[Senate Hearing 107-854]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 107-854

 
  ASLEEP AT THE SWITCH: FERC'S OVERSIGHT OF ENRON CORPORATION--VOL. I

=======================================================================



                                HEARING

                               before the

                              COMMITTEE ON
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION


                               ----------                              

                           NOVEMBER 12, 2002

                               ----------                              

      Printed for the use of the Committee on Governmental Affairs

                        U.S. GOVERNMENT PRINTING OFFICE
                              WASHINGTON : 2003   

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                   COMMITTEE ON GOVERNMENTAL AFFAIRS

               JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan                 FRED THOMPSON, Tennessee
DANIEL K. AKAKA, Hawaii              TED STEVENS, Alaska
RICHARD J. DURBIN, Illinois          SUSAN M. COLLINS, Maine
ROBERT G. TORRICELLI, New Jersey     GEORGE V. VOINOVICH, Ohio
MAX CLELAND, Georgia                 THAD COCHRAN, Mississippi
THOMAS R. CARPER, Delaware           ROBERT F. BENNETT, Utah
JEAN CARNAHAN, Missouri              JIM BUNNING, Kentucky
MARK DAYTON, Minnesota               PETER G. FITZGERALD, Illinois
           Joyce A. Rechtschaffen, Staff Director and Counsel
                       Beth M. Grossman, Counsel
               David M. Berick, Professional Staff Member
               Patrick J. Hart, Professional Staff Member
              Jason M. Yanussi, Professional Staff Member
              Richard A. Hertling, Minority Staff Director
             Gary M. Brown, Special Counsel to the Minority
                     Darla D. Cassell, Chief Clerk

                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Lieberman............................................     1
    Senator Thompson.............................................     5
    Senator Levin................................................    49
    Senator Collins..............................................    54
Prepared statement:
    Senator Bunning..............................................    73

                               WITNESSES
                       Tuesday, November 12, 2002

David M. Berick, Professional Staff Member, Committee on 
  Governmental Affairs, U.S. Senate..............................     9
Hon. Patrick H. Wood, III, Chairman, Federal Energy Regulatory 
  Commission.....................................................    33
Hon. Linda K. Breathitt, Member, Federal Energy Regulatory 
  Commission.....................................................    35
Hon. Nora M. Brownell, Member, Federal Energy Regulatory 
  Commission.....................................................    36
Hon. William L. Massey, Member, Federal Energy Regulatory 
  Commission.....................................................    37
Paul L. Joskow, Ph.D., Director, Center for Energy and 
  Environmental Policy Research, Massachusetts Institute of 
  Technology (MIT)...............................................    60
Frank A. Wolak, Ph.D., Department of Economics, Stanford 
  University.....................................................    62
.................................................................

                     Alphabetical List of Witnesses

Berick, David M.:
    Testimony....................................................     9
    Prepared statement...........................................    74
    Supplemental statement.......................................    93
Breathitt, Hon. Linda K.:
    Testimony....................................................    35
Brownell, Hon. Nora M.:
    Testimony....................................................    36
Joskow, Paul L., Ph.D.:
    Testimony....................................................    60
    Prepared statement...........................................   146
Massey, Hon. William L.:
    Testimony....................................................    37
Wolak, Frank A., Ph.D.:
    Testimony....................................................    62
    Prepared statement...........................................   159
Wood, Hon. Patrick H., III:
    Testimony....................................................    33
    Prepared statement with an attachment........................   130

                                APPENDIX

Responses to Post-Hearing Questions from:
    The Hon. Patrick H. Wood, III................................   177
    The Hon. Linda K. Breathitt..................................   202
    The Hon. Nora M. Brownell....................................   209
    The Hon. William L. Massey...................................   212

                                APPENDIX

                                Volume I

        Materials Submitted for the Record by Chairman Lieberman

A. GMajority Staff Memorandum on Committee Staff Investigation of 
  the Federal Energy Regulatory Commission's Oversight of Enron 
  Corp., November 12, 2002.......................................   220

 Supporting Documents (footnote numbers indicate footnote in Majority 
         Staff Memorandum where document was first referenced)

 1. G``Enron Federal Government Affairs-Outlook & Goals for 
  1999'' (Enron document) (footnote 11)..........................   271

 2. G``Overview of Key Energy Policy Issues,'' (Enron document) 
  (footnote 11)..................................................   277

 3. G``Government Affairs Directory'' (Enron document) (footnote 
  12)............................................................   285

 4. G``Government Affairs,'' November 2001 (Enron document) 
  (footnote 12)..................................................   294

 5. GComplaint, SEC v. Kopper, August 21, 2002 (footnote 22).....   303

 6. GInformation, United States v. Kopper, August 20, 2002 
  (footnote 22)..................................................   309

 7. GComplaint, SEC v. Fastow, October 2, 2002 (footnote 22).....   326

 8. GIndictment, United States v. Fastow, October 31, 2002 
  (footnote 22)..................................................   342

 9. GMinutes, Enron Finance Committee Meeting, May 5, 1997 
  (excerpted) (footnote 24)......................................   374

10. G``Project Storm: Draft Report,'' July 6, 2001 (prepared by 
  PriceWaterhouseCoopers) (excerpted) (footnote 27)..............   387

11. GZond Windsystems Holding Company, FERC Docket No. QF87-365..   529

    a. GRequest for Recertification of Qualifying Facility Status 
  for Small Power Production Facility, May 14, 1997 (footnote 29)   530

    b. GOrder Granting Application for Recertification as a 
  Qualifying Small Power Production Facility, June 30, 1997 
  (footnote 30)..................................................   549

    c. GNotice of Self-Recertification of Qualifying Facility 
  Status for Small Power Production Facility, August 3, 2000 
  (footnote 32)..................................................   555

12. GSky River Partnership, FERC Docket No. QF91-59..............   564

    a. GRequest for Recertification of Qualifying Facility Status 
  for Small Power Production Facility, May 14, 1997 (footnote 29)   565

    b. GOrder Granting Application for Recertification as a 
  Qualifying Small Power Production Facility, June 30, 1997 
  (footnote 30)..................................................   588

    c. GNotice of Self-Recertification of Qualifying Facility 
  Status for Small Power Production Facility, August 3, 2000 
  (footnote 32)..................................................   593

13. GVictory Garden Phase IV Partnership, FERC Docket No. QF90-43   605

    a. GRequest for Recertification of Qualifying Facility Status 
  for Small Power Production Facility, May 14, 1997 (footnote 29)   605

    b. GOrder Granting Application for Recertification as a 
  Qualifying Small Power Production Facility, June 30, 1997 
  (footnote 30)..................................................   626

    c. GNotice of Self-Recertification of Qualifying Facility 
  Status for Small Power Production Facility, August 3, 2000 
  (footnote 32)..................................................   631

14. GCabazon Power Partners LLC (Zond Cabazon Development Corp.), 
  FERC Docket No. QF95-186.......................................   641

    a. GNotice of Self-Recertification of Qualifying Facility 
  Status for Small Power Production Facility, November 30, 1998 
  (footnote 46)..................................................   642

    b. GNotice of Self-Recertification of Qualifying Facility 
  Status for Small Power Production Facility, January 7, 1999 
  (footnote 48)..................................................   649

    c. GNotice of Self-Recertification of Qualifying Facility 
  Status for Small Power Production Facility, January 8, 1999 
  (footnote 47)..................................................   656

    d. GNotice of Self-Recertification of Qualifying Facility 
  Status for Small Power Production Facility, January 24, 2001 
  (footnote 32)..................................................   664

15. GNotice of Self-Recertification of Qualifying Facility Status 
  for Small Power Production Facility, Victory Garden Power 
  Partners I LLC, FERC Docket No. QF99-92-001, January 24, 2001 
  (footnote 32)..................................................   672

16. GEnron Corporation Form U-1, Application under the Public 
  Utility Holding Company Act of 1935, April 14, 2000 (footnote 
  35)............................................................   690

17. GLetter from Joanne C. Rutkowski (LeBoeuf, Lamb, Greene & 
  MacRae) to Catherine A. Fisher (SEC), April 13, 2000 (footnote 
  39)............................................................   699

18. G``Alternative PUHCA Exemption for QF Relief, SEC Staff 
  Presentation,'' July 27, 2001 (Enron document) (footnote 39)...   702

19. GOrder Scheduling Hearing, Applications of Enron Corp. for 
  Exemption Under the Public Utility Holding Company Act of 1935, 
  SEC Administrative Proceeding File No. 3-10909. October 7, 2002 
  (footnote 40)..................................................   715

20. a. GMotion to Intervene and Opposition of Southern California 
  Edison Company, Enron Corp., SEC File No. 070-09661, March 26, 
  2002 (footnote 42).............................................   721

    b. GMotion to Intervene of Southern California Edison 
  Company, In re Victory Garden Power Partners I, LLC (FERC 
  Docket No. QF99-92, ZWHC LLC (FERC Docket No. QF87-365), 
  Victory Garden Phase IV Partnership (FERC Docket No. QF90-43), 
  Sky River Partnership  (FERC Docket No. QF91-59), and Cabazon 
  Power Partners LLC  (Docket No. QF95-186), filed April 3, 2002 
  (footnote 42)..................................................   737

21. GLetter from Magalie R. Salas (FERC) to James B. Woodruff 
  (Southern California Edison Company), May 28, 2002 (footnote 
  43)............................................................   773

22. GOrder Initiating Investigation and Hearing, Investigation of 
  Certain Enron-Affiliated QF's, FERC Docket No. EL03-17-000, 
  October 24, 2002 (footnote 44).................................   774

23. GE-mail from Susan Kappelman (Southern California Edison Co.) 
  to David Berick (Professional Staff Member, Committee on 
  Governmental Affairs), September 6, 2002 (footnote 45).........   782

24. GE-mail from Karen Berky (The Nature Conservancy) to David 
  Berick (Professional Staff Member, Committee on Governmental 
  Affairs), September 30, 2002 (footnote 49).....................   784

25. GAssignment Agreement between Zond Cabazon Development Corp. 
  and The Nature Conservancy, November 18, 1998 (footnote 50)....   785

26. GOrder Denying Applications for Recertification as Qualifying 
  Facilities, Coso Energy Developers, et al., December 16, 1998 
  (footnote 52)..................................................   790

27. GLetter to Laurel Mayer (The Nature Conservancy) from John 
  Lamb (Cabazon Power Partners LLC), January 11, 1999 (footnote 
  53)............................................................   807

28. G``Report on EnronOnline,'' August 16, 2001 (FERC Staff 
  Report) (footnote 54)..........................................   808

29. GLetter from Joseph I. Lieberman to the Honorable Pat Wood, 
  III, May 14, 2002 (footnote 55)................................   829

30. GLetter from Pat Wood, III to the Honorable Joseph I. 
  Lieberman, May 28, 2002 (footnote 55)..........................   836

31. G``Credit Quality for U.S. Utilities Continues Negative Trend 
  in Second Quarter,'' Standard & Poor's, July 12, 2002 (footnote 
  56)............................................................   844

                               Volume II

32. G``Initial Report on Company-Specific Separate Proceedings 
  and Generic Reevaluations; Published Natural Gas Price Data; 
  and Enron Trading Strategies: Fact-Finding Investigation of 
  Potential Manipulation of Electric and Natural Gas Prices,'' 
  (FERC Staff Report), August 2002 (footnote 58).................     1

33. a. ``GWilliams Traders Gave False Data,'' Wall Street 
  Journal, October 28, 2002 (footnote 64)........................   124

    b. ``GAEP Dismisses Five for Providing Inaccurate Market Data 
  for Indexes,'' AEP Press Release, October 9, 2002 (footnote 64)   125

    c. ``GDynegy Dismisses Six Employees, Will Discipline Seven 
  Others for Violations of Company Policies,'' Dynegy Press 
  Release, October 18, 2002 (footnote 64)........................   126

    d. ``GWilliams Discloses Natural Gas Trade Reporting 
  Inaccuracies,'' Williams Press Release, October 25, 2002 
  (footnote 64)..................................................   127

34. GLetter from Pat Wood, III to the Honorable Joseph I. 
  Lieberman, March 4, 2002 (footnote 66).........................   128

35. GLetter from Pat Wood, III to the Honorable Joseph I. 
  Lieberman, April 12, 2002 (footnote 66)........................   132

36. GOrder Establishing Evidentiary Hearing Procedures, Granting 
  Rehearing in Part, and Denying Rehearing in Part, San Diego Gas 
  & Electric Co. v. Sellers of Energy and Ancillary Service, July 
  25, 2001 (footnote 67).........................................   137

37. GInternal FERC memorandum on ``Audit of the Component Costs 
  of Generating Electric Power'' (footnote 68)...................   185

38. G``Electronic Platforms and Energy Trading, Talking Points 
  addressing Common Misperceptions,'' (Enron document) (footnote 
  72)............................................................   188

39. G``Update on Federal Government Affairs Energy Crisis 
  Campaign,'' July 27, 2001 (Enron document) (footnote 74).......   197

40. G``Enron Secures Commitments for Additional $1 Billion in 
  Financing,'' Enron Corp. Press Release, November 1, 2001 
  (footnote 81)..................................................   198

41. GIn Re Investigation of Certain Financial Data, FERC Docket 
  No. IN02-6-000.................................................   199

    a. GOrder to Respond, August 1, 2002 (footnote 84)...........   199

    b. GOrder Approving Stipulation and Consent Agreement, August 
  8, 2002 (footnote 85)..........................................   204

    c. GResponse of Transwestern Pipeline Company, September 3, 
  2002 (footnote 86).............................................   211

