[Senate Hearing 107-602]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 107-602
 
                       ENERGY MARKET MANIPULATION
=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

TO EXAMINE MANIPULATION IN WESTERN MARKETS DURING 2000-2001 AS REVEALED 
  IN RECENT DOCUMENTS MADE PUBLIC IN THE COURSE OF THE INVESTIGATION 
   UNDER WAY AT FERC; ACTIONS THAT WERE TAKEN TO MITIGATE ANY MARKET 
MANIPULATION OR FAILURES; FURTHER ACTIONS THAT SHOULD BE TAKEN NOW AND 
                             IN THE FUTURE

                               __________

                              MAY 15, 2002


                       Printed for the use of the
               Committee on Energy and Natural Resources
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               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                  JEFF BINGAMAN, New Mexico, Chairman
DANIEL K. AKAKA, Hawaii              FRANK H. MURKOWSKI, Alaska
BYRON L. DORGAN, North Dakota        PETE V. DOMENICI, New Mexico
BOB GRAHAM, Florida                  DON NICKLES, Oklahoma
RON WYDEN, Oregon                    LARRY E. CRAIG, Idaho
TIM JOHNSON, South Dakota            BEN NIGHTHORSE CAMPBELL, Colorado
MARY L. LANDRIEU, Louisiana          CRAIG THOMAS, Wyoming
EVAN BAYH, Indiana                   RICHARD C. SHELBY, Alabama
DIANNE FEINSTEIN, California         CONRAD BURNS, Montana
CHARLES E. SCHUMER, New York         JON KYL, Arizona
MARIA CANTWELL, Washington           CHUCK HAGEL, Nebraska
THOMAS R. CARPER, Delaware           GORDON SMITH, Oregon

                    Robert M. Simon, Staff Director
                      Sam E. Fowler, Chief Counsel
               Brian P. Malnak, Republican Staff Director
               James P. Beirne, Republican Chief Counsel
                 Leon Lowery, Professional Staff Member
             Howard Useem, Senior Professional Staff Member







                            C O N T E N T S

                              ----------                              

                               STATEMENTS

                                                                   Page

Ackerman, Gary, Executive Director, Western Power Trading Forum, 
  San Mateo, CA..................................................    71
Bingaman, Hon. Jeff, U.S. Senator from New Mexico................     1
Church, Lynne H., President, Electric Power Supply Association...    64
Craig, Hon. Larry E., U.S. Senator from Idaho....................    26
Davis, Hon. Gray, Governor, State of California..................    56
Fergus, Gary S., Attorney at Law, San Francisco, CA..............    49
First, Cynthia, Commissioner, Public Utility District No. 1, 
  Snohomish, WA..................................................    75
Frizzell, Jean C., Attorney at Law, Gibbs & Bruns, L.L.P., 
  Houston, TX....................................................    47
Hall, Stephen, Attorney at Law, UBS Warburg Energy, LLC, 
  Portland, OR...................................................    51
Martinez, Henry, Assistant General Manager, Power Services, L.A. 
  Department of Water and Power, Los Angeles, CA.................    63
Murkowski, Hon. Frank H., U.S. Senator from Alaska...............     2
Smith, Hon. Gordon, U.S. Senator from Oregon.....................    25
Winter, Terry, President and Chief Executive Officer, California 
  Independent System Operator Corp., Folsom, CA..................    18
Wood, Patrick III, Chairman, Federal Energy Regulatory Commission     5
Yoder, Christian G., Attorney at Law, UBS Warburg Energy, LLC, 
  Portland, OR...................................................    53

                                APPENDIX

Responses to additional questions................................    97







                       ENERGY MARKET MANIPULATION

                              ----------                              


                        WEDNESDAY, MAY 15, 2002

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 2:34 p.m., in 
room SH-216, Hart Senate Office Building, Hon. Jeff Bingaman, 
chairman, presiding.

           OPENING STATEMENT OF HON. JEFF BINGAMAN, 
                  U.S. SENATOR FROM NEW MEXICO

    The Chairman. The hearing will come to order. Thank you all 
for coming. We can go ahead and get started here. We have got 
quite a few witnesses to hear from.
    This is the seventh hearing that has been held in this 
Congress by this committee on the problem of California 
electricity markets.
    At our hearing in January, Senators Feinstein and Cantwell 
and Wyden particularly urged the Chairman of the Federal Energy 
Regulatory Commission, Pat Wood, who is here with us today, to 
investigate whether traders in California power markets had 
manipulated those markets to raise prices artificially. FERC 
began that investigation and although the investigation is not 
complete, it has already uncovered strong evidence that market 
manipulation was occurring and that various trading practices 
by Enron and other companies did affect prices in California's 
wholesale markets. Memos describing this manipulation were 
provided by Enron and were released by the FERC just this last 
week.
    Today's hearing has several purposes. I will list four of 
them at least here.
    First would be to help us understand the nature and extent 
of the trading practices that Enron was engaged in.
    A second purpose would be to assess the extent to which 
this market manipulation may have influenced prices of 
wholesale power.
    A third purpose would be to obtain a status report from 
FERC on its investigation and other actions that it is taking 
to provide relief for past market abuses and to prevent future 
abuses.
    A fourth would be to determine what statutory changes are 
required to prevent a recurrence of these problems in 
California and elsewhere.
    There will be many more months of evidence gathering and 
debate about what lessons we can learn from Enron's collapse 
and from California's troubled efforts to deregulate its 
wholesale electricity market.
    Alan Murray, in an article in yesterday's Wall Street 
Journal listed three lessons that he believes we should learn. 
No. 1, deregulation of the Nation's electrical system needs to 
be designed by smart people who are acting, as much as 
possible, in the public interest. No. 2, the deregulated system 
needs to have very clear rules that apply nationwide and do not 
vary from State to State. And No. 3, those rules need to be 
enforced by a well-staffed, muscular Federal regulatory agency. 
I will be interested in hearing from Chairman Wood and the 
other witnesses as to whether they agree that these are the 
right lessons for us to learn.
    Let me defer to Senator Murkowski for his opening 
statement. Then we will hear from the witnesses.

      STATEMENT OF HON. FRANK H. MURKOWSKI, U.S. SENATOR 
                          FROM ALASKA

    Senator Murkowski. Thank you very much, Senator Bingaman.
    First of all, let me comment relative to the Enron issue 
because it has become quite fashionable to simply blame 
activities on Enron. They are a convenient excuse. And there is 
a little politics involved, but that is not rare around here. 
Let me remind the record and my colleagues, in 1998 the Clinton 
administration sent an electricity bill to Congress. This was 
more than generous to Enron. It proposed Federal command and 
control. It created a national regulatory infrastructure, best 
suited to large trading operations seeking to cherry pick 
electricity from markets across the country or across the 
street. It greased the skids for trading. This made it even 
easier for Enron to appear bigger, stronger, faster. And of 
course, we know better today.
    Now, perhaps the Clinton bill had something to do with the 
fact that Ken Lay's name is in the guest book of the Lincoln 
Bedroom in the former Clinton White House, but it is not 
necessary for me to criticize who the house guests were. But I 
think it is fair to say that it is clear that the Clinton 
electricity bill was written, thanks in part to the close ties 
between Ken Lay and the Secretary of Energy at the time, 
Secretary Pena. So, make no mistake about it. It was a bill 
that a lot of us had concerns with. Many people recognized that 
it would have a broad, far-reaching effect on our economy and 
our energy supply. Therefore, we wanted to tread very, very 
lightly.
    As a consequence, that bill went nowhere. Enron was not 
happy. They wanted their legislation to move, and as evidence, 
I quote an excerpt from the Washington Post, January 13, 2002. 
In a news account of one particular meeting, ``Lay and Pena 
agreed that a go-slow approach to deregulation advocated by 
Senator Murkowski was unacceptable.''
    Now, Senate Republicans had not resisted the urging of 
Enron and high Clinton administration officials. The troubles 
of California would perhaps not be unique, nor limited to 
California. These same problems effected the entire Nation.
    As we look at today's hearing, we are talking about Enron's 
trading practices and FERC's efforts to protect the consumer. I 
want to commend Chairman Wood, FERC's current head. I want to 
also recognize the contribution of Mr. Hebert who was formerly 
Chairman. I think FERC is to be congratulated on their 
aggressive pursuit of these problems in the West. Hopefully it 
will be factual information. Right now, FERC has five major 
western price investigations underway. One uncovered the Enron 
memorandums which the Chairman spoke about.
    Let me also commend the administration, the Department of 
Justice, the SEC, and others.
    So, why was the California market vulnerable to 
manipulation? Why were there problems in California, but 
apparently certainly not to the degree anywhere else such as 
the PJM power pool on the east coast?
    Did Enron really cause California's problems or did it and 
other traders just take advantage of a flawed system?
    I think we all know the answers to many of these questions. 
The State of California created a dysfunctional market. 
Governor Davis received some very, very poor advice. You cannot 
stay in the candy business very long unless you pass on your 
costs to the consumer.
    Market participants such as Enron took advantage of the 
weaknesses in the California program. But California only has 
itself to blame for creating a flawed system in the first 
place. Hindsight is cheap and that is one of our jobs around 
here.
    It should come as no surprise that if you create a flawed 
system riddled with loopholes, people are going to take 
advantage of it. Let me make reference to a May 8 Washington 
Post editorial, and I quote. ``As with Enron's accounting 
scams, the firm's aggressive rule breaking is only half the 
story. The other half involves the rules themselves, which all 
but invited abuses. California's politicians created a flawed 
electric market that banned the long-term contracts that would 
have stabilized prices, forcing power users to depend entirely 
on short-term purchases. When power grew scarce because of 
weather and other factors, consumers were at the mercy of 
suppliers. By withholding power or engaging in other trading 
tricks, some perfectly legal, suppliers could send prices 
through the roof, which they did. On top of these design 
mistakes, California regulators refused to raise retail prices 
as shortages mounted in 2000. This only made the shortage more 
acute, increasing the opportunities for speculative profits.''
    California's problems resulted in price spikes and power 
shortages. It drove one of the three major investor-owned 
utilities into bankruptcy and put the other two on the verge.
    When that occurred, what was California's response? More 
counterproductive government. The State of California signed 
billions of dollars of long-term power supply contracts on 
behalf of the investor-owned utilities. Keep in mind that the 
State prevented the IOU's from long-term contracts in the first 
place.
    When the State signed contracts, when they proved to be far 
above the market, putting California taxpayers on the hook for 
billions of dollars, guess what happened? Well, we see that in 
the paper as Governor Davis proclaims his predicament. 
California, according to Governor Davis, is trying to abrogate 
the contracts and place the blame on industry, not just Enron.
    I must note that some of the biggest winners in this mess 
are California's public owned utilities. Exempt from both 
Federal and State oversight, they were entirely free to game 
the system--and they did. That is where I would hope FERC would 
focus. Public owned utilities charged some of the highest 
wholesale prices during the period that California had price 
spikes. Unfortunately, if FERC's investigation finds unlawful 
price manipulations and inappropriate windfall profits, 
California's municipal utilities may get off scot-free because 
FERC's authority is limited.
    I am disturbed by reports about the activities of the 
California independent system operator during this period. 
Congressman Ose recently released a transcript of a 
conversation between a staff member of the California ISO and 
Enron power trader. In this transcript the ISO asked Enron to 
keep their bid high in order to artificially elevate the price 
of power in California. That is either accurate or it is 
inaccurate. I hope we will find out.
    Why did the California ISO do that? After all, the 
California ISO was set up to promote competition and keep 
prices down, not to collude with energy traders to keep prices 
high. Perhaps the answer can be found in the Energy Daily 
publication dated April 25 which observed--and I quote--
``critics have alleged that the ISO was working on behalf of 
the California Department of Water Resources when prices 
collapsed last summer and the State was left holding onto 
excessive power at prices that were considerably above 
market.'' This is certainly something that I think FERC and the 
Justice Department should look into.
    Before we rush to judgment, it is important to note that we 
do not know for a fact that illegal price manipulations or 
gaming actually occurred. That is the subject of the ongoing 
investigation by FERC and others. We feel we are entitled to an 
answer. We do not have access to the documents FERC has 
received in its ongoing proceedings. Moreover, we do not even 
know if these activities were illegal. That is the job of the 
Department of Justice and FERC to determine, not necessarily 
the Congress. We all want to prevent price manipulation and to 
see punished those who violated the law. But we must be careful 
to not presume that an entire industry is guilty on pretrial 
information about a single participant. This is a very capital 
intensive industry and investors become wary of investing in 
new generation and transmission. They became afraid of undue 
political influence and legal matters, and see a rush to 
judgment. Consumers in our economy will suffer in the long 
term. We will not have reliable electricity at reasonable 
prices that we have come to expect and support this Nation's 
standard of living.
    We also need to be careful that we do not compromise 
ongoing Federal investigations for the sake of hearing 
processes. Thus, I was very disturbed by an article in USA 
Today which quotes Democratic Majority Leader Daschle as 
charging Enron with breaking the law. He is quoted as saying, 
``I don't think that there's any doubt that somebody ought to 
go to jail.''
    For those who think that Congress should do something more, 
we already have provisions in the Senate-passed energy bill. 
For example, we have given FERC new enforcement authority. We 
have given FERC new merger review authority. We have given FERC 
new authority to revoke deregulated rates. It gives FERC new 
authority to audit utility books. It requires FERC to establish 
an electronic information system. It requires enforceable 
reliability standards and establishes an office of consumer 
advocacy in the Department of Justice.
    I look forward to the witnesses' testimony today, as we try 
to get to the bottom of some of this information. I wish the 
panel a good day.
    The Chairman. I am sure each member of the committee here 
has strong views they would like to express, but I think in 
order to get on with our witnesses, we should proceed? Let me 
call on our Chairman of the Federal Energy Regulatory 
Commission, Pat Wood, first and then call on Mr. Winter to 
follow him. Please take about 8 minutes or however much of that 
you need to make the main points that you think we need to 
hear, and we will include any written statements you have in 
the record.
    Senator Wyden. Mr. Chairman, just a question. We have a 
vote on the floor. Is it your intention to hear from Mr. Wood 
first and then we will come back for questions? Or what is your 
intention?
    The Chairman. Well, I had not noticed the vote. I think it 
is important that we all hear his testimony. Perhaps we should 
go ahead and vote and then return. Let's do that? We will 
reconvene here in about 10 minutes.
    [Recess.]
    The Chairman. The hearing will reconvene. Please go right 
ahead with your testimony, Chairman Wood, and then Mr. Winter 
after that.

    STATEMENT OF PATRICK WOOD III, CHAIRMAN, FEDERAL ENERGY 
                     REGULATORY COMMISSION

    Mr. Wood. Thank you, Senator Bingaman, Senator Feinstein, 
and Senator Domenici.
    One of the principal reasons that I accepted the 
President's request for me to come work at FERC during this 
term was to restore customer confidence in the Nation's energy 
marketplace. After the events of the Western market in mid to 
late 2000, that certainly has been a challenging task.
    The sort of behavior indicated in the Enron memos that are 
the subject of today's hearing is not what I think we need to 
have customer confidence in the Nation's energy markets. One of 
the things that has fallen from that certainly is the nature of 
the regulatory regime at FERC, and certainly the questions, 
Senator Bingaman, that you asked me in the letter inviting us 
to the hearing draw that point.
    One of the things that as a former State regulator we 
needed and have wanted with our Federal agencies that did the 
same thing, the FCC for telecom regulation and FERC for energy 
regulation, would be a supportive partnership as we made 
changes in our State's regulatory structures. Market oversight 
is a big part of that supportive partner relationship between 
the State and Federal Governments, and it is one of the 
principal goals that I have set for this commission because I 
think it has not been principally an elevated role of what we 
do.
    Along with fostering a high quality environmentally 
responsible energy infrastructure and having balanced rules for 
the energy marketplace, we need to make sure that we protect 
customers through vigilant market oversight. So, one of the 
first things we did when I took over as chairman last 
September, was to formally amend our agency's strategic plan to 
recognize that market oversight is a big part of what we are 
about and certainly a growing part, as we move forward into the 
future.
    Building upon the existing structures that we have, both 
inside and outside the Commission, we have over the past 
several months created a new Office of Market Oversight and 
Investigation, which I am pleased is now headed by a gentleman 
from the outside. Among many qualified people that I 
interviewed personally for it, Bill Hederman, who has some very 
good background in the energy markets, is now head of that 
office and will, by the end of the summer, have that office 
fully staffed and up and operational with, hopefully, 80 or 100 
or so auditors, investigators, data folks, engineers, 
economists, attorneys, analysts, those type of folks, a broad 
multi-disciplinary group of people whose job is really to keep 
an eye on the day-to-day operations of the energy market in a 
manner that we quite frankly have not done and done well 
before.
    I want to say--and I mentioned to the prior committee--
right before I took over as Chairman, Senator Domenici called 
and asked, based on the testimony I gave to this committee in 
July of last year, was there anything we needed to basically 
effectuate the vision of market oversight. Certainly I thought 
long and hard and gave a figure for some additional funds for 
salaries for employees and some additional high-dollar 
employees. And I was pleased that at least a good chunk of that 
request made it through the conference and has been able to be 
used to support our efforts to begin that new office right away 
this year. So, I am appreciative of that as always to the 
members of the committee. I know Senator Feinstein helped as 
well in getting that through.
    Certainly getting the right people at the Commission to 
have the intellectual curiosity to follow up on this stuff, who 
are of a new mind set, not the traditional kind that receive 
filings and act on them, but who are going to go out, look at 
markets, ask hard questions, turn over rocks, that is a 
different mind set than the agency has had and that agencies at 
the State level have. So, creating that new role for regulators 
is not just a resource issue, but it is kind of a cultural 
change as well. So, we are in the process of going through that 
and again appreciate the support and help of Congress in that 
regard.
    A couple of other things we are doing besides setting up 
the office. Certainly the investigation I committed to all of 
you at your request in January to get deeper into the game 
here. Do not just do the refund hearing, but go deeper and find 
out really what happened here so we can know once and for all 
what kind of behaviors caused these market dislocations in the 
West in the past couple of years, find out if there are any 
particular bad players, go after them. If there are some 
particularly bad practices, get those fixed as well. So, that 
process began right away in February of this year.
    While most of our investigations are not announced and are 
private, because of the way we initiated this one by my 
commitment to you all, which my colleagues ratified, and we 
began with the investigation, it has been more in the public 
light than most of our investigations have been. That has its 
awkwardness, but I think, quite frankly, considering the 
gravity of the issue, the awkwardness is worth it. Where items 
are available to be made public, as these memos were last week, 
we have done so and will continue to do so. Our submissions 
from our agency will be in the public record.
    And as I reported back to you all in writing following the 
January hearing, I expect to have to you all a report, 
hopefully one with some finality, but at a minimum an interim 
report on where we are before the summer recess so that we can 
start to draw some conclusions from all of the information that 
we have acquired in the study.
    We are working with our sister agencies on this, the SEC, 
and the CFTC. We are also coordinating our efforts with what 
the DOJ has begun in its separate investigation as well.
    Other things that we are doing, in addition to the 
investigation and the refund hearing--I should update you on 
the refund hearing. We have gotten, thankfully from Mr. 
Winter's organization and also importantly from the now 
bankrupt California Power Exchange, the PX, the data that we 
need to go forward on the refund hearing. That refund hearing, 
which I had hoped would have been finished by this past spring, 
was delayed to allow those parties to get all the accurate 
information for the determination of what the individual 
refunds were hour by hour, day by day for the period from 
October 2000 through June 2001, which was the refund period.
    So, I expect that there will be a hearing on that. The 
judge has agreed to the parties' request to have that hearing 
in California, in San Diego this summer. The final conclusions 
from the judge will be out shortly thereafter, after parties 
have a chance to brief that. So, although I wish it had been at 
the first part of 2002, the refund case looks like it can come 
to closure at least in the latter part of this year, and I look 
forward to that and getting that determined and clarified.
    As you all know, there have also been some filings to have 
the justness and reasonableness of the long-term contracts that 
the State of California and a number of utilities in the West 
have entered into that have been referred to a hearing. We sent 
those contracts for review at hearings before for an 
administrative law judge. Again, we tried to put those on a 
relatively short time frame, but relatively short in that means 
probably by year's end as well.
    We have done some other things. The rulemakings that we 
have done to try to get things--both clarifying reports to give 
transparency of reporting requirements to the Nation's energy 
customers by all the Nation's energy sellers. That was just 
recently revised 2 weeks ago by the Commission.
    And then we are moving forward, in a very comprehensive 
way, to look at rules going forward across the country, much as 
the editorial that Chairman Bingaman mentioned in his opening 
comments, we are looking for a nationwide approach, certainly 
with some need for regional variation, but basically a 
nationwide approach toward energy markets that include not only 
structural fixes for market power, but market monitoring and 
mitigation tools to be used whenever behavioral fixes are 
needed and system planning for the transmission grid, 
reliability issues, independence of the operator of the grid, 
and the like.
    So, that comprehensive rulemaking is also a front and 
center issue for the Commission, and we have the assistance and 
help of a lot of helpful parties across the spectrum and across 
the country in that very public effort.
    So, that is some of the background on what we are up to. I 
just want to let you know, at the end of the day and the 
beginning of the day, our commitment is the same, to make this 
Nation's energy markets work for the customer. That is why 
regulators are here, to make sure that what are historically 
monopoly or potentially monopoly forces are harnessed and used 
for the good of the Nation's customers. It is my pledge to you 
all, as all along, that we will continue to do that. We have a 
ways to go and we are on track toward getting there.
    I look forward to any questions or comments from the 
committee members.
    [The prepared statement of Mr. Wood follows:]
   Prepared Statement of Patrick Wood, III, Chairman, Federal Energy 
                         Regulatory Commission
                      i. introduction and summary
    Mr. Chairman and Members of the Committee: Thank you for the 
opportunity to testify about potential manipulation in Western energy 
markets during 2000-2001 as suggested in recent documents provided in 
the course of the investigation under way at the Federal Energy 
Regulatory Commission (FERC or the Commission) and made public last 
week; actions that were taken to mitigate any market manipulation or 
failures; and further actions that should be taken now and in the 
future.
    Two major events in the past two years have raised significant 
concern over how well competitive electric markets are working, whether 
our nation's regulatory institutions and expertise are adequate to deal 
with such markets, and the wisdom of continuing to move forward to 
promote competitive electric markets. These events are the California 
energy crisis and the collapse of the Enron Corporation. Since last 
year, FERC has moved aggressively to take steps within its authority to 
remedy problems in the California and Western wholesale electric 
markets and to investigate potential manipulation of wholesale markets. 
Just as importantly, the Commission is taking forward-looking measures 
to realign the wholesale electric industry and ensure that there are 
adequate market rules and appropriate market oversight in place to 
support fully competitive markets. While the recent California and 
Enron events have caused industry observers to reevaluate where we are 
on the road to competition, I continue to believe that competition is 
superior to traditional cost-based regulation for providing reliable 
and adequate electricity supplies at the lowest reasonable cost to the 
nation's electric customers. Just as competition is thriving in the 
natural gas industry today, so too can it thrive in the wholesale 
electric industry--but there is more work to be done.
    Let's confront the key issues head-on. Did California experience 
severe electric market problems? Clearly, yes. Were these problems the 
result of market manipulation? We are currently investigating that 
issue. Many observers agree that these problems stemmed in part from 
the poor design of the California electricity market and the lack of 
adequate reserves and demand response relative to growing electricity 
demand. Those conditions made it possible for Enron (apparently)--and 
possibly other market participants--to exploit, profit from, and 
possibly exacerbate the magnitude of California's problems. Did FERC 
respond properly to help California deal with these problems? Yes. It 
is clear that FERC took action to address problems in California and 
western markets, which became apparent in May 2000, by instituting a 
fact-finding investigation into the nation's electric bulk power 
markets on July 26, 2000, and has been dealing with those issues 
extensively ever since. Since I joined the Commission in June 2001, we 
have addressed California and western states issues in almost every 
single open meeting and have dealt with each issue using the best 
information and evidence available to us under the guidance and limits 
of the law.
    In the eleven months since I joined FERC, the nation has continued 
to reap the continuing benefits of wholesale electric and natural gas 
competition. The billions of dollars invested in efficient, economical, 
independent generation and gas pipelines and production over the past 
decade have caused wholesale electric prices across the nation to drop 
by 59 percent, while weighted average prices in California have dropped 
from almost $140 to about $25 per megawatt-hour. Approximately 41,000 
new megawatts of electric generation capacity have been built across 
the country--but only 2,922 megawatts have come on-line in California. 
Since I arrived in Washington, FERC has issued over 60 orders on issues 
relating to California and the western states electric market and 
instituted numerous proceedings relating to the California and western 
electric market. And to ensure adequate market oversight for all 
wholesale electric markets in the future, FERC has formed and is now 
staffing a new Office of Market Oversight and Investigation.
    My purpose today is not only to look backward, but to look to the 
future as well. I will begin this testimony by speaking about the 
Commission's ongoing investigation into potential market manipulation 
by Enron or other entities in the West, and then describe what steps 
the Commission has taken on California issues. But it is important to 
look forward, and address the broader issue of how we can assure that 
competitive electric markets work effectively across the nation, so all 
Americans can enjoy the benefits of vibrant wholesale electric 
competition. The Commission is working on numerous initiatives to build 
a sound foundation for competitive markets. These efforts--to improve 
and expand our nation's energy infrastructure, standardize and improve 
wholesale market design and rules, establish independent regional 
transmission organizations (RTOs) to manage our nation's electric grids 
and markets, ease and expedite new generation interconnection, enable 
the full participation of customer demand response, improve market 
transparency, and police market participants' behavior--should greatly 
improve the effectiveness of competitive wholesale markets, and assure 
that market power abuse does not compromise long-term market success.
           ii. the commission's western markets investigation
    It has been alleged that Enron, through its affiliates, used its 
market position to distort electric and natural gas markets in the 
West. In response to these allegations, on February 13, 2002, the 
Commission issued an order directing its staff to launch a non-public, 
fact-finding investigation. This on-going staff investigation is 
gathering information to determine whether any entity, including Enron 
Corporation, through any of its affiliates or subsidiaries, manipulated 
short-term prices for electric energy or natural gas markets in the 
West, or otherwise exercised undue influence over wholesale prices in 
the West since January 1, 2000.
    FERC staff members are collaborating with experts at the 
Commodities Futures Trading Commission (CFTC), pooling the agencies' 
expertise on the physical and derivative transactions involved. We have 
established information-sharing agreements with the CFTC and the 
Securities and Exchange Commission (SEC). In addition, FERC has 
contracted with leading experts in business and academia to assist in 
the investigation, and hired specialists in large-scale electronic data 
retrieval and analysis to perform needed data processing and analysis.
    On March 5, 2002, Commission staff issued an information request 
directing all jurisdictional and non-jurisdictional sellers with 
wholesale sales in the U.S. portion of the Western Systems Coordinating 
Council (WSCC) to report by April 2, 2002: (1) on a daily basis, their 
short-term and firm and non-firm wholesale sales transactions for years 
2000 and 2001; (2) on a monthly basis, monthly firm and non-firm 
capacity and energy wholesale transactions for years 2000 and 2001; and 
(3) long-term capacity and energy sales transactions executed for 
delivery on or after January 1, 2000. Enron filed a deficient filing on 
April 15, 2002, and was directed to remedy its filing immediately. In a 
letter to Enron's counsel, on April 18, 2001, the Commission's staff 
noted that the deficiencies of Enron's response signaled a breakdown in 
supervision and quality control and seriously impeded the Commission's 
investigation. In light of these concerns, the Commission has sent two 
computer specialists to Enron's Houston office to help access the Enron 
databases that contain the information the Commission's staff seeks. At 
this time, Enron has yet to fully comply with the March 5, 2002, 
information request, particularly with respect to providing affiliate 
sales data.
    On May 6, 2002, counsel for Enron turned over to Commission staff 
three internal Enron memoranda that were partially responsive to 
previous data requests issued by Commission staff. Two of the memoranda 
are dated from December 2000 and the other memorandum is undated. 
Enron's counsel informed Commission staff that Enron's Board of 
Directors had voted, on May 5, 2002, to disclose these documents and 
waived all claims of attorney-client privilege. Enron's counsel also 
informed the SEC, the Department of Justice, and the Attorney General 
of California about these documents. FERC promptly released these 
memoranda to the public on the Commission's website, along with a 
letter asking follow-up questions about the documents. Because the 
investigation is non-public, the Commission has not made available to 
the public questions issued under subpoena or companies' responses 
containing confidential information.
    The two dated Enron memoranda provide a detailed description of 
certain trading strategies engaged in during the year 2000 by Enron 
traders, and, allegedly, traders of other companies active in wholesale 
electricity and ancillary services markets in the West and, 
particularly, in California. The last section of the dated memoranda 
discusses the California Independent System Operator's (CAISO) tariff's 
definition of, and prohibition of, ``gaming'' and other ``anomalous 
market behavior.'' The memoranda then list and discuss actions that the 
CAISO could take if the CAISO were to discover that Enron was engaging 
in such activities.
    According to the memoranda, the trading strategies generally fall 
into two categories. The first category is described as ``inc-ing 
load''--slang for increasing load--into the CAISO real-time market, 
whereby a company artificially increases load on a schedule it submits 
to the CAISO with a corresponding amount of generation. The company 
then dispatches the generation it scheduled, which is in excess of its 
actual load, and the CAISO pays the company for the excess generation. 
Scheduling coordinators that serve load in California were apparently 
able to use this trading strategy to include generation of other 
sellers. The second category is described as ``relieving congestion'' 
and involves a company first creating congestion in the California 
Power Exchange (PX) market (which terminated January 31, 2001), and 
then ``relieving'' such congestion in the CAISO real-time market to 
receive the associated congestion payments. This trading strategy is 
accomplished through such actions as reducing schedules or scheduling 
energy in the opposite direction of a constraint (counterflows), for 
which the CAISO pays the company. The two dated Enron memoranda also 
outline ten ``representative trading strategies'' that were used to 
``inc load'' and ``relieve congestion'' for profit.
    On the same day Enron counsel divulged these documents, the 
Commission's staff sent a follow-up data request to Enron to elicit 
more information about the trading strategies described in the 
memoranda. The follow-up data request ordered Enron to give the 
Commission, by May 10, 2002, the names of the traders who were 
interviewed and whose trading strategies are the subject of the 
memoranda. The Commission's staff also requested the production of any 
comparable memoranda that discuss trading strategies and asked Enron to 
provide all correspondence related to the subject matter of the 
memoranda. At this time, Enron has partially complied with the 
Commission's follow-up data request.
    The Enron memoranda allege that traders from other companies also 
employed several of these trading strategies. Therefore, the 
Commission's staff issued a notice, on May 7, 2002, to all sellers of 
wholesale electricity and/or ancillary services in the West, alerting 
them that the Commission would seek information about their use of the 
trading strategies discussed in the Enron memoranda in a data request, 
and directing them to preserve all documents related to such trading 
strategies. Also on May 7, 2002, the Commission's staff issued a data 
request to the CAISO, seeking information for the two-year period 2000-
2001; FERC staff is currently analyzing this material.
    On May 8, 2002, the Commission's staff issued a data request to 
over 130 sellers of wholesale electricity and/or ancillary services in 
the West during the years 2000-2001, with a due date of May 22, 2002. 
This data request asks every company with wholesale sales during this 
period to admit or deny whether it has engaged in the types of trading 
activities specified in the Enron memoranda, as well as any other 
trading strategies. The data request asks for all internal documents 
relating to trading strategies that the company may have used during 
the relevant time period, including correspondence between companies, 
reports, and opinion letters, and information concerning megawatt 
laundering transactions that any of these sellers might have engaged in 
with Enron. The data request specifies that the company's response 
should be an affidavit signed under oath by a senior corporate officer, 
after a diligent investigation into the trading activities of the 
company's employees and agents.
    This investigation is non-public and confidential, as are all of 
the Commission's enforcement activities. From the start, we have made 
many of our activities public (such as the questions asked of industry 
participants) and have released the Enron documents for which privilege 
was waived, because of the high level of public interest and the right 
of the public to be confident in our conduct of the investigation. But 
at the same time, we must protect the integrity of the on-going 
investigatory process and the rights of those being investigated. We 
need a complete record and extensive analysis on which to base any 
findings, and we have not yet compiled such a record. Although the 
Enron memos clearly are very serious, we cannot and should not indict 
either a single company or an entire industry based on three memos. 
Once the facts are clear, FERC will take appropriate actions within our 
statutory authority. But first we must gather all the facts.
    The Commission staff's discovery process has elicited, and 
continues to elicit, important information about trading strategies 
that several sellers in the West may have used. The Commission's staff 
is currently assessing how best to respond in terms of further 
discovery, analysis and theories of the case. As soon as the fact-
finding investigation is complete, a thorough and timely report will be 
submitted to Congress and the public.
   iii. other ferc investigations relating to california and the west
    The current Enron investigation should be placed in context with 
the Commission's other activities and investigations pertaining to 
California and the western states. The Commission has been working 
diligently on the evolving California issues, and will be acting on key 
pieces in the coming months. Some of these activities include:

   Requests for refunds for spot market sales through the CAISO 
        and the California Power Exchange are now in hearings initiated 
        by the Commission's order of July 25, 2001 (and supplemented on 
        December 19, 2001). This proceeding should determine the 
        appropriate mitigated market clearing price in each hour of the 
        refund period consistent with the rate pricing methodology 
        prescribed by the Commission; the amount of refunds owed by 
        each supplier according to the Commission's pricing 
        methodology; and the amount currently owed to each supplier, 
        with separate quantities due from each entity, by the CAISO, 
        the investor-owned utilities, and the State of California. 
        Consistent with refund authority under Section 206 of the 
        Federal Power Act, the effective refund period extends from 
        October 2, 2000, to June, 2001.
   The Commission's order of July 25, 2001, initiated hearings 
        on whether there may have been unjust and unreasonable charges 
        for spot market bilateral sales in the Pacific Northwest for 
        the period beginning December 25, 2000, through June 20, 2001. 
        The proceeding addresses the extent to which dysfunctions in 
        the California markets may have affected spot market prices in 
        the Pacific Northwest. The administrative law judge issued an 
        initial decision on September 24, 2001, recommending against 
        the ordering of refunds.
   On October 9, 2001, the Commission released a request for 
        proposal for an independent audit of the CAISO, which included 
        an evaluation of the CAISO's ability to manage the California 
        market, and appropriate recommendations. The audit, submitted 
        to the Commission on January 25, 2002, by Vantage Consulting, 
        Inc., confirmed FERC's prior findings that the CAISO board is 
        not fully independent, and offered recommendations to improve 
        the CAISO's management and processes. This matter is a pending, 
        contested proceeding before the Commission.
   On April 11, 2002, the Commission ordered a hearing for the 
        complaints filed by Nevada Power Company and Sierra Pacific 
        Power Company, Southern California Water Company and Public 
        Utility District No. 1 Snohomish County, Washington. These 
        utilities allege that dysfunctions in the California 
        electricity spot markets caused long-term contracts negotiated 
        in the bilateral markets in California, Washington and Nevada 
        to be unjust and unreasonable; they ask that FERC remedy the 
        problem by modifying the contracts. The Commission directed the 
        parties to first participate in contractually mandated 
        mediation.
   On April 25, 2002, the Commission issued an order setting 
        for evidentiary hearing complaints by the Public Utilities 
        Commission of the State of California and the California 
        Electricity Oversight Board against a group of sellers under 
        long-term contracts with the California Department of Water 
        Resources. The state agencies allege that the prices, terms and 
        conditions of such contracts are unjust and unreasonable and 
        seek contract modification. Here too, the Commission strongly 
        encouraged the parties to pursue settlement.
    iv. the commission's actions to mitigate market manipulation or 
                  failures in california and the west
    To understand FERC's actions and their impacts in California and 
the western power markets, it is useful to first understand how Enron's 
trading strategies were designed to exploit the California market:

   Strategies that involved ``inc-ing load''--artificially 
        increasing load on schedules, dispatching generation in excess 
        of actual load, and getting paid for the excess generation at 
        the market clearing price;
   Strategies that exploited the congestion management system 
        by relieving real or artificial congestion;
   Strategies that exploited the California v. Western price 
        differential (e.g., megawatt laundering); and,
   Strategies that involve misrepresentation (paper trading of 
        ancillary services when the company doesn't actually have the 
        services to sell, submitting false information about the 
        identity of the plants providing the services, and selling non-
        firm energy as firm to the PX).

    With the exception of those strategies which involved deceit, these 
strategies were specifically designed to exploit flaws in California's 
market design. Since November 2000, FERC has been taking action to 
address these flaws and alleviate their consequences, even though the 
specific trading behaviors outlined in the Enron memos were not the 
target of the Commission's efforts. These Commission actions are 
described below.
    Energy price levels--An extensive series of Commission orders 
served to moderate California and Western states' electricity prices, 
both through direct action on prices and through indirect action to 
stabilize California's spot and long-term markets.

   On December 8, 2000, at the CAISO's request, the Commission 
        responded to the supply emergency and snowballing price 
        conditions in California by modifying the $250 price cap, so 
        that bids above that level would be accepted but would not set 
        the clearing price paid to all sellers. That order also limited 
        generators' ability to withhold generation (using scarcity to 
        drive up prices) by authorizing the ISO to penalize 
        participating generators that refuse to operate in response to 
        emergency dispatch instructions.
   FERC's December 15, 2000, order reduced the impact and 
        vulnerability of the spot market by ending the requirement that 
        California's three investor-owned utilities (IOUs) sell all of 
        their resources into and buy all of their requirements through 
        the California PX. By terminating the requirement, FERC 
        released a total of 40,000 MW of load from the spot market and 
        placed 25,000 MW of the IOUs' resources directly under the 
        jurisdiction of the California Public Utilities Commission.
   To reduce possible withholding of generation and increase 
        available supplies, FERC's April 26, 2001, order allows the 
        CAISO to order increased production from any on-line, 
        uncommitted in-state generation capacity in the real-time 
        market if the energy is needed. The June 19, 2001, order 
        expanded this must-offer requirement to include all utilities 
        in the Western Systems Coordinating Council (WSCC).
   FERC's April 26, 2001 order also established a prospective 
        mitigation and monitoring plan for wholesale sales through the 
        CAISO spot market, and established an inquiry into whether a 
        price mitigation plan should be implemented throughout the 
        Western Systems Coordinating Council (WSCC). This plan included 
        price mitigation for all sellers (excluding out-of-state 
        generators) bidding into the CAISO real-time market during a 
        reserve deficiency (i.e., when reserves fall below seven 
        percent), with a formula to calculate the market clearing price 
        when mitigation applies.
   FERC's June 19, 2001 order established price mitigation for 
        spot markets throughout the West, equalizing region-wide price 
        limits across all western states through September 30, 2002; 
        this reduced the incentive to megawatt launder. Key elements of 
        the mitigation plan, to be in effect from June 21, 2001, 
        through September 30, 2002, included: retaining the use of a 
        single market clearing price for sales in the CAISO's spot 
        markets in hours when reserve margins fell below 7 percent; 
        applying that market clearing price for sales outside the 
        CAISO's single price auctions (i.e., bilateral sales in 
        California and the rest of the WSCC); and establishing a 
        different price mitigation level formula for those hours when 
        California does not face a reserve shortage.

