[Senate Hearing 107-602]
[From the U.S. Government Publishing Office]
S. Hrg. 107-602
ENERGY MARKET MANIPULATION
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
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
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
Responses to additional questions................................ 97
ENERGY MARKET MANIPULATION
WEDNESDAY, MAY 15, 2002
Committee on Energy and Natural Resources,
The committee met, pursuant to notice, at 2:34 p.m., in
room SH-216, Hart Senate Office Building, Hon. Jeff Bingaman,
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
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
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
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
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
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
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
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
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
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
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.
The Chairman. The hearing will reconvene. Please go right
ahead with your testimony, Chairman Wood, and then Mr. Winter
STATEMENT OF PATRICK WOOD III, CHAIRMAN, FEDERAL ENERGY
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
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
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
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
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
[The prepared statement of Mr. Wood follows:]
Prepared Statement of Patrick Wood, III, Chairman, Federal Energy
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
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
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
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
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
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
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
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.
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
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
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
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
(2) lack of significant demand response to hourly prices;
(3) high natural gas prices;
(4) inadequate infrastructure (including inadequate
(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
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
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
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.
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
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
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
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
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
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
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
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
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
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
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
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
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
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.
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
The Chairman. You sure can.
[The prepared statements of Senator Smith and Senator Craig
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
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
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
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
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
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
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
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
Would the Governor of California have acted to expedite the
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
They want to kill the goose just as it is laying the golden
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
Finally, I want to say a few words about a much-maligned agency--
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
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
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
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-
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
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
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. 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,
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
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
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
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
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
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
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
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
Senator Feinstein. Well, you give me hope. I thank you for
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
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
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
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
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
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
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
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
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
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
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
The Chairman. All right. We hope so.
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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,
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
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
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 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
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
[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,
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
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
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
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
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
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
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
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,
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
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
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.
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
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
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
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
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
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
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
I welcome the opportunity to answer, to the best of my
ability, any questions that the committee may have for me.
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.
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
The Chairman. All right.
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
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. 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
The Chairman. We are glad to do that.
[The prepared statement of the Governor of California
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
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
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
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.
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
Mr. Yoder. No.
Mr. Hall. Not to the best of my knowledge.
Senator Feinstein. And that goes for the past or the
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
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
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
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
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. 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
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
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
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
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
Senator Feinstein. Fine.
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
Mr. Hall. California Power Exchange?
Senator Feinstein. It just says Power Exchange. I do not
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
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
Senator Feinstein. Thank you for being direct.
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.
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
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
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
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
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
In sum, we have been part of the solution and not part of
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
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
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
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
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
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
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
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
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
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.
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;
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.
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
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
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
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
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
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,
Are FERC's market rules sufficient to ensure that markets are not
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
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
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-
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
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
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
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
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
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
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
[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
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\ 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-
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
\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
\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,
\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''
\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).
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
\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
\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
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
The ``immoral'' cost of energy, Everett Herald, Local News (April
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
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
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
\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\
\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).
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.
\34\ Citizens Power & Light Corporation, 48 FERC para. 61,210, at
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).
\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
\39\ National Electric Associates Limited Partnership, 50 FERC
para. 61,378, at 62,157 n.15 (1990)(citing 16 U.S.C.
the committee should insist on administrative rules that guarantee
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
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
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
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. 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
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
The Chairman. Ms. First, did you have a point of view on
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
The Chairman. So, what is the explanation? If it is not an
actual shortage of power, what was the explanation for those
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
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
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
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
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
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
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
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
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
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
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
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
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
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
Senator Cantwell. So, what will happen to your ratepayers
if these contracts are not voided? How long will we be paying
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
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
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.]
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,
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.
Pat Wood, III,
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
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.
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
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.
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
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
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
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
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
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
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
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
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
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 &
Richard Sanders, Vice President and Assistant General Counsel,
Marcus Wood, partner at Stoel Rives, LLP; and
Christian Yoder, Director of Legal Services, UBS Warburg
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.
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
Chris Mallory, Analyst Cash California Short Term Desk; present
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
Kim Ward, Manager, Middle Market; present employment unknown
Chris Stokely, Sr., Specialists, Volume Management; present employment
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
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
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.
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
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