42. G``Structuring Summary, Project Bluehorseshoe,'' September 
  17, 2002 (prepared by JP Morgan Global Syndicated Finance) 
  (footnote 87)..................................................   240

43. G``Regulation of Cash Management Practices,'' Federal 
  Register, August 7, 2002 (Notice of Proposed Rulemaking) 
  (footnote 88)..................................................   253

44. G``Account-146 Balances of Enron Owned Companies,'' (table 
  prepared by FERC staff) (footnote 89)..........................   260

45. GResponse of Portland General Electric Company to the 
  Commission's May 8, 2002 Data Request and Request for 
  Admissions, Fact-finding Investigation of Potential 
  Manipulation of Electric and Natural Gas Prices, FERC Docket 
  No. PA02-2-000, May 22, 2002 (footnote 94).....................   264

46. GMemorandum from John Mass (LeBoeuf, Lamb, Greene & MacRae, 
  LLP), August 2, 1999 (footnote 96).............................   287

47. GTranscripts of Portland General Electric Scheduling Calls, 
  April 15, 2000 (footnote 97)...................................   291

48. GTranscript of Scheduler Telephone Conversation, April 6, 
  2000 (footnote 98).............................................   333

49. GOrders Initiating Investigation, and Establishing Hearing 
  Procedures and Refund Effective Date, Portland General Electric 
  Co., et al., FERC Docket No. EL02-114-000, and Avista 
  Corporation, et al., FERC Docket No. EL02-115-000, August 13, 
  2002 (footnote 99).............................................   374

50. a. GLetter from John M. Delaware (FERC) to Transwestern 
  Pipeline Company, October 11, 2000 (footnote 100)..............   384

    b. GLetter from John M. Delaware (FERC) to Northern Natural 
  Gas Company, October 11, 2000 (footnote 100)...................   386

51. G``Preliminary Report on Operation of the Ancillary Services 
  Markets of the California Independent System Operator (ISO),'' 
  August 19, 1998 (prepared by the Market Surveillance Committee 
  of California ISO) (footnote 101)..............................   390

52. G``Report on Market Issues in the California Power Exchange 
  Energy Markets,'' August 17, 1998 (prepared by the Market 
  Monitoring Committee of the California Power Exchange) 
  (footnote 101).................................................   500

53. GMarket Order Proposing Remedies for California Wholesale 
  Electric Markets, San Diego Gas & Electric Co. v. Sellers of 
  Energy and Ancillary Services, November 1, 2000 (footnote 102).   530

54. G``Staff Report to the Federal Energy Regulatory Commission 
  on Western Markets and the Causes of the Summer 2000 Price 
  Abnormalities,'' November 1, 2000 (footnote 103)...............   606

55. GUnited States v. Timothy N. Belden..........................   729

    a. GPlea Agreement, October 17, 2002 (footnote 106)..........   729

    b. GInformation, October 9, 2002 (footnote106)...............   737

56. G``Status of California Electricity Markets,'' August 3, 2000 
  (presentation to FERC by Southern California Edison Co.) 
  (footnote 108).................................................   743

57. GMemorandum from Christian Yoder and Stephen Hall (Stoel 
  Rives LLP) to Richard Sanders, December 6, 2000 (footnote 109).   761

58. G``Commission Addresses California Electricity Markets, 
  Orders Investigation,'' FERC Press Release, August 23, 2000 
  (footnote 113).................................................   769

59. GOrder Initiating Hearing Proceedings to Investigate Justness 
  and Reasonableness of Rates of Public Utility Sellers in 
  California ISO and PX Markets and To Investigate ISO and PX 
  Tariffs, Contracts, Institutional Structures and Bylaws; and 
  Providing Further Guidance to California Entities,'' San Diego 
  Gas & Electric Co. v. Sellers of Energy and Ancillary Services, 
  August 23, 2000 (footnote 113).................................   771

60. G``Report on California Energy Market Issues and Performance: 
  May-June, 2000,'' August 10, 2000 (prepared by Department of 
  Market Analysis, California Independent System Operator) 
  (footnote 116).................................................   791

61. GDeclaration of Eric W. Hildebrandt, San Diego Gas & Electric 
  Co. v. All Sellers of Ancillary Services, October 20, 2000 
  (footnote 117).................................................   851

62. G``California Electricity Markets: Issues for Examination,'' 
  August 17, 2000 (presentation by Dr. Gary Stern, Southern 
  California Edison Co.) (footnote 120)..........................   875

                               Volume III

63. GOrder Directing Remedies for California Wholesale Electric 
  Markets, San Diego Gas & Electric Co. v. Sellers of Energy and 
  Ancillary Services, December 15, 2000 (footnote 123)...........     1

64. GOrder Directing Staff Investigation, Fact-Finding 
  Investigation of Potential Manipulation of Electric and Natural 
  Gas Prices, February 13, 2002 (footnote 124)...................   100

65. GTelephonic Deposition of Christian Good Yoder, Nevada Power 
  Co. et al. v. Duke Energy Trading and Marketing et al., June 
  18, 2002 (footnote 125)........................................   111

66. GDeposition of Stephen C. Hall, Nevada Power Co. et al. v. 
  Duke Energy Trading and Marketing et al., July 11, 2002 
  (footnote 126).................................................   197

67. GInvoice from Stoel Rives LLP to Christian Yoder, Enron 
  Capital & Trade Resources Corp., November 27, 2000 (footnote 
  126)...........................................................   305

68. GE-mail from Mary Hain to James D. Steffes, et al., August 
  29, 2000 (footnote 127) (Enron document).......................   312

69. G``Enron Hosts Annual Analyst Conference; Provides Business 
  Overview and Goals for 2000,'' Enron Corp. Press Release, 
  January 20, 2000 (footnote 132)................................   435

70. G``Enron Announces Increased Earnings Target for 2001 to 
  $1.70-$175 per share,'' Enron Corp. Press Release, January 25, 
  2001 (footnote 132)............................................   437

71. GLetter from Kevin F. Cadden (FERC) to David Berick 
  (Professional Staff Member, Committee on Governmental Affairs), 
  June 19, 2002 (footnote 133)...................................   438

72. G``What To Do About Western Wholesale Markets?'' Enron Corp., 
  August 25, 2000 (presentation by Tim Belden, Enron North 
  America) (footnote 135)........................................   455

73. GLetter from James J. Hoecker (Swidler Berlin Shereff 
  Friedman, LLP) to Susan J. Court (FERC), March 12, 2002 
  (footnote 136).................................................   507

74. G``Progress Toward Deal to Cut Power Cost,'' San Francisco 
  Chronicle, January 10, 2001 (footnote 136).....................   510

75. G``Advancing Electric Competition in the Wake of 
  California,'' February 5, 2001 (Enron document) (footnote 138).   513

76. GE-mail from Ed Gillespie to Andrew D. Lundquist, April 3, 
  2001, 3:47 pm (footnote 139)...................................   533

77. GE-mail from Ed Gillespie to Andrew D. Lundquist, April 3, 
  2001, 9:48 am (footnote 139)...................................   534

78. G``Advancing Electric Competition in the Wake of California: 
  Enron's Campaign to Affect Policy and Public Opinion,'' May 4, 
  2001 (Enron document) (footnote 141)...........................   535

79. GLetter from Alberto R. Gonzales, Counsel to the President, 
  to the Honorable Joseph I. Lieberman, May 22, 2002 (footnote 
  142)...........................................................   551

80. GLetter from Kenneth L. Lay to Clay Johnson, January 8, 2001 
  (footnote 142).................................................   561

81. GMemorandum from Linda Robertson to Ken Lay, February 12, 
  2001 (footnote 144)............................................   564

82. GMemoranda from Linda Robertson and Tom Briggs to Ken Lay re: 
  Meeting with Vice President Cheney, April 13, 2001 (footnote 
  146)...........................................................   566

83. GLetter from John Duncan (Department of the Treasury) to 
  Senator Joseph I. Lieberman, April 22, 2002 (footnote 147).....   627

84. GOrder on Rehearing of Monitoring and Mitigation Plan for the 
  California Wholesale Electric Markets, Establishing West-Wide 
  Mitigation, and Establishing Settlement Conference, San Diego 
  Gas & Electric Co. v. Sellers of Energy and Ancillary Service, 
  June 19, 2001 (footnote 150)...................................   630

85. G``Enron Reiterates Confidence In Operations and Earnings 
  Outlook,'' Enron Corp. Press Release, June 19, 2001 (footnote 
  151)...........................................................   688

86. G``Energy Markets: Concerted Actions Needed by FERC to 
  Confront Challenges That Impede Effective Oversight,'' General 
  Accounting Office Report, (GAO-02-656) June 2002 (footnote 152)   689

87. G``Subject: Tip on Enron Corp's crude oil price fixing,'' 
  April 26, 2002 (unsigned memorandum received by FERC) (footnote 
  155)...........................................................   790

88. GLetter from Pat Wood, III, to the Honorable Joseph 
  Lieberman, August 28, 2002 (footnote 156)......................   791

89. GFY 2003 Congressional Budget Request and Annual Performance 
  Plan, Federal Energy Regulatory Commission, February 2002 
  (excerpted) (footnote 157).....................................   819

90. GLetter from Pat Wood, III, to the Honorable Joseph Lieberman 
  (footnote 157).................................................   833

91. GE-mail from Don Chamblee (FERC) to David Berick 
  (Professional Staff Member, Committee on Governmental Affairs), 
  February 25, 2002 (footnote 158)...............................   862

92. G``Enforcement Activities at Selected Federal Agencies,'' 
  September 6, 2002 (Congressional Research Service Memorandum) 
  (footnote 160).................................................   865

                               Volume IV

B. GReported Contacts Between Current and Former FERC Employees 
  and Enron Corp.................................................     1

 1. GLetter from Chairman Joseph I. Lieberman and Ranking 
  Minority Member Fred Thompson, U.S. Senate Committee on 
  Governmental Affairs to Patrick H. Wood III, Chairman, FERC, 
  February 15, 2002..............................................     1

 2. GFERC's Response to Question 3 of the Committee's February 
  15, 2002 letter, March 4, 2002 (as revised April 8, 2002)......     6

 3. GFERC's First Supplemental Response to Question 3 of the 
  Committee's February 15, 2002 letter, March 21, 2002 
  (information as to current employees revised April 8, 2002)....   557

 4. GFERC's Second Supplemental Response to Question 3 of the 
  Committee's February 15, 2002 letter, April 24, 2002...........   640

 5. GFERC's Third Supplemental Response to Question 3 of the 
  Committee's February 15, 2002 letter, May 8, 2002..............   677

     Materials Submitted for the Record by Ranking Member Thompson

C. GMinority Views: FERC and its Oversight of Enron Corp. (with 
  attachment)....................................................   682

D. Documents:

 1. GCorrespondence between Chairman Wood and Senators Lieberman 
  and Feinstein concerning ethics violations of FERC Commissions 
  (with GAO report attached).....................................   690

 2. GCommissioner Breathitt's response to invitation by the 
  Minority staff of the Committee to supplement her reported 
  contacts with Enron............................................   698

 3. GChart of contacts between Commissioner Breathitt and Charles 
  Bone...........................................................   699

 4. GTimeline of contacts between Commissioner Breathitt and 
  Charles Bone...................................................   702

 5. GTyped up notes of Charles Bone regarding an August 23, 2000 
  meeting in Nashville with Commissioner Breathitt...............   708

 6. GHandwritten note by Charles Bone regarding conversation with 
  Commissioner Breathitt.........................................   709

 7. GCharles Bone billing records from Wyatt, Tarrant & Combs, 
  LLP (WTC)......................................................   710

 8. GBone memo, dated February 6, 2002, detailing money 
  transactions between the WTC and Enron.........................   734

 9. GWTC's response, dated February 15, 2002, to Bone memo.......   777

10. GFacsimile communication from Commissioner Breathitt to 
  Charles Bone concerning transcript of Senator Peace's comment 
  about Governor Breathitt.......................................   779

11. GFacsimile communication from Commissioner Breathitt to 
  Charles Bone regarding Governor Patton's recommendation letter, 
  dated August 23, 2000, to President Clinton for Commissioner 
  Breathitt to become Chairman of FERC...........................   781

12. GFacsimile communication from Commissioner Breathitt to 
  Charles Bone, dated August 29, 2000, regarding a news article 
  predicting who will be the next Chairman of FERC...............   783

  ASLEEP AT THE SWITCH: FERC'S OVERSIGHT OF ENRON CORPORATION--VOL. I

                              ----------                              


                       TUESDAY, NOVEMBER 12, 2002

                                       U.S. Senate,
                         Committee on Governmental Affairs,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:08 a.m., in 
room SD-342, Dirksen Senate Office Building, Hon. Joseph I. 
Lieberman, Chairman of the Committee, presiding.
    Present: Senators Lieberman, Levin, Thompson, and Collins.