    Congestion management--The fundamental flaw in California's 
congestion management system is that it does not fully recognize the 
existence of major transmission constraints outside the real-time 
market. Therefore, the CAISO schedules buyers' and sellers' 
transactions without regard to the system's actual physical transfer 
capabilities, so that day-ahead pre-schedules are often not feasible. 
In such a case, the infeasible day-ahead schedule causes the CAISO to 
anticipate a congested system, so it pays entities in real-time to 
relieve the congestion. This can be prevented--as it has been in all 
other active ISO organized markets--by designing the day-ahead market 
to recognize all transmission system constraints and reliability 
limits, and limiting the number of transactions and transmission 
accordingly to avoid artificial congestion and reduce real congestion. 
Other ISOs also use some version of congestion pricing that charges the 
cost of congestion to the entities that cause it. These approaches 
limit the ability of market participants to manipulate congestion and 
to profit from such manipulation.
    The Commission told the CAISO in January, 2000, that California's 
congestion management system was flawed and needed to be fixed. 
Although the CAISO has proposed significant changes to the system, 
those reforms are not scheduled to be in place until 2003-2004. 
Similarly, the addition of much needed generation and transmission 
capability, which will also help relieve congestion, will not occur in 
the near future, but rather will take years to accomplish.

   In an order issued on January 7, 2000, FERC found the 
        CAISO's congestion management structure to be fundamentally 
        flawed and directed the CAISO to develop and submit a 
        comprehensive congestion management and market redesign.
   In the face of limited response from the CAISO, FERC issued 
        its December 15, 2000 order, requiring the CAISO to file a 
        comprehensive redesign of its congestion management program by 
        January 31, 2001. The CAISO, under a new state-appointed Board, 
        did not make the filing.
   To the degree that exploitation of the interplay between 
        trading on the Cal PX and the ISO's day-ahead market enhanced 
        the ability of traders to manufacture congestion for profit, 
        the Commission's termination of the California PX rate schedule 
        reduced the effectiveness of these strategies. Trading on the 
        California PX was halted in January, 2001.
   In an order issued May 25, 2001, the Commission clarified 
        that price mitigation applies to both energy and congestion 
        management, thus limiting congestion payments and disincenting 
        this behavior.
   One year after directing changes to the CAISO's congestion 
        management system, FERC's December 19, 2001 order again 
        directed the CAISO to file a revised congestion management 
        plan, due May 1, 2002.
   The CAISO filed a market redesign proposal on May 1, 2002, 
        which anticipates implementing some congestion management 
        reforms by fall 2003 and winter 2004. The aspects of the ISO's 
        proposal that are proposed to become effective by September 30, 
        2002, will not change the congestion market substantially.

    The price mitigation measures put in place in the April 26, 2001, 
and June 19, 2001, orders have limited the effect of anti-competitive 
behaviors on market prices, and they will continue to do so until 
September 30, 2002, when price mitigation is scheduled to terminate. 
Before that date, the Commission will ascertain the appropriate 
mitigation tools needed for the California and western market going 
forward. The CAISO has filed its plan for post-September mitigation, 
and I expect the Commission to address this matter soon.
    Megawatt laundering--These strategies exploited the fact that there 
were price caps in effect for generation within California, but no caps 
affecting out-of-state imports into the California market. FERC 
addressed this through a number of actions, including its actions to 
increase the availability of in-state generation and to stabilize 
prices across all of the western states.

   In early August, 2000, the CAISO prohibited non-firm 
        exports.
   FERC's April 26, 2001, order forced marketers outside of 
        California bidding into the CAISO to be price-takers, so they 
        could not bid a higher price for imports and set the price for 
        the entire market; rather, as price-takers, importers accept 
        whatever price is set by in-state, non-imported generation.
   The June 19, 2001, order treated sales within and outside 
        California uniformly and imposed uniform price mitigation 
        throughout the West. These measures eliminated incentives for 
        megawatt laundering.

    Attachment A * is a detailed list of the significant FERC orders 
and actions pertaining to California and western states electric 
markets since November, 2000.
---------------------------------------------------------------------------
    * The attachments have been retained in committee files.
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    Deliberate misrepresentation of information--This is clearly wrong. 
For instance, selling or reselling what is actually non-firm energy but 
claiming that it is ``firm'' energy is prohibited by the rules of the 
North American Electric Reliability Council. But it should be 
recognized that many of the trading strategies contained in the Enron 
memos were not necessarily prohibited under the CAISO tariff, except 
for the general prohibitions against gaming.
    Although we have not completed our fact-finding investigation with 
respect to sellers in California and the western electric markets, as a 
general matter it is clear that regulators must have two essential 
tools to prevent or mitigate significant misbehavior. First, the market 
regulator must have adequate monitoring and oversight capabilities, and 
a good understanding of market activities and patterns, to identify 
when and whether misrepresentation and manipulation is occurring. 
Second, regulators must have meaningful penalty authority, to ensure 
that market participants do not jeopardize reliability or manipulate 
market outcomes. FERC is working to develop and improve its 
understanding of markets and market manipulation through the new Office 
of Market Oversight and Investigation and its on-going cooperation with 
the CAISOs' Market Monitoring Units and other federal agencies. But it 
is clear that the Commission's penalty and enforcement authorities are 
limited and need to be expanded if they are to serve as effective 
deterrents to market misbehavior. I will discuss this issue further 
below.
    As the California situation evolved between 1996 and mid-2001, I 
was a state regulator, and I appreciated from afar FERC's deference to 
California's legislators and regulators as they worked to design 
competitive wholesale and retail markets for electricity. In 1996, 
California's restructuring legislation, AB 1890, was unanimously passed 
by the state's Legislature. In retrospect, the Commission may have been 
too deferential to California's market design, allowing it to go 
forward because California had gone through a great deal of stakeholder 
consensus and compromise--and because many crucial measures of the 
market design were dictated by state legislation. But as the magnitude 
of the problems in California and the West deepened, it has been 
difficult to find a constructive way out of the binds that our joint 
history has created.
    Chairman Bingaman asked a number of questions in his letter of 
invitation which I would like to address here.
    First, are current disclosure rules sufficient to discover the 
kinds of behavior referred to in the Enron memos? That is not entirely 
clear. Based on a proposal issued in July, 2001, FERC recently adopted 
a rule requiring detailed, standardized, electronic reporting on 
electricity market transactions. We believe that these data will help 
to detect inappropriate behavior in energy markets, but it will take 
some time to assess whether the new information permits us to monitor 
markets effectively. We are also undertaking a comprehensive analysis 
of our information collection requirements to determine what 
information is needed to effectively monitor a competitive marketplace, 
and may seek to change reporting further in the future.
    Are there behavior patterns that should be considered presumptively 
manipulative? I don't know yet. Clearly anything that involves deceit, 
fraud or misrepresentation is manipulative, but it is not always easy 
to detect and prove such behavior. I hope we will be able to answer 
this question more definitively after the Commission completes its on-
going western states investigation.
    Are FERC's market rules sufficient to ensure that markets are not 
being manipulated? I believe that the rules now in effect across the 
organized markets in the eastern markets prevent major market 
manipulation of the type outlined in the Enron memos. And the Standard 
Market Design rules which we are now developing, through a public 
process, seek to prevent such market manipulation in the future. But 
the rules which have been in place in California have allowed some 
types of manipulation to be practiced. Until organized electric markets 
exist across the entire nation and transmission grid, it is still 
possible for market participants in vast areas of the country to engage 
in behaviors that can adversely affect both the long- and short-term 
markets. The Commission's goal is to rely on clear rules of the road 
under standard market design, and non-discriminatory transmission 
access, that would apply to all transmission owners and operators and 
all generators and load-serving entities. For this reason, we have 
placed the Standard Market Design effort at the top of our regulatory 
agenda.
          v. interaction between the commission and the caiso
    There are two critical issues affecting the future of the CAISO and 
its ability to remedy the problems that have occurred in California's 
electricity markets. One is the degree to which the Commission works 
with the CAISO to monitor activities and developments in the California 
market. The other is the independence of the CAISO itself.
    In the past year, FERC staff has maintained frequent contact with 
members of the CAISO's staff, including its market monitoring staff. 
The Commission has also held a series of technical conferences, most 
recently on April 4 and 5, 2002, and May 9 and 10, 2002, to facilitate 
continued discussions between the CAISO, market participants, state 
agencies and other interested participants, on a revised market design 
for the CAISO. In addition, the CAISO's market monitoring staff 
routinely contacts FERC staff to discuss events and issues in the 
California markets. In an April 26, 2001, order, the Commission 
established a process to better track the developments in the 
California market. The CAISO now submits weekly reports to the 
Commission of schedule, outage and bid data to review current market 
performance, and includes any concerns such as possibly inappropriate 
bidding behavior.
    When the Commission's new Office of Market Oversight and 
Investigation (OMOI) is fully staffed, it will take over the task of 
working with ISO and RTO market monitoring units (MMUs). The OMOI will 
coordinate closely with MMUs with respect to local and regional market 
patterns and problems, but will also look for patterns and problems 
across multiple regions and markets. OMOI will conduct monitoring and 
oversight and issue regular reports on the status of the nation's 
energy markets. It will also have the responsibility of investigating 
possible market problems and participant misbehavior and recommending 
improvements and solutions to the problems it finds.
    The issue of the CAISO's independence remains pending before the 
Commission as a compliance issue. In its December 15, 2000, order, the 
Commission directed that the CAISO board should be replaced with a non-
stakeholder board that is independent of the market participants. The 
CAISO declined to respond to this directive. FERC hired consultants to 
conduct an independent audit of the CAISO, and has recently received 
public comments on that audit report. To avoid pre-judging the issue, I 
cannot state any conclusions now on this contested matter, but at a 
minimum we should note that the issue of ISO independence and 
credibility is critical not only for California but for every ISO and 
RTO. Participants in a competitive, effective market need to be 
confident that the entity which manages the grid and the market is 
independent and unbiased and will not act in a way that favors or 
disadvantages any market participant. I expect the Commission to take 
up this matter soon.

             vi. caiso's comprehensive market redesign plan
    On May 1, 2002, the CAISO submitted for filing a comprehensive 
market design proposal, as directed in the Commission's order on 
clarification and rehearing, issued on December 19, 2001. The CAISO 
states that its proposal largely reflects the market structure in the 
Commission's standard market design rulemaking, i.e., an integrated 
day-ahead and real-time congestion management, energy and ancillary 
services market based on locational marginal pricing.
    The market redesign issue is pending before the Commission, so I 
cannot offer any substantive comments on its merits. I can say that 
California is part of, and dependent upon, the broader western states 
grid, and there will be many issues to resolve with neighboring markets 
before we can realize seamless, efficient, full competition that 
benefits California and all of its western neighbors.
             vii. will market design alone save california?
    Even with the CAISO's proposed market redesign, California's 
electricity problems will not be over. As California and others have 
recognized, a combination of factors combined to cause the state's 
problems in the year 2000:

          (1) tight supply conditions in California and throughout the 
        West;
          (2) lack of significant demand response to hourly prices;
          (3) high natural gas prices;
          (4) inadequate infrastructure (including inadequate 
        transmission capacity);
          (5) lack of long-term supply arrangements and underscheduling 
        in the forward markets;
          (6) inadequate tools to mitigate market power; and
          (7) poor market design. (Charles F. Robinson and Kenneth G. 
        Jaffe, CAISO's May 1, 2002 filing before the FERC of its 
        Comprehensive Market Design Proposal, pp. 7-8, footnotes 
        omitted)

    Since 2000, natural gas prices have dropped and a majority of 
California's demand is now served under long-term bilateral contracts 
rather than through the spot market. There are currently market 
mitigation measures in place for the load remaining in the spot market, 
and the CAISO has filed a proposal for a new and better market design 
and congestion management system. But little else has changed:

   California has built little new generation--only 3,055 
        megawatts of new generation have come on line since 2000, so 
        there is now a total of 50,345 MW in-state to serve a peak 
        demand of 54,255 MW projected for 2002. Power plant developers 
        have announced the cancellation of 17 plants previously 
        proposed to be built in California, for 1,296 MW, over the past 
        year alone; Attachment B, a map of new and cancelled power 
        plants across the western states since the year 2000, shows 
        that many proposed plants have been cancelled. Although the 
        CAISO itself has stated that ``the capacity reserve margin . . 
        . should be 14% to 19% of the annual peak load to promote a 
        workably competitive market outcome'' (``Preliminary Study of 
        Reserve Margin Requirements Necessary to Promote Workable 
        Competition'', Anjali Sheffrin, Market Analysis, CAISO, 
        November 19, 2001), California remains dependent on out-of-
        state imports for a significant share of its load, and on 
        unpredictable hydroelectric generation for 15% of its supply. 
        In the year 2000, California's reserve margin was only 2%; for 
        the summer of 2002, the CAISO predicts a reserve margin of 8.4% 
        at expected peak.
   California has built no new bulk transmission, either to 
        link the north and south portions of the state grid or to 
        improve its import capabilities from out-of-state generators. 
        Recently, the Western Area Power Administration, PG&E and 
        TransElect filed a proposal to upgrade California's Path 15 
        line.
   The ability of individual customers to receive price signals 
        and adjust their energy demands accordingly remains limited. 
        California has done much to reduce peak customer loads, but 
        more demand response is needed across the western states, as a 
        crucial check on the ability of suppliers to exercise market 
        power by raising prices.

    Most of the above problems can only be resolved by California 
itself; but FERC stands ready to assist the state within the limits of 
the law and our respective jurisdictions. For instance, over the past 
year this Commission has acted expeditiously to approve several natural 
gas pipeline applications to assure that additional gas supplies can be 
delivered to the California border to serve the state's growing load.
              viii. making markets work for the long term
    The Commission believes firmly that sound, competitive wholesale 
electric markets serve America's energy users better than the cost-of-
service, vertically integrated utility alternative. FERC has been 
working hard to implement Congress' vision of this since the passage of 
the 1992 Energy Policy Act. Since that time, we have seen clear 
evidence in other countries and states that wholesale competition 
improves reliability, drives down delivered energy prices, sparks 
technological innovation, and enhances local economies with new capital 
investment. It is time to recommit ourselves to the challenge of 
completing the transition to fully competitive wholesale markets.
    The Commission's strategy to complete the task of making wholesale 
markets work has several key elements. Many of them are informed by 
what we have learned from observing markets in California and the 
western states over the past three years, and comparing them to other 
energy markets. Here are some of the lessons we have learned, which 
underlie the Commission's initiatives concerning competitive wholesale 
electric markets.
Standard Market Design
    Energy markets are geographically large and regionally inter-
dependent, so it is critical to promote clear, fair market rules to 
govern wholesale competition that benefits all participants, and assure 
non-discriminatory transmission access. Market rules must also specify 
what constitutes inappropriate behavior and the consequences for such 
behavior. Through its ongoing Standard Market Design (SMD) rulemaking 
initiative, the Commission intends to reform public utilities' open 
access tariffs to reflect a standardized wholesale market design. SMD 
will help enhance competition in wholesale electric markets and broaden 
the benefits and cost savings to all customers. The goals of the SMD 
initiative include providing more choices and improved services to all 
wholesale market participants; reducing delivered wholesale electricity 
prices through lower transaction costs and wider trade opportunities; 
improving reliability through better grid operations and expedited 
infrastructure improvements; and, increasing certainty about market 
rules and cost recovery for greater investor confidence to facilitate 
much-needed investments in this crucial economic sector. A sound market 
design, similar to the designs developed and tested in the East, will 
reduce the incentives and opportunities to manipulate the market.
Regional Transmission Organizations (RTOs)
    As long as they are properly structured and truly independent, RTOs 
will provide significant benefits to electric utility customers across 
the nation by eliminating obstacles to competition and making markets 
more efficient. RTOs facilitate wholesale competition and, where states 
choose to pursue it, retail competition. Even in the absence of retail 
competition, electricity customers benefit from increased competition 
in wholesale markets because it reduces bulk power prices and improves 
reliability. First, RTOs should eliminate ``pancaking'' of transmission 
rates, that raises the cost of moving power across multiple utility 
systems. Second, RTOs that have the proper tools can better manage 
transmission congestion, reduce the instances when power flows on 
transmission lines must be decreased to prevent overloads, and 
effectively solve short-term reliability problems. I believe that RTOs 
(and independent transmission companies operating under an RTO 
umbrella) will attract the capital and expertise needed to expand the 
grid and serve the generation capacity necessary for growing, 
competitive electricity markets. Third, RTOs should ensure that 
vertically-integrated transmission-owning utilities do not discriminate 
in favor of their own generation over another seller's generation. 
Fourth, RTOs can facilitate transmission planning across a multi-state 
region and, by operating the grid as efficiently as possible, should 
provide assurance to state siting authorities that new transmission 
facilities are proposed only when truly needed.
Infrastructure
    The Commission continues to work with others to promote adequate 
infrastructure by anticipating 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. Without adequate infrastructure, prices will 
rise due to scarcity and there will be greater opportunity for market 
manipulation. To speed the interconnection of new generation 
facilities, FERC has proposed a rule to standardize interconnection 
agreements and procedures, for use between all transmission owners and 
generators. The Commission is also assessing the available energy 
infrastructure across the nation, working by region-by-region with 
state officials and industry members to determine whether any problems 
or gaps exist and how joint effort and attention can help to remedy the 
deficiencies.
Market Monitoring and Mitigation
    The Commission has instituted measures to ensure market mitigation 
in the future in all RTO markets. The Commission's Office of Market 
Oversight and Investigation will interface with the RTOs' market 
monitoring units and will monitor markets to ensure that market rules 
are working. Furthermore, under the Commission's ongoing standard 
market design initiative, monitoring for physical and economic 
withholding will be an important focus of the market monitoring units 
within each RTO region. Each market monitor will report directly to the 
Commission and to the independent governing board of the RTO. The 
Commission will exercise oversight over market monitoring and the 
impact of RTO operations on the efficiency and effectiveness of the 
market.
  ix. legislative actions that could help ferc deal with market power
A. Earlier Refund Effective Date
    The Commission must rely on Federal Power Act section 206(b) for 
refund protections if it finds that market-based rates are no longer 
just and reasonable. Section 206(b) provides that whenever the 
Commission institutes a section 206 investigation of a rate or charge 
that may be unjust or unreasonable, the Commission must establish a 
refund effective date. If the investigation is based on a complaint, 
the refund effective date must be no earlier than 60 days after the 
complaint is filed. Congress can help the Commission protect customers 
against the exercise of market power by amending Section 206(b) to 
allow the Commission to establish a refund effective date that is as 
early as the date a complaint is filed.
    Permitting the Commission to set a refund effective date as of the 
date a complaint is filed will have two principal effects. First, it 
will increase the deterrent effect of refunds by increasing the period 
over which the Commission can require refunds for market manipulation 
or other improper conduct. Second, it will give customers a stronger 
incentive to notify the Commission immediately when they perceive 
manipulation even very short-term manipulation--of the electricity 
markets, because customers will have greater access to refunds.
B. Increased Civil and/or Criminal Penalty Authority
    The White House has requested that Congress, as part of the energy 
bill, increase criminal penalties under the Federal Power Act. 
Specifically, the White House proposes that the penalty for a willful 
and knowing violation of the FPA be increased from the current $5,000 
level to $1 million and that the potential prison term be increased 
from two years to five years. For a violation of the Commission's 
regulations under the FPA, the White House proposes to increase the 
penalty from $500 per day to $25,000 per day. These changes will 
provide stronger deterrents to anti-competitive behavior, market 
manipulation, and other violations of the FPA and Commission 
regulations.
    Congress could create additional deterrents to anti-competitive and 
bad-faith behavior in the marketplace by broadening and strengthening 
the Commission's civil penalty authority. Currently, FPA section 316A 
provides for a civil penalty authority of up to $10,000 per day for 
violations of Section 211, 212, 213 or 214. These penalties could be 
broadened to all sections of the FPA and increased significantly.
C. Encouraging Construction of Needed Energy Infrastructure
    Congress could encourage construction of needed infrastructure--
particularly bulk transmission, to reduce costly (and manipulable) 
congestion--by adopting measures that include support for Regional 
Transmission Organizations and their regional planning function. 
Another crucial measure is to adopt needed tax code revisions to assure 
that municipally owned transmission owners can commit their assets to 
common grid use without losing the tax-exempt financing of those 
assets, and that investor-owned transmission owners can transfer or 
consolidate their assets without incurring a taxable event that raises 
the costs of the transaction. In May 2002, the Department of Energy 
released an excellent report, ``The National Transmission Grid Study,'' 
which explains the crucial need for and value of a sound national 
transmission grid. The Commission strongly supports the report's 
recommendations.
                             x. conclusion
    The Commission is moving aggressively to investigate potential 
market manipulation in California and the West, whether by Enron or 
other market participants. We also are moving forward on initiatives 
that will put in place clear wholesale market rules and effective 
market monitoring to protect customers in every region of the country. 
We will continue to work with other federal agencies, with the states, 
and with Congress to protect the nation's electric customers and 
achieve the full benefits of wholesale electric competition.
    I look forward to sharing the results of our western markets 
investigation with you this summer and welcome your input and 
questions.

    The Chairman. Thank you very much.
    Mr. Winter, please go ahead.

   STATEMENT OF TERRY WINTER, PRESIDENT AND CHIEF EXECUTIVE 
            OFFICER, CALIFORNIA INDEPENDENT SYSTEM 
                   OPERATOR CORP., FOLSOM, CA

    Mr. Winter. All right. Mr. Chairman, members of the 
committee, thank you for allowing me to be here. I did not hear 
how much time I had. You said 8 minutes.
    The Chairman. About 8 minutes. If you need another minute 
or 2, you are entitled to that, whatever you would like.
    Mr. Winter. I have submitted as direct testimony quite a 
number of documents that I may refer to, but rather than go 
into them in detail, I will wait for that to happen during the 
questioning period.
    But I would like to emphasize three points today, and then 
I will respond to any questions you may have.
    First, as disturbing as these strategies may be, I think 
that we have to look a little deeper, as we go forward, into 
the real cause of the dilemmas that we have faced in 
California. So, we have identified that market power is a big 
issue and that is not always identified as gaming or the things 
you have seen. So, you have to look at both of those together.
    From the start-up, the ISO has been filing documents. I did 
not bring them all. We had about a 2-foot stack of the 
different documents that we have filed concerning market power, 
but I have provided a chronological listing in the attachment 
of each of those documents.
    As you will see in that, there is a strong and consistent 
emphasis on detecting, constraining, and combating market 
power. Through the turmoil of late 2000 and early 2001, our 
Department of Market Analysis and an independent market 
surveillance committee repeatedly documented both the presence 
and the impact of the market power in the California markets, 
and we have proposed many different ways of dealing with those, 
some of which we have enacted, some of which were not.
    From the very beginning, there has been a potential for 
market power in the design that California implemented. We 
recognized that and we tried to combat it as we saw it come 
about. I stress these points because market power has been the 
means from which the greatest profits have been extracted from 
the California market and in many ways it is the enabler that 
allows these different gaming activities to take place.
    Second, with regard to the gaming of the type described in 
the Enron memos, the ISO consistently has monitored for such 
activities and, when appropriate, we have taken action. To cite 
but a few examples, we have rescinded payments to suppliers who 
have gamed our ancillary service markets. We have levied 
penalties on suppliers who withheld energy and had invalid 
dispatch instructions, and we have issued directives requiring 
suppliers to cease gaming strategies, and you will see the 
effect of those. We have also chosen to change the market rules 
when we identified this, and we have had our own internal 
practices of trying to counter the gaming, and in some cases, 
where a lot of these operated beyond our authority, we have 
referred those matters to FERC.
    Third, it is imperative that we learn from the experience 
we have had so that we may move forward to secure the consumer 
benefits and trust and efficiency of the system, but we cannot 
forget reliability. The ISO's goal is to maintain reliability 
and assure that we have sufficient power to meet the needs of 
our customers.
    On May 1, 2002, we filed with FERC a detailed proposal for 
a comprehensive redesign, and it adopts the best practices we 
could find not only in the West-wide area, but also in the Mid-
Atlantic and any foreign markets that we saw. One of the 
problems that we saw is that you cannot implement a market 
design piecemeal, so if you pick pieces apart and you only 
implement part of it, you leave an opportunity for people to go 
in and game the system. So, as you look at these designs, you 
have to be very careful that you pick up all the pieces, and 
that was very clear to us, especially in California, where in 
operating the system, there were many entities that, one, I 
could not see outside the State, and two, internally with the 
municipalities having their different systems, we found that we 
could not see a lot of the activities that were going on.
    Our proposal includes an integrated set of market 
monitoring and mitigation proposals. I think it is imperative 
that we probably overreact and protect customers from price 
spikes and high volatility in the market.
    Let me anticipate the question that rightfully you should 
expect me to answer, and that is, would this market design 
change that we propose address and close all opportunities for 
market manipulation? We have tried to do that, but as we have 
found in the past, every time we try to come up with a counter, 
somebody figures out a way around that counter. So, I cannot 
sit here and say that it would absolutely without doubt close 
off all gaming opportunities. On the other hand, a well-
designed market with sufficient capacity certainly would 
discourage many of these and, in fact, with the right penalties 
and sanctions, I think we could react quickly to those.
    In closing, let me just say that we are here to help. We 
have developed a tremendous amount of experience in the last 4 
years. We see tremendous amounts of data. We have a close 
relationship between our market monitoring and our operating 
people so as we see things that occur, then we can address it.
    Now, as I move on, let me answer one of the questions that 
was brought up earlier, and that was the incident of an ISO 
employee who recently made certainly the newspaper and every 
place else. Again, it is not easy to explain what happened, but 
in one of these markets, if you in fact make the differential 
between the price that is paid and the price that is actually 
bid, you end up reducing the overall cost to the marketplace 
because we have to pay the differential.
    So, this employee tried to raise, through an improper 
contact, that price so that the differential would be smaller 
and there would be less money paid out. In his mind, he thought 
that he was helping the people of California by reducing that 
cost to them. In fact, that violated our code of conduct, and 
so he was terminated for that activity.
    We then launched into a rather extensive investigation of 
the incident by an outside group. I put absolutely no limits on 
what they were to look at, and they interviewed people both 
vertically and horizontally, some 24 to 40-some people in the 
organization. And at this point, the preliminary results appear 
that this was an isolated example. But that investigation is 
not complete because the firm wants to look at some of the 
other areas. So, we will have to report on that later.
    Last and very quickly, what are some things I think the 
legislation should do? Senator Murkowski mentioned the Senate 
bill. I also am a great believer in visibility to the market or 
transparency. It is the best way to catch what these gaming 
things are. If we have a visible market and it is open for 
people to see what is going on, that is the way we determine 
and make these things visible. So that transparency is 
important.
    Second, on the refunds, it is my belief that if examples of 
market power are found, we should give refunds back to any ill-
gotten gains. And if FERC feels that they are limited for some 
reason on going back, then I would suggest legislation that 
would let them address that.
    Then from an operating standpoint, we need to have clear 
rules that we can implement immediately, and by that, I mean it 
is very, very important that we take action quickly. Sometimes 
the process just does not let us do that. We have to go back to 
FERC, ask for the authority. And the tariff should clearly 
define those before we get there.
    Another issue that I am always concerned about--and I am 
not an attorney. But one of the actions we tried to take was 
take one of the generating entities to court, and we were 
successful at the district court to enforce a restraining order 
to get them to take action. But that was overturned in the 
appellate court because it said only FERC had the authority to 
enact that tariff, and they had to defend their own tariff. I 
think sometimes that takes more time.
    So, from legislation, I would like to see FERC have the 
authority either to have those injunctive powers or, in fact, 
pass them down to somebody so we could go to court and attack 
some of these behaviors.
    Beyond that, I think my time is up. I am here to answer any 
questions that you may have and certainly look forward to 
working with you in the future. Thank you.
    [The prepared statement of Mr. Winter follows:]
   Prepared Statement of Terry Winter, President and Chief Executive 
   Officer, California Independent System Operator Corp., Folsom, CA
    Mr. Chairman, Members of the Committee: Thank you for inviting me 
to join you in an inquiry that is most important to electric consumers 
in California and throughout the western United States.
    I would like to emphasize three points today, and then I would be 
happy to respond to your questions.
    First, as disturbing as some of the strategies described in the 
Enron memos are, the greatest potential harm to electricity consumers 
in California and elsewhere comes not from ``games'' that some clever 
traders may play, but from the persistent exercise of market power by 
suppliers and traders. By ``market power,'' I mean the ability of a 
single seller or group of sellers--to command excessive prices on a 
sustained basis. It is the exercise of market power by suppliers that 
has cost California consumers billions of dollars since the summer of 
2000.
    From start-up four years ago, the ISO has placed particular 
emphasis on documenting and mitigating market power. I am providing the 
Committee with a chronology of activities the ISO has pursued in the 
past four years, directed to market power, gaming, and providing relief 
to consumers that have been victimized by market power.* You will see 
there a strong and consistent emphasis on detecting, constraining and 
combating market power. Through the turmoil of late 2000 and early 
2001, both our Department of Market Analysis and the independent Market 
Surveillance Committee repeatedly documented both the presence of and 
impact of market power in the California electricity markets. And we 
have proposed measures effectively to control that power. There have 
been times, indeed, when we have been accused of reacting too 
vigorously to the potential for market power to be exercised or market 
rules flouted as, for example, when we unilaterally imposed price caps 
on the ISO's markets and only afterward sought the authority to do so. 
I stress these points because market power has been the means by which 
the greatest profits have been extracted from the California markets, 
and because it has been the enabler for many of the gaming strategies 
identified in these markets.
---------------------------------------------------------------------------
    * The exhibits submitted by Mr. Winter have been retained in 
committee files.
---------------------------------------------------------------------------
    Second, with regard to gaming of the type described in the Enron 
memos, the ISO consistently has monitored for such activity, and when 
appropriate, we have taken action. To cite but a few examples, we have 
rescinded payments to suppliers who have gamed our ancillary services 
markets, we have levied penalties (following FERC approval) on 
suppliers who have withheld energy in the face of valid dispatch 
instructions, and we have issued directives requiring suppliers to 
cease gaming strategies in our congestion management market. In many 
instances, we have chosen to change market rules or our own internal 
practices to counter a gaming opportunity. In other cases, operating 
within the authority given to us, we have referred matters to FERC for 
review and further action.
    Third, it is imperative that we learn from the experiences we have 
had so that we may move forward to secure for consumers the benefits of 
efficiency and reliability that best can be provided by a robust 
regional grid and electricity market. Our focus must be to understand 
what went wrong and to put in place the protections necessary to ensure 
that consumers are unlikely ever again to be subject to the prejudice 
of market power abuse and gaming strategies.
    The most effective means of detecting and deterring the exercise of 
market power and unfair gaming of market rules is to establish market 
rules that encourage appropriate behavior--by which I mean offering all 
available electricity supplies at prices that reflect the suppliers' 
costs--coupled with enforcement programs that rest on clearly defined 
rules and consequences for non-compliance.
    On May 1, 2002, we filed with the FERC a detailed proposal for a 
comprehensive market redesign, that adapts the best features of the 
market design employed in the Mid-Atlantic region to the unique 
circumstances we face in California. The proposed design centers around 
a day ahead integrated market for procurement of energy and reserves 
and the management of congestion on the grid; and day ahead residual 
unit commitment, which will permit the ISO to require suppliers to make 
preparations to generate to meet tomorrow's demand. It also includes an 
obligation on utilities and others serving customers to arrange for a 
surplus of supply in advance to meet their customers demands, so that 
the short-term market never again becomes the primary vehicle for 
serving customers' needs.
    Our proposal also includes an integrated set of market monitoring 
and mitigation proposals to deter both the exercise of market power and 
the types of gaming strategies exemplified in the Enron memos. As it 
will take time to complete the development of the software and 
hardware, the filing includes a request that FERC extend and enhance 
the effectiveness of the current bid cap mechanism. We look forward to 
a positive and prompt response from the FERC so that we may go forward 
quickly to implement the new market design.
    Let me anticipate the question that you rightfully should expect me 
to answer: Would the market design changes we propose address and close 
the opportunities for market manipulation that it has been suggested 
Enron has engaged in? We think so, for the most part.
    Can I assure you that if we succeed with our redesign, all 
opportunities for market power abuse and market manipulation will be 
eliminated? Of course not. Many of the problems that contributed to the 
market failure in 2000-2001--deficiencies in supply, failure to engage 
in long-term contracting for resources, limitations on demand 
responsiveness, and inadequate transmission infrastructure--can only be 
addressed through close cooperation, not only between the ISO and FERC 
but also among state officials and market participants, in California 
and in our neighboring states. Moreover, I cannot tell you how often in 
the past we acted with the conviction that we closed a door to abuse 
only to find market participants creating new opportunities. What I can 
tell you is that our design will draw from the teachings across the 
country and do all that we now know to be feasible to assure a fair, 
efficient and competitive market.
    Mr. Chairman, members of the Committee, let me close with a pledge 
to each of you and to electric consumers in California and throughout 
the west: We at the ISO will learn from experience, and we will utilize 
every ounce of our considerable expertise so as best to assure that 
consumers never again suffer a repetition of past market power abuses, 
but instead, reap the benefits of a robust competitive market which I 
continue to believe can be substantial.

