enron 
presented a separate concern for the Commission about the 
economic integrity of the markets. Could Enron's positions be 
closed out without unduly increasing volatility, or reducing 
    In fact, Enron was but one of many significant participants 
in these increasingly liquid markets, and the markets proved 
resilient. And as Enron's positions were closed out, prices did 
not spike, nor did liquidity suffer.
    Because we are also concerned with the financial integrity 
of the markets, we closely monitored with the NYMEX 
clearinghouse and the futures commission merchants, or the 
FCMs, that were carrying most of Enron's positions, to monitor 
and manage the closeout of those positions.
    Through margin increases and other appropriate measures, 
the NYMEX clearinghouse was able to accomplish a very smooth 
landing while protecting the FCMs and their other customers.
    By the time that Enron filed for bankruptcy, the risk of 
its positions as measured by standard margin requirements had 
been cut by 80 percent from just a week earlier.
    By mid-December, all of its positions on the regulated 
futures exchanges had been closed out. I believe that this 
episode was an example of success for the system of financial 
controls in the on-exchange futures markets.
    The Commodity Futures Modernization Act was signed into law 
by President Clinton on December 21st, 2000. It amended the 
Commodity Exchange Act to among other things provide legal 
certainty for over-the-counter derivatives markets.
    With respect to contracts based on energy products, and 
certain other non-agricultural and non-financial commodities, 
the CFMA amended the Act to exempt two types of markets from 
much of the CFTC's oversight.
    The first type is bilateral, principal-to-principal trading 
between two eligible contract participants, a category that 
includes sophisticated entities, such as regulated banks, well-
capitalized companies, or individuals. For example, those with 
over $10 million in assets.
    The second type is electronic multilateral trading among 
eligible commercial entities, such as the eligible contract 
participants that I just described, that also have an ability 
to either make or take delivery of the underlying commodity, or 
dealers that regularly provide hedging services to those 
    Other types of bilateral energy trades are beyond the scope 
of our authority under the Commodity Exchange Act by virtue of 
the statutory exclusions of forward contracts and swap 
    As an oversight regulator, we have and will continue to 
look at how and why the markets within our jurisdiction respond 
the way that they do, whether well or poorly, to situations 
such as the failure of a significant market participant.
    Separately, as a member of the President's Working Group on 
Financial Markets, the CFTC is working with the SEC, the 
Treasury, and the Federal Reserve Board, to review for the 
President possible improvements in accounting, auditing, and 
disclosure practices with respect to publicly held companies.
    The Enron situation has led some to call for further 
responses from Congress and regulators, even for reregulation 
of markets that were provided legal certainty under the 
Commodity Futures Modernization Act.
    While I agree that it is prudent for a regulator to 
constantly review its policies and procedures to ensure that an 
appropriate level of oversight is exercised, I also believe 
that a situation of this magnitude deserves careful 
consideration before a regulator seeks to take action.
    Mr. Chairman, I agree with Chairman Wood and his written 
comments, and I believe that we as regulators should make sure 
that the true problem has been identified before remedies are 
    I supported passage of the CFMA because I sincerely 
believed that a one-size fits all approach to regulation was 
outdated, particularly in light of global competition, and 
important advances in technology within the financial services 
    Rules tailored to the participant, the product, and the 
trading facility seem to me to be a more appropriate approach 
than prescriptive regulations of the past. To date, I have seen 
no evidence to the contrary in the CFTC's initial analysis of 
the Enron situation.
    In closing, the CMFA was enacted after numerous hearings 
were conducted by our House and Senate Oversight Committees in 
the context of reauthorizing the Commission. Many issues 
relating to evolving markets received a full airing, and 
important changes to the law were agreed upon as a result.
    I believe that any departure from the path of progress 
represented by this important piece of legislation should be 
approached with extreme caution. We will continue to monitor 
the markets within our jurisdiction and to utilize all 
authorities given to us by Congress to aggressively pursue 
violations of the Commodities Exchange Act.
    We stand ready to work with this subcommittee, the 
Congress, other regulators and market participants. Mr. 
Chairman, I thank you for the invitation to appear before this 
    [The prepared statement of Hon. James E. Newsome follows:]
   Prepared Statement of Hon. James E. Newsome, Chairman, Commodity 
                      Futures Trading Commmission
    Thank you, Chairman Barton, and members of the Subcommittee. I 
appreciate your having given me the opportunity to testify here today 
on behalf of the Commodity Futures Trading Commission. I would first 
like to say--both as a federal financial regulator and as a citizen--
that I have great sympathy for those who are harmed by incomplete or 
inaccurate financial information. I also share the concern of many that 
appropriate action be taken to ensure that investors, creditors, 
commercial counterparties, and others who rely on the accuracy and 
completeness of financial disclosures by publicly-held companies can 
continue to do so with full confidence.
    Today, I would like to tell you about the important role of the 
futures markets in our economy and the role of the CFTC in overseeing 
those markets--particularly with respect to energy-based contracts--and 
how that role has changed under the Commodity Futures Modernization 
Act. I will also describe how the Commission responded to the Enron 
situation last fall and would like to finish with some thoughts on how 
the Commission might make a contribution as we move forward.
    The Commission was created by Congress in 1974 to oversee the 
nation's commodity futures and options markets. The Commission 
perceives its mission to be twofold: to foster transparent, 
competitive, and financially sound markets, and, to protect market 
users and the public from fraud, manipulation, and abusive practices. 
There are important differences between the futures markets and the 
stock markets. While the stock markets provide a means of capital 
formation, a way for new and existing businesses to raise funds, the 
futures markets perform a different role, providing producers, 
distributors, and users of commodities with a means to manage their 
exposure to commodity price risk.
    Historically, commodity futures and options were traded primarily 
on agricultural products. And while contracts based on agricultural 
products are traded as actively today as ever, a great many futures 
contracts are now based on non-agricultural physical commodities like 
precious metals or energy products and on financial commodities like 
interest rates, foreign currencies, or stock market indices. Because 
they serve the risk management needs of businesses in virtually every 
sector of the economy, the volume of trading in these financials and 
nonagricultural physicals is now nine times that in agricultural 
contracts. While farmers and ranchers continue to use futures contracts 
to effectively lock in the prices for their crops and herds months 
before they come to market, manufacturers now can also use futures 
contracts to plan their raw material costs and to reduce uncertainty 
over the prices they receive for finished products sold overseas. 
Mutual fund managers can use stock index futures to protect against 
market volatility and effectively put a floor on portfolio losses. And 
electric power generators can use futures contracts to secure stable 
pricing for their coal and natural gas needs.
    These producers, distributors, and users of commodities (whether 
physical or financial) are called hedgers. The futures contract 
positions that hedgers put on are referred to as covered positions. For 
example, a power generator's obligation to purchase natural gas will be 
covered by its ability to use that natural gas in its electricity 
generation. There are other participants in the futures markets who 
take uncovered positions in the hope of making profits rather than 
mitigating risks. These individuals and firms are known as speculators 
and they contribute to the smooth operation of a futures market by 
increasing its liquidity. Because the needs of different hedgers for 
long or short positions may not always be perfectly balanced, the 
presence of speculators increases market effectiveness by better 
ensuring that hedgers will be able to put on positions they need.
    Although I have described the primary purpose of futures markets as 
mechanisms for risk management, it should be noted that many futures 
markets play another important role in the economy, that of price 
discovery. Many businesses and investors that are not direct 
participants in the futures markets nonetheless refer to the quoted 
prices of futures market transactions as reference points or benchmarks 
for other types of transactions and decisions. This is particularly 
important in many agricultural markets where no other means of price 
discovery exists outside of the quoted futures prices but it is also 
true in other sectors, including many energy markets.
How the CFTC Performs Its Mission:
    In seeking to fulfill its mission to foster transparent, 
competitive, and financially sound markets and to protect market users 
and the public from fraud, manipulation, and abusive practices, the 
Commission focuses on issues of integrity. We seek to protect the 
economic integrity of the futures markets so that they may operate free 
from any fraud or manipulation of prices. We seek to protect the 
financial integrity of the futures markets so that the insolvency of a 
single market participant does not become a systemic problem affecting 
other market participants or financial institutions. We seek to protect 
the operational integrity of the futures markets so that transactions 
are executed fairly, so that proper disclosures are made to existing 
and prospective customers, and so that fraudulent sales practices are 
not tolerated.The Commission pursues these goals through a multi-
pronged approach to market oversight. We seek to protect the economic 
integrity of the markets against attempts at manipulation through 
direct market surveillance and through oversight of the surveillance 
efforts of the exchanges themselves. The heart of the Commission's 
direct market surveillance is a largetrader reporting system, under 
which clearing members of exchanges, commodity brokers (called 
``futures commission merchants'' or ``FCMs''), and foreign brokers 
electronically file daily reports with the Commission. These reports 
contain the futures and option positions of traders that hold positions 
above specific reporting levels set by CFTC regulations. Because a 
trader may carry futures positions through more than one FCM and 
because a customer may control more than one account, the Commission 
routinely collects information that enables its surveillance staff to 
aggregate information across FCMs and for related accounts.
    Using these reports, the Commission's surveillance staff closely 
monitors the futures and option market activity of all traders whose 
positions are large enough to potentially impact the orderly operation 
of a market. For contracts which at expiration are settled through 
physical delivery, such as in the energy futures complex, staff 
carefully analyze the adequacy of potential deliverable supply. In 
addition, staff monitor futures and cash markets for unusual movements 
in price relationships, such as cash/futures basis relationships and 
inter-temporal futures spread relationships, which often provide early 
indications of a potential problem.
    The Commissioners and senior staff are kept apprised of significant 
market events and potential problems at weekly market surveillance 
meetings, and on a more frequent basis when needed. At the weekly 
market surveillance meetings, surveillance staff brief the Commission 
on broad economic and financial developments and on specific market 
developments in futures and option markets of particular concern. At 
least one energy product market is usually discussed and officials from 
the Energy Information Administration of the Department of Energy 
periodically attend such meetings.
    If indications of attempted manipulation are found, the Enforcement 
Division investigates and prosecutes alleged violations of the 
Commodity Exchange Act (the ``Act'' or ``CEA'') or the Commission's 
regulations. Subject to such actions are all individuals that are (or 
should be) registered with the Commission, those who engage in trading 
on any domestic exchange, and those who improperly market commodity 
futures or option contracts. The Commission has available to it a 
variety of administrative sanctions against wrongdoers, including 
revocation or suspension of registration, prohibitions on futures 
trading, cease and desist orders, civil monetary penalties, and 
restitution orders. The Commission may seek federal court injunctions, 
restraining orders, asset freezes, receiver appointments, and 
disgorgement orders. If evidence of criminal activity is found, matters 
may be referred to state authorities or the Justice Department for 
prosecution of violations of not only the CEA but also state or federal 
criminal statutes, such as mail fraud, wire fraud, and conspiracy. Over 
the years, the Commission has brought numerous enforcement actions and 
imposed sanctions against firms and individual traders for attempting 
to manipulate prices, including the well-publicized cases against 
Sumitomo for alleged manipulation of copper prices and against the Hunt 
brothers for manipulation of the silver markets.
    In protecting the financial integrity of the futures markets, the 
Commission's two main priorities are to avoid disruptions to the system 
for clearing and settling contract obligations and to protect the funds 
that customers entrust to FCMs. Clearinghouses and FCMs are the 
backbone of the exchange system: together, they protect against the 
financial difficulties of one trader from becoming a systemic problem 
for other traders or the market as a whole. Several aspects of the 
oversight framework help the Commission achieve these goals:

(1) requiring that market participants post a performance bond, 
        referred to as ``margin,'' to secure their ability to fulfill 
(2) requiring participants on the losing side of trades to meet their 
        obligations, in cash, through daily (and sometimes intraday) 
        margin calls;
(3) requiring that FCMs segregate customer funds from their own funds 
        and protect these customer funds from obligations of the FCM; 
(4) monitoring the capitalization and financial strength of 
        intermediaries, such as FCMs and clearinghouses.
    The Commission works with the exchanges and the National Futures 
Association (the ``NFA'') to closely monitor the financial condition of 
FCMs. The Commission, the exchanges, and the NFA receive various 
monthly, quarterly, and annual financial reports from FCMs. The 
exchanges and the NFA also conduct annual audits and daily financial 
surveillance of their respective member FCMs. Part of this financial 
surveillance involves looking at each FCM's exposure to losses from 
large customer positions that it carries and one way in which such 
positions are tracked is through the large trader reporting system. As 
an oversight regulator, the Commission primarily reviews the audit and 
financial surveillance work of the exchanges and the NFA but also 
monitors the health of FCMs directly, as necessary and appropriate. We 
also periodically reviews clearinghouse procedures for monitoring risks 
and protecting customer funds.
    As with attempts at manipulation, the Commission's Enforcement 
Division investigates and prosecutes FCMs that are alleged to have 
violated financial and capitalization requirements or to have committed 
other supervisory and compliance failures in connection with the 
handling of customer business. Such cases can result in substantial 
remedial changes in the supervisory structures and systems of FCMs and 
can influence the way particular firms conduct business. This is an 
important part of the responsibility of the Commission to ensure that 
sound practices are followed by FCMs.
    Protecting the operational integrity of the futures markets is also 
accomplished through the efforts of several divisions within the 
Commission. The Division of Trading and Markets promulgates 
requirements that mandate appropriate disclosure and customer account 
reporting, as well as fair sales and trading practices by registrants. 
Trading and Markets also seeks to maintain appropriate sales practices 
by screening the fitness of industry professionals and by requiring 
proficiency testing, continuing education, and supervision of these 
persons. Extensive recordkeeping of all futures transactions is also 
required. Trading and Markets also monitors compliance with those 
requirements and supervises the work of exchanges and the NFA in 
enforcing the requirements.
    And, as with the Commission's efforts to protect the economic and 
financial integrity of the futures markets, the Division of Enforcement 
also plays an important role in deterring behavior that could 
compromise the operational integrity of the markets. Enforcement 
investigates a variety of trade and sales practice abuses that affect 
customers. For example, the Commission brings actions alleging unlawful 
trade allocations, trading ahead of customer orders, misappropriating 
customer trades, and non-competitive trading. The Commission also takes 
actions against unscrupulous commodity professionals who engage in a 
wide variety of fraudulent sales practices against the public.
The CFTC's Role in the Energy Markets and Our Response to the Enron 
    The Commission oversees on-exchange trading of energy-related 
futures and options contracts based on such things as crude oil, 
natural gas, heating oil, propane, gasoline, and coal. Several U.S. 
exchanges are designated to trade energy product futures and options, 
but the overwhelming majority of on-exchange transactions are executed 
on New York Mercantile Exchange (the ``NYMEX''), where contracts in 
each of the products I mentioned are actively traded. The CFTC does not 
regulate trading of energy products on spot (cash) markets or forward 
markets, which are excluded from our jurisdiction by the CEA.
    Because Enron was a large trader of energy-based contracts traded 
on the NYMEX, its onexchange activity has been monitored by our market 
surveillance over the years. At this time, we have no indication that 
manipulation of any on-exchange futures market was attempted by Enron. 
However, the rapid financial deterioration of Enron last year presented 
an additional concern for the Commission: Could Enron's on-exchange 
futures positions be closed out without causing sudden price volatility 
or unduly reducing liquidity? In fact, Enron was but one of many 
significant participants in these large and liquid markets and the 
markets proved to be quite resilient. When its financial difficulties 
became known and Enron voluntarily closed out its positions, energy 
futures markets showed remarkably little reaction. The prices of 
energy-based futures did not spike nor did liquidity dry up.
    As would the financial difficulties of any large futures customer, 
Enron's difficulties also raised concerns about the ability of the FCMs 
that carried Enron's onexchange futures positions to successfully close 
out those positions if Enron were to fail to meet margin calls. When 
Enron's financial troubles became known last fall, staff from our 
Division of Trading and Markets worked closely with the NYMEX 
clearinghouse and the affected FCMs to monitor and to manage the 
closing out of these positions. By appropriately adjusting margin 
requirements, the clearinghouse was able to ensure that adequate Enron 
funds remained on deposit at the FCMs, which both provided additional 
security for the FCMs and their customers and gave Enron a strong 
incentive to reduce its positions as quickly as possible.
    The closing out of Enron's on-exchange positions was accomplished 
quickly and smoothly so that, by the time of Enron's bankruptcy filing, 
the risks to which FCMs were exposed, as measured by standard margin 
requirements, had dropped by 80% from only a week earlier. By mid-
December, all of Enron's positions on the regulated exchanges had been 
liquidated. (Enron also owned a small subsidiary FCM, Enron Trading 
Services, that carried no positions for other customers and only a very 
small portion of Enron's own onexchange positions. At all times, ETS 
had regulatory capital several times the required level. Also by mid-
December, ETS had transferred its customers to other FCMs.) I believe 
that this episode was a success for the system of financial controls in 
the onexchange futures markets. There were no disruptions to the system 
of clearance and settlement. Enron met all its obligations. No customer 
lost any funds entrusted to any FCM.
How the Commodity Futures Modernization Act Changed Things:
    The Commodity Futures Modernization Act of 2000 (the ``CFMA'') was 
signed into law by President Clinton on December 21, 2000. It amended 
the Commodity Exchange Act to, among other things, provide legal 
certainty for overthecounter derivatives products. For contracts based 
on energy products and certain other nonagricultural and nonfinancial 
commodities, the CFMA added a new Section 2(h) to the Act that exempted 
two types of markets from much of the CFTC's oversight.
    The first type is bilateral, principal-to-principal trading between 
two eligible contract participants, a category that includes 
sophisticated entities such as regulated banks and wellcapitalized 
companies or individuals (for example, those with assets of at least 
$10 million), among others. The second type is electronic multilateral 
trading among eligible commercial entities, such as eligible contract 
participants that can also demonstrate an ability to either make or 
take delivery of the underlying commodity (called ``eligible commercial 
entities'') or dealers that regularly provide hedging services to those 
Suggestions on Moving Forward:
    As an oversight regulator, we will continue to look at how and why 
the markets within our statutory jurisdiction respond the way they do, 
whether well or poorly, to situations such as the failure of a 
significant participant. Separately, as a member of the President's 
Working Group on Financial Markets, the CFTC is working with the SEC, 
the Treasury Department, and the Federal Reserve Board to review for 
the President possible improvements in accounting, auditing, disclosure 
practices with respect to publiclyheld companies. And, within the 
Commission, we recently proposed a reorganization plan that will 
consolidate our market oversight functions into one division to help 
improve already excellent programs in market and financial 
    The Enron situation has led some to call for further responses from 
Congress and regulators, even for re-regulation of markets that were 
provided legal certainty by the Commodity Futures Modernization Act. 
While I agree that it is prudent for a regulator to constantly review 
its policies and procedures to ensure that an appropriate level of 
oversight is exercised, I also believe that a situation of this 
magnitude deserves careful consideration before a regulator seeks to 
take action. I believe that regulators should make sure that the true 
problem has been identified before remedies are pursued.
    I supported passage of the CFMA because I sincerely believed that a 
onesizefitsall approach to regulation was outdated, particularly in 
light of important advances in technology within the financial services 
industry. Rules tailored to the participant, the product, and the 
trading facility seemed to me to be a more appropriate approach than 
the prescriptive regulations of the past. To date, I have seen no 
evidence to the contrary in my agency's initial analysis of the Enron 
situation. The CFMA was enacted after a number of hearings conducted by 
our House and Senate oversight committees in the context of 
reauthorizing the Commission. Many issues relating to evolving markets 
received a full airing and important changes to the law were agreed 
upon as a result. I believe that any departure from the path of 
progress represented by this important piece of legislation should be 
approached with extreme caution.
    We will continue to monitor the markets within our jurisdiction and 
to utilize all authorities given to us by the Congress to aggressively 
pursue violations of the Commodity Exchange Act. We stand ready to work 
with this Subcommittee, the Congress, other regulators, and market 
participants. Thank you for the invitation to appear before your 
Committee. I will be happy to answer any questions you may have.

    Mr. Barton. We thank you, Mr. Chairman, and appreciate your 
    We now want to hear from the Commissioner of the Securities 
and Exchange Commission, the Honorable Isaac Hunt, who has 
appeared before our subcommittee before.
    Mr. Hunt. Yes, sir.
    Mr. Barton. Glad to have you back, and your statement is in 
the record, and you are recognized for 7 minutes, and to 
elaborate on the statement.