            OPENING STATEMENT OF CHAIRMAN LIEBERMAN

    Chairman Lieberman. Good morning and welcome. Today, we 
continue a series of Senate Governmental Affairs Committee 
hearings on what Federal and private sector watchdogs did and 
did not do to expose and prevent the unethical and illegal 
behavior of the Enron Corporation in the months and years 
leading to the company's collapse.
    Our goal from the beginning of this investigation last 
January has been to determine whether Federal agencies and 
others responsible for safeguarding our markets did all they 
could to prevent this economic catastrophe so that we can now 
act to prevent another such catastrophe from ever occurring 
again.
    Today, we are going to focus on the role of an agency that 
had direct regulatory responsibility over Enron's energy 
business and that is the Federal Energy Regulatory Commission, 
known as FERC. The Majority staff of this Committee has 
completed an exhaustive investigation into FERC's role, and in 
my judgment, what they found is an embarrassing and 
unacceptable failure of the Federal Government to protect 
millions of consumers, stockholders, and workers. Again and 
again, FERC failed to ask critical questions about Enron's 
business practices. In the few cases when they did ask 
pertinent questions, the people at FERC settled for incomplete 
or incorrect answers.
    The Committee's investigation has found the most egregious 
examples of lax FERC oversight in four areas: One, the 
company's treatment of certain wind farms and the special rate 
status for them, which Enron obtained and preserved; two, the 
operation of Enron Online, which was Enron's electronic trading 
platform, which it now appears Enron leveraged unfairly to its 
advantage against customers in the marketplace; three, the 
handling of transactions between Enron and its affiliated 
companies; and four, Enron's actions during the West Coast 
energy crisis last year, which raised electricity prices in 
California, Oregon, Washington, and other States by literally 
billions of dollars.
    In these four cases, FERC's oversight ranged from naive, at 
best, to negligent, at worst, and they lead me to offer the 
following five observations.
    First, the agency more often than not trusted Enron's 
assertions rather than questioning them. Indeed, in some cases, 
FERC failed to pursue questions even after Enron had presented 
specific evidence of potential abuses in documents Enron 
submitted directly to the agency. For example, when Enron 
applied to FERC for special permission to charge customers 
higher energy rates through a number of wind farms that it had 
acquired, and it in its application included many details that 
constituted red flags, or should have, at FERC, the agency 
failed to subject that application to anything but a 
superficial review.
    Under the special rate arrangement, Enron itself was not 
permitted to own wind farms, but in its application, Enron told 
FERC that it was providing the financing to the new owner of 
the projects, that Enron would retain a right to repurchase the 
projects, and that Enron would indemnify the new owner for tax 
liabilities incurred when it was repurchased. In other words, 
FERC was told many things that should have made Enron's 
contention that it did not own the wind farms highly suspect.
    Yet, despite seeing all this information which was included 
in Enron's application, FERC approved the ownership arrangement 
and the special rate status was granted to Enron, and that 
meant that Enron was able to charge customers higher energy 
rates than they were allowed to otherwise under law.
    Then, when Enron sought to have the special rate status 
extended, it submitted a self-recertification, which, like all 
such self-certifications that FERC receives, was never looked 
at or reviewed. The folks at FERC simply filed the application 
away and allowed Enron thereby to claim the special status for 
an additional period of time. Only after this Committee's 
investigation raised questions about FERC's handlings of these 
transactions did FERC open an investigation into Enron's 
original claims.
    Congress obviously did not create and empower and fund the 
Federal Energy Regulatory Commission so that it could be a 
filing cabinet. We created it to protect consumers, to ensure 
just and reasonable energy rates, and to level the playing 
field for all businesses and utilities. Those purposes are, of 
course, more crucial than ever in the newly deregulated energy 
markets.
    Second, the agency failed to anticipate or prepare for 
changes occurring in the energy markets, which are among the 
most volatile and rapidly evolving sectors of our economy. 
Americans depend on our regulatory agencies to keep the economy 
fair and efficient, to anticipate major developments, and to 
stay on top of where those markets they monitor are headed.
    Despite the fact that Enron Online and other electronic 
trading platforms had grown into a powerful force by the year 
2000 and were expected to dominate energy trading, FERC failed 
to even complete a basic study of whether regulating those 
platforms was its job or the job of another governmental 
agency, in this case, probably the Commodity Futures Trading 
Commission. Without even that critical step completed, FERC and 
the rest of the Federal Government could not begin to develop 
any long-term public policy strategy about how to keep these 
emerging market tools fair and efficient.
    Third, FERC reacted belatedly to many serious offenses, 
letting possible market abuses go uncorrected and unchallenged 
for many months. Too often, in place of effective oversight, 
the agency offered timid hindsight. For instance, in November 
2000, a FERC staff investigation into the causes of the 
California energy crisis concluded that power sellers had the 
potential to manipulate the power market. I'm tempted to add to 
my prepared statement what my teenage daughter would say here, 
duh, right?
    After coming to that obvious conclusion, which cried out 
for immediate follow-up, FERC took over a year to launch an 
investigation into the market behavior of individual companies 
during the California energy crisis, and that was only after 
Enron actually collapsed in early December of last year. Energy 
consumers on the West Coast should have had the Federal 
Government on their side during the energy crisis in 2000, not 
6 months or a year later.
    And the companies who may have tried to manipulate the 
market, or, in fact, any who may be thinking about doing it in 
the future, need to understand that FERC will be a 
sophisticated and sharp watchdog, not a listless and 
lackadaisical bystander.
    Of course, this is made all the more clear and compelling 
by the recent plea of guilty by the head of trading for the 
Western markets for Enron in regard to--and we'll get into this 
in further detail--in regard to manipulation of the markets 
that he, as a significant employee of Enron's, was involved in.
    Remember, FERC is the regulatory agency that led the 
movement toward widespread deregulation of the energy business. 
Of course, there was plenty of support for the deregulation in 
the private sector. But FERC was a supporter, and, therefore, 
it makes it particularly ironic, and I would say irresponsible, 
that FERC exhibited little or no vigilance to ensure that 
participants obeyed at least minimal rules of fair play in the 
deregulated marketplace.
    FERC often seemed to view itself not as a regulator but as 
a facilitator, not as a market cop but as a market cheerleader, 
and that left consumers with nothing to cheer about.
    When market players are given unprecedented latitude in a 
previously regulated market, there must be some effective 
checks and balances. No matter how passionately we believe in 
competition and capitalism as the best system for economic 
growth and opportunity, the invisible hand cannot do it all. We 
have seen this over our history, over and over again. The fact 
is that markets inherently have no conscience. To ensure the 
integrity of our markets, the invisible hand needs to be 
assisted by the fair hand of government oversight in the public 
interest and private sector self-regulation.
    Fourth, FERC made no effort to address the gaps, flaws, and 
inadequacies in the regulatory structure that allowed Enron's 
most questionable business practices to go without scrutiny. 
For example, Enron had applied to the SEC requesting a special 
exception to the Public Utility Holding Company Act. Under 
FERC's rules, simply requesting such an exception allowed Enron 
to repurchase a number of its wind farms while retaining that 
special rate status I referred to earlier, and apparently 
allowed it to earn tens of millions of dollars above what it 
would otherwise have earned from those projects.
    For more than 2\1/2\ years, the SEC sat on the application 
without reviewing it. Did anyone at FERC pick up the phone and 
ask the SEC about the status of those applications? Did these 
two lead regulatory agencies, FERC and the SEC, ever talk to 
each other about these applications? To the best of our staff's 
ability to find an answer to those questions, the answer is a 
disquieting one, which is no.
    It's frustrating enough when major market abuses escape 
government regulation because perpetrators are crafty enough to 
fly under the government's radar, but it is really infuriating 
when clear signals are right there on the screen and the people 
manning the stations do not see them or keep their eyes closed. 
FERC and the SEC had the opportunity, indeed the 
responsibility, to close that regulatory gap and did not.
    Fifth, FERC all too often relied on shortcuts and cursory 
analysis of the markets to come to overly optimistic 
conclusions about the potential effects of market manipulation. 
An internal FERC staff report into the Enron Online trading 
platform which was released in August 2001 asked whether the 
possibility of financial problems at Enron could threaten the 
energy markets. That was August 2001. Its answer, no, was based 
on what, by hindsight, certainly looks like incomplete and 
unrealistic assessments.
    First, FERC looked at the entire North American energy 
market rather than the individual regional markets, including, 
of course, most notably, the Western markets. And second, the 
report concluded that the chance of Enron failing financially 
was, in any event, remote. And though the same report 
recognized the competitive advantage Enron Online gave to 
Enron's own trading units, it ultimately concluded that these 
advantages presented no cause for concern. In fact, to their 
credit, FERC's staff itself later found that conclusion to be 
wrong.
    So FERC's analysis here is really stunning, because Enron 
was a major player in our energy markets. By the time of its 
collapse, Enron had grown to become the seventh largest company 
in the Nation and the largest electricity and natural gas 
trading company, and that brings me finally to the larger 
policy question that is raised by the Enron scandal and by the 
staff investigation that will be presented this morning.
    Can deregulated markets be left alone to police themselves, 
or does government need to be vigilant in monitoring behavior 
in those markets? And when we use ``deregulation'' here, it may 
be a confusing term. What happened when we so-called 
deregulated the energy markets is that we went from a system 
where FERC, for instance, was setting the wholesale prices of 
energy to a system where we allowed the market, and presumably 
competition, to do that. But isn't there still a need for a cop 
on the beat to make sure that those who are participating in 
the market competition are playing fairly and that there really 
is competition and transparency and honesty that will result in 
the best prices for consumers?
    For me, the results of this investigation answers that 
question. Government must vigorously and energetically enforce 
the law to protect consumers and investors from abuse, 
particularly when markets, as the term is meant here, are 
deregulated.
    Remember, it was James Madison who said that if men were 
angels--I should update that and say, if people were angels--no 
government would be necessary. Unfortunately, we see once again 
in this sad story that people are not always angels and that is 
why we continue to need government to protect the integrity of 
our markets and our economy.
    Obviously, the American economy cannot function without 
energy, and our Federal regulators on whom the people depend 
for protection cannot protect those markets if they 
systematically fail to exercise the powers that we give them.
    I hope that today's hearing helps to expose and correct the 
shortcomings in FERC's administration that we see here in this 
case so that American families and businesses can get the fair, 
transparent, and efficient energy markets they need and 
deserve.
    Senator Thompson, it is good to be back with you. I don't 
know how to say it, but I am going to miss you. Not only are 
you going on to new roles in life, I will be going on to a new 
role in this Committee. But it is a pleasure to have you 
working with us today, together, as we have, whether each of us 
was Chair or Ranking Member, in pursuit of the authority that 
this Committee has and I look forward to your statement.