    The Chairman. Thank you very much. Let me just start and I 
will just take 6 minutes, since I had an opening statement, and 
then we will do 8 minutes in this first round so that people 
have a couple of more minutes.
    Senator Domenici. Mr. Chairman?
    The Chairman. Yes.
    Senator Domenici. Since I have to leave, can I just submit 
questions for answering by the witnesses.
    The Chairman. All right.
    Senator Domenici. Let me start and ask a question for 
either or both of you. To what extent do we believe that these 
various strategies, which were employed and which have gotten 
such attention and which are described in these memos--the 
strategies for manipulating the market, or gaming the market--
actually contribute to and account for the dramatic price 
spikes that we saw in the California market at the end of 2000 
and the first half of 2001? Do either of you have an opinion on 
that? Maybe that is still a subject of your analyses going 
forward.
    I thought I understood you to say, Mr. Winter, that your 
belief is that the majority of the problem is with market power 
and not with these individual strategies. Is that what you 
said?
    Mr. Winter. Yes, that is what I said. If I were to look at 
the costs of the California market, I think in the 1999 time 
frame energy to California was approximately $7 billion.
    The Chairman. That is the cost of all the energy, of all of 
the electricity purchased, of all the wholesale power?
    Mr. Winter. Wholesale energy power to the State of 
California. That dramatically then--I cannot remember whether 
it was the next year or the year after that, but jumped to 
around $28 billion and then it went down to $26 billion. Those 
kind of increases to me, there is absolutely no way that a 
common market design ought to have that kind of result.
    So, if I look at the price of gas and I look at the natural 
things, let us assume that the $7 million was an extremely good 
deal and that the people were actually operating at a loss. To 
then jump that high, to me, is not supportable. If I go back 
and look at what I would expect competitive markets to produce, 
then I am more in the $10 million to $14 million. So, I look at 
a combination of market power and gaming, and to me we are in 
the neighborhood of anywhere from $10 billion to $15 billion 
more that California paid than it should have had to pay.
    Now, if you ask me to break those out, what was market 
power and what was gaming, here I have a lot of trouble because 
all I am able to see are the things inside California.
    So, one of the comments in the memos was that people were 
counter-scheduling congestion, and the figure of $30 million 
was in there that Enron made from congestion. Well, I am here 
to tell you they actually made $33 million on congestion for 
that path, which was called path 26.
    However, we then looked at their bidding activities because 
we could see how they bid across that line, and if you take out 
just the normal congestion that occurred from others bidding on 
both sides of that path, we came down to maybe the total impact 
was somewhere between $180,000 and $500,000, which says that is 
not a big amount of money when you are looking for $10 billion 
to $15 billion.
    Now, those that happened outside the control area or 
outside California could have had a much greater impact, and 
therefore, that is why I cannot really answer that. I also am 
not privy to the bilateral contracts and how they were arranged 
for or how much they cost.
    The Chairman. Let me ask about how the interaction between 
FERC and the ISO's will work in the future. Let me ask Chairman 
Wood about that. As I understand it, you are about to issue a 
rule on standard market design for the entire country. How do 
you envision this working here?
    It seemed like there were problems with the way the ISO in 
California was monitoring what was going on. They had things 
they were not able to stay on top of or deal with. How do you 
see FERC being able to correct any of that, or what do you see 
happening?
    Mr. Wood. One of the aspects of the market design rule and 
a key one is what are the monitoring and market mitigation 
responsibilities of an RTO, of a regional transmission 
organization. Actually just last week, we had the different 
folks like the ones that work for Terry and the ones that work 
elsewhere in the country come up to the Commission and talk 
about that critical aspect of the rulemaking. Again, that is a 
part that is still under a lot of discussion, certainly with 
these issues in mind.
    I expect, Senator, that there will be at each RTO the 
ability to mitigate anti-competitive or defined behavior and 
not have to have FERC come in and do it with the process. And I 
think Terry just laid that out pretty well. That would exist at 
the RTO. It would be clear. There would be basically what we 
have called tools in the tool box for the different RTO's in 
the country to use to address potential market power problems 
immediately and have those really be present at the RTO rather 
than, as we have had, here with California, kind of dished out 
with tariff filings and the like.
    The Chairman. You referred, Mr. Winter, to having the right 
penalties and sanctions with which to enforce these various 
provisions. Do you have anything you could tell us about 
whether the penalties and sanctions that are provided for in 
Federal law and particularly in this legislation that we are 
working on, the energy legislation, whether those are adequate 
or whether we should strengthen those, whether those are what 
they should be? I would ask Chairman Wood the same question, 
whether he sees something we should strengthen in the penalties 
and sanctions that can be imposed for this kind of gaming that 
obviously has taken place.
    Mr. Winter. I assume you want me to answer first and then 
he can correct me.
    [Laughter.]
    Mr. Winter. I think the whole idea of sanctions gets to be 
very difficult because when you start talking about the 
magnitudes of dollars, you really have to encourage people to 
follow the rules. I think it is very important that we look 
just beyond one State because you have got to look at the whole 
market or you leave pieces out of it. So, I am a large 
supporter of the RTO monitoring process. But I think it is a 
shared responsibility with a lot of entities.
    FERC has to have the authority to have injunctive power or 
we go to court and then they bounce it back to FERC, and 6 
months later we are out several billion dollars and we are 
trying to figure out what is going on. So, as far as the level, 
I would have to look at each individual sanction, but as long 
as FERC has that authority, I am okay.
    I think the RTO's have to have a clear set of rules so that 
when they see it broken, they can act immediately. Sanctions 
work in really two ways. No. 1, they identify that people are 
aware of this activity and you should not do it, and No. 2, it 
gets your name on a bad list and that has a lot of impact on 
what they can do. So, I think the local area has to do that.
    I think there is a local State function that needs to look 
at what is going on in markets, and that together, you get that 
information because it is impossible for FERC to sit in 
Washington, D.C. and have the information I have from an 
operator who is sitting on the floor and knows exactly what is 
going on and how the trades are being made. So, I support the 
RTO concept and that that market monitoring works itself down 
to the local level.
    The Chairman. Mr. Wood.
    Mr. Wood. With regard to the changes in the law to increase 
the tool box for the FERC, I mentioned in my testimony--and I 
think these are things, as I have followed them, that are in 
the bill that came out of the Senate a couple weeks ago. One is 
getting rid of the 60-day wait for a complaint. Under the 
electric law, it ought to be the day the complaint is filed. I 
believe that that has been eliminated in the bill.
    Secondly is the increased ability of the commission to 
assess civil penalties, administrative penalties for violations 
of the rule or the law. Certainly there are criminal penalties. 
I understand the administration has asked to maybe rethink 
those as well, make those higher on the criminal side. 
Criminal, of course, is handled by the Justice Department. And 
those could well be merited. But I think the broadening of the 
civil authority at the commission was in the bill that came out 
of here as well.
    So, as to the sanctions, I guess if what came out of the 
Senate goes all the way through and is enacted, I think that 
will certainly strengthen the commission's hand.
    I think the process issue that Terry just mentioned sounds 
like a good one. We have not really discussed that before, but 
the ability to actually to do some injunctive relief through 
probably an ALJ or through a commission order may well be a 
streamlining effort that would be worth looking at.
    The Chairman. I will go back and forth between the two 
sides here, and then go in the order that people arrived. 
Senator Smith, I believe is next.
    Senator Smith. Thank you, Mr. Chairman. I wonder if I can 
include in the record an opening statement and one for Senator 
Craig?
    The Chairman. You sure can.
    [The prepared statements of Senator Smith and Senator Craig 
follow:]
   Prepared Statement of Hon. Gordon Smith, U.S. Senator From Oregon
    Mr. Chairman, there have been several hearings in this and other 
Senate Committees into the demise of Enron, its effect on consumers and 
employees, and Enron's manipulation of the West Coast energy market in 
2000 and 2001.
    I must say, however, that the documents that are the focus of 
today's hearing are very disconcerting to me. They are, in essence, the 
smoking gun concerning Enron's trading practices in the West Coast 
energy market. These practices, with nicknames like ``Fat Boy,'' 
``Death Star,'' and ``Get Shorty,'' all had a common thread: they all 
used deceptive practices to circumvent California's price caps and to 
increase Enron's profits.
    I want to commend Christian Yoder and Stephen Hall for being 
willing to put their names on such a blunt memo. I can imagine that 
Christian faced angering his employer, and Stephen risked losing a 
client. We need to ensure that our investigative focus remains on those 
who engaged in deceptive practices, not those who reported on them.
    The information in these memos is not really surprising to me. I 
became convinced in early 2001 that the West Coast energy market at 
that time was not a free market, it was a broken market. That is why I 
cosponsored legislation with Senator Feinstein to impose price caps on 
the entire western market. In the face of our legislation, the Federal 
Energy Regulatory Commission finally stepped in and instituted certain 
price caps that have stabilized the market. Unfortunately, for my 
constituents, this stabilized market is still high by historic 
Northwest standards.
    While much of the press at the time focused on California, the 
entire West Coast energy market was driven by the prices in California. 
Prices in the Northwest for spot power in April 2001 were 10 to 12 
times their historic levels. This was devastating to those living on 
fixed incomes, small businesses, school districts, and small towns. In 
2001, job losses averaged 3,100 a month in Oregon.
    The repercussions of these high prices are still being felt in the 
Northwest. The Bonneville Power Administration had to raise its rates 
by 46 percent last October. This has huge implications for BPA's 
customers, most of which are publicly owned utilities serving rural 
communities continuing to struggle with high unemployment. Statewide, 
Oregon's unemployment remains at 7.5 percent, making it the highest in 
the nation.
    As we examine what went so wrong in the West Coast electricity 
market, we must not forget that the flawed way in which California 
implemented electricity restructuring also contributed to the broken 
market. They forced the investor-owned utilities to sell much of their 
generation assets, forced them to buy power only in the day-ahead 
market, and artificially lowered consumers' power rates. This meant 
that there were no long-term contracts to minimize risk of price 
volatility, and when shortages began there were no price incentives for 
consumers to conserve.
    It is going to take years for the courts to sort much of this 
out.In the meantime, we must examine the extent to which market 
manipulation occurred, and what the appropriate legislative response is 
in order to protect consumers who rely on this basic commodity. I look 
forward to hearing from the witnesses today.
                                 ______
                                 
   Prepared Statement of Hon. Larry E. Craig, U.S. Senator From Idaho
    The words I am about to speak are not the first, and will certainly 
not be the last, on the electricity crisis last year that so devastated 
California and many other western states, including my own. But I hope 
my words will move us closer to solutions, and not further away. And I 
am confident they will, for my premise for speaking is that we must pay 
closer attention to facts, and move away from myth and distorting 
rhetoric.
    There has been much too much distortion and rhetoric in this 
debate. In part, this is understandable. Like other serious and 
complicated problems that face us, the western electricity crisis was 
laced with emotion and partisanship. But we must try to put both aside, 
for the sake of our constituents and our country. We must try to be 
calm, and truthful and wise.
    So let us try to focus on the facts.
    Allow me to begin with an observation.
    I believe that reasonable people may, in good faith, reach 
differing conclusions on the question of whether the prices charged for 
wholesale electricity in California was ``just and reasonable'' under 
the law. It is worth noting that a dramatic rise in rates does not, by 
itself, make those rates ``unjust and unreasonable.''
    To a certain extent, justness and reasonableness is a judgment 
call. We in Congress have empowered FERC with the authority and 
responsibility to make that judgment call. Saying that FERC went AWOL 
because it didn't order refunds automatically is unfair.
    When FERC makes its findings on whether rates are unjust and 
unreasonable, it gives the companies involved a chance to rebut the 
Commission's conclusions. In America, we allow the accused the means 
and the opportunity to defend themselves. Under the Federal Power Act, 
when the accused fail to justify their conduct, FERC orders refunds.
    We do not want knee jerk, shot-gun justice from any tribunal, let 
alone FERC when it needs to be very careful not to scare off suppliers 
with false refund orders, while not permitting overcharging to 
consumers.
    So let's allow the debate to rage on as to whether that agency has 
exercised its judgment on just and reasonable rates wisely and fairly.
    This is a legitimate topic for debate. So be it.
    But there is another debate that I believe has not proven to be 
legitimate in all respects.Indeed, it is a debate that has been marred 
by a notable lack of reason and good faith.
    The debate of which I speak concerns the causes of the high prices 
that have been charged for wholesale electricity in California. In this 
debate many have, for their own political purposes, engaged in 
distortions and outright lies.
    Some people said last year during the crisis and continue to 
suggest today that there was no lack of electricity supply in the West. 
They say there were and are plenty of power plants and transmission 
lines to meet all of the demand for electricity. They say that a small 
group of companies, based mainly in Texas, have conspired to withhold 
electricity from the market in order to drive prices up to 
unreasonable, indeed, unconscionable, levels.
    Let's talk about the facts--not just the ones we like, but the ones 
we may not like to acknowledge.
    Since 1990 there has been a 26% increase in the demand for 
electricity in the State of California. During that time, not one major 
power plant was constructed--to repeat, not one. Even the Governor of 
California, Gray Davis, who has led the misdirected and politically 
inspired assault on the independent generators in the state, has 
repeatedly alluded to the fact that California has been derelict in not 
adding new generation.
    Even Gray Davis, in a prime time speech delivered last spring, said 
that the major problem facing the state in this crisis was the lack of 
available generating capacity.
    Despite a chronic shortfall in electric capacity to meet peak 
demands, Californians have, until last year, been able to get by 
without blackouts and price spikes. They have covered their shortfall 
by importing electricity--lots of it--from neighboring states, 
especially hydropower from the Pacific Northwest.
    But last year, the Pacific Northwest suffered from its worst 
drought in decades. Reservoir levels were at their lowest since the 
1930's.
    In addition, the economic growth in the Pacific Northwest, Arizona 
and Nevada caused power plants in these areas to dedicate more of their 
output to their own localities and less to California. To be specific, 
peak summer demand in the west has increased at an annual average rate 
of 8% in the Arizona/New Mexico/Nevada region, 3.2% for California, 
2.8% for the Rockies, and 2.4% for the Pacific Northwest. Yet, from 
1991 to 1998, the growth rate of new generation capacity additions was 
less than 1%.
    All of these factors have resulted in a stark exposure of the 
electricity supply deficiency within California. California had to 
subsist off of the kindness of its neighbors, and those neighbors were 
not in a position to be so kind.
    Another important part of the reality in California has been the 
high price of natural gas and of securing necessary emission credits. 
The costs of both have soared through the roof. This has created 
enormous upward pressure on the price of electricity generated by these 
old gas-fired power plants.
    A shortage of electric generating capacity, a region-wide drought 
causing a reduction in imported power, high natural gas and emission 
credits costs--these are the fundamental causes of the California 
electricity crisis. Any one of these factors would have caused a 
problem. Together they have dealt a devastating blow to the electricity 
marketplace.
    This is the big picture. It is the true picture.
    Leave it to politicians running scared and looking for scapegoats 
to obfuscate this otherwise obvious reality.
    Put simply and bluntly, this reality does not suit the political 
needs of Governor Davis and his compatriots.
    And so, again, and again, and again, conspiracy theorists accuse 
the independent generators of withholding electricity and of other 
forms of market manipulation.
    Now we have FERC's publication of a law firm's summary of Enron's 
trading strategies in California. These memos use very colorful 
language. Some are saying these memos ``prove market manipulation'' 
and, therefore, provide the proverbial ``smoking gun.''
    Perhaps, but are we certain? First, let me be clear--I am not here 
as a defender of Enron. There are plenty of legal investigations into 
the legality of Enrons activities and if the results of any one of them 
results in criminal convictions, I, for one, will not be saddened.
    However, we here on the Energy Committee are not in the business of 
criminal investigations. We are in the business of developing sound 
public policy. For us to competently assess the public policy 
implications of these recently published memos requires some knowledge 
of the California energy markets and economic markets in general.
    A very recent memo prepared by Jonathan Falk, Vice President of the 
National Economic Research Associates, analyzed these ``smoking gun'' 
memos and found, on balance, ``there is no evidence that Enron's 
activities in California had any deleterious impact.'' He also provides 
some instructive advice for public policymakers:

          It will require large amounts of data and sophisticated 
        analysis to calculate a net effect, but the assumption of a net 
        adverse effect through a combination of outrage and succumbing 
        to the public relations effect of the names of strategies is 
        unworthy of serious consideration in the making of public 
        policy.''

    So we have our work cut-out for ourselves, Mr. Chairman. I still 
strongly suspect that California's problem is a fundamental problem of 
supply and demand. What do we need to do to solve it?
    Obviously, more power plants and transmission lines need to be 
constructed. And, the fact of the matter is, this is happening, at 
least with respect to power plants.
    In addition, the crisis has spurred California to accelerate its 
permitting processes, and the Governor is publicly touting the addition 
of 5000 MW of new capacity and another 5000 MW sometime this year.
    One wonders, if prices had been reduced by government intervention 
to the extent demanded by the conspiracy theorists--

   Would all or any of this investment in new power plants have 
        taken place?
   Would the Governor of California have acted to expedite the 
        permitting process?
   Would Gray Davis, a committed environmentalist, have issued 
        the order last year that waived air emissions restrictions and 
        penalties during power supply emergencies?

    I doubt it.
    What this robust new construction market evidences is the timeless 
law of supply and demand at work. Prices have been high mainly because 
demand has outpaced supply. These high prices have in turn stimulated 
development of additional supply, as I stated above.
    It would be high irony, not to mention stupidity, to eradicate the 
market signals that have caused this investment to take place. Yet, 
that is exactly what the conspiracy theorists seek to accomplish.

   They want to cap prices and thereby discourage further 
        investment.
   They want to kill the goose just as it is laying the golden 
        egg.

    Another bit of evidence that the market works, and is working in 
California is the recent downturn in market prices and absence of 
blackouts.Of significance has been the return to service of several 
large generating facilities, including some nuclear plants, a reduction 
in consumption, and mild weather.
    In other words, California has seen an increase in supply and a 
reduction in demand and that has lowered the wholesale price. Imagine 
that!
    Finally, I want to say a few words about a much-maligned agency--
FERC.
    FERC has come in for almost as much vilification as the generators. 
The conspiracy theorists argue that FERC has done next to nothing to 
police and restrain the wholesale electricity market. Governor Davis 
claims to have everything under control, except for the runaway prices 
in the wholesale market, and he blames FERC for allowing this situation 
to persist.
    As I stated earlier, I believe that reasonable minds may differ in 
evaluating FERC's actions. Given the enormity, complexity and 
difficulty of the issues presented by the crisis in California, it 
would almost be asking too much to expect the agency to have made every 
decision correctly.
    Further, it is important to note that many of the key actions that 
need to be taken to alleviate the shortage and price crisis are actions 
that only the state, not the FERC, can take.

   FERC does not license new power plants.
   FERC does not license new transmission lines.
   FERC does not regulate retail rates and thus cannot impose 
        rates that reflect the true cost of electricity and induce 
        conservation by consumers.

    Finally, while I am on the topic of the limits of FERC's authority, 
I should mention that FERC doesn't even have the legal power to 
regulate all sellers of wholesale electricity. FERC doesn't regulate 
sales by municipalities, such as the City of Los Angeles, which is a 
major participant in the wholesale electricity market in California.
    Nor does FERC regulate sales by Canadian companies, who sell 
significant amounts of electricity in California and the rest of the 
West.
    And FERC has only limited ability to regulate the rates charged by 
the Bonneville Power Administration--so long as the rates set by BPA 
recover all of that agency's costs, FERC must approve them.
    But it is a horrible distortion to say that FERC has not done 
anything to help out in California. To the contrary, FERC has taken 
many steps which, in conjunction with actions at the state level, will 
put the market back on the path to normalcy.
    Perhaps the most important step was taken by the agency in December 
2000, when FERC ordered the California utilities to stop selling to, 
and buying from, the spot market power exchange.
    You see, under the California restructuring plan, the local 
utilities, which still control over 25,000 MW of supply in the state, 
were required to sell and then repurchase, on a spot market basis, all 
of their own power resources.
    FERC put an end to this. As a result, the spot market--where the 
highest and most volatile prices are found--is now much smaller than it 
was over a year ago.
    Further, FERC has encouraged the state to procure more of its power 
needs in the long-term bilateral contract market. This will stabilize 
and lower prices going forward.
    Every expert commentator, and many who are not experts, have 
identified the state's own decision to rely almost exclusively upon the 
spot market to serve the electric load, and to forsake long-term 
contracting and hedging, as the key structural mistake made in 
California's restructuring. FERC has done everything in its power to 
rectify that mistake.
    FERC has taken other actions.
    FERC has authorized the alternative power producers--the so-called 
Qualifying Facilities--that have contracts with the California 
utilities, to sell their power that is beyond their contractual 
commitments to the utilities directly to the open market.
    FERC instituted a tough, price mitigation plan for purchases of 
power by the California ISO in the real-time market. And FERC is 
investigating spot sales transactions both within California and 
throughout the entire western interconnection for compliance with the 
just and reasonable standard of the Federal Power Act.
    Finally, FERC is moving aggressively to investigate the cause of 
sky-high natural gas prices, the fuel source for much of the power 
generation in California.
    I could go on and on about FERC activities. But the point is that 
the agency is working at a frantic pace to investigate the charges of 
market abuse, order refunds where appropriate, and institute structural 
reforms.And I would be remiss if I did not also point out that FERC has 
been sued numerous times by various parties in California over its 
decisions and has yet to be reversed by a court, even a California-
based court.
    It is too bad that Governor Davis and others haven't spent more 
time working with FERC and the generators, and less time speaking to 
the press about villains and conspiracies.
    I will close by calling upon my colleagues in the United States 
Senate to join with me in working toward constructive solutions based 
upon the facts, not the myth, of the California electricity crisis. 
Reasonable men and women, working in good faith, can solve this crisis.
    It is not too late to begin.