    Mr. Hunt. Chairman Barton, Ranking Member Boucher, and 
members of the subcommittee, I am Commissioner Hunt of the U.S. 
Securities and Exchange Commission. I am pleased to have this 
opportunity to testify before you on behalf of the SEC.
    As you know, for almost 20 years the SEC has consistently 
supported repeal of those provisions of PUHCA that either 
duplicate laws administered by other regulators, or that are no 
longer necessary.
    Since I last testified on PUHCA repeal before this 
committee in December, the magnitude of the Enron debacle and 
the harm that Enron's collapse has travesty inflicted on the 
company's investors and employees has become clearer.
    Congress and various regulatory agencies, including the 
SEC, are appropriately investigating what happened at Enron, 
why it happened, and what should be done to prevent Enron-like 
debacles in the future.
    As we continue to investigate and learn from the events 
surrounding Enron's collapse, we remain open-minded and of 
course would reconsider our views on conditional PUHCA repeal 
if warranted.
    Currently, however, we are not aware of anything that would 
cause us to conclude that there is reason to abandon our 
longstanding support for conditional PUHCA repeal. The 
Commission continues to support repeal of PUHCA as long as the 
repeal is accomplished in a way that gives the FERC and State 
regulators sufficient authority to protect utility consumers.
    Specifically, FERC and State regulators should be given 
additional authority to monitor, police, and regulate affiliate 
transactions. As long as electric and gas utilities continue to 
function as monopolies, there will be a need to protect against 
    The best means of guarding against this is likely to be 
audits of books and records, and Federal oversight of affiliate 
transactions. Any move to repeal PUHCA should include 
provisions providing FERC and State regulators the necessary 
tools to engage in this type of oversight.
    In addition, Congress should consider giving FERC the 
authority to issue rules prohibiting or limiting those types of 
affiliate transactions that FERC concludes are inherently 
    The harm that Enron's collapse has tragically inflicted on 
the company's investors and employees are now clear. What may 
not be as clear is why Enron's power marketing activities did 
not subject it to PUHCA, and why Enron is an exempt public 
utility holding company.
    In 1994, Enron Power Marketing, Inc., a subsidiary of 
Enron, received a no-action letter from the staff in the SEC's 
Division of Investment Management, in which the staff agreed 
not to recommend enforcement action against that subsidiary if 
it engaged in power marketing activities without it or Enron 
itself registering under the Act.
    In its request for no-action relief, the subsidiary argued 
that the contracts, books, and records, and other materials 
underlying its power marketing activities were not, 
``facilities used for the generation, transmission, or 
distribution of electric energy or sale.''
    Accordingly, Enron argued that the power marketing 
subsidiary was therefore not ``an electric utility company'' 
for purposes of PUHCA, and therefore Enron was not a utility 
holding company for purposes of PUHCA.
    The staff gave the subsidiary the requested no-action 
relief, and since that time, the staff has given analogous no-
action relief to approximately 20 other companies.
    Moreover, in 1997, the Commission, after public notice and 
comment, adopted Rule 58 that permits registered holding 
companies to engage in the brokering and marketing of energy 
commodities as permitted non-utility activities.
    In July 1997, Enron acquired Portland General Electric and 
claimed an exemption to PUHCA registration under Rule 2 as 
intrastate public utility holding company. Enron was able to 
claim this exemption because both Enron and Portland General 
were incorporated in Oregon, and all of Portland General's 
operations were in Oregon.
    Enron recently agreed to sell Portland General to Northwest 
Natural Gas, a transaction that is subject to Commission 
approval under PUHCA. Enron's claim to an intrastate exemption 
was and is consistent with the Commission's historical 
interpretation of the intrastate exemption.
    For example, as early as 1937, the Commission granted an 
exemption to the Southeastern Indiana Corporation. That 
company, which was incorporated in Indiana, owned a single 
public utility subsidiary, which was also incorporated in, and 
operated exclusively in Indiana.
    The company, however, also owned a number of nonutility 
subsidiaries incorporated in Indiana and Ohio that provides bus 
and telephone service in Indiana, Ohio, and Kentucky. In 
granting the company's request for an exemption, the Commission 
stated that, ``such nonpublic utility activities of the 
applicant do not deprive it of its intrastate character insofar 
as public utility aspects of its business is concerned, and 
that so long as all of its public utility subsidiaries are 
organized under the laws of Indiana and confine their public 
utility business to that State, it will be entitled to the 
exemption provided by Section 3(a)(1),'' the intrastate 
    Again, with respect to PUHCA, as we continue to investigate 
and learn from events surrounding Enron's collapse, we remain 
open-minded and would reconsider our views on repeal if 
warranted. Currently, however, it appears that the tragic 
collapse of Enron is not as a result of its classification or 
lack of classification as a public utility holding company.
    Rather, a number of recent events, including Enron's 
collapse, suggests that for several years our system of 
disclosure regulation has needed repair. What happened to 
investors of Enron should be prevented from happening to 
investors in any other company.
    All investors, including investors in public utility 
holding companies, are entitled to a regulatory system that 
produces disclosure that is meaningful and intelligible. Today, 
this morning, the SEC announced its intention to propose its 
first set of rule changes designed to enhance and improve our 
current disclosure system.
    These proposals would, one, require companies to timely 
disclose transactions by their executive officers and directors 
in company securities, including transactions with the company.
    Two, require enhanced disclosure of other companies 
critical accounting polices. Three, accelerate the timetables 
for companies to file their quarterly and annual reports with 
    Four, expand the list of significant events required to be 
disclosed on Form 8K, and accelerate the following deadlines 
for that form; and, five, require that public companies include 
their 8K reports on their internet websites at the same time 
that those reports are filed with the SEC.
    These proposals will be the first of a series of Commission 
initiatives to enhance our disclosure and financial reporting 
system. Other Commission initiatives to follow will include 
better disclosure of trend and evaluative data, clear and 
informative financial statements, and enhanced related party 
disclosures that would provide needed sunshine to affiliated 
    Likewise, in order to permit our systems of accounting from 
being abused, whether by public utility holding companies or 
other types of companies, we are working to establish a better 
system of private regulation of the accounting profession, and 
to make sure that they respond expeditiously and clearly to 
establish needed accounting standards.
    The lessons learned from the Enron tragedy cannot be 
limited merely to public utility holding companies. In my 
opinion, these teachings must be used to protect all investors, 
not just those who have invested in public utility holding 
    After all, investors who have lost their life savings will 
find little comfort in the fact that their losses came from an 
investment in a computer company, as opposed to a public 
utility holding company. Thank you for your time, and I would 
be happy to answer any questions that you may have.
    [The prepared statement of Hon. Isaac C. Hunt, Jr. 
   Prepared Statement of Hon. Isaac C. Hunt, Jr., Commissioner, U.S. 
                   Securities and Exchange Commission
    Chairman Barton, Ranking Member Boucher, and Members of the 
                            i. introduction
    I am pleased to have this opportunity to testify before you on 
behalf of the Securities and Exchange Commission (``SEC'') regarding 
the SEC's continuing support for legislation to repeal much of the 
Public Utility Holding Company Act of 1935 (``PUHCA,'' ``the 1935 Act'' 
or ``the Act'').1 As you know, for almost twenty years the 
SEC has consistently supported repeal of those provisions of PUHCA that 
either duplicate laws administered by other regulators or that are no 
longer necessary. The SEC has always stressed, however, that, in order 
to protect the customers of multistate, diversified utility holding 
companies, it is necessary to give the Federal Energy Regulatory 
Commission (``FERC'') and state regulators authority over the books and 
records of holding companies and authority to regulate their ability to 
engage in affiliate transactions. Since I last testified before this 
Subcommittee on PUHCA repeal in December, the magnitude of the Enron 
debacle, and the harm that Enron's collapse has tragically inflicted on 
the company's investors and employees, have become clearer. Congress 
and various regulatory agencies, including the SEC, are appropriately 
investigating what happened at Enron, why it happened and what should 
be done to prevent Enron-like fiascoes in the future. As we continue to 
investigate and learn from the events surrounding Enron's collapse, we 
remain open-minded and, of course, would reconsider our views on 
conditional PUHCA repeal if warranted. Currently, however, I am not 
aware of anything that would cause us to conclude that there is reason 
to abandon our longstanding support for conditional PUHCA repeal.
    \1\ As I testified before this Subcommittee in December 2001, the 
SEC generally supports H.R. 3406, which is pending before this 
Subcommittee and which would repeal much of PUHCA. But see, footnote 7 
                             ii. background
    Before discussing the SEC's current views on PUHCA, it is useful to 
review the history of the SEC's longstanding support of repeal. PUHCA 
was enacted in 1935 in response to abuses that had occurred in the gas 
and electric industry during the first quarter of the last 
century.2 The abuses included misuse of the holding company 
structure, inadequate disclosure of the financial position and earning 
power of holding companies, unsound accounting practices, excessive 
debt issuances, and abusive affiliate transactions.
    \2\ See 1935 Act section 1(b), 15 U.S.C. Sec. 79a(b).
    The 1935 Act addressed these problems by giving the Commission 
authority over various practices of holding companies, including their 
issuance of securities and their ability to engage in affiliate 
transactions. The Act also placed restrictions on the geographic scope 
of holding company systems and limited registered holding companies to 
activities related to their gas or electric businesses. Because of its 
role in addressing issues involving securities and financings, the SEC 
was charged with administering the Act. In the years following the 
passage of the 1935 Act, the SEC worked to reorganize and simplify 
existing public utility holding companies in order to eliminate abuses.
    In the early 1980s, however, the SEC concluded that many aspects of 
1935 Act regulation had become redundant. Specifically, state 
regulation had expanded and strengthened since 1935, and the SEC had 
enhanced its regulation of all issuers of securities, including public 
utility holding companies. The SEC therefore concluded that the 1935 
Act had accomplished its basic purpose and that many of its remaining 
provisions were either duplicative or were no longer necessary to 
prevent the recurrence of the abuses that had led to the Act's 
enactment. The Commission thus unanimously recommended that Congress 
repeal the Act.3
    \3\ See Public Utility Holding Company Act Amendments: Hearings on 
S. 1869, S. 1870 and S. 1871 Before the Subcomm. On Securities of the 
Senate Comm. On Banking, Housing, and Urban Affairs, 97th Cong., 2d 
Sess. 359-421 (statement of SEC).
    For a number of reasons--including continuing concern about the 
potential for abuse through the use of a multistate holding company 
structure, related concerns about consumer protection, and the lack of 
a consensus for change--repeal legislation was not enacted during the 
early 1980s. Because of continuing change in the industry, however, the 
SEC continued to look at ways to administer the statute more flexibly.
    In response to accelerating changes in the utility industry during 
the early 1990s, in 1994, then-Chairman Arthur Levitt directed the 
SEC's Division of Investment Management to undertake a study, under the 
guidance of then-Commissioner Richard Y. Roberts, to examine the 
continued vitality of the 1935 Act. The study was undertaken as a 
result of the developments noted above and the SEC's continuing need to 
respond flexibly in the administration of the 1935 Act. The purpose of 
the study was to identify unnecessary and duplicative regulation, and 
at the same time to identify those features of the statute that remain 
appropriate in the regulation of the contemporary electric and gas 
    \4\ The study focused primarily on registered holding company 
systems. There were, at the time of the study, 19 such systems. The 
1935 Act was enacted to address problems arising from multistate 
operations, and reflects a general presumption that intrastate holding 
companies and certain other types of holding companies, which the 1935 
Act exempts and which now number 119, are adequately regulated by local 
authorities. Despite their small number, registered holding companies 
account for a significant portion of the energy utility resources in 
this country. As of September 30, 2001, the 27 registered holding 
systems (which included 35 registered holding companies) owned 133 
electric and gas utility subsidiaries, with operations in 44 states, 
and in excess of 2500 nonutility subsidiaries. In financial terms, as 
of September 31, 2001, the 27 registered holding company systems owned 
more than $417 billion of investor-owned electric and gas utility 
assets and received in excess of $173 billion in operating revenues. 
The 27 registered systems represent over 40% of the assets and revenues 
of the U.S. investor-owned electric utility industry and almost 50% of 
all electric utility customers in the United States.
    The SEC staff worked with representatives of the utility industry, 
consumer groups, trade associations, investment banks, rating agencies, 
economists, state, local and federal regulators, and other interested 
parties during the course of the study. In June 1995, a report of the 
findings made during the study (``Report'') was issued. The staff's 
Report outlined the history of the 1935 Act, described the then-current 
state of the utility industry as well as the changes that were taking 
place in the industry, and again recommended repeal of the 1935 Act. 
The Report also outlined and recommended that the Commission adopt a 
number of administrative initiatives to streamline regulation under the 
    Since the report was published, the utility industry in the United 
States has continued to undergo rapid change. Congress has facilitated 
many of these changes. For example, as a result of various amendments 
to the Act, any company, including registered and exempt holding 
companies, is now free to own exempt wholesale generators and foreign 
utilities and to engage in a wide range of telecommunications 
activities.5 In addition, the SEC has implemented many of 
the administrative initiatives that were recommended in the 
Report.6 In sum, during the past decade, while the SEC has 
continued to support repeal of the Act, we have also recognized that we 
need to administer it faithfully, while streamlining and adding 
flexibility to the regulatory structure where permitted by the Act.
    \5\ Sections 32 and 33 of the Act, which were added to it by the 
Energy Policy Act of 1992, permit, subject to certain conditions, the 
ownership of exempt wholesale generators and foreign utility companies. 
The impact of section 32 on the electricity industry is discussed in 
more detail below. Section 34, which was added by the 
Telecommunications Act of 1996, permits holding companies to acquire 
and retain interests in companies engaged in a broad range of 
telecommunications activities.
    \6\ The Report recommended rule amendments to broaden exemptions 
for routine financings by subsidiaries of registered holding companies 
(see Holding Co. Act Release No. 26312 (June 20, 1995), 60 FR 33640 
(June 28, 1995)) and to provide a new exemption for the acquisition of 
interests in companies that engage in energy-related and gas-related 
activities (see Holding Co. Act Release No. 26667 (Feb. 14, 1997), 62 
FR 7900 (Feb. 20, 1997) (adopting Rule 58)). In addition, the Report 
recommended, and the SEC has implemented, changes in the administration 
of the Act that would permit a ``shelf'' approach for approval of 
financing transactions. For example, during calendar year 2000, all 
eleven of the new registered holding companies received multi-year 
financing authorizations that included a wide range of debt and equity 
securities. The Report further recommended a more liberal 
interpretation of the Act's integration requirements which has been 
carried out in our merger orders. The Report also recommended an 
increased focus upon auditing regulated companies and assisting state 
and local regulators in obtaining access to books, records, and 
accounts. Six state public utility commissions participated in the last 
three audits of the books and records of registered holding companies.
                          iii. repeal of puhca
A. The Commission's Continuing Support of Repeal
    As I have stated, the Commission continues to support repeal of 
PUHCA, as long as repeal is accomplished in a way that gives the FERC 
and state regulators sufficient authority to protect utility 
consumers.7 Not surprisingly, however, in light of recent 
events, there are those who are now asking whether Enron's collapse 
should cause those who support PUHCA repeal to reconsider.
    \7\ We do, however, have a concern about coupling PUHCA repeal with 
provisions that would provide unique regulatory benefits to small 
groups of companies under other statutes that the Commission 
administers. Section 125 of H.R. 3406 raises this concern. Section 125 
appears to address a unique set of circumstances that give rise to 
questions about the status of an issuer as an ``investment company'' 
under the Investment Company Act of 1940. The Investment Company Act 
already provides the Commission with significant flexibility to deal 
with status issues. We therefore see no reason for legislation to deal 
with such issues. More broadly, we are prepared to work with any 
utility holding companies currently relying on the exemption from the 
definition of ``investment company'' provided by section 3(c)(8) of the 
Investment Company Act if repeal of PUHCA leads to questions about 
their status under the Investment Company Act.
    As I stated at the beginning of my testimony, the harm that Enron's 
collapse has inflicted on the company's investors and employees is now 
readily apparent. The SEC, various other regulatory agencies and the 
Congress are now all investigating what happened at Enron, why it 
happened and what should be done to prevent Enron-like debacles in the 
future. These investigations are not only appropriate, but are 
necessary if the implications of Enron for a broad range of policy 
issues are to be fully understood. Currently, however, I am aware of 
nothing with regard to Enron that would change our opinion on PUHCA 
    Enron is currently an exempt holding company under PUHCA. When 
Enron acquired Portland General Electric in 1998, it claimed an 
exemption under PUHCA rule 2 8 as an intrastate holding 
company.9 Enron was able to claim this exemption because it 
was incorporated in Oregon; Portland General, its only utility 
subsidiary, was incorporated in Oregon; and Portland General's utility 
operations were located in Oregon.10 For more than sixty 
years, the SEC has held that as long as the holding company and its 
utility subsidiaries are all incorporated in the same state and the 
utility operations are conducted primarily in that state, the holding 
company is entitled to an exemption. The SEC does not look to where the 
holding company's non-utility subsidiaries are incorporated or where 
the non-utility subsidiaries operate.11
    \8\ 17 C.F.R. Sec. 250.2.
    \9\ Enron recently agreed to sell Portland General to Northwest 
Natural Gas, a transaction that is subject to Commission approval under 
    \10\ The intrastate exemption which, in part, underlies rule 2 is 
PUHCA Sec. 3(a)(1), 15 U.S.C. Sec. 79c(a)(1). In administering the 
intrastate exemption, the SEC has traditionally looked to three 
factors: the state in which the holding company is incorporated, the 
state(s) in which its utility subsidiaries are incorporated, and the 
state(s) in which the public utility subsidiaries do business.
    \11\ See, e.g., In the Matter of Southeastern Indiana Corp., 2 
S.E.C. 156 (1937)(``[S]uch non-public utility . . . activities of the 
applicant do not deprive it of its intrastate character so far as the 
public utility aspect of its business is concerned . . .'').
    The manner in which the Commission has administered the intrastate 
exemption is consistent with its purpose. One of the overriding 
concerns of PUHCA is to give federal regulators jurisdiction over 
multistate public utility holding companies that no single state can 
effectively regulate. In particular, PUHCA is meant to ensure that if a 
state does not have jurisdiction over both the holding company and the 
utility that does business in its state--a situation that will occur if 
the holding company is incorporated in a state different than that in 
which the utility subsidiary is incorporated--a federal regulator with 
access to all the holding company's books and records can step in to 
monitor and police affiliate transactions. In general, the Commission 
has concluded that, where the holding company and all of its utility 
subsidiaries are incorporated in the same state, this concern does not 
arise, and an exemption from PUHCA is warranted. Indeed, Oregon's 
experience with Enron as an exempt company, at least anecdotally, 
confirms this--the Chairman of the Oregon Public Utility Commission 
recently testified that Oregon ratepayers were not harmed by Enron's 
collapse and that ``this utility [Portland General] is able to function 
just as well as it did before.'' 12
    \12\ See Tom Detzel, ``Senators Mull Enron, PGE Link,'' The 
Oregonian (Feb. 7, 2002) (quoting Roy Hemmingway, Chairman, Oregon 
Public Utility Commission).
    In 1994, Enron Power Marketing Inc. (``EPMI''), a subsidiary of 
Enron, received a no-action letter from staff in the SEC's Division of 
Investment Management in which the staff agreed not to recommend 
enforcement action against EPMI if it engaged in power marketing 
activities without it or Enron registering under the Act. In its 
request for no-action relief, EPMI argued that the contracts, books and 
records and other materials underlying its power marketing activities 
were not ``facilities used for the generation, transmission, or 
distribution of electric energy for sale,'' 13 that the 
power market subsidiary was therefore not an ``electric utility 
company'' for purposes of PUHCA, and that Enron was thus not a utility 
holding company for purposes of the Act. EPMI's request stated that, at 
the time, other companies were already engaged in similar power 
marketing activities. The staff, without necessarily concurring in 
EPMI's legal analysis, gave EPMI the requested no-action relief. Since 
1994, the staff has given analogous no-action relief to approximately 
twenty companies.14
    \13\ See PUHCA Sec. 2(a)(3), 15 U.S.C. Sec. 79b(a)(3) (definition 
of ``electric utility company'').
    \14\ The Commission has also given exempt and registered holding 
companies the authority necessary to engage in power marketing as a 
nonutility activity. For example, rule 58, 17 CFR Sec. 250.58, which 
was adopted in early 1997, permits registered holding companies to 
engage in ``[t]he brokering and marketing of energy commodities, 
including but not limited to electricity, natural or manufactured gas 
and other combustible fuels'' as a permitted nonutility activity.
    As Chairman Pitt recently testified before a House Subcommittee, 
the speed and tragic consequences of Enron's collapse demonstrate the 
need for a variety of reforms in our administration of the securities 
laws that the Chairman and others at the SEC have been discussing in 
recent months. All investors, including investors in public utility 
holding companies, are entitled to a regulatory system that produces 
disclosure that is meaningful and intelligible. To address flaws in the 
current system, we continue to consider ways to ensure that investors 
receive more current disclosure, better disclosure of ``trend'' and 
``evaluative'' data, and clear and informative financial statements. 
Likewise, to prevent our system of accounting from being abused, 
whether by public utility holding companies or other types of 
companies, we are working to establish a better system of private 
regulation of the accounting profession and to make sure that the FASB 
responds expeditiously and clearly to establish needed accounting 
    In sum, Enron is a tragedy for our entire system of disclosure 
regulation. What happened to investors of Enron should be prevented 
from happening to investors in any company. However, the tragic 
collapse of Enron is not a result of its classification or lack of 
classification as a public utility holding company.
B. Affiliate Transactions and Cross-Subsidization
    Thus, we continue to believe that repeal of PUHCA will not 
sacrifice any needed investor protections. As we have testified in the 
past, however, we continue to believe that, in order to provide needed 
protection to utility consumers, the FERC and state regulators should 
be given additional authority to monitor, police, and regulate 
affiliate transactions.
    Specifically, although deregulation is changing the way utilities 
operate in some states, electric and gas utilities have historically 
functioned as monopolies whose rates are regulated by state 
authorities. Some regulators subject these rates to greater scrutiny 
than others. There is a continuing risk that a monopoly, if left 
unguarded, could charge higher rates and use the additional funds to 
subsidize affiliated businesses in order to boost its competitive 
position in other markets. Because repeal of PUHCA would eliminate 
existing restrictions on both the size of utility holding companies and 
their ability to engage in non-utility activities, this risk may be 
magnified if holding company systems become bigger and more complex. 
Thus, so long as electric and gas utilities continue to function as 
monopolies, the need to protect against this type of cross-
subsidization will remain. The best means of guarding against cross-
subsidization is likely to be audits of books and records and federal 
oversight of affiliate transactions. Any move to repeal PUHCA should 
include provisions giving the FERC and state regulators the necessary 
tools to engage in this type of oversight.
    As we testified late last year with respect to H.R. 3406, the bill 
represents a form of this type of conditional repeal. In particular, 
H.R. 3406 would provide the FERC with the right to examine books and 
records of holding companies and their affiliates that are necessary to 
identify costs incurred by associate utility companies, in order to 
protect ratepayers. H.R. 3406 would also provide an interested state 
commission with access to such books and records (subject to protection 
for confidential information), if they are necessary to identify costs 
incurred by utility companies subject to the state commission's 
jurisdiction and are needed for effective discharge of the state 
commission's responsibilities in connection with a pending proceeding. 
H.R. 3406 thus gives the FERC and state regulators the ability to 
review affiliate transactions after-the-fact and to exclude unjustified 
costs arising from affiliate transactions from a utility's rate base. 
While this is a significant power, and one we believe that state and 
federal rate regulators should possess, we also believe that Congress 
should consider giving the FERC the authority to use its rulemaking 
authority to prohibit or limit on a prospective basis those types of 
affiliate transactions that it concludes are so abusive that they 
should not be allowed.
C. Market Power Issues
    Repeal of PUHCA would remove barriers that now exist to 
consolidation within the utility industry as well as barriers that 
prevent diversified, non-utility companies from acquiring utilities. 
Removal of these restrictions may raise competitive issues related to 
the ``market power'' of utilities. PUHCA was intended to address, among 
other things, the concentration of control of ownership of the public-
utility industry. In particular, section 10(b)(1) of the Act requires 
the SEC to disapprove a utility acquisition if it will tend toward 
concentrated control of public-utility companies in a manner 
detrimental to the public interest or the interest of investors or 
consumers.15 Traditionally, the SEC's analysis of utility 
acquisitions under section 10(b)(1) includes consideration of federal 
antitrust policies.16 More specifically, the anticompetitive 
ramifications of an acquisition have traditionally been considered in 
light of the fact that public utilities are regulated monopolies 
subject to the ratemaking authority of federal and state administrative 
    \15\ The SEC must also consider whether the purchase price is 
reasonable; whether the purchase will unduly complicate the 
capitalization of the resulting system; and whether the transaction 
will serve the public interest by tending toward the economic and 
efficient development of an integrated public-utility system.
    \16\ Municipal Electric Association v. SEC, 413 F.2d 1052, 1056-07 
(D.C. Cir. 1969) (section 10(b)(1) analysis ``must take significant 
content'' from ``the federal anti-trust policies''), cited in City of 
Holyoke v. SEC, 972 F.2d 358, 363; Environmental Action, Inc. v. SEC, 
895 F.2d 1255, 1260 (9th Cir. 1990) (``Federal antitrust policies are 
to inform the SEC's interpretation of section 10(b)(1)'').
    \17\ Entergy Corp., Holding Co. Act Release No. 25952 (Dec. 17, 
1993), citing Northeast Utilities, Holding Co. Act Release No. 25221, 
request for reconsideration denied, Holding Co. Act Release No. 26037 
(Apr. 28, 1994), remanded sub nom. Cajun Electric Power Cooperative, 
Inc. v. SEC, 1994 WL 704047 (D.C. Cir. Nov. 16, 1994).
    However, the SEC is not the only agency that reviews the potential 
anticompetitive effects of utility acquisitions. In many instances, 
proposed utility acquisitions are subject to FERC and state approval. 
Like the SEC, the FERC must consider antitrust implications of matters 
before it.18 In addition, the potential anticompetitive 
effects of utility acquisitions are independently reviewed by the 
Department of Justice or the Federal Trade Commission.
    \18\ See Gulf States Utilities Co. v. FPC, 411 U.S. 747 (1973).
    In recent years, the SEC has looked to all these regulators for 
their expertise in assessing operational and competitive issues, 
particularly in situations in which the combined entity resulting from 
a merger would have control of key transmission facilities and of 
surplus power. Thus, although the SEC does independently assess the 
transaction under the standards of PUHCA, we have generally relied upon 
the FERC's greater expertise regarding issues related to utility 
competition. The Court of Appeals for the District of Columbia Circuit 
has stated that ``when the SEC and another regulatory agency both have 
jurisdiction over a particular transaction, the SEC may `watchfully 
defer' to the proceedings held before--and the result reached by--that 
other agency.'' 19
    \19\ Madison Gas and Electric Company v. SEC, 168 F.3d 1337, (D.C. 
Cir. 1999); City of Holyoke v. SEC, supra note 10, citing Wisconsin's 
Environmental Decade, Inc. v. SEC, 882 F.2d 523 (D.C. Cir. 1989).
    Therefore, repeal of PUHCA is unlikely to affect how market power 
issues are reviewed at the federal level. Other federal agencies 
already have significant authority in this area. While PUHCA provides 
an additional layer of regulatory approval for certain utility mergers, 
the Commission's reliance, where appropriate, on other regulators for 
the key market power determination makes its review of market power 
issues largely redundant. Nonetheless, because repeal of PUHCA may 
increase consolidation in the utility industry, Congress could conclude 
that additional clarification of the FERC's authority in this area is 
necessary to give the FERC sufficient authority to ensure that what 
consolidation does occur in the utility industry does not harm 
D. Other Consumer Protection Issues
    I know that Congress and others are considering other types of 
consumer protections in the utility area. For example, there has been 
discussion of whether the FERC needs additional ratemaking authority in 
the wholesale electricity markets. Likewise, there has been discussion 
of whether the FERC or the Commodity Futures Trading Commission should 
be given additional authority to oversee trading in energy-related 
derivatives to prevent market manipulation. While I recognize that it 
is important for Congress to consider issues of these types, the SEC 
does not have statutory authority to regulate utility rates under 
PUHCA. Likewise, PUHCA does not give the SEC authority to attempt to 
prevent manipulation in the energy trading markets. The SEC therefore 
lacks the expertise to express a view on whether reforms are needed in 
these areas.
E. PUHCA Repeal and National Energy Policy
    Repealing the Act is not, however, a magic solution to the current 
problems facing the U.S. utility industry. PUHCA repeal can be viewed 
as part of the needed response to the current energy problems facing 
the country--notably, the Administration's recent report on energy 
policy includes a recommendation that PUHCA be repealed.20 
But repeal of the Act will not have any direct effect on the supply of 
electricity in the United States. The Act does not, for example, 
currently place significant restrictions on the construction of new 
generation facilities. As part of the Energy Policy Act, Congress 
amended the Act in 1992 to remove most restrictions on the ability of 
registered and exempt holding companies (as well as companies not 
otherwise subject to PUHCA) to build, acquire and own generating 
facilities anywhere in the United States. These types of facilities--
exempt wholesale generators or ``EWGs''--are not considered to be 
electric utility companies under PUHCA, and, in fact, are exempt from 
all provisions of PUHCA. The only limitation that remains under PUHCA 
is one imposed by Congress on registered holding companies' investments 
in EWGs--namely, that a registered company may not finance its EWG 
investments in a way that may ``have a substantial adverse impact on 
the financial integrity of the registered holding company system.'' 
21 In short, the Energy Policy Act removed restrictions on 
the ability of registered and exempt holding companies to build, 
acquire and own generating facilities anywhere in the United States. As 
a result, a number of registered holding companies now have large 
subsidiaries that own generating facilities nationwide. Numerous other 
companies not subject to the Act have also entered the generation 
    \20\ See National Energy Policy: Report of the National Energy 
Policy Development Group at 5-12 (May 2001) (recommending the reform of 
``outdated federal electricity laws, such as the Public Utility Holding 
Company Act'').
    \21\ While no Commission approval is required for the acquisition 
of an EWG as a result of the Energy Policy Act, Commission approval is 
required, for example, before a registered holding company can issue 
securities to finance the acquisition of, or guarantee securities 
issued by, an EWG. Under the Energy Policy Act, Congress directed the 
SEC to adopt rules with respect to registered holding companies' EWG 
investments. Pursuant to these requirements, in 1993 the SEC adopted 
rules 53 and 54 to protect consumers and investors from any substantial 
adverse effect associated with investments in EWGs. Rule 53, which 
created a partial safe harbor for EWG financings, describes 
circumstances in which the issue or sale of a security for purposes of 
financing the acquisition of an EWG, or the guarantee of a security of 
an EWG, will be deemed not to have a substantial adverse impact on the 
financial integrity of the system. For transactions outside the Rule 53 
safe harbor, a registered holding company must obtain SEC approval of 
the amount it wishes to invest in EWGs. The standards that the SEC uses 
in assessing applications of this type are laid out in Rule 53(c).
    \22\ See, e.g., National Energy Policy: Report of the National 
Energy Policy Development Group at 5-11 (May 2001) (noting that 
``[m]ost new electricity generation is being built not by regulated 
utilities, but by independent power producers'').
    Instead, repeal of the Act would eliminate regulatory restrictions 
that prohibit utility holding companies from owning utilities in 
different parts of the country and that prevent nonutility businesses 
from acquiring regulated utilities. In particular, repeal of the 
restrictions on geographic scope and other businesses would remove the 
impediments created by the Act to capital flowing into the industry 
from sources outside the existing utility industry. Repeal would thus 
likely have the greatest impact on both the continuing consolidation of 
the utility business as well as the entry of new companies into the 
utility business.
    Repeal of the Act would also eliminate any impediments that exist 
to other regulators' attempts to modernize regulation of the utility 
industry. For example, during the past year, questions have arisen 
about how the Act will impact the ability of the FERC to implement its 
plans to restructure the control of transmission facilities in the 
United States.23 Specifically, in order to ``ensure that 
electricity consumers pay the lowest price possible for reliable 
service,'' the FERC recently implemented new regulations designed to 
create ``independent regionally operated transmission grids'' that are 
meant to ``enhance the benefits of competitive electricity markets.'' 
24 As a result of FERC's new regulations, many utilities 
will cede operating control--and in some cases, actual ownership--of 
their transmission facilities to newly-created entities. The status of 
these entities, as well as the status of utility systems or other 
companies that invest in them, raise a number of issues under the Act. 
Most prominently, it has been asserted that the limits the Act places 
on the other businesses in which a utility holding company can engage 
will create obstacles for nonutility companies that may wish to invest 
in or operate these new transmission entities. While the SEC believes 
it has the necessary authority under the Act to deal with the issues 
created by the FERC's restructuring without impeding that 
restructuring, repeal of the Act would nonetheless effectively resolve 
these issues.
    \23\ See FERC Order 2000, ``Regional Transmission Organizations,'' 
65 FR 810 (Jan. 6, 2000) (codified at 18 C.F.R. Sec. 35.34).
    \24\ Order 2000, 65 FR at 811.
    This example, however, raises the broader issue of the relationship 
between the FERC's and the SEC's regulation of the utility industry. 
The FERC is clearly the agency that Congress intended to take the lead 
role in regulating the utility industry. The SEC, in contrast, is 
primarily devoted to regulating the securities markets. Although we 
always attempt to work together with the FERC to ensure that, to the 
extent possible, our regulation of utility holding companies under 
PUHCA does not impede their ability to regulate the utility industry, 
sometimes conflict is inevitable. Given this, if Congress chooses not 
to repeal PUHCA, we believe that responsibility for the Act, whether in 
its current form or in a modified form, should be transferred from the 
SEC to the FERC. Given the nature of the FERC's responsibilities and 
its expertise in regulating the utility industry, it is simply in a 
better position to balance the goals of PUHCA and the other statutes it 
administers, and thereby regulate the utility industry in a more 
consistent and effective manner.
    The SEC takes seriously its duties to administer faithfully the 
letter and spirit of the 1935 Act and is committed to promoting the 
fairness, liquidity, and efficiency of the United States securities 
markets. By supporting conditional repeal of the 1935 Act, the SEC 
hopes to reduce unnecessary regulatory burdens on America's energy 
industry while providing adequate protections for energy consumers.

    Mr. Barton. Thank you, Commissioner Hunt.
    We would now like to hear from Mary Hutzler, who has 
testified before, and who is the Acting Director of the Energy 
Information Administration, to give us your view on the facts 
and the figures about what happened when Enron's bankruptcy 
became more prevalent.
    And I would point out for the record that each testifier 
has gotten a little bit longer than the previous one, and so 
hopefully you can disassociate yourself from that trend.

                  STATEMENT OF MARY J. HUTZLER

    Ms. Hutzler. Mr. Chairman, and members of the subcommittee, 
I appreciate the opportunity to appear before you today to 
discuss current and future energy prices and supplies in the 
United States in light of the recent Enron situation.
    The Energy Information Administration is the autonomous 
statistical and analytical agency within the Department of 
Energy. We are charged with providing objective and timely 
data, analysis, and projections for the use of the 
administration, the Congress, and the public.
    Energy markets with particular emphasis on electricity and 
natural gas have experienced considerable turmoil over the past 
2 years. These markets, however, have emerged into a period of 
relative calm.
    Most of the volatility in electricity markets occurred on 
the West Coast, particularly in California, and in the Pacific 
Northwest. Many of the conditions that contributed to the 
electricity market squeeze in California are no longer present.
    Unfortunately, one of the contributors to lower electricity 
market volatility is the significant slow-down in the U.S. 
economy in 2001, particularly due to the dramatic decline in 
industrial output, which is still pervading the economy.
    Despite the volatility in some spot electricity markets, 
most retail electricity customers have seen only slight 
increases in delivered electricity costs, because at the retail 
level, electricity prices are still regulated in many States.
    Some States, particularly California, have seen large 
changes in delivered electricity prices, but for most areas, 
retail price changes have been relatively small over the last 2 
    Some of the pressure on the electricity prices in 2000 and 
early 2001 were related to fuel costs, and the availability of 
adequate generating capacity. Throughout 2000, natural gas spot 
prices were rising steadily because of strong demand and 
stagnant or declining productive capacity.
    The economy was expanding rapidly and incremental natural 
gas demand requirements were outstripping the capacity to 
produce new supplies. Natural gas inventories fell steadily to 
very low levels at the beginning of the 2000 and 2001 heating 
seasons, setting the stage for significant increases in natural 
gas costs to end-use customers.
    Oil prices were also well above typical levels because of 
the tight condition of world oil markets. The reduction in 
hydroelectric resources in 2000 due to weather factors served 
to tighten electricity markets by removing an important 
component of electricity supply, adding to the increased demand 
for natural gas generation.
    In late 2000, very cold temperatures moved heating and 
energy use to well above normal levels. This squeeze on natural 
gas markets resulted in a dramatic run-up in the natural gas 
prices, which sent fuel costs soaring.
    Since last winter the onset of the economic slowdown and 
relatively mild weather has reduced demand and changed the cost 
price environment for electricity and other energy sources.
    Average U.S. natural gas spot prices are currently between 
one-fourth and one-fifth the level seen at the height of the 
run-up last winter, and oil prices are noticeably lower.
    Electricity spot prices are generally between $18 and $30 
per megawatt hour, compared to mid-January 2001 prices of $40 
to $50 in the south and east, and $400 to $500 on the West 
    We have examined electricity and natural gas price data 
since the fourth quarter of last year and compared them to 
Enron's stock prices. As this chart shows, we see no 
correlation between spot market prices for electricity and the 
path of Enron's stock price.
    Between October 2001 and February of 2002, wholesale 
electricity prices for the Middle Atlantic, New York, New 
England, and California, displayed relative stability at the 
same time that Enron's stock value was plummeting from nearly 
$37 a share in October, to less than $1 a share 6 weeks later.
    In terms of electricity, Enron was a small contributor in 
2000, accounting for less than 1 percent each of total retail 
electricity sales, total generating capacity, and total 
electricity generation.
    Similarly, the Henry Hub spot natural gas price, while a 
little more volatile than electricity prices, showed no sign of 
being affected by the Enron problems during the same period. 
While Enron had as much as a 10 percent interest in interstate 
pipeline capacity, this capacity, of which the largest pipeline 
has been sold, is operating and is expecting to operate, 
regardless of future ownership.
    Both electricity and natural gas markets appear to have 
shrugged off the Enron situation with little or no discernable 
market impacts. In the short term, little change is expected 
for electricity prices.
    For 2002, an average decline in residential electricity 
prices of 1.6 percent is expected, and a modest increase of 
about a .5 percent is anticipated for 2003 as fuel costs 
increase moderately, and as aggregate electricity demand 
    In the longer term the electricity prices are expected to 
decline about .2 percent annually from 2000 to 2020, as more 
competition and lower coal prices to electric generators offset 
somewhat higher natural gas prices.
    Spot wellhead prices are currently averaging around $2 to 
$2.20 per million Btu, or about one-quarter of what they were 
in January of last year, when prices at the wellhead reached 
record levels.
    Very mild weather during the fourth quarter of last year 
through January of this year has reduced heating demand 
considerably. The low heating demand, a weak economy, and high 
storage levels for natural gas, should result in natural gas 
wellhead prices of about $1.85 per thousand cubic feet for 
2002, increasing to nearly $2.40 per thousand cubic feet in 
2003, as the economy grows and world oil prices increase.
    Natural gas prices at the wellhead are expected to rise 
from their current levels, reaching $3.26 per thousand cubic 
feet by 2020 in real 2000 dollars.
    In summary, it appears that the factors responsible for the 
very volatile and high electricity prices on the West Coast, 
and the spike and subsequent collapse in natural gas prices 
nationwide stemmed from numerous economic and non-economic 
developments that are not obviously related to Enron's market 
activity. Enron, while a large and well-known player among 
energy trading entities in the United States, was one among 
many existing and potential new players in electricity and 
natural gas markets.
    The existing array of market participants should be able to 
interact effectively to ensure a normal competitive market 
balance. There is nothing in what has occurred in energy 
markets since the failure of Enron that would suggest otherwise 
as far as the aggregate energy market data is concerned. Thank 
you, Mr. Chairman, and members of the subcommittee. I will be 
happy to answer any questions that you may have.
    [The prepared statement of Mary J. Hutzler follows:]
  Prepared Statement of Mary J. Hutzler, Acting Administrator, Energy 
            Information Administration, Department of Energy
    Mr. Chairman and Members of the Subcommittee: I appreciate the 
opportunity to appear before you today to discuss current and future 
electricity and natural gas prices and supplies in the United States, 
in light of the recent Enron situation.
    The Energy Information Administration (EIA) is an autonomous 
statistical and analytical agency within the Department of Energy. We 
are charged with providing objective, timely, and relevant data, 
analysis, and projections for the use of the Department of Energy, 
other Government agencies, the U.S. Congress, and the public. We do not 
take positions on policy issues, but we do produce data and analysis 
reports that are meant to help policy makers determine energy policy. 
Because we have an element of statutory independence with respect to 
the analyses that we publish, our views are strictly those of EIA. We 
do not speak for the Department, nor for any particular point of view 
with respect to energy policy, and our views should not be construed as 
representing those of the Department or the Administration. However, 
EIA's baseline projections on energy trends are widely used by 
Government agencies, the private sector, and academia for their own 
energy analyses.
    The Subcommittee has requested information about current and future 
electricity and natural gas prices and supplies in light of the Enron 
situation. EIA collects and interprets data on the current energy 
situation, and produces both short-term and long-term energy 
projections. The projections in this testimony are from our Short-Term 
Energy Outlook, February 2002, and the Annual Energy Outlook 2002, 
released late last year. The Short-Term Energy Outlook provides 
quarterly projections of energy markets through 2003, while the Annual 
Energy Outlook provides projections and analysis of domestic energy 
consumption, supply, and prices through 2020. These projections are not 
meant to be exact predictions of the future, but represent a likely 
energy future, given technological and demographic trends, current laws 
and regulations, and consumer behavior as derived from known data. EIA 
recognizes that projections of energy markets are highly uncertain and 
subject to many random events that cannot be foreseen, such as weather, 
political disruptions, strikes, and technological breakthroughs. In 
addition, both short- and long-term trends in technology development, 
demographics, economic growth, and energy resources may evolve along a 
different path than assumed in the Short-Term Energy Outlook and the 
Annual Energy Outlook. Many of these uncertainties are explored through 
alternative cases with a range of assumptions concerning world oil 
prices and weather in the Short-Term Energy Outlook, and world oil 
prices, economic growth, and, technology in the Annual Energy Outlook. 
My testimony today will present our reference case projections, which 
represent current policies and trends, and are not expected to be 
affected by the situation surrounding the collapse of Enron 
    Enron Corporation declared bankruptcy in December 2001. Our mid-
term projections, which were published the same month, incorporated the 
most recent events in energy markets as possible, but most of our 
analysis was completed by the end of September 2001. At that time, the 
problems of Enron had not yet been made public, and were not foreseen 
by most energy analysts. It is our view, however, that the mid-term 
outlook for energy markets is not materially affected by this 
situation, which is essentially confined to the shareholders and 
employees of Enron.
            the current situation and the short-term outlook
    Energy markets, with particular emphasis on electricity and natural 
gas, have experienced a great deal of volatility over the past two 
years. For electricity, the most dramatic ups and downs have occurred 
on the West Coast, particularly in California. Natural gas market 
changes over that period have been broader in scope and have been felt 
strongly across the country, although the highest price increases were 
in California. In general, it appears that the factors that are 
responsible for the very volatile and high electricity prices on the 
West Coast, and the spike and subsequent collapse in natural gas prices 
nationwide, stemmed from numerous economic and non-economic 
developments (some years in the making) that are not obviously related 
to Enron's market activity. Furthermore, these developments appear to 
be resolving toward a general result that would be obtained with or 
without the continued existence of Enron. Enron, while a large and 
well-known player among energy trading entities in the United States, 
was one among many existing and potential new players in electricity 
and natural gas markets. The existing array of market participants 
(producers, traders, marketers, distributors, consumers) should be able 
to interact effectively to ensure a normal (competitive) market balance 
in the future. The projections in this testimony are based on that 
premise, and there is nothing in what has occurred in energy markets 
since the failure of Enron that would suggest otherwise.
    Electricity markets in the United States emerged, in mid to late 
2001, from a period of significant turmoil into a period of relative 
calm with respect to spot electricity price movements. Most of the 
increased volatility in spot electric prices occurred on the West Coast 
of the United States, particularly in California, but also in the 
Pacific Northwest (Figure 1). Between May 1, 2000 and June 1 2001, the 
average daily percent spot price change at the California/Oregon border 
(COB) was 20 percent with a maximum absolute change of 140 percent. For 
the period August 7, 1998 to December 30, 1999, the average was 12 with 
a daily maximum of 126. The relative calm that has characterized the 
West Coast market since last winter is demonstrated by the fact that 
between June 1, 2001 and February 8, 2002, the average daily percent 
change in COB electricity spot prices has been 9.6 percent with a 
maximum absolute change of 84 percent. Many of the conditions that 
contributed to the electricity market squeeze in California in late 
2000/early 2001 are no longer operative and the prospects for continued 
calm in electricity prices through 2003 are good. Unfortunately, one of 
the contributors to lower electricity market volatility is the 
significant slowdown in the U.S. economy in 2001, particularly as 
demonstrated by the dramatic decline in industrial output which is 
still pervading the economic environment. It should be noted that, 
despite the volatility in some spot electricity markets, most retail 
electricity customers in the United States have seen only marginal 
increases in delivered electricity costs, and moderate declines in 2002 
are likely. This result stems from the fact that at the retail level 
electricity prices are still regulated in many States. Some States 
(particularly California) have seen large changes in delivered 
electricity prices, but, for most areas, retail price changes have been 
relatively small over the last two years.
    Some of the pressure on electricity prices that emerged in 2000 and 
early 2001 were related to fuel costs and the availability of adequate 
amounts of certain kinds of generating capacity. Throughout 2000, 
natural gas spot prices were rising steadily because of strong demand 
and stagnant or declining productive capacity. The economy was 
expanding rapidly and incremental natural gas demand requirements were 
outstripping the capacity to produce new supplies. Natural gas 
inventories fell steadily to very low levels at the beginning of the 
2000-2001 heating season, setting the stage for significant increases 
in natural gas costs to end-use customers, including electric power 
generators. At this time, oil prices were also well above typical 
levels because of the tight condition of world oil markets. It should 
be noted that a concomitant reduction in hydroelectric resources in 
2000 (due of course to exogenous weather factors) only served to 
tighten electricity markets by, in effect, removing an important 
component of everyday electricity supply capacity. This was 
particularly true on the West Coast. In late 2000, very cold 
temperatures shocked energy markets by moving heating demand-related 
energy use to well above normal levels. The resulting squeeze on 
natural gas markets resulted in one of the most dramatic runups in 
natural gas prices ever seen in the United States, with the result that 
industrial and power generating companies (as well as other energy 
users) saw fuel costs soar. For power generators, some alternatives to 
natural gas alleviated some of the pressure. In fact, the 2000-2001 
winter turned out to be one of the busiest winters for oil-burning 
power stations in many years. While oil-fired generating capacity 
represents only a marginal source of alternative electricity supply, 
this development nevertheless helped prevent gas price runups from 
being even worse than they actually were last winter.
    Since last winter, the onset of economic recession and relatively 
mild weather (including unusually warm heating season temperatures 
beginning in November of 2001) has reduced electricity (and other 
energy) demand and changed the cost/price environment for electricity 
and other energy sources. Average U.S. natural gas spot prices are 
currently between one fourth and one fifth the level seen at the height 
of the runup last winter. Oil prices are noticeably lower now than 
during the winter of 2000-2001 as well. Electricity spot prices now 
generally between $18 and $24 per megawatt-hour compared to $40-$50 in 
the South and East, and $400-$500 on the West Coast during mid January 
2001. Cost conditions in the near term (2002 and 2003) are expected to 
be such that average energy prices remain much closer to current levels 
than to anything resembling the high prices of late 2000 to early 2001. 
Moreover, current supplies (inventories) are relatively high right now 
for most fuels in the United States, particularly natural gas. Although 
some tightening in natural gas markets is anticipated for 2003, prices 
are likely to remain quite low on average through most of 2002.
    Until the U.S. economy begins to recover in earnest and domestic 
fuel inventories are pared to more normal levels, the probability of 
sharp price runups is minimal. In addition to the demand and fuel cost 
factors that have reduced the level of electricity price volatility 
since last winter, there has been a significant number of new electric 
generating plants added to the U.S. inventory over the last year or so. 
Current estimates are that there has been about a 73,500-megawatt (9.3-
percent) increase in generating capacity between the end of 1999 and 
the beginning of 2002. Approximately 2,000 megawatts (3.9 percent) have 
been added in California. Furthermore, it is generally expected that a 
significant recovery in hydroelectric power availability on the West 
Coast is likely this year. Such a development would further reduce the 
likelihood of renewed pressure on electricity prices in the region 
regardless of the specific entities engaged in trading there.
    Despite a period of wide variability and sharp runups in spot 
electricity prices since 1999, for most retail electricity consumers, 
price movements have been much less dramatic. For example, between 1999 
and 2001, U.S. residential electricity prices have risen an average of 
1.9 percent per year. The highest monthly year-over-year increase in 
the last two years for average residential prices has been 4.6 percent 
(February 2001). For 2002, an average decline in residential 
electricity prices of 1.6 percent is expected. A modest increase of 
about 0.5 percent is anticipated for 2003 as fuel costs increase 
moderately and as aggregate electricity demand begins to rise. U.S. 
electricity demand is currently estimated to have fallen by 0.6 percent 
in 2001. Much of that decline is expected to be reversed in 2002 and 
reach a more normal annual growth rate of 2.7 percent in 2003. This 
projection presumes that the U.S. economy will begin to recover in 2002 
and post a 4.0-percent real GDP growth rate in 2003.
Enron and Electricity Prices
    Average wholesale electricity prices across the Nation have been 
relatively stable since October 2001 (Figure 2). Monthly average 
electric power prices during this period ranged from a high of about 
$38.00 a megawatthour to a low of about $18.00 a megawatthour in 
response to changing demand and supply conditions.
    Enron's stock traded at $36.79 per share on October 11, 2001. Its 
price continued its downward spiral during the months of October and 
November. The stock has not recovered since then. This performance is 
also in sharp contrast with the stock's performance in September 2000 
when its price reached a high of nearly $90.
    The rate of decline accelerated as information about Enron's 
accounting practices emerged and Federal agencies began looking closely 
into Enron's affairs. Failure of a merger agreement between Enron and 
Dynegy also contributed to a decline in Enron's stock. Given the 
relative stability of wholesale electricity prices together with the 
collapse of Enron's stock price, it is not possible to establish any 
meaningful correlation between electric power prices and Enron's 
performance in the stock market.
    A review of average retail electricity prices (calculated as 
average revenue per kilowatthour) in relation to Enron's stock price 
during January 1999 through October 2001 also fails to exhibit any 
correlation between average retail electricity prices and Enron's 
stock's performance (Figure 3). As electricity prices are still 
regulated by many State public utility commissions, they do not appear 
to be influencing or being influenced by the Enron stock price.
Natural Gas
    Spot wellhead prices are currently averaging around $2.00-$2.20 per 
million Btu, or about one-quarter of what they were in January of last 
year when prices at the wellhead reached record levels (Figure 4). 
These prices are measured at the Henry Hub--a major upstream trading 
center, the prices of which are often used as representative of U.S. 
natural gas markets. Very mild winter weather during the fourth quarter 
of last year through January of this year has lowered heating demand 
considerably. Heating degree-days in the fourth quarter 2001 were about 
26 percent below levels from the previous fourth quarter and about 16 
percent below normal, while January 2002 heating degree-days were about 
14-17 percent below normal (depending on the region) and below year-ago 
levels. The low heating demand, a weak economy, and the ensuing excess 
storage levels for natural gas during the winter of 2001-2002 through 
the spring of 2002 should result in rather tepid natural gas prices in 
the near term. At the end of last November, working gas in storage was 
30 percent above levels during the previous November. By the end of 
January, the storage level was almost 80 percent above that of the 
previous year and about 35 percent above a 5-year normal (Figure 5). We 
expect that by the end of the heating season--less than 2 months away--
working gas in storage will be double the level at the end of last 
March. Another factor that helped to temper natural gas prices is the 
relatively low price for petroleum. Both crude and product prices are 
considerably less than they were this time last year, thus relieving 
any upward competitive price push on natural gas.
    With the heating season nearly over (given the high storage levels 
and weak demand), it is perhaps surprising that natural gas prices have 
not fallen further. It is true that average daily spot prices at the 
Henry Hub have slipped below $2 per million Btu on more than one 
occasion since November, most recently on January 29 of this year. Yet 
for much of the heating season to date (mid-December through mid-
February), Henry Hub spot prices have remained in the $2.30-$3.00 per 
million Btu range. Our current view for natural gas prices is that for 
much of the rest of 2002, spot wellhead prices will hover near (or 
perhaps slightly below) the $2.00-per-million-Btu level. A modest 
recovery in prices by late 2002 or early 2003 depends largely upon the 
speed of recovery in the U.S. economy, weather, and the net effect on 
gas productive capacity of the slowdown in U.S. drilling. The latest 
statistics from Baker Hughes show that gas-directed drilling in the 
United States has fallen to levels not seen since July 2000. We believe 
that room for some continued declines exists over the next several 
months because, on balance, aggregate lease revenues for oil and gas 
producers aren't likely to turn upward again until mid-summer. This 
will be particularly true if oil prices remain flat or weaken instead 
of increasing gradually as expected. For 2003, we project that, as 
economic growth accelerates and as world oil prices rise, natural gas 
wellhead prices will rise accordingly, gaining about 50 cents per 
thousand cubic feet on average compared to 2002.
Enron and Natural Gas Prices
    Very little information regarding Enron's true financial status was 
available to natural gas markets prior to October 16, 2001. In the 
period from that day through February 9, 2002, natural gas spot prices 
have fluctuated between $2 and $3 per million Btu (MMBtu) at the Henry 
Hub, with only a few brief exceptions.
    The price fluctuations during this period do not appear to have a 
clear correspondence with important dates involving Enron (Figure 6). 
While all daily variation is not necessarily easily explained, the 
price trends over weeks relate well to market conditions. Spot prices 
were increasing during October, which is a typical occurrence as the 
markets prepare for the heating season. Weather forecasts at the time 
were calling for a cold winter and prices reacted accordingly. As low 
temperatures failed to materialize, prices subsided to levels around 
$2. In December, as temperatures declined, once again forecasts were 
calling for cold winter temperatures in the near future, and natural 
gas prices rose in reaction.
    Since the beginning of the year, weather has tended to be warmer 
than normal, which has kept prices from increasing greatly. Further, 
the generally higher-than-normal temperatures during the heating season 
caused operators to limit withdrawals of natural gas from storage. The 
exceptionally large volumes of gas remaining in storage pose a 
substantial supply cushion that has mitigated the impact of any demand 
pressures on the market.
    Looking back over the past 2 years, natural gas markets have 
experienced a remarkable period in which prices rose from just above $2 
per MMBtu in January 2000 to more than $10 by the end of the year. 
After beginning 2001 at these elevated levels, prices returned to below 
$2 by the end of September 2001 (Figure 7). EIA examined gas market 
conditions and prices in two studies, U.S. Natural Gas Markets: Recent 
Trends and Prospects for the Future (May 2001), and U.S. Natural Gas 
Markets: Mid-Term Prospects for Natural Gas Supply (December 2001). 
These reports concluded that the high natural gas prices experienced in 
2000 were caused by constrained domestic productive capacity that 
resulted from a sustained period of relatively low oil and natural gas 
prices, followed by unusually high demand--the result of strong 
economic growth and an unusually warm summer and cold winter--and a 
poor storage position heading into the winter season (November 2000 
through February 2001).
    EIA does not believe that the Enron situation has had a strong 
detrimental impact on natural gas markets. The major events involving 
Enron do not appear to have a correlation with natural gas markets and 
prices. Further, gas price patterns during the past 2 years have 
reasonable explanations that did not require an extraordinary role for 
Enron in the Electricity and Natural Gas Industries
    In many ways, Enron was deemed a very large company. Among the 33 
major energy companies reporting to the Financial Reporting System 
(FRS) in 2000, Enron ranked second in total revenues (11 percent 
share), third on total assets (9 percent share), seventh on capital 
expenditures (4 percent share), and tenth on the basis of net income (2 
percent share). However, as the table below shows, Enron accounted for 
less than 1 percent of total retail electricity sales, generating 
capacity, and electricity generation in the United States in 2000. 
Enron mainly operated in wholesale trading markets, without owning or 
operating physical assets.