             OPENING STATEMENT OF SENATOR THOMPSON

    Senator Thompson. Thank you, Mr. Chairman. I appreciate 
that. I imagine that we are both a bit nostalgic this morning, 
but for different reasons.
    Chairman Lieberman. Yes. [Laughter.]
    Senator Thompson. But I appreciate your comments and I have 
enjoyed very much our working together. I could not imagine, 
given all of the pressures of this place, being able to work 
with a Ranking Member or Chairman of the opposing party in any 
better fashion than you and I have worked together.
    Chairman Lieberman. Thank you.
    Senator Thompson. I will never forget the campaign finance 
investigation when I was Chairman, when bipartisan support was 
very difficult to come by on occasion, and you always did what 
you thought was right, contrary to some of the wishes of 
Members of your own party. I will never forget that, and I have 
tried to remember that as you have been Chairman and taken some 
detours and things that I personally would not have taken, but 
I have always respected you. We have done a lot of good work 
with regard to this particular area that we are dealing with 
today, too.
    I cannot help but, before I get into the remarks I had 
intended to give, sitting here listening to you, to think back 
over the last several years and how what you were saying was 
relevant to what we have been hearing for a long period of 
time.
    When I was going out as Chairman about a year-and-a-half 
ago, I submitted a report called ``Government at the Brink,'' 
and it pointed out what we had been hearing. It was a 
compilation, really, of GAO reports and IG reports and 
Committee hearings and all, and basically, the conclusion was 
that we have got serious problems with regard to our 
government, our government departments, our government 
agencies, the way we do things. It is rife with waste and abuse 
and things are not operating the way they should and it is 
costing us a lot of money. Now, we know it is costing us in 
terms of our national security.
    So, unfortunately, you can pick your agency. We can talk 
about the details of FERC and what its responsibilities are and 
how they have performed, but it is one of any number--and it is 
a regulatory agency, somewhat different from some of the others 
we have had--but we have had department after department, 
agency after agency, appear on the high-risk list every year. 
We are not doing much better than we did several years ago.
    We are striving to get some accountability into the system. 
We are trying to get a performance-based system, really, so 
that we can have more accountability. I don't think it will do 
any good until we tie it to the budget process and there are 
some consequences to poor performance, but you can single out 
almost any agency. I think it has tremendous ramifications for 
homeland security. I think that it points out the need for the 
flexibility that the administration must have in reorganizing 
so many departments. We are talking about one little department 
here that a lot of people considered kind of a backwater until 
all of these problems hit.
    But the idea of getting the right people in the right 
places and being able to get rid of the wrong people in the 
wrong places and more funding and more accountability and 
things of that nature are all lessons that we need to learn, 
not only with regard to FERC, but with regard to our national 
defense and homeland security. So it is an important subject, 
but it is the very tip of a very big iceberg.
    It has been approximately a year since there were revealed 
financial matters that ultimately led to the collapse of Enron, 
then our country's seventh-largest company. Much has happened 
in that year, particularly following Enron's bankruptcy, the 
largest at the time until it was eclipsed by WorldCom's.
    I am proud to say that much has happened and much has been 
revealed as a result of the hearings and investigations by our 
Committee, as well as our Permanent Subcommittee on 
Investigations. A review of recent criminal charges against 
Enron's CFO Andrew Fastow, for example, reads as if it was 
written in large part from the results of our investigations. 
Much of our investigation has also been conducted on a very 
bipartisan basis, a fact of which I am also quite proud and a 
testament to what can be done when we work together.
    Our Committee and the Permanent Subcommittee on 
Investigations have investigated the roles of various actors in 
the Enron saga, the Board of Directors, auditors, securities 
analysts, credit rating agencies, and financial institutions, 
and we discovered that many of these actors with important 
roles in monitoring Enron or its financial condition generally 
adopted a ``see no evil'' approach that allowed Enron to 
present to the public a clean bill of financial health up until 
the company's collapse.
    We are seeing positive movement addressing these issues 
raised in our investigations: Accounting oversight and other 
reforms mandated by Sarbanes-Oxley; tougher new SEC regulations 
and movement toward lessening conflicts of interest in the 
investment banking community; and tougher listing standards at 
security exchanges. Recently, we issued a bipartisan report 
with respect to the SEC, rating agencies, and security analysts 
that noted a number of deficiencies and areas of needed reform. 
We look forward to a response to that report, which brings us 
to the Federal Energy Regulatory Commission, FERC, and our 
hearings today.
    Sometimes, you have to play the cards that are handed you, 
and I have been given a hand today that I prefer not to have 
been my last hand on this Committee. But as I look over the 
report that we are considering today, I am concerned about it.
    Frankly, I think FERC fits a different category than some 
of these other regulatory agencies. I always thought FERC's 
primary responsibility was to try to achieve just and 
reasonable rates. It doesn't seem to me like they have the 
responsibility that a lot of these other entities have, and if 
the SEC and the Board of Directors and people who sit on 
auditing committees and security analysts and all these didn't 
catch a lot of these things, I am wondering what kind of 
responsibility we can really fairly place on FERC in these 
areas.
    And as I look over the areas of concern, the wind farm 
transactions basically occurred between 1997 and 2000, as I 
understand it. With regard to the Enron Online issue, that 
ceased operation in December 2001. With regard to the affiliate 
transactions issue, FERC already has rules in place there and 
apparently responded pretty promptly to those issues.
    With regard to California trading, obviously, that has been 
very controversial and there is probably enough blame to go 
around there, but everyone has to acknowledge FERC has limited 
authority with regard to that. It shares authority with regard 
to that and California would not allow long-term contracts, and 
everyone acknowledges that the State had a poor regulatory 
system.
    So looking at all of that, it makes me wonder what the 
proper role is. Obviously, there are some shortcomings there 
that need to be addressed, but it seems to me somewhat of a 
different category than some of these other agencies that have 
more direct responsibility with regard to the investigative 
efforts and ferreting these things out part of things. They 
could stand improvement.
    We can talk about improvement, and that is another irony of 
it. It seems to me like this ought to be a good news hearing. 
From at least one of the experts that the Majority has called, 
apparently, some very good things have happened under the FERC 
watch of this administration. The things that are of most 
concern with regard to FERC happened while on the watch of 
appointees of the prior administration.
    I am not the one to partisanize the effort, but the fact of 
the matter is, up until now, when you think about FERC, most 
people's minds immediately jump to the suggestions and 
accusations concerning one contact between Mr. Lay of Enron and 
a former member, a former chairman appointed by the Bush 
Administration to FERC. There was a letter by this Committee to 
Mr. Wood questioning the ethical standards of FERC. There was a 
GAO investigation with regard to that contact, a contact that, 
as I understand, Mr. Hebert made, or Mr. Lay and Mr. Hebert had 
with counsel, general counsel sitting in the room with Mr. 
Hebert on his side of the telephone conversation, but we had a 
GAO investigation about that.
    And now, when I read the staff report that we are 
considering today, I see that we still have a section here, 
``Enron's Effort to Influence the FERC.'' Unfortunately, it is 
only with regard to Enron's effort to influence the Bush 
appointees at FERC. It refers to documents that have been 
obtained and refers to a PR and lobbying effort campaign of 
Enron, which undoubtedly is true. It refers to a Republican 
lobbying firm that had been hired. It refers to efforts or 
support from Mr. Wood and Ms. Brownell, which, of course, 
supplies some modest taint to them. And then it concludes, it 
is difficult to evaluate Enron's far-reaching efforts on 
decisions made at FERC and leaves that hanging out there.
    But unfortunately, there is no reference to numerous 
contacts, several during the height of the California 
contracts, between Enron lobbyists and a current FERC 
commissioner who was appointed by the prior administration.
    So I think to the extent that we can consider FERC, I think 
if you wanted to really get to the heart of decisions that were 
made that affected some of these problems, you would have more 
of the prior commissioners here to talk about it, quite 
frankly. Then we would be giving credit due to what is 
happening there. But if we want to really consider what we can 
do to make FERC stronger and better, I think that part of it is 
fine.
    But when you consider the history of all this and the 
continuing reference in the report, about five pages' worth, of 
the implications of impropriety with regard to primarily one 
contact, I see, then we must put this in perspective as we go 
forward and try to make progress. Selective indignation is not 
going to work, and unfortunately, it overshadows some of the 
more positive aspects that we have been able to agree on and 
pursue together.
    Hopefully, as we go forward today, we can flesh some of 
these issues out and put things in a bit of perspective. Thank 
you, Mr. Chairman.
    Chairman Lieberman. Thanks, Senator Thompson. You have 
raised some fair questions. Look, I would say, overall, the 
interest of the--as I believe the staff investigation, and 
certainly my opening comments of what I drew from it, suggest, 
the staff was not given any directions to limit their inquiry 
to events that occurred after the change of administrations in 
January 2001. In fact, they were asked to go back and look at 
the whole history here and let the truth of the investigation 
fall where it fell. So, clearly, a lot of the behavior that is 
criticized occurred before, and by FERC, occurred before 
January 2001.
    Second, I hope and expect that Mr. Berick, who is our first 
witness, will be able to respond to some of the specific 
questions you raised, or perhaps wait until you question him 
more specifically to respond to the suggestion about the one 
commissioner in contact with Enron.
    So at this point, I would like to go to David Berick. David 
is our first witness. He is a Senior Professional Staff Member 
on the Majority staff. He will summarize the findings of the 
Majority staff investigation into FERC's oversight of Enron. 
Because the investigation covers a number of complicated 
issues, I suppose this is by way of warning, the staff 
testimony will be somewhat lengthy. But the importance of the 
subject definitely requires that.
    I will say for my part that I think the staff has done a 
very good job and performed the role of oversight that is 
uniquely this Committee's in a way that is not only impressive, 
but is productive. Of course, that is why we have the current 
commissioners here, not just to defend the past, because some 
of them were not there, but to talk about what is happening now 
and what we can do to make sure that the shortcomings that the 
staff investigation has seen are not repeated in government 
oversight of our critically important energy markets.
    Mr. Berick, I am going to ask you if you would please stand 
and raise your right hand. Do you solemnly swear that the 
testimony you will give the Committee today is the truth, the 
whole truth, and nothing but the truth, so help you, God?
    Mr. Berick. I do.
    Chairman Lieberman. Thank you. Please be seated, and the 
record will show that the witness has answered the question in 
the affirmative. Mr. Berick, please proceed.