    Senator Smith. I will paraphrase, in the interest of time, 
an experience I had in the midst of the California-west coast 
energy crisis. I was talking to some people in an energy-
sensitive business, and they indicated to me dismay that power 
prices could go up 1,000 percent but their products never could 
and wondered why, in a highly regulated industry, that that 
would be possible.
    Pat, thank you in your capacity at FERC for responding to 
the repeated call that Senator Feinstein and I made to bring 
some stability into west coast markets by putting on some price 
caps that frankly are counter to my ideological makeup, but as 
a free-marketer, I believe in free markets. I do not believe in 
rigged or broken markets. I think what these memos indicate is 
that is what we had and that is why Senator Feinstein and I, on 
a bipartisan basis, were screaming that something be done 
because people's lives were being dramatically and negatively 
impacted.
    And I want to thank a couple of Oregonians who are here who 
are on the witness list because I think it took them some 
courage, Christian Yoder and Stephen Hall, for being willing to 
put their names on a very blunt memo. I can imagine that 
Christian faced angering his employer and Stephen risked losing 
a client. But as we talk about them, we need to remember that 
the focus is on those who broke the law, not on those who 
reported the breaking of that law. So, I want to thank them for 
the courage of being here and for their honesty.
    But clearly, terms like ``fat boy,'' ``death star,'' and 
``get shorty'' ought to involve Hollywood productions, not 
power company productions.
    So, I want to thank our witnesses for being here, and I had 
a particular question for Pat. As you know, Mr. Wood, the 
current price cap for the West Coast energy market expires on 
September 30 of this year, and I am concerned about what we 
will do after that. I am specifically concerned about a very 
volatile market returning. I am concerned about historically 
high rates in the Northwest, even with those caps in place. So, 
I am wondering if you can predict how the FERC is going to 
ensure that just and reasonable pricing remain in effect after 
2002.
    Mr. Wood. Senator Smith, the CalISO filed on May 1 a 
request to continue the market mitigation that we adopted last 
June--and that was their preference--but in lieu of that, to 
consider some other measures that had been discussed with their 
market oversight committee and others.
    The implications of those for States outside of California 
are unknown quite frankly. We have not, to my knowledge, heard 
from people other than the CalISO about what happens when that 
order expires. I fully expect that utility commissions in your 
State and others that are interested, as well as market 
participants, will file in the California filing and discuss 
with us the pros and cons of that being West-wide as opposed to 
just California only.
    That is an open proceeding. It just got noticed in the 
first part of this month. I believe there is a 30-day comment 
cycle. We are committed to acting on that very quickly so that 
if there are any changes to the regime, that they be announced 
early enough so people can adapt to them.
    As I have said publicly, before the filing was even made, 
to people from the Governor of California on down to my 
colleagues, I fully expect we are not going to go from the 
regime we had to nothing. I mean, we do not have that even in 
the well-functioning markets over on this half of the 
continent. So, I would expect--and I cannot project because I 
have got my colleagues here. We are going to look at all the 
pleadings from all the parties and make the best judgment we 
can based on the record. But that is what I expect that we will 
get from people both in and outside of California, a lot of 
feedback on that.
    We will put the appropriate regime in place to make sure 
that just and reasonable rates continue to happen. We are 
committed. That is why we took the steps. I mean, I personally 
did. I am like you. That was the very first vote I had to make 
as a member of this Commission, and it was pretty different 
than the philosophy I have had to live under. But at the end of 
the day we have got to do what is appropriate for the 
situation. And what was going on there was an out-of-control 
marketplace that needed, quite frankly, a cooling off period. I 
think that has happened.
    I have attached to my testimony a number of plans. I do 
note that probably uniquely in Oregon and in Wyoming, the only 
two States out here that do not have plant cancellations or 
plants on hold, but do have new plants that have been built and 
are operational now in the past 2 years. So, something is going 
right in, interestingly enough, your two States, that people 
are building plants there and not canceling them.
    But I think it is important to maintain the infrastructure 
investment that we need so badly. It is not just a new plant. 
It is a new plant to keep up with the fact the old plant is 
finally closing down because it is so old. The economy coming 
back to life, load growth increasing. So, there are needs that 
never go away for new infrastructure, and that is an important 
part that we do not talk about a lot. But just and reasonable 
rates also need to be reasonable enough for investors to come 
in and make the commitment to a certain region of the country.
    Senator Smith. Well, I want to thank you again for what you 
did. I would point out that from April 2001 and on, Oregon was 
losing roughly 3,100 jobs a month. Senator Wyden and I 
represent a State that lamentably leads the Nation in 
unemployment right now. I think a lot of it can be tied to this 
period of time when many businesses, small businesses, 
especially were pushed over the brink and into bankruptcy and a 
lot of people lost a paycheck.
    I would also like to thank your colleagues, Chairman Wood, 
Mr. Massey, Ms. Brownell, and Ms. Breathitt, who voted with you 
to do what you had to do. Again, I thank you because I think we 
showed that we have a Federal law in place for a good reason.
    I would like to make note of the fact that you are from 
Texas. Is that correct?
    Mr. Wood. Yes, sir.
    Senator Smith. There is a lot of media commentary about 
Texas pirates, and I think President Bush took a lot of heat at 
the expense of some of these editorialists. But you are his 
nominee. You are his Chairman and you acted. I want to, for the 
record, say that all Texans are not pirates. We have got one in 
front of us and President Bush is another one. I thank you and 
him for acting and using Federal law to bring stability to a 
very reckless situation on the West Coast.
    Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Feinstein.
    Senator Feinstein. Thanks very much, Mr. Chairman.
    Mr. Chairman, it has been about 2 years now since the 
Western power crisis, and I think all of us have had a very 
good opportunity to observe what has been happening. I want 
particularly to commend Mr. Wood because I think he is really 
leading the Commission on a new path and that that path is 
really fully carrying out the Federal responsibilities of the 
Power Act. However, I have got some real questions as to 
whether those are adequate.
    I have distributed to the committee--and I know Mr. Wood 
has a copy of this and I know Mr. Winter has just been given a 
copy of it--a document entitled ``California Electricity 
Markets: Issues for Examination.'' What is interesting is that 
this document is dated August 17, 2000. The document comes from 
one of California's investor-owned utilities, namely Southern 
California Edison. It is divided into two parts.
    The first part is ``Observed Abuses,'' and they catalog 
``get shorty,'' ``death wish,'' ``DEC,'' ``INC,'' ``ricochet.'' 
So, it is no secret that this has been going on. Clearly this 
was given to the Commission on August 17, 2000.
    It secondly has in it a section, ``Arenas for 
Investigation,'' and it gives the Commission an outline of 
areas that, at least in the view of Southern California Edison, 
deserve investigation.
    Now, we heard Mr. Winter speak about market power. It is 
going to be one thing if market power includes gaming and 
manipulation as acceptable practices under Federal law. So, 
``get shorty'' and ``death wish'' and ``INC'' and shutting down 
a third of the power in the State to make money from the 
shutdown under the auspices of maintenance is something that we 
are going to permit to happen on a regular basis.
    I have asked the Attorney General to investigate not only 
Enron, but the whole industry for criminal illegality. It seems 
to me that if the Federal Power Act does not recognize these 
practices as illegal under Federal law, we ought to make them 
illegal under Federal law. If FERC does not have the power to 
adequately regulate, we either have to give FERC the power to 
adequately regulate or, in my view, forget deregulation and 
reregulate.
    I frankly am shocked by these abuses. I do not know any 
other sector of the economy that this blatantly for years could 
get away with this kind of what Mr. Winter I think rather 
loosely called market power and not have citizens get up in 
arms all across this great country, but we find, under the 
guise of market power, give false information. We find under 
the guise of market power it is okay to manipulate the cap. We 
find under market power that it is all right to say you are 
relieving congestion and do nothing to relieve that congestion 
and, more fundamentally, get paid for it. As I said before, in 
my book that is outright fraud, and if Federal law does not 
mark that down as outright fraud, we ought to.
    Now I want to ask a couple of questions. If you go to the 
bottom of page 1 of the paper, it speaks to unscheduled/
scheduled maintenance of reliability must-run units. This was 
brought to FERC's attention again in August 2000. ``Units under 
contract to relieve local reliability problems have 
simultaneous outages, both scheduled and unscheduled. The ISO 
must find another unit to resolve the problem; often''--
strangely enough--that is my addition--``there is only one 
owner to solve the problem. This other units plays the INC or 
DEC game and receives payments at the cap.''
    Now, Mr. Winter, I spoke to you about this awhile back in 
December 2000 precisely. We discussed plant outages. I think at 
one point you informed me that 15,000 megawatts were off line 
at one time because of some sort of needed maintenance. This at 
the time was a third of the generation of the State, and it 
occurred at a time when California was in the middle of a daily 
stage 2 and stage 3 energy emergency.
    FERC investigated back in February 2001, and as I 
understood their report, they found nothing wrong. In June 
2001, the GAO did a report on the FERC investigation, finding 
simply that FERC did a poor investigatory job.
    What I would like to ask Mr. Winter is, is it normal to 
have 15,000 megawatts off line at one time in California for 
maintenance?
    Mr. Winter. No. That is a rather high figure, although I 
will tell you today, we have around 15,000 megawatts of power 
shut down in California. Approximately 2,500 to 3,000 of that 
is forced outage. Another 3,000 to 4,000 is planned 
maintenance, and the remainder of that is what we are calling 
economic shutdown because we are blessed right now with having 
heavy imports from the Northwest and from Arizona.
    When we ran into this problem, one of the things that we 
did not, at the ISO, have the authority to do was mandate 
schedules. Since that time, FERC has given us that authority so 
that we can now demand that plants go out at different times.
    Senator Feinstein. So, these outages are planned.
    Mr. Winter. About 6,000 of them are. Then you have forced 
outages; a unit is running and it breaks, so it comes out, 
which would another 3,000 megawatts normally in our system that 
occurs.
    Senator Feinstein. Were the outages of 15,000 planned at 
the time I spoke to you?
    Mr. Winter. No, they were not.
    I think we have to look back at what those reasons were. 
There are some valid and there are some invalid. I think when 
we talked, I pointed out that a lot of people were ``not 
getting paid'' at that time and so they were taking units off. 
Now, if they claimed they were maintenance, we would follow up 
and see whether or not they were doing maintenance.
    But there was the financial area. Also we had the 
qualifying facilities who were not being paid, and so they were 
choosing not to run.
    And then a more realistic figure is we had a lot of those 
units off for maintenance for two reasons. No. 1, there was a 
summer that--when I was in San Diego, I used to run two or 
three of those units maybe 50 hours out of the year because 
they were 1954 units. Well, during that summer of 2000, we 
literally had all of those units running all day long, and when 
you do that to a 50-year-old unit, you have to take maintenance 
on it or it is going to go on forced outage.
    Senator Feinstein. But what I am trying to point out is in 
this from Southern California Edison--and I think some of these 
units were units that were directly purchased when Southern 
California Edison was required to divest, and then they went 
out. And what Southern California Edison was pointing out to 
FERC back in December is that this was a gaming technique. Now, 
you are the ISO and you are excusing it.
    Mr. Winter. Well, let me go on. I am giving you reasons for 
it and then I will get back to why I am excusing it or not 
excusing it.
    The other reason that we had so many units out was the 
buyers of those units, the IOU's, had committed to an air 
quality program and that meant that they had to do retrofits on 
these units to get them in compliance with the air quality 
district.
    Senator Feinstein. Even if it meant going into a stage 3 
emergency and a blackout?
    Mr. Winter. Well, the problem was that some of those take 6 
months, and so they would have started early in the year before 
we knew we were in that problem and then find out that we did 
not have enough.
    Now, having said all of that and appearing that I am 
excusing the high level, let me also say that we were very 
aware of the game where the generator would take an RMR unit 
out and then replace it with another unit that was in the 
market and they could get whatever price the market had to be 
paying. I do not remember, but I thought FERC did fine some 
people for having taken that practice and maybe Pat will 
remember. But we brought that to their attention and I thought 
they did take some action against the generator who was doing 
that. We certainly made it an activity that we monitored and 
asked them not to do it. And if the unit did go down, we sent 
an inspector down there to make sure the unit was legitimately 
out.
    Senator Feinstein. Thank you.
    Mr. Wood, the question that is raised--because as you know, 
Enron was not really a generator in California, but Dynegy and 
Reliant and others were. I gather in an article in the Houston 
Chronicle this morning, Reliant admits to at least two of the 
items on the Enron list. I think one can assume that these 
practices were much more generalized than just with Enron and 
most probably were utilized--I say most probably--by other 
energy generators in California at this time.
    In your opinion, should practices such as those depicted by 
``fat boy,'' ``death wish,'' ``ricochet,'' ``get shorty,'' be 
made specifically illegal?
    Mr. Wood. In other words, if they are not already?
    Senator Feinstein. If they are not already, should they be 
illegal?
    Mr. Wood. I think so, yes. I think that is taking advantage 
of a system to the detriment of others. I will just leave it at 
that.
    Senator Feinstein. Well, you give me hope. I thank you for 
that.
    The Chairman. Senator Feinstein, should we go and do 
another round here?
    Senator Feinstein. Yes, thank you, Mr. Chairman.
    The Chairman. Senator Thomas.
    Senator Thomas. Thank you, Mr. Chairman.
    Sorry I missed part of your testimony. We had a little vote 
and some other things.
    Mr. Wood, do you think FERC has the tools to get to the 
bottom of this controversy that continues to go on?
    Mr. Wood. I do. I would like to point out one issue of 
interest because this has been such a huge issue across the 
entire West. As I have admitted to you all before, we have a 
ways to go developing our skill set internally. It is hard to 
find people on the outside who can help us manage this mountain 
of data who were not already conflicted out. We have tried to 
obtain the assistance of some people who have been involved in 
various aspects of the California proceeding and have, quite 
honestly, gotten some opposition.
    Senator Thomas. Do you think you have the tools under the 
law?
    Mr. Wood. We have the tools under the law with the changes 
that came out of the Senate electricity title. If those are 
enacted, yes, sir, I think that is definitely an improvement.
    Senator Thomas. ISO data suggests that Enron was a 
relatively small player. So, even if all these allegations are 
true, what kind of impact do you think Enron had on this 
California market?
    Mr. Wood. We will have to see as we are going through the 
investigation, Senator. That would be certainly kind of a 
fallout item. This could have happened. Okay. Did it happen? 
The data can probably pretty much tell you yes or no. And then 
adding that up is something I hope we can have ready for the 
report to the committee this summer.
    Senator Thomas. Do you have quite a bit more work to do in 
terms of putting it all together?
    Mr. Wood. Yes, sir. We are going to need every day we can 
get.
    Senator Thomas. What in your opinion is California's 
relationship to the Western energy market? California is kind 
of an electric island, is it not?
    Mr. Wood. Oh, I do not think it can be an island. I think 
when they import 20 to 25 percent of their summer peak from 
outside the State, they are----
    Senator Thomas. They are an island, depending on somewhere 
else for the source. And they have not been moving very fast to 
get something done.
    If California had used a standard design like locational 
marginal pricing, would that have reduced the opportunity for 
scheming on these prices?
    Mr. Wood. I think reduced, yes. I think I would agree with 
Terry's assessment, and it is one I did mention in my 
testimony, that if you fix things structurally, you are in a 
lot better shape, but you still do need somebody walking the 
beat to make sure that those get done. To their credit, they 
have got a pretty good shop out there that is smart and gets 
it. We need to make sure they have the right tools. That is 
something we are working with them on.
    Senator Thomas. Mr. Winter, do you think the strategies 
that Enron has talked about and alleged are illegal under your 
rules, under your ISO rules?
    Mr. Winter. Again, I am not an attorney, but certainly 
falsifying information to the ISO to me is an unacceptable 
practice.
    Senator Thomas. Is it illegal?
    Mr. Winter. I am not an attorney. I am afraid I cannot go 
there. I hope it is.
    Senator Thomas. Well, my point is why did you not do 
something about it if you knew that was the case.
    What was the impact of utilities' under-scheduling on the 
functioning of your market?
    Mr. Winter. Well, on the market, of course, it had a 
tendency to end up with us having to buy in real time, which 
theoretically would be the most expensive market you could be 
in because it is done in 10-minute intervals. From an operating 
standpoint, it put us in a horrible position because then we 
were out scrambling looking for between 20 and 25 percent of 
the needs of the State in literally hours before we needed to 
use it.
    Senator Thomas. Are you not responsible for the rules in 
terms of the ISO?
    Mr. Winter. We certainly are. And we filed and made the 
under-scheduling issue front and center, and FERC gave us a 
decision that people did have to schedule in more.
    On the other hand, when we tried to enact the penalties for 
doing that, what we found was that we had several bankrupt or 
near bankrupt utilities that could not afford to go out and buy 
the power. So, you could fine the utilities for not bidding 
their full load in, but it did not do much good because, in 
fact, they could not pay for what they were getting.
    Senator Thomas. Well, I guess the question that arises is 
somebody is in charge. That is why you have independent 
operators.
    Mr. Winter. Right.
    Senator Thomas. And when something is going wrong, it is 
your responsibility to either do something about it or go to 
somebody who can.
    Mr. Winter. Yes.
    Senator Thomas. And it seems to me there was quite a lag 
between when you knew something and when something happened.
    Mr. Winter. Yes, I guess I would disagree respectfully with 
that. When we became aware of under-scheduling, we filed asking 
for under-scheduling penalties.
    Senator Thomas. Filed with whom?
    Mr. Winter. With FERC.
    Senator Thomas. And how long did that take to get a 
reaction?
    Mr. Winter. Well, I cannot remember the exact date. I could 
go through the list of filings we had, but I would assume we 
would have gotten it in 60 to 90 days.
    Senator Thomas. I guess when you look at this, here are 
some things that did not go well. Some are allegedly illegal, 
certainly inappropriate. But over here you have an apparatus 
that is supposed to be operating there, both the State 
functioning and your functioning, and it did not seem like 
there was much going on in terms of taking care of yourselves. 
First of all, you changed the rules. Right?
    Mr. Winter. Right.
    Senator Thomas. You took the prices off and so on, which is 
fine. But when you did that, you had a responsibility to see 
that it worked properly.
    Mr. Winter. That is correct.
    Senator Thomas. You mentioned apparently some legal 
authority for the ISO. We have in the bill some legal authority 
to the Reliability Group. Would you imagine that they should 
have legal authority as you have suggested?
    Mr. Winter. Yes. I think that they have to to get the 
reliability and pass on the requirements to ensure that we have 
sufficient power to run the system. It is an absolute 
requirement. Now, whether they get that through FERC or 
directly to the Reliability Council is----
    Senator Thomas. I know this is hard, but if you both could 
just--what do you think should be the outcome of these 
hearings? What should happen as a result of these hearings?
    Mr. Wood. The committee's hearings or the FERC's 
investigations?
    Senator Thomas. Our hearings today when we are looking at 
the problem, what caused it, what should be done about it. Just 
in general, short, what do you think ought to happen?
    Mr. Wood. Quite frankly, I think it already has. I mean, by 
calling the hearings, you have sent certainly to us--and we 
knew it was important to you all, but you sent to the rest of 
the world that this is not just another administrative affair. 
This is a big deal and you want it fixed.
    Senator Thomas. So, you do not need anything done 
particularly.
    Mr. Wood. I just would hope that the bill that I know you 
all worked so hard to get out has some supportive language for 
efforts to give markets some discipline, and I would hope that 
that ends up on President Bush's desk as soon as possible.
    Senator Thomas. Mr. Winter.
    Mr. Winter. I, this morning, went over all the key 
components of the Senate bill. I think that they cover most of 
the things that I would hope this group would do probably from 
an operator's standpoint. I certainly want visibility into the 
participants that are coming into the market that I do not now 
have, be that either municipalities or out-of-State entities. 
It is kind of hard to run the market when you do not know what 
outside is happening. Inside I know because I have telemetry on 
all the units. I know exactly what their status is, what they 
are producing.
    Senator Thomas. Can you not get some information before 
they get on your system?
    Mr. Winter. Pardon?
    Senator Thomas. Can you not get some information as a 
condition of getting on the system?
    Mr. Winter. Yes, on in-State units I can. Out-of-State, I 
am just doing a schedule with an adjacent control area telling 
me here is what they are providing in megawatts.
    Senator Thomas. Sounds good, Mr. Chairman, in terms of the 
energy bill.
    The Chairman. All right. We hope so.
    Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman.
    Mr. Wood, between this morning's Commerce session and this 
afternoon's Energy hearing, I am now in my 6th hour of hearing 
testimony on this. I will tell you what I have learned today 
seems pretty gross, even by Enron's standards. If you look, for 
example, at these notes, these handwritten notes--you do not 
need to look. I am just going to summarize a couple of them 
because I want to give you some background--the handwritten 
notes surrounding the preparation of the December 6 memo, it 
says, for example, ``Portland deals, remove the notes, 
exclamation point,'' which sure looks like a coverup to me.
    In another area, the handwritten notes say, ``no one can 
prove, given the complexity of our portfolio.'' These are what 
the handwritten notes are about.
    You and I have already talked about what the head of 
Enron's litigation unit told me earlier. He said that they sold 
non-firm, interruptable BPA power as firm power, and you said--
and I will quote you here--is it looks like a fraud and you are 
going to look into it.
    So, this has been a pretty gross day in my view, even by 
Enron's standards. And I think what I want to ask now is some 
questions about really where we go from here.
    For example, we have been talking about the role of the 
lawyers on all of these matters surrounding the December 6 
memo, but I want to know where we are with respect to your 
investigating the Enron traders themselves. It sure looks like 
Tim Belden was directing these Enron schemes to manipulate the 
markets. What are you doing as of now to get at the records of 
the traders on these issues?
    Mr. Wood. Because this is a pending investigation and we 
are coordinating with other investigation agencies and 
sometimes talking to a lot of the same people, let me demur on 
the specifics of what they are doing. Let me just confirm to 
you that it is a comprehensive investigation, and probably 
everything you are reading about is something that either we 
have looked at or will look at because we are hearing about it 
through that means. But let me, if I could, sir, hold on and 
answer that question when we do provide the full report and 
work it with the other agencies that are investigating.
    Senator Wyden. All right.
    The law firm in Portland has repeatedly said that they 
advised Enron that all of the practices or the vast majority of 
the ones that they have been describing were deceptive. They 
showed them copies of criminal statutes that the practices 
violated. Has FERC referred evidence to the Department of 
Justice at this point that Enron's practices may have violated 
criminal laws?
    Mr. Wood. I think I can answer that question, and the 
answer at this point is no.
    Senator Wyden. There has been no referral as of now.
    Are any enforcement proceedings underway against Enron or 
any of its traders that were described in the various schemes 
as of now?
    Mr. Wood. That is what I expect could potentially follow. 
We have got here the road map. What we need to add to the road 
map is the data that we have got from the markets to ascertain 
did it happen, how much, how often, who was involved, what 
days, what utilities. So, at this point that process is not 
complete, and so enforcement proceedings have not begun as to 
specific counts.
    Senator Wyden. Do you dispute that what Enron was doing to 
manipulate the California market had very painful consequences 
for the Pacific Northwest?
    Mr. Wood. Do I----
    Senator Wyden. Yes. They manipulated the California market. 
I think it was a west coast protection racket. Given the fact 
that we basically heard about fraud this morning, I would like 
you to just give me your opinion.
    Mr. Wood. I think the interconnectivity of the markets, as 
we have recognized when I came in--we really had to put the 
scheme over the whole West in order to really capture all the 
activity.
    Senator Wyden. But you do not dispute then that what Enron 
was doing to manipulate the California market had very painful 
consequences for my constituents in the Northwest.
    Mr. Wood. Again, I would like to make sure that we 
ascertain exactly the extent of this activity here. But if it 
is substantial, certainly it affects not just California.
    Senator Wyden. Our price spikes--and I used charts on this 
this morning--were just has high and in some case higher than 
in California. In fact, I will bring that chart out again. How 
can you conclude otherwise than that the manipulation in 
California hammered the Northwest?
    Mr. Wood. I have not concluded that, sir. But what I think 
is important is this subset of activity that is laid out by the 
memos--I have not come to the conclusion--and I do not know 
that anybody has--that that activity alone is what is driving 
that curve. In fact, I just heard my fellow witness here 
indicate that there are other exercises of market power other 
than the manipulation of this type that may explain some of 
that, and I think that is just a fair question. I think they 
are both behaviors we do not want to have happen. But your 
question was specifically as to what the manipulation that 
Enron may have done had to do with that curve, and I think the 
linkage we will have to keep working on.
    Senator Wyden. This morning, I used a chart prepared by a 
Portland Energy Consultant, Robert McCullough, that compares 
actual prices paid by Northwest utilities with the reported 
prices at the most important pricing location for power 
contracts in the Pacific Northwest. That is the Dow Jones Mid-
Columbia Index. What the data shows is that the reported prices 
were consistently higher than the prices Northwest utilities 
actually paid. And it just seems to me that the recent 
admissions by energy traders that they engaged in these phantom 
swaps of power and other sham transactions that drove up 
prices, is a likely explanation for the disparity between 
reported prices in the Northwest and actual prices utilities 
paid.
    Tell me your assessment of the analysis that I just gave. 
Is there anything you would disagree with on the basis of what 
I just told you?
    Mr. Wood. Again, to have a fact and then have that 
conclusion come from it that that fact alone is what drove that 
spread, again--this is not data we are keeping non-public, but 
through our public requests of the constructors of these public 
indices and through all the underlying market data, making the 
same comparisons that Mr. McCullough has and really following 
that through, that is the kind of activity that the 
investigation team is doing right now. Again, I would like to 
answer that question more fully when we have looked through all 
that correlation between reported data going into the index and 
then what went into the market trades.
    Senator Wyden. You keep looking, but this chart that Mr. 
McCullough did for me shows that it does not pass the smell 
test to argue anything other than market manipulation. I have 
shown you two charts.
    Let us review what happened today. Two charts I have shown 
you just in the last minute or so. You had the head of Enron's 
litigation unit essentially admitting to, at best, 
misrepresentation and what you said looks like fraud. I would 
sure like to have somebody aggressive there say, well, Senator 
Wyden, at least it points to market manipulation rather than 
say, well, we are kind of still looking through all this 
because I do not see how the evidence can point to anything 
other than market manipulation. And what sure looks like fraud 
to me pounded the smithereens out of my constituents. And I 
want to see somebody like yourself go after it and go after it 
aggressively.
    Mr. Wood. Sir, please know that we are. The only dispute I 
had is can you attribute all that spike to one particular type 
of behavior. I think we will get to the bottom of what caused 
those spikes and report back to the committee. So, please do 
not misread my answer.
    Senator Wyden. We want to know about the charts that I just 
showed you because I do not think it passes, as I say, the 
smell test, as anything other than market manipulation? And 
this is a huge deal. I mean, just what Mr. Sanders said today 
with respect to Enron characterizing non-firm power as firm 
power, which at best is misrepresentation, and you said it 
looks like fraud.
    Do you know what that means for Northwest ratepayers? If 
Bonneville Power can void the overpriced contracts with Enron 
because of Enron's market manipulation, our ratepayers, the 
people that Maria Cantwell and Gordon Smith and I represent, 
could save more than $220 million. This is a big deal. We need 
you to go after it aggressively.
    I was one of the people who thought you were going to bring 
a fresh approach to the agency, but I have got to tell you I am 
disappointed in terms of what is going on with respect to this 
Northwest investigation. You have told me that you are doing a 
comprehensive review of that. The California witnesses that 
came to the Senate Commerce Committee in the past did not seem 
to agree with it. And I am concerned. Now, the verdict is still 
out. You have said that you are going to have something for us 
in a few months. But the storm in California caused a lot of 
water damage and a lot of people got hurt there, but it caused 
massive flooding in the Pacific Northwest. And we need you to 
go after this more aggressively than I have seen in the past.
    Thank you, Mr. Chairman.
    The Chairman. Senator Cantwell.
    Senator Cantwell. Thank you, Mr. Chairman.
    Mr. Wood, I would like to follow on with some questions, 
and I would appreciate your being as succinct as possible since 
I have lots of questions. I heard the answer that you gave my 
colleague about percentages, but I just have some more specific 
questions.
    First, do you think that market manipulation can ever be 
just and reasonable or in the public interest?
    Mr. Wood. I do not think any of the 10 that were in that 
memo----
    Senator Cantwell. I am just asking the question in general. 
I am just asking the question in general. Do you believe--I am 
talking theoretically here.
    Mr. Wood. Right.
    Senator Cantwell. I know you have cases.
    Mr. Wood. No, no, but I think----
    Senator Cantwell. I am talking theoretically. Do you think 
that market manipulation--if you find market manipulation, can 
that ever be just and reasonable or in the public interest?
    Mr. Wood. I cannot think of an instance when it would. I 
mean, certainly the use of the word ``manipulation'' would seem 
to indicate no.
    Senator Cantwell. I think that is a good answer, Mr. Wood.
    Do you think that Enron's memo--various memos I should 
say--represent market manipulation?
    Mr. Wood. I would say yes.
    Senator Cantwell. That is a good answer too, Mr. Wood.
    Given that, do you think that the Northwest contracts, the 
long-term contracts that my colleague referred to, given these 
memos, that there is a connection between the Northwest and 
these memos?
    Mr. Wood. I am trying to think. When you say the Northwest 
contracts, the ones that Mr. Wyden indicated were done--let me 
make sure I know what you are talking about.
    Senator Cantwell. Long-term contracts.
    Mr. Wood. Just in general? I do not know about in general. 
If there were some that were provided to----
    Senator Cantwell. Do you think the long-term contracts and 
what happened in California are related? Do you think these 
memos show that they are related, that it was all the same 
market and that we were all affected by it I guess is the 
question.
    Mr. Wood. I am sorry, Senator Cantwell. The contracts you 
are referring to are which ones?
    Senator Cantwell. I am saying in general. Okay, sorry. Put 
the contract issue--I have two questions here, but I guess I 
spoke a little too quickly on the first one.
    There has been some confusion that maybe somehow what has 
happened in the Northwest was not related to what happened with 
the California ISO. The fact that we had to go out and buy on 
the spot market somehow was something that was different than 
what happened in California and the fact that the prices of 
long-term contracts were, indeed, affected by what happened in 
California. Do you believe that the long-term contracts were 
affected by what happened in California? Those prices?
    Mr. Wood. I think, depending on when they were signed, they 
well could have been.
    Senator Cantwell. Do you think that the Northwest 
contracts, given that you have just stated that you think that 
market manipulation can never be unjust and unreasonable----
    Mr. Wood. Can never be just and reasonable.
    Senator Cantwell. Right, can never be just and reasonable 
or in the public's interest--and the fact that you just said 
that you think these represent--these memos do, in fact, 
represent market manipulation, is FERC going to let the 
Northwest out of these long-term contracts that we are 
continuing to pay on that is costing the citizens of our State 
millions of dollars?
    Mr. Wood. I think a couple of facts have to be shown, and 
that is the main reason we sent that to the hearing. First of 
all, we have got the investigation, as I mentioned to Mr. 
Wyden. We have got to ascertain, yes, this memo happened, what 
behavior happened, when did it happen in the market. If the 
behavior was fixed by the changes that Mr. Winter has filed 
with the commission back before I ever got there and the 
behavior was, as apparently asserted this morning, terminated 
in the year 2000, then if a contract was signed thereafter, 
then I would say that is probably not a direct link.
    Senator Cantwell. Are you talking about process, Mr. Wood?
    Mr. Wood. No. I am talking about----
    Senator Cantwell. I certainly could appreciate process. But 
you just said that you did not think that market manipulation 
could ever be just and reasonable.
    Mr. Wood. Right, but----
    Senator Cantwell. And you did not think that this 
particular case--you agreed that market manipulation had taken 
place and you agreed that there was a relationship between 
Northwest contracts and California. What else do you need to 
know?
    Mr. Wood. Well, the timing. If this behavior had stopped 
back in the time when apparently, according to the lawyers from 
this morning, they stopped these things, and all this stuff got 
kind of prohibited by rules at the ISO and no longer happened, 
that is a pretty critical fact. And that is what we are looking 
at. Yes, these assertions were made and may well have been 
done, but we have got to find out when they were done. The data 
is there. I think we will be able to find that when this gaming 
behavior happened and when that type of thing, INC/DEC game was 
played, and when death star, whatever it is, did what it did. I 
think it matters as to the link between when this behavior 
happened and when it stopped, if has stopped, and what happened 
in maybe a subsequent period of time. So, again, not knowing 
the full story about when the unjust and unreasonable market 
manipulation behavior happened and when a contract may have 
been executed, those would be pretty relevant facts.
    I mean, I understand the point and heard you both loud and 
clear, but I also recognize we have got to have some process 
for the people that may not agree with that assessment to go 
through a factual hearing and have the timing of this stuff be 
laid out and made cuts on.
    Senator Cantwell. Well, I hope you will not penalize 
consumers and give Enron the benefit of the doubt. I hope you 
will look at this and not put dates and say all of a sudden 
because of contracts--what standard do you plan to apply to 
this as it relates to the hearing? Unjust and unreasonable as 
it is in the Federal Power Act?
    Mr. Wood. For the hearing?
    Senator Cantwell. On Northwest contracts, yes, on whether 
they should be relieved, whether the Northwest should be 
relieved.
    Mr. Wood. I think to the extent ones have been filed with 
the Commission, we have sent that over to an ALJ with 
discussion about what the standard is based on the contract 
that was entered into.
    Senator Cantwell. Why is there a discussion about what 
standard when the Federal Power Act is very specific that the 
standard is unjust and unreasonable, unduly discriminatory, or 
preferential? The commission shall determine the just and 
reasonable rates.
    Mr. Wood. There have been subsequent Supreme Court cases 
that have put that in context. These were called the Mobile-
Sierra cases that determine the ability of two contracting 
parties to preserve their deal up or down.
    Senator Cantwell. I am very well aware of the Sierra-Mobile 
standard. That was when you reviewed contracts prior to them 
going into place.
    We are in a market rate system. You are not reviewing those 
contracts in advance. So, to rely on that Supreme Court 
standard when it is clear in Federal jurisdiction that you 
should be using unjust and unreasonable as the standard I think 
is an abrogation of your responsibilities.
    Mr. Wood. I am sorry you feel that way. This is a pending 
case. We did the analysis. We referred that case to hearing 
with the appropriate guidance on the standard. I am not sure if 
the contracts you refer to even had the Mobile-Sierra language 
or not.
    Senator Cantwell. I think that FERC is trying to use a 
higher threshold standard to make the people of the Northwest 
prove that there was abuse when you just said before our 
committee you answered all the questions, and yet now you are 
trying to use--even though the Federal Power Act says, FERC, 
use this standard of unjust and unreasonable, now you are 
trying to use a higher standard of legal burden proof for the 
people of the Northwest. And that is a problem. I do not think 
you can use that standard. We obviously have filed in this case 
as well, and we expect to see a response to that particular 
filing.
    I have a last question, but I would appreciate if my staff 
would bring up the chart. If I seem a little anxious about the 
situation, Mr. Wood, it is because people in my State have paid 
such high rates because of these long-term contracts, and I 
just want to say to the press these are estimates. These are 
estimates by our staff. I should say the bottom two are 
estimates from information that has been made public.
    I am just talking about Enron long-term contracts. I am not 
talking about the whole effect of the market on the Northwest. 
I am talking about Enron contracts have caused a 46 percent 
rate increase by BPA and 49 percent by one Snohomish County PUD 
that just happens to be where I live, Mr. Wood. We estimate 
that those contracts with BPA, about $700 million, with 
Snohomish County, $300 million--if we were let out of those 
contracts, as my colleague, Mr. Wyden, said, we would probably 
be able to buy power at half the cost of that contract.
    Now, we are telling you this is very important because BPA 
is planning another 11 percent increase for this fall. We are 
not out of the woods. Some of these are multi-year contracts 
that the ratepayers of the Northwest will be paying for many 
years. You are the only policeman on this street, and there is 
a mugging happening in my State. You have to respond, otherwise 
these taxpayers are going to pay this bill for many years. It 
is going to wreck our economy.
    And I think we will have to as Congress responds with more 
clear rules and regulations how FERC, the only cop on the 
block, has to act in protecting consumers in this country. 
Otherwise, we have failed. Otherwise, we have failed.
    I have more questions, Mr. Chairman, but I see my time has 
expired.
    The Chairman. Thank you.
    Let me just alert members here we have eight more witnesses 
to call in the hearing and it is now 4:30. Should we go to the 
second panel? Is that an appropriate way to proceed or should 
we have one additional question from each?
    Senator Feinstein. One question.
    The Chairman. Each panel member gets one question and one 
answer and no follow-ups. Then we go to the next panel. How is 
that? Senator Feinstein. I will postpone asking any questions 
myself in this second round. Go ahead, Senator Feinstein.
    Senator Feinstein. You are very generous.
    Mr. Wood, the memorandum that our office gave to you I 
think yesterday right after we got it. Could you tell us what 
was done with this memorandum when it arrived? Now, I know you 
were not there, but what happened and what actions were taken 
pursuant to it and when were they taken?
    Mr. Wood. I have got to confess--Senator, thank you for 
that--I was pretty disappointed not to find that on an internal 
request last summer when Commissioner Brownell and I first got 
to the commission.
    But nonetheless, these issues apparently were done in an 
investigation that the commission staff was instructed to do in 
the summer of 2000 as a result of all the Western power market 
issues. This was one of a number of documents that were used to 
create this November 2000 report entitled ``Staff Report to 
FERC on Western Markets and the Causes of the Summer 2000 Price 
Abnormalities.''
    I should say, to their credit, there was a discussion of 
the under-scheduling issue, of all the congestion management, a 
host of issues, a subset of those are certainly in there. The 
day-ahead schedules following below forecast issue, and then 
the exporting power, I think the ricochet format, which were in 
the issues for investigation. I read this pretty quick after I 
got your memo, so the other issues may well have been in there.
    But this report then became the template for the December 
15 order of FERC that really got rid of a lot of the flaws in 
the market. It has not been fully implemented, but I think 
certainly that order was a big turning point.
    I do not know that everything and, in fact, I do not 
believe that everything that showed up in this memorandum got 
fixed by that order. I have not mapped the SOCAL Edison issue 
to where it got fixed along the way. But in mapping the Enron 
issues to where things got fixed along the way, which we did 
last week, the only things we have not gotten at really are the 
fraud, the issues where they just outright lied. Those are just 
ongoing things that really the front line folks have to catch. 
As you catch people lying, you have got to chop something off. 
But the market flaws that were exploited, which the SOCAL ED 
paper refers to, in my estimation have been addressed or will 
have been addressed by the filing that the ISO made 2 weeks 
ago.
    So, I think I will be glad to look at that further from the 
memo you gave me to make sure that everything there maps to a 
subsequent fix and let you know what that is.
    Senator Feinstein. Just a quick observation. The Enron 
memo, of course, was far after this.
    Mr. Wood. Yes.
    Senator Feinstein. So, clearly whatever FERC did had no 
deterrent effect.
    Mr. Wood. Actually the memos were dated about the same time 
of the--I think they were December 6 and 8, and then this was 
the subsequent week. So, of course, we did not have those 
memos, but I think it all did happen about the same time.
    Senator Feinstein. Thank you.
    The Chairman. Senator Wyden.
    Senator Wyden. Mr. Wood, what policy changes in your view 
are most likely to prevent future Enrons and Enron-like scams? 
You have got the three sponsors, led by Senator Feinstein, for 
example, of efforts to bring more transparency on the 
derivatives issue. As you know, we have gone back and forth on 
the question of a Federal ratepayer advocate, something I feel 
very strongly about. But why do I not let you wrap up by way of 
giving us your idea of the policy changes that are most likely 
to prevent future Enrons?
    Mr. Wood. By policy meaning a legislative enactment, or 
just a change at the agency?
    Senator Wyden. You can reverse the administration's 
position and support the Feinstein-Cantwell-Wyden derivatives 
legislation. You can come out for the ratepayer advocate which 
is in conference. There may be other changes you want.
    Mr. Wood. Senator, I think I wrote you a letter when you 
asked us to do it at the FERC. I think it is totally 
appropriate for that ratepayer advocate to be at the Attorney 
General, as it is in most States, or either as a freestanding 
agency altogether. I think that is actually a great idea, and 
we look forward, when that person is getting picked, working 
with him at FERC or any of the other agencies.
    Senator Wyden. So, the administration is going to support 
in conference a Federal ratepayer advocate. I mean, you have 
made my day. You can kind of take the rest of the day off.
    Mr. Wood. I am an independent agency. I think the White 
House can speak for themselves. You asked me my opinion as the 
head of an independent agency.
    Senator Wyden. That is a good initiative to support. So, 
what else?
    Mr. Wood. And we have already spoken. I think I wrote a 
month or so ago to Senator Feinstein saying how important we 
think, at the FERC, transparency is to the industry, not just 
in the cash market, but in the financial market as well. I 
think to the extent there is a need there--and I am not an 
expert on CFTC law, but I think to the extent that transparency 
is garnered by what you all are proposing there, that is 
needed.
    As far as the policy side, we have, I think, done that for 
the cash market, for the futures, for the long-term contracts, 
and all the short-term deals by what we enacted 3 weeks ago, 
which quite frankly was what we thought we had enacted 10 years 
ago. But people are finding ways around it, so we just gave 
them a computer sheet and said, fill in the lines here. Do not 
give us your own format. Fill it in our way. Give that to us on 
all your transactions. Make that web searchable, and then 
people have more transparency.
    Senator Wyden. We are going to resurrect the derivatives 
cause because, if anything, the events of the last 10 days have 
highlighted how important it is to get openness early on. So, 
we will look forward to your supporting aggressively those 
kinds of measures in the conference. It will be very helpful 
and I appreciate your doing it this afternoon.
    The Chairman. Senator Cantwell.
    Senator Cantwell. Thank you, Mr. Chairman.
    Mr. Wood, will you make available to either the Department 
of Justice or to this committee or other body of the Senate the 
contracts that you are currently investigating?
    Mr. Wood. Will we make available to?
    Senator Cantwell. The Senate?
    Mr. Wood. The ones that were referred to hearing?
    Senator Cantwell. The Senate or the Department of Justice. 
Will you make those contracts that you are investigating in 
some format--we obviously sometimes obtain information from 
various agencies that are not made public, but they are 
reviewed by bodies.
    Mr. Wood. The contracts referring to which ones, Senator?
    Senator Cantwell. The contracts during this time period 
that are under investigation by FERC.
    Mr. Wood. Again, what we are looking at here, though, 
Senator, is not the individual--actually we are looking at all 
the data from the contracts. I do not know that we have got the 
actual contracts in here specifically unless they have been 
filed. I think Snohomish has filed. I am sorry. You are talking 
about contracts. You mean?
    Senator Cantwell. I think the public is looking for 
information, and obviously I think we were all surprised that 
these memos existed. Part of proving this case is understanding 
what is in those contracts. So, I am asking you if you are 
going to make those contracts available either to the 
Department of Justice or to a committee of the Senate for our 
review as well.
    Mr. Wood. The reason I am being a little careful answering 
this question is because we are involved with the other three 
investigatory agencies on this, and we have already as a 
Commission approved contracts to work and exchange documents 
with each other. So, that actually is going on right now.
    Senator Cantwell. What agencies?
    Mr. Wood. With the SEC, CFTC, and DOJ is not part of that 
now.
    Senator Cantwell. Will you make it available to the DOJ or 
to a Senate committee?
    Mr. Wood. Yes, we should have no problem doing that, 
Senator.
    Senator Cantwell. Thank you very much.
    The Chairman. Let me just ask one final question. We got 
this fax transmission from the Attorney General of California 
of all these notes which evidently were taken by--do we know 
the name of the lady? The testimony at the Commerce Committee 
this morning was that it was Mary Hain, who I do not know. But 
at any rate, we got all of this handwritten information here, 
which quite frankly we have not had time to try to understand. 
I guess I would just ask if you have had a chance to review 
this or any of your staff. If you could take this and make it 
part of your investigation. That is all I am asking.
    Mr. Wood. I would be glad to, sir.
    Senator Wyden. Mr. Chairman?
    The Chairman. Yes.
    Senator Wyden. I would just ask unanimous consent to enter 
that document into the record. It is really an extraordinary 
document. I have had a chance to go through it now. It is a 
very troubling document. It is almost like an autopsy. You 
know, everybody talks about a smoking gun. I would like to ask 
unanimous consent that it be put into the record in its 
entirety.
    The Chairman. Without objection, it will be, but I do think 
it would be useful if FERC investigators would look at this to 
determine whether or not there is something in here that is 
useful.
    [The document referred to follows:]

                               State of California,
                            Office of the Attorney General,
                                      Sacramento, CA, May 14, 2002.
Hon. Jeff Bingaman,
Chair, U.S. Senate, Energy and Natural Resources Committee, Dirksen 
        Senate Office Building, Washington, DC.
    Dear Senator Bingaman and Committee Members: I am enclosing a set 
of documents from Enron's Portland, Oregon offices which were recently 
discovered as part of the investigation which my office, along with the 
Attorneys General of Oregon and Washington, is conducting into the 
manipulation of the Western United States energy markets. These 
documents include notes relating to the memoranda released last week by 
Enron, as well as other subjects relevant to your hearings tomorrow.
    We believe that these documents may be helpful in aiding the 
Senate's inquiry into the energy crisis of 2000 to 2001. As you know, 
the investigation and enforcement efforts of the California, Washington 
and Oregon Attorney General's Offices are on-going,
            Sincerely,
                                              Bill Lockyer,
                                                  Attorney General.

    NOTE: The documents that accompanied this letter have been retained 
in committee files.

    The Chairman. Thank you both very much for your testimony. 
We appreciate it.
    Let me call the second panel. Jean Frizzell, who is an 
attorney at law with Gibbs & Bruns; Mr. Gary Fergus, attorney 
at law with Fergus law firm in San Francisco; Mr. Christian 
Yoder, attorney at law with UBS Warburg Energy; and Mr. Stephen 
Hall, attorney at law with UBS Warburg Energy. Thank you all 
very much for being here.
    I am told we are going to have another vote over on the 
Senate floor in about 10 minutes. Why don't we do this? Let me 
just have you sit down and we will start through your 
testimony. Let's start going from right to left here, my right 
to my left, and ask each of you to give us about 5 or 6 minutes 
of sort of the main points you think we ought to be aware of. I 
think you can tell from the questions that you have already 
heard from those of us here the types of questions we are 
interested in. Any insights you could give us as to what has 
occurred or what actions the Congress should take or FERC or 
anybody else would be greatly appreciated. When the vote gets 
to the midway point, we will have to probably adjourn the 
hearing for a few minutes to go vote.
    Mr. Frizzell, please go ahead.

        STATEMENT OF JEAN C. FRIZZELL, ATTORNEY AT LAW, 
               GIBBS & BRUNS, L.L.P., HOUSTON, TX

    Mr. Frizzell. Thank you, Senators. My name is Jean 
Frizzell. I am a partner in the law firm of Gibbs & Bruns, 
L.L.P. Gibbs & Bruns is a litigation law firm. Our practice 
consists primarily of the prosecution and defense of commercial 
disputes.
    I understand that the committee's inquiry today includes 
the issue of what additional legislative or regulatory measures 
might be appropriate in light of Enron's activities in the 
California market. I am not an energy or regulatory specialist 
and do not consider myself an expert in that area, so I have no 
specific policy initiatives to propose. I am able, however, to 
relate to the committee my role in connection with the matters 
that were the subject of the memoranda recently released by 
Enron.
    In late November of 2000, my firm was engaged by Enron to 
defend Enron Power Marketing, Inc. and Enron Energy Services in 
previously filed class actions brought in California. Gibbs & 
Bruns was one of several litigation law firms that Enron 
retained, including Brobeck of San Francisco. Enron also hired 
a regulatory firm to represent the Enron entities in related 
proceedings before the Federal Energy Regulatory Commission. 
The draft memorandum co-authored by me that is one of the 
subjects of this hearing was prepared by litigation counsel 
during the course of preparing to defend those class actions.
    As is required in the defense of any lawsuit, one of the 
immediate tasks undertaken by the defense team was to begin a 
preliminary investigation of both the potential merits and the 
potential defenses to the claims made in those suits. In this 
case, very shortly after we were engaged, Enron provided the 
defense teams copies of the Stoel Rives' memorandum. I and 
other members of the defense team were thereafter involved in a 
series of interviews with a number of Enron traders, wherein 
the traders described the California market, the strategies 
outlined in the Stoel Rives' memorandum, and their 
understanding of the potential impact of those strategies on 
the California marketplace.
    During the course of those interviews, we were informed 
that Enron had ceased trading in the real-time market, and that 
the strategies discussed in our draft memo were no longer being 
used.
    Following our interviews, I and the other members of the 
defense team prepared the initial draft of our memorandum on 
Mr. Fergus' portable computer. Mr. Fergus agreed to send the 
draft to us for our review and comments, which he did. However, 
we decided that before we finalized the status report, Mr. 
Fergus would have Enron's head trader in Portland review it to 
make sure that our statements were accurate.
    Approximately a week later, I received and reviewed a draft 
of the status report. About 2 weeks later, I received comments 
from another member of the defense team. My understanding was 
that, consistent with our original discussion, Mr. Fergus was 
going to meet with the head trader to discuss the draft report 
before finalizing it. However, I did not participate in those 
discussions and had no further involvement in the draft report.
    The defense team, including myself and my firm, were 
involved in the defense of existing class action lawsuits. As 
trial lawyers, we were attempting to gather information and 
develop arguments that would assist in the defense of Enron 
during a trial or trials of the civil lawsuits brought in 
California involving strategies that were no longer being used. 
We were not attempting to and did not condone or authorize the 
strategies themselves, and we played no part in their 
development or execution.
    In light of the fact that Enron has waived its attorney-
client privilege, I am prepared to answer any of the 
committee's questions regarding my role as a trial lawyer in 
defense of the California class actions. Thank you.
    The Chairman. Thank you very much.
    Mr. Fergus, please go ahead.

         STATEMENT OF GARY S. FERGUS, ATTORNEY AT LAW, 
                       SAN FRANCISCO, CA

    Mr. Fergus. Senators, I had prepared and submitted written 
testimony on the five questions that you had posed in the 
invitation, but I will also refer to the memos.
    My name is Gary Fergus. For approximately 21 years, I was a 
trial lawyer at the firm of Brobeck, Phleger & Harrison, LLP.
    My client Enron has instructed me that it is waiving the 
attorney-client privilege with respect to my testimony before 
this subcommittee.
    Brobeck, Phleger & Harrison was retained in late September 
2000 to represent Enron in connection with threatened 
litigation in California arising out of the high energy prices 
in the wholesale electricity market during the summer of 2000. 
Enron used a concept that they called the virtual law firm to 
assemble a team of lawyers from different firms, each with 
their own area of expertise. Brobeck was selected because of 
our jury trial experience in complex matters. Brobeck was not 
and is not an energy regulatory firm.
    By late November 2000, Enron had assembled a defense team 
that was headed by Mr. Robin Gibbs of the Gibbs & Bruns law 
firm in Houston, Texas. Mr. Michael Kirby of the Post, Kirby, 
Noonan & Sweat firm was added to the team as another 
experienced jury trial lawyer with extensive antitrust 
experience and familiarity with the San Diego County California 
courts where a number of complaints had been filed.
    In addition, Enron had a number of other firms that 
regularly advised the company in their areas of expertise.
    The Chairman. We are going to let you complete your 
testimony and then adjourn for this vote that has just started. 
So, go right ahead.
    Mr. Fergus. Thank you, Senator.
    These other firms included Stoel Rives located in Portland 
and Bracewell & Patterson has offices throughout the United 
States. Stoel Rives had energy regulatory experience and 
routinely advised Enron with respect to such issues. At the 
time, Stoel Rives had seconded Mr. Stephen Hall, sitting on my 
right, to Enron to be available on premises in Portland to 
provide additional resources to Mr. Christian Yoder, sitting on 
my far right, and to be available on the trading floor to 
respond to questions from traders.
    Brobeck was invited by Enron to attend a large 2-day 
orientation session in Portland in early October, along with a 
number of other firms, including Bracewell & Patterson. At this 
orientation session, there was a presentation from the head 
trader giving an overview of the electricity market conditions 
that had prevailed during the summer of 2000.
    In early November 2000, I spent an additional 2 days in 
Portland beginning to learn the details of how the markets 
operated during the summer of 2000 and beginning to interview 
individual traders as to how they did their jobs. Mr. Richard 
Sanders, who is head of litigation for Enron, and Mr. Stephen 
Hall participated in some but not all of these meetings.
    My understanding is that between the meetings in early 
November and the beginning of December 2000, Mr. Hall continued 
to meet with traders and gather more information. As a result 
of his interviews, he prepared the December 6, 2000 memorandum, 
which is also dated December 8, 2000.
    On December 11-12, 2000, a meeting was held in Portland, 
Oregon to further investigate the trading practices described 
in the December 8 memorandum. The meeting was chaired by Mr. 
Robin Gibbs and Mr. Richard Sanders. I, along with Mr. Michael 
Kirby and Mr. Stephen Hall, participated. At that time, the 
decision was made to suspend any of the trading strategies 
still in use that were described in the December 8, 2000 
memorandum.
    At the same time, the wholesale electricity market was 
undergoing extreme volatility. The Federal Energy Regulatory 
Commission had issued its November 1, 2000 order, and it was 
known generally that the commission was about to issue an order 
on December 15. There were also concerns about credit risk of 
market participants. Because all of these events were consuming 
the attention of Enron traders, a decision was made to set up a 
meeting as early as possible in January to further investigate 
the trading practices that had been used during the summer of 
2000.
    In early January, there was another meeting in Portland at 
Enron where trading strategies that were described in the 
December 8 memorandum were discussed by the defense legal team 
and the head trader in Portland. At that time, Mr. Richard 
Sanders reiterated that none of the trading strategies 
described in the December 8th, 2000 memorandum were to be used 
by Enron.
    The lawyers responsible for defending Enron in the 
litigation pending in California were assigned the task of 
investigating the facts and evidence surrounding the events 
from the summer of 2000. Individual traders were interviewed by 
a team of defense lawyers from Brobeck, Phleger & Harrison, 
Gibbs & Bruns, and Post, Kirby, Noonan & Sweat to learn what 
information the traders had about the events that had 
transpired during the summer of 2000.
    At the end of these meetings, all the defense lawyers, who 
had been interviewing witnesses, jointly prepared the first 
draft of the memorandum summarizing what we had learned. This 
memorandum was circulated only to outside counsel and to Mr. 
Richard Sanders. There were several revisions that were 
exchanged amongst the lawyers during the next few days while 
our interviews were still fresh in our minds. This memorandum 
was a work in progress. The next step was to check back with 
the head trader in Portland to make certain that the lawyers 
understood the facts correctly. Other events, however, such as 
litigation with the California Power Exchange, its subsequent 
bankruptcy, the motion practice in California cases, and the 
retention of experts overtook the defense team.
    It was not until April 2001 that the defense team was able 
to turn back to the draft memorandum. At that time, during 
discussions with the head trader, I learned that the lawyers 
still did not have all of the facts correct about what had 
happened during the summer of 2000. I also asked to see some 
documentary evidence that was relevant to some of the 
strategies that had been used during the summer of 2000. What I 
found were documents that were in conflict with some of the 
descriptions we had been given.
    The draft memorandum was never completed because we had not 
resolved the factual conflicts. Other events in the litigation 
took precedence over the factual investigation of what happened 
during the summer of 2000.
    On December 2, 2001, Enron filed for bankruptcy and all 
defense efforts ceased.
    I stand ready to answer any questions that you may have.
    [The prepared statement of Mr. Fergus follows:]
 Prepared Statement of Gary S. Fergus, Attorney at Law, San Francisco, 
                                   CA
    My name is Gary Fergus. For approximately 21 years, I was a trial 
lawyer at the firm of Brobeck Phleger & Harrison, LLP. My client Enron, 
has instructed me that it is waiving the attorney-client privilege with 
respect to my testimony before this Subcommittee.
    Brobeck Phleger & Harrison, LLP was retained in late September 2000 
to represent Enron in connection with threatened litigation in 
California arising out of the high energy prices in the wholesale 
electricity market during the summer of 2000. Enron used a concept that 
they called the ``virtual law firm'' to assemble a team of lawyers from 
different firms each with our own area of expertise. Brobeck was 
selected because of our jury trial experience in complex matters. 
Brobeck was not and is not an energy regulatory firm.
    At the present time, I have started my own firm. My regulatory 
expertise is limited specifically to Enron and does not extend to the 
industry generally. I understand that the committee is interested in 
information on five topics. My comments are set forth below:
    1. Are current disclosure rules sufficient to discover the kind of 
behavior referred to in the documents and if not, should disclosure 
rules be strengthened either by rule or statute?
    My understanding is that there already is a tremendous volume of 
data that I understand is already required to be disclosed. Because of 
the complexity of the transactions involved, I am uncertain whether 
additional disclosures would be helpful with respect to discovering 
behavior.
    2. Are there behavior patters that, in and of themselves, should be 
considered presumptively manipulative? If so, what kinds of behavior?
    I am sure there must be such behavior patterns, but I do not have 
an opinion as to how to specifically define such patterns.
    3. Are FERC's market rules sufficient to ensure that markets are 
not manipulated?
    One of the most significant issues in this area is the intersection 
of the jurisdiction between FERC and the California ISO. At times, it 
appears that the two entities have not agreed upon the appropriate 
method for handling the California electricity market. I have no 
opinion on how those rules should be changed.
    4. What actions are being taken to change the rules, if they are 
not now sufficient? Is further statutory authority necessary?
    I have no information about potential rule changes. I have no 
opinion as to whether further statutory authority is necessary.
    5. What is the division of responsibility for oversight between the 
CALISO and the Commission? Are those roles properly structured?
    In my experience, the roles seemed to be confused and at times at 
odds with each other. I have no other opinion on this subject.

    The Chairman. Well, thank you very much. Let us take a 
short recess here. We will be back in 10 or 15 minutes.
    [Recess.]
    The Chairman. Why don't we go ahead. We have still got two 
witnesses to give us their testimony. Mr. Hall, please go ahead 
with yours, take 5 or 6 minutes, and tell us what we need to 
know.

          STATEMENT OF STEPHEN HALL, ATTORNEY AT LAW, 
             UBS WARBURG ENERGY, LLC, PORTLAND, OR

    Mr. Hall. Thank you, Mr. Chairman. My name is Stephen Hall.
    The Chairman. Let me also say if any of you want to take 
your jackets off, go ahead. It is a little hot in this place.
    Mr. Hall. It is a little warm in here. Thank you, Senator.
    As an attorney at the law firm of Stoel Rives, LLP, which 
served as outside counsel to Enron North America on certain 
regulatory matters, I was asked in October 2000 to research and 
prepare a memorandum describing certain wholesale energy 
trading practices at Enron. That memorandum, delivered to Enron 
on December 6, 2000, characterized certain of those practices 
as deceptive. At the same time, we advised Enron in a face-to-
face meeting that deceptive trading practices could violate the 
ISO tariffs, as well as State criminal laws.
    Enron has waived the attorney-client privilege with respect 
to these matters, and I would be happy to assist the committee 
in any way in its investigation of trading practices in the 
Western wholesale energy markets.
    I would like to provide some brief background regarding the 
preparation of the memorandum. In fall 2000, as an associate as 
Stoel Rives, I did work for various clients of the firm in the 
energy industry, including Enron. I worked under the 
supervision of Marcus Wood, a partner at Stoel Rives with many 
years of experience in the energy industry.
    In October 2000, at a meeting convened by Enron's 
litigation counsel in Portland to address the company's 
response to a subpoena from the California Public Utility 
Commission, Enron traders began describing certain strategies 
used in the California wholesale energy market. The strategies 
presented were extraordinarily complex and the descriptions 
given were highly technical.
    Following that meeting, Enron's counsel asked me to review 
the applicable tariffs, interview Enron traders, and seek to 
develop for the first time a written description of the trading 
strategies that were identified at the meeting. Subsequently I 
talked with traders at Enron and, working with Mr. Wood and 
Enron inside counsel, Christian Yoder, who is also testifying 
today, developed the memorandum that has been provided to the 
committee.
    As I learned about Enron's trading practices, I became 
increasingly concerned. In the course of my discussions with 
traders, I became aware that certain of these trading 
strategies involved deception. As I learned of deceptive 
practices, I advised the traders with whom I spoke that such 
practices were deceptive and that they should stop such 
practices immediately. I also attended meetings in which Enron 
traders provided assurances that such practices had been 
discontinued.
    In addition to the descriptions of trading practices I had 
been asked to prepare, I included in the memorandum a summary 
of the ISO tariff rules against gaming or deceptive practices 
to ensure that Enron would understand the ISO standards 
applicable to these practices and the sanctions for violations. 
Mr. Wood, my supervising partner, revised the memorandum to 
emphasize the deceptive nature of certain of these strategies 
and provided Enron counsel copies of California criminal 
statutes on fraud and theft, to make it clear to Enron that 
deceptive practices could constitute violations not only of ISO 
rules but also possibly of criminal statutes. Subsequently, Mr. 
Yoder and I met with the head trader at Enron in Portland to 
communicate Stoel Rives' findings and conclusions to ensure 
that he understood our belief that many of the trading 
practices involved deception.
    In June 2001, I accepted a position as an in-house attorney 
at Enron where I remained for 8 months. From the time I 
delivered the memorandum through my brief tenure at Enron, I 
saw no evidence or received any indication that the deceptive 
practices which I discussed in my memorandum ever resumed.
    In sum, I was asked to talk with Enron's traders to learn 
about and summarize the trading strategies used. In the course 
of my review, my law firm developed an understanding of those 
strategies, identified in writing certain practices that 
appeared deceptive, advised Enron traders that these practices 
must be discontinued, understood that Enron had discontinued 
these practices, and advised our client that the future use of 
deceptive trading practices could violate ISO rules and/or 
criminal statutes.
    I understand that this committee is conducting a review of 
whether actions taken and under consideration by the Federal 
Energy Regulatory Commission are sufficient to prevent 
manipulation of the Western energy markets. I would 
respectfully inform the committee that I have been an attorney 
for only 6 years and have practiced energy law for only 4 
years. I am not an economist or a public policy expert and do 
not feel qualified to opine on public policy issues. With that 
caveat, I would be happy to discuss my findings regarding 
Enron's practices and to assist this committee in any way I 
can.
    Thank you, Mr. Chairman.
    The Chairman. Thank you very much.
    Mr. Yoder, go ahead.

