[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
THE EFFECT OF THE BANKRUPTCY OF ENRON ON THE FUNCTIONING OF ENERGY
MARKETS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ENERGY AND AIR QUALITY
of the
COMMITTEE ON ENERGY AND COMMERCE
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/
house
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77-988 WASHINGTON : 2002
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
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COMMITTEE ON ENERGY AND COMMERCE
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
JAMES C. GREENWOOD, Pennsylvania EDOLPHUS TOWNS, New York
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
CHARLES ``CHIP'' PICKERING, KAREN McCARTHY, Missouri
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
GREG WALDEN, Oregon
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
CHARLES ``CHIP'' PICKERING, KAREN McCARTHY, Missouri
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
GREG WALDEN, Oregon
W.J. ``BILLY'' TAUZIN, Louisiana
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
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
(iii)
THE EFFECT OF THE BANKRUPTCY OF ENRON ON THE FUNCTIONING OF ENERGY
MARKETS
----------
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
officio).
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
Markets.
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
this.
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
expected.
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
Enron.
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
supply.
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
it.
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
statement.
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
record.
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
chairman.
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
ordered.
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
onion.
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
Chairman
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
transactions.
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
corporations.
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
follows:]
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
history.
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
percent.
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
percent.''
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
it.
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
chart.
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
record.
[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
expect.''
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
earnings.
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
investigation.
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
options.
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
performance.
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
reality.
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
exist.
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
difficulty.
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
him.
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
statement.
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
Enron.
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
collapse.
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
time.
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
system.
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
acceptable.
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
Oklahoma.
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
reform.
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
statement.
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
marketplace.
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
1999.
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
Enron.
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
volatility.
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
markets.
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
UtiliCorp.
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
country.
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
commodities.
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
Corp.
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
operation.
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
approvals.
``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
futures.
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
better.
Mr. Wood. Shorter?
Mr. Barton. Shorter would be even more fine.
STATEMENTS OF HON. PATRICK H. WOOD III, CHAIRMAN, FEDERAL
ENERGY REGULATORY COMMISSION; HON. JAMES E. NEWSOME, CHAIRMAN,
COMMODITY FUTURES TRADING COMMISSION; HON. ISAAC C. HUNT, JR.,
COMMISSIONER, SECURITIES AND EXCHANGE COMMISSION; MARY J.
HUTZLER, ACTING DIRECTOR, ENERGY INFORMATION ADMINISTRATION,
DEPARTMENT OF ENERGY; AND HON. THOMAS L. WELCH, CHAIRMAN, MAINE
PUBLIC UTILITIES COMMISSION
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
country.
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
America.
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
level.
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
industries.
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
follows:]
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
below.
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
Enron.
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
unaffected.
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.
EnronOnLine
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
(ICE).
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
rates.
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
appropriate.
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.
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\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
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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
www.ferc.gov.
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.,
EnronOnline).
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
initiative.
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.
Creditworthiness
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.
STATEMENT OF HON. JAMES E. NEWSOME
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
confidence.
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
risk.
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
Act.
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
liquidity.
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
entities.
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
contractions.
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
pursued.
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
industry.
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
subcommittee.
[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.
Background:
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
obligations;
(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;
and
(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
Situation:
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
entities.
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
surveillance.
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
testimony.
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.
STATEMENT OF HON. ISAAC C. HUNT, JR.
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
cross-subsidization.
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
abusive.
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
exemption.
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
us.
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
transactions.
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
companies.
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.
follows:]
Prepared Statement of Hon. Isaac C. Hunt, Jr., Commissioner, U.S.
Securities and Exchange Commission
Chairman Barton, Ranking Member Boucher, and Members of the
Committee:
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.
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\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
infra.
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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.
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\2\ See 1935 Act section 1(b), 15 U.S.C. Sec. 79a(b).
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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
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\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).
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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
industries.4
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\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
Act.
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.
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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.
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\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
repeal.
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
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\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
PUHCA.
\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 . . .'').
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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
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\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.
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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
standards.
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
bodies.17
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\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).
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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.
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\18\ See Gulf States Utilities Co. v. FPC, 411 U.S. 747 (1973).
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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
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\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).
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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
consumers.
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
business.22
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\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'').
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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.
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\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.
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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
years.