  TESTIMONY OF DAVID M. BERICK,\1\ PROFESSIONAL STAFF MEMBER, 
         COMMITTEE ON GOVERNMENTAL AFFAIRS, U.S. SENATE

    Mr. Berick. Thank you, Mr. Chairman, Senator Thompson. What 
I will describe to you this morning, as briefly as I can, are 
the findings of the Majority staff inquiry into the Federal 
Energy Regulatory Commission's oversight of the Enron 
Corporation. The findings I will highlight can be found in 
greater detail in the accompanying staff memo being submitted 
in conjunction with today's hearing, and I would ask that my 
written statement and the Majority staff memo be made part of 
the record.\2\
---------------------------------------------------------------------------
    \1\ The prepared and supplemental statements of Mr. Berick appear 
in the Appendix on page 74 and 93, respectively.
    \2\ The Governmental Affairs Committee Majority Staff Report 
appears in the Appendix on page 219.
---------------------------------------------------------------------------
    Chairman Lieberman. Without objection, so ordered.
    Mr. Berick. As you related this morning, Mr. Chairman, in 
January, you directed us to initiate a broad investigation into 
the role of the Federal Government and private sector watchdogs 
in what was at the time the largest corporate bankruptcy in 
American history. The purpose of the investigation was to 
determine whether, over a period of years, of the 10 years 
preceding Enron's collapse, whether Federal regulators did 
their job correctly and took reasonable steps consistent with 
their missions and mandates to identify and, if possible, 
prevent the problems that led to Enron's implosion.
    In investigating the role of FERC, the Federal Government's 
lead energy regulator, the investigation identified four 
specific areas of concern, which you've identified this 
morning. These are Enron's sale and repurchase of wind farms, 
activities related to Enron Online, the electronic trading 
platform run by Enron, and transactions conducted between Enron 
and Enron-affiliated companies, and finally, the role of Enron 
in the California power crisis.
    As you will see, the evidence in all four cases reveals a 
consistent pattern, that in the face of Enron's tireless 
determination to game the system, FERC displayed a striking 
lack of determination to scrutinize the company's activities, 
and this was not simply FERC becoming another victim of Enron's 
misrepresentations. Rather, on a number of occasions, FERC was 
provided with sufficient information to raise suspicions of 
improper activities or had itself identified potential 
problems, but failed to follow through.
    In short, the record demonstrates a lack of vigilance on 
FERC's part and a failure to structure the agency to meet the 
demands of the new market-based system that the agency itself 
has championed. While we do not know with certainty whether the 
disclosure of any of the individual activities I will highlight 
here today could have prevented Enron's collapse, it seems 
highly likely that a more proactive, aggressive action by FERC 
would have limited some of the abuses that appear to have 
occurred, would have raised larger questions about Enron's 
trading practices and other business activities and would have 
exposed at least some of the cracks in Enron's foundation 
earlier. Perhaps scrutiny by a Federal agency would have also 
jolted the Enron Board of Directors and Enron itself into 
acting to change direction. At a minimum, we believe it would 
have alerted investors, analysts, and hopefully regulators of 
other regulatory agencies to look more closely at Enron.
    FERC had and continues to have jurisdiction over Enron 
Corporation's many energy subsidiaries and activities. There 
were at least 24 electric, 15 gas pipeline, and 5 oil pipeline 
subsidiaries or affiliates of Enron subject to FERC regulation. 
Not surprisingly, then, FERC had thousands of contacts with 
Enron over the 10-year period examined by the Committee staff 
concerning Enron's FERC-regulated subsidiaries and affiliates.
    In addition to these contacts with FERC, our investigation 
also uncovered evidence of an aggressive public relations and 
lobbying campaign that Enron undertook in 2000 and 2001 to 
defend its role in the power crisis in California and to seek 
to influence the composition, policies, and practices of FERC, 
as well as to shape the debate over the California crisis. 
After all, Enron was heavily invested in the success of the 
deregulation of energy markets because it represented 
opportunities for Enron's energy trading and energy services 
businesses, as well as new market opportunities in the United 
States and overseas. It was important to Enron, therefore, that 
the California crisis not be blamed on deregulation or on 
market systems or on individual market players, like Enron 
itself.
    The Majority staff has concluded that among the many Enron-
related questions that came before FERC in recent years, four 
stand out as egregious and cautionary examples of regulatory 
failure. In each case, despite ample opportunity and available 
information, FERC failed to answer, much less challenge, 
Enron's behavior. It is likely that this passive regulatory 
stance enabled Enron to distort its financial condition, failed 
to protect energy consumers and the energy industry, and failed 
to prevent or mitigate the ultimate effects of the company's 
collapse.
    The first area I would like to cover are the wind farms in 
California that the Chairman addressed earlier. In January 
1997, Enron acquired a number of wind farm projects that were 
considered qualifying facilities, or QFs, under Federal law and 
were, therefore, eligible for special rate treatment. Shortly 
after the acquisition of these wind farms, in August 1997, 
Enron completed its acquisition of a public utility company 
located in Oregon, Portland General Electric. Under Federal 
law, however, projects that are given special status as 
qualifying facilities cannot be owned by a public utility or 
its holding company. This has been interpreted by FERC to mean 
that it cannot own more than 50 percent of a qualifying 
facility.
    Thus, because Enron now owned a public utility company, the 
wind farm projects that it had purchased would no longer be 
eligible for QF status. In order to maintain the QF status of 
the wind farms, Enron found it was necessary to divest itself 
of ownership in a number of these projects. In at least four 
cases, however, it appears that Enron did not truly divest 
itself of ownership, and, in fact, effectively retained the 
risks and benefits of ownership.
    FERC had the responsibility to certify that ownership 
requirements and other pertinent requirements of QF status were 
met. Critical details of these apparently sham transactions 
were revealed to FERC, but FERC failed to adequately scrutinize 
these particular transactions and wound up agreeing with Enron 
that they, in fact, met the ownership requirement.
    Specifically, in 1997, Enron sold a 50 percent interest in 
each of three wind farm projects to a special purpose entity 
named RADR, allegedly set up by Chief Executive Officer Andrew 
Fastow and his deputy, Michael Kopper. In August, as discussed 
in the staff memo, Mr. Kopper pled guilty to wire fraud and 
conspiracy to commit money laundering, based in part on a 
scheme he and others allegedly devised to enrich themselves and 
enable Enron to maintain secret control over California wind 
farms while appearing to maintain eligibility for QF status, 
and similar charges have now been filed against Mr. Fastow by 
the Justice Department.
    However, minutes of a May 1997 meeting of the Finance 
Committee of Enron's Board of Directors indicate that there was 
formal corporate consideration of the RADR transactions. The 
minutes indicate that although the arrangement was expected to 
satisfy FERC's requirements for transfer of ownership, it was 
not ``a sale for book purposes,'' and that Enron, therefore, 
planned to continue to recognize revenues from the project.
    In addition, the minutes describe Enron's right to 
repurchase the projects, noting that Enron would retain ``a 
call option to repurchase the assets in the future and sell in 
non-fire sale environment,'' an indication that the company saw 
itself as forced to divest its interest in the wind farms 
quickly because of its purchase of Portland General and was 
using the sales to RADR to temporarily park the projects until 
it could obtain a more lucrative financial return.
    The minutes also reveal that Enron provided 97 percent of 
RADR's initial capital by way of a loan from one of its 
subsidiaries and that Enron intended to indemnify RADR against 
future tax, environmental, and other liabilities.
    The nature of these wind farm transactions is further 
confirmed by a 2001 PriceWaterhouse Coopers due diligence 
report, prepared in anticipation of another related Enron 
transaction, which notes that because Enron ``retained all the 
risks and rewards associated with the projects,'' and retained 
an option to repurchase the shares, the wind farm deal was not 
treated as a sale and the revenue from the projects was 
accounted for as income from joint ventures.
    Information revealed to FERC in Enron's formal applications 
for QF status should have, in our opinion, raised serious 
questions at FERC as to whether or not the wind farms' 
ownership arrangements entitled them to this QF status. Among 
other things, Enron's application stated that the company would 
loan RADR the money to purchase its interest in the wind farm 
projects, that an Enron affiliate would indemnify the owners of 
RADR for tax liabilities if the project was repurchased, that 
Enron would retain an option to repurchase RADR's interest in 
the projects, and that land for the facilities would be leased 
from an Enron affiliate and that the same Enron affiliate would 
receive fees for providing operation and maintenance service 
for the facilities.
    However, despite Enron offering up all this information, 
FERC appears either not to have understood or not to have tried 
to understand the actual financial arrangements described to it 
by Enron and their implications, and it seems that this was not 
out of the ordinary for FERC's review of QFs.
    A similar lack of scrutiny repeated itself in 2000 and 
2001, when a number of the wind farm projects, including the 
three RADR projects, were reacquired by Enron and FERC once 
again was given the opportunity to review the transactions. 
However, in each of the repurchase agreements, Enron filed a 
self-recertification with FERC, informing it of the ownership 
changes and asserting that the facility, now majority or 
entirely owned by Enron, which was still then a utility holding 
company, should maintain its eligibility for QF status. 
Remember, Mr. Chairman, that the QF status is supposed to be 
granted only when facilities are not controlled by a public 
utility or its holding company.
    Two fundamental weaknesses in the regulatory system emerge. 
First of all, as a matter of policy, FERC never reviewed the 
RADR self-certifications, and to this day still never reviews 
self-certifications for QF status no matter what the 
applications may say unless an outside party raises an 
objection. Instead, FERC simply files them away as it did in 
the case of RADR.
    I want to note that these repurchase agreements and filings 
for RADR were not the only time that Enron took advantage of 
the weaknesses inherent in FERC's self-certification system. In 
November 1998, Enron self-certified a new ownership arrangement 
for another wind farm project known as Cabazon. In this case, 
Enron self-certified that it had transferred 50 percent 
ownership in the project to a nonprofit organization, The 
Nature Conservancy, within the meaning of FERC's QF ownership 
requirements.
    In fact, Enron did not actually transfer an ownership 
interest. Rather, it only transferred a right to 50 percent of 
the net profits, a condition which did not actually meet the 
FERC ownership test. Indeed, The Nature Conservancy did not 
consider itself to have any ownership interest in the Cabazon 
project. However, because this ownership change was the subject 
of a self-certification, it was not reviewed or contested by 
FERC.
    Second, Enron also took advantage of a regulatory black 
hole between FERC and the Securities and Exchange Commission on 
the RADR repurchase transactions as well as other wind farm 
repurchases. Enron told FERC in its self-recertification 
application that it was now eligible to own the wind farms 
because it had applied to the SEC, requesting a special 
exemption under the Public Utility Holding Company Act, which 
would permit it to retain QF status for the wind farms.
    It did have such an exemption pending at the SEC. The 
application remained pending, however, for 2\1/2\ years, and, 
in fact, the SEC is only now scheduling a hearing to consider 
the merits of the application. Meanwhile, from the moment the 
application was on file at the SEC, for FERC's purposes, it was 
deemed to have been approved. The two agencies never 
communicated with each other about the substance of the 
application. Instead, FERC's practice was and still is to treat 
a company's good faith application to the SEC alone as 
sufficient for the company to qualify for this exception. As a 
result, Enron got the benefits of the QF status and retains 
them to this day.
    The second area that the staff believed was significant was 
FERC's review of Enron's electronic trading platform, Enron 
Online. In 1999, Enron Corporation played a leading role in a 
fundamental shift in the way natural gas and electric power 
were traded by creating Enron Online, an Internet-based trading 
platform for natural gas and electric power. Online energy 
trading quickly became a significant portion of the energy 
trading market. In 2001, it was estimated to account for 
approximately 38 percent of natural gas and 17 percent of 
electric power marketed in the United States. Until Enron's 
bankruptcy, Enron Online was widely acknowledged to be the 
leading platform for such trading. Enron, in turn, lauded 
itself for its trading capabilities and rapidly expanded the 
range of commodities it traded on Enron Online, from paper to 
broadband communications capacity.
    The public implications of this fast emerging energy 
trading method did not greatly interest FERC until May 2001. At 
that point, FERC's general counsel initiated a staff-level 
inquiry into the status of electronic trading in the electric 
power and natural gas markets in general, and the role played 
by Enron in particular. FERC staff were asked to evaluate Enron 
Online's dominant position in electronic trading in the energy 
industries and to determine whether that position might be 
exploited to manipulate prices and otherwise distort the energy 
market.
    A non-public report discussing these matters was completed 
on August 16, 2001. The report found that, unlike some online 
trading platforms which operate as third party many-to-many 
exchanges, matching willing buyers and sellers, Enron Online 
operated as a proprietary extension of Enron's trading units, 
including entities regulated by FERC. In other words, in this 
so-called one-to-many exchange, an Enron trader was a party, 
either as a buyer or a seller, to every trade on Enron Online. 
Therefore, only Enron would know valuable information about the 
actual volumes and prices transacted on its trading platform 
and, of course, how the prices changed in any particular 
transaction were set, or how they compared to those charged in 
other similar transactions, or even whether the transactions 
actually had occurred.
    The financial risks of all the trades conducted on Enron 
Online remained with Enron subsidiaries, and since Enron's 
traders were a party to every trade, this risk was substantial. 
It also meant that the solvency of Enron as a whole was 
important to the viability of Enron Online and to Enron's 
trading activities.
    With this observation in mind, the report asked whether 
financial problems at Enron would threaten the energy markets. 
The report answered the question in two ways. First, it 
concluded that Enron did not have sufficient market share to 
disrupt the energy market if it failed. As we describe in our 
staff memorandum, this conclusion was based on a cursory 
analysis of the entire North American energy market rather than 
a more thorough attempt to scrutinize individual regional 
markets, which would have yielded a much more complex, and, we 
believe, a much more troubling, picture.
    Second, the report concluded that, in any event, the chance 
of Enron failing financially was remote. The report provided 
little support for this conclusion and it has obviously been 
disproved over the last year.
    Finally, the report found that Enron Online gave a 
competitive advantage to Enron's own trading units by reducing 
their transaction costs, giving them wider access to the 
market, and providing them better market intelligence. But yet 
it concluded that there was no reason for concern. This 
conclusion also appeared the result of wishful thinking, and 
there is now evidence, described in an August 2002 FERC staff 
report concerning FERC's own investigation of Enron and other 
participants in the Western energy market, that Enron, in fact, 
likely did exploit this advantage to manipulate prices, 
particularly in the California and Western markets.
    In short, though the FERC report identified a number of 
areas that could have and should have raised concerns with the 
Federal Government's lead energy regulator, FERC staff 
concluded that there was no reason for concern and no cause for 
action. Quite simply, FERC's review was too cursory, settled 
for incomplete answers, drew the wrong conclusions, and the 
agency ultimately failed to follow up on the warning signs it 
did raise.
    Another troubling facet of the 2001 report is that it was 
not distributed to any of FERC's commissioners prior to or 
during Enron's collapse to inform their decisionmaking with 
regard to this event. It is unclear at what point any of the 
information contained in the report may have been provided to 