 STATEMENT OF CHRISTIAN G. YODER, ATTORNEY AT LAW, UBS WARBURG 
                   ENERGY, LLC, PORTLAND, OR

    Mr. Yoder. Thank you, Mr. Chairman. For the record, thank 
you, Senator Smith from Oregon, even though he is not here, for 
his kind remarks earlier.
    Good afternoon. My name is Christian Yoder. I am currently 
a director in the Legal Department of UBS Warburg Energy, LLC, 
in Portland, Oregon. Prior to joining UBS Warburg in February 
2002, I worked for Enron Corp. where, from 1994 to February 
2002, I was employed as senior counsel. I worked in Enron's 
Houston offices from 1994 to 1998, at which time I was 
relocated to its Portland, Oregon offices.
    As a lawyer for Enron, my job was to provide legal advice 
to the company on transactional matters, including the 
negotiation and drafting of master agreements with other 
wholesale power trading entities. I did not specialize in 
Federal Energy Regulatory Commission law.
    In September 2000, Stephen Hall, a third-year associate 
attorney at the Portland law firm, Stoel Rives, LLP, outside 
counsel for Enron, was detailed from his law firm to work in 
Enron's Portland office, although he remained an associate of 
Stoel Rives and was not an Enron employee at that time.
    Around that time, I and other members of Enron's legal 
department anticipated that litigation might be commenced 
against Enron and other power traders who conducted business in 
the Western United States and especially in California. I asked 
Stephen Hall to attend litigation preparation meetings, perform 
some basic factual research, and draft a memorandum regarding 
Enron's trading practices, including any problematic aspects he 
might identify. In connection with this assignment, Mr. Hall 
produced a memorandum dated December 6, 2000. There is also a 
December 8, 2000 version of the same memorandum, but I believe 
that only the date is different. Although Mr. Hall drafted the 
memorandum, my name was added as a co-author to indicate that I 
had participated in discussions regarding its preparation and 
content.
    When I received the memorandum from Mr. Hall sometime in 
early December 2000, I provided a copy to my supervisor, Mr. 
Mark Haedicke, the managing director of the legal department of 
Enron North America. I also believe that Richard Sanders, the 
associate general counsel, who had responsibility for 
overseeing litigation matters, also received a copy, although I 
cannot recall whether I or Mr. Hall provided it to him.
    With respect to the issues the committee is examining, I am 
here voluntarily and intend to fully cooperate with this 
committee and any other congressional investigation into these 
matters. Because I learned much of the information in my 
possession in my capacity as a lawyer for Enron, under Texas 
and Federal law, the attorney-client privilege would normally 
prevent me from disclosing privileged information. However, 
Enron has provided me with a waiver of the attorney-client 
privilege that enables me to answer the committee's questions 
even if my answers disclose attorney-client privileged 
material.
    I welcome the opportunity to answer, to the best of my 
ability, any questions that the committee may have for me.
    Thank you.
    The Chairman. Thank you. Thank you all very much for 
testifying. I acknowledge everyone is here voluntarily. We have 
subpoenaed nothing and we have subpoenaed nobody. So, I 
appreciate that. And I also appreciate the fact that Enron has 
chosen to waive the attorney-client privilege. I think that is 
to be commended.
    Our purpose in a lot of what we are trying to do, both with 
the hearings and with the electricity title that we have in the 
energy bill that we passed through the Senate and is now in 
conference with the House, or will be, we believe, this 
summer--but our purpose in there is to ensure that, to the 
extent deregulation occurs, to the extent that States determine 
to proceed with deregulation, that it not result in the 
consumer or the ratepayer being disadvantaged and that the 
benefits of competition that are supposed to result from 
deregulation actually have a chance to happen.
    In light of that, obviously the revelations about these so-
called deceptive practices--I think that is the phrase that 
everyone has used since that does not prejudge whether they are 
illegal or legal. They are just deceptive, but the existence 
and the pattern of deceptive practices that is discussed in the 
memos that we have talked about here is a concern. I would like 
to be sure that the Federal Energy Regulatory Commission has 
full authority to impose civil penalties on people, firms, or 
individuals who do trade in energy markets and use these 
deceptive practices. And I would also like to be sure that, 
where appropriate--and I am not sure it is appropriate in every 
case--but where appropriate, there be criminal penalties that 
also could be pursued by the Department of Justice.
    I would just ask each of you if you have reached a 
conclusion about whether FERC has adequate authority to impose 
civil penalties for these deceptive practices and/or whether 
the Department of Justice has adequate authority to pursue 
criminal penalties for some of these deceptive practices, if 
some of them should be subjected to criminal penalties.
    Mr. Frizzell, did you have any opinion on this? If you do 
not have opinions, you can state that. But obviously this is a 
central issue I think for our committee to decide.
    Mr. Frizzell. Senator, I am sorry. I am not a FERC lawyer. 
I do not know what their power is, and so I do not have an 
opinion on that.
    The Chairman. Okay. Do you have any view on this, Mr. 
Fergus?
    Mr. Fergus. Senator, I do not. My expertise in dealing with 
FERC matters has been very narrow, having to do with the refund 
cases, and I just have not looked at the penalty provisions, so 
I cannot comment. I am sorry.
    The Chairman. Mr. Hall, do you have view on this?
    Mr. Hall. Senator, I would be reluctant to comment given 
that I have not looked into this matter with any consideration.
    The Chairman. How about you, Mr. Yoder.
    Mr. Yoder. I am sorry. I cannot say that understand the 
implications of what kind of power FERC has or does not have. I 
cannot really help in that.
    The Chairman. Let me ask a slightly different question. 
Would you agree with my statement that these deceptive 
practices should be subject to civil penalties that could be 
uniform around the country? That is my concern here, that if we 
just leave it up to each ISO, each regional transmission 
organization to decide whether or not to allow particular 
practices, I think we are less likely to have a system that 
people can have confidence in. For that reason, it seems to me 
logical that we should have a pretty clear definition of what 
is proscribed, what is prohibited by FERC, and what penalties 
will be imposed if practices occur. Do you any of you have 
views on that?
    Mr. Frizzell. Well, without any specific expertise I can 
say it does seem logical, and I would agree with that.
    The Chairman. Mr. Fergus?
    Mr. Fergus. One of the things that struck me about learning 
the California organization is how the markets operated. It was 
very different than how it is done elsewhere in the United 
States. I have not studied it elsewhere, but it has been 
described to me by those that I believe know, mostly other 
lawyers who practice in the area, that it is very different. 
So, I start with the premise that uniformity would be a very 
good thing, but the way the systems operate, there is such a 
thing as three-part bidding, two-part bidding. There are some 
intersections that are related to how California was organized. 
So, that is about as far as I can go, Your Honor--excuse me, 
Senator. You can tell I am used to being in a court--without 
further study.
    The Chairman. All right.
    Mr. Hall.
    Mr. Hall. I think that the suggestion for uniform rules--
there are good reasons for that and I would not suggest that I 
could list them all. But electricity is a commodity that 
travels across State lines and through different control areas, 
like Mr. Fergus was suggesting, and to the extent that the 
rules were uniform with respect to penalties, it would seem to 
make sense because the commodity travels freely. So, if it was 
subject to a single set of rules, it would make it much easier 
to determine what the rules were of the market.
    The Chairman. Mr. Yoder, did you have a view?
    Mr. Yoder. I would tend to support the view of consistent 
rules too. I mean, one of the legal realities that exists in 
the West is you have the California ISO tariff and its 
provisions, which is FERC approved tariff, very thick pages, 
and then you have other control areas that have different 
rules. There is obviously room for problems when you have 
different areas and different rules. So, consistency legally is 
always something that appeals to lawyers I think as a general 
matter.
    The Chairman. Yes, I think particularly if you are 
identifying practices that you want to prohibit and you are 
stating what the penalty is going to be for anybody caught 
engaged in those practices. It seems to me if you have got one 
set for a company that trades in several ISO's or has business 
in various parts of the country--it is not a very useful way to 
proceed to think you can get away with something in one part of 
the country, but not in another part of the country.
    Senator Feinstein.
    Senator Feinstein. Yes. I do have questions.
    Mr. Chairman, I would like to begin by asking you to 
include a statement from the Governor of California in the 
record.
    The Chairman. We are glad to do that.
    [The prepared statement of the Governor of California 
follows:]
  Prepared Statement of Hon. Gray Davis, Governor, State of California
    I am pleased to submit the following statement for the record.
    Thank you for holding these important hearings. In the last week, 
documents released by the Federal Energy Regulatory Commission (FERC), 
the Securities and Exchange Commission (SEC) and announcements by 
individual companies have revealed a disturbing pattern of deception 
and abuse by energy traders. The people of California and the U.S.--as 
consumers, taxpayers, businesses, retirees and shareholders--have been 
hurt. It is time to get to the bottom of these practices, ensure that 
they come to a stop and that the guilty pay.
    As I have said many times before, California's electricity market 
was and is broken. Traders and sellers have engaged in market 
manipulation and taken advantage of the flaws in the market to line 
their own pockets. Protections supposedly built into California's 
market design and subject to federal regulatory approval failed. 
Federal regulators for too long overlooked the obvious signs of market 
abuses and manipulation and ignored their own regulatory mandates. And 
it cost California consumers, businesses, treasury and economy 
literally billions of dollars in the last three years.
    We have been saying as much since 2000.We have been accused of 
blaming others for problems of our own making. We have been told 
repeatedly to ``trust the market.'' But FERC's revelation last week of 
Enron's confession to abusive, manipulative and possibly illegal 
electricity trading practices bear out what California has been saying. 
There is reason to believe that other traders engaged in similar 
practices. Also, the SEC announced it was investigating a practice by 
Dynegy and CMS Energy called ``round trip'' or ``wash'' trades--a kind 
of financial shell game where companies traded equal amounts of energy 
to inflate their trading volumes. Reliant Energy admitted it also 
engaged in ``wash'' trades. Now we learn that Enron has admitted to 
overstating the value of its assets by up to $24 billion.
    Electricity is too important to our economy and indeed our health 
and safety to tolerate the games these traders have been playing. It is 
time to insist that these industry trading practices be thoroughly 
investigated, those who did wrong be held accountable and that 
California consumers be made whole for the billions of dollars that 
flowed out of state as a result of these deceptions. It is also time 
for the regulators to step up to their responsibilities to ensure that 
consumers' interests are put first.
    There are three fundamental actions that must happen--first, there 
must be a thorough accounting and remedy of all these abusive and 
corrupt practices; second, there must be actions to ensure that 
effective protections are put in place and stay in place and third, 
there must be effective mechanisms to hold traders accountable for 
their actions.
    Enron's confession memos are truly astounding only in how many 
abusive practices they reveal. Unfortunately, we have long understood 
the effects of their manipulations--wildly volatile energy markets, 
unreasonably high prices, forced blackouts and tight supplies. We have 
also long known that these problems were not merely the consequence of 
the supply and demand situation in California and the West, but of 
deliberate attempts to manipulate the market to the detriment of our 
people and economy. We have taken steps to make sure there is enough 
electricity in California. We have built eleven new power plants with 
more coming on-line this summer. We have invested historic amounts in 
energy efficiency and in 2001, Californians achieved heroic levels of 
conservation.
    Some have labeled the Enron memo a ``smoking gun,'' but I believe 
it is also something else--the tip of the iceberg. Enron's memo labeled 
these fraudulent practices--Fatboy, Ricochet, Death Star and Get 
Shorty--trading practices that drove California to the brink of 
blackouts by creating ``phantom'' power supply shortages and congestion 
of power lines to drive up prices.
    According to the Enron memo, the only downside as one trading 
strategy was described was a ``public relations risk arising from the 
fact that such exports may have contributed to California's declaration 
of a Stage 2 emergency yesterday.'' The Enron memos allege that others 
in the industry engaged in these practices FERC should follow up 
thoroughly. Asking other traders and sellers to admit to whether they 
engaged in similar practices as FERC did on May 8 is a good start but 
it is not enough. We believe and have submitted to FERC evidence of 
other abusive practices, such as withholding of power. FERC must 
thoroughly investigate and remedy any and all market abuses.
    Enron's influence went beyond just leading other traders in 
deceptive and fraudulent activities. It is well known that Enron sought 
to make political, legislative and regulatory changes to support their 
version of the brave new world. They tried through every means possible 
to unravel any regulatory oversight. Enron attempted to ensure they 
could conduct their business behind a veil of secrecy. They sought to 
convince regulators that price controls and effective market 
surveillance were unnecessary and would in fact harm competition. We 
never believed that the electricity market could function like that. 
Now the rest of the world knows that the deregulation Enron advocated 
was all just a part of Enron's deceptions.
    I applaud these committees' investigations of abusive practices. I 
urge you to call on federal regulators, both FERC and the SEC, to 
ferret out these market manipulations by energy traders, remedy them 
and put protections in place to make sure it does not happen again. If 
they do not act decisively, the Congress should.
    Last week, I joined members of the California Congressional 
delegation in calling on Attorney General Ashcroft to initiate a 
criminal investigation of Enron's activities.
    In a May 7, 2002 letter to FERC Chairman Pat Wood, I outlined the 
steps we believe FERC must take:

          1. FERC must thoroughly investigate these practices by all 
        energy traders, not just Enron. We are heartened to see that 
        FERC is asking all energy traders and seller whether they 
        engaged in these practices.
          2. FERC must allow the California Independent System Operator 
        (CAISO) to adopt stronger rules to discourage, prevent and 
        punish abusive trading behavior. In the past year, FERC has 
        rejected some CAISO proposed rules--rules FERC allowed other 
        ISOs to use.
          3. FERC must continue west-wide price caps and must offer 
        requirements beyond September 30, 2002. Not only do 
        California's markets continue to be vulnerable to manipulation, 
        but also it is clear from the Enron memo that a California-only 
        solution will not work.
          4. FERC must act on California's refund request. California 
        is appealing an earlier FERC decision to exclude billions of 
        dollars from the refund proceeding.
          5. FERC must also reform the long-term contracts as 
        California has requested in a proceeding brought by the Public 
        Utilities Commission and the Electricity Oversight Board.

    Today, I sent another letter to Chairman Wood, in light of the 
revelations of other abusive trading practices by Dynegy and Reliant 
Energy, asking FERC to broaden its investigation beyond the Enron memo 
activities.
    This is not just California's plight. We know from the memos that 
Enron perpetrated its dirty tricks throughout the West. Also, the New 
York Times reported on May 12 that during a test of their system last 
summer, Texas officials found that companies exaggerated their demand 
and drove prices higher. With brazen arrogance, this was during a test 
when the companies knew the regulators were watching.
    We welcome your investigation. We urge aggressive Congressional, 
FERC and SEC oversight of electricity traders. Experience shows that 
traders will create and exploit new market flaws as soon as the old 
ones are stopped.
    Electricity is not just any commodity. It is essential to health 
and safety. It literally powers our economy. We must have reliable, 
stable and reasonable priced electricity.
    Thank you.

    Senator Feinstein. Thanks very much.
    My first questions are to Mr. Yoder and to Mr. Hall. If I 
understand correctly, you are both now employed by UBS Warburg. 
Is that correct?
    Mr. Yoder. Yes.
    Mr. Hall. Yes, Senator.
    Senator Feinstein. Does UBS Warburg, either today or in the 
past, employ any of the schemes mentioned in the December 6 and 
8 memorandum?
    Mr. Yoder. No.
    Mr. Hall. Not to the best of my knowledge.
    Senator Feinstein. And that goes for the past or the 
present.
    Mr. Yoder. That is my understanding, yes.
    Mr. Hall. Yes, Senator.
    Senator Feinstein. I would like to read you a section from 
the December 6, 2000 Enron memo in reference to the strategy to 
buy power in California and send it out of the State. You 
wrote--and I quote--``This strategy appears not to present any 
problems other than a public relations risk arising from the 
fact that such exports may have contributed to California's 
declaration of the stage 2 emergency yesterday.'' Do you recall 
that?
    Mr. Hall. Yes, I do, Senator. Would you like me to respond?
    Senator Feinstein. Not quite yet.
    As it turns out, this strategy may have led to far more 
serious events than just a stage 2 emergency. In fact, the next 
day, December 7, California experienced its first-ever stage 3 
emergency, forcing State and Federal water pumps to be shut 
off, and soon after came the blackouts.
    So, my question is, how do you characterize the damage done 
to families and businesses as a result of the Western power 
crisis as a mere public relations risk for Enron?
    Mr. Hall. Senator, the practice that you are describing 
there is the export of power out of California. At that time, 
my understanding is that----
    Senator Feinstein. To avoid the cap.
    Mr. Hall. To avoid the cap. My understanding is that at 
that time there was a price cap in place in California, but not 
in the rest of the West. And my understanding at the time was 
also that it is legal to export power from California as well 
as to import power into California. And because of the loophole 
created by having a price cap in one State and not having a cap 
in the other States, that encouraged people to export power 
from California.
    The point that I was trying to draw my client to, when I 
made the statement there, was to point out that even though the 
strategy was completely legal at the time, there were adverse 
results that could result from this. And I was trying to say 
that even though it was legal, there were other considerations 
to be taken into account.
    Senator Feinstein. Now, I would like to go to the 
handwritten documents that the chairman referred to, which I 
only received last night. But in these notes, a Ms. Hain 
appears to be laying out a strategy to defend deceptive trading 
practices in court, as well as in the court of public opinion.
    Mr. Hall, Mr. Yoder, and Mr. Fergus, you were all mentioned 
in these notes that appear to be dated October 3. And on the 
page with your names, Ms. Hain made the following notes about 
Enron's defensive strategy. ``Look like we're forthcoming.'' 
``Show the Power Exchange/Williams-hogs at trough.'' And then 
this note, ``No e-mails except to Richard at his direction.'' 
And later on, ``No one can prove, give complexity to our 
portfolio.''
    Were the three of you at a meeting with Ms. Hain when she 
made these notes?
    Mr. Yoder. I was at the October 3 meeting. It was an all-
day meeting. The litigation team had come in from Portland and 
California. Many law firms were there, regulatory people. It 
was a big meeting. I was in and out of the meeting all day 
long, and that was the meeting when the traders began to 
describe the trading strategies to the legal team. That is when 
we first heard those offensive names and so forth. So, I was 
there at that meeting, yes.
    Senator Feinstein. Mr. Hall.
    Mr. Hall. Senator, I too was at the meeting. Christian and 
I were working together that day, and I was definitely at the 
meeting for the discussion of the trading strategies. I was not 
there all day.
    These notes are new to me. The first that I have heard of 
these notes was today. Obviously, I do not know that they are 
Mary Hain's notes or anyone else's notes.
    What I do know is that following that meeting, I took it 
upon myself and Christian Yoder took it upon himself to write a 
memo describing those trading strategies and, when we felt that 
they were deceptive, to bring them to the client's attention 
and to ensure that those strategies were stopped.
    Senator Feinstein. Mr. Fergus.
    Mr. Fergus. Yes, Senator, I was at that meeting. It was as 
described, that it was an all-day meeting. There were lawyers 
there from the Bracewell Patterson firm. I was there. Mr. 
Richard Sanders was there. There were a number of business 
people there. That was my first introduction to anything really 
having to do with the electricity markets.
    First of all, before I guess last night, I did not see 
those handwritten notes either.
    But I think that in my experience and as I recall, there 
were individuals who were there who were trying to adjust to 
the litigation to what was going on, and there were all sorts 
of ideas that were tossed out. The idea with respect to Power 
Ex being at the trough or whatever, that is a comment that I 
remember. As the meeting went on and as there were discussions, 
I would not describe what is down there at all as any plan of 
how the litigation would be defended.
    One of the reasons I say that is, I have been introduced 
to, I know Ms. Hain. She was a FERC regulatory lawyer who was 
in, I believe, Enron's governmental affairs. I have no idea why 
she wrote down what she wrote down, but there were many 
discussions.
    For example, a lot of the information--there were concerns 
about trade secrets and commercial information that if others 
in the industry were made aware of, what prices things were 
being sold at, that as I understand it, would have been a 
violation of various regulations. So, there was lots of free 
interchange amongst a large group of people with varying 
degrees of experience. So, that is what I remember as I sit 
here right now.
    Senator Feinstein. Mr. Chairman, I see the red light, but 
if I could just quickly continue.
    The Chairman. Go ahead.
    Senator Feinstein. I am going to ask you each the same 
question, and if you would just answer it, I would appreciate 
it. The question is, did you suggest or agree to withhold 
information in any way?
    Mr. Yoder.
    Mr. Yoder. No.
    Senator Feinstein. Mr. Hall.
    Mr. Hall. I am not sure I understand your question. To 
withhold what information?
    Senator Feinstein. Essentially I think it is related to no 
one can prove because of the complexity of our portfolio.
    Mr. Hall. No. Never at any time did I agree to withhold any 
information.
    Senator Feinstein. Mr. Fergus.
    Mr. Fergus. That is correct, Senator. I would not and I did 
not suggest withholding information.
    I do have to tell you I have further recollections about 
that meeting, though. This was in the context of, I believe, a 
subpoena that had been issued by the California Public 
Utilities Commission which, if read literally, would have 
called for hundreds of gigabytes of data. So, there was a 
selection process going through what was asked for by their 
subpoena and there were negotiations that Michael Day and I 
did--I am sorry. I cannot remember his last name. His first 
name is Harvey. He is a lawyer at the Public Utilities 
Commission--as to what we would do when we would do rolling 
productions. So, there was certainly a selection of information 
because there was extreme pressure to get it quickly, but there 
was not any decision made. In fact, there were e-mails I 
believe that followed up on conversations that said Enron was 
not waiving whatever objections it had to producing to 
jurisdiction, but we would go ahead and produce on a rolling 
basis. So, there was an ongoing dialogue as to what would be 
produced.
    A similar issue has come up, I know, in the FERC 
investigation where there are such enormous quantities of data. 
A question that says, please provide all transaction 
information, literally would call for lots of data. So, that is 
my recollection.
    Senator Feinstein. On the subject of death wish, there is a 
page that lists one name----
    The Chairman. This is ``death star.'' Right?
    Mr. Fergus. That is correct, Mr. Chairman.
    Senator Feinstein. ``Death star.'' There is a page on 
``death star,'' and then it lists something I cannot make out, 
and then it says, ``Coral, Power Exchange also do.''
    Mr. Fergus. I am sorry. I did not hear you, Senator.
    Senator Feinstein. It says, ``Coral, Power Exchange also 
do.'' The implication is someone suggested that they also carry 
out the ``death star'' practice.
    Mr. Fergus. Without seeing the document----
    Senator Feinstein. You do not know, and you did not suggest 
that they also participated in this.
    Mr. Fergus. I am sorry. The words that you read I just do 
not recognize, and I am not sure I understand. I would have to 
see it.
    Senator Feinstein. Well, this is somebody's notes. What I 
am drawing from them is that someone at the meeting indicated 
that these companies also practiced the scheme known as ``death 
star.'' Was that discussed?
    Mr. Fergus. I have no recollection of any discussion at 
that point.
    Senator Feinstein. Fine.
    Mr. Hall.
    Mr. Hall. By ``Corral,'' do you mean ``Coral''?
    Senator Feinstein. Excuse me. Coral. That is correct.
    Mr. Hall. This was an issue that came up earlier this 
morning in reference to a question from Senator McCain. There 
had been a statement in the memo that possibly other traders 
were using these strategies at other companies, and it all 
arose from a comment of, I think, just one trader who said, you 
know, there used to be a gal or a guy who worked here who went 
to go work for Coral. Maybe they are doing this too. And I 
think that that was about the extent of it. It was speculation.
    Senator Feinstein. And Power Exchange? How did that come 
into it?
    Mr. Hall. California Power Exchange?
    Senator Feinstein. It just says Power Exchange. I do not 
know.
    Mr. Hall. I do not know, Senator.
    Senator Feinstein. Mr. Yoder.
    Mr. Yoder. Well, I would like to help and disclose as much 
as I can, but I have not seen those notes and I do not know 
about that comment. We have heard testimony and you yourself 
brought some evidence today that other companies out there may 
or may not have been using these strategies. I think I would 
not have been surprised had I heard somebody in that meeting 
say somebody else is doing it too. But I am not an expert on 
facts of what happened exactly with that particular company.
    Mr. Fergus. Senator, I do have a recollection similar to 
what Mr. Hall said, that there was a description of an employee 
who had left and the speculation that maybe they were using it 
where went. But that is all I remember.
    Senator Feinstein. On one of the pages, the notes say, 
``Tim's list strategies.'' Who was Tim?
    Mr. Fergus. I do not know for sure, but there is a Tim 
Belden who is the head trader, and that would be consistent, 
but I cannot say----
    Senator Feinstein. At Enron.
    Mr. Fergus. Yes, in Portland.
    Senator Feinstein. Is that your understanding, Mr. Hall?
    Mr. Hall. Yes, it is. Tim explained some but not all of the 
strategies.
    Senator Feinstein. Mr. Yoder.
    Mr. Yoder. Yes. I think the logical person with the name 
Tim would have been Tim Belden there.
    Senator Feinstein. I think I may have covered it.
    Let me ask your comment. There is some anecdotal evidence 
that manipulative trading strategies still persist, and let me 
just give you an example because I suspect one day we will get 
at it. But the example is a Washington Post article over the 
weekend that noted that there are plenty of signs that traders 
still engage in manipulation, and that article pointed out a 
$20 million fund that Texas created to compensate providers for 
clearing congestion was to have lasted 18 months and it was 
depleted in 2 weeks. Do any of you know anything about that?
    Mr. Yoder. I do not, Senator.
    Mr. Hall. I do not, Senator.
    Mr. Fergus. Senator, the only thing that I can recall, at 
one point in time I received a phone call from Enron's trading 
desk in Texas, and I believe that ERCOT is the acronym for it. 
There was a question about it was starting. And I do not even 
remember what the legal question was, but before responding, 
because I was being called, in essence, by the business types, 
I checked with Mr. Richard Sanders, and his comment was it did 
not make a lot of sense to have a California lawyer 
investigating or giving advice on a Texas issue. But that is 
all I remember.
    Senator Feinstein. Thank you.
    I am going to ask you now for you opinion, particularly 
you, Mr. Yoder and Mr. Hall. Now that you have left Enron and 
you are working for a firm that you indicate to me does not 
indulge in any of these practices, either in the present or the 
past, do you think these practices should be legal?
    Mr. Yoder. My view, Senator, is any practice that involves 
false information should be illegal and have civil and possibly 
criminal sanctions. If there is false information that is being 
submitted to a public agency, that is wrong.
    Senator Feinstein. How about a practice like saying you are 
clearing congestion, you make up the congestion, you are going 
to clear it, you do nothing, and you make money from it?
    Mr. Yoder. Well, the difficulty I have with that is I am 
not a trader that understands how to--I do not really know what 
happens when those strategies really occur. So, it is difficult 
for me to understand the physics and the operational side of 
it. I am an attorney and I know that false information is bad. 
It is wrong.
    Senator Feinstein. But I am just asking you. You deal in 
this area. You still do. Right? I am just asking you what you 
think about it. As an individual, we all have opinions, and I 
am asking for your opinion on how you feel about trading 
something that really is not there in the first place.
    Mr. Yoder. Well, I have asked traders and people that do 
those kind of things, and there are arguments that are given 
for whether or not power is really moving or not. So, you can 
immediately get into the complexities of what is really going 
on there on a system. I do not want to give an opinion on 
something that I am not qualified to understand.
    Senator Feinstein. Mr. Hall.
    Mr. Hall. Senator, any practice that involves deception is 
clearly wrong.
    Senator Feinstein. Thank you for being direct.
    Mr. Fergus.
    Mr. Fergus. I think the same answer, Your Honor.
    Senator Feinstein. Mr. Frizzell.
    Mr. Frizzell. I would agree with that as well.
    Senator Feinstein. Thank you very much. Thanks, Mr. 
Chairman.
    The Chairman. Thank you very much. I thank all four of you. 
I know the hearing has taken a long time. We have one more 
panel, so I will dismiss this panel and ask the final panel to 
come forward.
    Ms. Cynthia First, who is commissioner with Snohomish 
Public Utility District in Everett, Washington; Gary Ackerman, 
who is executive director of the Western Power Trading Forum in 
San Mateo, California; Lynne Church, who is the president of 
the Electric Power Supply Association; and Henry Martinez, 
assistant general manager of Power Services with the L.A. 
Department of Water and Power.
    Thank you all very much for staying and giving us the 
benefit of your views. Ms. First, let me just advise you that 
Senator Cantwell is presiding over the Senate, and she asked if 
she could be able to come back so that she could hear your 
testimony. So, we are going to try to put you last in this 
group and hear from the others first. Then we hope that by the 
time they are through, she will have arrived, and we will do it 
that way.
    Mr. Martinez, please start and we will go across this way.

 STATEMENT OF HENRY MARTINEZ, ASSISTANT GENERAL MANAGER, POWER 
 SERVICES, L.A. DEPARTMENT OF WATER AND POWER, LOS ANGELES, CA

    Mr. Martinez. Well, thank you very much, Senator. My name 
is Henrique Martinez. I am the assistant general manager for 
Power Services for the Los Angeles Department of Water and 
Power. I appear here in response to a request of this committee 
sent to the department on May 10, 2002. Obviously, since we 
only received the invitation last Friday, we were unable to 
prepare written comments for distribution, as requested in the 
committee's letter.
    LADWP is a vertically integrated, municipally owned 
electric utility. LADWP owns and operates generation, 
transmission, and distribution facilities, and the primary 
purpose is to provide affordable electric power to the 
community we serve. LADWP provides electric service to more 
than 3.8 million customers behind 1.4 million meters, and the 
customer base represents approximately 10 percent of the total 
electric market in California.
    Participation in the wholesale market is not the primary 
business of the Department of Water and Power. LADWP's system 
has been built to serve its retail customers, and at its peak, 
only 10 percent of our energy was sold to the wholesale market, 
representing only 1 or 2 percent of the total load in 
California.
    LADWP supported the State of California during the State's 
energy crisis and help mitigate the crisis. The department's 
sales of surplus energy in excess of the requirements for Los 
Angeles were intended to and did assist the State in its 
efforts to prevent and delay rolling blackouts caused by energy 
shortages in California. During this period of crisis and rapid 
changing market circumstances, most notably the loss of credit 
worthiness of the California ISO and the California Power 
Exchange, LADWP sought to balance its responsibilities to the 
city and its customers with its ability to provide excess power 
to the California ISO and the California PX. LADWP took 
extraordinary measures to help out during the energy crisis in 
California.
    In sum, we have been part of the solution and not part of 
the problem.
    Thank you for the opportunity to make these remarks, and I 
will answer any questions you may have.
    The Chairman. Thank you very much.
    Ms. Church, thank you for being here.

           STATEMENT OF LYNNE H. CHURCH, PRESIDENT, 
               ELECTRIC POWER SUPPLY ASSOCIATION

    Ms. Church. Thank you, Senator and Senator Feinstein. I am 
Lynne Church, president of the Electric Power Supply 
Association, which is the trade association representing 
competitive generators and marketers. Thank you for this 
opportunity to comment on recent developments in the Western 
markets.
    The three internal Enron memos raise very serious questions 
about the operation of the California market in 2000-01 that 
need to be fully investigated by the FERC. The competitive 
power industry supports, without hesitation, FERC's aggressive 
inquiry into this matter and its review of practices. The facts 
should be determined and the results laid out before the 
American people. The commission should be allowed, however to 
conduct its inquiry in a complete, fair, and dispassionate 
probe without a rush to judgment that could prove premature.
    We have always supported fully competitive and transparent 
energy markets. Practices designed to manipulate customer 
prices create unfair advantages for specific market 
participants or threaten the reliability of the electric grid 
absolutely cannot be condoned. If anyone ultimately is found to 
have engaged in such practices, we certainly support FERC's 
issuance of appropriate individual and structural remedies.
    However, the alleged manipulative Enron practices should 
not be considered an indictment of the competitive electric 
market as a whole. An analogy is the New York Stock Exchange. 
Over the years, some members of the exchange have broken the 
rules. They have been caught and punished. But the exchange was 
not shut down nor the trades unraveled because a few members 
were guilty of misconduct.
    It is also crucially important not to let the flurry of 
attention over Enron's alleged market manipulation obscure the 
real drivers of the electricity shortages and high prices in 
California and throughout the West. Enron was neither 
responsible for the drought in the Northwest nor the 
accompanying widespread heat wave.
    Worsening the situation in California was the absence of 
truly competitive markets. The rules prohibited the utilities 
from exercising basic risk management and they could not sign 
long-term contracts at a time when prices were low. Instead, 
they were forced to buy all of their power supplies in the spot 
market until sometime in 2001, which exacerbated price 
volatility.
    Other rules made it difficult for suppliers to build new 
plants in the State at a time when California's high tech boom 
was causing demand to go up.
    Also unchanged is the fact that all of these conditions, as 
well as a 10-fold increase in natural gas prices, the need to 
buy unanticipated NOX emission credits, and the 
failure to be paid in many cases--and to this day to be paid--
resulted in the wholesale power prices experienced by customers 
in the region.
    We should not ignore that consumers generally have greatly 
benefitted from competition. The historical data are clear. The 
nationwide average price of electricity for all customers has 
gone down as much as 35 percent since the introduction of 
wholesale competition into the electric market in the mid-
1980's. In fact, retail prices for Pacific Gas and Electric and 
San Diego Gas and Electric went down 41 and 49 percent, 
respectively, between 1985 and the end of 2000. On the other 
side of the ledger, the so-called good old days of traditional 
cost-plus regulation produced waste and stranded costs 
estimated to be almost $29 billion, which California ratepayers 
have been paying.
    The practices outlined in the Enron memo show the critical 
importance of good market structure. Most of these practices 
would not have happened had there been a seamless, integrated 
regional market with good rules. And FERC's existing 
initiatives to create independent and multistate regional 
transmission organizations, a standard market design, and good 
congestion management are all critical to well-functioning 
markets.
    The West needs to become a seamless, integrated electricity 
market, and the California ISO needs to become truly 
independent. The key is to get the market rules right and then 
to put in place structures that provide certainty, 
transparency, consistency and that prevent abusive behavior and 
assess significant penalties for wrongdoing.
    In conclusion, we strongly support, without reservation, 
FERC's aggressive investigation, and FERC's initiatives to 
develop seamless, integrated regional markets with standardized 
rules should be encouraged. As Senator Bingaman said in his 
opening statement, we do need a strong regulator.
    Also, the energy conference committee should recognize that 
a number of provisions in the Senate's energy bill enhance 
FERC's authority to ensure a well-functioning market, as 
Senator Murkowski also stated, including greater access to 
market participant data, added FERC jurisdiction over the 
transmission facilities of the public and Federal utilities, 
and enhance FERC's civil and criminal penalty authority.
    Competitive power suppliers recognize that our customers 
and other stakeholders need to have confidence in our industry, 
and we stand ready and willing to do what is necessary to 
ensure that trust.
    [The prepared statement of Ms. Church follows:
           Prepared Statement of Lynne H. Church, President, 
                   Electric Power Supply Association
    Chairman Bingaman, Senator Murkowski and members of the Committee, 
I am Lynne H. Church, President of the Electric Power Supply 
Association (EPSA) and am here today representing EPSA's member 
companies. EPSA is the national trade association representing 
competitive power suppliers, including independent power producers, 
merchant generators and power marketers. These suppliers, which account 
for more than a third of the nation's installed generating capacity, 
provide reliable and competitively priced electricity from 
environmentally responsible facilities serving global power markets. 
EPSA seeks to bring the benefits of competition to all power customers. 
On behalf of the competitive power industry, I thank you for this 
opportunity to comment on recent developments concerning the Western 
electricity market.
    The three internal Enron Corp. memos raise serious questions about 
the operation of California's electricity market in 2000-2001 that need 
to be fully investigated by the Federal Energy Regulatory Commission. 
The competitive power industry supports, without hesitation, FERC's 
aggressive inquiry into this matter and its review of practices in 
other markets.
    The facts should be determined and the results laid out before the 
American people. The commission should be allowed, however, to conduct 
a complete, fair and dispassionate probe without a rush to judgment 
that could prove premature.
    The competitive power supply industry has always supported fully 
competitive and transparent energy markets. Practices designed to 
manipulate customer prices, create unfair advantages for specific 
market participants or threaten the reliability of the electricity grid 
absolutely cannot be condoned.
    If anyone ultimately is found to have engaged in such practices, we 
will support FERC's issuance of appropriate individual and structural 
remedies. We also support a review of FERC's penalty authority during 
the upcoming legislative conference to determine whether such authority 
should be enhanced.
    What's important is that the activity alleged in the Enron memos, 
even if it took place, in no way is an indictment of the competitive 
electricity market as a whole. And the remedy, if found to be 
necessary, should fit any practices found to be inappropriate.
    An appropriate analogy is the New York Stock Exchange. Over NYSE's 
history, some individuals have broken the rules. Those individuals were 
caught and then punished. Sometimes they were fined, sometimes they 
were banned from the Exchange and sometimes they went to jail. The NYSE 
wasn't shut down or trades unraveled because a few members were found 
guilty of misconduct.
    It's also crucially important not to let the flurry of attention 
over Enron's alleged market manipulation obscure the real drivers of 
the electricity shortages in California.
    Let me be explicitly clear: whatever else Enron might have done to 
profit improperly from the power supply shortages in California, Enron 
was neither responsible for the drought in the Northwest nor the 
accompanying widespread heat wave.
    Worsening the situation in California was the absence of true 
competitive markets. The rules prohibiting energy utilities from 
exercising basic risk management meant that they couldn't sign long-
term contracts at a time when prices were low. Instead, they were 
forced to buy all their power supplies in the spot market, exacerbating 
price volatility.
    Other rules made it difficult for suppliers to build new plants in 
the state, at a time when California's growing high-tech boom caused 
energy needs to increase at an unanticipated rapid rate.
    Also unchanged is the fact that all of these conditions, as well as 
a ten-fold increase in natural gas prices and the need to buy 
unanticipated emissions credits, resulted in the wholesale power prices 
experienced by customers in the region.
    Regardless of alleged market manipulations by Enron, we should not 
rewrite history in a way that ignores or forgets the root causes of 
California's troubles--the supply shortages and the structure of the 
market that existed at the time.
    Also, we should not ignore that consumers generally have greatly 
benefited from competition. The historical data are clear: The average 
price of electricity has gone down as much as 35% since the 
introduction of wholesale competition in the 1980s.
    Electricity in the so-called ``good old days'' of cost-plus 
regulation was much more expensive than in today's competitive 
marketplace. Between 1970 and 1985, inflation-adjusted electricity 
prices nationwide increased 25 percent for residential customers and 
increased 86 percent for industrial/commercial customers.
    These price increases and inefficiencies drove the start of 
electricity competition in the mid-1980s. In California alone, 
ratepayers were obligated, because of the bloated regulatory structure, 
to pay stranded costs estimated to be over $28.8 billion (in 1996 
dollars).
    With wholesale and some retail competition, inflation-adjusted 
electricity prices decreased from 1985 to 2000 on average by 35 percent 
for all customers, 31 percent for residential customers and by 36 
percent for industrial/commercial customers. (The chart in the Appendix 
of this testimony shows the decline in real residential prices since 
the introduction of wholesale competition.)
    The problems faced in California show the critical importance of 
good market structure. From the beginning, our industry has been at the 
table identifying potential market problems and recommending 
improvements.
    The Enron memos demonstrate the value of FERC's existing 
initiatives to create independent and multi-state regional transmission 
organizations, a standard market design with appropriate market 
monitoring, and good congestion management rules. We strongly endorse 
FERC's ongoing reforms and urge the continued evolution of efficient, 
integrated transmission grids.
    Standard market design will ensure more consistent and transparent 
market rules, promoting greater regional trading on a level playing 
field. In addition, the commission has undertaken a major effort to 
enhance market oversight. Those efforts are critical to ensure that all 
market participants have confidence that markets are being operated 
fairly and according to known and established rules.
    New regional transmission organizations (RTOs) need to be flexible 
enough, if necessary, to seek changes of rules that aren't promoting 
robust competition. Indeed, both the Texas ISO and the Mid Atlantic-
based PJM have aggressively proposed rules to prohibit alleged gaming 
in their markets. They have made structural changes that prevent such 
practices in the future and have recommended penalties against the 
companies that engaged in them.
    The key is to get the market rules right--that is to put in place 
structures that provide certainty and consistency, that prevent abusive 
behavior and assess significant penalties for wrongdoing.
    Energy traders and marketers in truly competitive markets provide 
real value by managing customer risk and reducing long-term volatility. 
Trading allows customers to reduce risk by developing a portfolio of 
long, medium and short-term power contracts. The high volatility found 
in the daily spot markets can also be dampened by allowing utilities 
and other retail providers to hedge their market risks through 
financial transactions, thereby keeping the price of power more 
consistent for end users.
    Where should the industry go from here? FERC should be allowed to 
follow through on its broad investigation. FERC should also be 
encouraged to continue its development and implementation of a standard 
market design for use in RTOs.
    Next, the West needs to become a seamless integrated electricity 
market. For that to happen, the California-ISO must become truly 
independent, with an independent board. New market rules, such as 
improved congestion management policies, must be developed. FERC has 
long since ordered this to take place and the CAISO continues to drag 
its feet.
    If there's a true regional market in the U.S., the West is it and 
has been for a long time. The region's climate balances electricity 
usage through the year. During the cold winter months, the Northwest 
imports power to cover its highest levels of demand. In summer, the 
Northwest and Southwest export power to California. A seamless regional 
market helps all sides because fewer power plants can serve more people 
all year round, and power can move easily to where it is needed.
    That greatly reduces costs. Neither Arizona nor Washington 
ratepayers want to pay for more local plants to cover their peak demand 
seasons only to have them sit idle half of the year if they can't sell 
their power through regional markets to other customers during their 
lower demand season.
    In conclusion:
    1. We strongly support, without reservation, FERC's aggressive 
investigation into alleged market abuses. The probe needs to proceed on 
a full and fair basis, and the findings placed squarely before the 
American people. The truth about what did or did not take place in 
California and elsewhere should be completely and accurately disclosed.
    2. The competitive power supply industry has always supported fully 
competitive and transparent energy markets. Practices designed to 
manipulate customer prices, create unfair advantages for specific 
market participants or threaten the reliability of the electricity grid 
absolutely cannot be condoned.
    3. The Energy Conference Committee should recognize the following 
improvements, among others, that have been included in the Senate's 
energy bill. They would:

          a) Give FERC greater access to market participant data 
        thereby improving market transparency;
          b) Broaden FERC's jurisdiction to include the transmission 
        facilities of the public and federal utilities, eliminating 
        holes in the regulation of our national transmission system; 
        and
          c) Extend FERC's civil and criminal penalty authority.