            Table 1. Enron in the Electricity Business, 2000
                Category                  Enron   U.S. Total     Share
Retail Sales (million kilowatt-hours)..      9.6   3,421,414      0.0003
Capacity (megawatts)...................    3,389     811,625      0.4176
Generation (million kilowatt-hours)....      915   3,800,000      0.2400

    In the natural gas business, Enron was a major player in the 
interstate gas pipeline business. Overall it had interests in 10 
percent of the interstate gas pipeline capacity in the United States 
(Table 2). However, some of this capacity has already been sold. In 
January 2002, the largest pipeline Enron owned was sold to Dynegy, 
reducing its interests to 7 percent. Enron also has interests in some 
gas storage and intrastate pipeline facilities. Enron operates 
underground storage facilities through Northern Natural in the States 
of Iowa and Kansas. Midwest Natural Gas Transmission operates one 
storage field in Indiana. The total capacity of these storage 
operations is approximately 2.5 percent of the total underground 
storage capacity for the nation. On a State basis, the fields operated 
by Enron entities account for more then 40 percent of the 273 billion 
cubic feet (Bcf) of capacity in Iowa and more then 25 percent of the 
301 Bcf of capacity in Kansas. Operations in Indiana amount to less 
then 1 percent of the total storage capacity for the State. No storage 
operations are associated with either Florida Gas Transmission or 
Northern Border. All of these facilities are expected to continue to 
operate regardless of their future ownership.

          Table 2. Enron Interstate Natural Gas Pipelines, 2001
                                    Ownership     (Million
             Company                  Share      cubic feet      Miles
                                    (Percent)     per day)
Northern Natural Gas Company....           100         3,904      15,671
Transwestern Gas Company........           100         2,836       2,532
Florida Gas Transmission Co.....            50         1,742       5,342
Northern Border Pipeline Co.....            12         3,094       1,248
Midwestern Pipeline Co..........           \1\         1,000         359
  Total Enron Interests.........  ............        12,576      25,152
Total US Interstate.............  ............       128,387     214,528
Enron Interests (percent) \2\...  ............            10          12
\1\ Enron owns 12.4 percent of Northern Border Partners which in turn
  owns 100 percent of Midwestern Pipeline.
\2\ The stated percentages are the share of the industry represented by
  the companies in which Enron has an ownership share.

                       annual energy outlook 2002
Reference Case
    Electricity Prices--Between 2000 and 2020, the national average 
price of electricity in real 2000 dollars is projected to decline from 
6.7 cents per kilowatt-hour to 6.5 cents per kilowatt-hour, an average 
reduction of 0.2 percent per year, mainly as a result of competition 
among electricity suppliers (Figure 8). By sector, projected prices in 
2020 are 6.4, 3.9, and 0.2 percent lower than 2000 prices for 
residential, commercial, and industrial customers, respectively.
    The cost of producing electricity is a function of fuel costs, 
operating and maintenance costs, and the cost of capital. In 2000, fuel 
costs typically represented $22 million annually--or 76 percent of the 
total operational costs (fuel and variable operating and maintenance)--
for a 300-megawatt coal-fired unit, and $66 million annually--or 93 
percent of the total operational costs--for a natural-gas-fired 
combined-cycle unit of the same size. For nuclear units, fuel costs are 
typically a much smaller portion of total production costs. Nonfuel 
operations and maintenance costs are a larger component of the 
operating costs for nuclear power units than for plants that use fossil 
    The impact of rising natural gas prices in the forecast is more 
than offset by a combination of falling coal prices and stable nuclear 
fuel costs. After the price spikes of 2000 and 2001, natural gas prices 
to electricity suppliers are projected to rise by 2.2 percent per year 
in the forecast, from $2.64 per thousand cubic feet in 2002 to $3.94 in 
2020 (Figure 9). The natural gas price increases after 2002, however, 
are offset by forecasts of declining coal prices, declining capital 
expenditures, and improved efficiencies for new plants.
    Before 2001, 14 States, including California, instituted 
competition in their retail electricity markets. Both the District of 
Columbia and Ohio began retail competition in 2001, and Texas and 
Virginia are scheduled to begin in 2002. Since the beginning of 2000, 
however, 7 States have delayed the opening of competitive retail 
markets beyond the dates originally planned, and in the fall of 2001, 
California suspended retail competition. Specific restructuring plans 
differ from State to State and utility to utility, but most call for a 
transition period during which customer access will be phased in. The 
transition period reflects the time needed for the establishment of 
competitive market institutions and the recovery of stranded costs as 
permitted by regulators. It is assumed that competition will be phased 
in over 10 years, starting from the inception of restructuring in each 
region. In all the competitively priced regions, the generation price 
is set by the marginal cost of generation. Transmission and 
distribution prices are assumed to remain regulated.
    It is not clear at this point to what extent the Enron situation 
will affect the announced plans of these States to move their 
electricity markets toward competitive restructuring. Clearly, the 
large price increases seen in California during the second half of 2000 
had a chilling impact on the trend toward deregulation. There have been 
no recent announcements of new State-level restructuring initiatives. 
On the other hand, with the return to stability in the California 
electricity market, as well as in national natural gas markets, there 
have been only a few decisions to delay or reverse the announcements 
already made. No clear trend concerning Enron's impact on electricity 
prices are discernible, implying that the effects will be small at 
    Electricity Sales--The continuing saturation of electric 
appliances, the availability and adoption of more efficient equipment, 
and efficiency standards are expected to hold the growth in electricity 
sales to an average of 1.8 percent per year between 2000 and 2020, 
compared with a 3.0-percent annual growth in GDP. By 2020, electricity 
sales are expected to be 4916 billion kilowatt-hours, compared to 3413 
billion kilowatt-hours in 2000, a 44 percent increase. During the 
1960s, electricity demand grew by more than 7 percent per year, nearly 
twice the rate of economic growth (Figure 10). In the 1970s and 1980s, 
however, the ratio of electricity demand growth to economic growth 
declined to 1.5 and 1.0, respectively. Several factors have contributed 
to this trend, including increased market saturation of electric 
appliances, improvements in equipment efficiency and utility 
investments in demand-side management programs, and more stringent 
equipment efficiency standards. Throughout the forecast, growth in 
demand for office equipment and personal computers, among other 
equipment, is dampened by slowing growth or reductions in demand for 
space heating and cooling, refrigeration, water heating, and lighting.
    With the number of U.S. households projected to rise by 1.0 percent 
per year between 2000 and 2020, residential demand for electricity is 
expected to grow by 1.7 percent annually, to 1672 billion kilowatt-
hours (Figure 11). Electricity demand in the commercial sector is 
projected to grow by 2.3 percent per year between 2000 and 2020. 
Projected growth in commercial floorspace of 1.7 percent per year 
contributes to the expected increase. Electricity is projected to 
account for three-fourths of commercial primary energy consumption 
throughout the forecast. Expected efficiency gains in electric 
equipment are expected to be offset by the continuing penetration of 
new technologies and greater use of office equipment. In the industrial 
sector, electricity consumption is projected to grow 1.4 percent 
annually over the forecast period, stimulated by growth in industrial 
output of 2.6 percent per year. Industrial delivered electricity use is 
projected to increase by 32 percent, with competition in the generation 
market keeping electricity prices low.
    Electricity Generating Capacity--From 2000 to 2020, 355 gigawatts 
of new generating capacity (excluding cogenerators) is expected to be 
needed to meet growing demand and to replace retiring units (Figure 
12), bringing total capacity to about 1060 gigawatts. Between 2000 and 
2020, 10 gigawatts (10 percent) of current nuclear capacity and 37 
gigawatts (7 percent) of current fossil-fueled capacity are expected to 
be retired, nearly all before 2010. Of the 185 gigawatts of new 
capacity expected by 2010, 10 percent is projected to replace retired 
oil- and natural-gas-fired steam capacity.
    Because of their favorable economics, natural gas-fired combined-
cycle units are projected to be used for most new baseload 
requirements. The average efficiency for combined-cycle units is 
expected to approach 54 percent by 2010, compared with 49 percent for 
coal-steam units, and the expected construction costs for combined-
cycle units are about 44 percent of those for coal-steam plants. As a 
result, most (59 percent) of the projected combined-cycle additions are 
expected before 2010. As natural gas prices rise later in the forecast, 
new coal-fired capacity is projected to become more competitive, and 80 
percent of the projected additions of new coal-fired capacity are 
expected to be brought on line from 2010 to 2020.
    A total of 31 gigawatts of new coal-fired capacity is projected to 
come on line between 2000 and 2020, accounting for almost 9 percent of 
all the capacity expansion expected. Competition with low-cost gas-
turbine-based technologies and the development of more efficient coal 
gasification systems have compelled vendors to standardize designs for 
coal-fired plants in efforts to reduce capital and operating costs in 
order to maintain a share of the market. Renewable technologies account 
for 3 percent of expected capacity expansion by 2020--primarily wind, 
geothermal, and municipal solid waste units. About 19 gigawatts of 
distributed generation capacity is projected to be added by 2020, as 
well as a small amount (less than 1 gigawatt) of fuel cell capacity.
    In addition to building new capacity, electricity generators are 
expected to use other options to meet demand growth--maintenance of 
existing plants, power imports from Canada and Mexico, and purchases 
from cogenerators.
    Electricity Generation--As they have since early in this century, 
coal-fired power plants are expected to remain the key source of 
electricity through 2020 (Figure 13). In 2000, coal accounted for 1,968 
billion kilowatt-hours or 52 percent of total generation, including 
cogeneration. Although coal-fired generation is projected to increase 
to 2,472 billion kilowatthours in 2020, increasing gas-fired generation 
is expected to reduce coal's share to 46 percent. Concerns about the 
environmental impacts of coal plants, their relatively long 
construction lead times, and the availability of economical natural gas 
make it unlikely that many new coal plants will be built before about 
2005. Nevertheless, slow growth in other generating capacity, the huge 
investment in existing plants, and increasing utilization of those 
plants are expected to keep coal in its dominant position. By 2020, it 
is projected that 23 gigawatts of coal-fired capacity will be 
retrofitted with scrubbers to meet the requirements of the Clean Air 
Act Amendments of 1990 (CAAA90).
    In percentage terms, natural-gas-fired generation is projected to 
show the largest increase, from 16 percent of the total in 2000 to 32 
percent in 2020. As a result, by 2004, natural gas is expected to 
overtake nuclear power as the Nation's second-largest source of 
electricity. Generation from oil-fired plants is projected to remain 
fairly small throughout the forecast.
    Natural Gas Prices--From 1995 to 2000, the wellhead price of 
natural gas averaged $2.38 per thousand cubic feet (2000 dollars). 
Relative to that average, the price is expected to increase at an 
average rate of 1.6 percent per year in the reference case, reaching 
$3.26 in 2020 (Figure 14).
    Increasing prices reflect the rising demand for natural gas; the 
progression of the discovery process from larger, shallower, and more 
profitable fields to smaller, deeper, and less profitable ones; and 
increasing production from higher cost sources, such as unconventional 
natural gas. Projected average growth in production from unconventional 
sources from 2000 to 2020 ranges from 3.1 to 3.6 percent per year 
across the cases, compared to a range of 2.0 to 2.2 percent per year 
for conventional sources. Technically recoverable gas resources are 
expected to remain more than adequate to meet the projected production 
increases. The price increases are expected to be tempered by 
technological progress in both discovering and producing natural gas.
    Long-term end-use prices for natural gas are projected to be lower 
than the relatively high prices experienced in 2000 and 2001. Average 
transmission and distribution margins are generally expected to remain 
constant or decline through 2020, moderating the projected increase in 
wellhead prices. The average end-use price is expected to increase by 
35 cents per thousand cubic feet from 2005 through 2020, compared with 
an increase of 61 cents per thousand cubic feet in the average price of 
domestic and imported supply in the same period. By 2020, the average 
end-use price is expected to be $4.92 per thousand cubic feet.
    Declining margins are particularly important in restraining the 
rise in both residential and commercial end-use prices (Figure 15). 
From 2005 through 2020, residential and commercial end-use prices are 
projected to increase by 12 cents per thousand cubic feet, to $7.16, 
and 28 cents per thousand cubic feet, to $6.02, respectively.
    The industrial and electricity generation sectors have the lowest 
end-use prices, in part because they receive most of their natural gas 
directly from interstate pipelines, avoiding local distribution 
charges. Summer-peaking electricity generators reduce their 
transmission costs by using lower cost interruptible transportation 
rates during the summer when spare pipeline capacity is available; 
however, as electricity generators take an increasing share of the 
market, they are expected to rely on higher cost firm transportation to 
a greater extent. Prices of natural gas for the industrial and 
electricity generation sectors are projected to reach $4.01 and $3.94, 
respectively, by 2020. The highest end-use prices are expected for 
compressed natural gas vehicles, because the costs of additional 
infrastructure requirements are expected to be added to pipeline and 
distribution rates.
    Natural Gas Production and Imports--Growth in domestic natural gas 
production of 9.4 trillion cubic feet between 2000 and 2020 is expected 
to come primarily from lower 48 onshore nonassociated (NA) sources 
(Figure 16). Conventional onshore natural gas production is projected 
to grow rapidly in the last 10 years of the forecast, increasing its 
share of total lower 48 production from 37 percent in 2000 to 39 
percent in 2020. As a result of technological improvements, production 
from unconventional sources (tight sands, shale, and coalbed methane) 
is projected to increase more rapidly. Unconventional natural gas 
production is projected to increase from 25 percent of total lower 48 
production in 2000 to 32 percent in 2020. Production of associated-
dissolved (AD) natural gas from lower 48 crude oil reserves declines 
slightly in the projections, following the expected pattern of crude 
oil production. AD natural gas is projected to account for 9 percent of 
lower 48 natural gas production in 2020, compared with 16 percent in 
    Offshore production is expected to increase less rapidly, 
accounting for 24 percent of total lower 48 gas production in 2020. In 
recent years, innovative cost-saving technologies have been applied, 
particularly in the deep waters of the Gulf of Mexico, where 
significant finds are expected to continue.
    Alaskan natural gas production is projected to grow by 1.7 percent 
per year through 2020 to meet expected State demand. Options for 
marketing the gas outside Alaska include transportation through a 
pipeline, conversion to liquefied natural gas (LNG), and conversion to 
synthetic petroleum products.
    Imports of natural gas make up the difference between U.S. 
production and consumption (Figure 17). Imports are generally expected 
to be priced competitively with domestic sources. Imports from Canada, 
primarily from western Canada and the Scotian Shelf in the offshore 
Atlantic, are expected to make up most of the increase in U.S. imports. 
Because most of the producing regions in Canada are less mature than 
those in the United States, there is strong potential for low-cost 
production. Net imports from Canada are projected to provide 15 percent 
of total U.S. supply in 2020, about the same as in 2000.
    LNG imports are expected to increase, but they are not expected to 
become a major source of U.S. supply through 2020. Two LNG import 
facilities, at Cove Point, Maryland, and Elba Island, Georgia, have 
been closed for many years but are expected to reopen by 2002. It is 
expected that those facilities, plus the other two U.S. facilities, at 
Everett, Massachusetts, and Lake Charles, Louisiana, will be operating 
at full capacity by 2010, supplying 0.8 trillion cubic feet per year 
through 2020.
    Although Mexico has a considerable natural gas resource base, trade 
with Mexico has until recently consisted primarily of exports from the 
United States. Mexico is projected to remain a net importer of U.S. 
natural gas through 2020; however, U.S. exports are expected to peak in 
2015 and then decline as the infrastructure is developed for Mexican 
natural gas to meet indigenous demand.
    Natural Gas Consumption--Total natural gas consumption is projected 
to reach 33.8 trillion cubic feet by 2020. Increasing demand by 
electricity generators (excluding cogenerators) is expected to account 
for 55 percent of the total consumption growth by 2020 (Figure 18). 
Demand growth is also expected in the residential, commercial, 
industrial, and transportation sectors. Most new electricity generation 
capacity is expected to be fueled by natural gas, and natural gas 
consumption in the electricity sector is projected to grow rapidly 
throughout the forecast as electricity consumption increases.
    In the reference case, natural gas consumption for electricity 
generation (excluding cogeneration) is projected to increase from 4.2 
trillion cubic feet per year in 2000 to 10.3 trillion cubic feet per 
year in 2020, an average annual growth rate of 4.5 percent. At the end 
of the forecast period, electricity generation is expected to surpass 
the industrial sector as the largest consumer of natural gas. Although 
coal prices to the electricity generation sector are generally 
projected to fall throughout the forecast, natural-gas-fired 
electricity generators are expected to have advantages over coal-fired 
generators, including lower capital costs, higher fuel efficiency, 
shorter construction lead times, and lower emissions.
    Although more than half the increase in natural gas consumption 
between 2000 to 2020 is expected in the East, the West--including 
Canadian imports and most of the Gulf Offshore--is expected to provide 
approximately 80 percent of the incremental lower 48 natural gas supply 
in the reference case. As a result, most new natural gas pipelines are 
expected to be built from the West to the East. The exception is 
expected new pipeline capacity originating in Canada and the Rocky 
Mountains, which will be needed to meet growth in natural gas 
consumption along the Pacific Coast.
    The collapse of Enron Corporation, while detrimental to the 
employees and shareholders of the company, has not had a noticeable 
impact on energy markets, especially those for electricity and natural 
gas, to date. An examination of wholesale price data for both 
electricity and natural gas indicates that, during the same period that 
Enron stock was declining from over $37 to less than $1 a share, spot 
prices for electricity and natural gas were relatively stable, showing 
normal fluctuations related to supply and demand. It is not expected 
that the Enron situation will have any lasting impact on future 
electricity and natural gas markets, either in the short term, or 
through 2020. Electricity prices are expected to remain fairly stable 
over the next couple of years, with a slight decline through about 2010 
due to the effects of competition and falling coal prices before rising 
again through 2020 because of rising natural gas prices. Natural gas 
prices, which were highly volatile during much of 2000 and 2001, are 
expected to be lower in 2002 before rising about $0.50 per thousand 
cubic feet at the wellhead in 2003. In the long term, natural gas 
prices are expected to increase from current levels, reaching $3.26 per 
thousand cubic feet (real 2000 dollars) by 2020.
    Thank you, Mr. Chairman and members of the Subcommittee. I will be 
happy to answer any questions you may have.









    Mr. Barton. Thank you. And you are the first one to be 
under time, which we appreciate.
    I might say before we go to Mr. Welch that some of this 
very dry recitation of facts and figures does tend to be a 
little drowsing inducing to the chairman, but it is very 
    I mean, it is important to put that into the record that 
those are the facts, and that is not rhetoric, but that is what 
is really happening in the energy market, and I appreciate you 
being here to put that into the record.
    We now would like to hear from the Chairman of the Public 
Utility Commission of the great State of Maine, which is a 
State that I have not had the honor to visit, but it is a State 
that I hear great things about.
    And I have got several friends from Maine who just brag, 
brag, brag, about what a great place it is. I hope, some day, 
to get up there. Your statement is in the record, and we 
welcome you to elaborate on it for such time that you may 


    Mr. Welch. Thank you very much, Mr. Chairman, and members 
of the subcommittee. If you do plan to visit, August is a 
better time than February.
    Mr. Barton. In most States, by the way.
    Mr. Welch. I speak here today only for the Maine 
Commission, but I think since our market is as open to 
competition as any market in the country, our experience may 
nevertheless provide a useful view.
    And I also want to say right away that it is a pleasure to 
be able to confirm, from our State's perspective, many of the 
observations of my friend and colleague, Pat Wood. Frankly, 
many of us in the States think he is exactly the right person 
to be in the job at the moment.
    No State has a greater interest in the success of 
competitive electricity markets than Maine. In the 2 years 
since we opened our retail markets to competition, Maine's 
consumers have been directly and often immediately affected by 
changes in the wholesale prices in New England.
    This dependence has its roots in two critical principles of 
Maine's law. First, Maine cut the regulatory link between 
electricity supply and delivery by requiring our utilities to 
divest themselves completely of generation.
    We did so because we believe that competition in the 
electricity markets is likely to be fairest and most robust 
when the transmission and distribution utility has no reason to 
favor any one competitor over any other.
    Second, Maine decided to forego artificial price 
controlling devices, such as price caps or low term fixed 
supply contracts, that insulate consumers from the prices 
revealed in the wholesale markets.
    Even Maine's standard offer, the product for people who do 
not contract directly with energy suppliers, is priced by 
competitive bid rather than regulatory or legislative 
    The effect of Maine's approach to restructuring has been 
dramatic. Forty-four percent of the total electric load in 
Maine is served through bilateral contracts between retail 
customers and suppliers.
    Incidentally, Enron, by our best estimates, served about 
one-quarter of Maine's total load, serving both part of the 
standard offer, and many retail customers as well. Maine's 
aggressive adoption of the competitive model, however, has 
vastly increased the vulnerability of Maine's consumers to 
distortions in the wholesale market.
    Accordingly, we have worked hard to ensure that the 
wholesale market reflects the economics of supply and demand, 
and does not provide either inadequate incentives for efficient 
investment, or opportunities for gaming and the exercises of 
market power.
    Thus, it is with considerable personal and professional 
relief that I can report that both Maine and New England have 
apparently avoided significant injury from Enron's recent 
    The greatest dangers we saw, as the collapse became 
evident, were threats to the reliability of supply, and to the 
prices paid by Enron's customers. Neither of these threats 
materialized to any substantial degree.
    Supply continued without discernible disruption, and 
because of very careful management, particularly by the New 
England independent system operator, and participants in the 
New England power pool, we saw little instability in the 
trading market.
    Enron's collapse did not cause a reliability problem 
because Enron does not own generation in New England. The 
generation owners' interest remains unchanged, to run their 
generators and sell the output. Customers continue to buy that 
    Loads did not change, and the generating plants did not go 
anywhere. Moreover, there was enough trading capacity available 
to ensure that purchasing and selling could proceed on a scale 
sufficient to absorb the volume abandoned by Enron.
    Indeed, the stressed and ultimately bankrupt Enron 
continued, and continues to this day to meet its contractual 
supply obligations. These contracts remain valuable assets of 
the bankrupt entity because most, if not all, of these 
contracts are profitable for Enron in today's electricity 
    Virtually all of the contracts were signed at the time of 
higher electricity prices in the region, and required customers 
to pay a higher price than the current market price.
    I'm sorry to report, however, that the ability of Maine and 
New England to escape largely unscathed has little to do with 
our own foresight or cleverness. We escaped for the simple 
reason that when Enron fell, energy supplies were high and 
energy prices low.
    Had Enron collapsed in a period of rising energy prices, 
customers would have been exposed to enormous market risks. For 
example, had Enron's implosion occurred in a higher priced 
market, like the one we had just a year ago, and Enron had 
defaulted on its obligations, Maine's customers would have had 
to pay at least a $100 million more to secure the same supply.
    The losses for all of New England could have been 10 times 
that amount. Our fundamental concern is that the risks in the 
energy market are asymmetrical. If a customer signs a contract 
with an energy supplier and market prices fall, the customer is 
stuck with paying the now higher than market price for its 
    This remains true even if the supplier goes bankrupt. The 
contract is a valuable asset of the bankrupt company, and one 
that the bankruptcy court will likely seek to enforce. On the 
other hand, if a customer has a contract with an energy 
supplier and market prices rise, and the supplier, for whatever 
reason, defaults on the contract, the customer must buy new 
supply in the high priced energy market, and take their place 
in line with all of the other creditors, with frankly little 
hope that the protections that the customer negotiated in the 
supply contract will provide sufficient relief.
    Maine tries to minimize such risks that the States standard 
offers electricity customers, by requiring licensed suppliers 
to provide evidence of their financial soundness, either by 
posting a substantial bond or providing us a corporate 
guarantee that the supplier will meet its obligations.
    The Enron experience suggests, however, that Maine's own 
efforts along these lines are likely to be insufficient. A 
corporate guarantee from Enron, frankly which we would have 
accepted last year, would obviously not have saved our 
    Surety bonds, as we have discovered in our own experience 
in another matter, are difficult to enforce, and in many cases 
likely to become significantly more expensive due in no small 
part to the Enron related losses themselves.
    I remain convinced that a well-structured and genuinely 
competitive electricity market, can bring substantial benefits 
to consumers and investors alike. That market will be destroyed 
in its infancy, however, unless market rules require all 
players to compete fairly based on the underlying economics of 
what they bring to the market.
    Just as important is public confidence in the solvency and 
integrity of the players. Absent the latter, customers will be 
justifiably reluctant to enter the market. Competition and 
larger regional electricity markets are increasingly recognized 
as superior to traditional regulation as a way of creating 
incentives for investment, disciplining prices, and ensuring a 
robust and secure infrastructure.
    But the political and regulatory consensus needed to 
achieve those broad competitive markets may whither away if 
consumers are perceived to be vulnerable to unethical or 
irresponsible behavior by market participants.
    Energy providers, consumers, and investors, very much need 
national reforms that will restore confidence in markets, and 
by themselves, States cannot protect against incompetence or 
purposeful cheating by a major national player.
    Apart from the costs and limited effectiveness of requiring 
corporate guarantees or surety bonds, unscrupulous players can 
avoid State design and State-enforced consumer protections by 
doing business only in States with fewer or less effective 
    The reforms enacted to restore such confidence must thus be 
national in scope. I do not have specific legislative proposals 
to recommend this afternoon. I urge, however, that you give 
favorable consideration to national standards, whether done 
through new accounting and reporting rules, or greater FERC 
oversight authority over market participants.
    And thus will minimize the possibility of consumers in 
Maine and elsewhere will be exposed to the financial 
consequences of events like the sudden collapse of a major 
market player that customers had no reason to expect based on 
the information available to them.
    Customers in electricity markets should of course be 
subject to the normal competitive risks of price fluctuations 
due to changes in supply and demand. They should not also be 
subjected to risks created by deceptive financial reporting or 
inadequate regulatory tools. Thank you for your time.
    [The prepared statement of Hon. Thomas L. Welch follows:]
  Prepared Statement of Hon. Thomas L. Welch, Chairman, Maine Public 
                          Utilities Commission
    Good morning, Mr. Chairman, members of the Subcommittee.
    Thank you for this opportunity to report to the Subcommittee on the 
effects of the Enron Corporation's recent decline on the electricity 
market in Maine and New England. I am Thomas L. Welch, Chairman of the 
Maine Public Utilities Commission (MPUC).
    To aid the Subcommittee's work on restructuring the electricity 
industry, I have brought copies of the Maine Commission's very recent 
Report on Restructuring in our state. This document can also be found 
on the MPUC website at: www.state.me.us/mpuc/2002legislation/
    No state has a greater interest in the success of the wholesale 
electricity markets than Maine. In the two years since we opened our 
retail markets to competition, Maine's consumers have been directly and 
often immediately affected by changes in the wholesale prices in New 
England. As much as any jurisdiction, Maine cut the regulatory tie 
between electricity supply and delivery by requiring its utilities to 
completely divest themselves of generation. We did so because we 
believe that competition in electricity markets is likely to be fairest 
and most robust when the transmission and distribution utility, the T&D 
utility, has no reason to favor any one competitor over any other. 
Apparently energy companies agree; currently 14 of them have competed 
and won customers in Maine, including Enron, which--by our best 
estimates--serves fully one quarter (an estimated 450 megawatts) of 
Maine's load--or at least it did so prior to its recent troubles.