the Commission. Thus, a report that might have served as a 
warning wound up being little more than a footnote in the story 
of Enron's collapse.
    Another serious concern is that FERC did not initially even 
address the question of whether or not, and the extent to 
which, FERC and the Commodity Futures Trading Commission, both 
of which had some regulatory responsibility for energy trading, 
had jurisdiction over Enron Online and other similar electronic 
trading platforms. This was despite the fact that Enron and 
other similar systems were at the time expected to become the 
dominant way in which both electricity and natural gas were 
traded.
    A FERC legal memorandum analyzing FERC's jurisdiction over 
Enron Online and other electronic trading was to have been 
prepared in conjunction with the August 2001 report I mentioned 
earlier. This jurisdictional memorandum was not, however, 
completed until July 2002, after you, Chairman Lieberman, 
raised questions about it. This failure to address the agency's 
jurisdictional authorities created yet another regulatory black 
hole, leaving any thorough scrutiny of Enron Online and other 
electronic trading platforms to languish. And as we discuss in 
the staff memo, there is indication at Enron that they believed 
that this trading platform, for all intents and purposes, was 
virtually unregulated.
    One final footnote about the 2001 Enron Online inquiry is 
that it also examined the issue of how pricing information from 
Enron Online might distort published price indices, such as 
those reported by trade publications like Natural Gas 
Intelligence and Gas Daily. The FERC staff noted that such 
indices were comprised of anecdotal, unconfirmed information 
and that information provided from a source such as Enron 
Online could be subject to manipulation.
    At the time the staff was examining this very issue, the 
Commission was promulgating its order on refunds for the 
California market, which included a methodology for determining 
baseline electricity generation costs tied to these published 
price indices. The concerns expressed by the Enron Online 
inquiry staff concerning these indices were apparently never 
communicated to the commissioners considering the refund issue, 
nor was other relevant information compiled by the Office of 
the Chief Accountant concerning electricity generation costs in 
the California market.
    The significance of these failures is highlighted by the 
FERC staff's August 2002 report in its ongoing Enron 
investigation, which found that published price indices in the 
California market were unreliable and may have been distorted 
or even manipulated by data from Enron Online. The 2002 report 
recommends that, as a result, the Commission modify its 
California refund----
    Chairman Lieberman. Mr. Berick, let me just interrupt you 
for a moment. In a few cases here, you have described FERC 
staff reports which were not communicated to or conveyed to the 
commissioners. Did you reach a conclusion about why that 
happened, why they were not transferred to the commissioners?
    Mr. Berick. Well, we didn't reach a conclusion, Mr. 
Chairman. We tried to understand as best we could what 
happened, why this information was not passed on, and it just 
seems to have been a variety of factors, some that it was not 
deemed to be a priority. In other cases, it appears that there 
was a change in administration. The general counsel, who asked 
for the Enron Online investigation, and the Chairman that he 
worked for, Mr. Hebert, left the Commission at about the time 
that this was being completed and the ball was apparently 
simply not passed on to the incoming team.
    Chairman Lieberman. So you found no evidence that there was 
a decision by the staff to suppress their work. They just, for 
various reasons such as you have described, or perhaps just 
decisions that in hindsight by the bureaucracy don't make 
sense, decided not to convey those reports to the 
commissioners.
    Mr. Berick. Right, but we concluded that there was 
important information that was relevant to deliberations that 
the Commission had ongoing and it should have been communicated 
to the commissioners. It was something that should not have 
ended up on the shelf.
    Chairman Lieberman. OK. Please proceed.
    Mr. Berick. Our third area of review was Enron's affiliated 
transactions. Obviously, whenever a company conducts 
transactions among its own affiliates, there may be cause for 
concern about fair dealing. One concern is that where one 
affiliate has captive rate payers, a one-sided deal may impose 
financial burdens on those rate payers. Another concern 
obviously is that one affiliate may treat its sister affiliate 
with favoritism at the expense of other companies or customers, 
or in ways that are detrimental to the market as a whole.
    Based on our review, we concluded that the existing 
regulatory rules and tools in the hands of FERC proved 
inadequate to deter Enron, as the company now appears to have 
engaged in a number of inappropriate inter-affiliate 
transactions.
    Just one example are the loans of two of Enron's pipelines 
obtained on behalf of the parent company, Enron, in November 
2001. As Enron struggled to avoid bankruptcy, the company 
announced that J.P. Morgan Chase and Citigroup had committed to 
loan it a total of $1 billion. But the loans were actually made 
to two of Enron's FERC-regulated interstate pipeline 
subsidiaries, Northern Natural Gas Company and Transwestern 
Pipeline Company, and were secured by assets of those pipeline 
companies. The vast majority of these loan proceedings were 
subsequently transferred to Enron in the form of unsecured 
loans from the pipelines to their parent company.
    After Enron declared bankruptcy a few weeks later, the 
pipeline companies, which did not file for bankruptcy, were 
left to pay off the entire amount of the obligations to the 
banks, a matter of concern because, ordinarily, such costs 
would be passed on to shippers who use the pipelines and 
ultimately to natural gas customers.
    In this case and in other cases discussed in the staff 
memo, FERC is now investigating potential wrongdoing concerning 
Enron's inter-affiliate transactions and seeking to strengthen 
some of the relevant accounting rules. However, it is troubling 
that the agency failed to address the broader policy question 
earlier. As parts of the energy markets have been deregulated 
under FERC's watch and at FERC's urging, the issue of 
transactions among a company's affiliates have taken on 
increased importance.
    Until Enron's collapse, however, FERC failed to adequately 
identify such transactions, especially the financial 
transactions, and as in the case of the--or in the case of the 
transactions between marketing affiliates, like Portland 
General, traditional utilities, FERC's regulations proved to be 
inadequate. Thus, it turns out that this is another area where 
the agency did not adequately anticipate problems in the market 
that it was instrumental in constructing.
    The final area in which the Committee staff reviewed FERC's 
oversight of Enron regards the company's role in the California 
energy crisis. As you will recall, severe energy shortages in 
California began in the spring of 2000, about 2 years after the 
State's energy deregulation plan was put in place. The State's 
investor-owned utilities and regulators blamed the crisis on 
power sellers and marketers, who they said were unfairly 
manipulating the system to gin up profits. The power sellers 
and marketers, on the other hand, claimed that the flaws lay in 
the actual structure of the new California system and they, in 
turn, were the chief culprit for the crisis.
    However, FERC as far back as 1998 had received reports from 
energy experts in California raising concerns about the 
exercise of market power and began a staff investigation into 
the causes of the California crisis in the summer of 2000. The 
investigation reached what might be considered a curious 
conclusion, that power sellers had the potential to manipulate 
the power market, but that there was no evidence to indicate 
whether an individual company engaged in actual market abuse. 
The report concluded that identifying individual cases of 
market abuse would require further investigation.
    Despite this initial report clearly articulating the 
potential for market abuse and the Commission's own orders 
essentially agreeing with that conclusion, it would take a full 
15 months, until February 2002, after Enron's collapse, for 
FERC to order a formal staff investigation into the market 
behavior of Enron and other individual companies.
    Even as FERC was avoiding the question of what individual 
companies were doing, Enron itself initiated an internal 
investigation into its own trading practices in California in 
October 2000----
    Chairman Lieberman. Excuse me again. What motivated Enron 
to initiate that investigation of its own practices?
    Mr. Berick. They were concerned about the legal 
implications of those practices. They had received a subpoena 
from the California Public Utility Commission and there was 
concern about additional regulatory actions that would be 
taken--might be taken against them, and in terms of preparing 
for their own defense, they began to investigate the extent and 
characteristics of the trading practice that they had engaged 
in.
    Chairman Lieberman. OK.
    Mr. Berick. And that internal investigation would 
ultimately result in a now well publicized memorandum that was 
produced in December 2000 which asked some searching questions 
about a range of strategies that Enron traders use, such as the 
so-called ``Get Shorty,'' ``Death Star,'' ``Fat Boy,'' 
``Ricochet'' trading strategies, and it also discussed the 
sanction provisions of the California Independent System 
Operator Tariff.
    Unfortunately, as we discussed, Enron appears to have been 
more concerned about its own behavior than was the government's 
leading energy regulator. As stated earlier, FERC itself did 
not begin to investigate these practices until more than a year 
later, after Enron's collapse.
    In August 2002, that investigation--and again, I am 
referring to FERC's ongoing Enron investigation--that 
investigation produced an interim report describing the 
manipulating trading practice that Enron traders allegedly 
engaged in. Those findings have, in fact, further prompted 
three formal FERC investigations into the behavior of 
individual companies, including Enron.
    More confirmation about what FERC may have found, had it 
been more vigilant and diligent, was revealed last month when 
Timothy Belden, who headed Enron's Western trading desk, pled 
guilty to a charge of conspiracy to commit wire fraud based on 
allegations that he and others at Enron engaged in trading 
strategies designed to manipulate energy markets in California 
from 1998 to 2001.
    The Committee Majority staff believes that the rules and 
regulations of a Federal agency such as FERC cannot effectively 
deter unreasonable market action if the agency fails to hold 
market participants accountable. It should not have taken 
Enron's collapse to finally trigger FERC's investigation of the 
role of Enron and other individual companies in the California 
energy crisis.
    In conclusion, Mr. Chairman, all four stories convey the 
same general message. The Federal Energy Regulatory Commission 
was a poor match for Enron's efforts to subvert the spirit, if 
not the letter, of the regulatory system. FERC's failure cannot 
be attributed simply to Enron's aggressive public relations and 
lobbying campaigns or to the deviousness of its methods.
    In many cases, the Commission had specific and sufficient 
information that should have raised suspicions about improper 
behavior on Enron's part. In other cases, FERC recognized 
potential problems, but through poor management or poor 
internal communication or sheer lack of will, never followed 
its suspicions through to their logical ends. Even after Enron 
declared bankruptcy, FERC dragged its feet, for example, in the 
case of the wind farms, and failed to step into the breach, 
reinforcing a pattern of performing too little, too late.
    To be fair, FERC has taken some tentative steps to remedy 
this unacceptable state of affairs, such as creating a new 
Office of Market Oversight and Investigation. But simply 
rearranging the bureaucracy is not sufficient. FERC must work 
in concert with other regulatory agencies. It must request and 
be given sufficient resources to monitor and police the 
marketplace. And it must be more cognizant of what goes on 
under its own regulatory roof.
    But most importantly, FERC must reorient itself to a 
changed and increasingly complex regulatory environment, an 
environment that FERC itself has fostered but failed to adapt 
to. Had FERC proven more aggressive on any one of the fronts I 
have described in my testimony today, it might have unearthed 
Enron's abuses sooner, perhaps mitigating the company's 
collapse, protecting consumers from hardships, and competitors 
from Enron's alleged market manipulations. Instead, through a 
striking lack of vigilance, FERC abdicated many of its core 
responsibilities as a Federal regulator.
    Thank you, and I look forward to answering your questions 
and Senator Thompson's questions.
    Chairman Lieberman. Thank you very much, Mr. Berick. I 
thank not only you, but all the members of the staff who worked 
so hard over a long period of time to assemble the information 
and reach the conclusions that you have presented to us this 
morning on their behalf and yours.
    I am going to go to the end and then go back to the 
beginning. Let me ask you this, and this goes to the broader 
question I discussed in my opening statement about what is the 
role or necessity of Federal oversight in a deregulated energy 
market environment. As I said, I reached the conclusion that 
you can't just say, OK, FERC is not going to set the prices 
after an administrative process, wholesale prices of energy 
anymore, go out and let the market reach the right conclusion, 
because as we see here in your testimony, in your report, 
private parties, human nature unfortunately being what it is, 
particularly in a very increasingly sophisticated climate with 
Enron Online and all the rest, will seek advantage for 
themselves and there will be consequences that can, as they 
were in this case, be disastrous, particularly for Western 
American energy markets and billions of extra dollars that 
consumers, including business consumers, obviously, had to pay.
    In your conclusion, you talk about the importance of more 
aggressive implementation of regulatory oversight authority 
that FERC has and the need, I think, for additional staff, 
dedication of FERC staff to these matters. Is there any need 
for additional law here, or do you think that the law, as it 
exists, gives the Federal Energy Regulatory Commission the 
authority it needs to protect the energy markets in a 
deregulated environment, it is just that they didn't use the 
power they had?
    Mr. Berick. Well, I think they did not use the authority 
that they had. That doesn't mean that they couldn't benefit 
from enhanced authority, and in FERC's testimony today, they 
asked for additional authority for criminal and civil penalties 
under their organic statutes, the Natural Gas Act, Federal 
Power Act, to try to expand the range of regulatory tools that 
they have. This was something that was also a recommendation in 
the General Accounting Office report that was prepared for you, 
again, suggesting that they have a significant amount of 
authority today, but they could, in fact, benefit from some 
additional enhancements and expansions of that authority.
    Chairman Lieberman. I take it you would agree with that 
request that the Commission will make today, and I agree with 
it also, but it also highlights the fact that we are asking, 
based on the work that was done, the investigation and the 
report, that FERC not only have oversight but enforcement 
authority when the rules of the road are violated, is that 
correct?
    Mr. Berick. Yes. One of our basic conclusions here is that 
FERC's role is fundamentally changing, and I think FERC has 
acknowledged this, but has not been able to deliver on the need 
to change the way it approaches its role from one of being a 
rate setter to a market overseer. I mean, it is endemic to the 
restructuring of the regulatory process and FERC is now no 
longer in the process of setting rates. They are now in the 
process of overseeing the market and the behavior of 
participants in that market. And consequently, they have to 
change their view and their institutional structure to better 
deal with that challenge.
    Chairman Lieberman. And part of that is to have the 
authority to take action--to initiate action, civil and 
criminal, against those who are not playing fair, is that 
correct?
    Mr. Berick. Yes, but they have other authorities which they 
can use, such as denying the ability of a company to have 
market-based rate authority. Again, it is a fairly, maybe 
draconian or overly draconian measure, and that is why they are 
requesting this additional expansion. But there are tools that 
they have and there is authority that they have to take action 
against companies that manipulate or abuse the market or 
operate unfairly in the market.
    Chairman Lieberman. OK. Let me go back to some questions 
that were raised in earlier parts of your testimony, which 
covered a number of issues--wind farms, the Western energy 
market crisis, Enron Online--but a central and very troubling 
point from your testimony is that FERC had direct oversight of 
a number of Enron's activities that now appear to have been at 
least improper, and in some cases illegal.
    The fact is that Mr. Kopper of Enron has now pleaded guilty 
to criminal and civil fraud with regard to the wind farm 
transactions that you have described. Mr. Belden, the head 
energy trader in the Western region for Enron, has also now 
pleaded guilty to a Federal criminal charge in connection with 
trading practices in the California market, which had 
disastrous consequences for that market.