    Competitive power suppliers recognize that our customers need to 
have confidence in our industry. We stand ready and willing to do 
whatever is necessary to ensure their trust.


                               Appendix B

attachment to lynne h. church's testimony before the senate energy and 
 natural resources committee response to the senate energy and natural 
             resources committee request dated may 10, 2002
    Are current disclosure rules sufficient to discover the kind of 
behavior referred to in the documents and, if not, should disclosure 
rules be strengthened either by rules or statute?
    Under the Federal Power Act, FERC has the full investigative powers 
needed to get to the bottom of any allegations of market manipulation. 
16 U.S.C. 825f provides the Commission with the authority to subpoena 
witnesses, compel attendance, take evidence, and require the production 
of books, papers, correspondence, memoranda, contracts, agreements or 
other records which the Commission finds relevant or material to its 
inquiry.
    Are there behavior patterns that, in and of themselves, should be 
considered presumptively manipulative? If so, what kinds of behavior?
    Certainly collusive behavior to fix prices is illegal under 
antitrust statutes. In addition, the abuse of market power, defined as 
the ability to profitably raise prices above competitive levels on a 
sustained basis, is unacceptable and should not be permitted. Further, 
actions which violate ISO rules and tariffs should not be tolerated. 
However, in the absence of a Standard Market Design, those practices 
vary from ISO to ISO.
    Are FERC's market rules sufficient to ensure that markets are not 
manipulated?
    What actions are being taken to change the rules, if they are not 
now sufficient? Is further statutory authority necessary?
    As noted above, FERC has adequate authority to investigate 
allegations of market manipulation. In addition, under 18 U.S.C. 825o, 
FERC has authority to assess civil penalties against those who violate 
the Federal Power Act.
    As to market rules, FERC's Standard Market Design efforts are a 
work in progress and not yet complete. The final rules, however, will 
certainly include extensive market monitoring and mitigation 
procedures.The competitive power supply industry has been actively 
engaged in FERC's SMD development process and just released some 
principles for market mitigation as part of the SMD. We look forward to 
working with the Commission and the industry to complete the SMD 
process as quickly as possible.
    Passage of the Senate Energy Bill's electricity title, which 
includes important provisions to extend consistent regulatory oversight 
over the entire interstate transmission grid, will be very helpful to 
prevent manipulation. The presence of regional regulatory ``seams'' 
creates confusion and the opportunity for misunderstanding or mischief 
by market participants. The additional clarification that FERC has the 
authority to compel participation by transmission owners in an approved 
RTO would be helpful, but not essential.
    What is the division of responsibility for oversight between the 
CALISO and the Commission? Are those roles properly structured?
    There has been a serious problem with the lack of independence of 
the California ISO Board for some time. The state of California is now 
a major player in the energy markets through the Department of Water 
Resources, and the ISO Board members are appointed by and accountable 
to the Governor. Other market participants are obviously skeptical of 
the ISO's ability to serve as the unbiased monitor of market behavior. 
This is an untenable situation and the ISO Board must be disbanded and 
replaced with an independent entity.Once an independent ISO Board is in 
place, the role of the ISO Market Monitoring Unit will be to review and 
assess the behavior of all players in the energy market--generators, 
marketers, load, and the ISO itself--to ensure that the rules are in 
place to encourage robust competition and that all market participants 
are following those rules. If the ISO MMU identifies anomalous rules or 
market behaviors, those problems should be brought to the attention of 
the ISO and to FERC to determine the appropriate remedies.

    The Chairman. Thank you very much.
    Mr. Ackerman, why don't we go to you next.

 STATEMENT OF GARY ACKERMAN, EXECUTIVE DIRECTOR, WESTERN POWER 
                  TRADING FORUM, SAN MATEO, CA

    Mr. Ackerman. Thank you, Mr. Chairman and members of the 
committee. My name is Gary B. Ackerman, and I am executive 
director of the Western Power Trading Forum, a nonprofit trade 
association of 38 buyers and sellers of wholesale power across 
the Western region.
    Today, I wish to express, on behalf of my membership, our 
regret and sincere concern for the situation that brings us 
together. Many of my members were disappointed and disheartened 
by the tone of the Enron memos. The nicknames used in the memos 
to describe different trading strategies are not standard 
industry terms. I have been in the power industry for 26 years, 
and 5 of those years I have been working with power traders 
certainly in the West. And the first time I ever heard or read 
those names to describe trading strategies was a week ago 
Monday when the memos were first made public.
    Because my organization is a trade association and not a 
trading entity, I cannot comment directly on any one company's 
trading practices or strategies. Antitrust laws explicitly 
prohibit conversations among and between the membership 
regarding terms of service and trading practices. We work 
together, however, to analyze a wide range of regulatory 
matters and present a common voice for the thousands of 
businessmen and women who play a role in providing competitive 
products for electricity consumers, much like insurance 
companies do for their policyholders. In other words, we can 
absorb the variation in day-to-day prices so that consumers may 
have the certainty of fixed prices.
    With your permission, Mr. Chairman, I would like to put a 
chart up, if I may.
    The Chairman. Yes, go right ahead.
    Mr. Ackerman. I hope you can see that. What this does is 
show, for the 4 years since competition began in California, 
three things: what the weekly wholesale prices were, spot 
prices, that is; what the historical average generation 
procurement cost was for the three electric utilities in the 
State of California; and the red line there that you see very 
low at the beginning and then over time it goes above the blue 
line and then meets it is the cumulative average of the 
competitive wholesale prices.
    Since competition began in California in 1998, the average 
competitive wholesale power price to date is the same as the 
investor-owned utilities' historical average costs for 
generating and procuring electricity. That is even after the 
immense price increases that we witnessed in 2000 and 2001.
    You might ask, so what does competition provide that tired 
and true cost-of-service regulation cannot if the two indices 
are the same after 4 years? As my chart shows you, the average 
competitive price is falling as market prices continue to hover 
in a range less than half of what the pre-1998 costs were. That 
is what that blue line or the blue shaded area represents, less 
than half of what the blue line running all the way across is. 
And it is easily one-third of the regional price cap imposed by 
FERC last year. Our index will soon be lower than the 
historical investor-owned utility cost benchmark.
    Second, markets move much faster than regulatory agencies. 
The power markets were quick to respond when there was scarce 
supply and economic growth increased electricity demand. 
However, people should also recognize that prices under the 
competitive system were quick to fall, as they did a year ago, 
and have remained at the lower levels for almost a year.
    With respect to the business practices of the many 
companies that trade power, my other purpose today is to 
express the fact that there is a wide range of attitudes and 
behavior among the diverse membership I represent. Trading 
organizations not only follow the rules of the California ISO, 
but also abide by the spirit of what the ISO is trying to 
achieve. WPTF seeks trading rules that are fair, reasonable, 
and give consumers confidence that they are getting something 
from the new way power is provided to their homes and 
businesses. Commodity exchanges in operation today all have 
rules to guide trading behavior, and we are no different in 
that respect.
    We believe that the Federal Energy Regulatory Commission is 
doing everything it can to quickly uncover the deficiencies in 
the California ISO rules and work with all parties to correct 
any apparent shortcomings. However, long before the Enron memos 
were written, it was apparent to people in my industry that 
there were flaws in the California market design. There are 
still flaws in place that need immediate attention.
    Finally, our goal is to work with the California ISO and 
Federal agencies to get California back on track. There is much 
to be done. Chief among the tasks we must cooperatively 
undertake is to simplify the trading rules, institute a system 
of regional--and not State, but regional--oversight of the 
bidding behavior of market participants and, equally important, 
reestablish the independence of the California ISO Governing 
Board. In its current form, the mix of State versus Federal 
interests is causing deep friction and impeding quick progress 
in getting California's power markets on a better basis for 
consumers to enjoy the benefits of competition.
    Thank you for inviting me to join this panel, and I look 
forward to answering your questions.
    [The prepared statement of Mr. Ackerman follows:]
Prepared Statement of Gary Ackerman, Executive Director, Western Power 
                      Trading Forum, San Mateo, CA
    Mr. Chairman, and members of the Committee, my name is Gary B. 
Ackerman, and I am executive director of the Western Power Trading 
Forum (``WPTF''). WPTF is a California non-profit, mutual benefit 
corporation. The membership of WPTF includes energy service providers, 
scheduling coordinators, generators, federal power agencies, municipal 
utilities and a power exchange, all of which are active participants in 
the restructured California electricity market. WPTF has a vital 
interest in the development of a competitive electric market and in the 
reduction of barriers that may exist in the structure of new markets. 
Please note that my testimony represents the sentiments of our 
organization as a whole and not the opinion of any individual member.
    Our broadly based membership organization is dedicated to enhancing 
competition in Western electricity markets in order to minimize the 
cost of electricity to consumers throughout the region while 
maintaining the current high level of system reliability. WPTF actions 
are focused on supporting development of competitive electricity 
markets by developing uniform, non-discriminatory and practical 
operating rules that will promote efficiency, liquidity and 
transparency for participants in wholesale electric markets in the 
western region of the United States. WPTF provides a voice through 
which members can contribute to the development of viable and cohesive 
market structures throughout the region.
    My purpose here is to express on behalf of my membership our regret 
and deep concern for the situation that brings us together today. Many 
of my members were disappointed and disheartened by the tone of the 
Enron memos. The nicknames used in the memos to describe different 
trading strategies are not standard industry terms. I have been in the 
power industry for more than 26 years, and have worked with power 
traders for more than five years, and the first time I ever heard or 
read those names to describe trading strategies was a week ago Monday 
when the memos were made public. It is very unfortunate that so many 
companies are being tainted by the actions of one.
    Because WPTF is a trade association, and not a trading entity, I do 
not have information about any individual company's trading practices 
or strategies. Antitrust laws explicitly prohibit conversations about 
prices, the terms and conditions of service and individual trading 
strategies or practices and such conversations are banned when the WPTF 
membership meets or discusses issues. We work together, however, to 
analyze a wide range of technical and regulatory issues and present a 
common voice in regulatory proceedings in support of competitive 
markets.
    I would like to make three points regarding the competitive process 
in wholesale power markets. First, since competition began in 
California in 1998, the average competitive wholesale power price is 
comparable to the California utilities' historical average cost for 
providing electric generation service. That comparability has occurred 
even with the scarcity and regulatory-induced price increases of 2000 
and 2001. One might ask, so what does competition provide that tried 
and true cost-of-service regulation cannot, if the two indices are the 
same after four years? The answer is that each month the competitive 
price is falling as market prices continue to hover in a range that is 
less than half of the historical generation component of cost-based 
utility rates were, and approximately two-thirds below the regional 
price cap imposed by FERC last year. The wholesale power price index 
will soon be lower than the historical utility cost benchmark.
    Second, competitive commodity markets move much faster than 
regulatory agencies in response to changing market conditions. The 
power markets were quick to respond when there was a supply shortage in 
the West and economic growth increased electricity demand. With such 
conditions in place, it was no surprise that power prices rose 
dramatically. People should also recognize, however, that prices under 
the competitive system were quick to fall, as they did a year ago, 
before FERC-mandated price caps were imposed in the region, and have 
remained at the lower levels for almost a year.
    Third, it is important to understand that there is a clear 
distinction between the price arbitrage that is common to all commodity 
markets, which contributes to market efficiency and stability, and the 
type of behavior that artificially affects market stability and 
promotes market dysfunction. It is critical to develop rules that deal 
with the latter behavior and not the former. With respect to the 
business practices of the many companies that trade power, we generally 
agree on certain basic principles.
    Trading organizations should not only follow the rules of the 
California ISO, but also abide by the spirit of what CAISO is trying to 
achieve. WPTF seeks and prefers market rules that are fair, reasonable, 
and give consumers confidence that they are receiving benefits from the 
change in the way power is provided to their homes and businesses. 
Finally, we note that all commodity exchanges in operation today have 
rules that guide trading behavior and that the California power market 
is no different in that respect.
    However, it has been recognized for at least two years that there 
were flaws in the California market design. There have been efforts 
underway to correct these flaws, which were commenced well before the 
Enron memos were disclosed. The process is moving along to address and 
resolve these concerns. WPTF believes the FERC is doing everything it 
can to quickly uncover the deficiencies in the California market rules, 
and work with all parties to correct any apparent shortcomings. 
However, we note that it is important to focus on developing effective 
rules and not simply castigate those who abuse them.
    Ultimately, our principal goal is to work with the California ISO 
and federal agencies to get California back on track. There is much to 
be done. Chief among these tasks is the need to cooperatively undertake 
a simplification of the market rules, especially those that affect 
trading, institute a system of regional (not state) oversight of market 
participant behavior and, equally important, re-establish the 
independence of the California ISO Governing Board. In its current 
form, the mix of state vs. federal interests is causing deep friction 
and impeding progress in getting California's power markets on a better 
basis for consumers to enjoy the benefits of competition.
    WPTF appreciates the opportunity to participate and hopefully 
contribute to the national dialogue regarding the structure and 
operation of our country's vital electricity markets. Our invitation to 
speak today included a request that we respond to certain questions. 
Our responses are provided below.
    Are current disclosure rules sufficient to discover the kind of 
behavior referred to in the documents and if not, should disclosure 
rules be strengthened either by rule or statute?
    We believe that FERC is on top of this issue and note that on April 
24 it announced the replacement of a number of reporting filings with a 
quarterly electronic report. The FERC stated that this would equalize 
reporting requirements for both traditional utilities and power 
marketers, making information more easily available to the public. 
Moreover, the new reporting is designed to ``provide greater price 
transparency, promote competition, enhance confidence in the fairness 
of the markets and provide a better means to detect and discourage 
discriminatory practices . . .''
    Additionally, although the existing CAISO rules may be sufficient, 
the agency tasked with collecting the data and evaluating the same must 
continuously monitor the information. The information is too often 
unexamined until there is an official investigation in response to an 
event that is reported in the public media. The Enron memos in fact 
describe in detail the authority that the CAISO had, and still has 
within its tariff to address ``gaming,'' and ``anomalous market 
behavior.''
    WPTF supports the FERC efforts to enhance reporting and advocates 
that there should be an independent market monitor for all West-wide 
transactions. Market monitoring and enforcement is not solely a 
California concern. Experience demonstrates that the Western markets 
are interconnected and that consumers throughout the West will benefit 
from a West-wide approach to market monitoring and enforcement.
    Are there behavior patterns that, in and of themselves, should be 
considered presumptively manipulative? If so, what kinds of behavior?
    ``Manipulative'' is, of course, a term that is difficult to define. 
While it makes for dramatic headlines, it is not the firmest of 
foundations to use for making decisions about statutes or rules. The 
evaluation of arbitraging behavior as ``manipulative'' must be done in 
the context of the tariff that governs both the grid operator, and the 
market participants. The tariff, which is subject to FERC approval, 
must be precise in detailing what it considers to be acceptable versus 
unacceptable behavior. The activities in the Enron memos ranged from 
items that are routine and acceptable business practice to those that 
were ethically dubious (such as intentionally scheduling transactions 
that the company never had any intention of fulfilling). In fact, the 
failure to perform has explicit penalties in the CAISO tariff that 
would be incurred for such behavior.
    As a bottom line, we believe the focus should be on getting the 
market rules right, based on benefit or harm to consumers and other 
market participants, and the needs of system operation. In any market, 
parties will try to operate within the rules by engaging in 
transactions that maximize their economic benefit. If their behavior 
exposes flaws in the rules, however, then the rules should, and must, 
be changed.
    Are FERC's market rules sufficient to ensure that markets are not 
manipulated?
    The FERC is in the process of developing a standard for market 
design. That standard will be publicly debated for several more months, 
and is expected to be approved by the Commission late this year or 
early next year. Until such time, existing competitive power markets 
operate under unique, highly detailed tariffs, protocols, and operating 
procedures. The tariffs are subject to FERC review and approval, 
whereas the protocols and operating procedures are filed with the 
Commission. We note that CAISO Governing Board has not been terribly 
cooperative with this process and in fact earlier this month, at FERC's 
express order, CAISO very reluctantly filed a proposed market-redesign 
plan described as ``hypothetical.'' This type of behavior demonstrates 
a lack of commitment to the type of state-federal cooperation that is 
absolutely necessary to resolve these issues.
    What actions are being taken to change the rules, if they are not 
now sufficient? Is further statutory authority necessary?
    As noted above, redesign of the California market has been underway 
for two years now. CAISO was ordered by the Commission to submit a 
comprehensive market redesign, which was filed on May 1, 2002. While 
the form of the market design is not yet final, we anticipate that the 
redesign effort will lead to a market that benefits consumers by 
eliminating inappropriate incentives.
    WPTF believes that in order to implement a proper market design, 
the basic governance structure of the CAISO needs to be reworked. The 
CAISO must become truly independent of all market participants, as are 
ISOs in other parts of the country, rather than an extension of the 
California state government, as it is now. In our February 21 filing at 
FERC this year, we wrote that, ``Independent ISO governance has long 
been advocated by WPTF, and we believe it to be a prerequisite to the 
resolution of market design problems.''
    We describe in greater detail in response to the next question our 
concern with the lack of an appropriate governance structure for the 
CAISO, which has contributed mightily to the politicization and co-
opting of the independence of that organization.
    What is the division of responsibility for oversight between the 
CAISO and the Commission? Are those roles properly structured?
    Thomas a Klempis once wrote that, ``Man proposes, but God 
disposes.'' Not to impute divine insight to the FERC, nonetheless the 
proper division of responsibility here is for CAISO to propose 
oversight rules and to monitor performance and for the FERC to finalize 
such rules and direct how the markets will be overseen. FERC has a 
broader, national perspective and it properly seeks a national 
uniformity that is essential for an interstate market such as 
electricity. Indeed, as you know, individual state controls of 
interstate commerce run a serious risk of violating U.S. Constitutional 
protections.
    The FERC has deliberated too long on the lack of independence of 
the CAISO Governing Board. WPTF has aggressively and repeatedly sought 
remedies to the violation of independence. Our organization filed 
comments at FERC on July 22 and September 7 of 1999, November 22, 2000, 
January 16, February 26, March 22, April 20, 2001, May 22, June 19 and 
October 29 of 2001, and January 18, February 21 and March 1 of this 
year, in which we stressed this point. In our most recent filing, on 
March 1 of this year, we commented on the retention of Vantage 
Consulting, Inc. to perform an Operational Audit of CAISO. It was a 
well-done report, and the conclusions confirmed many of the statements 
WPTF made to the Commission in previous filings. WPTF particularly 
supported the Audit's findings and recommendation to establish a new 
and independent Board of Governors, along with a formal Stakeholder 
Committee. In our comments filed less than three months ago, WPTF wrote 
that:

          The Operational Audit supports the conclusion reached long 
        ago by most stakeholders, that is, the CAISO is in appearance 
        and reality essentially an instrument of the State of 
        California and, as such, fails to satisfy the core principal 
        underlying the formation of both ISO's and RTOs--independence 
        from market participants. Accordingly, the WPTF emphatically 
        supports the auditor's recommendations to establish a new and 
        independent Board of Governors, along with a formal Stakeholder 
        Committee. Because other problems in California and throughout 
        the West cannot be effectively and efficiently resolved until 
        CAISO's governance problems are addressed, the WPTF 
        respectfully urges the Commission to expeditiously develop and 
        implement procedures to replace the existing, California-
        controlled BOG with an independent board as soon as possible.

    We continue to urge that the FERC move forward on issues of 
independence and governance of CAISO. WPTF also urges CAISO and FERC to 
devote more time and effort to the creation and enforcement of market 
rules that ensure a fair and competitive market that results in the 
lowest prices for all consumers, both in California and the rest of our 
country. Moreover, as noted previously, the entire market monitoring 
function ought to be a West-wide function and not simply a California-
only exercise.
    Thank you very much for the opportunity to speak today with regard 
to these important issues.

    The Chairman. Well, thank you very much.
    I had hoped we would have Senator Cantwell here. She is not 
here, so why don't you go ahead, Ms. First.

   STATEMENT OF CYNTHIA FIRST, COMMISSIONER, PUBLIC UTILITY 
              DISTRICT NO. 1, SNOHOMISH COUNTY, WA

    Ms. First. Thank you, Senator. My name is Cynthia First. I 
am one of three elected commissioners for the Snohomish County 
PUD District No. 1 in Washington State. We are the second 
largest public utility in the State. We are the 12th largest 
public utility in the United States, and we are Bonneville 
Power Administration's largest customer.
    In 1936, the people voted to create us to give them cost-
based public power. Our main goal is to be reliable. We rely on 
BPA for 80 percent of our load. 10 percent of our own 
generation, including the Henry M. Jackson hydroelectric plant. 
You may have heard of him. And 10 percent, we go to the market 
for the rest of our power.
    For the first time in 5 decades of us being in service to 
our customers, our ability to provide low-cost, just and 
reasonable rates to our consumers has been compromised. Why has 
it been compromised? Because of the disintegration of the 
wholesale Western markets. And lest there be any question 
whether or not California's problems have affected us, they 
certainly have and I will share the reasons for that throughout 
my comments today.
    We also attribute out inability to provide just and 
reasonable rates to our customers to FERC's unconscionable 
delay to fix the problem. We three commissioners had to raise 
rates 60 percent over the last 12 months even though our non-
power costs have remained steady over the last 5 years. There 
is really nothing else to attribute this to except the market 
situation.
    During the crisis period of May 2000 through June 2001, 
prices increased 5, 10, up to 100 times greater than the 
average in the region. I have also brought with me--if I could 
share this with you--just a brief chart showing you the price 
increases at the Mid-C, which is where we receive our power. 
This big spike in the middle is what happened in December of 
the year 2000. We can talk about 5, 10, 100 times an increase 
in power, but until you see it actually in arithmetic form, it 
is hard to imagine what we are talking about.
    The analogy that I use when I talk to our customer-owners 
is that if you went to your gas station for gasoline today and 
it cost you $1.25 per gallon, and you went by tomorrow and it 
was $500 a gallon, that is about exactly what we are talking 
about.
    Unfortunately, whereas we can decide to ride a bike or walk 
or carpool to work or to the store or something, we do not have 
the luxury with electricity. And we, as a publicly owned 
utility, do not have the luxury of deciding not to provide 
electricity to our customers. We have a legal obligation to 
serve. Unfortunately, we have a legal obligation to serve at 
any price.
    BPA was hit by this problem that I just shown you. Because 
we buy 80 percent of our power from BPA, there was an indirect 
effect to us. As Senator Cantwell pointed out, BPA is talking 
about, in addition to an original 49 percent increase in their 
rates to us, another 11 percent in October.
    But we were also affected directly with that 10 percent of 
our power we receive from the market. We had in December of 
2000 no choice but to go to the market for some of our power. 
On December 22, we sent out 17 requests for proposals for a 
mere 100 megawatts of power. Out of those 17 requests that we 
sent out, we got three responses: one from Enron, one from 
American Electric Power, and one from Morgan Stanley. Together 
they barely offered us enough to meet the load that we needed 
to cover. The initial prices they offered were at 6 to 10 times 
the normal for the region. None of those suppliers were willing 
to hold their prices long enough to have the contracts actually 
negotiated. In 1 day, one supplier added another 10 percent to 
its price, and the others increased their rates 12 to 15 
percent over a 3-day period.
    We had no choice but to sign the deals and enter into long-
term contracts, which is, by the way, what the commissioners at 
FERC were requesting that we do, enter into long-term 
contracts, because we could not risk getting into the short-
term market. Again, I want to remind you we have a legal 
commitment to serve and we have to serve at whatever price it 
is.
    We similarly could not wait for FERC to act. At the time, 
in fact, FERC refused to act. Then FERC Chair Hebert issued his 
famously Antoinette-like pronouncement that Californians had to 
get out their shovels and start digging because generation was 
the only way that was going to help them.
    As a result of the inaction by FERC, consistent with 
Senator Cantwell's chart, our customers have to pay $300 
million more than what they would have paid if the market had 
remained the same as it has been for 19 of the last 20 years. 
$300 million. That comes out to $1,100 per household, and that 
is why we had to make a 60 percent rate increase.
    If I might just give you a few examples of the impact this 
has had on our customers, I would like to do that. I have 
personally heard from hundreds of people about the devastating 
effects of the situation, and I am sure you all have your own 
horror stories. But while the voices of consumers are not often 
heard above the din of abstract policy debates in Washington, 
D.C., their cries for relief and their anger are very real. We 
have schools who are choosing between electricity and books. 
And I have included some of these letters in my packet to you. 
We have a mom who wrote to us. She has to choose between 
electricity and buying her senior daughter a prom dress. We 
have people at the AMPM's who will not serve our linemen 
because they are so angry. We have people who are threatening 
to throw their meters through our windows. We have elderly 
people who are choosing between medicine, food, and 
electricity.
    We have violence threatened against us and our staff. Some 
of these letters are just enough to scare the tar out of you, 
and if you do not live with it every day, if you do not walk 
through the lobby and see those customer service reps doing 
their best to help these people while they are angry and 
screaming and crying and throwing things, it is something that 
you have to see. I will not go through the letters that we 
reported.
    The net result, according to the Wall Street Journal's 
recent article, is that disposable income in Washington State 
is going to be cut by $1.7 billion over the next 3 years, and 
we are going to lose 43,000 jobs in our region. In our State, 
not just even in our region. In our State.
    Three things in conclusion. We need greater market 
transparency to prevent the abuse of market power, and I will 
not go into that in great detail. Many of the speakers today 
have talked about the transparency that we need to have.
    I want to just point out, though, that the objections that 
we received from marketers that they do not want their 
contracts being made public contravenes their legal obligation 
to publicly report contract information under the Federal Power 
Act, section 205(c). Power marketers should not be able to 
write this provision out of the FPA and FERC should not let 
them do it.
    Let us see. Second, FERC's market rules are obviously not 
sufficient to ensure that markets are not manipulated. But 
despite their apparent inability to restrain the market abuse, 
FERC is going forward with nationwide what they call standard 
market design and regional transmission organizations. They 
cannot get this right and they are going forward into two new, 
huge, complicated forays into national energy policy. They need 
to hold their horses, if you pardon the colloquialism, and get 
this right before they go forward with any other things. We 
have some discussions going on now about how in the Pacific 
Northwest especially--BPA presents us with a unique situation 
in terms of our transmission, and to include us in an RTO 
situation, like they are trying to do with the rest of the 
United States, is just not what we need to have happen.
    Finally, a very gentle comment. Third, FERC needs to have 
more balance in its composition. There is no one on the 
Commission now that lives west of Texas, and in the last 
several decades, we have had no one west of the Rockies on 
FERC. So, when you are considering putting other people on 
FERC, filling potential vacancies, please consider putting 
somebody on from the West who understands hydro, who 
understands relicensing, who understands BPA, who understands 
California. That is very, very important.
    We have yet to sort out what has happened to us. It seems 
to me that at a minimum, though, we need to learn our lessons 
before we go forward.
    To follow up on Senator Cantwell's earlier analogy about we 
are being mugged and we do not have the cop on the block to 
stop what is happening to us, if FERC cannot do it, Congress 
needs to do it. We know who the robbers are in this situation. 
It is Enron. It is American Electric Power. It is Morgan 
Stanley, and we desperately need FERC to step in and help us 
stop the crime that is happening right under their noses.
    Thank you very much for letting me go over my time. I 
appreciate it.
    [The prepared statement of Ms. First follows:]
   Prepared Statement of Cynthia First, Commissioner, Public Utility 
                  District No. 1, Snohomish County, WA
    Good afternoon and thank you for the opportunity to appear before 
you today. I am Cynthia First, Commissioner of Public Utility District 
No. 1 of Snohomish County, Washington (the ``District''). As on of the 
three elected representatives of the electric ratepayers of Snohomish 
County, I would like to, first, describe to you the devastating effect 
the dysfunctions the Western wholesale power markets have had on the 
consumers of Snohomish County and, second, explain our deep and 
continuing concern that the Federal Energy Regulatory Commission's 
(``FERC'') rules on disclosure and market design are not adequate to 
ensure there is no repeat of the disaster of 2000-01. Our skepticism is 
only deepened by recent revelations demonstrating that FERC knew as 
early as 1999 of the kinds of abuses detailed in the recently-revealed 
Enron memos yet turned a blind eye for two years while consumer losses 
in the West mounted into the tens of billions of dollars and tens of 
thousands were thrown out of work.\1\ FERC continues to engage in the 
kind of large-scale experimentation, like California's failed 
experiment in deregulation, that may go rapidly and drastically wrong, 
with economically and socially devastating consequences. Its inability 
or unwillingness to police and remedy fundamental abuses of market 
rules despite its apparently detailed knowledge of those abuses has 
caused the consumers I represent to call into question whether FERC can 
be trusted to protect consumers from the kinds of rampant abuse that 
occurred in California and that wrought havoc across the West.
---------------------------------------------------------------------------
    \1\ Bob Keefe, ``Federal Power Regulators Were Told of Price 
Schemes in 1999,'' Cox News Service, May 11, 2002.
---------------------------------------------------------------------------
                       about snohomish county pud
    Snohomish County PUD was formed by a vote of the people of 
Snohomish County in 1936 based upon the promise of a cost-based, 
publicly-owned electric power system. The District is the second-
largest publicly-owned utility in Washington State and the nation's 
12th largest publicly-owned utility. We serve approximately 270,000 
homes, businesses, and schools over a system encompassing 5,323 miles 
of electric lines and a service area of 2,200 square miles in Snohomish 
County and on neighboring Camano Island, which is just north of 
Seattle.
    In the more than five decades since the District has operated as an 
electric utility, the District has consistently delivered on the 
promise of cost-based, publicly-owned power, providing its citizens-
owners with highly reliable service at rates among the lowest in the 
country. Our ability to continue to provide reliable and inexpensive 
service, however, has been compromised by the disintegration of the 
Western wholesale power markets and by FERC's unconscionable delay in 
acting to correct a fundamentally dysfunctional market. Because of the 
Western wholesale power market dysfunction, Snohomish has been forced 
to raise its retail rates nearly 60% despite holding its non-power 
costs steady. I have attached as Exhibit A 1a a chart 
showing the drastic price increases Enron-style abuses caused in the 
Western wholesale power markets.
---------------------------------------------------------------------------
    \1a\ Attachments A, B, and C have been retained in committee files.
---------------------------------------------------------------------------
               the western power crisis and snohomish pud
    As a consumer-owned utility, the District is exempt from FERC 
jurisdiction. Nonetheless, the District is dependent upon effective 
FERC regulation of interstate transmission and the wholesale power 
markets because it depends upon generation resources remote from the 
county for approximately 90% of its supply. Specifically, we must 
purchase power directly on the wholesale market to cover the difference 
between our loads, the power we receive from the Bonneville Power 
Administration (``BPA''), and our own generation located at the Henry 
M. Jackson Hydroelectric Project in Snohomish County. Currently, about 
80% of our power supply comes from BPA, but we are indirectly dependent 
on the wholesale markets because BPA must purchase power on the markets 
to cover the difference between what it can generate from its own 
resources and its commitments to serve Northwest loads. The District 
and its customers have been drastically affected by the persistent 
crisis in Western electricity markets, and we are concerned that FERC's 
current policy direction may portend further drastic disruptions in our 
ability to serve our load economically and reliably.
    It has now become clear that a combination of withholding of 
generation to drive up market prices in California, combined with 
strategic ``gaming'' of the market rules in California, drove electric 
prices into the stratosphere, not only in California but also in 
markets across the West that are interconnected with California, 
including the Pacific Northwest. In the Pacific Northwest, during the 
``crisis period'' from May 2000 to June 2001, prices on both the short-
term and long-term markets were regularly five to ten, and at times 100 
times above the long-term historical average in the region. 
Specifically, wholesale power prices in the Pacific Northwest 
historically have averaged about $24 per MWh and since FERC's belated 
intervention in mid-2001, prices have returned to near the historical 
average. However, during the crisis period, prices for short-term power 
in the Pacific Northwest were regularly above $100/MWh and at times 
reached $500/MWh. In the first two weeks of December, spot prices 
increased to stratospheric levels. For several days the price hovered 
around $1000/MWh. Spot prices during that period as recorded by Dow 
Jones reached as high as $3300/1VlWh. In fact, during much of late 2000 
and early 2001, spot market prices in the Pacific Northwest were the 
highest in the country, turning the historical pattern on its head.\2\ 
This would be like finding that the price of gasoline at your local 
service station went overnight from $1.25 per gallon to $5 per gallon, 
then to $25 per gallon, and then to $50 per gallon. As a load-serving 
entity, Snohomish is unlike an ordinary consumer of gasoline because we 
cannot simply choose to walk or ride a bike when prices get too high. 
We have a legal obligation to ensure an adequate power supply to serve 
our customers. Accordingly, we cannot simply say ``no'' even when the 
prices demanded by power marketers like Enron are outrageous, as they 
were during the 2000-01 crisis period.
---------------------------------------------------------------------------
    \2\ Hal Bernton, ``NW Utilities Get Socked the Hardest,'' Seattle 
Times, (Apr. 13, 2001).
---------------------------------------------------------------------------
    There is no real question that the 2000-01 power market crisis was 
caused by strategic withholding of power supplies and abuse of market 
power rules. The power marketing lobby has often blamed the huge price 
increases and market instability on shortages of power caused by a 
drought in the Pacific Northwest and lack of generation supply in 
California. Recent evidence demonstrates that this explanation simply 
does not wash. A paper published by Northwest energy economist Robert 
McCullough in April demonstrates that power supplies were in fact 
better during the crisis period than during previous droughts in the 
West. Indeed, the crisis began in 2000, during an ordinary water year, 
and ended promptly with FERC's price cap and ``must-run'' orders in 
June 2001, even thought the Pacific Northwest was in the midst of the 
second-worse drought ever recorded.\3\
---------------------------------------------------------------------------
    \3\ Robert McCullough, ``Revisiting California,'' Pub. Utils. 
Fortnightly, April 1, 2002.
---------------------------------------------------------------------------
    A recent study by economists Paul Joskow and Edward Kahn examines 
each of the causes for high prices that have been identified--high gas 
costs, pollution control costs, etc.--and concludes that the huge run-
up in prices during the summer of 2000 cannot be explained by these 
``market fundamentals.'' On the contrary, the study concludes, ``The 
evidence that there was a significant market power effect reflected in 
market prices in California during Summer 2000 is overwhelming. Indeed, 
no comprehensive studies exist that come to a different conclusion.'' 
\4\
---------------------------------------------------------------------------
    \4\ Paul Joskow & Edward Kahn, ``A Quantitative Analysis of Pricing 
Behavior In California's Wholesale Electricity Market During Summer 
2000: The Final Word,'' Feb. 4, 2002 (available at http://econ-
www.mit.edu/faculty/pjoskow/papers.htm).
---------------------------------------------------------------------------
    Even in the midst of the crisis period, there was solid evidence of 
market power abuse and gaming of market rules. In May 2001, a group of 
ten of the nation's leading. economists, including Dr. Alfred Kahn, 
father of the deregulation movement, and nine economists with direct 
involvement in the California market experiment, wrote a letter to the 
President, Congress and FERC explaining that:

          Numerous . . . studies based on actual market behavior and 
        performance have identified a number of serious problems of 
        market design, supplier behavior, and market performance that 
        were not anticipated or considered in FERC's initial market-
        structure screens. . . . We cannot expect a market to operate 
        to benefit consumers or for the resulting wholesale prices to 
        satisfy the requirements of the Federal Power Act if effective 
        competition does not exist. . . . California's markets are not 
        characterized by effective competition.\5\
---------------------------------------------------------------------------
    \5\ Letter from Dr. Roger Bohn et al. to President George W. Bush 
et al., May 25, 2001, at 2 (emphasis in orig.) (Exhibit B).