    Maine's interest in the success of the wholesale electricity 
markets is further rooted in our decision to forego artificial price-
controlling devices such as price caps or long term fixed supply 
contracts that insulate consumers from the prices revealed in the 
wholesale markets; even Maine's Standard Offer (default or provider of 
last resort) supply is provided at prices that are set by competitive 
bid. The effect of Maine's approach to restructuring has been dramatic:

 the incumbent investor-owned utilities no-longer supply 
        generation service;
 virtually all of Maine's generation is supplied by competitive 
        suppliers, and
 44 percent of the total electric load in Maine has departed 
        the standard offer (the provider of last resort) and is served 
        by retail suppliers.
    Maine's aggressive adoption of the competitive model, however, 
comes at a price. The prices paid by Maine's consumers are--perhaps as 
much as any in the country--sensitive to the vagaries of the wholesale 
market. Accordingly, we have worked hard to ensure that the wholesale 
market reflects the economics of supply and demand, and does not 
provide either inadequate incentives for efficient investment or 
opportunities for gaming and the exercise of market power. We have 
tried to avoid or minimize the impact of any events which will impair 
competition or unfairly injure consumers--residential or business.
    And, thus far, I am relieved to report, both Maine and New England 
have apparently avoided significant injury from Enron's recent 
financial collapse. Most feared were threats to the reliability of 
supply and to the prices paid by Enron's customers. Supply continued 
without discernible disruption. And, because of very careful 
management, particularly by the ISO-New England and participants in the 
New England Power Pool (NEPOOL), there was little instability in the 
markets and apparently no major financial losses.
    Enron's collapse did not cause a reliability problem because Enron 
does not own the generators. The generation owners' interest remained 
unchanged: run their generators and sell the output. Customers 
continued to want that output. Loads did not change. Generators did not 
go anywhere. So reliability was unaffected.
    And in this environment the stressed and ultimately bankrupt Enron 
continued--and continues--to meet its contractual supply obligations, 
most--if not all--of which were profitable in today's energy market. 
Those contracts required customers to pay a higher price than the 
current market price.
    Nevertheless, companies who owned the generators, fearing that 
Enron might not pay for its power purchases, opted out of contracts 
when possible and instead sold into the spot market.
    NEPOOL's old financial assurance policies allowed the organization 
to rescind membership in the Pool, but did not allow NEPOOL to cut off 
a company from trading in the energy markets in response to a situation 
like that posed by Enron. NEPOOL and ISO-New England's new policy will 
automatically restrict a company's trading in the pool if its credit 
rating falls below a certain level.
    The sudden Enron disintegration impaired its ability to arrange 
bilateral contracts with generators. In response, Enron bought more and 
more from the Pool each day. When Enron declared bankruptcy, it was 
carrying a large, negative financial balance with the Pool (pre-
bankruptcy-petition debt). There are two possible remedies for this 
pre-petition debt. The bonds that Enron was required to post to 
establish credit with the pool may cover the debt; and if not, NEPOOL 
has filed a claim in the bankruptcy proceeding.
    Enron fought to avoid giving up its trading activities. In lieu of 
the 30-day settlement process accorded healthy energy trading 
companies, Enron negotiated a new 3-day-rolling-average payment 
arrangement with the Pool (administered by the ISO). Enron now 
maintains a 3-day cash balancing account with the ISO. At the end of 
each day, the ISO withdraws enough money to cover the transactions that 
occurred three days previously. Enron has agreed to wire-transfer to 
the ISO--by the end of the next day--enough money to replenish the 
account. In December this arrangement and term sheet were submitted to 
the FERC for emergency approval. The FERC promptly approved it.
    There was further concern in the New England market that, because 
parties with bilateral contracts to supply Enron could terminate those 
contracts because of the bankruptcy but Enron could keep buying what it 
needed in the spot market, Enron's resort to the spot market could 
produce over-reliance on it (similar to what happened in California), 
sharply increasing spot-market prices. While that did not happen in 
this instance, it remains at least a theoretical possibility in the 
event of the financial collapse of another big player.
    Outcomes like the one Maine and New England just experienced 
frequently leads to the oft-used phrase ``we dodged the bullet.'' True, 
the bullet did not hit us. But it was not because we were smart enough 
or nimble enough to escape its blow. We were simply and profoundly 
    We are, and have been for many months, in a falling energy-price 
market, one in which suppliers with a fixed price can profit from 
declining prices. Had the same set of events occurred against a 
backdrop of rising energy prices, suppliers would have had an 
extraordinary incentive to escape their obligations. (Maine has had 
direct experience with such circumstances.)
    Had Enron's implosion occurred in a rising market, Maine's 
ratepayers could have taken a ``hit'' in excess of $50 million, perhaps 
$100 million. And, remember, Maine is a state of fewer than 1.3 million 
people. If Enron has captured as much of the market across New England 
as it has in Maine and if we were in a rising-energy-price market, the 
comparable ``hit'' for ratepayers across New England could have 
approached $1 billion.
    For ratepayers, there is a certain ``heads you win, tails I lose'' 
aspect to the energy market. If a customer signs a contract with an 
energy supplier and market prices fall, the customer is stuck with 
paying the now higher-than-market price for its energy. This remains 
true even if the supplier--as has Enron--goes bankrupt; the contract is 
a valuable asset of the bankrupt, one which the Bankruptcy Court will 
seek to use on behalf of other creditors.
    But if a customer has a contract with an energy supplier, market 
prices rise, and the supplier (for whatever reason) goes bankrupt and 
defaults on the contract, the customer must buy new supply in the high-
priced energy market and take its place in line with all the other 
creditors with little hope that the protections the customer negotiated 
in its supply contract will provide sufficient relief.
    Maine tries to minimize such risk to the state's Standard Offer 
electricity customers by requiring licensed suppliers to provide 
evidence of their financial soundness, either by posting a substantial 
bond or (in the case of companies whose guaranteeing parent has a 
minimum credit rating of BBB+ or equivalent) by providing us a 
corporate guarantee that the supplier will meet its obligations.
    But even if we had required and Enron had provided a bond to 
protect Maine's Standard Offer customers, we would have had little 
meaningful protection--at least sooner than the conclusion of very 
protracted litigation. Reportedly Enron had purchased surety bonds to 
guarantee billions of dollars of natural gas and crude oil to two 
offshore companies. Enron declared bankruptcy in November, ostensibly 
leaving its guarantors with the bill.
    Enron's failure (perhaps amplified by large claims associated with 
Kmart's failure) supposedly represents one of the largest payouts ever 
for the surety industry, about $2 billion, according to experts. 
Reportedly, it is comparable to the effect of the September 11th 
terrorist attacks on the property and casualty insurance industry, and 
the magnitude of these losses may force some bonding companies out of 
the surety-bond business.
    As a result, bond companies likely will raise prices, require 
collateral, tighten underwriting standards, and cancel some policies. 
Thus, it could be more difficult for some companies to obtain bonds, 
thereby reducing the number of competitive providers and making 
competition less vigorous. Energy market prices may reflect these 
additional cost burdens.
    In conclusion, well-structured, well functioning energy markets can 
bring substantial benefits to consumers and opportunity to ethical, 
well run businesses, and strengthen the U. S. economy. Benefits will be 
realized regardless of whether a state or states open their markets to 
retail competition.
    The keys to a well structured, well functioning market are rules 
that allow all players to compete fairly, based on the underlying 
economics of what they bring to the competition, and on the integrity 
of the players. Absent the latter, competitive energy providers will 
not enjoy the confidence of investors (hence their financial support) 
or other players in the market (making it harder for them to bring 
valuable products to the market).
    Energy providers, consumers, and investors very much need reforms 
that will restore confidence in markets. By themselves, states cannot 
protect against a incompetence or purposeful cheating by a major 
national company. Apart from the costs and limited effectiveness of the 
protections mentioned earlier (e.g., surety bonds, corporate 
guarantee), unscrupulous players can avoid state-designed and -enforced 
protections by doing business only in states with the least restrictive 
protections. The specific reforms of this nature must be national in 
scope and carefully designed to balance the price of that protection--
both financial and regulatory--against the value of the additional 
assurances received.

    Mr. Barton. Thank you for that excellent testimony.
    The Chair would now recognize himself for the first series 
of questions, and will set the clock at 5 minutes.
    There has been quite a bit of discussion about need, either 
need for more transparency, or additional transparency in some 
of these markets. It is my understanding that the Enron trading 
system, Enron on-line, was not a market created like the New 
York Stock Exchange, where the New York Stock Exchange creates 
a trading entity, a trading area, and then independent brokers 
actually create markets in the specific stocks and bonds that 
are traded on the New York Stock Exchange.
    It is my understanding that Enron was actually a 
participant in each trade; that they could either purchase the 
commodity, or sell the commodity, but they were actually on one 
side of each trade.
    So my first question, and I am going to ask it to Mr. Wood, 
and then to Mr. Newsome, but if Mr. Hunt wants to answer, he is 
certainly welcome to. The Enron on-line trading system, is it 
something that we should have separate regulations for at the 
Federal level?
    Mr. Wood. Actually, in September, before Enron ever came 
up, this issue was raised at the Commission, and we put out in 
the context of a broader rulemaking that we have now pending, 
whether the codes of conduct that applied to corporate 
affiliates, such as between Enron Pipeline and Enron, the gas 
trading company, whether that same type of reporting 
requirement and those prohibitions that we have, should apply 
also to Enron on-line, which is in effect an extension, a 
marketing extension so to speak, of Enron's competitive sales 
    But, yes, it is an issue that we are looking at. We gave 
asked for comment on, and I expect that the comments may look a 
little different in light of Enron's departure, but I think it 
is within current statutory authority to go ahead and do that 
if it is needed to be done.
    Certainly any guidance from Congress would be welcomed, but 
we are looking at that also in our investigation as to the role 
of Enron on-line, and look deeper into just what it could have 
done or not have done.
    Mr. Barton. Mr. Newsome.
    Mr. Newsome. Thank you, Mr. Chairman. As I said in my 
testimony, I think it is extremely important to define the 
problem before we look toward the solution. And at this point, 
at least in our opinion, as tragic as the Enron situation has 
been, we have yet to find any problems with the Enron on-line 
trading system, at least as it relates to our markets.
    So it appears that there was no apparent breakdown in the 
trading system itself. I think when we look at their Enron on-
line as a trading system, we would look at it in terms of the 
bilateral trading exemption that I discussed earlier.
    And when we look at those bilateral systems, and I think as 
Congress looked at it, and made the determination to exempt 
from the Commodity Exchange Act, at least from the CFTC, I 
think it looked at a system in which you had two very large 
sophisticated players doing business with each other, and in 
which the price was negotiated at that level between those two 
sophisticated parties.
    And recognized that that bidding was not openly 
competitive, and it was only between those two parties, and I 
think the reason that Congress did not require transparency at 
that point is that because you were dealing between two large 
sophisticated parties, who may be dealing in a very large 
amount of a product, that it could actually distort a 
competitive market price if that was in fact transparent.
    Mr. Barton. Mr. Hunt.
    Mr. Hunt. I don't have anything to add, Mr. Chairman. The 
stockmarket is different from the energy market, and as you 
characterized, the trades on the exchange are between 
individual members of that exchange typically and the exchange 
itself is not a party to those trades. It is just a trading 
    Mr. Barton. Well, would it be good for the public to know 
that in the Enron trading system, where Enron itself is making 
the market in several--it is buying on one side, and selling on 
another side--it is buying from one person and selling it to 
another person.
    And if you are going to make that market, should you at the 
end of the day or the end of the week, the end of the month, do 
a net balance sheet analysis to the FERC or the CFTC, so that 
we know whether you are long or short in aggregate in your 
aggregate trading positions? Is that something that we should 
look at or not look at?
    Mr. Norlander. I think Congress made the determination at 
the time of the CFMA that there was something that did not need 
to be looked at. We are continuing----
    Mr. Barton. Well, Congress changes its mind on occasion.
    Mr. Newsome. Well, that is an area that we are continuing 
to look at, Mr. Chairman. We are cooperating with other 
agencies as well in looking at the transparency issues, and I 
think that as we come up with a determination, surely we will 
share that information and our thoughts with this subcommittee.
    Mr. Barton. My last question is did Enron actually default 
on any of its energy contractual obligations that it entered 
into under its trades with Enron on-line?
    Mr. Wood. We can check into that. I know that it has 
defaulted on some trades, but I am not sure if those are the 
ones that were entered into on Enron on-line or not.
    [The following was received for the record:]
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    Mr. Barton. Well, specifically, energy related contracts. 
Did they actually default or were they able--one of the 
testifiers was that because of the great work of various other 
markets, they were able to offset, download, hedge, so that 
there was really none of that.
    So the committee would be very interested if there were 
examples of actual defaulted obligations. My time has expired, 
and we would recognize the gentleman from Virginia for 5 
    Mr. Boucher. Thank you, Mr. Chairman. Ms. Hutzler, let me 
inquire of you concerning a number of matters. In the wake of 
the Enron bankruptcy, there was a marked diminished ability on 
the part of companies that built merchant energy plants to 
attract capital. And I wonder, as a first matter, whether your 
agency has done an inventory of the projects for construction 
of new power plants that were either delayed, or canceled, in 
the wake of the Enron Bankruptcy? Do you have any information 
about that?
    Ms. Hutzler. We actually have not done an inventory on 
that, but I will note, as I noted in my testimony, that over 
the past 2 years we have built 74 gigawatts of capacity and 
brought them on-line, which in 2001 was probably close to a 
record at 49 gigawatts of capacity.
    In a time when demand is high, and the economy is thriving, 
obviously there are a lot of announced capacity additions. But 
the amount of announced capacity additions would probably be 
far more than the demand that is needed.
    In our forecast over the next 20 years, we show at a 1.8 
percent growth in electricity demand, the need for about 375 
gigawatts of capacity. So that would be about 20 on average a 
    Now, obviously the economy is different each year, and the 
weather is different in each year, and so the amount that you 
need does fluctuate by year. But we have certainly seen a 
record amount coming on recently.
    Mr. Boucher. Well, let me focus your attention just on the 
most recent event, which was the Enron bankruptcy. I would like 
to have your opinion, and if you aren't prepared to give it 
today, then we would be happy to receive it in written form on 
a subsequent day, about the effect of the Enron bankruptcy and 
the subsequent lack of ability on the part of many of the 
merchant energy companies to attract the capital to build the 
new plants that they had announced that they were going to 
    And the effect that that is going to have on the energy 
supply for the Nation as the economy recovers. I have heard 
many people express a concern that these plant cancellations 
and delays may result in there being an insufficient amount of 
electricity available.
    Let me just ask you if you share that concern, and if you 
would like to provide an answer that is more extensive in a 
supplement, that would be fine as well.
    Ms. Hutzler. Well, I would prefer to provide it for the 
record. As I did mention though, with the lower economy and the 
lower demand, you would expect cancellations at some of these 
plants, but I can't go into any more detail than that now.
    [The following was received for the record:]

    The amount of capacity under construction and planned needs to be 
compared to the amount of capacity needed to maintain a reliable supply 
of electricity. EIA's most recent data show that over 27,000 megawatts 
of capacity came on line in 2000 and an estimated 48,000 megawatts of 
capacity came online in 2001.\1\ In addition, over the 2002 to 2005 
period, electric power generation companies reported to EIA that about 
278,700 megawatts are in earlier stages of planning. If all of that 
capacity were to come on line as planned between 2001 and 2005, it 
would mean that roughly 326,000 megawatts of capacity would be added 
which would amount to a 40 percent increase in total U.S. capacity from 
the 2000 level.
    \1\ EIA is still working to check the status of 5,000 megawatts of 
capacity that had reported plans to come on at the end of 2001, but for 
which confirmation has not been received. As a result, the actual 
amount of capacity added in 2001 could vary between 43,000 megawatts 
and 48,000 megawatts.
    Comparing the amount of capacity added annually in 2000 and 2001 to 
history shows that it far exceeds the amount added annually over the 
past 20 years and rivals the expansion that occurred in the mid-1970s 
when the demand for electricity was growing much more rapidly than it 
is today (see figure below). Further, if all of the 326,000 megawatts 
called for were to come on line, it would imply annual capacity 
additions of 65,200 megawatts over the 2001 to 2005 period--a sustained 
expansion level that has never been seen in U.S. history even when the 
demand for electricity was growing much more rapidly, such as between 
1965 and 1975 when it grew 6 percent per year. From a historical 
perspective, the amount of capacity additions announced in recent years 
far exceeds what would appear to be needed to maintain a reliable 
supply of electricity. It is not surprising that some companies--
including construction and financing companies--are now beginning to 
reassess their plans and cancel some of their projects. Whether their 
reassessments were prompted by the problems at Enron or their 
continuous efforts to monitor market conditions is unknown.

    Comparing the reported capacity expansion plans to projections of 
needed capacity also illustrates that there appears to be more capacity 
planned than is reasonably needed and cancellations are not surprising. 
With expected annual growth in the demand for electricity of 2.1 
percent, the Reference Case in the Annual Energy Outlook 2002 (AEO) 
calls for 73,000 megawatts of new capacity to be added over the 2001 to 
2005 time period--nearly two thirds of which appears to have been added 
in 2001 alone. Even with a higher growth rate--2.8 percent per year--
the High Demand Case in the AEO 2002 calls for 88 gigawatts of new 
capacity between 2001 and 2005; still far below the announced capacity 
expansion plans of power supply companies. Regarding future growth in 
the demand for electricity or the amount of existing capacity that is 
going to be retired, the amount of capacity that has been announced to 
come on line over the next few years would seem to far exceed the 
amount of capacity that is needed.
    Similar results can be seen by looking at industry data. The Table 
below summarizes information from the North American Electric 
Reliability Council's (NERC) 2001-2010 Reliability Assessment. As 
shown, NERC's estimates show peak demand (net internal demand) growing 
from 68 1,000 megawatts in 2001 to 742,000 megawatts in 2005--a change 
of approximately 61,000 megawatts. Essentially

NERC show's a roughly 61,000 megawatt increase in peak demand over the 
period. Thus, to maintain existing reserve margins about 72,000 
megawatts (6 1,000 times 1. 18) would be needed. This is consistent 
with the AEO 2002 projections that show 73,000 megawatts of new 
capacity through 2005.

                                                                                      Planned     Reserve Margin
                                                                     Net Internal    Capacity       (% of Net
                                Year                                  Demand (MW)    Resources       Internal
                                                                                       (MW)          Demand)
2001...............................................................      680,941       801,990             17.8
2005...............................................................      741,623       934,090             26.0
Change.............................................................       60,682       132,100              8.3
Source: Reliability Assessment 2001-2010, The Reliability of Bulk Electric Systems in North America, October 16,
  2001, Table 1, page 14.

    NERC's planned capacity resources far exceed what is needed to 
maintain existing reserve margins. NERC shows planned capacity 
resources increasing by 132,000 megawatts between 2001 and 2005--nearly 
double what would be needed to maintain existing reserve margins. The 
NERC values are much lower than the reported plans to EIA because they 
only include plans that they believe are reasonably firm. Because the 
planned resources exceed the amount needed to maintain current reserve 
margins, the U.S. reserve margin is projected to increase dramatically, 
from 17.8 percent in 2001 to 26.0 percent in 2005. For some regions the 
increase in reserve margin is even larger. For example, the reserve 
margin for the Mid-Atlantic Area Council (MAAC) region would increase 
from 18.1 percent in 2001 to 52.3 percent in 2005 if all of the 
capacity NERC is treating as firm were to come on as planned. As a 
result, if the entire 132,000 megawatts of planned capacity resources 
reported to NERC were to come on line, many areas of the country are 
likely to have a significant amount of excess capacity.
    In summary, it is EIA's belief that the power plant project 
cancellations that have occurred recently primarily result from power 
supply companies' and finance companies, reassessments of market 
conditions rather than a direct response to the Enron bankruptcy. It is 
certainly possible that the problems at Enron prompted some of the 
reassessments. However, unless the number of cancellations expand 
dramatically, the amount of capacity still scheduled to come,on in the 
next few years appears more than sufficient. It is certainly possible 
that some local problems could occur from time to time, but they are 
not expected to be widespread given the amount of capacity that is 
still being developed.

    Mr. Boucher. Well, the cancellations, the economy had been 
diminishing for the better part of a year, and these 
announcements of delays and cancellations came very rapidly 
after the Enron bankruptcy.
    So most people, I think, see some correlation. This isn't 
simply a question of the economy having declined. So, take a 
look at it if you would, and enlighten us, Mr. Wood. Let me ask 
you a couple of questions.
    What actions, in your opinion, can be taken at your agency, 
and what actions would be necessary for us to take 
legislatively, in the effort to restore investor confidence in 
the condition of the wholesale market, and in the companies 
that supply electricity into that market?
    And feel free to comment, in providing this answer, if you 
would like, about the progress that you are making, and 
adopting rules with regard to regional transmission 
organizations, and also uniform interconnection standards, and 
other matters?
    Mr. Wood. Thank you, Mr. Boucher. I wrote those down as you 
mentioned them in your opening statement, and I would add and 
say that those three with certainty, and I would add two more 
that the Commission has also done in the past 6 months.
    The transparency initiative, which I discussed to get more 
standardized disclosure, and make it web friendly, and make it 
more contemporaneous. That is a work in progress.
    The RTO initiative which the Commission began with the 
rulemaking in 1999, at this stage we are implementing that 
rule. I don't envision that that substantive approach needs to 
    We will be flushing out the details of what RTOs should do, 
and so there is some certainty about--you know, even though 
this RTO may be 5 years behind that RTO, ultimately this is 
where it is all going so there can be some uniformity in the 
market and a reduction of transaction costs.
    And which depending on the market, the suppliers tend to 
eat those transaction costs. And that is not always so, but 
that certainly is a thing that we can do to add certainty. 
Uniform generation and interconnection, and make it easy to 
build a power plant.
    And to basically take the haggling with the local utility 
out of the picture, and it is hard enough to get the financing 
lined up, and the water rights, and the pollution issues dealt 
with by the local regulators.
    And then to have to run the gauntlet past the utility for 6 
or 10 months to negotiate a contract is to me time not well 
spent. We have also set up an Office of Market Oversight 
Investigation at the Commission.
    And I think having an active referee in the market, and not 
a coach, and not a re-regulator, but a referee watching the 
market to make sure that some of the things that we worry 
about, or have talked about at this hearing so far, don't kind 
of replicate themselves through energy markets, is important.
    And the last thing that I would add would be an integration 
of standards of conduct that we have with gas and utility 
companies, and electric utilities, there are standards out 
there that are separate. And putting those under one umbrella 
seems to make a lot of sense, and something that would give 
some certainty to how the world going forward will look.
    Mr. Boucher. Can you take all of these steps with current 
authority, or do you need additional authority from this 
    Mr. Wood. I mentioned in my statement, and certainly as I 
have before this committee before, that although in light of 
what I heard today maybe RTOs won't be challenged in court 
either, but RTOs and transparency are initiatives that I think 
certainly within the broad reading of the Federal Power Act, 
there is authority, but I also know that things go through 
courts at a pretty glacial pace.
    And certainty from the Congress on RTOs and transparency of 
information are certainly--would be helpful in shaving probably 
3 to 5 years off that court run.
    Mr. Boucher. Mr. Wood, thank you, and Ms. Hutzler, thank 
you. And thank you, Mr. Chairman.
    Mr. Barton. We have a vote on the floor on the Shay 
substitute to the Campaign Finance Reform. We are going to take 
a short recess, and reconvene at approximately 4 p.m.
    Normally, I would let this panel go, but I know Mr. Sawyer 
wants to ask questions, and Mr. Largent, and Mr. Shimkus, and I 
want to ask one more round myself. So I hate to inconvenience 
you, but if you all will wait another 10 minutes, we should be 
back and reconvene the hearing. We are in recess until 
approximately 4 p.m.
    [Brief recess.]
    Mr. Barton. The subcommittee will come to order. We have 
got a number of members who wish to question this first panel, 
and they are not back yet. In the interest of time, I am going 
to ask a few questions, and then hopefully by then Mr. Sawyer, 
Mr. Largent, or Mr. Shimkus, or Mr. Pickering, or Mr. Wynn, 
will be back in attendance, and they will be recognized.
    In my first round of questions, I asked the question about 
transparency, and whether we needed additional legislation to 
set some additional standards for transparency.
    In this second round, I am going to ask the question a 
little bit differently. If you were me, chairman of the 
subcommittee, and jurisdiction over energy markets, what would 
you change or reform in current statutory authority?
    I will ask that one question, and then I will recognize Mr. 
Sawyer, since he is now back in attendance. So what would you 
change, Mr. Wood, or reform, if you were the chairman with 
legislative authority at a markup of a pending electricity bill 
before your subcommittee.
    Mr. Wood. Gosh, I would like to give you an actual 
language, but conceptually I think the main thing that is close 
to the line now is the extent to which we can require a certain 
type of information being disclosed.
    Mr. Barton. A little additional authority for information 
    Mr. Wood. Because there are a lot of cries for 
confidentiality. This is sensitive business information, et 
cetera, and while that may be true, on an open exchange such as 
Jim and them oversee, that information is available on an 
aggregate basis, and is available on trade basis, and you get a 
lot of information in an open exchange market that informs 
markets that you don't necessarily get on bilateral markets, 
where a lot of the energy trades actually happen.
    So if you want transparency, I think it is really just kind 
of focused on that issue, and I would be glad to work on 
anything with you all.
    Mr. Barton. Good. Mr. Newsome.
    Mr. Newsome. Mr. Chairman, I wouldn't have anything 
specific to add at this point. We may later as we continue 
reviewing what happened and how it happened. But I think as it 
relates to transparency, I would try to get down to the bottom 
end question of what is in the public good.
    And certainly if a market provides a price discovery 
function, then it is in the public good for that market to be 
transparent. And trying to learn more, I guess, and make a 
determination about is in the public good, and what is not in 
the public good, would be a great place to start.
    Mr. Barton. Okay. Mr. Hunt.
    Mr. Hunt. Sir, you know what I would do. I would repeal 
    Mr. Barton. I love that answer, but you need Mr. Dingell 
and Mr. Markey, and Mr. Waxman here to hear it.
    Mr. Hunt. Well, I made sure that they were out of the room 
when I said it. And give the additional protections of books 
and records to FERC, and transfer authority over that amended 
act to FERC, because they are the energy experts. We're not.
    And they could be consistent in administering all of the 
Federal Energy Acts together. You know, we try to avoid 
conflicts with them in administering PUHCA, but sometimes it is 
    But we would like to see whatever comes out of this 
committee and the Congress as a whole in the public utility 
area, to transfer it to FERC.
    Mr. Barton. Okay. Ms. Hutzler, was there any additional 
authority your authority would like to have?
    Ms. Hutzler. Well, generally, the more markets can have 
information, the better they function. So that would be my only 
    Mr. Barton. And Mr. Welch, who is implementing some of 
these, or overseeing some of these, at the State level.
    Mr. Welch. I think with respect to FERC authority, I think 
what Chairman Wood indicated is probably the best thing. 
Getting enough information to enough people in time for them to 
act upon it in their own interests is really critical to these 
markets. And right now that flow is not where it needs to be.
    Mr. Barton. The Chair would recognize Mr. Sawyer for 
questions for 5 minutes.
    Mr. Sawyer. Thank you, Mr. Chairman. Let me get to a 
question that I raised in my opening statement. Commissioner 
Hunt, is there any evidence or reason to suspect that Enron 
avoided acquiring multiple utilities in order to avoid coming 
under PUHCA?
    Mr. Hunt. I don't know that we have any hard evidence of 
that. They certainly knew, Mr. Congressman, that if they 
acquired another utility that they would be under PUHCA if it 
was not a farm utility, or an EWG, or a utility from another 
    And that might have restricted their other areas of 
operation, because to be so registered, as opposed to exempt 
holding companies, PUHCA has a lot to say about what other 
nonutility activities unregistered holding companies can engage 
    Mr. Sawyer. So if they had come under PUHCA, there would 
have been tools that would have been useful in----
    Mr. Hunt. If they were under PUHCA, we certainly could have 
examined their books and records. We are now trying to get to a 
5-year cycle of closely examining the books and records of the 
27 registered holding utility system.
    So there is a possibility that we would have given a look 
at them under the Public Utility Act. But we also have the 
authority, Mr. Sawyer, to look at their books and records, and 
their annual reports under the 33 Act, but we don't have enough 
people to look at every large company every year. And so we put 
them on a 4 or 5 year cycle.
    Mr. Sawyer. Are there tools within PUHCA that if or when 
PUHCA is repealed, we ought to take special care to assure that 
it remains in the law in the interest of the kinds of things 
that you are talking about.
    Mr. Hunt. From our perspective, we think that the most 
important thing is how to inspect the books and records, and to 
look at affiliate transactions primarily. There is no cross-
subsidization, and to give PERC the power to rule, or order, 
prohibit affiliate transactions that are inherently unfair.
    Mr. Sawyer. Chairman Newsome, are there similar oversight 
tools that are found in PUHCA that would be available to 
regulators if energy derivatives were to return to the 
Commodity Exchange Act?
    Mr. Newsome. Congressman, I am just not that familiar with 
PUHCA. I mean, we absolutely have no responsibility or 
jurisdiction in that area. So it would be very difficult for me 
to respond from that standpoint. I just am not familiar with 
    Mr. Sawyer. Chairman Wood, are there tools which would be 
important to FERC as responsibilities under PUHCA went away?
    Mr. Wood. Yes, sir. Certainly the discussions, and I think 
Commissioner Hunt represents those pretty well in this written 
and oil testimony so far, that giving access to books and 
records of all members of a holding company system, to FERC and 
to State and regulatory Commissions, is important to make sure 
that electric and gas customers don't subsidize through 
regulated rates the other activities of a corporate empire.
    And that role actually is to me in a lot of the discussions 
over the past several years, there seems to have been an 
important kind of tradeoff of any sort of reform to PUHCA. 
There are other aspects, but that it is the ability to get to 
the books and records.
    Now, that is no easy task, as one who has lived through the 
rate sending saddle in the State level, it is a jungle. I mean, 
to go through all the costs, and make sure that they are not 
being unfairly allocated on top of the rate pair in your own 
State. And that is certainly difficult.
    Mr. Sawyer. Commissioner Welch, would you agree that where 
you work is a jungle?
    Mr. Wood. I lived in one, too. So I think the increased 
access, and also I think it was mentioned in Mr. Hunt's 
testimony about market power reviews in PUHCA that would go to 
FERC, and certainly that would offset the absence of PUHCA 
being there.
    Mr. Sawyer. Let me just say by way of observation, Mr. 
Chairman, that the whole question of capital formation seems to 
me to be critical in the industry right now. And if it is 
fragile in generation, then it is even more fragile in 
transmission, which has never been seen as a traditional 
earning center.
    Putting transmission in a position to do precisely that I 
think is one of the great challenges in forming effective 
regional markets, and I would look forward to discussing that 
with you in the future. Thank you, Mr. Chairman.
    Mr. Barton. Thank you. The Chair would recognize the 
distinguished gentleman from California, Mr. Waxman, for 5 
minutes for questions.
    Mr. Waxman. Thank you very much, Mr. Chairman. Mr. Wood, 
you testified that energy markets and the growing trend toward 
competition did not cause or contribute to Enron's collapse.
    That might be a true statement and it might not be. I think 
I will associate myself with the remarks of Mr. Dingell, who 
accurately states that we really don't fully understand Enron's 
collapse yet.
    But, Mr. Wood, let's for a moment assume that you are 
right, and energy markets and competition did not cause or 
contribute to Enron's collapse. In your view, Mr. Wood, do we 
fully understand the impacts of Enron's collapse?
    Mr. Wood. For the limited purpose of the physical markets 
that we regulate, I think we do know certainly what has 
happened in the recent past was not a significant disruption of 
those markets. So to that extent, yes, sir, Mr. Waxman.
    Mr. Waxman. I want to introduce into the record a letter 
from the Northern California Power Agency. Several of the 
agency's members entered into long term agreements with an 
Enron subsidiary for electricity, and the letter explains the 
serious situation these California municipalities are now in.
    [The letter follows:]