    Am I correct that you are saying that FERC had a direct 
regulatory role in these areas which might have prevented some 
of the abuses from occurring that have now been acknowledged by 
Mr. Kopper and Mr. Belden?
    Mr. Berick. Precisely. That is, I think in some ways, one 
of the most troubling aspects of the investigation that we did, 
was that FERC looked, for example, in the wind farm issue, 
specifically at the ownership issue. That was the principal 
purpose of the reviews that they conducted of all three wind 
farm transactions, was to look at whether or not these 
transactions met the ownership test, which was that they could 
not be owned more than 50 percent by Enron. They looked 
specifically at that issue.
    Regardless of whether or not we can have expected FERC to 
have caught all of the fraudulent activities that Mr. Fastow or 
Mr. Kopper are alleged to have engaged in, we have, and we cite 
this in the staff memo, we have the internal Finance Committee 
minutes that indicate that, in fact, this was a corporate 
decision to structure these transactions this way.
    So our point is that if FERC had probed, there would have 
been something to find, even within the official corporate 
records, irrespective of the ultimate frauds that may have been 
committed.
    Chairman Lieberman. In the wind farms case, I referred in 
my opening statement to a regulatory gap between FERC and the 
SEC. Is it fair to say that you concluded and the staff 
concluded that Enron skillfully took advantage of that gap?
    Mr. Berick. Precisely. They knew that FERC would consider--
well, they knew that because they were using the self-
certification process that it was something that would not 
receive, or was not likely to receive actual review, and they 
approached the SEC in such a way that they did not expect the 
SEC to actually act on the application. So they very carefully 
took advantage of the sort of regulatory black hole, the 
regulatory gap that existed between the two agencies.
    The fact that it was allowed to go on for 2\1/2\ years just 
simply speaks to how extensive and continuing that gap was, 
because the two agencies never discussed this issue, not just 
with regard to these particular applications, but they never 
discussed this issue in a generic way to make sure that, in 
fact, as people, as companies like Enron were making 
applications to the SEC that might have been relevant to 
proceedings underway or decisions that needed to be made at the 
FERC, that they were in coordination with one another. So it 
was not done specifically and it was not done generically.
    Chairman Lieberman. Let me finally in this round just deal 
briefly with another regulatory vacuum that Enron seems to have 
been able to exploit, which was with regard to Enron Online, 
the Internet-based commodity trading system. We have the issue 
of whether FERC can regulate Enron Online and should have, and 
second, we have the question of whether the CFTC also had 
regulatory jurisdiction over Enron Online and what the two 
agencies do or don't do to resolve that issue, which I presume 
is still an issue. I wonder if you could briefly address that 
question.
    Mr. Berick. Well, as I mention in my testimony, Enron 
considered, at least some at Enron considered Enron Online to 
be virtually unregulated because of this sort of regulatory 
gap. FERC had never asserted jurisdiction over these trading 
platforms, even though they had been in place for quite a 
while. As I mentioned, Enron Online was created in 1999. We 
don't see FERC actually even beginning to look at the question 
of its jurisdiction or the implications of these trading 
platforms until May 2001, and then they never actually resolved 
the issue of their own jurisdiction and how it might interact 
with those of another agency, in particular, the Commodity 
Futures Trading Commission. The memorandum was just never 
completed until the question was raised by this Committee.
    Chairman Lieberman. And as your testimony indicated, in the 
meantime, Enron not only set up the system, but was using it 
and in that sense was gaining advantages. It was gaming the 
system that it had created in the absence of any oversight of 
that system, correct?
    Mr. Berick. That is correct, and again, what is striking is 
the findings in the August 2002 FERC staff report----
    Chairman Lieberman. Right.
    Mr. Berick [continuing]. Which concludes that, in fact, the 
very nature of Enron Online, how it was structured, the one-to-
many type of structure that allowed only Enron to actually know 
what was being traded on that system, was likely to have been 
used by Enron to manipulate prices in the California market.
    Chairman Lieberman. OK. I have used up my time on the first 
round. It is a very disquieting picture of a system that has 
changed, gone to deregulation, and the private sector players, 
including Enron, just seemed to be so far ahead of those who 
are supposed to be protecting the rest of us that they gamed 
the system, with disastrous effects for consumers, investors, 
and employees of a lot of companies, and for the economy of the 
Western part of our country. So there are some very striking 
lessons I hope we will learn, and together go on to try to act 
in a way that prevents any such gaming from occurring again.
    Senator Thompson.
    Senator Thompson. Thank you very much, Mr. Chairman.
    Mr. Berick, over what period of time did the wind farm 
transactions take place?
    Mr. Berick. They occurred in 1997, were the initial sales 
to RADR, and the repurchases were in 2000.
    Senator Thompson. I beg your pardon?
    Mr. Berick. The repurchases occurred in 2000. The initial 
sales were in 1997.
    Senator Thompson. All right. And with regard to Enron 
Online, you mentioned that it started up in 1999?
    Mr. Berick. That is correct.
    Senator Thompson. And was first looked at by the Commission 
in May 1999--I am sorry, May of----
    Mr. Berick. May 2001.
    Senator Thompson. OK. And with regard to the California 
trading and marketing abuses, the California electricity supply 
crisis apparently began in May 2000, and in June 2000, 
California suffered its largest planned blackout since World 
War II, is that correct?
    Mr. Berick. Yes, sir.
    Senator Thompson. All right, sir. So with regard to the 
situation that Mr. Wood and others came into, you call in your 
report recent initiatives by the FERC as tentative. You say the 
newly-created Office of Oversight and Investigation is nothing 
more than rearranging the bureaucracy. In contrast, Mr. Joskow, 
one of your expert witnesses, I might add, has said he is very 
pleased that this office was created and that the office is off 
to a good start.
    I will give you a two-part question. The other part is that 
nowhere in your statement do you refer to one of FERC's most 
visible recent reforms, and that is the standard market design 
rulemaking. Mr. Joskow, in his statement, calls this a 
courageous reform effort, intended to facilitate market 
competition and improve performance.
    So apparently the issue here is whether or not you are 
really giving appropriate credit to Mr. Wood and FERC as it is 
currently constituted with regard to its overall performance, 
and specifically with regard to the Office of Oversight and 
Investigations and the standard market design rulemaking. Would 
you comment on that?
    Mr. Berick. Certainly. Obviously, it is too early to tell 
how well the Office of Market Oversight is going to perform, 
since it is just now being established. We did look, with the 
help of the Congressional Research Service, at sort of the 
resources and staffing that office was being given by FERC and 
it raised some fundamental concerns with us.
    Less than 10 percent of the agency's FTEs are going to be 
in that office.
    Chairman Lieberman. Why don't you define FTEs for the 
record.
    Mr. Berick. Full-time equivalent. That is essentially one 
individual working full time.
    Less than 10 percent of FERC's FTEs are going to be 
assigned to that office, and even if we give FERC the benefit 
of the doubt and concede that all 250 FTEs that are identified 
in its budget request as having something to do with 
enforcement and market oversight are included, so we are 
essentially giving credit for more than double the number of 
people actually in that office, that number is still 
significantly less. It is less than 20 percent.
    And if we compare that to other Federal agencies that 
engage in similar types of activities, the Commodity Futures 
Trading Commission, the FCC, we find that those agencies have 
significantly larger resource commitments, both in terms of 
FTEs and in terms of dollars. So while it seems to be a step in 
the right direction, it seems to be too small a step in the 
right direction.
    And the other thing that we would observe, and this is sort 
of fundamental to the staff investigation, is that there are a 
range of activities which we have discussed--the wind farms, 
for example--that are not going to be fixed by the new office. 
They are regulatory responsibilities that FERC has. Another 
example would be the inter-affiliate transactions, the holding 
company transactions, which are not going to be fixed or 
addressed by this new office.
    So our point is twofold. The steps that they appear to be 
taking seem to be too small, and that the steps that they are 
taking are not broad enough to encompass the range of 
regulatory shortcomings that we identified in the 
investigation.
    Senator Thompson. So you are concerned about the allocation 
of resources, and I understand the issue. I think you may find 
yourself in the minority with regard to the witnesses here 
today on that issue, but we have had bigger disagreements on 
this Committee than one as to whether or not there are 
sufficient resources allocation.
    Chairman Lieberman. I got kind of uneasy when you said, 
``you may find yourself in the minority.'' [Laughter.]
    Senator Thompson. Some of us----
    Chairman Lieberman. Until I heard you conclude that 
question.
    Senator Thompson. Some of us almost certainly will, yes. 
[Laughter.]
    But on another subject, how do you view the Commission's 
decision back on December 15, 2000, FERC's order? In an effort 
to remedy the California dysfunctions, as a part of the order, 
FERC rejected wholesale rate caps in California. A lot of 
people consider that a significant action and not enough, 
insufficient, all of that. Did your analysis encompass that and 
what do you think about it?
    Mr. Berick. We didn't really look at that issue. It was 
obviously an issue that we covered fairly extensively last year 
in the Committee's hearings on the California energy crisis. 
This would have been last June, in 2001. We had two hearings on 
this issue and we did not spend a significant amount of time on 
it in this review, other than to acknowledge that, in fact, the 
Commission had made that decision and that it did raise the 
question as to whether or not--we raised the question as to 
whether or not that was sufficient.
    Senator Thompson. Mr. Berick, I think, in looking at your 
report here, you have done a lot of good work, thorough in many 
respects. I think there is a question as to whether or not you 
are giving sufficient credit due and whether you are placing 
blame where that is due. We have spent an awful lot of time 
with regard to FERC, and you heard my opening statement, 
including a GAO investigation about a contact that a former 
FERC commissioner had with a representative of Enron. Of 
course, the dates speak for themselves. Quite clearly, a lot of 
these problems, or most of these problems started--all of these 
problems, I guess you might say, started during the prior 
administration. We can argue whether or not the new people who 
really had a majority on the Commission, according to my notes 
here, only on June 14, 2001.
    But more specifically than that, and it goes to the 
fairness of your assessment here, is the fact that when we got 
to looking through the documents here that were subpoenaed or 
gathered by the Majority, it appears that there were several 
contacts between Enron lobbyists and Commissioner Breathitt 
that were not referred to in any way, and you spent quite a bit 
of time, once again, reminiscent of prior hearings and prior 
actions of this Committee, about five pages on Enron's efforts 
to influence FERC, but nowhere are those contacts mentioned.
    You do mention Enron's lobbying campaign, and clearly they 
did lobby. Clearly, they did whatever they felt like they could 
do and get away with. You mentioned, of course, again, that Lay 
met with various individuals. You mentioned that they met with 
members of the Clinton Administration, but in the context of 
discussing an open meeting, discussing the current crisis in 
California and what to do about it, and I assume there were 
many people in that meeting, but you mentioned their lobbying-
public relations campaign designed to indirectly influence the 
outcome of FERC's decisionmaking with regard to California.
    So if the issue is whether or not Enron was influencing 
FERC's decisionmaking, that is very precise. I must ask whether 
or not you have been fair in your assessment here. You mention 
Enron's corporate head of government affairs, with the 
assistance of a Washington, DC, lobbying firm. You mention the 
firm. It is a Republican lobbying firm.
    You mentioned its effort to strongly support Pat Wood as 
chairman, and also Ms. Brownell. Of course, now they have to 
deal with that. Mr. Lay called Karl Rove to express support for 
Ms. Brownell, talking about their nominations further. Mr. 
Skilling met with Secretary O'Neill, Ken Lay, Linda Robertson, 
a 30-minute meeting with the Vice President, Larry Lindsey 
apparently somewhere along the line.
    You say it is difficult to evaluate the impact of Enron's 
far-reaching efforts to influence decisionmaking at FERC, and 
unless we are missing something here, when staff went through 
the records, it appears that there were 46 contacts, most of 
them telephone conferences, between lobbyists for FERC and 
Commissioner Breathitt from August 2000. Of course, we know the 
California blackout was in June 2000. From August 2000 through 
December 2001. Were you aware of those contacts?
    Mr. Berick. Yes, we were, Senator Thompson. As you know, we 
asked FERC for all of their contacts, all of the agency's 
contacts, staff contacts and commissioner contacts, and there 
were, you know, hundreds of pages of just identification of 
individual contacts.
    What we tried to focus on in the contacts you are referring 
to are contacts related to the California energy crisis. There 
were lots of other issues. There were issues on deregulation of 
the market, and the establishment of regional transmission 
organizations. There were lots of other issues before FERC that 
Enron had interest in and that, obviously, commissioners 
spanning many years had communications with.
    Where we devoted our effort was to the specific issue of 
the California market, because that is where there was the 
greatest concern about whether or not Enron had manipulated 
that market, and we were also struck by the scope of Enron's 
efforts to shape the debate of both FERC and the influences on 
FERC for resolving that issue. There was really a very 
pronounced----
    Senator Thompson. Let me make a couple of observations. How 
can you tell from looking at a document whether or not 
California was at issue when that conversation took place, when 
that conversation, that conference call, whatever it is, is at 
the height of the California crisis, and it is between an Enron 
lobbyist and a member of the Commission? Why would you assume, 
on the one hand, that one commissioner's conversation would not 
have to do with California, and on the other hand, some member 
of the Bush Administration's conversation would have to do with 
California?
    Mr. Berick. Well, we went on the documentation that was 
provided. We did not interview any of the commissioners on any 
of their contacts. We went on the basis of the documentation 
that was provided to us, and we did go back. We did ask for 
documentation from former commissioners who are no longer on 
the Commission. FERC was very good about helping us go back and 
get additional information from past commissioners. We went on 
the basis of the information that was provided to us in the 
documents.
    Senator Thompson. But the issue, according to your report 
here, the fact that they had a public relations campaign 
designed to directly or indirectly influence the outcome of 
FERC's decisionmaking with regard to California assumed that 
their support of Pat Wood only had to do with California, 
because it is in here. Enron's support of Ms. Brownell was a 
California issue? It is in here.
    Mr. Berick. If I may, Senator, it is----
    Senator Thompson. Yes, one more point and then I will let 
you respond. You have testified that your concern with Enron 
goes back a number of years, and that you had concern 
concerning the wind farms transaction. You had concerns 
concerning Enron Online transactions. You had affiliate 
transactions concerns. And then you had the California 
situation.
    When it comes to contact with commissioners, then, why 
would you only focus on the California aspect? Was it because 
of the fact that some members of the current administration, or 
Mr. Hebert, who was disappointed, had a one-time contact 
apparently with Mr. Lay? Was that the reason that you focused 
in on the California aspect of the four areas of concern? That 
is the only area of pursuit that is the subject of your report 
here, about five pages, when all the time, the issue was how 
the Commission was being affected or how Enron was trying to 
affect the Commission and there is clearly more than one 
commissioner.
    Mr. Berick. The Enron documentation on California is fairly 
explicit about the fact that they were very concerned about the 
implications for energy deregulation and for the future of that 
part of their business with regard to California, and the 
documentation is very explicit about the fact that they viewed 
FERC as being central to resolving that crisis. And they also 