The extent of the market dysfunction was confirmed by the Commission's 
own staff in a recent report to Congress, which noted that after the 
market dysfunctions in California occurred, ``energy prices in the 
long-term, short-term and spot markets were high throughout the 
[Western] region.'' \6\
---------------------------------------------------------------------------
    \6\ ``The Economic Impacts on Western Utilities and Ratepayers of 
Price Caps on Spot Market Sales,'' FERC Staff Report to the United 
States Congress, at 14 (Jan. 31, 2002).
---------------------------------------------------------------------------
    The internal Enron memos not only confirm this evidence, but 
provide the ``smoking gun'' to demonstrate how market power and market 
rules were abused. The memos also show whose hands held the smoking 
gun--power marketers like Enron. The memos explain in some detail the 
strategies used by Enron, such is ``inc-ing,'' which the memo defines 
as ``artificially increas[ing] the load on the schedule submitted to 
the ISO'' so that the ISO would pay Enron an artificially inflated 
price for the excess of generation over scheduled load on the real-time 
market.\7\ Another strategy ``used by Enron's traders is to relieve 
system-wide congestion in the real-time market, which congestion was 
created by Enron's traders in the PX's Day Ahead Market. . . . Because 
the congestion charges have been as high as $750/MW, it can often be 
profitable to sell power at a loss simply to collect the congestion 
payment.'' \8\
---------------------------------------------------------------------------
    \7\ Id. at 1-2.
    \8\ Id. at 3 (emphasis added).
---------------------------------------------------------------------------
    Enron developed a number of these strategies to game California's 
market rules, many with colorful nicknames like ``Fat Boy'' and ``Death 
Star.'' \9\ The common elements of each strategy, apart from their 
deviousness, were to game the California market rules to artificially 
inflate prices while delivering little or nothing of value to the 
Western electric system. The memo describes the ``Death Star'' 
strategy, for example, as ``earn[ing] money by scheduling transmission 
in the opposite direction of congestion . . . and then collecting the 
congestion payments. No energy, however, is actually put onto the grid 
or taken off . . . The net effect of these transactions is that Enron 
gets paid for moving energy to relieve congestion without actually 
moving any energy or relieving any congestion.'' \10\ Other strategies 
involved not just gaming of market rules, but outright fraud. The memo 
states that, for the ``Get Shorty'' strategy (i.e., selling ancillary 
services into the day-ahead market, then cancelling the commitment and 
buying ancillary services in the real-time market) to work, ``it is 
necessary to submit false information that purports to identify, the 
source of the ancillary services.'' \11\ In fact, these gaming 
strategies became so sophisticated that Enron's traders were able to 
anticipate how other market participants would game the market and take 
advantage of those strategies to further enhance the profits from their 
own gaming:
---------------------------------------------------------------------------
    \9\ Id. at 3-6.
    \10\ Id. at 4-5 (emphasis added).
    \11\ Id. at 6 (emphasis added).

          The traders were able to anticipate when the dec price will 
        be favorable by comparing the ISO's forecasts with their own. 
        When the traders believe that the ISO's forecast underestimates 
        the expected load, they will inc load into the real time market 
        because they know the market will be short, causing a favorable 
        movement in real-time ex post prices. Of course, the much-
        criticized strategy of California's investor-owned utilities 
        (``IOUs'') of underscheduling load in the day-ahead market has 
        contributed to the real-time market being short. The traders 
        have learned to build such underscheduling into their models, 
        as well.\12\
---------------------------------------------------------------------------
    \12\ Id. at 2.

    The memo leaves little doubt that the effect of these gaming 
strategies was to artificially inflate market prices. In describing the 
``Load Shift'' strategy, for example, the memo states that ``by 
knowingly increasing the congestion costs, Enron is effectively 
increasing the costs to all market participants in the real time 
market.'' \13\ The memo further makes clear that many other traders 
were using the same or similar tactics to game the California market. 
The memo reports, for example, that the ``inc-ing'' strategy ``is the 
`oldest trick in the book' and, according to several traders, it is now 
being used by other market participants.'' \14\ Similarly, with respect 
to the strategy of selling non-firm energy as firm, ``[t]he traders 
claim that `everybody does this.' '' \15\ In fact, gaming was so 
widespread, according to the memo, that ``Enron's traders have used 
these nicknames with traders from other companies to identify these 
strategies.'' \16\ One experienced energy trader reported that 
pressures to create profits were so intense that ``if you didn't 
manipulate the market and manipulation was accessible to you, that's 
when you were yelled at.'' \17\ In fact, in an article in this past 
Sunday's New York Times, the Director of Market Analysis for the 
California ISO reports that traders continue to exploit loopholes in 
the California rules: ``They keep testing us any way they can, in big 
ways and small . . . Unless we are more diligent, we could have the 
same kind of crisis all over again.'' \18\ The article reports that 
regulators in deregulated markets around the country complain that 
``they still lack the tools to properly manage competitive power 
markets'' and that schemes similar to those employed by Enron ``remain 
in wide use, because energy markets remain flawed.'' \19\
---------------------------------------------------------------------------
    \13\ Id. at 5. The memo notes that Enron's profits in FY 2000 were 
increased by approximately $30 million by using the ``Load Shift'' 
strategy.
    \14\ Id. at 1.
    \15\ Id. at 7.
    \16\ Id. at 3.
    \17\ Joseph Kahn, ``Californians Call Enron Documents the Smoking 
Gun,'' New York Times, May 8, 2002 (quoting R. Martin Chavez, former 
head of risk management in energy trading at Goldman, Sachs).
    \18\ Joseph Kahn, ``With Markets Flawed, Enron's Tactics May Live 
On,'' New York Times, May 12, 2002 (quoting Anjali Sheffrin, Director 
of Market Analysis, California ISO).
    \19\ Id.
---------------------------------------------------------------------------
    Nor was the damage inflicted by the schemes concocted by Enron to 
game the California market confined to California's borders. The memo 
explains how Enron, for example, shipped power out of California to 
escape prices caps that were in place in California.\20\ Likewise, the 
``Death Star'' strategy exploited transmission constraints arising from 
lines connecting the Southwest and Northwest to California to collect 
counter-scheduling payments without ever actually either moving energy 
or relieving transmission constraints.\21\ As noted above, the gaming 
and abuse of market power rules in California produced startling 
results both in California and in the Pacific Northwest. In short, the 
recently-revealed Enron memo reveals how Enron and other power 
marketers were able to abuse the rules of California's restructured 
market to create the appearance of a shortage and to artificially 
inflate market prices.
---------------------------------------------------------------------------
    \20\ Id. at 3. Interestingly, Enron saw no problem with this 
strategy ``other than a public relations risk arising from the fact 
that such exports may have contributed to California's declaration of a 
Stage 2 emergency.'' Id.
    \21\ Id. at 4-5.
---------------------------------------------------------------------------
    The severe market dysfunction in California, and the spill-over 
effect of that dysfunction in the Pacific Northwest, has forced 
utilities across the region to drastically increase retail rates. For 
utilities like Snohomish, which rely heavily on BPA for their power 
supply, BPA's wholesale rates have reached historic highs because BPA 
was forced to purchase large amounts of power to supplement its base 
supply at a time when the wholesale markets across the West were 
severely dysfunctional. Indeed, in late 2001, BPA predicted its rates 
could increase by as much as 400% because of the costs of purchasing 
overpriced supplemental power. Only extreme and heroic, and in many 
cases economically damaging, efforts across the region to reduce the 
electric load placed on BPA prevented triple-digit rate increases. Even 
with these extreme measures, BPA was forced to implement a 46% rate 
increase on October 1, 2001. In the absence of the Western wholesale 
power crisis, its rates would have remained essentially unchanged.
    The Westwide market dysfunction also drastically impaired 
Snohomish's ability to obtain power on reasonable terms during the 
crisis period. In fact, Snohomish had no real choice of suppliers and 
had to take power on the terms offered by those suppliers, including 
Enron, or else risk being unable to serve its load. Snohomish could not 
continue to rely on short-term purchases to fill its needs. Any 
question about the risk of continued reliance on the short-term market 
for even a small amount of power was erased after the severe price 
spike experienced in December 2000. During that episode, it became 
clear that attempting to meet Snohomish's load during a similar cold-
weather episode could result in a power cost increase in the range of 
$25 million for only a few days' worth of power, potentially wiping out 
Snohomish's rate stabilization fund, threatening its financial position 
with respect to its bond holders, and forcing large and unpredictable 
rate increases on its customers.
    Nor did Snohomish have any real choice in terms of the power 
suppliers. Following a strategy urged by FERC, after the huge price 
spike experienced in Western spot markets in December 2000, Snohomish 
quickly moved to fill out its supply portfolio with long-term 
contracts. On December 22, 2000, Snohomish issued a Request For 
Proposals (``RIP'') to 17 potential sellers seeking up to 100 MW of 
power. Only three parties, Enron, Morgan Stanley Capital Group, and 
American Electric Power Corp., were willing to sell power to Snohomish 
in the shape and time frame needed during 2001, and, taken together, 
the amount of power these parties were willing to sell Snohomish was 
barely enough to meet our needs. Thus, to obtain enough power to meet 
the needs of its customers and maintain reliable service, Snohomish was 
forced to contract with all three parties.
    The course of negotiation with respect to the price term similarly 
demonstrates the seventy of the market dysfunction that occurred at the 
time and the almost complete lack of bargaining leverage suffered by 
Snohomish. The prices initially offered by the suppliers were extremely 
high, in the range of six to ten times the long-term average for the 
region. Arid yet none of the three bidders were willing to hold their 
initial price offer even for long enough to contracts to be negotiated. 
In the space of a single day, one supplier ratcheted the already-
exorbitant price term of its initial offer more than 10%. Similarly, 
the available pace offers from other suppliers were ratcheted up 12-15% 
over the course of a few days. Snohomish had no choice but to take 
these offers because there were no alternative suppliers at any price 
and Snohomish could not risk either continued reliance on the wildly 
dysfunctional spot market. Nor could it risk being unable to meet its 
legal commitment to serve its native load.
    Nor could Snohomish wait for FERC to take meaningful action to 
correct the pervasive dysfunction of the Western electric markets. Even 
a single additional surge in the short term markets could have 
devastated Snohomish financially. Yet, at the time Snohomish entered 
these contracts, it was clear that FERC intended to take no meaningful 
action to reign in the runaway West Coast markets or to correct the 
structural flaws in the California market that were at the root of the 
West Coast crisis.\22\ Indeed, that policy was directed from the 
highest levels of the federal government: ``Throughout California's 
energy crisis last year, President Bush and Vice President Dick Cheney 
strongly opposed any government interventions or price controls 
intended to rein in the surging costs of electricity.'' \23\ That 
policy was confirmed only a few days after the three contracts were 
signed, when then-FERC Chairman Hebert issued his famously Antoinette-
like pronouncement that Californians ought to ``get out their shovels 
and start digging'' because building new plants was the only way out of 
the crisis.
---------------------------------------------------------------------------
    \22\ Al Gibbs, ``Analysis: Bush Offered Almost No Help to Public 
Power During Energy Crisis,'' Tacoma News-Tribune, April 1, 2002 (``I . 
. . walked out of that room with the message: `Don't count on this 
administration to help out with your current crisis,' '' [Seattle City 
Light Superintendent Gary] Zarker said. ``You'll get no cap or 
intervention'').
    \23\ Don Van Natta, Jr., ``Bush's California Energy Stance 
Faulted,'' New York Times, May 8, 2002.
---------------------------------------------------------------------------
    FERC Commissioner William Massey's recently captured how the dire 
circumstances of Western wholesale power crisis of 2000-01 made it 
difficult or impossible to negotiate power supply contracts on 
reasonable terms:

          The atmosphere in which these contracts were negotiated was 
        unprecedented. The California spot markets were out of 
        control--this Commission declared them dysfunctional--and they 
        were driving prices throughout the West. There was an urgent 
        need to get load off of the spot market and into forward 
        contracts. Yet it must have been extraordinarily difficult for 
        the contracting parties to negotiate long-term contracts under 
        these circumstances. After all, the most influential benchmark 
        in negotiating forward contracts--the spot market and 
        expectation of future spot prices--was wildly dysfunctional. 
        The Commission has explicitly recognized this critical 
        relationship. In the AEP Power Marketing order issued just last 
        Fall, we recognized that `maintaining an accurately priced spot 
        market is the single most important element for disciplining 
        longer term transactions.' Yet this single most important 
        element was out of control when the contracts at issue were 
        negotiated. Unfortunately, this agency failed to intervene 
        forcefully and effectively until June 20, 2001, more than a 
        full year after the market dysfunction began.\24\
---------------------------------------------------------------------------
    \24\ Nevada Power Co. et al., 99 FERC para. 61,047 (2002) (Comm'r 
Massey, concurring in part, dissenting in part) (footnote omitted). See 
also GWF Energy, LLC, 98 FERC para. 61,330 (2002) (Comm'r 
Massey, dissenting in part) (``It is a well accepted maxim that a good 
spot market will discipline the forward market. Indeed, the Commission 
expressly recognized and accepted this relationship in a recent order . 
. . By the Commission's own clear findings, the spot market conditions 
needed for disciplining the longer term contract prices were not 
present in the California market'').

    In sum, the Western power crisis of 2000-01 forced huge rate 
increases on Snohomish and its customer-ratepayers. As we detail in the 
next section, the results of these rate increases were devastating 
economically, socially, and personally to hundreds of thousands of 
citizens in our county and to millions of citizens across the West.
consumers in snohomish county and across the west have been devastated 
                      by the western market crisis
    I have heard personally from hundreds of citizens in Snohomish 
County about the devastating effects of the rate increases we have been 
forced to impose on them by the Western wholesale power crisis. I have 
attached hereto a few of the hundreds of letters we have received. Some 
of these letters are from senior citizens, low-income citizens, and 
others living on fixed incomes who have been pushed to the brink of 
poverty by high electric bills. Regrettably, threats of violence 
against our employees and facilities have become common. I attach, as 
well, a few examples of the threats we have received. While the voices 
of consumers are not often heard above the din of abstract policy 
debates in Washington, D.C., their cries for relief and their anger are 
very real, as the following excerpts from local newspapers illustrate:

    Snohomish Co. utility discusses lowering rates, Seattle Post--
Intelligence Reporter (March 6, 2002)

          Like a lot of people north of Seattle this year, Linda 
        Harrison and her family are having a rough go. Her husband, a 
        computer technician at the Everett Boeing plant, was laid off 
        last Friday. Her 84-year-old mother is entering the early 
        stages of Alzheimer's. Then came the blow she didn't expect--
        the power bills. The two-month tab for her mother's modest, 
        double-wide home in south Everett shot up to $747 this winter. 
        That's three-quarters of the woman's monthly Social Security 
        check and 66 percent more than her normal bill from last 
        winter.

    The ``immoral'' cost of energy, Everett Herald, Local News (April 
20, 2001)

          The Edmonds School District's Energy costs have climbed from 
        $400,000 last year to $600,000 this year. That $600,000 would 
        pay for 10 or 12 teachers, says district budget and finance 
        chief Bill McKeighen. Or 28 teachers aids. Or half of the 
        district's interscholastic sports program. Or all of this 
        year's textbook allotment. So how do you choose between books 
        and heat? Asked William Massey, a member of the Federal Energy 
        Regulatory Commission. ``That's an impossible choice,'' he 
        added. It's probably going to mean staff cuts, McKeighen 
        replied. ``We could not just not buy textbooks.'' The exchange 
        came Thursday at a forum on federal power policy sponsored by 
        U.S. Rep. Jay Inslee at the Snohomish County PUD auditorium in 
        Everett.
                                 ______
                                 
          Most, including Inslee and Gov. Gary Locke, called for some 
        sort of power price cap. ``This is not an abstraction, some 
        kind of economic theory or bar graph,'' Locke said. ``These 
        people are living the energy crisis every day.'' Massey agreed.
                                 ______
                                 
          ``I see no reason to protect a dysfunctional market when this 
        dysfunctional market is putting people out of work,'' [Massey] 
        said following the forum. ``I was moved by the testimony I 
        heard from real people, real businesses.''
                                 ______
                                 
          One of the real people to speak Thursday was Don Paterson of 
        Bellingham, who lost his job when Georgia Pacific closed its 
        pulp and chemical mill there. Georgia Pacific historically had 
        paid 4 to 5 cents a kilowatt-hour for electricity, he said. 
        ``When it jumped up to 4 to 5 dollars, they shut the door.''
                                 ______
                                 
          Soaring power costs cut into first-quarter profits by 20 
        percent, said Diane Symms, owner of the Lombardi's Cucina 
        restaurant in Everett--even though the staff has cut energy use 
        as much as 15 percent. They've done all they can do to conserve 
        power, Symms told a forum on federal energy policy Thursday. 
        But a restaurant has to cook and boil water, and that requires 
        natural gas. And food has to be refrigerated, and that requires 
        electricity. So in response, Symms said, she's cut her 
        restaurant hours, and cut back on staff. ``We suspect we're 
        going to have to do more of that to keep the business open.''

    Struggling to keep heat, lights on: Calls swamp energy assistance 
offices, Seattle Times, Local News (December 21, 2001)

          Caseworkers say they're hearing from people who are returning 
        Christmas presents, borrowing money from relatives and selling 
        their cars to keep the heat on. One Snohomish County woman 
        burned cardboard boxes in her wood-burning stove for heat when 
        she ran out of money for wood. Seniors on fixed incomes are 
        particularly squeezed. An elderly woman with health problems 
        called a Snohomish County aid program after setting her heat at 
        60 degrees and putting on three pairs of overalls and two 
        sweaters to keep warm
                                 ______
                                 
          People who run utility-assistance programs say they're 
        worried about the spring. ``I can guarantee you we'll run out 
        sooner this year because of Boeing,'' which is still in the 
        process of laying off thousands of workers, said Dennis 
        Smedsrud, who oversees PSE's Warm Home Fund. Bill Beuscher, who 
        runs Snohomish County's federal energy-assistance program, said 
        he's likely to be out of funds by the end March, right before 
        what may be his program's busiest week.

    Kimberly Clark facing huge hike in PUD rates, Everett Herald 
(September 29, 2001)
          For residential customers of Snohomish County PUD, 
        electricity costs will climb 18 percent starting Monday. But 
        for Kimberly-Clark Corp., a major employer in the county and a 
        major PUD customer, power costs will rise more than four times 
        that amount, or 75 percent. ``It's a matter of huge concern and 
        priority,'' said Scott Felter, manager of Kimberly-Clark's 
        Everett pulp mill, earlier this week. Felter and Dave Faddis, 
        general manager of Kimberly Clark's waterfront pulp and tissue 
        mills, knew a significant rate increase was on the way. The 
        operation had long had a negotiated agreement for lower rates, 
        but that's expiring. But the increase was larger than expected 
        and will cost the company millions of dollars at a time when 
        it's looking to trim costs as much as possible to remain 
        competitive.

    In aggregate terms, as well as in individual terms, rapidly 
escalating electric rates have caused severe harm across the Pacific 
Northwest. The Wall Street Journal has estimated that, as a result of 
the Western energy crisis, disposable household income in Washington 
State will be cut by $1.7 billion and 43,000 jobs will be lost over the 
next three years.\25\
---------------------------------------------------------------------------
    \25\ ``Rising Energy Prices Could Tip Washington Toward a 
Recession,'' Wall Street Journal, March 13, 2001.
---------------------------------------------------------------------------
    Put another way, ``If FERC had intervened in May 2000, the entire 
crisis might well have been avoided. . . . [T]he bankruptcy of Pacific 
Gas & Electric and the closure of industries from Arizona to British 
Columbia could have been avoided, and thousands of jobs could have been 
preserved.'' \26\
---------------------------------------------------------------------------
    \26\ Robert McCullough, ``Revisiting California,'' Pub. Utils. 
Fortnightly, April 1, 2002, at 36.
---------------------------------------------------------------------------
    This economic devastation is traceable directly to the excessive 
electric prices arising from the Western wholesale power crisis of 
2000-01. Snohomish PUD has held its non-power costs steady, below the 
rate of inflation, for several years. Yet the rapid rise in wholesale 
power costs since 2000 has forced it to raise its rates by an aggregate 
of nearly 60% since the end of 2000.
greater market transparency is key to preventing abuse of market power 
                       and gaming of market rules
    One key factor that allowed the abuse of market power and the abuse 
of market rules to go on for so long was that the wholesale power 
markets have operated under a cloak of secrecy woven from contractual 
and industry rules that make virtually any market information subject 
to confidentiality rules. Indeed, as Northwest energy economist Robert 
McCullough recently wrote, one reason dysfunctions in the Western 
wholesale power markets reached such serious levels is that ``the 
aggressive use of confidentiality agreements'' kept critical market 
data ``out of the hands of the public, the press, and policy makers.'' 
\27\ Overly broad claims of confidentiality facilitate the ability of 
power marketers to manipulate prices and impose unjust and unreasonable 
terms of service on consumers by hiding critical facts from regulators 
and denying consumers access to meaningful information about their 
power supply transactions. Again in the words of Robert McCullough, 
such secrecy rules are ``an incentive for abuse.'' \28\
---------------------------------------------------------------------------
    \27\ Id.
    \28\ Testimony of Robert McCullough Before the Subcommittee on 
Energy and Air Quality of the House Committee on Energy and Commerce 
(Feb. 13, 2002).
---------------------------------------------------------------------------
    In recent testimony before this Committee, Mr. McCullough similarly 
stated that: ``Restriction of market information weakened the 
negotiating position of consumers and made high prices far more likely 
in these markets. Even today, weak reporting of marketers to FERC and 
restrictive information rules by ISOs make concentration and abuse in 
market hubs difficult to monitor.'' \29\ In the absence of ``open 
information'' for consumers and policymakers, ``market failures are 
easily disguised and corrective measures are painfully delayed.'' \30\ 
Simply put, consumers and regulators--such as FERC--cannot effectively 
detect and correct abuses by marketers if marketers are allowed to 
function under a cloak of secrecy.
---------------------------------------------------------------------------
    \29\ Testimony of Robert McCullough Before the Senate Committee on 
Energy and Natural Resources (Jan. 29, 2002).
    \30\ Id.
---------------------------------------------------------------------------
    Indeed, as FERC itself has recognized, ``[p]ublic reports [of price 
and revenue data] are likely to result in increased competition in the 
marketplace.'' \31\ As the Commission also has ruled, public 
availability of price data is ``essential to enable the Commission . . 
. and the public to detect undue discrimination . . .'' \32\ In the 
Commission's own words, access to price data should not be limited to 
only the Commission staff because ``fellow [market] participants and 
other interested parties are best situated as competitors and customers 
. . . to identify actual discriminatory practices.'' \33\ Particularly 
when a seller is a power marketer, like Enron, the Commission ``and 
other interested parties'' need access to contract information to 
detect abuses of market power because the means by which power 
marketers acquire and exercise market power is through their purchase 
and sales contracts.\34\
---------------------------------------------------------------------------
    \31\ Western System Power Pool, 64 FERC para. 61,063, at 61,603 
(1993) (emphasis in original).
    \32\ Id. at 61,604.
    \33\ Id.
    \34\ Citizens Power & Light Corporation, 48 FERC para. 61,210, at 
61,778 (1989).
---------------------------------------------------------------------------
    Power marketers have insisted on confidential treatment of their 
contract information on what we believe to be a flimsy basis--that 
disclosure of contract information after the contract is signed might 
somehow prove harmful to competition by allowing power marketing 
competitors to ``reverse engineer'' the proprietary pricing models used 
by such marketers. In fact, because of the many different elements of 
such pricing models, this is unlikely to be so. In fact, the courts 
have rejected such claims, concluding that proprietary information is 
unlikely to be gleaned from contracts in analogous circumstances.\35\
---------------------------------------------------------------------------
    \35\ GC Micro Corp., 33 F.3d at 1114-15 (contract price term is 
``made up of too many fluctuating variables for competitors to gain any 
advantage from the disclosure''); Acumenics Research & Technology v. 
U.S. Dept. of Justice, 843 F.2d 800, 807-08 (4th Cir. 1988) (same).
---------------------------------------------------------------------------
    Indeed, a U.S. Department of Energy Office administrative hearings 
board recently rejected just such a claim by the Bonneville Power 
Administration (``BPA''). That panel found that the ``[c]onclusory and 
generalized allegations of substantial competitive harm'' frequently 
voiced by power marketers ``are unacceptable and cannot support'' the 
withholding of such information.\36\ The panel further observed that 
``Courts have traditionally viewed with great skepticism the claim that 
the release of past pricing and quantity data would allow competitors 
to predict an entity's future pricing strategy.'' \37\ Hence, the Board 
concluded, BPA ``has not shown how its customers' competitors could use 
past pricing and quantity information to predict BPA's future offering 
prices for resales of electric power or for sales and goods and 
services produced with the electric power purchased from BPA.'' \38\
---------------------------------------------------------------------------
    \36\ Id., slip op. at 3. See also id. at 5 (noting that privilege 
for commercial information ordinarily ends once process of awarding a 
contract is concluded).
    \37\ Id.
    \38\ Id. at 3.
---------------------------------------------------------------------------
    The power marketers' assertions of confidentiality in fact 
contravene their legal obligation to publicly report contract 
information under the Federal Power Act (``FPA''). Section 205(c) of 
the FPA requires all public utilities, including power marketers, ``to 
file with the Commission for public inspection all rates, charges 
classifications, and practices, as well as any contracts that affect or 
relate to such rates, charges, classifications, and practices.'' \39\ 
Power marketers should not be allowed to write this provision out of 
the FPA through contractual language and administrative acquiescence by 
FERC.
---------------------------------------------------------------------------
    \39\ National Electric Associates Limited Partnership, 50 FERC 
para. 61,378, at 62,157 n.15 (1990)(citing 16 U.S.C. 
Sec. 824d(c)(1988)).
---------------------------------------------------------------------------
  the committee should insist on administrative rules that guarantee 
                          transparent markets
    In light of the above discussion, Snohomish would like to provide 
its answers to the questions posed by the Committee in it letters of 
invitation to the PUD to testify:
1. Are current disclosure rules sufficient to discover the kind of 
        behavior referred to in the documents and if not, should 
        disclosure rules be strengthened either by rule or statute?
    The most urgent reform FERC ought to undertake is to immediately 
make all critical contract terms (price, length of contract, and 
quantity) at issue in its Enron investigation, as well as critical 
underlying documents such as internal Enron memoranda, immediately 
public. The pall cast upon those contracts by the recent revelations of 
Enron's systematic abuse of market rules removes any justification for 
keeping those contract terms confidential. Further, the most recent 
contracts at issue in the FERC investigation are nearly a year old and 
there is no reasonable argument that any meaningful proprietary 
information will be revealed by disclosure of such stale contracts, 
especially in light of the fundamental changes that have occurred in 
the Western power markets since that time.
    In addition, we believe that FERC's market disclosure rules must be 
significantly strengthened. As noted above, Enron and other power 
marketers have used contractual confidentiality provisions aggressively 
to make sure critical market information does not become public, which 
has crippled the ability of both government regulators and power 
purchasers to detect market power abuse and gaming of market rules. It 
is therefore essential for power market information to be readily 
available. We believe that all power marketers and generators should be 
required to file a publicly available report with FERC at least 
quarterly identifying all final power sales transactions entered into 
during that quarter, and the critical terms of those sales--price, 
contract quantity, contract terms, market hubs, receipt and delivery 
points--should be disclosed in a uniform, meaningful, and easily 
accessible format. While FERC has recently issued rules tightening up 
on power market disclosure requirements, we believe disclosure rules 
contain significant loopholes that must be closed. For example, FERC's 
rules do not require the disclosure of long-term contracts. While we 
recognize that the terms of offers must be remain confidential during 
the process of power contract negotiations to prevent collusion and 
manipulation, once the contract is signed, there is no good reason to 
prevent disclosure of critical contract terms. Indeed, consumer-owned 
utilities such as Snohomish operate under public disclosure statutes 
that ordinarily require all contracts to be public once the negotiation 
process has concluded.
2. Are there behavior patterns that, in and of themselves, should be 
        considered presumptively manipulative? If so, what kind of 
        behavior?
    The most destructive behavior that occurred in the California 
market was economic withholding of power; that is, the intentional 
withholding of power to artificially drive up market prices. In 
addition, the recently-revealed Enron memo lays out a number of 
different strategies used to game the California market to artificially 
enrich power marketers at the expense of consumers. The common elements 
of these behaviors, besides their deviousness, was the fact that Enron 
was able to profit while providing little or nothing of value to the 
system. These types of behaviors must be outlawed, those guilty of such 
abuses should be punished, and remedies to consumers who suffer because 
of such abuses must be assured of effective remedies.
3. Are FERC's market rules sufficient to ensure that markets are not 
        manipulated?
    No. There are credible charges of market manipulation in every 
market where deregulation has been tried, including FERC's current 
``poster children'' for deregulation, ERCOT in Texas and the PJM 
Interconnection in the mid-Atlantic. Despite the apparent inability to 
restrain these kinds of market abuse, FERC is plunging ahead with a 
nationwide ``Standard Market Design'' and with Regional Transmission 
Organizations, both of which entail a large, complex, and convoluted 
system of market rules--a playground for marketers to devise new 
strategies for abuse of these rules. FERC should immediately suspend 
these rulemaking initiatives and should not continue with them until it 
has satisfied itself, this Committee, and Congress that it has workable 
rules in place that will prevent the kinds of abuse that occurred in 
California, Texas, PJM, England, New Zealand, and numerous other 
jurisdictions around the world that have attempted to implement new 
rules for the power markets.
4. What actions are being taken to change the rules, if they are not 
        now sufficient? Is further statutory authority necessary?
    Apart from a recent order tightening somewhat the rules for 
disclosure and the current investigation of California market power 
abuse, in our view FERC is doing little to ensure that the kinds of 
rampant abuse of market rules that occurred in California does not 
occur elsewhere. In fact, as noted above, FERC is moving in the wrong 
direction by attempting to institute national rules of the kind that 
were so skillfully manipulated by Enron and other power marketers in 
California. In our view, FERC has adequate statutory authority to 
prevent these kinds of abuse, but if it refuses to exercise that 
authority, or to provide adequate remedies to protect electric 
consumers. If FERC refuses to fulfill its Congressionally-mandated 
mission to protect electric consumers, Congress should not hesitate to 
mandate appropriate rules.
    In addition to the actions recommended above, two other actions 
would be helpful in our view. The first is that the Commission should 
have more balance in its composition. FERC has been without a 
representative from the Western United States for decades. This has 
resulted in an institutional lack of knowledge about the Western power 
system, which has, evidenced itself most recently in Standard Market 
Design and Regional Transmission Organization rulemakings that threaten 
many of the unique aspects of the Pacific Northwest electric system, 
such as the predominance of hydroelectric power, coordinated operation 
of the Columbia River system, and long distances between generation 
supply and load. The value of more diversity in the Commission is also 
important with regard to other matters at FERC, such as hydroelectric 
facility licensing and relicensing. The majority of the hydroelectric 
capacity that is coming up for relicensing in the next several years is 
located in the West. The Commission today has no members from west of 
the Rocky Mountains, as has been the case for many years, and the new 
nominee is similarly from the East. Representation of the Western 
United States at FERC is long overdue.
    We also strongly recommend that FERC slow down its sprint toward 
implementing Standard Market Design policies and the forced formation 
of Regional Transmission Organizations. These policies are generally 
intended to further open markets and encourage competition. We have no 
quarrel with open markets and competition per se, but it occurs to us 
that we ought to understand how to effectively operate open markets and 
ensure fair and transparent competition before we throw yet another 
round of free market ideology onto American consumers and the American 
energy system. Further, as noted above, FERC seems intent on 
implementing these policies in the Pacific Northwest with very little 
knowledge of those policies will affect the unique operations of the 
Northwest's electric system and, worse, little apparent inclination to 
learn.
    We have yet to sort out the disastrous impacts of the last round of 
``market design'' and to sort out the lessons learned from those 
mistakes that were made in the last round. It seems like we should do 
that, at the very minimum, before we launch into another round of 
sweeping change that my customers fear is simply going to be the basis 
for another round of bureaucratic bungling that ends up costing them 
more money. We owe it to them to do better, so let's slow down and make 
sure we get it right, if we do it at all. We simply have to remember 
that the interests of native load-your average electricity consumers-
and the utilities that serve them have to be addressed at the same time 
you are trying to improve the world for new market entrants like Enron, 
Calpine, Morgan Stanley, Dynegy and the like. These entities may have a 
place in the world, but they are not load serving entities with an 
obligation to serve-and I suggest to you that we ignore the well being 
of the load serving entities and their average customers at some great 
risk to yourselves.