                   Northern California Power Agency
                                        Roseville, CA 95678
                                                  February 12, 2002
The Honorable Henry A. Waxman
United States House of Representatives
2204 Rayburn House Office Building
Washington, DC 20515
    Dear Congressman Waxman: Over the past couple of years, the 
California energy markets have weathered several significant crises. 
Moreover, it appears that no group or class of consumers or market 
participants have been insulated from the impacts of the crisis, even 
those once blamed as primary instigators. The Northern California Power 
Agency \1\ (NCPA) member cities are no exception. For example, many 
NCPA members have been forced to significantly raise their retail 
rates, some for the first time in over a decade, due to high prices, 
enhanced market risk, and skyrocketing litigation costs.
    \1\ NCPA is a nonprofit California join powers agency established 
in 1968 to generate, transmit, and distribute electric power to and on 
behalf of its fourteen members: cities of Alameda, Biggs, Gridley, 
Healdsburg, Lodi, Lompoc, Palo Alto, Redding, Roseville, Santa Clara, 
Ukiah, the Port of Oakland, the Truckee Donner Public Utility District, 
and the Turlock Irrigation District; and seven associate members: cites 
of Davis, Santa Barbara, ABAG Power, Bay Area Rapid Transit District, 
Lassen Municipal Utility District, Placer County Water Agency, and the 
Plumas-Sierra Rural Electric Cooperative serving nearly 700,000 
consumers in central and northern California.
    The Enron debacle is only one story, albeit significant, in a long 
list of casualties involved in the western energy market crisis. For 
many market participants, including several NCPA members with remaining 
long-term contractual relationships with Enron, there is an ongoing 
risk. This ``ongoing risk'' is discussed in more detail below.
    Enron Corporation filed for Bankruptcy on December 2, 2001, the 
same day that Enron subsidiary, Enron Power Marketing Inc. (EPMI), 
stopped delivering power to NCPA and several of its member cities. 
Although EPMI resumed deliveries again on December 21, on a day-to-day 
basis, to date they provide no long-term assurances of continued 
deliveries to their customers. Thus, the possibility remains, given the 
Enron financial collapse, those deliveries will once again cease. This 
risk is greatly enhanced if we reenter a period of electric price 
volatility. Why is this significant?
    Several NCPA members have been placed in a serious dilemma 
resulting from the Enron collapse, due to the structure and form of 
long-term agreements with its subsidiary, EPMI. For example, NCPA's 
contract with EPMI is pursuant to the Western Systems Power Pool (WSPP) 
agreement,\2\ which is widely used throughout industry. Under this 
agreement, the sole remedy for the non-defaulting party (in this case 
NCPA) is to terminate the contract. Upon termination, however, the non-
defaulting party must calculate the present value of the contract, 
positive or negative, and pay, or receive, a termination payment within 
three business days. In the case of an above-market contract (i.e., the 
terms under the contract are higher than what can be purchased in the 
market), the non-defaulting party must remit what amounts to a windfall 
to the defaulting party (in this case EPMI). Practically speaking, the 
nondefaulting party cannot terminate the contract because the 
termination payment, in the millions of dollars, is prohibitive. As a 
consequence, the defaulting party is vested with all of the benefits of 
the contract and all of the risks are shifted to the non-defaulting 
    \2\ The WSPP agreement is not unique in its termination provisions. 
Some individual NCPA members used the Edison Electric Institute (EEI) 
contract, with nearly identical provisions. Many view the EEI contract, 
in fact, as even more draconian due to onerous collateral posting 
    Should the market at some time in the future revert back to high 
spot prices and extreme volatility and EPMI again ceases deliveries, 
NCPA or its members will have missed their opportunity to replace these 
contracts at low rates. Moreover, it can be assumed that EPMI would be 
unable to make our members whole through a positive termination payment 
because they are insolvent.
    Fortunately for NCPA and others, because the EPMI contracts are 
above current market rates, we can cover the EPMI contracts during the 
periods of non-delivery resulted in savings. Had these contracts been 
below market, however, it is easy to imagine that innocent parties 
might have been driven into their own financial crises. Thus, without 
the ability to terminate the contracts during a period of low prices, 
NCPA and other parties remain at risk should market prices again rise 
and if EPMI can no longer deliver.
    NCPA and its members have similar contracts with other suppliers as 
well. They serve as an example that standards and practices applied in 
commodity and other free market transactions do not always translate 
well to utility markets. Often this is not discovered, however, until 
after the crisis occurs.
    Overall, the Enron calamity has resulted in enhanced consumer 
risks, undermined consumer confidence, increased transactional costs 
(hidden/inflationary) to consumers due to risk premiums, and slowed the 
developing market. It is now incumbent upon policy makers to provide 
careful, nonpartisan analysis of the roots and causes of the Enron 
crisis, with a focus on resolving the underlying flaws in our 
assumptions regarding deregulated electricity markets and regulatory 
deficiencies in the oversight process.
    If you have any questions regarding this letter, please do not 
hesitate to contact me at (916) 781-4200.
                                              George Fraser
                                                    General Manager

    Mr. Waxman. Upon announcing Enron's bankruptcy the Enron 
subsidiary stopped delivering electricity for almost 3 weeks. 
Now, the Enron subsidiary delivers electricity on a day-to-day 
basis, providing no long term assurances.
    So the Northern California Power Association Agency members 
are in a quandary. If they terminate their contracts, they owe 
Enron a huge amount of money, and if they don't terminate their 
contract, they have uncertain service for potentially years to 
come. Mr. Wood, are you aware of this situation?
    Mr. Wood. I am not specifically aware of that one, Mr. 
    Mr. Waxman. Does FERC know how many entities hold Enron 
contracts who are also in a situation like this?
    Mr. Wood. We do not specifically know. We have only heard 
from those that actually want to invoke some authority from the 
    Mr. Barton. Would the gentleman yield?
    Mr. Waxman. Yes.
    Mr. Barton. We asked before the gentleman came a similar 
question. The Chair asked a similar question if there was 
information about contractual obligations that Enron had 
defaulted on. So we are with you in trying to get that 
    Mr. Waxman. I guess the other question, and I will ask it, 
and maybe we can get an answer for the record, is how many 
Enron contracts has FERC evaluated to determine the effect of 
the Enron collapse? Do you know, Mr. Wood?
    Mr. Wood. To date, not any that I am aware of. That's why 
we opened our investigation to look into potential manipulation 
in the gas and power markets by Enron and its affiliates, and 
any other entity.
    Mr. Waxman. I have one last question for all of the 
witnesses. The letter from the NCPA concludes by stating that 
it is now incumbent upon policymakers to provide careful non-
partisan analysis of the roots and causes of the Enron crisis 
with a focus on resolving the underlying flaws in our 
assumptions regarding deregulated electricity markets, and 
regulatory deficiencies in the oversight process.
    I want to ask everyone at the table if each one agrees or 
disagrees with this recommendation, or whether they think that 
Congress should immediately press forward to pass legislation 
to deregulate the electricity industry? Mr. Wood, why don't we 
start with you.
    Mr. Wood. Well, first of all, I have not viewed the efforts 
of this committee or any others to deregulate the industry. I 
think adding more competition to the wholesale power markets is 
quite a different thing from deregulating.
    But with that caveat, I think certainly understanding what 
happened to Enron is important, and if in fact that causes us 
to change our assumptions about a lot of things, I am willing 
to do that.
    But I also want to be informed, and as I think Mr. Newsome 
mentioned in his statement, by what we have learned, and by 
what your committee learns, and your sister committee learned, 
and by what we found out through courts that happened in this 
Enron deal.
    But I do think it is the best part of good policy to learn 
first and then react to that after we learn.
    Mr. Waxman. Mr. Newsome.
    Mr. Newsome. Yes, sir?
    Mr. Waxman. Should we learn first or should we legislate 
    Mr. Newsome. Well, I think when you talk about energy 
deregulation, it refers more to the cash markets and the 
forward markets, of which we have absolutely no jurisdiction 
over. So I wouldn't even begin to try and comment from that 
    I would say that in the markets that we do have regulatory 
oversight that we are continuing to do our due diligence, and 
we are looking under every rock, and looking at all areas.
    We are cooperating with other financial regulators to 
provide whatever expertise we might have to look at in our area 
of jurisdiction. But under the cash markets, we would have 
    Mr. Hunt. Mr. Waxman----
    Mr. Barton. Use one of the microphones.
    Mr. Hunt. Yes, I'm sorry. We have, I think, seen some areas 
in the laws that we administer primarily, and in accounting 
regulations, that didn't work in the Enron case clearly.
    My preliminary view is a part of that was lack over 
oversight by the board of the company, and certainly a lack of 
oversight by the audit committee of the board, and certainly a 
fairly poor job done by the outside auditors.
    And in terms of the disclosure statutes that we administer, 
certainly the word impenetrable has been used to describe 
Enron's financial statements, and textual statements, in terms 
of describing the many off the book entities that were 
affiliated with Enron.
    So we think we already know enough to know that we have a 
lot of work to do to make out disclosure laws and our 
regulation of the accounting profession both stronger and 
    Mr. Waxman. Let me just put the question on the table for 
the last two people. The recommendations from this organization 
in Northern California was that we don't--that we resolve the 
underlying flaws in our assumptions regarding deregulated 
electricity markets and regulatory deficiencies in the 
oversight process before we legislate. Do you have any views on 
that subject? Ms. Hutzler.
    Ms. Hutzler. It is always generally good to understand what 
has happened in the past and how that is going to affect future 
issues. The real question is how much do you need to study it, 
and how much detail do you need to study it.
    One can continually study issues and not move forward on 
anything else. So you have to realize what the data will allow 
you to study and how far you can get answers to those 
    Mr. Waxman. Mr. Welch.
    Mr. Welch. Well, thank you. We actually deregulated our 
market several years before Enron, and so I am not sure that we 
can go back. Nothing about what has happened in Enron in 
particular has thus far caused me to lose confidence in the 
basic structure of moving from a sort of command and control 
integrated resource planning model, which we had for many 
years, to a model which relies much more on market style and 
    And having said that, we continuously review whether or not 
what we are doing is exactly the right thing, and obviously 
Enron has some lessons, and I am not sure exactly what they 
are. But I don't think at least for us they have thus far 
caused us to doubt that the particular direction in which we 
are moving is the right one.
    Mr. Waxman. Thank you. Thank you, Mr. Chairman.
    Mr. Barton. The gentleman's time has expired. The gentleman 
from Massachusetts is recognized for 5 minutes.
    Mr. Markey. Thank you, Mr. Chairman, very much. Chairman 
Wood, good job, huh? It's interesting, you know. I would like 
to turn to Enron's status under the Federal Power Act.
    Under Sections 203 and 204 of the Federal Power Act, FERC 
has claimed legal authority to regulate Enron's energy 
marketing affiliates, such as Enron Power Marketing, as a 
public utility.
    Now, under Section 204 of the Federal Power Act it requires 
prior FERC approval of issuances of securities and assumptions 
of liability by any public utility like Enron Power Marketing. 
Isn't that right?
    Mr. Wood. Yes, sir.
    Mr. Markey. Did the FERC ever require Enron Power Marketing 
to obtain prior FERC approval before it issues securities, or 
assumed liabilities?
    Mr. Wood. The FERC has had a practice since I believe the 
mid-1990's or early 1990's, Mr. Markey, of granting blanket 
preapproval authority to power market applicants unless there 
is a protest.
    Mr. Markey. So in issuing blanket prior authorization for 
such security issuances and liability assumptions, Enron did 
not have to seek FERC approval for its specific obligations or 
security issuances; is that correct?
    Mr. Wood. That's correct.
    Mr. Markey. Now, Section 204 says that FERC shall approve 
issuances of securities or assumptions of liabilities by public 
utilities, quote, if it finds that such issue or assumption, 
(a) is for some lawful object within the corporate purposes of 
the applicant, and compatible with the public interest which is 
necessary, and/or appropriate for or consistent with the proper 
performance by the applicant of service as a public utility, 
and which will not impair its ability to perform that service. 
And (b) is reasonably necessary or appropriate for such 
    Had the FERC been reviewing and approving Enron's issuances 
of securities or transfers of liabilities to the LJM, CHUCO, 
Jedi, and Raptor Partnerships, do you think you would have 
approved them under that standard?
    Mr. Wood. I think it is fair to say that it would be--well, 
assuming that we could understand the nature of LJM, CHUCO, 
Jedi, and the others, and it is difficult even with the Wall 
Street Journal dubbing it down for us what it is.
    I think it is a fair question that those would have had 
trouble getting past the standard.
    Mr. Markey. So it probably would not have passed mustard 
given the tests that they would have had to pass if they had 
not already received prior blanket approval?
    Mr. Wood. Again, I am not prejudging that if we had to deal 
with it, but I have to say that if we had reviewed those under 
the lawful and necessary, the (a) and (b), standard of 204(a) 
and (b) in advance, we might have had a different outcome.
    Mr. Markey. So even if you started regulating power 
marketers as public utilities under Section 204, you still 
wouldn't have authority over their holding companies would you?
    Mr. Wood. No. I believe that again is a PUHCA issue.
    Mr. Markey. So you couldn't stop an operating utility from 
simply dividing up their profits and sending it up to the 
parents, and the parents issuing whatever securities, notes, 
papers, et cetera?
    Mr. Wood. Correct. It is just the marketer that is, quote, 
the public utility under the Act, yes.
    Mr. Markey. So you would not have any control over that?
    Mr. Wood. No.
    Mr. Markey. So let me go to you then, Commissioner Hunt, 
over at the SEC, and now you have got the ball in your court. 
Not withstanding the fact that the FERC has long said that a 
contract for the delivery of electricity constituted a public 
utility facility under the Federal Power Act, the SEC in 1994 
issued a no action letter, deciding to tell Enron Power 
Marketing that it would not consider such contracts public 
utility facilities under PUHCA.
    And reversing a longstanding 1974 SEC staff interpretation 
to the contrary. Isn't it true that the SEC's decision in this 
matter was contrary to what the law requires, and contrary to 
established precedent, and contrary to what the SEC staff had 
previously said on the matter?
    Mr. Hunt. We did give an Enron subsidiary in 1994--the 
staff agreed not to recommend enforcement action against that 
subsidiary if it engaged in power marketing activities without 
that subsidiary or Enron itself registering under the Public--
under the 1935 Act.
    We did not think and do not think that power marketing and 
what the tools of power marketing are, quote, facilities used 
for the generation and transmission, or distribution of 
electric energy for sale.
    So we don't think that subsidiary was an electric utility 
company for purposes of PUHCA, and that therefore that ENRON 
itself was not a utility holding company for purposes of PUHCA.
    We think that FERC reached a different conclusion under the 
Federal Power Act, because the Federal Power Act serves very 
different purposes.
    Mr. Markey. Okay. Now in 1974 the SEC said just the 
opposite, and I would bring that to your attention, 
Commissioner. So obviously a big decision was made in 1994 
(sic) by the SEC and we can see this regulatory black hole 
opening here between the FERC and the SEC.
    And into which Enron and its shenanigans would be able to 
move. Can I ask for unanimous consent to continue for 2 
additional minutes, Mr. Chairman?
    Mr. Barton. Well, you are 1 minute over. Could you have one 
more really penetrating question that they can answer very 
    Mr. Markey. I will try hard. Commissioner Hunt, you had 
previously testified that Enron got an exemption from PUHCA for 
owning Portland Gas and Electric because Enron reincorporated 
in Oregon, where PG&E was operating.
    The reason of course was that Enron didn't want to be a 
registered holding company. So it reincorporated in Oregon 
because of PUHCA. Isn't that right?
    Mr. Hunt. I don't know the reasons for their 
reincorporation. It certainly is plausible, Congressman, that 
their reincorporation in Oregon was to avoid the strictures of 
PUHCA, but I have not talked to Mr. Lay lately, and so I don't 
know if that is correct or not.
    Mr. Markey. Well, isn't it true--well, let's talk about the 
effect of it then. Isn't it true that that allowed the Oregon--
    Mr. Hunt. Yes, that is certainly true.
    Mr. Markey. --PUHCA to place certain protections on the 
holding company of its Oregon operating utility as PUHCA was 
designed to do?
    Mr. Hunt. Well, I have testified with the Chairman of the 
Oregon Public Utility Commission before the other body last 
week, and he thought that Enron's activities had nothing to do 
with the good functioning of the utility in Oregon.
    Mr. Markey. All right. Now, if PUHCA is repealed, except 
for books and records, isn't it true that there will be no 
reason at all for holding companies to be incorporated in the 
same State where they own utilities?
    Mr. Hunt. There certainly would be no PUHCA reason.
    Mr. Markey. Okay. Thank you. I understand that the SEC----
    Mr. Barton. That's three questions after the one question. 
Do you have a bottom line question there?
    Mr. Markey. If I can just get----
    Mr. Barton. Why don't you go to the bottom line question?
    Mr. Markey. Let me get one more yes.
    One more yes, and then I get the big conclusion. I 
understand that the SEC staff didn't fully review Enron's 
filings from 1997 until it initiated its enforcement inquiry 
late last year; is that true?
    Mr. Hunt. Because of a lack of resources as you probably 
know, we only review a limited number of publicly held 
companies every years, and we had on schedule to review Enron 
in 2001, but some new derivatives came on line, and so we put 
it off for one more year.
    Now, if you give us more staff and more money, we will 
review every publicly held company every year.
    Mr. Markey. Well, this is the seventh largest company in 
the United States. If you aren't reviewing Enron's books and 
records, and Enron apparently could not understand its own 
books and records, and Wall Street analysts couldn't understand 
them, and their accountants couldn't understand them, how do 
you expect a State PUC, with limited jurisdiction, to be able 
to figure out what they are up to?
    Mr. Barton. This has to be your last question, because we 
have three other members, and you have doubled the time.
    Mr. Markey. I will finish up by asking hasn't PUHCA kept 
the registered holding companies out of the junk bond scandals 
and indeed from what we can tell out of the Enron mess, except 
where they can find these regulatory black holes?
    Mr. Hunt. Well, we hope that we have done a decent job 
administering the Act, Mr. Congressman, and that we have kept 
the registered holding companies out of the morass that Enron 
now finds itself in.
    Mr. Markey. Thank you, Mr. Chairman. I appreciate your 
    Mr. Barton. Those are all good questions by the way. I am 
not opposed to the content of the question, but just the time 
that it takes to ask them. Mr. Shimkus for 5 minutes.
    Mr. Shimkus. Thank you, Mr. Chairman. Mr. Welch, because of 
the Enron crisis have you all made any changes to help the 
individual citizens of the State of Maine so that they can 
uphold to the old cliche of let the buyer beware?
    I mean, what changes are going on in the State to help?
    Mr. Welch. We have not done anything specific, except that 
we are currently reviewing what kind of security we are going 
to require from market participants who are selling 
particularly to residential consumers, residential small 
    We view the larger consumers as having sufficient 
wherewithal to make their own judgments about with whom they 
are dealing. But for the smaller consumers, we do think some 
form of security is important as my written remarks indicated.
    We are trying to beef that up in a way that we won't be 
surprised in the future.
    Mr. Shimkus. And correct me if I am wrong, but in your 
opening statement and in your written testimony you maintain 
that because in essence we are in a slow economy that we are 
not seeing the natural gas price spikes that we had two winters 
ago, and the demand was not as great.
    And that that limited the effect of the Enron trading, and 
20 percent leaving the market, and diluted that. And that is 
correct, that is what you made in your opening statement; is 
that correct?
    Mr. Welch. Yes, it is.
    Mr. Shimkus. Now, I will ask the other panelists. Do you 
all agree with that? And if we could start with Mr. Wood, and 
then just go down to the others.
    Mr. Wood. Let me just clarify. Tom, what you had said yes 
to was the----
    Mr. Wood. I'm sorry. The particular point I was making was 
that because Enron typically was in the market with contracts 
to supply customers of prices that were above the now current 
market price, we were not too worried if Enron defaulted on 
those contracts, because in effect they had not defaulted on 
those contracts, and if they did default, people would be able 
to replace the power less expensively.
    Mr. Shimkus. But there would have been another crisis had 
we been in a more restricted high demand market, with higher 
    Mr. Wood. Yes. Had the market price been above the Enron 
contract price, then it would have been a serious problem for 
our consumers.
    Mr. Shimkus. Does anyone disagree with that? So we are 
lucky that Enron collapsed now, versus when we had the natural 
gas price spikes of a year-and-a-half ago, or whenever that 
was? Probably a year ago last winter?
    I mean, is everybody shaking their head yes? Is that what 
it means?
    Mr. Wood. Yes, on that narrow fact, yes, sir. But I would 
wonder if Enron would not have collapsed had they been in that 
market. I mean, I mentioned in my testimony that they kind of 
had a one-way strategy that seemed to work.
    Mr. Shimkus. Well, we had the accounting hearing last week, 
and there was a lot of--they had a lot of shady financial 
dealings. Chairman Wood, let me ask, has the Commission 
significantly altered--it is kind of similar to the question 
that I asked the public utility of Maine.
    Have you significantly altered any of your positions with 
respect to the development of competitive energy markets as a 
result of Enron?
    Mr. Wood. I think the specific results of Enron have been 
that we have published one further question, but quite frankly 
the seminal event for us in our agency's development was what 
happened in Mr. Waxman's home State, and the changes that we 
have made to respond to what happened in California, were 
really the seminal events for our agency.
    And in adding a market oversight division, and enhancing 
our ability to get transparent data as I discussed earlier, and 
in changing the codes of conduct for affiliate review, and 
looking at how market powers analyze.
    So a lot of things that Enron could represent in-part were 
represented in the totality about what happened in California. 
So I would say, yes, but recognize that a big part of the yes 
was already under way.
    Mr. Shimkus. Does anyone else want to have any changes or 
plans of changes based on what we have perceived? Obviously 
members of the legislative branch are looking at ways to 
address legislation that might affect it.
    Mr. Newsome or Mr. Hunt, do you have any--are you planning 
on any changes?
    Mr. Hunt. Yes, sir. I said in my oral testimony that today 
the SEC had announced five additional things that we are going 
to look to, to enhance disclosure of publicly held companies.
    This will be the first of a series of commission 
initiatives to enhance our Federal disclosure and financial 
reporting system. Clearly, the Enron case has shown--and it is 
not clear whether this was all legal or not.
    But that in some instances our disclosure and financial 
reporting systems simply did not work in that instance, and we 
need to make some changes in it.
    Mr. Shimkus. In the auditing hearing that we had last week, 
I asked a question on pro forma statements, and that is kind of 
what I am addressing. Are they helpful or are they harmful?
    Mr. Hunt. They can be either.
    Mr. Shimkus. And that is kind of the answer that I got last 
    Mr. Hunt. Some people have misused them. They can sometimes 
help explain fairly complicated financial structures, but we 
issued a recent public statement that they can be misused, and 
warned companies to not misuse them and make their results look 
better than what they were.
    Mr. Shimkus. Thank you, and Mr. Chairman, I yield back my 
    Mr. Blunt [presiding]. I thank the gentleman. I know my 
fellow Missourian, Ms. McCarthy, has already welcomed our 
friends from Kansas City; Rick Green, from UtiliCorp, and his 
associates from UtiliCorp and Aquila. So I am not going to do 
    I will file a statement to the record and recognize Ms. 
McCarthy for 5 minutes.
    And if you want to go ahead and do your 5 minutes of 
questioning now, or--we just had a vote call, but I would think 
we could do your questions if you would like.
    Ms. McCarthy. I just have a brief question actually for Mr. 
Wood and anybody else who wants to discuss it with us briefly, 
but that is about getting greater price transparency, which was 
mentioned in your testimony that that would really help improve 
the efficiency of the markets.
    And I know that transparency is something that we have been 
talking about here in the Congress. So could you elaborate, or 
if anyone else on the panel wants to talk about how is that 
best approached?
    Is that through the regulatory agencies calling for it, or 
is it something that might require legislation, or is it 
something within the industry and can they bring that forward? 
I would just like for you to expand on that notion?
    Mr. Wood. Let me put two things out there and then answer 
your question after that. We have proposed for more price 
transparency in kind of a modest way quite frankly last July.
    And that required standard disclosure, and internet based, 
et cetera, and two areas have been pushed back, and one of them 
mentioned a moment ago on confidentiality business information, 
which is traditional with the tussle that there is between 
opacity and transparency.
    But the second one, which of course took a lot more relief 
after 9/11 is an argument that this much information in the 
market is actually a security issue now. So we are kind of--you 
know, you don't want to be wrong on that count, but on the 
other hand, you don't want that to be kind of a generic excuse 
not to have transparent data.
    So certainly, yes, Madam, our job would be to make the best 
cut we can at the regulatory agency, and make that the rule. 
And it is kind of detailed probably that in general you all do 
want to delegate to an agency to figure out.
    But if there is any guidance that Congress has on 
particularly how that ought to be balanced with security, then 
it would be welcomed. And certainly the corporate--you know, 
the private business information, and we can do that.
    But any guidance on that certainly is welcomed as well. but 
those are the two kind of flash points that it would give us 
some guidance, and perhaps save us from litigating reporting 
form for the next several years.
    Ms. McCarthy. Would anyone else like to comment before we 
go vote on the transparency issue and guidance from Congress, 
or other thoughts? Then thank you, Mr. Chairman, and I 
appreciate your----
    Mr. Waxman. Would you yield to me?
    Ms. McCarthy. Of course.
    Mr. Waxman. If you have completed your questions.
    Mr. McCarthy. Yes.
    Mr. Waxman. Because I wanted to maybe use your time to sort 
of ask a question and get a response on the record. Mr. Wood, 
last year, the Wall Street Journal reported that Ken Lay played 
an influential role in the appointment of FERC Commissioners, 
and that you were supported by Ken Lay.
    And there have also been reports that Mr. Lay supported 
your appointment to the Texas Public Utilities Commission. I 
have asked other officials for a listing of their contacts with 
    I would like to have you provide for the committee a list 
of your contacts with Mr. Lay and other Enron officials during 
your service as a FERC Commissioner, and while you served on 
the Texas PUC. And I would request that the list of contacts 
provide the date of contact, as well as the subject matter of 
the contact.
    Mr. Wood. I would be happy to provide that, sir.
    [The information referred to follows:]
    [GRAPHIC] [TIFF OMITTED] T7988.019
    [GRAPHIC] [TIFF OMITTED] T7988.020
    [GRAPHIC] [TIFF OMITTED] T7988.021
    [GRAPHIC] [TIFF OMITTED] T7988.022
    Mr. Waxman. Thank you. Thank you, Mr. Chair.
    Mr. Blunt. If you will provide that for the record.
    Every member of the committee has a requisite number of 
days to submit questions and may want to do that. If we are 
done with this panel, we will recess for 15 minutes and start 
the second panel at 5 o'clock.
    [Brief recess.]
    Mr. Barton [continuing]. To elaborate on it, and Houston, 
Texas; and Mr. Gerald Norlander, who is the Executive Director 
for Public Utility Law Project, in Albany, New York, and Mr. 
Robert McCullough, who is the Managing Partner for McCullough 
Research, in Portland, Oregon. We will start with you, Mr. 
Green. Your testimony is in the record. We will recognize you 
for 7 minutes to elaborate on it.