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
Coast.
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
increases.
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
Corporation.
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
Overview
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
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.
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
------------------------------------------------------------------------
Enron
Category Enron U.S. Total Share
(Percent)
------------------------------------------------------------------------
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
------------------------------------------------------------------------
Capacity
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
fuels.
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
best.
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
2000.
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.
conclusion
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.
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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
important.
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
consume.
STATEMENT OF HON. THOMAS L. WELCH
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
directive.
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
collapse.
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
output.
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
market.
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
energy.
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
consumers.
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
protections.
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/
2002legreports.htm.
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
lucky.
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
activities.
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
area.
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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[GRAPHIC] [TIFF OMITTED] T7988.017
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
minutes.
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
year.
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
build.
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.
[GRAPHIC] [TIFF OMITTED] T7988.018
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
change.
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
Congress?
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
gathering?
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
PUHCA.
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
inevitable.
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
recommendation.
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
State.
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
in.
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
it.
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
party.
---------------------------------------------------------------------------
\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
requirements.
---------------------------------------------------------------------------
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.
Sincerely,
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.
Waxman.
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
FERC.
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
information.
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
first?
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
standpoint.
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
none.
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
clearer.
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
questions.
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
resources.
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
purposes.
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
quickly?
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
patience.
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
business.
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
prices?
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
week.
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
time.
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
that.
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
Enron.
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.
STATEMENTS OF RICHARD C. GREEN, CHAIRMAN, UTILICORP UNITED,
INCORPORATED; DAVID K. OWENS, ON BEHALF OF THE EDISON ELECTRIC
INSTITUTE; RAYMOND PLANK, CHAIRMAN AND CHIEF EXECUTIVE OFFICER,
APACHE CORPORATION; GERALD A. NORLANDER, EXECUTIVE DIRECTOR,
PUBLIC UTILITY LAW PROJECT OF NEW YORK, INCORPORATED; AND
ROBERT MCCULLOUGH, MCCULLOUGH RESEARCH, PORTLAND, OREGON
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
terrible.
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
usual.
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
collapse.
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
long-term.
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
efficient.
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
groups.
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
minutes.
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
division.
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
market.
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
Institute
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
investigating.
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
bankruptcy.
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
reevaluated.
Corporate Board members and officers are reviewing their roles and
responsibilities.
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
power.
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.
conclusion
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
minutes.
STATEMENT OF RAYMOND PLANK
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
interdependent.
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
middle.
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
collapse.
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
provider.
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
broken.
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
producers.
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
capacity.
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
position.
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
overseas.
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
health.
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.
STATEMENT OF GERALD A. NORLANDER
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
businesses.
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
markets.
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
markets.
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
manipulations.
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
shortage.
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
years.
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
interest.
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
breached.
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
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\1\ My curriculum vitae is attached as an exhibit to this
testimony.
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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
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\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
attached.
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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.
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\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).
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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
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\5\ ``Enron's Former Customers Try to Find a Replacement,'' Chicago
Tribune, Feb. 8, 2002.
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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.
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\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.
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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
savings.
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
share.8
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\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
1998).
\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).
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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.
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\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.
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conclusion
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
regulation.
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
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\10\ ``Disconnected Policymakers,'' The Electricity Journal p. 22
(Aug./Sept 2001).
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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.
STATEMENT OF ROBERT MCCULLOUGH
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.
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
blackouts.
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
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\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.
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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
failure.
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.
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\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.
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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
customers
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
permanent.
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\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
Tijuana.
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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
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\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.
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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.
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\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.
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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
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\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.
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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
2001.
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
markedly.
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
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\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.
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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
daunting.8
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\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
load.
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
mendacity.
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
present.9
---------------------------------------------------------------------------
\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
2000.
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
years.
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
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\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
observed.
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
vengeance.
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
dark.
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
time.
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
contracts.
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
paragraph.
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
mark-to-marketing?
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
company.
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-
Line?
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
am.
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
we----
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
concert.
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
reporting.
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
detail.
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
failed.
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
Failed.
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
committee?
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
unreported.
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
transparency.
Obviously, people who are playing in the market can see
what is going on, but even customers, many utilities, will set
up----
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
sell.
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
contracts.
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
retail?
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
around.
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
hearing.
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.]
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