    The Chairman. Thank you very much. Thank you all very much 
for your testimony. Let me ask a few questions and then defer 
to Senator Feinstein.
    Mr. Ackerman, what is your explanation for why prices went 
the way they did there?
    Mr. Ackerman. Scarcity of supply. There were very poor 
hydro conditions in the Northwest. There was no new generation 
to meet the vastly increased amount of demand for electricity, 
which took place in the Western States. It was taking place 
across the Western region all at once, so that every megawatt, 
for example, in Arizona, Nevada, or Oregon that was used to 
meet its own economic growth and growth in electricity demand 
was one less megawatt that could come into California. So, 
there was a supply shortage, and there was no way for people to 
see the higher prices which you can see on my chart there on 
their bills because people in California, at least those who 
were served by the investor-owned utilities, were under a rate 
freeze. So, we had a situation where demand could not respond 
and a supply shortage, and those are the fundamentals which 
drove prices up.
    The Chairman. It is your view that there was a genuine 
shortage, not a contrived shortage.
    Mr. Ackerman. Yes, sir.
    The Chairman. Let me ask any of the other witnesses if they 
have a point of view on this subject.
    Ms. Church.
    Ms. Church. Senator, I absolutely agree. There was a real 
shortage in California, and I think it is very troubling to 
hear some of the State officials say that, in fact, that 
shortage did not actually occur because they are basically 
setting themselves up for additional problems.
    What we saw was the hydropower that normally is imported 
from the Northwest was unavailable due to the drought, and a 
lot of power that normally is imported during the summer from 
the Southwest from your State and from Arizona and Nevada was 
not available because the increased load within their own 
States and the fact that the heat wave was very widespread.
    I absolutely agree there was a shortage. I think the 
Governor has recognized that because he has tried to have new 
plants built in that State.
    The Chairman. Mr. Martinez, did you have a point of view?
    Mr. Martinez. I can agree with the comments earlier made in 
regards to the hydro shortage. It was a drought year. 
California has always relied on imports of hydro from the 
Pacific Northwest to fill in the gaps. Indeed, the economy in 
California had also gotten to a point where the demand was 
there.
    The department, looking at the portfolio generation that we 
had, decided in early 2000 to reactivate two out-of units that 
we had mothballed for several years because we saw not only a 
need for our system, but potentially for the Western States to 
provide that type of capacity. So, we brought back to service 
350 megawatts of capacity that had been out-of for many, many 
years.
    The Chairman. Ms. First, did you have a point of view on 
this?
    Ms. First. I do, Senator. The power marketing lobby has 
often blamed the huge price increases on market instability, on 
shortages of power caused by a drought, which we certainly had 
in the Pacific Northwest. But the recent evidence and even 
evidence as late as this week clearly demonstrates that this 
explanation is not the only reason. If you look at Mr. 
McCullough's report, which I believe has been provided to the 
committee, in April demonstrates that power supplies were, in 
fact, better during the crisis period than during the previous 
droughts in the West. They cannot just lay it off on the 
hydroelectric production.
    The Chairman. So, what is the explanation? If it is not an 
actual shortage of power, what was the explanation for those 
dramatic increases?
    Ms. First. Oh, I think it was a shortage of power, but I 
think that shortage was manipulated.
    The Chairman. So, you think it was withheld from the 
market, although it was available to be provided.
    Ms. First. Absolutely. You heard testimony this afternoon 
that a third of the generation in California was off line at 
one time I think in response to Senator Feinstein's questions. 
Was that usual? Well, no, they had to admit it really was not.
    The Chairman. But you think it was withheld in order to 
drive prices up.
    Ms. First. I do.
    The Chairman. Ms. Church.
    Ms. Church. Senator, there is no evidence of that 
happening. In fact, the only evidence from any government 
agency that has looked at this issue was a FERC report, albeit 
not a very expansive report, which found to the contrary.
    A number of State agencies, including the CPUC, have 
actively investigated whether or not there was any withholding 
of power in order to manipulate prices. They or no other agency 
have issued any reports that found any such withholding.
    Mr. Winter himself earlier here today said, yes, 15,000 
megawatts were off. Some were off because they had not been 
paid. Now, I do not know any industry in this country where if 
you do not think you are going to be paid because you do not 
have a credit worthy seller, that you have to run and incur the 
cost of buying power, buying the fuel, hiring people and 
running that plant, buy the emission credit, and not be paid.
    Secondly, as Mr. Winter said earlier, many of the plants 
that we are talking about are very old natural gas, middle 
cycle and peaking units. Some were literally Korean War era. 
They were used to running 50, maybe 200 hours a year, and all 
of a sudden, they are being asked to run 24/7. No 50-year-old 
man or woman can run that much without having to stop for some 
rest, seeing the orthopedic doctor, and some other things, and 
certainly a 50-year-old plant cannot be asked to run that way 
either.
    The Chairman. Let me ask just one question about these 
recently disclosed deceptive practices that have been described 
here at length at our hearing and then at the Commerce 
Committee hearing this morning. One of the witnesses at the 
Commerce Committee hearing is Dr. Frank Wollak, a professor of 
economics at Stanford. He says in his written testimony, ``The 
above logic implies that the strategies described in the Enron 
memos are at best a small part of the cause of the California 
electricity crisis. Of the more than $10 billion of refunds 
that the California ISO has calculated are owed to California 
consumers from paying unjust and unreasonable wholesale 
electricity prices over the period June 2000 to June 2001, the 
strategies outlined in these memos at most account for $500 
million, when aggregated over all California market 
participants.''
    Do any of you have views as to whether he is correct in 
that, or do you have a different point of view on this question 
of how significant these deceptive practices were in causing 
the exorbitant prices that occurred in California or the 
Northwest?
    Mr. Ackerman.
    Mr. Ackerman. My response to that, without commenting on 
Dr. Wollak's numbers, because I believe Dr. Wollak has a good 
grasp on the numbers and I would agree with those, is that for 
the case of manipulation to be made, one would have to go to 
this pricing cycle over the last 4 years, hypothesize that no 
deception took place from April 1998 until May 2000, and then 
for a period of 1 year, deception took place which caused those 
higher prices, and then in May 2001, it suddenly disappeared. 
That is the case for manipulation, and I do not see it.
    The Chairman. Do any of you have a point of view on this?
    Ms. Church. I will hazard a comment. I cannot comment on 
Mr. Wollak's number of $500 million--$500,000.
    The Chairman. No. It is $500 million. Out of the $10 
billion which he cites here as $10 billion in refunds that the 
California ISO has calculated are owed to California consumers.
    Ms. Church. I can say that given what we know about Enron's 
participation in that market, certainly Enron cannot be 
responsible for the $10 billion. The ISO's own numbers or 
estimate back about a year ago of the excess prices charged by 
both FERC jurisdictional and publicly owned utilities was about 
$6 billion. That was into the ISO. Of that amount, $40 million 
was credited to Enron, less than 1 percent. Enron was not that 
big a player in the California market. They did not own 
generation which others have said. As I said, I cannot comment 
on his numbers, but I think it sounds roughly about right.
    The Chairman. Yes, Ms. First.
    Ms. First. I cannot comment on his numbers either, except 
just to make this one observation very quickly. Ultimately it 
does not matter why those rates went up that high, whether it 
was market manipulation or something else. The fact remains the 
wholesale rates were unjust and unreasonable, and it is up to 
FERC to figure out why and how much should be refunded.
    The Chairman. Yes, and he makes that point elsewhere in his 
testimony. That is a very good point. I agree.
    Did you have a comment?
    Mr. Martinez. Again, I just want to emphasize at the 
Department of Water and Power, the trading portion of our 
business is a very small portion, and we do not analyze a lot 
of the transaction that go on in the market. Basically we are 
bread and butter, just put energy into the process, bid it to 
the system, and if there is a market there to buy it, fine. If 
not, we will stay out of it. So, we cannot comment on the 
numbers, and I do not know to what extent these numbers in the 
ball park or on target.
    The Chairman. Senator Feinstein.
    Senator Feinstein. Thanks very much, Mr. Chairman.
    I would like to ask each of the panelists the same question 
I asked earlier. Would you consider the practices outlined in 
the December 6 and 8 memos as deceptive practices? Mr. 
Ackerman, yes or no.
    Mr. Ackerman. Not on all of those practices because the 
more we look into them, the more we research it, there is one 
in particular which I think the ISO identified before December 
of 1998 and said do not do this, which I think is sufficient 
warning for anybody who did do that, which was identified in 
the memo you should not be doing it. So, therefore, I would say 
that is a practice that should not be encouraged.
    Senator Feinstein. And the others?
    Mr. Ackerman. The others. I would have to say the judgment 
is out. I can construct situations where they could be 
absolutely legitimate and then I can construct situations where 
they can be absolutely deceptive. So, I really cannot answer.
    Senator Feinstein. So, you think it is legitimate to sell 
something you do not really intend to deliver?
    Mr. Ackerman. Much like when somebody shorts a stock and 
then sells it even though they do not own it. I suppose there 
is some legitimacy in that because it happens in other 
commodity markets.
    Senator Feinstein. Ms. First.
    Ms. First. Based on what I understand about what is in 
those memos--and I have read them. I have had discussions with 
my staff about them. I have read lots of things on it--I think 
they are definitely deceptive. There is no question.
    Senator Feinstein. Ms. Church.
    Ms. Church. I think the impact of most of the practices, 
whether or not they are deceptive, really depends on what FERC 
finds in terms of what happened, when, what the rules were in 
place in the ISO, and what was the impact on prices or on 
reliability.
    I can tell you, however, I am very disturbed by suggestions 
that in those memos that misleading information was given to 
the ISO or that there may have been some joint action with 
other players. Those two are very troubling.
    Senator Feinstein. Mr. Martinez.
    Mr. Martinez. Senator Feinstein, yes, we see that as 
deceptive type of practices that we would not support.
    Senator Feinstein. Thank you very much.
    See, I guess I am deeply troubled by this industry. If I 
were to tell you that many of these practices were carried out 
on-line in futures derivatives trading and there is no record 
kept, there is no transparency, there is no anti-fraud or anti-
manipulation oversight, and there is no requirement for any 
capital to be put up--and we know for a fact now that the 
capital issue is in fact an issue. Yet, both your associations 
opposed it, which in a sense tells me something about the 
industry. I just want you to know that this Senator from 
California is very deeply concerned about the ethics, the 
practices, the deception that is practiced by the energy 
industry. I do not intend to get off this subject. I intend to 
follow it, every ``i'' and every crossed ``t'', from this point 
on.
    I do not have a lot of questions. I understand you 
represent other people, but in my reading of this, there can be 
no justification for practices like these. The thing that 
concerns me is that both of you say, well, it may be okay under 
these circumstances and it may be okay under that circumstance. 
We really have a problem because this points out to me that 
people are not going to learn and they are going to rationalize 
and they are going to justify what is basic, I think, fraud, 
but let us say at the least deception.
    We are going to have to come to grips with this one way or 
another because I do not think the American people want it, and 
I think that is the ultimate determinator of all of this.
    I just say this because in my dealings with business as a 
mayor and in the 10 years I have been in the Senate, I have 
never encountered an industry quite like this, the brazenness, 
the arrogance, the ``well, this is the oldest trick in the 
book, let's do it,'' that it is all some kind of giant game. 
And yet, people on the other end really suffer because of it. 
And then the willingness to blame, never to look in your own 
shop to see what we can do better or more honestly, but to 
blame. It is all somebody else's fault.
    And I just want to say that to you directly and publicly 
because I read your comments. Ms. Church, I am reading your 
comment in Energy Daily that high prices are not bad. Price 
volatility and price spikes are natural in well-performing 
electricity markets and should be allowed to play their 
economic role, whatever that is. I really think we are on 
different wavelengths as to how we see this.
    I think you people are really making the best possible case 
for re-regulation. If this continues, I have no doubt that 
people in this Nation will want to move to a system which is 
controlled.
    Ms. Church. Senator, may I respond to your comments?
    Senator Feinstein. Sure, absolutely.
    Ms. Church. First of all, let me respond to the article 
that you are referring to yesterday. We had an economic 
consulting firm look at the volatility of spot prices in about 
eight or nine Eastern markets. Some of them were ISO's like 
PJM, New England, New York. Some of them were markets such as 
into Cinergy, into Entergy which are where the players are 
primarily vertically integrated, regulated utilities, but those 
are very liquid markets.
    What the data found was that in all periods, peak periods, 
off periods, peak hours, peak seasons, there is a great deal of 
volatility if you look at hourly and daily prices. But this is 
the spot market which, unlike in California during the period 
we are talking about, is roughly 5 to 10 percent of the market. 
What the data seem to show is that these price spikes for short 
periods of time for small parts of the market are very normal, 
and yet no one is arguing that we have seen and nor has anyone 
seen the kind of price disruption that we saw in California.
    So, the point we are trying to make is we have a commodity 
that is much like natural gas, much like metals, much like 
other commodities where volatility in that spot market is very 
common. And yet, when you are able to exercise--have a lot of 
markets, have a lot of buyers and sellers, you are able to take 
advantage of contracts either physical or financial contracts 
that allow you to hedge your risk, you can get a very smooth--
and the title of the study was Still Waters Run Deep, meaning 
that you can have a smooth top but a lot of volatility going on 
underneath. And that is the point we are trying to make.
    I will be the first to agree with you, Senator, that what 
happened in California is very unfortunate, obviously, and what 
I think what FERC, in looking forward, is trying to do is to 
develop fully integrated, seamless markets throughout the 
United States on a regional basis with very standardized rules, 
which would have prevented, which would prevent a lot of the 
activities we have been talking about today. Certainly as the 
FERC Chairman said, if the type of congestion management system 
that they think is the best model had been used in California, 
Enron would have been unable to have been able to arbitrage 
differences in congestion management. I agree with you the 
rules were not good in California, and they need to be changed.
    Senator Feinstein. Thanks, Mr. Chairman.
    The Chairman. Senator Cantwell.
    Senator Cantwell. Thank you, Mr. Chairman. I would like to 
follow up on Senator Feinstein's questions, and I certainly 
want to associate myself with her remarks because being 
relatively new to the Senate, this has been a frustrating 
experience for us.
    But I think, Ms. Church, maybe there is a way that the 
industry can help now, can step forward, and be helpful in this 
process. You may be familiar that our attorney general has been 
testifying before the Senate Judiciary Committee, has asked for 
Enron to turn over relevant documents, which they have not 
done. So, I am asking you whether your industry association 
members would be willing to turn over to this committee or to 
the Department of Justice relevant documents to when and where 
power capacity--basically when and where their plants were off 
line in California.
    Ms. Church. They have been turning over information to--
they have been, quite frankly, sued up the kazoo by State 
organizations. They have been asked for data from FERC. They 
have been asked for data from private litigants. I know that 
they have turned over a lot of information to officials----
    Senator Cantwell. I am specifically asking, would you 
recommend to your members to turn over to the Western AG's or 
to the Department of Justice documents about when and where 
their plants were off line.
    Ms. Church. I am certainly not going to recommend to them 
that they violate some sort of production order. I am not in a 
position to say whether or not what is being asked of them is 
appropriate, who is asking. I am just not in a position to 
answer that question.
    Senator Cantwell. Do you not think that would be helpful 
for us to know?
    Ms. Church. The bilateral contracts that are entered into 
by individual parties contain a lot of very commercially 
sensitive information. Certainly appropriate government 
agencies, State and Federal, may have jurisdiction and may have 
a need to see those contracts under some sort of protective 
seal, and I am certainly not going to suggest that that not be 
done. But turning these contracts over publicly--I do not know 
what is in them, but my----
    Senator Cantwell. I am not suggesting that. I am talking 
about the Attorney General or the Department of Justice because 
it seems to me that the industry is taking a position of, well, 
we do not really know that this was caused by manipulation. And 
one thing that you could do to step up in the current situation 
and be accountable is to provide access to information about 
whether power was held back. And that seems to me to be a very 
responsible thing for the industry to do.
    Ms. Church. Senator, I will look into it, but I do not 
really know the circumstances you are talking about.
    Senator Cantwell. You do not know whether they----
    Ms. Church. I do not know who is asking for this----
    Senator Cantwell. Okay. We will get that information to 
you. Thank you.
    Ms. First, thank you very much for being here and 
testifying. I live in Snohomish County, and so I very much 
appreciate it. I was talking to some of my friends and 
neighbors whose monthly bills for the last 2-month period went 
from $363 roughly to about $556, a year ago to this time 
period. And while somebody thinks, okay, well, that's roughly a 
couple hundred dollars, that is obviously a huge impact in my 
opinion. But what people do not realize is that the Northwest 
took extreme measures to even get to that $200. People had 
their homes at 58 degrees. People implemented all sorts of 
plans. People did everything and still got stuck with a high 
bill. So, I appreciate your comments today to rectifying this 
problem.
    I am most interested in the fact that Enron--Snohomish 
County had several Enron contracts. How many?
    Ms. First. We had one for $2 million a month.
    Senator Cantwell. And that was negotiated?
    Ms. First. In December 2000.
    Senator Cantwell. And that contract--if you went out, if 
that was abrogated--I mean, if you went out and basically 
voided that contract, what would today's market bring for that 
power?
    Ms. First. What would the equivalent price be?
    Senator Cantwell. What would the cost be.
    Ms. First. I cannot really talk to you about the disparity 
in cost. We are talking about maybe $25 to $30 a megawatt hour. 
But I cannot really talk to you about the specifics of that 
contract because, as you pointed out, we have a restraining 
order that prohibits us from talking about the specifics of 
each of those contracts. They actually went to court and got a 
restraining order.
    Senator Cantwell. Who has that restraining order?
    Ms. First. Well, my recollection is Enron does.
    Senator Cantwell. So, Enron put a restraining order on you 
from talking about those contracts even with government 
entities.
    Ms. First. Absolutely. We are a publicly owned utility. We 
have an obligation to disclose a lot of things in our utility. 
We have a customer who had a request for the three long-term 
contracts we entered into, American Electric Power, Morgan 
Stanley, and Enron, and we were taken to court by two out of 
the three to basically put a gag order on us so that we could 
not release that information to the public. We are a public 
utility.
    Senator Cantwell. Mr. Chairman, this is why I think that 
either this committee or Senator Lieberman's committee or 
working with the Department of Justice, we need access to these 
documents. If Enron is basically stopping legal action from 
this information being public and then we hear from the 
industry, well, you cannot prove your case, well, of course, we 
cannot prove even further the manipulations, although I 
guarantee you this Congress is going to get to the bottom of 
this. People are just holding us up from finding out the 
accurate information. We can take all due steps and processes 
to make sure that vital competitive information is not released 
to the general public. But right now withholding the 
information and stopping individuals--so, have you voided these 
contracts?
    Ms. First. We are asking FERC to void them. We have filed 
an action with FERC. We are asking them to void our long-term 
contracts because the rates are unjust and unreasonable, and we 
are in the middle of that process now.
    I will say we are sympathetic to the industry's complaints 
that they do not want their proprietary information made 
public. We understand that. Certainly during the negotiation 
process, that should be private, but once these contracts are 
inked and we have deals, certainly there can be no harm in 
revealing the terms of those contracts a month later or 3 
months later if they were required, for example, to file 
quarterly reports with FERC that had all that information in 
it.
    Senator Cantwell. So, what will happen to your ratepayers 
if these contracts are not voided? How long will we be paying 
these----
    Ms. First. We will be paying 7 to 9 years. We were, 
fortunately, in a good position, unlike our neighbors to the 
south, another publicly owned utility, who had to borrow half a 
billion with a ``B'' dollars just to meet their payroll to pay 
for their electricity. We were not in that position because we 
were more financially secure, but they are still going to have 
that in their rate base. We are truly passing on the cost of 
power to our customers now. A 60 percent rate increase, 
Senator, living in that district, is just unconscionable.
    Senator Cantwell. So, even though the hydro crisis may be 
over for the Northwest, at least in providing hydropower, we 
are now stuck unless FERC voids these contracts.
    Ms. First. We are absolutely stuck.
    Senator Cantwell. FERC has already said today, the 
Chairman, that he does believe that this was manipulation. We 
are stuck paying for this manipulation for the next 7 to 8 
years.
    Ms. First. And I will say that we are not a utility that 
has ever tried to get out of any power contracts, ever before 
in 50 years. We do not have a choice here. We feel that we had 
a gun to our head and we had to do this. And it is just not 
right.
    Senator Cantwell. Thank you, Mr. Chairman.
    The Chairman. Well, thank you very much. I want to thank 
all of you. It has been a long hearing, and you were very kind 
to stay and give us your testimony. We appreciate it and we 
hope we can continue to monitor this situation and find some 
ways to help remedy it. Thank you.
    [Whereupon, at 6:43 p.m., the hearing was adjourned.]
                                APPENDIX

                   Responses to Additional Questions

                              ----------                              

                      Federal Energy Regulatory Commission,
                                      Washington, DC, June 5, 2002.
Hon. Jeff Bingaman,
Chairman, Committee on Energy and Natural Resources, U.S. Senate, 
        Washington, DC.
    Dear Mr. Chairman: Thank you for your letter of May 21, 2002, 
enclosing questions from Senator Pete V. Domenici and Senator Maria 
Cantwell for the record of your Committee's May 15 hearing.
    I have enclosed my responses to the questions from Senator Domenici 
and Senator Cantwell. Please note that the Commission requests 
CONFIDENTIAL TREATMENT of certain information submitted as part of this 
letter and the attachment hereto. If you need additional information, 
please do not hesitate to let me know.
            Best regards,
                                             Pat Wood, III,
                                                          Chairman.
[Enclosures]
              Responses to Questions From Senator Domenici
                   prohibition on long-term contracts
    Background: According to CBO's report, Causes and Lessons of the 
California Electricity Crisis, California's Public Utility Commission 
(PCU) prevented utilities from entering into long-term agreements with 
independent producers or obtaining futures contracts. PCU operated 
under the assumption that significant generating capacity would exist 
to ameliorate short-term price pressures. However, unfavorable weather 
conditions reduced supply and the energy demands of California's 
economy quickly absorbed the excess capacity causing the Power Exchange 
(PX) to collapse.
    Question 1. Long-term contracts allow utilities to lock in future 
prices now, which facilitates planning and investment in additional 
energy producing capacity. If the California Public Utility Commission 
(PCU) had permitted utilities to enter into long-term contracts, is it 
likely that power generators would have had enough incentive to bring 
on addition capacity thus reducing some of the upward price pressures?
    Answer. Long-term contracts can benefit both sellers and buyers of 
power. Long-term contracts can provide the financial certainty a 
generator needs to develop a new facility. In fact, until recently, 
almost all independent power producers depended on long-term contracts 
in order to develop new facilities. Similarly, a wholesale power 
purchaser using long-term contracts to meet much of its load will be 
less affected by spot price volatility than a purchaser buying all of 
its power in the spot market. While I cannot quantify in dollars the 
effect of barring long-term contracts in California, the effect was 
definitely harmful.
    Question 2. A futures contract not only permits an individual or 
entity to hedge against future risks but also provides markets with 
valuable pricing information about the future. Did the absence of a 
well-developed futures market inhibit the ability of producers to 
anticipate and react to spikes in demand?
    Answer. While futures markets have operated at certain locations in 
the West for several years, California's restrictions on long-term 
contracting may have constrained trading in these markets and, as a 
result, impaired the price discovery function of these markets. A 
robust futures market can provide useful price signals to producers. 
Price increases in the futures market can encourage producers to 
develop additional supply. A futures market also can benefit customers, 
allowing them to buy power at a fixed price months in advance of when 
it is needed and thus avoid the volatility of the spot market. 
Customers also can benefit from the price discovery function of futures 
markets, since price increases in futures market can lead customers to 
make investments in conservation or demand response. A well-functioning 
futures market is a valuable tool in any commodity-based market.
                               price caps
    Background: The California energy market-restructuring plan 
established a set of complex rules and procedures governing auctions 
conducted on the spot market at the Power Exchange (PX) and California 
Independent Systems Operator (CAISO). In particular, it required all 
successful bidders to accept contracts based on the last highest price 
offered and actually capped prices in the CAISO. CBO's analysis 
suggests that these rules created an incentive for sellers to bid in 
such a way as to raise wholesale prices.
    Question 3. California's energy deregulation plan appears to have 
failed because it was poorly designed. In other areas of the country 
where energy markets were deregulated did any of the other plans 
include elements that capped prices?
    Answer. Price caps are also used in the markets operated by 
independent system operators (ISOs) in Texas, New England, New York and 
the mid-Atlantic region operated by PJM. However, the $1,000 ``circuit-
breaker'' price caps in those regions are much higher than the caps 
were in California in, e.g., late-2000 (as low as $250). The ISOs also 
use other forms of price mitigation depending on market conditions and 
participant behavior.
    Question 4. If the price caps had been removed from CAISO auctions, 
would that market have functioned more smoothly?
    Answer. I do not know. The functioning of the California and 
Western markets over the last two years was extremely complex and I 
cannot identify with any certainty the effect of undoing one aspect of 
these markets (price caps) but assuming everything else had stayed the 
same. Ultimately, however, our goal in wholesale power markets should 
be to encourage development of sufficient infrastructure, adopt 
balanced market rules and adequately monitor the behavior of market 
participants. If we accomplish these goals, I believe we can reduce or 
end our reliance on price caps in most circumstances.
                             ferc releases
    Background: As part of the Federal Energy Regulatory Commission's 
(FERC) Staff Fact-Finding Investigation of Western Markets, many of the 
documents it has collected are available online. The three Enron memos 
discussed at this afternoon's hearing included in your briefing book 
were obtained from the FERC's website. However, many other documents 
they have requested have not yet been released.
    Question 5. Some have recently criticized the FERC for not 
releasing more of the information it has requested from other companies 
involved in the California energy crisis. Is this criticism warranted? 
If these allegations are correct, what is preventing FERC from 
releasing the additional documents?
    Answer. No, the criticism is not warranted. The Commission is 
making available documents that have been submitted without claim of 
privilege in the Fact-Finding Investigation of Potential Manipulation 
of Electric and Natural Gas Prices, Docket No. PA02-2-000. The 
Commission's data requests acknowledged, however, that a respondent may 
seek privileged treatment for documents and information by providing an 
index of those materials that are subject to claims of privilege. The 
index includes the date of each document, its title, the recipient(s), 
sender(s), a summary of the contents and the basis for the claim of 
privilege.
    There are several reasons for not releasing privileged information 
that is obtained in a non-public fact-finding investigation. First, due 
process requires that the Commission grant privileged treatment where 
it is warranted under generally accepted rules of civil procedure. In 
addition, confidential treatment of privileged data responses elicits 
more cooperation from respondents so as to enable completion of the 
investigation in a reasonable amount of time. That is particularly 
pertinent here because the Commission must obtain information quickly, 
from many sources. In fact, the Commission's regulations, at 18 C.F.R. 
Sec. 1b.9 (2001), provide that information and documents obtained in an 
investigation will be kept confidential unless the Commission 
authorizes a release, release is required under the Freedom of 
Information Act, or the documents and information are released in the 
course of an adjudicatory proceeding. Finally, the Commission is 
conducting its investigation in cooperation with other agencies that 
are conducting similar investigations (CFTC, SEC and DOJ), and release 
of non-public information could compromise not only our investigation 
but also those of the other agencies.
    Some respondents have requested confidential treatment by claiming 
that disclosure of certain documents would result in competitive harm 
to themselves or to the market or that particular documents are covered 
by traditional discovery privileges, such as attorney-client or 
attorney work product. Rather than adjudicate and possibly litigate 
individual claims of privilege or competitive harm prior to receiving 
the documents, the Commission's rule at 18 C.F.R. Sec. 388.112 (2001) 
provides that any person submitting a document to the Commission may 
request privileged treatment by claiming that all or part of the 
document is exempt from public disclosure under the Freedom of 
Information Act. The respondent then files the document in redacted and 
unredacted forms, and the unredacted version of the document remains in 
the Commission's non-public files pending a decision by the Commission 
on the claim of privilege. The Commission has found that this procedure 
fosters voluntary cooperation with fact-finding investigations while 
providing due process to respondents.
                                 ______
                                 
              Responses to Questions From Senator Cantwell
    Question 1. As we discussed at the hearing, FERC has issued data 
requests to over 100 Western market participants, asking them to affirm 
or deny whether they employed strategies similar to those contained in 
the Enron memos in order to manipulate Western power markets. I 
understand those responses are due by May 22. Please provide those 
responses to the Senate Energy and Natural Resources Committee as 
promptly as possible. If it is not possible for FERC to turn over these 
documents to the Senate in their entirety, please provide me with a 
legal explanation as to why this may be the case, as well as a briefing 
on the information.
    Answer. Many respondents did not claim privileged treatment for 
their data responses in the Fact-Finding Investigation of Potential 
Manipulation of Electric and Natural Gas Prices, Docket No. PA02-2-000, 
and those responses will be posted later this week on the Commission's 
webpage, www.ferc.gov. Other respondents sought privileged treatment 
for certain documents or portions of documents. The logs in which 
respondents identified the privileged documents and the bases for their 
claims of privilege also will be posted on the Commission's webpage. 
However, the unredacted versions of the documents for which claims of 
privilege have been made are being withheld.
    Due process requires that the Commission observe its rules, upon 
which the public has a right to rely. Under 18 C.F.R. Sec. 388.112 
(2001), any person submitting a document to the Commission may request 
privileged treatment by claiming that some or all of the information is 
exempt from mandatory public disclosure under the Freedom of 
Information Act, 5 U.S.C. Sec. 552 (1994). The respondent requesting 
privileged treatment submits the document in redacted and unredacted 
forms, and the unredacted version is placed in the Commission's non-
public files pending a determination on the claim of privilege. If a 
request for a privileged document is made, the respondent is entitled 
to at least five days in which to respond to the request. And if the 
Commission ultimately determines to release the document, the 
respondent is entitled to at least five days' notice before release.
    The Commission has not had an opportunity yet to rule on the claims 
for privileged treatment of data responses in the fact-finding 
investigation. The investigation is ongoing, and the Commission's 
resources are being devoted to analyzing the data and determining what, 
if any, additional information is needed. We believe we must focus now 
on the investigation itself rather than on adjudicating and perhaps 
litigating individual claims of privilege.
    Question 2. What recourse does FERC have should any entity refuse 
to comply with its data requests?
    Answer. Section 307 of the Federal Power Act, 16 U.S.C. Sec. 825f 
(1994), authorizes the Commission to issue subpoenas to compel the 
production of documents for the purpose of any investigation or 
proceeding under the FPA and to invoke the aid of the United States 
District Courts to require such production in the event of a failure to 
obey a Commission subpoena. In addition, section 314 of the FPA, 16 
U.S.C. Sec. 825m (1994), authorizes the Commission to bring an action 
in an appropriate United States District Court to enforce compliance 
with the orders it issues under the FPA and to seek writs of mandamus 
commanding persons to comply with those orders. The Commission also may 
revoke a public utility's authorization to sell power at market-based 
rates. See, e.g., FactFinding Investigation of Potential Manipulation 
of Electric and Natural Gas Prices, 99 FERC para. ----, Docket No. 
PA02-2-000 (order issued June 4, 2002) (requiring four public utilities 
to show cause why the Commission should not revoke their market-based 
rates for lack of compliance with a staff data request).
    Question 3. How many subpoenas has FERC issued in its staff 
investigation of Western power market manipulation? To whom has FERC 
issued these subpoenas? If it is not possible to provide a list to the 
Senate, please provide me with a legal explanation as to why this may 
be the case, as well as a briefing on this information.
    Answer. The Commission is working with the CFTC and the SEC, and is 
providing assistance to United States Attorneys Offices within DOJ in 
the fact-finding investigation. To date, the Commission has issued 14 
subpoenas. Because this is a joint investigation, the Commission cannot 
unilaterally reveal the names of the persons subpoenaed. We must avoid 
all actions that would compromise any criminal proceeding that might be 
initiated.
    Question 4. Who has FERC deposed during the course of this 
investigation? Who does FERC plan to depose? If it is not possible to 
provide a list to the Senate, please provide a legal explanation as to 
why this may be the case, as well as a briefing on this information.
    Answer. As discussed in response to Question No. 3, the Commission 
is working with the CFTC and the SEC, and is providing assistance to 
United States Attorneys Offices within the DOJ. The Commission and the 
CFTC have deposed 13 people and interviewed 25 other persons. We cannot 
reveal the names of those interviewed for the same reasons stated in 
response to Question No. 3, to avoid compromising any potential 
criminal action.
    Question 5. What specific steps can and will FERC take to turn over 
evidence of possible criminal activities to the Department of Justice?
    Answer. The Commission is assisting the United States Attorneys 
Offices within the DOJ and the FBI. Also the Commission is working 
closely with the SEC and CFTC. If the Commission finds evidence of 
possible criminal violations of the FPA or NGA or has other evidence 
that will be useful to the DOJ, it will provide such information to the 
DOJ.
    Question 6. FERC has recently posted on its Website a report 
related to an internal investigation of EnronOnline. The names of the 
memo's author and recipient have been redacted. Would you please 
provide those names to the Committee?
    Answer. Attachment A, for which I request confidential treatment, 
contains the staff names you request. Before the Commission decided to 
release the memo with the staff names deleted, the memo was an internal 
document that would have been exempt from public disclosure in its 
entirety under the Freedom of Information Act, exemptions five (for 
deliberative process) and seven (for investigations and enforcement 
proceedings). This memo was disclosed since some of its content was 
referred to in correspondence from an elected official, which was 
publicly released. I request that the members of the Committee keep the 
names on this internal work product confidential so as not to chill 
staff candor and effectiveness in internal communications in the 
future.
    Question 7. The EnronOnline report also suggests FERC's Office of 
General Counsel had initiated a legal opinion or memo on the 
Commission's jurisdiction over online trading. There are indications 
this opinion or memo was never completed. Why is this the case?
    Answer. In the summer of 2001, the Commission's prior General 
Counsel assigned an attorney in the Office of the General Counsel (OGC) 
to draft an analysis of jurisdictional issues related to Enron Online. 
An initial draft was completed in late August 2001 as an internal OGC 
document. This was followed by a time of transition at the Commission, 
including the departure of the then-Chairman and then-General Counsel. 
It should be noted that, under Commission precedent, the Commission has 
asserted jurisdiction over only the public utility sellers that sold 
electric energy for resale through Enron Online and only where such 
energy went to physical delivery; further, there was no Enron Online 
itself or over derivatives trading over Enron Online. In recent months, 
however, additional factual and legal questions have arisen regarding 
Enron Online's role in power markets. OGC is in the process of 
finalizing a more comprehensive jurisdictional memo. We anticipate that 
this memo, which will represent privileged and confidential non-public 
attorney work product, will be given to all Commissioners in the next 
few weeks.
    Question 8. Please provide a comprehensive list and timeline of 
FERC enforcement actions (of any sort) taken against participants in 
Western energy markets, from July 2000 through the present.
    Answer. The list and timeline are appended in Attachment B. The 
Commission seeks confidential treatment of the attached information.
                                 ______
                                 
                                 Steptoe & Johnson,
                                          Attorneys At Law,
                                      Washington, DC, June 7, 2002.
Hon. Jeff Bingaman,
U.S. Senate, Chairman, Committee on Energy and Natural Resources, 
        Dirksen Senate Office Building, Washington, DC.

Re: Senate Energy And Natural Resources Committee Hearing on Energy 
Price Manipulation in Western Markets

    Dear Mr. Chairman: In connection with the above-referenced hearing, 
held on May 15, 2002, Senator Cantwell submitted two written requests 
to, among others, Mr. Stephen Hall. Below are Mr. Hall's responses to 
those requests.
    Request 1. Please provide me with a comprehensive list of the 
traders with whom you consulted in preparation--or otherwise discussed 
the contents--of the memos recently released by FERC. To the extent 
possible, please also provide their titles, current employer and the 
dates of your interaction with these individuals.
    Response. To the best of Mr. Hall's recollection, below is a list 
of the traders with whom in preparation of the December 6, 2000 
memorandum from Stephen Hall and Christian Yoder to Richard Sanders he 
may have consulted or otherwise may have discussed the contents of the 
memorandum:

        Tim Belden, managing director of Enron's West Power Desk;
        Jessie Bryson, Enron real-time trader;
        Michael Driscoll, Enron real-time trader;
        John Forney, manager of Enron's real-time desk;
        Chris Mallory, Enron real-time trader; and
        Jeff Richter, Enron day-ahead trader.

    Request 2. Please provide a comprehensive list of any other 
attorneys, Enron or Portland General Electric employees with whom you 
consulted in preparation--or otherwise discussed the contents--of the 
memos recently released by FERC. To the extent possible, please also 
provide their titles, employer and the dates of your interaction with 
these individuals.
    Response. To the best of Mr. Hall's recollection, below is a list 
of other attorneys (other than personal counsel), Enron employees and 
Portland General Electric employees with whom in preparation of the 
December 6, 2000 memorandum from Stephen Hall and Christian Yoder to 
Richard Sanders he may have consulted or otherwise may have discussed 
the contents of the memorandum:

        James Fell, partner at Stoel Rives, LLP;
        Gary Fergus, attorney-at-law, formerly of Brobeck, Phleger & 
        Harrison LLP;
        Richard Sanders, Vice President and Assistant General Counsel, 
        Enron Corporation;
        Marcus Wood, partner at Stoel Rives, LLP; and
        Christian Yoder, Director of Legal Services, UBS Warburg 
        Energy.

    Mr. Hall continues to offer his full cooperation with the 
Committee's investigation into this matter. Please feel free to contact 
me with any questions concerning his responses.
            Sincerely,
                                          Mark J. Hulkower,
                                     Attorney for Mr. Stephen Hall.
                                 ______
                                 
      Responses of Gary Fergus to Questions From Senator Cantwell
    Question 1. Please provide me with a comprehensive list of the 
traders with whom you consulted in preparation--or otherwise discussed 
the contents--of the memos recently released by FERC. To the extent 
possible, please also provide their titles, current employer and the 
dates of your interaction with these individuals.
    Answer. These are the individuals that I recall discussing, at 
least in part, the facts underlying the contents of the memos:

Tim Belden, Vice President Enron North America; now at UBS Warburg
Jeff Richter, Manager Cash California Short Term Desk; now at UBS 
Warburg
Chris Mallory, Analyst Cash California Short Term Desk; present 
employment unknown
John Forney, Manager, Real Time Desk; present employment unknown
Michael Driscoll, Analyst; present employment unknown
Mike Dillingham, Title unknown; present employment unknown
Bret Huntsucker, Sr. Specialist, Cash Volume Management; present 
employment unknown
Kim Ward, Manager, Middle Market; present employment unknown
Chris Stokely, Sr., Specialists, Volume Management; present employment 
unknown
Bill Williams, Specialist, Real Time Desk

    My primary interaction with these individuals was in late fall 2000 
and early January 2001. I also was in communication with Mr. Belden and 
Mr. Richter from time to time thereafter on specific issues. There may 
be others that I do not recall.
    Question 2. Please provide a comprehensive list of any other 
attorneys, Enron or Portland General Electric employees with whom you 
consulted in preparation--or otherwise discussed the contents--of the 
memos recently released by FERC. To the extent possible, please also 
provide their titles, employer and the dates of your interaction with 
these individuals.
    Answer. I recall discussing the contents of the memos, at least in 
part, with the following attorneys:

Gibbs & Bruns--Robin Gibbs, Jean Frizzell, Barrett Reasoner
Enron--Richard Sanders, Christian Yoder, Steve Hall (during certain 
periods)
Stoel Rives LLP--Marcus Wood, Steve Hall (during certain periods)
Post Kirby Noonan & Sweat LLP--Michael Kirby, Dave Noonan
Goodin, MacBride, Squeri, Ritchie & Day, LLP--Michael Day
Brobeck, Phleger & Harrison LLP--Michael Molland, Kelly Wooster, Peter 
Meringolo, Amanda Smith
Bracewell & Patterson--Dan Watkiss
Ruby & Schofield--Allen Ruby
Cooper, Arguedas & Cassman--Chris Arguedas
Law Offices of Paul Meltzer--Paul Meltzer
Vinson & Elkins--Mark Tuohey III

    There may have been other attorneys with whom I discussed the 
contents of the memos that I do not recall.
Enron Employees
    I spoke with the individuals listed above to learn the facts.
    I may also have spoken with Allan Comnes, in Enron's governmental 
affairs group in Portland, about some of the contents of the memos.
Portland General Electric
    I had two meetings with Portland General Electric but we did not 
discuss the contents of the memos.
                                 ______
                                 
     Responses of Jean Frizzell to Questions From Senator Cantwell
    The following are my responses to the questions from Senator 
Cantwell:
    Question 1. You have asked me to provide a list of the traders with 
whom I consulted in preparation--or otherwise discussed the contents--
of the memos recently released by FERC. I was not involved in the 
preparation of the memoranda authored by Stephen Hall and Christian 
Yoder. I recall meeting with the following traders in December of 2000 
and/or January of 2001 before coauthoring the draft memorandum:

          a. Tim Belden: Tim Belden was the head trader for the 
        Portland office. I have heard that Mr. Belden currently works 
        for UBS Warburg.
          b. Jeff Richter: I do not recall Mr. Richter's specific 
        position; however, I believe Mr. Richter was responsible for 
        one of the trading desks. I do not have any information 
        regarding his current employment.
          c. John Forney: I do not recall Mr. Forney's specific 
        position; however, I believe Mr. Forney was responsible for one 
        of the trading desks. I do not have any information regarding 
        his current employment.
          d. Chris Mallory: I do not recall Mr. Mallory's specific 
        position; however, I believe Mr. Mallory was responsible for 
        one of the trading desks. I do not have any information 
        regarding his current employment.

    2. The attorneys, Enron or Portland General employees, with whom I 
consulted in preparation--or otherwise discussed the contents--of the 
memos recently released by the FERC are as follow:

          a. Gary Fergus--Partner, Brobeck, Phleger & Harrison LLP (now 
        Fergus, A Law Firm), 1 Market Street, 35th Floor, San 
        Francisco, California 94105
          b. Michael Kirby--Partner, David Noonan (discussed Hall/Yoder 
        memorandum only), Partner, Post, Kirby, Noonan & Sweat, 600 
        West Broadway, 11th Floor San Diego, CA 92101
          c. Richard Sanders--Enron In house counsel, Enron Company, 
        1400 Smith Street, 28th Floor Houston, Texas 77002-7361
          d. Robin Gibbs--Partner, Barrett Reasoner; Partner, Brandon 
        Allen (discussed Hall/Yoder memorandum only); Associate, Gibbs 
        & Bruns, L.L.P., 1100 Louisiana, Suite 5300, Houston, Texas 
        77002

                               

      
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