    Mr. Green. Good. Thank you, Chairman Barton, and other 
members of the subcommittee. As Chairman of UtiliCorp, I 
appreciate this opportunity to testify on behalf of the 
Electric Power Supply Association. EPSA is a national trade 
association that represents the competitive power suppliers, 
producers, and marketers.
    And UtiliCorp is an international energy and services 
company based in Kansas City. Our Aquila subsidiary is one of 
the largest wholesalers of electricity and natural gas. We also 
are one of the leading providers of risk management services in 
North America, and the United Kingdom, and continental Europe.
    Mr. Chairman, we are here today because of the Enron 
bankruptcy. It has made governments suspicious and investors 
leery, and employees nervous. The tragedy visited on Enron's 
employees and its shareholders, and the communities they served 
should never happen again.
    Recent events have raised questions about the trading of 
energy, the security of pensions, corporate ethics, and 
financial disclosure. These issues are separate and must be 
addressed individually.
    I am here today to talk about the questions that are unique 
to the energy industry. Based on my understanding of the 
reports today, it appears that Enron failed due to questionable 
non-core business investments, and inadequate financial 
reporting practices.
    Enron did not fail because it was in the energy business. 
It failed because of the way that it did business. Despite the 
shock of the Enron bankruptcy, and the loss of the largest 
industry player, the energy markets did not panic. This market 
continued to deliver power and gas to our customers.
    There were no significant swings in prices and there were 
no interruptions. In fact, because of the transparency in the 
marketplace of credit, trading, and operations, the market knew 
way in advance that Enron was in trouble and market 
participants were prepared and found it easy to replace Enron.
    Mr. Chairman, these markets did work, but there is still 
work to be done. The further refinement of the market can do 
nothing but continue to deliver benefit to customers. While I 
understand the need to study the reasons for the Enron 
collapse, and how the market responded, these legitimate 
inquiries should not slow down the continued development of 
more efficient energy markets, or cause a retreat to historical 
forms of regulation.
    Questions have been raised about the use of derivatives, 
and accounting disclosures of derivatives. In simplest terms, a 
derivative is a contract where one party pays another when a 
certain event occurs.
    Many businesses have used derivatives over the years to 
manage risk. A good example of the benefits of a customized 
derivative is our contract with the Sacramento Municipal 
Utility, which provides them power or cash to purchase power 
when there is insufficient rainfall for their hydroelectric 
generation to operate.
    This allows the Sacramento Utility to protect its customers 
from rate increases to cover the costs of purchasing last 
minute power at high prices on the open market.
    Congress and FERC must continue their effort to restructure 
the energy industry. The progress to date has allowed this 
market to work so that the benefit to customers can continue. 
Do not stop now.
    This will send a strong signal to the capital markets to 
invest in the critical infrastructure for our future energy 
supply and delivery. It is important to move forward to make 
this market more efficient.
    I urge you to move forward on broad regional transmission 
organizations to provide more transparency, and adopt 
standardized interconnection rules to allow clear and timely 
access to the power grid for new generation supply, and repeal 
PERPA prospectively, and remove outdated restrictions on the 
ownership of QFs, which will encourage capital investment.
    In closing, Mr. Chairman, I want to again emphasize the 
energy markets worked, and there was no panic, and energy 
customers were served. The modern energy market did not cause 
the Enron bankruptcy.
    I trust that as this Congress seeks to respond to the 
tragic suffering experienced by Enron employees and 
shareholders that it will not take action that will disrupt our 
Nation's vital energy market. Thank you.
    [The prepared statement of Richard C. Green follows:]
Prepared Statement of Richard C. Green, Chairman, UtiliCorp United Inc.
    Thank you, Chairman Barton, Representative Boucher, and members of 
the Sub-Committee. I appreciate the opportunity to testify on behalf of 
the Electric Power Supply Association (EPSA) this afternoon. EPSA is 
the national trade association representing competitive power 
suppliers, including independent power producers, merchant generators 
and power marketers. EPSA members provide reliable, competitively 
priced electricity from environmentally responsible facilities in U.S. 
and global power markets. EPSA recognizes that competition has brought 
many benefits to our customers, and seeks to continue the delivery of 
benefits to customers as competitive markets continue to develop.
    Based in Kansas City, UtiliCorp United Inc. is an international 
energy and services company with customers and operations across the 
U.S. and in Canada, Europe, New Zealand, and Australia. Our Aquila, 
Inc. subsidiary is one of the largest wholesalers of electricity and 
natural gas and providers of risk management services in North America, 
the United Kingdom and continental Europe. UtiliCorp also owns 
traditional investor-owned utilities in mostly non-urban areas of 
Missouri, Kansas, Colorado, Nebraska, Iowa, Michigan and Minnesota as 
well as utilities in Australia, New Zealand and Canada. At September 
30, 2001, UtiliCorp had combined total assets of $11.9 billion and 12-
month revenues of $42.3 billion. UtiliCorp plans to adopt ``Aquila'' as 
its corporate name later in this first quarter to more accurately 
reflect our increasing focus on our wholesale energy and risk 
management business.
    My great-grandfather, Lemuel Green, started the predecessor to our 
first regulated utility in 1908. What started as a small family 
business has grown substantially due to UtiliCorp being in the 
forefront of change in the competitive global energy market place. I 
have served as the CEO of UtiliCorp from 1985 through 2001, and the 
Chairman since 1989. I also serve on the U.S. Department of Energy's 
Electricity Advisory Board.
    The Enron bankruptcy has shaken the confidence of government, 
investors, employees and the capital markets. The tragedy delivered to 
Enron employees, and shareholders, and the communities they served is 
    The Enron bankruptcy has raised questions about how the wholesale 
market physically works, the trading of energy, the security of 
pensions for employees, and corporate ethics. It is imperative that we 
all work together to answer these questions.
    Our knowledge of the energy markets and the facts reported to date 
indicate that Enron failed due to questionable non-core business 
investments and inadequate reporting practices of financial information 
to investors, shareholders, and employees that dramatically reduced 
investor confidence. Enron did not fail because it was in the energy 
marketing business. The underlying business practices of Enron would 
have created the same result if their core business had been real 
estate development, software products, or sporting goods.
    Despite the shock of the Enron bankruptcy, the energy markets did 
not panic. The energy market--in terms of delivering power and gas to 
customers in a reliable and efficient manner has continued without 
interruption. The market was stable and customers were served without 
interruptions. Enron was a significant competitor to Aquila's wholesale 
energy and risk management business. At its peak, Enron was responsible 
for approximately 20% of the trades in the energy market. Despite the 
loss of the largest participant, liquidity was maintained and there 
were no significant swings in prices or disruptions in the supply of 
gas or electricity. In this regard, the energy industry did not miss a 
beat. The competitive wholesale market continued to do business as 
    The energy market, particularly from the customer's point of view, 
remained stable--without interruption of services because of the 
liquidity and stability provided by the marketplace. When Enron's 
situation became apparent, other parties stepped in to fill the void. 
The market offered choice and diversity. Cautiously, companies began to 
adjust their positions and move business to alternative companies and 
electronic trading platforms. It is a testament to the strength of the 
energy markets, that in only a few short weeks, the industry could 
adjust to the collapse of a significant player with little effect on 
the customer.
    Energy trading volume moved seamlessly--demonstrating the market 
diversity--from EnronOnLine, Enron's proprietary electronic trading 
platform, to other open many-to-many electronic trading platforms owned 
by a group of shareholders such as the Intercontinental Exchange (ICE), 
in which my company has a minority ownership interest. Total volumes on 
ICE increased by 65% from October to November 2001. During that time as 
well, the number of ICE users increased by 30%. Specifically, ICE saw 
an increased volume of gas and power trades for next-day as a result of 
the need to replace Enron volumes. Formerly EnronOnLine provided much 
of this market liquidity. The ability to move to other trading 
platforms did not destabilize the energy market. In fact, ``choice'' 
promoted stability.
    As a result of the Enron collapse, questions have been raised about 
the use of derivatives and accounting disclosures of derivatives. I 
urge members to distinguish between derivatives themselves and these 
accounting disclosures. Derivatives, as financial instruments, first 
evolved in the 1850s after the railroads and telegraph communications 
developed on a widespread basis. With available transportation to move 
agricultural products a long distance and the advent of telegraph 
communication, farmers could sell their crops while they were in 
transit or before the crops were harvested. The derivative tool, when 
used as a hedging instrument, removed exposure to fluctuating prices 
from the farmer's income. As noted by the acclaimed historian, Alfred 
Chandler, ``the standardizing and systemizing of marketing procedures 
carried out by the exchanges transformed methods of financing and 
reduced the costs of movement of American crops.'' The use of 
derivatives evolved well beyond agriculture to numerous industries such 
as metals, banking--for exchange rate fluctuations, and energy.
    The use of derivatives helped to stabilize the markets after 
Enron's collapse. Derivatives are financial tools, reflecting the 
underlying value of the commodity, that allocate risk and promote 
liquidity. I would agree with Energy Secretary Abraham's remarks, 
recently appearing in The Washington Post, that the pioneering work in 
energy trading, particularly derivatives, played a central role in 
providing market liquidity and risk allocation during the Enron 
    I would also agree with the National Association of Regulatory 
Utility Commissioners' (NARUC's) recent comments on derivatives. NARUC 
adopted a resolution, passed by their Board of Directors in July 2001 
that ``recognizes the important use of financial and physical 
mechanisms to reduce electricity and natural gas market volatility''. 
The NARUC resolution states that that these financial instruments are a 
``component of a comprehensive energy procurement program.'' 
Furthermore, NARUC states ``that the Board of Directors of NARUC, urges 
each State Commission to explore and examine the potential benefits to 
consumers and distribution utilities of using financial and physical 
mechanisms to hedge against market volatility in wholesale electric and 
gas markets.''
    Derivatives are important to consumers and to regulated utilities 
in providing price stability. Furthermore, derivatives can be 
customized specifically to the purchaser's unique circumstances and 
needs. I would point out the following examples of customized 
derivative products that Aquila provides to help our customers, such as 
regulated utilities or businesses, control their risks and lower the 
costs to their customers.
    Example #1--Example from Summer 2001): Sacramento, California's 
municipal utility (SMUD), pays close attention to weather forecasts. 
During droughts, because there is no water to go through the dam, 
Sacramento gets less of its electricity from hydroelectric dams and 
must pay higher prices for power on the short term, open market. To 
ease the pain of buying high-cost power during droughts, the municipal 
utility entered into a five-year derivative contract with Aquila. The 
Sacramento utility receives replacement power or cash to purchase 
replacement power from Aquila when measured rainfall is below a certain 
level. In this way, SMUD cushions the risk of a budget hit due to 
lower-than-expected rainfall. This allows the Sacramento utility to 
protect its customers from rate increases to cover the costs of 
purchasing last minute power at high prices on the open market when 
such hydroelectric generators cannot operate.
    Example #2--Production of aluminum is a very energy-intensive 
business. One aluminum producer traditionally obtained its electricity 
from the hydroelectric facilities it owned at a nearby river. As a 
result, it used to schedule aluminum production based on projection of 
that river's spring flows. In essence, their ability to produce 
efficiently hinged on sufficient snowmelt and rainfall to fill the 
hydro dams.
    Today, Aquila supplies that smelter with all of its energy, so 
production can be based on raw material market conditions--not weather 
and rainfall. In exchange for the purchased derivative, customized 
specifically for this plant in this location, we maximize the use of 
energy from company's dams on the river. Of course, if the 
manufacturing company requires more electricity than those dams can 
supply, we obtain it from regional markets and other power plants at a 
predetermined price. This derivative ``cushions the risk'' for the 
manufacturer and its production schedule. It allows the manufacturer to 
be more competitive in the global market.
    Example #3--Aquila has customized a derivative product called 
Guaranteed Bill for the customers of a Midwestern regulated utility. 
Guaranteed Bill is marketed to its residential customers by the local 
utility. The service offers customers a fixed monthly bill for natural 
gas. It is designed to put the retail customer in control and allows 
the individual to fix his/her energy costs. Historically, a customer 
trying to control costs was limited to a level payment plan which 
offers no insulation from weather or commodity price fluctuations, only 
the averaging of monthly payments over the course of the agreement. 
With Guaranteed Bill there is no end-of-agreement ``settle up'' payment 
due at the termination of the agreement. Aquila provides the utility 
with a weather hedge and a fixed commodity price allowing the utility 
to provide its customers true price certainty.
    A further illustration of the increasing recognition of the 
importance of derivatives is Aquila's teaming with The World Bank and 
the International Finance Corporation (IFC) to launch a global weather 
risk facility that will sell weather derivatives to companies in 
emerging markets. This initiative of the World Bank and the IFC has 
grown out of the multilateral agencies' plans to broker weather 
derivatives to boost agricultural yields in North Africa.
    It is imperative that the value and utility of derivatives 
themselves not be confused with questionable accounting practices and 
questionable financial reporting. It is imperative that companies 
reports provide accurate and transparent information concerning their 
actions and financial health of companies.
    I understand the concerns of Congress and the other regulatory 
agencies such as the Securities and Exchange Commission (SEC), the 
Federal Energy Regulatory Commission (FERC), and the Commodity Futures 
Trade Commission (CFTC) in considering and examining the energy 
industry issues and accounting and pension issues affecting all 
industries catapulted into the spotlight by the Enron collapse. The 
Enron actions have understandably raised questions about the necessary 
protections required for shareholders and employees.
    Congress should look at several issues that will help restore their 
confidence in the energy industry as well as other industries in order 
to ensure that employees and investors are protected.
    (1) The inability of Enron employees to diversify their retirement 
portfolios as the stock price of Enron declined having high 
concentration of Enron stock ownership within their portfolios must be 
examined and corrected. Legislation that addresses these employee 
concerns and allows employees at any time to diversify is needed.
    (2) The standards for disclosure of special purpose entities (SPEs) 
and off-balance sheet financing need examination and correction. I 
believe that the SEC has the proper authority to make these changes 
that will provide for appropriate disclosure of such entities. 
Investors should have confidence that such entities are adequately 
being disclosed.
    (3) The standards required for the oversight of external auditing 
needs examination and resolution. Currently, the accounting industry 
would be characterized as self-policing. The SEC has the authority to 
require the independent oversight of audit procedures and standards. 
Investors should have confidence that there is an independent oversight 
function. Such an independent oversight body could also review audit 
failures and should have subpoena power.
    Aquila has made and will make every effort for full and open 
disclosures within the energy industry. Just recently, Aquila 
executives conducted a seminar for Wall Street and investment analysts 
about accounting methods. I believe that it is crucial that we educate 
these groups and others about the accounting methods and practices 
applicable to our industry. Our disclosure practices and communication 
of our financial information are not like Enron, and we find ourselves 
in the position of having to explain that very clearly.
    Lack of confidence by the capital markets in the energy industry 
has been raised as a result of the Enron collapse. Rating agencies have 
raised the credit standard for generators and traders. There have been 
steep declines in stock values. There is a new appetite for a stronger 
capital ratio reflecting greater equity value and less debt.
    This shift in the capital structure will force many energy 
companies to reduce debt and to scale back investments in new gas 
processing, development of storage facilities and pipelines, and 
generation plants. The result could be a shortage of generation in the 
    Since 1990, the competitive power supply industry has accounted for 
more that half of all the power generation capacity brought online in 
this country, and we expect this percentage to increase as competitive 
wholesale markets continue. The loss of confidence by the capital 
markets in the wake of Enron's demise will likely result in a 
reluctance to invest in the critical infrastructure for our energy 
supply and delivery. Congress can help to encourage confidence and to 
encourage the capital markets to invest in much-needed energy 
infrastructure by passing legislation to continue to make markets more 
    Briefly, I would commend the Bush Administration, Chairman 
Bingaman, Chairman Tauzin, Congressman Barton, and the Federal Energy 
Regulatory Commission (FERC), as well as many others, for their various 
proposals for new legislation that encourage a further efficient 
marketplace in which consumers will benefit.
    The energy areas in which I would submit that you take action 
include: existing federal legislative reform, the standardized 
interconnection to the power grid, and the formation of regional 
transmission organizations.
    Federal Legislative Reform: While PURPA in 1978 opened a new path 
for independent power companies to create wholesale generating capacity 
outside traditional utility regulation, the independent power 
generation industry is now mature and robust. Moreover, subsequent law 
enacted by Congress in 1992 effectively deregulated the creation of 
wholesale generating capacity. If PURPA is repealed prospectively as 
part of a comprehensive federal electricity bill, there must be 
explicit recognition and preservation of existing PURPA contracts as 
negotiated in good faith. I also endorse efforts to guarantee the 
recovery of PURPA contract costs as appropriate federal policy. 
However, such cost recovery must be explicitly related to the honoring 
of existing contracts. Moreover, the existing QF ownership restrictions 
in PURPA have outlived their usefulness. They are an artificial and 
outdated restriction on the transfer of ownership of QF facilities. 
These restrictions lead utilities that want to acquire QFs to resort to 
the use of complex, temporary, corporate shells or trusts to dilute the 
utility ownership below 50%. The artifices are expensive, cumbersome, 
and serve no apparent useful public policy.
    Standardized Interconnection: The power transmission grid has been 
compared to the national highway system in terms of its importance to 
our economic infrastructure. The highway system, along with protections 
to promote interstate commerce, has allowed a flow of benefits between 
regions. The national power grid requires standardization to promote 
the flow of power between regions as the national highway systems 
supports the flow of goods and services.
    I endorse a clarification and standardization of interconnection 
rules for new sources of power generation. I cannot overemphasize how 
important this issue is for investment and construction of new 
generation. For companies interested in expanding electric generation 
capacity--critical to affordable power rates throughout the country, 
the physical interconnection of the generation plant to the power grid 
has become too often the ``choke point'' for project development.
    Ad hoc interconnection standards create uncertainty, extensive 
delays and unexpected or unfair costs for developers. Legislation needs 
to affirm the right of new generation to interconnect on a non-
discriminatory basis to transmission facilities, provide a clear avenue 
for the federal review of interconnection policies, and establish a 
timely remedy, if necessary, for any abuse. Access to the transmission 
grid should be uniform just as entrance and exit ramps are uniform 
throughout the interstate highway system.
    RTOs: Congress should affirm FERC's authority to order utilities 
and other entities that own transmission assets to join a FERC approved 
Regional Transmission Organizations (RTOs) in order to realize a truly 
open and competitive transmission grid. I am supportive of FERC's 
directive to organize large, regional RTOs to reflect the way power 
flows. Independence in operation and market monitoring are crucial for 
the achievement of the open access initiated by Order 888.
    The nation's transmission system is in need of upgrades and new 
investment to take economic advantage of available and most 
advantageously priced generation supply. I support market-like 
incentives to encourage new transmission builds in place of cost-based 
ROE. Pricing for transmission should preclude ``pancaking'' (multiple 
charges as power flows from one transmission system to the next) which 
can increase costs to customers due to excessive transmission charges 
for the delivery of power supply. Each user of the transmission grid 
must be required to take service under a single open access 
transmission tariff. The information system that guides the reservation 
and pricing and rules of transmission access should be standardized to 
increase transparency, reduce costs, and level the playing field.
    Congress should reaffirm FERC's authority to set and enforce a 
clear deadline for all utilities and other transmission owning entities 
to join Regional Transmission Organizations (RTOs).
    The continued support of Congress and FERC is necessary to re-
establish confidence, to foster the creation of new technologies, to 
attract the necessary capital for infrastructure and to ensure a robust 
marketplace for the future. This will result in the reliable, 
affordable supply of energy.
    While all companies are naturally concerned about creating 
shareholder value, companies must demonstrate equal concern and 
diligence for monitoring the human capital within their organizations. 
A foundation principle of our company is that the best companies are 
those where its people are rooted in a common understanding of 
expectations, and share in the ownership of the company. Furthermore, 
when business values and codes of conduct are integrated into 
performance management and business processes, they serve as a system 
of checks and balances as these values are upheld in practice. We all 
must make every effort to provide transparent information that 
facilitates the understanding of our financial actions and their 
results--which earns and maintains investor confidence.
    Four important stakeholders that are vital to the company's long-
term success ultimately evaluate a company's success: employees, 
customers, communities and shareholders. Employees vote their 
confidence in the company by taking advantage of ownership 
opportunities, referring friends for employment, and advancing their 
career within the company. Customers show confidence in our ability to 
provide superior energy solutions by selecting us over others in the 
marketplace. Communities cast their votes of confidence by providing us 
with operational franchises, purchasing our services, and partnering 
with us on vital economic development initiatives. The value of 
corporate citizenship must first be demonstrated in the very 
communities in which we live and work. Finally, shareholders 
demonstrate confidence by investing in our company.
    The UtiliCorp/Aquila culture identifies values that are the 
foundation for success. We have also recognized that by effectively 
executing compliance with these values, the company is creating 
discipline and durability to deliver performance to our stakeholder 
    The Enron collapse is tragic for employees, their communities, and 
their shareholders. Enron failed, not the energy market. We must all 
work together to re-establish and restore confidence so that customers 
will continue to benefit.
    Thank you for the invitation to appear before your Committee. I 
will be happy to answer any questions you may have.

    Mr. Barton. Thank you, Mr. Green.
    We now want to hear from Mr. David Owens. Your statement is 
in the record. We would ask you to speak to it from 5 to 7 

                   STATEMENT OF DAVID K. OWENS

    Mr. Owens. Thank you, Mr. Chairman. Good afternoon, Mr. 
Chairman, and members of the subcommittee. My name is David K. 
Owens, and I am the executive vice president of the Edison 
Electric Institute. We certainly are pleased to testify on the 
effect of the Enron bankruptcy on energy markets.
    Enron's employees and its investors have borne the brunt of 
Enron's bankruptcy. Congressional committees and government 
agencies are appropriately investigating the causes of this 
debacle. Fortunately, Enron's bankruptcy did not have an 
immediate harmful impact on electricity consumers.
    As other witnesses have stated today, there was no 
disruption of service to retail customers, the lights stayed 
on, and prices remained stable. In addition, the Chairman of 
the Oregon PUC testified recently at a Senate hearing that 
Enron's bankruptcy does not appear to have harmed the retail 
consumers of Portland General Electric Company, an Enron 
    Now, as you know, allegations have been made that Enron 
manipulated forward prices in Western electricity markets. As 
we heard today from FERC Chair, Pat Wood, FERC plans to conduct 
an investigation of these allegations, and I think that is 
totally appropriate.
    In other respects, Enron's bankruptcy is having important 
impacts on energy markets. Many energy companies have reported 
losses resulting from Enron's bankruptcy, and Wall Street is 
asking more questions about financial practices, and tightening 
credit standards, particularly for energy companies.
    The stock prices of many energy companies have declined 
significantly. And many companies have delayed investments in 
generating capacity, raising the possibility of tight power 
supply markets when economic growth picks up.
    In addition, there is increased scrutiny about the effect 
of accounting for forward trade in electricity, known as mark-
to-market accounting. Selling electricity for future delivery 
is essential for efficient operation of electric markets.
    However, when forward markets are not very liquid, there 
are greater uncertainties as to the proper market valuation for 
such transactions. Now, Enron's collapse suggests a need for 
many reforms that affect all publicly owned companies, and not 
just energy companies.
    With respect to energy, it appears that the area of 
greatest concern is the transparency of financial reporting and 
disclosure as thinly traded electricity markets, much of what 
we heard from the first panel.
    The ultimate cure for this is to advance measures to 
promote liquid trading markets, and in electricity, that would 
involve enhancing our transmission infrastructure. It would 
involve moving toward standardized power markets with efficient 
transmission pricing.
    And it would also include facilitating independent regional 
transmission organizations. In other words, establishing more 
liquid hubs for the delivery and trading of power.
    FERC has taken the lead in addressing many of these issues. 
However, legislation is needed in areas where FERC cannot act. 
H.R. 3406, together with the tax provisions of H.R. 4, already 
passed by the House, contain many needed electricity reforms to 
achieve the goal of a more robust, competitive wholesale 
    We look forward to working, and continuing to work with the 
subcommittee on these important legislative initiatives, and I 
would be happy, Mr. Chair, to respond to any of your questions 
and other members of the subcommittee. Thank you.
    [The prepared statement of David K. Owens follows:]
 Prepared Statement of David K. Owens on Behalf of the Edison Electric 
    Mr. Chairman and Members of the Subcommittee: My name is David K. 
Owens, Executive Vice President of the Edison Electric Institute (EEI). 
EEI is the association of U.S. shareholder-owned electric utilities and 
industry affiliates and associates worldwide. We are pleased to have 
the opportunity to testify before the Subcommittee on the effects of 
the Enron bankruptcy on the functioning of energy markets.
    Enron was reported to be the 7th largest company in the nation and 
often had been cited among the ``most admired and innovative 
companies.'' Its sudden bankruptcy has shaken the confidence of the 
nation's investors and devastated Enron's own employees, many of whom 
have lost their jobs and their retirement savings. This bankruptcy has 
raised substantial questions that the Energy and Commerce Committee, 
other congressional committees and government agencies are properly 
    Investors must have confidence in the corporations whose stock they 
own. This requires the fair, accurate and transparent presentation and 
disclosure of financial information. Enron obviously did not meet this 
fundamental standard. The circumstances of Enron's demise, while not 
yet fully known, certainly require a reevaluation of our approaches to 
auditing standards, financial reporting and disclosure for all 
companies, no matter what industry they operate in.
       did enron's bankruptcy have any impact on energy markets?
    Fortunately, Enron's bankruptcy did not have any immediate harmful 
impact on electricity consumers. Nevertheless, it is affecting energy 
companies and future developments in the energy industry in many ways.
    First, the good news. As FERC Chairman Wood testified on January 29 
before the Senate Committee on Energy and Natural Resources, despite 
the fact that Enron was the nation's largest marketer of gas and 
electricity, Enron's collapse has had little or no impact on the supply 
or price of electricity. There was no disruption of service to electric 
customers. The lights stayed on. Prices remained steady.
    It appears that electricity traders, including those at Enron, 
worked hard to unwind various deals involving Enron and to find other 
parties to complete such transactions. Enron and many other market 
participants often used a standardized electricity trading contract, 
voluntarily developed by traders, buyers and sellers under the auspices 
of EEI, which simplified the process of responding to Enron's financial 
collapse. The contract provided uniformity in the terms and conditions 
of electric trading transactions, and contained detailed default and 
credit provisions which enabled parties to protect themselves if the 
party they were trading with (the counterparty) suddenly lacked 
creditworthiness. See ``Using the EEI-NEM Master Power Contract to 
Manage Power Marketing Risks,'' 21 Energy Law Journal, 269 (2000).
    Chairman Wood's testimony to the Senate Energy Committee contains 
data showing that daily power prices for electricity, which are often 
extremely volatile, had no unusual peaks during the fall of 2001. 
Electricity trading markets have proven to be robust and efficient, 
allowing others to step in to fill the void left by Enron.
    In addition, Enron's bankruptcy does not appear to have harmed the 
retail customers of Portland General Electric Company, an Enron 
division which provides electricity to retail consumers in Oregon. Roy 
Hemmingway, Chairman of the Oregon Public Utility Commission, confirmed 
this in his testimony to the Senate Energy Committee on February 6.
    I understand that Mr. McCullough, who appears with me today, has 
testified recently that Enron's bankruptcy was followed by a 30% 
decline in West Coast forward prices and suggested that Enron used its 
``market dominance'' to ``set'' forward prices. I do not know whether 
declines were as significant as Mr. McCullough indicates or if they 
were the result of manipulation by Enron.
    It is plausible that prices declined with Enron's bankruptcy 
because other sellers tried to dispose of power at one time that they 
had originally sold to Enron. Other factors that might have contributed 
to the decline in electricity prices include the sluggish economy, 
warmer than normal weather and falling natural gas prices. Whatever 
really happened, the Federal Energy Regulatory Commission will 
investigate these allegations, as it should.
    In other respects, Enron's demise does appear to be having 
important impacts on energy markets.
    Many energy companies reported losses resulting from Enron's 
    Wall Street is asking more questions about financial practices and 
tightening credit standards, particularly for energy companies.
    Accounting and reporting practices are being scrutinized and 
    Corporate Board members and officers are reviewing their roles and 
    The stock prices of many energy companies have declined 
significantly. Credit rating agencies have downgraded some energy 
companies and are re-evaluating others. All of which makes it more 
difficult and costly to raise capital to make needed investments in our 
nation's energy supply infrastucture.
    Many companies have delayed investments in generation capacity and 
some are selling assets, raising the possibility of tight supply 
markets when economic growth picks up.
    Many of these actions are understandable responses to the concerns 
of investors, customers and the public.
    In addition, the circumstances of Enron's bankruptcy have raised 
specific questions about the effect of accounting for forward trades in 
electricity. A forward trade is a transaction for delivery of 
electricity at some future time. Selling electricity for future 
delivery is essential for efficient operation of electric markets. The 
California experience demonstrated the problems of relying too much 
upon the spot market for electricity and confirmed the importance, for 
stable electricity prices, of having a portfolio of long and short-term 
electricity contracts.
    Where there is a transparent liquid market for longer-term 
commodity contracts, mark-to-market accounting is used to recognize and 
disclose the financial impact of such transactions. However, where 
forward markets are not as liquid and prices are not as transparent, 
there are greater uncertainties as to the proper market valuation and 
accounting for such transactions. Thus, the absence of transparent 
market prices could raise concerns about improper manipulation of 
anticipated prices that could distort financial reporting and 
disclosure. Questions have been raised regarding Enron's accounting for 
the income from such transactions and its treatment of the risks and 
valuation of the underlying trades.
    In a related vein, questions have been raised whether the exemption 
of forward energy trades from CFTC regulation contributed to Enron's 
problems by giving it a greater opportunity to take advantage of 
illiquid markets.
    Information from investigations of Enron will be helpful in 
addressing these questions.
 are there any legislative energy-related recommendations that result 
                         from enron's collapse?
    Enron's collapse suggests the need for many reforms and changes 
that affect all publicly-owned companies. Such changes must be much 
broader in application than just the energy industry. We are pleased 
that Congress is looking into these issues, although many reforms can 
and should be accomplished without legislation.
    Depending upon what else we learn about the circumstances at Enron, 
right now it appears that the ``energy'' area of greatest concern is 
the transparency of financial reporting and disclosure in thinly traded 
electricity markets. The ultimate cure for this is to initiate measures 
to promote more liquid trading markets. In the electricity context, 
this would involve enhancing our transmission infrastructure, moving 
toward standardized power markets with efficient transmission pricing, 
facilitating independent regional transmission organizations and 
establishing more liquid ``hubs'' for the delivery and trading of 
    FERC is taking the lead in addressing many of these issues. 
However, legislation is also needed in areas where FERC cannot act.
    H.R. 3406, together with the tax provisions of H.R.4 already passed 
by the House, contain many needed electricity provisions to achieve the 
goal of a more robust, competitive wholesale market and to promote 
market liquidity. The tax provisions of H.R. 4 remove disincentives to 
transferring transmission assets to RTOs for both privately-owned 
companies and public power entities. This will facilitate the voluntary 
formation of large regional RTOs without federal mandates. (While many 
electric companies disagree with aspects of FERC's current RTO policy 
and the RTO mandate language in H.R. 3406, there is broad support for 
development of robust, large regional RTOs.)
    The transmission siting and incentive rate provisions of H.R. 3406 
would facilitate investment in and construction of needed new 
transmission facilities. The standard market design initiative being 
conducted by FERC would achieve greater liquidity in electric markets. 
And the reliability provisions of H.R. 3406 would help assure the 
continued reliability of the grid.
    In addition, FERC must have the same level of authority over all 
transmission owners, no matter what type of entity owns transmission 
facilities, if we are to attain the consistency needed for transparent 
liquid markets. While H.R. 3406 moves in the direction of granting FERC 
some increased authority over the 25% of the transmission network that 
governmental and cooperative utilities own, it is too timid. FERC 
should have the same level of regulatory authority over all 
transmission providers no matter what their ownership form.
    The provisions of the Public Utility Holding Company Act (PUHCA) 
and the Public Utility Regulatory Policies Act (PURPA) are incompatible 
with the current move to competitive wholesale markets. PURPA assumes 
we are still operating under the old vertically integrated monopoly 
paradigm, not with open access transmission and a competitive wholesale 
market comprised of hundreds of active participants. Prospective repeal 
of PURPA's mandatory purchase obligation is needed to eliminate future 
distortions in energy markets.
    PUHCA's commitment to vertically integrated utilities is directly 
contrary to FERC's goals of a decentralized, competitive wholesale 
generation market and large regional transmission organizations that 
are completely independent of power generators and retail electric 
sellers. PUHCA precludes investment from non-electric companies, 
interferes with establishment of large regional transmission companies 
and promotes concentration of generation, not dispersion. A better 
approach, contained in H.R. 3406, is to assure strong access to books 
and records for all state commissions and FERC, recognizing that our 
responses to Enron's situation will lead to improved financial 
reporting and disclosure approaches for all public companies.
    Finally, Congress needs more information on the role of 
commodities-type regulation for energy forward markets and perhaps 
should hold hearings on this topic.
    In conclusion, I appreciate the opportunity to appear before this 
Subcommittee to address the energy market ramifications of Enron's 
bankruptcy and would be pleased to respond to your questions.

    Mr. Barton. Thank you, Mr. Owens.
    We now want to hear from Mr. Raymond Plank, of Apache 
Corporation, in Houston, Texas. Your statement is in the 
record, and we would ask that you elaborate on it for 5 to 7 


    Mr. Plank. Thank you very much, Mr. Chairman, members, and 
interested persons in the audience. My name is Raymond Plank, 
and I have correctly been introduced as in effect the founder 
and CEO of Apache Corporation, which has had an opportunity to 
observe energy markets for the 49 years of business, in which 
we have gone from the smallest of 16,000 oil and gas producers, 
to among the 20 largest in the world.
    Mr. Barton. You know my good friend Michael T. Halboutie by 
any chance?
    Mr. Plank. Yes, I do.
    Mr. Barton. He still goes to the office every day, and I 
think he is 95. He is as ornery as ever.
    Mr. Plank. I haven't seen him for a couple of years, but he 
is quite a guy.
    Today, what we have as I see it, in the energy chain, 
natural gas is a very critical link. The reason is that it is 
the fuel of preference, both from an environmental standpoint, 
and in terms of its robust usage in commanding that portion of 
the natural gas and the electricity markets, which are totally 
    Now, today, the greatest threat faced by the natural gas 
supply side is, rather than minimize price volatility, it has 
exasperated price volatility, contrary to the promises when 
Enron and others were capturing the last phase of deregulation, 
and assured such party purchasers as the State of California, 
that prices would be lower, and that supplies would be 
adequately abundant for their purchases to take place on a day 
to day basis on a spot market.
    I would suggest that the committee follow the self-
interests of those who make these claims, for if in the 
physical market the ratio of physical trading is one point for 
every 15 points of a virtual market, and you can command the 
same margin of profit on one trade to 15 trades, then in your 
virtual market, you have an opportunity for a multiplying 
factor of 15.
    That then drives the psychology under which during the last 
phase of deregulation, which was preceded by some very 
constructive phases of deregulation, which they didn't really 
have to be, because it was such a terrible mess at the time 
that deregulations began some 15 years ago.
    At that time the process was hijacked by the marketers. The 
hijackers immediately moved in between the pipeline companies 
and the consumers and filled that gap. They were the 
deregulated portion selling their commodities and their 
protection against volatility to whoever would buy it in the 
    Unfortunately, from the standpoint of natural gas, paper 
contracts, paper agreements, futures sales, don't burn. They 
don't generate energy. So commitments were being made to 
potential consumers, but spot market prices would be very 
adequate for them to buy all of the supply behind which there 
were a pack of lies.
    Those lies are coming out today as truths, and Enron 
carried it as far as they could, and then it collapsed. Now, 
credit has been taken here today and appropriately should be, 
for the fact that the process moved smoothly during the Enron 
    I want to suggest that in addition to the two reasons 
suggested thus far that there is a third one. The first one of 
course being a period of recession, in which gas demand, 
particularly from industrial users, is significantly down.
    The second one is an unseasonably warm winter to date; and 
the third one is the fact that they weren't contributing a darn 
thing in the first place. They were not a value-added service 
    They were an opportunist, who saw an opportunity to create 
a market through current technology and go out and fill it. 
Now, in doing that, that process, and you know it as well as I, 
but it rests with you and other legislative committees, to 
pursue it to a point where justice has been served.
    They did capture a good bit of that market, but again the 
value added service has not been provided, and as proof go back 
to the early 1970's before Ken Lay came over to the predecessor 
to Enron, before they then acquired Northern Natural Gas, which 
more recently they flipped off for $1.5 billion, as though it 
were a rotten apple hanging on a tree, in order that they could 
concentrate 100 percent of their activities on the highly 
profitable energy side, which is a misnomer, because they were 
no longer in the energy business.
    They were a trader/marketer of commodities and of 
derivative products. That became the definition of their 
business. At that point in time then, one of the reasons why 
the industry could skate by, and the final reason that they 
could skate by the collapse of Enron was very simply that they 
were contributing so little in the first place.
    Now, deregulation has contributed quite a bit in its 
earlier phases. I have indicated that it was a mess, and if I 
had more time, I would be pleased to continue, but if you ask 
me a question, I would be pleased to comment thereupon.
    Today, our greatest problem that we confront within the 
industry, both as consumers and as suppliers, is price 
volatility. The promise was that with broader trading markets 
there would be less price volatility.
    Gentlemen, the price of natural gas in 18 months has gone 
from under $2 to over $10, and back to under $2. That would 
represent the New York Stock Exchange or the Dow Jones average 
going from 10,000 points to 50,000 points, and back to 5,000 
points, or wherever you want to put it.
    The ratio is still on a 10-to-1, and the arithmetic I am 
going to leave to you, as I am certain that you will get that 
right. That would not be a salutary condition and the impact 
upon the supply side of the market is very simple.
    We spend our cash-flow to replace a depleting reserve base, 
and it takes about a thousand rigs drilling at a time in the 
United States and Canada to maintain our reserve base at a 
level where it can meet the present known demand of 
approximately 60 BCF or a million Btus of gas per day. That is 
about our daily demand.
    Mr. Barton. Mr. Plank, you are at a little over 1 minute 
over the 7 minutes. I have read your testimony, and if you 
could try to summarize it in the next minute.
    Mr. Plank. All right. We will put it this way. We have got 
a bit of a ticking time bomb here, gentlemen, and your job 
isn't finished. The energy markets are not fractured. They are 
    We could come a long way, but before you rebuild and 
improve regulatory structure or before you turn it loose for 
the cars to go down the streets of Washington, DC at 100 miles 
an hour instead of 20, we better do the counterpart of what was 
done in New York City.
    They cleaned up ground zero before they are going to start 
building on it again. There is an age old principle to this old 
bomber pilot in the South Pacific, and to a father who said to 
me, son, when you grow up, I hope you will remember this word 
of advice.
    There are a lot of very smart crooks around. The 
interesting thing is that they would have done a lot better for 
themselves and for the country if they had been honest in the 
first place.
    There is an ethical problem here, and there is a moral 
problem here; the citizens of the United States understand it 
the more clearly as a result, Mr. Chairman, of 9/11. I hope the 
committee will take that into consideration as they deal with 
these problems. Thank you very much.
    [The prepared statement of Raymond Plank follows:]
   Prepared Statement of Raymond Plank, Chairman and Chief Executive 
                      Officer, Apache Corporation
    Mr. Chairman and Members: Thank you for the opportunity to speak to 
the committee today.
    My name is Raymond Plank, and I am the Chairman and CEO of Apache 
Corporation. In five decades in the oil and gas business, Apache has 
grown from one of the smallest to one of the larger independent 
    Natural gas is the single most important domestic energy source--an 
abundant resource that warms millions of homes, fuels much of America's 
industrial base and plays a large and growing role in the nation's 
electricity industry. However, while many believe natural gas is the 
fuel of the future, I believe that future is in doubt because of the 
flawed structure of the natural gas market in this country.
    The fact is the nation's energy markets skated by and escaped a 
disaster in the wake of Enron's collapse. Why? Certainly not because 
this market serves the nation's needs. No, we avoided a supply crunch 
because the recession and one of the warmest winters in recent history 
combined to keep demand in check. If the economy had been more robust, 
or if weather conditions had been different, the story could have been 
far different.
    This is an issue that should be important to the other members of 
this panel because they have developed business plans, raised billions 
of dollars from investors and erected power plants based on the 
availability of reliable supplies of natural gas. The current market, 
marked by excessive price volatility, has undermined the ability of 
Apache and other North American producers to meet their requirements.
    Mr. Chairman, I know you have worked hard to introduce competition 
into the nation's energy markets. But deregulation has been hijacked by 
traders, hedge funds and others who profit from volatility and who 
scorn the hardworking men and women who produce this important 
resource. If you don't fix the natural gas market, then all your 
efforts to bring competition to the electricity market will be for 
naught because natural gas is the fuel of choice for new generating 
    The uncertainty in the gas market caused by excessive price 
volatility endangers the infrastructure required to explore for and 
produce natural gas. Every time the price goes down and Apache and 
other companies cut back, skilled workers, from roustabouts to 
engineers to scientists, leave the industry. Drilling rigs are taken 
out of service and cannibalized for spare parts. Marginal wells are 
shut in, never to return to production.
    Right now, the industry is not drilling enough wells to maintain 
production at current levels.
    Yes, Mr. Chairman, Enron is gone, but the damage has been done to a 
vital element to the nation's economic security. In some ways, this is 
a homeland security issue: There is a sleeper cell out there, a ticking 
time bomb set to wreak havoc when the economy comes back and demand 
increases. I'd like to give you some background on how we came to our 
    For the last 10 years, our ability to find and produce the natural 
gas this country needs has been crippled by increasing price 
volatility. North America is a mature producing province, which means 
that while there is still a great deal of natural gas to be found, 
producing it requires better technology, better science, more time and 
more money. Most of these projects take from 12 months to two years to 
complete. It is harder and harder to commit capital to these kinds of 
projects when we can't forecast what the price of our product is going 
to be tomorrow, much less a year from now.
    Natural gas prices, like all commodity prices, run in cycles. 
That's been true as long as I can remember. Recently, however, as hedge 
funds and traders have come to dominate the market, the cycles have 
become shorter in duration and more pronounced. In press reports and 
presentations to analysts, these traders acknowledge that they derive 
their profits from price volatility.
    The casino mentality that has taken over the energy markets has a 
real impact on the consumers as well as producers.
    Let me give you a real example that we all remember.
    In December 1999, we were paid less than $2 for a thousand cubic 
feet of gas. In January 2001, the price climbed to nearly $10, only to 
fall back below $2 by October. To put that in perspective, think about 
the impact on the stock market--and the American economy--if the Dow 
Jones Industrial Average took a trip from 10,000 to 47,000 and back to 
10,000 in a year and a half. What would your constituents be telling 
you if the price of gasoline jumped from $1.20 per gallon to $6 and 
then back down to $1.20?
    Last winter's price spike dealt a damaging blow to the industrial 
economy which in total accounts for 40 percent of U.S. natural gas 
consumption. Natural gas-intensive industries like steel, plastics and 
petrochemicals significantly curtailed or shut in production in 
response to extremely high gas costs. Some of this demand has been 
permanently displaced. In addition, natural gas volatility played a key 
role in California's energy problems. The consequences for the economy 
due to overheated gas prices are painfully clear.
    But when the price falls back to $2 per thousand cubic feet, the 
capacity of the industry to supply natural gas is diminished--
permanently. One consequence is a brain drain in the industry. The 
average age of oil and gas workers is 48 years old. As young engineers 
and scientists seek opportunities elsewhere, the nation will lose its 
technological edge in this industry.
    When prices fall, companies like Apache reduce their drilling 
expenditures and seek more profitable avenues for investment, usually 
    As a consequence, I can assure you that the next price spike is 
just around the corner. It may not come until this fall or next winter, 
but it is inevitable and it could be severe.
    As much as we know about getting natural gas out of the ground, 
there are many things about this market that have been hidden from view 
by powerful insiders who profit from its opacity. We can't find the 
answers because we don't have subpoena power. It's up to you to break 
through some of these Chinese walls and get to the bottom of this 
structurally flawed market.
    Now, I'd like to discuss some of the most glaring problems with 
this market and our suggestions on fixing it.
    Every month, the price we get for our natural gas production is 
based on indices published in one or more trade publications. The 
reporters who compile these price indices are hard-working, honest 
journalists, but their sources--the pipelines, utilities and 
marketers--are under no obligation to provide complete or even accurate 
information. Similarly, the American Gas Association's weekly storage 
report became a major market event because it was a proxy for supply 
and demand data but it was based on voluntary, self-serving data.
        In a market as important as the natural gas market, the 
        government should collect and disseminate real-time information 
        on natural gas supply and demand from market participants, with 
        penalties imposed for failing to file accurate reports.
    Even some energy marketers acknowledge that the current rules give 
unfair advantages to integrated energy companies with their regulated 
pipelines, unregulated marketing affiliates and electric generating 
units. While allegedly separate, these people go to work in the same 
office building, share coffee--and benefit from the same corporate 
incentive systems.
        The current rules governing the conduct of regulated and 
        unregulated affiliates are weak and subject to abuse. To 
        prevent the trading of insider information, these functions 
        should be geographically separated and their dealings limited 
        to real transactions with real money changing hands. If 
        companies abuse these rules, they should be required to divest 
        their unregulated affiliates.
    Online trading platforms, which operate outside the longstanding 
framework that regulates commodities exchanges, provide their operators 
with vast information about the trading positions of other market 
players which can be used to manipulate the market.
        These online platforms are exchanges; they should be subject to 
        similar regulation to ensure fair treatment of all parties. In 
        the equities market, there is a basic rule that agents cannot 
        put their trades ahead of their clients' transactions; similar 
        rules should guide the conduct of the energy markets.
    The bright light of Wall Street cast on energy marketers in the 
aftermath of the Enron collapse revealed them to be overleveraged. They 
rely on mark-to-market accounting of energy contracts that allows them 
to book the revenues and profits of long-term contracts up front, long 
before the revenues are collected and the profits realized. Though they 
appear profitable on the surface, a closer examination reveals that the 
profits may prove to be illusory. The current system incentivizes 
traders to book deal after deal, seeking profits from every move in the 
market and distorting legitimate supply and demand signals.
        End mark-to-market accounting and require traders to book their 
        revenues and profits when they are realized. Impose capital 
        requirements to assure customers that the traders will be there 
        to deliver the gas and electricity.
    Some would have you believe that the fact that a company as large 
as Enron could fail without causing any disruption in the energy 
markets is a signal that these markets are deep and liquid. I disagree. 
I think it demonstrates that Enron and others like it add no value.
    I also believe that failure to reform this market will cause 
lasting damage to the nation's energy infrastructure and economic 
    Mr. Chairman, you have before you the record of the fall of Enron--
the self-dealing, the subterfuge and the apparent fraud. I think it's 
fair to ask whether the same behavior permeated Enron's biggest 
business--its natural gas and electricity trading operations. Once your 
committee answers that question, I hope you will conduct a thorough 
examination of the structure of the energy market and make the changes 
necessary to ensure that there are not other Enrons out there, waiting 
to happen.
    The task before you is clear: To introduce effective oversight and 
transparency in this market and restore the environment that will 
encourage producers to make the investments to meet the nation's vital 
energy needs.
    Thank you very much for the opportunity to be here today.

    Mr. Barton. Thank you, and I will provide a Washington 
translation of the straight Texas talk that you just gave us, 
since I am also a Texan. I will translate that into Washington 
legalese so that the audience will understand some of those 
words that you put before us.
    We now want to hear from Mr. Gerald Norlander, who is the 
executive director of the Public Utility Law Project. Your 
statement is in the record, and we would ask that you elaborate 
on it in 7 minutes.


    Mr. Norlander. Thank you, Chairman Barton. In addition to 
being the executive director of the Public Utility Law Project, 
I am also the Chairman of the Electricity Committee of the 
National Association of State Utility Consumer Advocates, also 
known as NASUCA.
    And we didn't have enough time to put together a NASUCA 
position on this today, and so I am speaking for PULP, Public 
Utility Law Project. We represent low income consumers, 
primarily up in New York State, on issues affecting universal 
service, consumer protection, and affordability.
    Although most eyes were turned toward California last year, 
we had a near-California experience in New York City with 
respect to the deregulation plan that was put into effect and 
implemented there.
    That was the plan that was very much like the model that 
Enron had proposed and the effect of that in the summer of 2000 
was a 1-month jump of 43 percent in consumer bills. There were 
hearings, and consumers living day to day with just a few 
dollars of discretionary income for themselves, just simply 
can't make ends meet with bills like that, nor could 
    And the hearings were crowded by business people whose 
business plan was spoiled. People who ran grocery stores, and 
ran coolers, and things like that, had no remedy whatever from 
the price spikes.
    And subsequently the utility which was buying the energy 
for the consumers in primarily the spot market, didn't know 
what had been going on, subsequently said they had been buying 
from only 2 or 3 sellers at times and locations in the city.
    And they went to FERC under the prior administration I 
might add, and couldn't get relief. And I would like to point 
out that under current leadership at the FERC, we are quite 
pleased that one utility in New York called a runaway train 
heading for disaster, and that has at least been slowed down.
    And I think they are beginning to ask the correct questions 
about market manipulation in the spot markets, and about the 
standards for granting market based rates. I would urge the 
committee that in looking at this that we apply a different 
test, and which is not that we will do harm to the markets, but 
will we do harm to the people.
    And people who demand and expect reasonable rates under the 
old law, which is still law, were quite sensitive to that in 
New York, because New York never changed its law, and the 
Commission went out and asked the utilities to divest their 
plants, and then buy back the energy for consumers in the spot 
    The theory urged by Enron, and that is why I bring this 
back to Enron, is that it was their model that--and certainly 
others bought into it, that we would have a spot market and it 
would be volatile, but it would be efficient, and it would be 
competitive, and the marketers would come to the rescue when 
the volatility got to be too much.
    And I think they are wrong on just about every count, at 
least so far, in our ISO markets. And we have markets that are 
riddled with market power. We don't have enough sellers. It 
seems to us from our look at the problem that we simply don't 
have enough sellers in these markets, and that the traditional 
anti-trust screens are not sufficient in the electricity 
    So that an entity that passes the traditional tests will 
still be able with their friends to bid up the markets in these 
spot markets without conspiracy, and without overt 
    So if we are out looking for smoking guns and really bad 
conduct, and price rigging, we may not see it. What we may see 
is a system that is not generating an efficient price. Now, the 
markets were relied upon too soon I think without looking at 
things like reliability, the costs of going forward in them, 
market design, and whether we had remedies.
    And I think that today you have asked what remedies might 
we look at. We think that a good remedy would be, or would help 
us get to that test, and are consumers going to be better off.
    We should have the regular reporting of costs by 
generators. What does it cost to run the machine, and they 
don't have to bid that perhaps, but when something goes wrong, 
or when there needs to be an investigation into the market, not 
only is the information readily available, but there is a reset 
or fallback price that can be utilized to correct a market 
power problem.
    I think that in the States that haven't done this yet, they 
are going to be looking very carefully at whether these new 
measures of FERC will indeed control market power at times of 
    We are also seeing a situation where the reliance on the 
new market to bring new plants is a major question. We had a 
situation where 19 plants were on the list to be built in New 
York, and last week in an article reminiscent of Willie Nelson, 
that says turn out the lights, the party is over. They say that 
about half of those plants will look like they are going to be 
built now.
    New York does need new energy supply. It didn't come and we 
had to build and have the Public Power Authority from the State 
come in to build the emergency plants in the last couple of 
    We are concerned that with Enron that some of the marketers 
like Enron will go bankrupt. We had that happen with a gas 
marketer in Buffalo, and 19,000 people lost a contract, and 
many off them had paid in advance, and their money is in the 
bankruptcy court and the bank has a priority, has a secured 
    And so they had to pay twice. On a larger scale, Enron 
seems to have defaulted on some of its retail contracts in the 
Chicago area, leaving consumers holding the bag and fortunately 
being able to go out in a low market and replace what had been 
    Now, NASUCA, in its resolution last summer, recommended 
that the FERC adopt measures to provide a cost-based fallback 
when market power is found, and we do believe that that is a 
corrective measure that is very important for FERC to pursue. 
We think that from a legislative prospective we need to look at 
the problem of market power in these unique electricity 
auctions as a particular problem.
    And I think that the problem of mergers I think is one of 
the major problems, and that if we go to the effort to get more 
sellers in through the larger markets, we are going to spend a 
lot to get larger markets and more people selling. And if at 
the end of the day if sellers can merge, we are back where we 
are today. Thank you very much.
    [The prepared statement of Gerald A. Norlander follows:]
  Prepared Statement of Gerald A. Norlander Executive Director Public 
                 Utility Law Project of New York, Inc.
    I am Gerald Norlander, Executive Director of the Public Utility Law 
Project.1 Thank you for inviting me to testify on the effect 
of Enron on energy markets, and for the opportunity to suggest remedial 
measures. PULP is a nonprofit organization, created by community 
organizations during the 1970's energy crisis, to represent the 
interests of low income utility consumers. We focus our efforts on 
matters affecting universal service, consumer protection, and 
affordability. Our website is: www.pulp.tc
    \1\ My curriculum vitae is attached as an exhibit to this 
    I am also Chairman of the Electricity Committee of the National 
Association of State Utility Consumer Advocates (NASUCA). NASUCA is an 
association of state utility consumer advocates from 43 states, and has 
several members from nonprofit organizations such as PULP.
    We did not have time before today's hearings to develop specific 
NASUCA positions on the impact of Enron on energy markets, and so my 
remarks today are on behalf of PULP. In the course of my testimony, 
however, I will mention the NASUCA resolution on the problem of market 
power in the energy markets.
    The hasty rush to restructure the electric industry is now 
characterized by higher rates for consumers in California and New York 
City, which experienced 43% bill increases in the Summer of 2000. Last 
year, I pointed out in an article that the electricity restructuring 
``Juggernaut'' had already ground to a halt, and observed that the 
legendary Juggernauts of India crushed overzealous worshipers. I argued 
that much more attention must be given to consumer concerns such as 
rate stability and predictability, universal service, consumer 
protection, and affordability.2 The halt or slowdown of 
restructuring in the states had already occurred well before the 
collapse of Enron, but restructuring adherents had still urged staying 
the course. Consumers were promised that even if rate decreases were 
not in sight, after a period of higher rates, competition would lower 
them at some unspecified future date. Customers were exhorted to ``let 
go'' and trust the market and that the trust would grow with 
experience. That panglossian optimism evaporated with the fall of 
Enron. Paraphrasing a great Texan, Willie Nelson, the New York Times 
titled a recent article reviewing New York's restructuring experience 
``Turn Out the Lights, The Party's Over.'' 3
    \2\ ``Disconnected Policymakers,'' The Electricity Journal p. 22 
(Aug./Sept 2001). A copy of the article is attached.
    \3\ The New York Times, Feb. 10, 2002. A copy of the article is 
          the pre-bankruptcy impact of enron on energy markets
    Enron was a major driving force in an effort throughout the country 
to restructure regulation of wholesale and retail electricity prices, 
replacing cost-based regulation with market mechanisms widely assumed 
to yield better results. The key element of the model was the creation 
of volatile wholesale spot markets under federal, not state, control.
    Once the spot markets were established, Enron offered respite from 
the price volatility they introduced, through long term energy 
contracts and financial derivatives at Enron Online. Enron claimed to 
be able to hedge energy prices either through contracts or energy 
market derivatives that would protect wholesale buyers from future 
market price volatility. Similarly, in the retail markets, it was 
assumed that Enron and other marketers would smooth out the volatility 
that had been introduced by the old utilities, which in the past had 
striven to make rate changes glacially.
    Enron avidly supported wholesale spot markets with high volatility 
and without upper limits on price sellers could demand, and 
participated in the spot and bilateral wholesale markets in New York 
and other states as a buyer and a seller. In addition, in some states, 
Enron affiliates sold energy and energy services to retail consumers.
    Enron generally called for states to introduce retail competition, 
and to begin passing through of wholesale spot market prices to retail 
consumers who had not yet left the incumbent utility provider. Under 
the model, the utility would sell its power plants and cease efforts to 
hedge forward prices for its remaining retail customers. Competitive 
interstate energy companies, including Enron affiliates, would then 
offer retail consumers respite from the volatile pricing.if they 
preferred predictable, stable rates.
    Electricity spot markets, so critical to Enron's strategies, were 
created, with varying degrees of attention to:

 Reliability--the challenge of mirroring additional market 
        transactions in an already complex electricity grid that was 
        not physically designed for that purpose,
 Cost--is it worth enormous expense to modify the electric grid 
        in transmission constrained areas--ostensibly so more sellers 
        can compete in presently constrained areas--when at the end of 
        the day, as wider geographic scope is created, market power may 
        be maintained by reducing the number of sellers, through merger 
        and consolidation?
 Market design--did market rules ensure efficient pricing and 
        adequate information?
 Market power--could the new markets be ``gamed'' by bidders?
 Remedies--are regulatory tools sufficient to protect the 
        public from market failure, exploitation, and results inferior 
        to traditional regulation?
    All of the federally approved spot markets created to date have 
been found to be vulnerable to the exercise of market power.
           the post-bankruptcy impact of the enron bankruptcy
    It is probably too soon to assess the full impact of the Enron 
bankruptcy on energy markets. The information needed to determine the 
full impact of the demise of Enron is not publicly available. Some 
reports suggest that wholesale energy prices, to date, may not have 
been significantly affected by the Enron bankruptcy. The market role of 
the special purpose entities and partnerships created by Enron is 
unclear. The first ``JEDI'' partnership with the California Public 
Employees Retirements System apparently was a party to some energy 
transactions.4 It is possible that partnerships or special 
purpose entities were the ultimate counterparties of some of Enron's 
wholesale energy market-making activities. If so, the question arises 
whether there are some still-outstanding forward contracts held by 
Enron or the partnerships, and whether those will be honored. There is 
no answer without access to the books of the partnerships, which 
apparently are not in bankruptcy. Some parties with contracts for 
energy to be provided by Enron may have ``unwound'' their positions, 
and may fortuitously have found substitute supplies at low cost from 
other sources in the energy markets, which are currently characterized 
by surplus and low prices. Some Enron contracts may still be fulfilled 
in vestigial operations now taken over by a successor. It has been 
claimed that Western wholesale electricity prices actually dropped due 
to the demise of Enron. Further investigation is needed.
    \4\ See Report of Investigation By the Special Investigative 
Committee of the Board of Directors of Enron Corp. (``Powers Report''), 
p. 5 (Feb. 1, 2002).
    Enron retail energy services contracts are reported to be 
cancelled, adversely affecting some consumers who had long term 
contracts that will not be fulfilled:
        ``T]he guaranteed prices and energy-bill predictability that 
        Enron offered have evaporated along with the energy-trading 
        giant's profits. Amid the rubble of Enron's bankruptcy, some of 
        Chicago's most prominent corporate and civic names are now 
        moving to find a replacement for Enron, who had sold them 
        contracts worth hundreds of millions of dollars stretching over 
        several years or more.'' 5
    \5\ ``Enron's Former Customers Try to Find a Replacement,'' Chicago 
Tribune, Feb. 8, 2002.
    The Enron bankruptcy has been followed by major financial setbacks 
for other market participants.6 This could lead to more 
mergers, a consequent reduction in the number of electricity suppliers, 
and a slowdown in the building of new generating facilities. If there 
is an insufficient number of sellers to make markets competitive, this 
could have serious future policy impacts.
    \6\ See, e.g., ``Reliant Energy Unit Startles Market with 
Accounting Issue,'' Houston Chronicle Feb. 6, 2002 (``[T]he accounting 
problem involves purchases of natural gas and electric power that were 
made by its wholesale energy group''); ``Utility Company Mirant Tries 
to Recover from Enron Debacle, Economic Downturn,'' Atlanta Journal 
Constitution, Feb. 11, 2002 (``Its stock price has lost about 80 
percent of its value from its high point''). Copies of these articles 
are attached.
    If, as Enron asserted, it was stabilizing energy prices in the 
forward markets, it remains unclear whether future electricity and 
natural gas prices will become more volatile, and whether the wholesale 
markets will be characterized by more frequent periods of boom and 
bust. Such volatility could cause new problems down the road for both 
business and residential consumers.
    The majority of states that have not restructured their electric 
industries as urged by Enron are now even more reluctant to accept on 
faith that if they allow their utilities to sell off their generating 
plants, ``the market'' participants like Enron and generators like 
Mirant and Reliant will actually provide the future supply and price 
stability needed. Similarly, consumers may have even less appetite to 
risk the major rate instability and price increases experienced in 
California and New York, for relatively little in the way of promised 
    The larger question for Congress is whether the public can have 
confidence that federally approved wholesale markets and market-based 
rates are free from strategic bidding, gaming or manipulation. Market-
based rates established in or influenced by federally approved spot 
markets must yield results as good or better than traditional cost 
based regulation to satisfy the existing statutory command to establish 
reasonable rates.
    At Enron's urgings, heavy reliance was prematurely placed on some 
markets flawed in design, vulnerable to market power, and without 
effective remedies. Enron is currently under state and federal 
investigation to determine whether it and others manipulated the 
markets to drive California ISO energy prices up to unprecedented 
levels in 2000 and 2001. Congress should lend its powers to see that 
this issue is cleared up.
    The theoretical goal of the spot markets is that competing 
generators will bid to sell their output at their marginal running 
costs, recovering their investment and earning a fair return to the 
extent their plant is more efficient than the least efficient unit 
called to run at any particular time. A major flaw detected in the spot 
market models, however, is that strategic bidding (``gaming'') can 
readily occur, even at non-peak times by sellers who do not have a 
large market share. Despite this, markets are being approved with too 
few sellers using obsolete or inapplicable screens to test for anti-
trust compliance.
    Mathematical analysis and game theory has shown that many 
participants are needed before spot auction markets, and the bilateral 
markets informed by spot prices, can possibly be 
competitive.7 Characteristics of electricity and the 
repetitive nature of the auctions permit participants to establish a 
Nash equilibrium mutually benefitting the players, (without overt 
cartel price-fixing or anti-trust conspiracy), through strategic 
bidding. This is not limited to the most extreme bidding behaviors 
noticed at times of peak system demand. Recent economics laboratory 
simulations of electricity spot market auction bidding behavior found 
that rates could be driven 50% above cost, with or without price-caps, 
confirming the need for many more sellers, and the inadequacy of 
federal agency policies that still rely on traditional notions about 
what constitutes a sufficient number of participants and maximum market 
    \7\ Mathematical findings by the Tellus Institute showed that under 
many conditions twenty equal-sized generation owners might be required 
to create competitive outcomes. Rudkevich, Duckworth, and Rosen, 
Modeling Electricity Pricing in a Deregulated Generation Industry: The 
Potential for Oligopoly Pricing in a Poolco. Energy Journal, (July 
    \8\ T.D. Mount et al., Testing the Performance of Uniform Price and 
Discriminative Auctions, presented at the Rutger's Center for Research 
in Regulated Industries 14th Annual Western Conference: Advanced 
Workshop in Regulation and Competition, Competitive Change in Network 
Industries, San Diego, California (June, 2001).
    The Committee has requested suggestions regarding information 
disclosure and for making markets more transparent. States that have 
not yet restructured, and customers throughout the nation, can have no 
confidence that proposed new federal markets would be better than 
traditional regulation if there is no information upon which to measure 
the difference, and no fallback price readily available when the 
markets fail to yield reasonable rates. NASUCA in its Resolution 2001-
01 urged ``cost-based price regulation and/or other appropriate means 
of mitigation in any wholesale market where rates are not demonstrably 
and reliably just and reasonable.'' 9 Similarly, PULP has 
urged that generators file their running costs as a routine matter. 
This information disclosure will facilitate prompt analysis of bidding 
behavior in the markets and provide the necessary information upon 
which remedies can be based.
    \9\ Resolution 2001-01, ``Urging That The FERC Employ Price 
Regulation and/or Other Mitigation Measures Where Effective Wholesale 
Competition Does Not Exist, And Where Market-Based Pricing Therefore 
Does Not Produce Just And Reasonable Rates'' National Association of 
State Utility Consumer Advocates, (June 19, 2001). A copy of the NASUCA 
resolution is attached.
    Five years ago consumers were given the impression that the 
electric industry restructuring urged by Enron would offer at least as 
good or better service at a better price than traditional cost based 
    A year ago, after California, they were told to be patient, they 
``may have to pay higher prices, before they pay less,'' but to ``let 
go,'' it was only ``a matter of trusting the free market and trusting 
free-market entrepreneurs. Trust grows with experience.'' 10
    \10\ ``Disconnected Policymakers,'' The Electricity Journal p. 22 
(Aug./Sept 2001).
    After Enron, the lesson is that restructuring, while it may be 
beneficial to some industry stakeholders, does not appear to be a value 
proposition for the ordinary consumer.
    Before going any further to restructure the electric industry, 
Congress needs to do more to assure universal service, consumer 
protection, and affordability of energy for ordinary energy consumers.
    Thank you for the opportunity to present this testimony. I look 
forward to any questions from the Committee.

    Mr. Barton. Good. Thank you very much, Mr. Norlander.
    We are now going to hear from Mr. McCullough, who is from 
Portland, Oregon. He is the managing partner in McCullough 
Research, and we will put your statement in the record, and we 
will give you 7 minutes to elaborate.
    We have a vote, a 15 minute vote, and if you were actually 
to give us about 4 minutes, we might actually be able to let 
each member take one or two questions, and then adjourn the 
hearing. But if that doesn't work, we will come back about 6 
o'clock. So I put you on your behavior.


    Mr. McCullough. Mr. Chairman, I can't talk as directly as a 
Texan, but I will move fast. Thank you, Mr. Chairman, and thank 
you members of the committee. I am addressing directly Enron in 
    California was a bad design, bad incentives, bad results. 
Enron was a major player in the creation of the system, and had 
a large market share, and we have some evidence that their 
ethics may be in question.
    We don't yet know how far that goes, but obviously we are 
going to have to wait until the investigation at FERC and the 
SEC runs its course. We have had 20 years of a good power 
market on the West Coast. It wasn't created by Enron.
    It was created by the availability of real power, Mr. 
Plank, in excess because of the Columbia River. It has lasted 
through droughts, and it has lasted through earthquakes, and it 
has lasted through resource shortages, and it has lasted 
through high fossil fuel prices.
    It was very stable with one exception. Last year, we had a 
series of price spikes and emergencies. If we now look at the 
WSEC, Western Systems Coordinating Council, reports, we now 
discover that our load resource situation was better last year 
than it had been for the previous 5 years.
    Moreover, the Columbia River was at 92 percent of average 
flows, and not good, but not in fact a crisis during the 
initial summer of the California problems. In 1994, we had less 
resources, more load, and a lower river, but we didn't have 
    The bottom line on it is real simple. We had a situation 
where it was easy for the incentives to go the wrong way and 
that led us to generators bidding into the California PX, but 
led us into emergencies on an ongoing basis.
    Chairman Wood and FERC implemented price controls, and 
suddenly plant operations improved, and the prices fell. Now, I 
am a price theory economist, and I am not someone who likes 
price controls. They don't work in a competitive market, but we 
didn't have a competitive market in California.
    Do we know that Enron was responsible? No. We won't know 
more until we get those investigations. Do we know that they 
seem to have had enough market share to have price leadership? 
The answer is yes.
    We know that we have long-term pricing problems throughout 
the industry on the west coast, and prices that had left the 
just and reasonable standard, and that they were a multiple of 
what they would have cost to build a new power plant.
    That is worrisome, and we need to get to the bottom of it. 
The bottom line is that we need to know more. Transparency is 
not simply a goal. Practical issues need to be addressed. We 
need to know market shares. We know those in regular markets, 
but we don't know them on the West Coast.
    We need to know whether or not one party is driving the 
prices or whether it is an open and competitive market. Those 
are issues in front of Chairman Wood, and I trust he will do a 
good job. Thank you, Mr. Chairman.
    [The prepared statement of Robert McCullough follows:]
 Prepared Statement of Robert McCullough, Managing Partner, McCullough 
                         Research 1
    \1\ Special thanks to Ann Stewart assistant director of the Harvard 
Electricity Policy Group and James Harding of Seattle City Light, City 
of Seattle for detailed comments and input.
    Thank you for your invitation to testify.
    Six words characterize the California market since April Fool's 
Day, 1998--``bad design, bad incentives, bad results''. The market was 
overly complex, checks and balances were absent, information (except to 
suppliers) was virtually non-existent, and market concentration was 
very high. This is an expert's list of the factors that lead to market 
    Enron had a strong role in this market. Enron also had a central 
role in designing this market. Since Enron's accounting practices have 
failed any sensible business ethics test, the question we will have to 
wrestle with in days to come is whether the ethical problems we have 
seen at LJM and Whitewing will surface in its commercial transactions 
as well.
    It seems very likely that Enron had the ability to affect prices in 
California. This is not an indictment of free enterprise. Market power 
is a continuing problem in competitive markets. In California we do not 
have ready access to market information as we do in other markets. What 
little we know makes a careful review of Enron's role very necessary.
                            a brief overview
    Market based pricing for short term markets started in 1980 on the 
West Coast. This was the first time we had seen an open, competitive 
market in the electric industry. We weren't entirely pleased. The 
Bonneville Power Administration averages a ``non-firm'' surplus of 
nearly 3,000 average megawatts on a yearly basis.2 
Traditionally BPA had allocated this surplus among its customers.
    \2\ Non-firm and secondary are terms of art in the Pacific 
Northwest that mean firm power that may not be available during the 
following year if a drought occurs. Electric utilities are not allowed 
to use ``non-firm'' power in their planning to meet system peaks.
    After the passage of the Pacific Northwest Electric Power Planning 
and Conservation Power Act of 1980, with its complex rate provisions, 
BPA decided to market this power on a monthly basis. A number of BPA 
customers actually litigated against this decision, but the Ninth 
Circuit found in favor of BPA's discretion.
    After the first two years of this arrangement, other Pacific 
Northwest utilities began to appreciate the benefits of an open market. 
For example, we introduced the first commodity/electric derivative in 
1982 and 1983, in part because access to the new market gave us new 
choices. Known in the markets as ``variable rates'' this is now the 
standard approach across the world for energy-intensive industrial 
    California utilities hated the idea since prices tended towards the 
running cost of the highest cost unit along I-5 as opposed to the 
extremely low embedded cost of the Columbia River dams.3 
After a number of cases before FERC, the WSPP (Western Systems Power 
Pool) experiment was put in place in 1987. This allowed members of the 
WSPP to buy and sell short term energy without FERC cost based 
regulation. In 1991, market based pricing for short term sales became 
    \3\ The geography of the West Coast is divided into the ``west 
side''--the major cities from Vancouver, British Columbia to San 
Diego--and the ``east side''--the utilities nestled into the Rockies. 
For transmission reasons, the I-5 corridor is the most integrated. The 
reliability of the western half of North America is in the hands of the 
Western Systems Coordinating Council (WSCC). Market participants often 
use WSCC as a shorthand way of describing the market from Edmonton to 
    By this time we had established a competitive market in energy 
across the WSCC. The market was open--any buyer and any seller could 
enter and exit the market at will. California's barriers to market 
entry--rules and regulations that made participation difficult--were 
years in the future.
    Data from this period is not hard to find, but since there was no 
centralized reporting, it tends to be taken from the books of the 
individual utilities rather than a central source. Commodity/electric 
derivatives and spot pricing contracts were common and this provides 
much of the data on the monthly spot markets. Because of the vast 
ability of the Columbia River to factor off-peak energy, the real time 
markets were not (and still aren't) terribly important.4
    \4\ One of the ironies of the failed California centralized market 
experiment is that it concentrated on a part of the market that might 
never have gained prominence without California's disastrous 
prohibitions on forward markets.
    Almost all transactions in the market were monthly. This is still 
the case today. Short term transactions tended to reflect special 
operating issues--plant outages and load spikes. Longer term 
transactions were common, but these tend to reflect alternatives to 
resource purchases. Due to a peculiarity in BPA's enabling legislation, 
five years was a logical time horizon for forward 
transactions.5 We have little organized data on long term 
costs. Bonneville's often issued ``future focus'' diagram gives a sense 
of the overall firm costs since 1980.
    \5\ BPA must include a ``pullback'' condition in its long term 
contracts for sales outside the Pacific Northwest. While there are 
exceptions to this rule, it tended to make the five year duration a 
logical choice in the market.
    From 1980 through 1996, long term prices fell from $75 per 
megawatt-hour to $18. In the late 1990s, BPA frequently expressed its 
concern that market competition might expose it to bankruptcy. By 
comparison, a five year transaction today will cost a wholesale 
customer $28 per megawatt-hour. One year ago, the same transaction 
would have cost a customer $80 to $100 per megawatt-hour.6
    \6\ Newcomers to these markets often confuse current events--
weather and streamflows--with long term prices. Since weather, 
streamflows, and plant outages are unknown and unknowable for future 
years, prices reflect fundamental conditions of supply and demand as 
opposed to current events.
    The wholesale market was surprisingly stable before May 2000. In 
spite of three major droughts, fossil fuel price spikes, and true 
resource shortages in the early 1980s, prices reflected the operating 
cost of the least efficient unit currently operating. In the past 
twenty two years, this rule was only violated from May 2000 to June 
    West Coast markets reached their greatest level of competition in 
1996 and 1997. At that time there were more than twenty active 
competitors. Today, by comparison, there are usually very few players 
in the long term market. In the absence of PG&E and SCE, California is 
only represented by Sempra. Enron was present until its bankruptcy and 
Morgan Stanley, Calpine, El Paso, and Aquila continue to be active. 
Many Pacific Northwest utilities have dropped out of the market. Idaho 
Power and Powerex are still active, but Powerex is very cautious and 
requires board approval to make deals. On the Canadian side of the 
market, Edmonton and TransAlta have largely dropped out as well.
    Long term transactions have tended to be complex in an effort to 
capture transmission and operating advantages. The PX/ISO structure 
discourages that level of optimization. More importantly, the winter of 
2000-2001 led to the ISO breaking most of the interregional agreements 
on ``operational emergency'' grounds. Overall, the choices available to 
ultimate consumers like utilities and industries have diminished 
             california's market experiment--``bad design''
    Prices increased almost immediately after the California experiment 
started. One reason was the elimination of the buying power of Pacific 
Gas and Electric. Prior to that time, PG&E's enormous buying power 
allowed it to dictate prices to the market for much of the year. Since 
it was a net buyer, it negotiated ferociously to keep wholesale prices 
as low as possible.
    Another reason was the enormous complexity of the California 
market. Enron was a major participant in the process that created two 
state agencies--the Independent System Operator and the Power 
Exchange--to run the market. While Enron's involvement in the CPUC 
process and the negotiations leading to the passage of AB-1890 was 
significant, it was just one of many groups that maneuvered for 
advantage in this byzantine process.7
    \7\ Enron's central role in the CPUC hearings, passage of AB-1890, 
and the prolonged implementation process has been carefully detailed by 
Eric Woychik in ``Enron--`Leader of the Pac' in California'', February 
6, 2002.
    While this observation is unpopular with the proponents of ``market 
design'', the sheer complexity of the California market (and equally 
complex institutions elsewhere) discouraged suppliers from entering. As 
late as a year ago, a confidential ISO report (posted on its web site) 
noted that even PG&E was unable to understand ISO operations. Many 
utilities and marketers elsewhere in the WSCC were in the same boat. 
Participation in the ISO requires a detailed knowledge of hundreds of 
thousands of pages of rules, regulations, protocols, studies, 
directives, investigations, and committee reports. Literally, thousands 
of individuals either work at the ISO or are committed to its 
``stakeholder processes'' on a daily basis. Even large utilities have 
found the resource commitment to enter this market 
    \8\ Paula Green, power manager of Seattle City Light, has estimated 
that contract administration costs in California were as high as 10% of 
the total energy cost.
    On April 1,1998, the new California market was launched. One 
unforeseen side effect of the rules was the complete irrelevance of the 
retail side--the original goal of the entire process. Enron, although 
initially aggressive in the retail market, dropped out after just a few 
months. This decision proved clairvoyant since the difference between 
market prices and retail price was one of the most catastrophic 
features of the California crisis for entities trying to serve retail 
    May 22, 2000 was the beginning of the California crisis. Everyone 
has heard the slogan that ``California hadn't built a plant in ten 
years while rapid load growth had taken place.'' Enron's 
representatives have repeated this refrain throughout the entire debate 
concerning the California crisis. This slogan was audacious in its 
    In reality, the industry was in better load/resource condition in 
the summer of 2000 than it had been in some time. Peak loads were lower 
and total resources were higher than in previous years. The following 
chart shows actual reserve margins in the WSCC from 1992 to the 
    \9\ WSCC Coordinated Plan Summaries from 1993 through 2000. Monthly 
data for 2001 are a forecast from the 2000 Coordinated Plan since this 
data has not yet been released by the WSCC.
    The reserve margin is the ratio between electric resources and peak 
loads. Like the ratio between snacks and hungry teenagers, the reserve 
margin is better when it is high. Industry practice is to keep the 
reserve margin above 15%. As the chart shows, reserve margins in the 
WSCC reached as low as 15% in 1994 and actually crossed this line in 
1998. Columbia River runoffs were 20% lower in 1994 than they were in 
    The source of this data is the Western Systems Coordinating Council 
yearly reports summarizing the past year and the upcoming decade. The 
WSCC provides these reports because it is responsible for preparing the 
authoritative load resource balance for the western half of the 
continent--Canada, U.S., and Mexico--in order to ensure electric 
reliability. They have been preparing these studies for the past 35 
    The chart illustrates a simple truth. The WSCC's load resource 
balance was better (more snacks than teenagers) in 2000 than it had 
been since 1993. A large part of this was the low peak loads that 
occurred in California that year. Peak California loads in the ISO's 
control area in 2000 were the lowest since 1997.10
    \10\ Historical Coincident Peak Demand and Operating Reserve, 
California Energy Commission, December 7, 2000, page 1:
      1997    44,059
      1998    44,406
      1999    45,884
      2000    43,784
    When faced with this data, proponents of the resource shortage 
theory usually fall back on two secondary explanations. First, the 
crisis in California was caused by the drought in the Pacific 
Northwest, and second, that environmental authorities forbade plant 
operations. While there is a little more truth to these arguments than 
the resource shortage argument, they turn out to be very, very weak. 
While the Pacific Northwest did have roughly normal water in 2000, the 
severe drought actually occurred in 2001. The worst of the drought 
occurred after price controls had gone into effect and prices--both 
short and long term--had fallen to historical competitive 
levels.11 The environmental argument blames low plant 
operations on local environmental rules. In fact, the environmental 
authorities granted exceptions, changed market rules, and accelerated 
permits. The comments of two of the most important districts, L.A. and 
San Diego's, on February 6, 2001 used very blunt language to describe 
the value of the generators' claims.12
    \11\ Hydroelectric generation in the 3rd quarter of 2001 was only 
74% of hydroelectric generation the year before. In spite of the low 
hydro in the summer of 2001, prices returned to normal.
    \12\ February 6, 2001 letters by Barry Wallerstein (SCAQMD) and 
Richard Smith (San Diego APCD). Mr. Wallerstein's letter includes the 
phrase ``[t]hese statements by AES are completely false and call into 
question AES' motivation in this matter.''
                   market failure--``bad incentives''
    A simpler explanation lies ready to hand. 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 2000.13 Any 
market participant equipped with this data would be able to easily 
adjust their 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.
    \13\ 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.
    Documenting this was not easy. During the first part of the crisis, 
the generators' representative was the Chairman of the ISO board. ISO 
market surveillance was rudimentary and timid. Generators' lobbying at 
the WSCC made access of the operating data to non-market participants 
slow and controversial.
    Ironically, the hourly data is public outside of California--even 
today--as part of the EPA's emissions database. Unfortunately for the 
ratepayers in California, access to this data is usually delayed from 
three to five months.14
    \14\ One of our first roles in the summer of 2000 included 
providing this ``secret'' information back to policy and regulatory 
agencies in California after it had been supplied to the Oregon Public 
Utilities Commission.
    The following chart shows the monthly operations of the units owned 
by Duke, Dynegy, Southern, 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.15
    \15\ 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.
    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.16
    \16\ 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.
        implementation of price caps--correcting ``bad results''
    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 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.'' 17 This is quite an understatement--by the end of 
June, prices had fallen to $43/MWh at Palo Verde.
    \17\ 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.
                       enron's role in the market
    Clearly, enormous concentration in California markets was required 
for this to take place. 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.18 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 their sales were nearly 30% of the market. As Enron entered 2001, 
the growth of their wholesale operations appears to have stalled. 
Overall statistics indicate that Enron's physical sales declined after 
4th quarter 2000.
    \18\ Deconstructing Enron's Collapse, 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 their ability to use their scale to affect prices had long been 
    Enron's sales directly to the California ISO were not large. 
Enron's sales at the hubs were vastly greater than their sales to the 
ISO. This simply reflects 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.
    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 June 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.
    As it turns out, we are not obligated to prove that hourly prices 
in California aren't just and reasonable. FERC has already made that 
finding and has a proceeding underway to determine the refunds 
necessary to correct the situation.
    If arrogance is a clue, 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 would not move fast enough. This is market power with a 
                   enron's long term price leadership
    Our research into Enron's financial and accounting arrangements 
indicates that it was probably more interested in forward markets than 
spot markets. The pervasive use of mark-to-market revenue and earnings 
estimates would reward Enron for exercising price leadership in forward 
markets. As one trader said to the Chicago Tribune, ``We would go 
further out on the futures contracts than anybody else would . . .  So 
you could pretty much make up your own numbers''.19
    \19\ ``Huge bets paved way to Enron's downfall'', Flynn McRoberts 
and Melita Marie Garza, Chicago Tribune, 1/31/2002.
    The decline in forward markets that took place when Enron declared 
bankruptcy provides some evidence that they did have price leadership 
in forward markets. While Enron was not a seller to California in 
Governor Davis' long term contracts signed in the first quarter of 
2001, Enron did have a major share in long term markets. Snohomish PUD, 
the Bonneville Power Administration, Sierra Pacific, and Palo Alto have 
all indicated that they had made significant purchases in the forward 
markets from Enron. Snohomish and Palo Alto have cancelled their 
purchases, citing credit language in the contracts. Sierra Pacific has 
asked FERC to review their contracts under its authority to determine 
just and reasonable prices. Bonneville has not taken any steps so far 
to revisit these out-of-market contracts.
    FERC has indicated that it will review Enron's impacts on the 
forward markets. Clearly, FERC's role as a regulator should include 
review long term purchases as well as short term purchases. The 
question of whether these long term prices were just and reasonable is 
easily addressed. Long term prices aren't just and reasonable if they 
bear no relationship to the cost of constructing new electric 
generating plants.
    Many of the long term contracts signed during the California market 
failure from May 2000-June 2001 were considerably more expensive than 
any conceivable new plant. These contracts need a careful review under 
the just and reasonable standard. To the degree that the pricing of 
these contracts was based on the short term markets, this determination 
has already been made in FERC's existing orders.
    In sum, Enron was a major player in California markets. If their 
market share was as high as 30%, their ability to affect prices is not 
in question. We don't yet know what share of the more robust long term 
market Enron had. This will only become clear when FERC accumulates 
data from the region's utilities concerning their long term purchases. 
At that time, FERC will be able to determine market share and discover 
just what caused these contracts to depart from the ``just and 
reasonable'' standard.
                      a petition for transparency
    It is worth remembering that concern over market power is not an 
indictment of free enterprise. The nature of any competitive market is 
that it can become a victim of market power. The prosecution of Archer-
Daniels-Midland in 1996 for anti-trust was not a signal to adopt state 
regulation of the prices of agricultural products. It simply reflected 
a continuing need for vigilance. California's contorted market provided 
bad incentives and created a shortage out of a surplus. The crisis 
started when a small number of participants had access to operating 
data that their customers did not. At the California ISO, these 
problems still exist.
    Perhaps the worst part of the California market is its continuing 
opacity. Keeping information from consumers can prove an incentive for 
abuse all in itself. Reserving the same data for market participants is 
clearly an inversion of effective public policy. Economists call this 
``transparency.'' With transparency the standard checks and balances 
function smoothly. Without it, competitive markets will function in the 
    Thank you.

    Mr. Barton. The Chair would recognize Mr. Sawyer for 5 
minutes for questions.
    Mr. Sawyer. I am not going to use my entire 5 minutes, but 
I have to tell you, Mr. Plank, that I was tempted to say 
deregulation is a mess and would you care to comment, but I am 
not going to do that, because we are going to run short on 
    I throw this to everyone, but Mr. McCullough seems to have 
the most direct experience with it. The price exchange in 
California was supposed to provide the kind of transparency 
that you were talking about. The PX apparently failed. Can you 
tell us why and what lessons we should learn?
    Mr. McCullough. Two reasons. One, the rules were simply too 
complex. They allowed end-runs that enabled smart players to 
get special results. Two, the flow of information in California 
is constipated.
    Literally, I have more information on the California 
situation in this short piece of testimony than we have yet had 
available in California through their process. That was a 
policy error and it needs to be corrected.
    Mr. Sawyer. Any other comments on that?
    Mr. Owens. I am not going to comment on the transparency, 
but I think there were other things that were taking place in 
California which we are all aware of. There was a high 
dependency on the spot market, and there were not bilateral 
    Mr. Mr. Sawyer. I understand that, but I am talking 
specifically about the failure of the PX to perform adequately.
    Mr. Owens. The failure of the PX to perform, many would 
suggest, is because the rules were not clear that the PX 
operated under.
    Mr. Sawyer. Thank you, Mr. Chairman. I yield back.
    Mr. Barton. I am going to give the panelists an option. I 
can ask one or two questions and adjourn the hearing, and you 
can go have supper, and I can go vote and come back, and spend 
30 minutes asking questions.
    So you folks want to get out of here quick, or do you folks 
want me to go vote and come back, and maybe a few more members 
come back.
    Mr. Owens. We want to be helpful to the committee. If there 
are questions that you need in the record, we would be pleased 
to do it. If not, I would like to go home.
    Mr. Sawyer. I agree with Mr. Owens.
    Mr. Barton. Well, let me ask just a few quick questions 
then, and we will have some written questions for the record 
that you can elaborate on. Mr. Plank says in his written 
testimony that we should just eliminate the concept of mark-to-
market accounting and require traders to book revenues and 
profits as they are actually realized.
    Now, that has a lot of appeal to me, and I can't book votes 
in advance, no matter how good my poll numbers look. I have to 
wait until they are voted that day of the election, and then I 
get to count them.
    So, Mr. Green, should we end mark-to-market accounting as 
Mr. Plank recommends?
    Mr. Green. Right now, mark-to-market accounting is a 
requirement as you know, and I think it is one of the most 
rigorous accounting processes here. People can abuse almost any 
process, and I think we have seen some abuses of that, but 
mark-to-market accounting exactly does that.
    You have to put the fair value of your contracts, and we do 
it on a daily basis. I think there came be some more disclosure 
of that, and how you value those contracts, either the current 
or as well as the extended.
    But used correctly, it is the most rigorous accounting 
process we have for the trading environment that we are in.
    Mr. Barton. Mr. Owens, would you have a comment on that?
    Mr. Owens. I would agree with him, and say that there are 
two things that you could do. One would be uniformity in the 
price curves. Mark-to-market accounting is not just used by the 
energy industry. It is used by a broad range of industries, and 
it is very complicated.
    But I think it also has tremendous value. The second thing 
would be link it to transparency.
    Mr. Barton. Okay. Mr. Markey, we are about to end the 
hearing. I have asked two questions, and Mr. Sawyer has asked a 
question. Would you like to ask one or two questions and let 
this panel go?
    Mr. Markey. Mr. Chairman, we are fortuitously scheduled to 
be here until 3:30 a.m., and we----
    Mr. Barton. Your definition of fortuitous and my definition 
of fortuitous are different.
    Mr. Markey. Well, these are really important people in 
terms of discussing this energy marketplace, and I don't have 
anything to do. I mean, if they don't have anything to do, I 
don't have anything to do. I can stay here. I mean, if you 
don't mind.
    Mr. Barton. We are going to recess the hearing and we will 
reconvene at 6 p.m.
    [Brief recess.]
    Mr. Barton. The subcommittee will reconvene. Congressman 
Markey should be on his way back. He promised me that he would, 
and he keeps his promises, and so I will ask some questions 
until he gets back, and then we will recognize him for 
questions. I would like to ask--oh, Mr. McCullough is not here. 
Did he have a plane to catch? Oh, he is on his cell phone.
    I just saw Mr. Markey just come in and so I will wait until 
he gets here and then we will recognize him. The Chair would 
recognize Mr. Markey for 5 minutes for questions. Well, let me 
put it this way. How much time do you think you are really 
going to use, and I will recognize you for that amount of time?
    Mr. Markey. If I had 10 minutes, I think that would do it.
    Mr. Barton. Okay. The Chair would recognize Mr. Markey for 
15 minutes for questions.
    Mr. Markey. It won't take that long. It won't take that 
long. Mr. Green, did you ever see those Ed McMahon adds that 
say congratulations, you may have already won millions of 
dollars from the Publishers Clearinghouse Sweepstakes. Well, 
congratulations, Mr. Green, you may already soon be an 
unregistered mutual fund.
    Are you aware that Enron sought and obtained an exemption 
from the Investment Company Act of 1940, the law that protects 
mutual fund investors?
    Mr. Green. I am not.
    Mr. Markey. You're not? Well, Enron apparently obtained an 
exemption from that Act from the Securities Exchange Commission 
staff back in 1997. Were you aware of that?
    Mr. Green. I was not.
    Mr. Markey. Now, were you also aware that there is a 
provision in Mr. Barton's electricity restructuring bill, 
Section 125, that would allow every exempt and registered 
holding company to transform itself into an unregulated mutual 
fund without any of the protections that the Investment Company 
Act provides with respect to self-healing, leveraging, 
independent boards, and excessive fees?
    Mr. Green. I am not aware of that.
    Mr. Markey. Did you know that the SEC has warned Mr. 
Dingell and me in a letter we just received today that if this 
particular provision were passed, quote, hundreds of 
unregulated investment companies would result, and that, quote, 
that it would be virtually impossible to determine an exact 
number of potential unregulated investment companies created by 
Section 125?
    Mr. Green. Well, these are areas that I really don't have 
an interest in.
    Mr. Markey. Are you aware that the Investment Company 
Institute, which represents mutual fund industry, is strongly 
opposed to this provision, and in a letter that they sent me 
today, they have requested that Section 125 should be deleted 
from H.R. 3406 in its entirety?
    Your company, Mr. Green, could already be an unregistered 
mutual fund, in other words; a benefit that perhaps you are not 
aware of, but something that with the right MBA who gets hired 
this summer could put you into a position of diversification 
than the person that you are today?
    Mr. Green. Well, that's not our business. We stick to our 
core businesses, and don't diversify in that sense.
    Mr. Markey. And that's good.
    Mr. Barton. Would the gentleman yield on this line?
    Mr. Markey. I would be glad to.
    Mr. Barton. That particular provision in the bill was put 
in for a company or companies in the midwest, and it has 
nothing to do with Mr. Green's company, and we have already 
told at the staff level that due to the concerns of Mr. Dingell 
and yourself, that we will be very willing to clarify the 
specific language in it, and if it is controversial, we will 
take it out in its entirety. So I don't see a reason to berate 
Mr. Green on this.
    Mr. Markey. I am not berating him.
    Mr. Barton. It has got nothing to do with that particular 
    Mr. Markey. I know that. Well, let me ask Mr. Owens. What 
is the EEI position on that provision?
    Mr. Owens. We have no position.
    Mr. Markey. No position?
    Mr. Owens. No. We are not concerned about that.
    Mr. Markey. Okay. I guess the point that I am trying to 
make here is that Mr. Green and his company may not be 
interested in taking advantage of that, but we know that Mr. 
Lay and Mr. Schilling would have taken advantage of it, and did 
take advantage of it.
    So if it is a broad exemption that is universal, then while 
Mr. Green may decide not to do it, it would not be because he 
was restricted from doing it. It would just be a choice to stay 
home and to do the things that he does well.
    But it wouldn't mean that others wouldn't be able to get 
out into the field without the safeguards, the protections that 
are in the 1940 Act. Mr. Plank, in your opinion--let's do this. 
Tell me, Mr. Plank, what is the one think you want us to 
remember from this hearing? Give me the one big truth you want 
us to have?
    Mr. Plank. Commodity price volatility and natural gas is 
excessive to the point where our responsibility as producers to 
Americans, to consumers, to our shareholders, and to our own 
integrity, is threatened by our inability to determine with any 
degree of accuracy whatsoever what our cash-flow may be, and 
thereby what funds we may have available to reinvest in a 
business which depletes its wells on a day-to-day basis. That 
is my primary message and primary hope.
    Mr. Markey. And your solution is?
    Mr. Plank. I think before you reconstruct, Congress Markey, 
on the site of ground zero regulation, the sifting through what 
the failures have been in this particular phase can be very 
rewarding as you adopt new regulation, which on the one hand 
still does your very best to maintain human and individual 
freedom and dignity, and on the other hand, reinforces the 
American ethic of morality, and protects against the invasions 
of all kinds of financial side institutions.
    Such as Forbes has an article out this week, and there is 
another one in another major publication that puts the 
contingent unbooked liabilities of major banks at the present 
time at somewhere around $5 trillion.
    A lot of that money is predicated and is at risk due to 
their guarantee to pick up commercial paper in the event of 
credit unworthiness. But be that as it may, the credit 
unworthiness that stands behind these trades and these virtual 
activities, which are supposed to be mark-to-market every day, 
was frequently predicated upon making sure that you don't 
recognize dollar income before you have got a cash receipt to 
go against that mark-to-marketing.
    Mr. Markey. So it really isn't mark-to-market is it? It is 
    Mr. Plank. That's correct.
    Mr. Markey. They actually don't have the receivables here. 
What they are saying is that we have got a good idea that 
somewhere down the line, 2 or 3 years from now, because our 
marketing is so good, that we will have that thing that we are 
promising is going to serve as the collateral.
    Mr. Plank. Mr. Markey, could I add that it is a very 
difficult situation at the present time because there is 
trading speculation that has extended to the securities market 
itself, to such a degree that those who are running the hedge 
funds have no interest in the company or the performance of the 
    They are interested only in the momentum of that particular 
trade. We see that day after day, and we have 40,000 
shareholders, 137 million shares of stock outstanding, and our 
stock in a given day based upon information which is we believe 
generated internally to serve those that can profit by creating 
the volatility, we have seen gas markets on a daily basis 
change by as much 15 percent----
    Mr. Markey. I am going to run out of time, Mr. Plank, and 
that is----
    Mr. Plank. And that is what I wanted to say.
    Mr. Markey. But you just finished it?
    Mr. Plank. I just finished.
    Mr. Markey. Then let me ask you then do you think Enron was 
able to manipulate the gas marketplace because of Enron On-
    Mr. Plank. In my opinion, absolutely, and I am absolutely 
satisfied that they did.
    Mr. Markey. How did they do it?
    Mr. Barton. Would the gentleman yield?
    Mr. Markey. Sure, I would be glad to.
    Mr. Barton. We would like to see some documentary evidence 
of that. You are entitled to your opinion.
    Mr. Plank. So would I, and I don't have the power of 
subpoena and you do. So, I suggest you are closer to it than I 
    Mr. Barton. Well, we just had all of the people who would 
have it in evidence and they said just the opposite, that there 
is absolutely no evidence to indicate that.
    Mr. Plank. Then I would look to their self-interests.
    Mr. Barton. No, these were the government witnesses. They 
would have no self-interest. The EEI is purely a gatherer of 
information. EIA, I'm sorry. So I know that you feel that very 
sincerely, but----
    Mr. Plank. Well, may I give an example?
    Mr. Barton. Yes, sir.
    Mr. Plank. You recognize that storage figures of course on 
natural gas were published this past year, and have been for 
quite some time, on a Wednesday at 1:30 p.m., Washington, DC 
time, or New York time.
    And these storage figures are basically--and what they 
gambled on was either storage fill or storage draw down, and 
that also allowed Enron to be in the weather trading business.
    So it would be very much to Enron's interests to know 
whether a gambling point at 1:30 on a Wednesday afternoon, the 
information which was going to be released then to the general 
market, would show either a larger than anticipated storage 
fill, or a decline, at that particular point in time.
    Mr. Ferris, or president, who happens to be here, and I 
happened to meet with a gentleman for lunch in his office, and 
    Mr. Barton. We will give the gentleman from Massachusetts 
additional time.
    Mr. Markey. No problem.
    Mr. Plank. We met in his office at--or he met in our 
office, and we asked him what is your guess as to the storage 
fill for the week, and he said I think I know. And he said that 
the storage fill would be 74 billion cubic feet this week.
    And we said where did you get the information. A senior 
Enron official. And within 10 minutes the man walked into our 
office and our staff, and got it released to the public, and 
the storage fill for the week was 74 bcf.
    The market response is instantaneous, and people who can 
either control that information or gain access to it in advance 
of the other in a speculative market can move that market and 
does to the major personal benefit thereof. And I charge that 
is a reality.
    Mr. Barton. Everything you said is absolutely, totally 
factually true. Let's say that.
    Mr. Plank. Okay.
    Mr. Barton. The fact that you know something is going to be 
released, and you can take a position, and you have got prior 
knowledge, and you have insider knowledge, you may be guilty of 
a securities violation for trading on it.
    But how does that manipulate the market? How would that 
manipulate it? Mr. Markey's question to you is does it 
manipulate the market?
    Mr. Plank. It means that the benefits of the insider market 
are able to get insider information.
    Mr. Barton. But that is different.
    Mr. Plank. And are able to be captured.
    Mr. Barton. But that is different.
    Mr. Plank. What is different?
    Mr. Barton. Being able to benefit from insider information 
may in fact be a criminal violation, but I thought Mr. Markey 
asked you if you thought that Enron was manipulating the 
market, and actually taking the market to a different location 
than it would be otherwise, and that particular story, even if 
totally true, does not indicate market manipulation.
    Mr. Plank. My belief is that those who were supplying 
storage fill information were in a position to and did act in 
    Mr. Barton. I am also told that AGA no longer does that. 
That EIA does it, and so that information would be 
instantaneously available to the public and not procured and 
perhaps given to certain insiders like it may have been in that 
instance. I don't know when your story occurred.
    Mr. Plank. If I may, sir, they are in the field of 
regulation, and it would be very important that there be teeth 
behind the information which the storage people provided.
    Mr. Barton. I agree with that.
    Mr. Plank. At the present time, there is not.
    Mr. Barton. I don't disagree.
    Mr. Plank. So if they have a predisposition either not to 
answer the storage fill question, or to tilt it in terms of 
where they feel their self-interests may lie, I think you have 
been looking at that in the normal 1:30 Wednesday afternoon 
    Mr. Barton. I don't disagree with that.
    Mr. Plank. And that doesn't do the consumers any good. I 
can tell you that it doesn't do the producers any good at all, 
in terms of predicting or having a less volatile market out of 
which to predict our capital flows, and therefore to make 
larger commitments in the United States.
    We are reducing our capital commitments by 70 percent in 
North America and during the year, which means a reduction in 
just this little company of $700 million. We are not doing it 
deliberately to bring down the sword of Damocles around the 
consumer's head.
    We are doing it because there is too great a risk in the 
market at the present time of continued price volatility. 
Multiple that by the other producers in this industry, and we 
have got a ticking bomb in terms of a respike of natural gas 
prices, which you can't deal with quickly enough to bring 
enough LNG in here to make a difference.
    Or which coal can't gear up rapidly enough, which totally 
leaves us at the mercy of volatility and the amount of capacity 
that needs to be erected and constructed in terms of cogent 
facilities, or the amount of replacement capital that needs to 
go into our infrastructure. And I have not touched yet on what 
is being done to human capital. I am all through lecturing, 
unless you give me another chance.
    Mr. Markey. No, thank you.
    Mr. Barton. It is Congressman Markey's time.
    Mr. Markey. No, you are obviously a brilliant man, Mr. 
Plank, and what you just said is very frightening. You are 
basically saying this volatility that is now being built into 
the marketplace discourages long term investment, and 
discourages the kind of drilling that could give us the extra 
margin of energy security which our country needs.
    And that is a frightening warning that you have just given 
to our committee, and you are pointing the finger of 
responsibility back at this now out of control marketplace that 
is based upon speculation and short term trading.
    Mr. Plank. I knew there was a reason that I liked you.
    Mr. Markey. I am trying to restate it in a way that I could 
explain it to my mother. I don't think I can repeat what you 
just said. It was too well-thought out and intricate in its 
    Let me ask you this, Mr. Plank, and Mr. McCullough. If you 
were Enron On-Line,and you were trading as a principal with 
hundreds of companies, and as a result got non-public 
information about who was long, and who was short in the 
market, couldn't you use that data to front run those other 
countries in the NYMEX, and how would the CFTC ever even know 
that you had done it?
    Mr. Plank. Well, if we couldn't use that information to our 
great benefit, again absent any integrity and morality, then 
you would have to write another book about when stupidity 
    The current hot book so far as I am concerned and are 
excellent books to be considered in this context, is the 
misnomer itself of a company called Long Term Capital. And in 
that particular instance, the title of the book was When Genius 
    So for someone not to know how to utilize insider 
information outside the bonds of morality and of legality, and 
of criminality, you would have to be very stupid indeed.
    Mr. Markey. So what you are saying is that Enron On-Line 
was in a position to take proprietary information of hundreds 
of companies, and to then use that information because they 
were essentially creating the marketplace to their own 
advantage as a player in that marketplace simultaneously, and 
to the disadvantage of hundreds of other companies.
    And right now you are saying this committee and the 
American public isn't aware of the full extent to which that 
may have occurred?
    Mr. Barton. Would the gentleman yield?
    Mr. Markey. Sure, I would be glad to.
    Mr. Barton. The gist of the gentleman's question, I share 
the same concern. I don't think that we have shown, and I don't 
think the record will show, that Enron manipulated the market 
that it was making.
    I think the fact that they could take some of this 
information that they received as a result of creating this 
market, and use it in other markets, may in fact be something 
that we need to look at.
    And if I know who is long and short in the electricity 
market that I am a player in, and I can take that to the NYMEX 
with advantage because I have information that nobody else has, 
then that is an issue that we need to look at.
    So I am with you on going into other markets. I don't see 
that the record is showing that they took their position in the 
on-line trading market to their own advantage, but I am going 
to ask some questions after you do, and I am going to ask Mr. 
Green and Mr. Owens to comment.
    Mr. Markey. Well, I think Mr. Plank is saying to us is that 
if he had the subpoena power which this committee has, there 
would be a whole bunch of people that he would ask to sit at 
this table to answer questions, and that we would play the role 
that a whole bunch of companies like his, and a whole bunch of 
investors and consumers out there really aren't in a position 
to ask, and be afraid to ask, because they are not in a 
protected position like we are.
    But I think we could perhaps get some suggestions from some 
people as to who we might want to have sit here and answer the 
questions as to what they were doing with the marketplace.
    And not trying to overextend your courtesy to me, but Mr. 
McCullough, I would like for you to answer the same question 
that I asked Mr. Plank.
    Mr. McCullough. I don't know the answer. I am going to 
yield to Mr. Plank, because it is a natural gas question.
    Mr. Markey. No, it is the on-line--if they were trading 
electricity, for example, would they have the capacity to use 
that information to position themselves against the other 
electricity companies trading on-line, Mr. McCullough?
    Mr. McCullough. We don't have an active NYMEX electricity 
market. So moving back and forth for electricity would be 
different than moving back and forth for gas.
    Mr. Markey. I have also been told that it was a practice at 
Enron to quote a price for electricity or gas OTC contract, and 
then come back to the customer in a day, or a week, and say the 
bid asked has now changed.
    And since some customers did their mark-to-market based on 
Enron's quotes, the customer would be taken to its position 
limit, and would have to cash out their position at a loss. 
Have you ever heard of that practice taking place either at 
Enron or elsewhere, Mr. Plank, or anyone else?
    Mr. Plank. I have heard it referred to, but I have no basis 
to verify or comment further. I don't know whether that is 
accurate or not.
    Mr. Markey. Do you think it is a worthy subject of inquiry? 
Would that be an important subject of inquiry for the 
    Mr. Plank. I think it is an important subject of inquiry, 
and a particularly important subject of inquiry is the fact 
that when you have 120 points at which natural gas can either 
be received or sold, then you have got 120 equivalencies of 
gambling casinos, all of them unregulated, all of them 
    The net result is that we, insofar as price volatility, 
have a 150 pound tail wagging a 10 pound puppy, and this 10 
pound puppy ain't going to be able to deliver the gas if the 
demand increases. That's the essence of my concerns throughout 
as an American.
    Mr. Markey. Mr. Plank, I am going to have to let you stop 
right there. If any of that was happening in the stockmarket, 
it would be a violation of the Securities Exchange Act.
    Mr. Plank. And it ought to be a violation of the Corrupt 
Practices Act in some way.
    Mr. Markey. It would be, and Mr. Green, I just want to say 
I apologize for my line of questions in the beginning. It was 
only meant to point out that you would be turned into a mutual 
fund as an opportunity for your company to pursue, and not 
meant in any other way or to make any other reference to the 
good company that you represent.
    Mr. Green. Understood.
    Mr. Barton. The Chair would recognize himself for some 
brief questions because we do have one more vote, and we are 
not going to ask you folks to sit through another vote.
    Mr. Plank had a recommendation that deals with some of the 
questions that Mr. Markey was asking, and since Enron could 
actually take a position in trades in its on-line trading 
system, and in fact did take a position, Mr. Plank's 
recommendation is that--and I will just read it.
    It says that these on-line platforms or exchanges, they 
should be subject to similar regulation to ensure fair 
treatment of all parties, and in the equities market, there is 
a basic rule that agents cannot put their trades ahead of their 
client's transactions. Similar rules should guide the conduct 
of the energy markets.
    Now, the Enron On-Line trading system, everybody knew that 
Enron was half of every trade. They were in a sell position or 
a buy position. So my first question to you, Mr. Green, and to 
Mr. Owens, is should we just prohibit that in its entirely and 
say you couldn't have that kind of a market, and that in fact 
you ought to have a market similar to the New York Stock 
Exchange, or the NYMEX, where the market maker is simply a 
broker, but not a participant?
    Mr. Green. I think the key ingredient there, and obviously 
I think it is going to be looked into, is there other types of 
exchanges besides the Enron On-Line, which we would say is a 
thin exchange, meaning it is many trading with one.
    Some of the more successful electronic exchanges that have 
been developed, like ICE, the Intercontinental Exchange, is 
many on many. So you have full disclosure or transparency. And 
it is one of the key developments in the industry to bring real 
    Obviously, people who are playing in the market can see 
what is going on, but even customers, many utilities, will set 
    Mr. Barton. But as a general rule should we prohibit a 
market maker like Enron from participating--if they want to 
have an on-line trading system, fine, but you can't buy or 
    You just create the forum for the market. Is that 
intrinsically letting Enron be a buyer or seller, and then 
doing what Mr. Markey and Mr. Plank said they may have done, 
which is take that information from the fact that they were 
buying and selling, and take it into other markets?
    Should we just eliminate that potential conflict of 
interest by saying you cannot take a position in a market if 
you are going to be the market maker? That's my question.
    Mr. Green. Yes. That certainly could be an outcome, because 
I believe in transparency in the market, and nobody should have 
a right to more information than others.
    Mr. Barton. Mr. Owens?
    Mr. Owens. I would respond the same way. I think those were 
thinly traded markets. It seems to me that the results should 
be that we should have a deep market and a transparent market, 
and we would avoid an entity being able to manipulate the 
market as has been alleged by Mr. Plank.
    If, in a transition, it is important to make sure that an 
entity that also is trading in the market also can't set the 
market rules until the markets are deeper and more liquid, that 
may be a compromise.
    Mr. Barton. Okay. Good. And, Mr. Plank, you have been in 
the energy business, or at least Apache as a company, for 49 
years. So I would assume you have been with Apache for 49 
years, is that correct?
    Mr. Plank. I started it, so I had better be.
    Mr. Barton. Now, I have never had to put money into an oil 
well or a gas well. I have just been an observer, and so I have 
never had to put my money where my mouth is so to speak.
    But the gas market, once upon a time, Texas gas prices 
intrastate were unregulated, and gas prices interstate were 
regulated by the gas policy or Natural Gas Act of 1935. And 
pipelines bought the gas from the producer and had long term 
    And some pipelines made bad deals, and they agreed in the 
1930's and 1940's to supply gas to the northeast for 5 cents an 
MCF, or 10 cents, or one cent. Texaco had a famous contract 
where it was like 3 cents an MCF forever. You had a very 
structured market, and everybody knew what the price was.
    But the producers kind of chaffed under that, and they came 
to guys like me when we were getting ready to run for Congress, 
and said you ought to decontrol natural gas prices. Now my 
guess is that you probably wrote me a check or two way back 
then, saying if you get elected, I want you to help to 
decontrol natural gas prices in the interstate market, and 
maybe you didn't.
    But if we wanted to totally take the traders out of the 
market like you recommend in your testimony, you almost de 
facto go back to a regulated situation, where you would have 
these long term contracts and you have got stability, but you 
don't allow for changes in economic conditions.
    Are you advocating that we go back to the system that we 
had where wellhead prices were regulated, and pipelines bought 
the gas, and they sold it to distributors, who then sold it 
    Are you advocating that, or are you simply saying that as 
these markets emerge, we need to get more transparency, and we 
need more reporting, and we need to make sure that people 
cannot create inside information, and then take advantage of 
it? Exactly, what are you trying to tell this committee?
    Mr. Plank. Mr. Chairman, I would like to think that if some 
of the potential securities violations here and other 
violations were acted to be eliminated, and with other 
accounting considerations having been effectively dealt with, 
that it might be adequate to clean up the fringes.
    Also, I, of course, am thrilled that Enron is out of the 
ball game. I am one of those people who saw it coming. And like 
some people who testified here today, it took longer than I 
thought it would.
    It could be, particularly if the appropriate courts find 
that criminal acts have been performed, and that the bad apples 
go to the hoosegow----
    Mr. Barton. We have got an oversight subcommittee that is 
doing the most aggressive investigation of any of the 
Congressional committees just down that line, and I am strongly 
supportive of that.
    Mr. Plank. Then I would be delighted to see one hang on to 
as much freedom as possible, but still balanced with 
appropriate regulation, and based on what we found didn't work, 
so that we could try to improve it a little bit the next time 
    Mr. Barton. But you are not advocating reregulation of 
wellhead natural gas prices?
    Mr. Plank. I would just as soon not have reregulated 
natural gas prices, although on the other hand, if it were--if 
you can't get stability back into the price market, I would 
hope that later on down the road you could give some 
consideration to price band opportunities, and in which you 
traded a minimum price for a maximum price, and allowed the 
volatility to take place between two base points.
    Mr. Barton. But my position is that I believe a market, if 
properly structured, with transparency and ease of entry, and 
egress and ingress, is a better system than a regulated system, 
but you have got to have a fair system.
    And if the old system that Enron was--I think they had like 
90 percent of the trades, or some huge number, and if that gave 
them an insider position that could be used for manipulative 
purposes, that's wrong.
    And if we need to change the legislative statute to deal 
with that, we are going to do it. We have got a bill that is 
coming hopefully in the next month or so that we can do it. If 
on the other hand, we just need to fine tune the system, and 
then throw the book at people that have abused it in the past, 
that's a whole different thing.
    So I don't think we can go back to a regulated electricity 
market like we had prior to 1992. I don't think we can go back 
to a regulated energy market like we had in the Natural Gas 
Policy Act of 1978. I don't think we can go back to regulated 
oil prices like we had in the windfall profits tax that came in 
during the mid-1970's.
    I think we almost have to stay with the market system, but 
perfected, reform it, whatever the verb you want to use, so 
that the stockholders, the stakeholders, the investors, the 
consumers, know that it is a fair system, and that nobody has 
insider ability to affect it in an unfair way.
    Now, that is just my position, but I think that is a 
position that a majority of the Congress may hold once we get 
through all these hearings. Mr. Norlander, did you want to say 
something? And I am going to have to go vote and adjourn this 
    Mr. Norlander. I think that there is an alignment of 
interests at the consumer end and the producer end for some 
system that puts some stability out there for the good of the 
country, and for planning. We have to have a playing field and 
decide what we want here.
    Do we really want to have power plants allocated based on 
the market. In New York City, they are not doing it now. So to 
get the next power plant, do we have to bid for it with the 
highest rates in the world? And I think the answer is yes, 
unless we have a system in place that looks at it.
    The other piece is that this committee is a wholesale power 
committee mainly, and we are now seeing that directly impact 
consumers, and originally when this was started the idea was 
everybody will be at least as well off, and will be better off, 
and if we hold in place the network of programs for the poor, 
and everything else, and let the States work out these things, 
prices are coming down, and we will all be better off.
    That is not the message that people are receiving in the 
real world today in New York City, and it is not what they 
received in Buffalo with natural gas. That the price volatility 
is intolerable for ordinary consumers living on fixed incomes.
    Mr. Barton. Well, thank you. I am going to release you 
folks, and we want to thank you for being patient and being 
here all day basically. Thank you for your testimony, and we 
will file a report on this, and digest this.
    And if you have potential amendments to the pending 
electricity restructuring bill, we would ask that you get them 
to us, because some of these issues we can put in the bill when 
we mark it up, which I would hope would still be in the very 
near future. We thank you for your testimony, and this hearing 
is adjourned.
    [Whereupon, at 6:32 p.m., the committee was adjourned.]