make it clear--again, this is Enron making it clear--that the 
membership of the Commission was a very important element to 
them in terms of making this problem, this political problem, 
go away.
    Senator Thompson. Well, then by that same token, when you 
have got a California crisis that certainly goes from May 2000 
until the end of that year--we all remember December 15, when 
FERC rejected wholesale cap rates, which some people 
interpreted as a pro-Enron decision by the Commission--you have 
that crisis brewing all this time and you have records in your 
file showing numerous meetings between Enron lobbyists and 
Commissioner Breathitt.
    I think the proper way to handle this is wait until 
Commissioner Breathitt has an opportunity to address these 
sheets. But May, August 23 and 24; September 7, 15, 28, 29, and 
30; October 18, 19, 26, 30, and 31; November 7, 16, 27, and 28; 
December 4, 5, and 8; all these are in your file and in your 
record, Mr. Berick.
    I think in view of the fact that we have spent so much 
time, including letters and GAO investigations of criminal 
activity and everything else with regard to Mr. Hebert's 
telephone conversation he had with Ken Lay and the issue of Ken 
Lay's support for his chairmanship, let us just assume for the 
moment you were only concerned about California with regard to 
the Commission. I find it difficult to understand why you 
wouldn't in your report, since you are dealing specifically 
with that issue, why you wouldn't in your report mention that 
fact. Were you aware?
    I understand you had a lot of information and you are 
focusing on specific things, and I am not necessarily saying 
that you were attempting to skew the results here. I do 
question your fairness in the way you treated this. In 
retrospect, don't you think it would have been better to deal 
with this on more of an even basis? If you are going to mention 
contacts with the administration, or even more relevant, 
contacts with the Commission, should these not have been 
referred to in your report also, in view of the long history 
that we have had, this Committee has had, with FERC and 
questions of undue influence and things of that nature?
    Mr. Berick. Senator, I guess I am going to repeat what I 
said before, is that there were, as you know, voluminous 
documentation of contacts. There were many contacts with 
current commissioners, former commissioners, on a variety of 
subjects. There are a lot of other areas that we could have 
pursued in the investigation and which we did pursue in the 
investigation. But at the end of the day, we based our analysis 
on the documentation that was provided to us.
    Senator Thompson. We also had documentation--excuse me.
    Mr. Berick. I am sorry.
    Senator Thompson. No, go ahead and finish if you want to. I 
started to say, we also have--and I am not implying that there 
was anything wrong with these contacts any more than I would 
have suggested there was anything wrong with Mr. Hebert's 
contact. But he had to undergo a criminal investigation because 
of his one contact. I am just talking about what has been in 
the press and what people have been subjected to for all of 
this time and questions of a level playing field, and it pours 
over into the rest of your report, unfortunately, and the 
question as to whether or not you are giving due credit for 
what is happening now.
    We have records here in the file also from the law firm 
that represented Enron, and apparently, it is Ms. Breathitt's 
father's law firm that represented Enron and partners in that 
firm, along with Enron in-house lobbyists, with these numerous 
meetings and they were paid hundreds of thousands of dollars, 
apparently, including Johnny Hayes, who was with the TVA and 
then during most of when this was going on was the treasurer 
for the Gore campaign.
    I mean, it is hard--this is my last day on the Committee. 
This is not what I wanted to be doing my last day. But as I 
say, some days you have got to play the hand that is dealt you 
and we can't not recognize what is sitting in the living room.
    Were you aware of what I just said? It is in your records, 
in your files.
    Mr. Berick. We had--yes----
    Senator Thompson. We have no independent subpoena power or 
authority. These are all Committee records----
    Mr. Berick. Yes, sir----
    Senator Thompson [continuing]. In the Majority's possession 
where we had to go to look through them. Were you aware of 
these things?
    Mr. Berick. Yes. We have the documents, and I have reviewed 
those documents.
    Senator Thompson. You just didn't consider them to be 
relevant for your purposes?
    Mr. Berick. Didn't consider them relevant to the California 
issue that we were examining. There are, again, many issues, 
including an issue you discussed this morning about the Hebert-
Ken Lay contacts. As you have observed, the Committee did ask 
the general--actually, the Committee did not. At that time, it 
was Senator Lieberman on his own behalf asking for that 
investigation. We did not pursue that issue in this staff 
memorandum and in this staff investigation.
    Senator Thompson. Well, I appreciate----
    Mr. Berick. We could have raised that issue, but we didn't. 
We focused on particular areas that we believed had important 
policy relevance to the Commission and its behavior and to very 
significant questions involving the energy markets and----
    Senator Thompson. Do you think the Quinn, Gillespie 
lobbying firm had more impact on those policy issues than 
Commissioner Breathitt did?
    Mr. Berick. What we say in the memo is where we came out on 
this, which was it is clear that Enron engaged in a very 
extensive campaign to influence deliberations by the Commission 
directly and indirectly on the California issue.
    Senator Thompson. Well, I think we are----
    Mr. Berick. At the end of the day, we have acknowledged 
that the Commission, in adopting the price caps in June 2001, 
took a position contrary to what Enron stated its position was. 
But the facts----
    Senator Thompson. But on December 15, 2000, it didn't take 
a position that it was totally contrary to what Enron wanted. 
December 15, rejecting wholesale rate caps.
    My only point is, and I think you are making my point, Mr. 
Berick, in what you just said. You say in your report it is 
difficult to evaluate the impact of Enron's far-reaching 
efforts in decisionmaking with FERC. I am totally at ease with 
the notion that Enron did whatever it could wherever it could, 
and I am not suggesting that there is necessarily anything 
improper. Unfortunately, I come across the names of people I 
know here, some of these Enron lobbyists, lawyers, friends of 
mine. At least they were until today when they hear about this 
hearing. [Laughter.]
    But it is there. It is in the records, it is in the files, 
and I felt compelled to raise the issue with you. But as I say, 
you have made a very extensive report, and I think for the most 
part, made a valuable contribution with most of this report.
    Thank you very much, Mr. Chairman.
    Chairman Lieberman. Thanks, Senator Thompson.
    Let me just do a few follow-ups. The first, I suppose, I 
should say in defense of the Quinn, Gillespie firm, that it is 
not a Republican firm but, for better or worse, a bipartisan 
firm. Mr. Quinn would probably want to assert his strong 
Democratic lineage.
    The second is that this is the first that I have heard of 
this question of the law firm, which I gather Commissioner 
Breathitt's father has some part in. I was troubled when you 
mentioned at the start of the hearing you were going to bring 
it up, that I hadn't heard about it.
    I have heard Mr. Berick's answers. I actually asked my 
staff about it back here and they went out and did a--with the 
options that the modern world provides--a NEXIS search and find 
a number of news stories at the end of October of this year, 
including, not surprisingly, from some newspapers in Tennessee 
because of the presence of the two people in the firm in 
Tennessee about this matter that they were lobbying on behalf 
of Enron and did have communication with Commissioner 
Breathitt. I regret that I didn't know about that before, but 
has, I gather, been a matter of public record, and, of course, 
all the documents that the staff, the Majority subpoenaed were 
shared with the Minority staff, as well.
    I just want to give you the opportunity, Mr. Berick, and I 
think I understand what you are saying, that the contacts with 
this firm, which I gather from Senator Thompson and I 
communicating informally up here is a Louisville-based firm----
    Senator Thompson. I think so.
    Chairman Lieberman [continuing]. But has some connection to 
these two folks from Tennessee.
    Senator Thompson. They have offices in Nashville.
    Chairman Lieberman. This firm didn't jump out at you and 
its contacts with Commissioner Breathitt didn't jump out at you 
because the information that we subpoenaed and got showed a 
very significant number of, I presume, law firms and other 
lobbyists having contact with all the FERC commissioners on 
Enron's behalf. Am I hearing your explanation correctly? I 
understand that is part of it, and the other part of it is that 
you were focused on the California energy transactions and 
didn't see any connection between this context and that matter.
    Mr. Berick. First of all, Mr. Chairman, there were, again, 
voluminous contacts. I hope you will forgive me for this, but 
Bill Massey's declaration of the number of contacts he had with 
Enron goes on for several pages in the documentation he 
reported to us. Again, it doesn't mean that there weren't 
contacts. There were a number of contacts that both current 
commissioners and former commissioners had with Enron. We did 
not pursue all those because they did not appear to us to be 
significant issues related to anything that went to the heart 
of Enron's corporate activities and Enron's collapse, which was 
where we tried to go with this hearing.
    What activities that FERC engaged in or that Enron engaged 
in were related to Enron and Enron's collapse and what we could 
do to make sure that, as you said in your opening statement, we 
didn't find ourselves in a similar situation with the collapse 
of the largest energy trader, seventh largest corporation in 
the United States? What kinds of lessons should we learn here?
    The particular matter that Senator Thompson has raised with 
the law firm, as I understand the record, involved an Enron 
dispute with Tennessee Valley Authority over some power 
contracts, and at the time, again, it didn't--at the time then, 
at the time now, it wasn't really at the heart of the kinds of 
policy issues that we felt were critical to examining. We could 
have. We could go back to those issues.
    There were many issues that came up in this investigation 
which we could have pursued, but the selection we made was 
based upon those that we felt were relevant to the future of 
the way in which these markets are regulated and that is how we 
made the decision of which issues to pursue and which issues 
not to pursue.
    Chairman Lieberman. So your understanding, and again, we 
should save most of these questions for Commissioner Breathitt 
to answer, but your understanding from the documents obtained 
under subpoena was that the matter that the Louisville and 
Nashville offices of this particular firm was discussing with 
the FERC had to do with the TVA, is that correct?
    Mr. Berick. Yes.
    Chairman Lieberman. OK. And just to clarify, and I don't 
know if you could put a number on it. I presume that in the 
documents the staff went over, can you put any number on--did 
all of the Enron commissioners during the period you 
investigated--were all of them contacted by lobbyists, 
individually by lobbyists on behalf of Enron?
    Mr. Berick. I don't know. I would have to say many 
commissioners reported contacts with Enron in one form or 
another, either direct contacts or meetings involving industry 
associations or those kinds of things, workshops, industry 
conferences----
    Chairman Lieberman. Right.
    Mr. Berick. I have no idea how many total we are talking 
about, because we went back 10 years. We went back to all the 
commissioners.
    Chairman Lieberman. So you would say most of them had 
contacts with Enron lobbyists?
    Mr. Berick. Or with Enron. Not just through lobbyists----
    Chairman Lieberman. Or with Enron directly?
    Mr. Berick [continuing]. But with Enron itself or 
representatives of Enron.
    Chairman Lieberman. And just to understand why you didn't 
focus on Commissioner Breathitt and her contacts, but you tell 
me and we will review this internally, were her contacts more 
numerous than other commissioners, do you recall?
    Mr. Berick. No, they weren't.
    Chairman Lieberman. They were not? Her contacts with people 
on behalf of Enron were not more numerous than the contacts 
that other FERC commissioners had?
    Mr. Berick. No, they weren't.
    Chairman Lieberman. I don't have any further questions. I 
am inclined to go on to the next panel, unless you would like 
to----
    Senator Thompson. No, Mr. Chairman, I think I must follow 
up a bit. Maybe we ought to ask the question more precisely. 
Were there any other commissioners who had that level of 
contact with Enron lobbyists through 2000 and 2001, because as 
you said, you went back and asked for contacts over a 10-year 
period. If the point is that there are other--during the focus 
of your investigation, which I understand is 2000 and 2001, 
basically, there are other commissioners with other contacts, 
we should be talking about them, too. We should not be singling 
out one commissioner.
    This is just the information that we had. We started out 
with the information that the commissioners themselves provided 
for us, and at least I am not aware of anywhere near this level 
of contact. But the records speak for themselves. I would 
suggest, Mr. Chairman, we go back and check on that. Maybe Mr. 
Berick cannot remember that.
    But I would say that you need to think through your answer 
to the TVA question. Now, it is true that some of these 
meetings were with Johnny Hayes, who had been commissioner of 
TVA. This is on August 24. I assume that his prohibited 
activity, his banned activity was past and I think he has a 2-
year ban with regard to Federal agencies on things he was 
directly involved in, but the facts will speak for themselves. 
I can only assume that he is OK as far as that is concerned, 
and there are some meetings there with Mr. Hayes.
    It is also true that Mr. Hayes apparently received $200,000 
directly from Enron and also another $300,000 from this law 
firm, the Wyatt law firm, and that was a part of a $500,000 fee 
that the Wyatt law firm had been paid by Enron. So perhaps we 
can find out about the TVA aspect.
    But there is a memo in the file here. We went to the law 
firm of Mr. Hayes--of course, he is not a lawyer, but the Wyatt 
law firm, and they supplied information that is in the 
Committee files and Mr. Bone, who was a partner in that firm, 
who was in most all of these meetings with Commissioner 
Breathitt made a memorandum.\1\ I am not sure what the date of 
it is. I am not sure it is dated, but it was clearly during the 
Presidential campaign, and Mr. Bone, who was at that time, as I 
say, lobbying for Enron, said, ``very friendly meeting with 
Linda Breathitt.'' I won't read all of it. We can go over it 
with Ms. Breathitt.
---------------------------------------------------------------------------
    \1\ The Bone Memo appears in the Appendix on page 734, Vol. IV.
---------------------------------------------------------------------------
    ``We had a good opportunity to talk about the issues and 
her position as the swing vote. We visited Gore headquarters 
and had lunch with Johnny Hayes. Next point, the FERC will be 
responding today to the request of President Clinton and 
Secretary Richardson. FERC will be very responsive to the 
crisis with investigations in California and possibly a hearing 
in California. She is very impressed with Steven Keene and 
spoke highly of him.'' Steven Keene, of course, is with Enron, 
also. This has nothing to do with TVA. This has to do with 
California.
    I have no further questions, Mr. Chairman, unless the 
witness wants to respond to that.
    Chairman Lieberman. Do you want to respond to that?
    Mr. Berick. No----
    Chairman Lieberman. Let me ask, and then I do want to move 
on to FERC, but why did you make the reference to TVA? Was that 
in the information that was submitted by Commissioner Breathitt 
or FERC to----
    Mr. Berick. No. The files that I think that Senator 
Thompson is referring to were provided to us from Enron, our 
request from Enron for contacts with FERC and my review of 
those documents showed that, to the extent that there was an 
issue involving FERC, it had to do with the TVA contact.
    Chairman Lieberman. Right. In fairness, we ought to give 
you a chance to go back and look at it. You looked at tens of 
thousands of documents to get to the priority choices you made 
about the four areas you were going to investigate. These are 
all the pages that were submitted to us, and every one of these 
pages contains, depending on the size of the description, 
between five and ten individual contacts between Enron 
employees or representatives and commissioners or staff of 
FERC. There have got to be several hundred contacts here, and I 
would----
    Senator Thompson. Mr. Chairman, if I may, I would suggest, 
if that is not public, that ought to be made a part of the 
public record.\1\ I assume what you have got there goes back 
over a 10-year period and it may or may not be relevant. But I 
think that the record ought to speak for itself and let people 
decide for themselves what is relevant.
---------------------------------------------------------------------------
    \1\ Records from 10 year-period appears in the Appendix beginning 
on page 1 of Vol. IV.
---------------------------------------------------------------------------
    Chairman Lieberman. That is fine with me, and I guess I 
want to just state for the record, and I know you are not 
questioning this, but just in case there is an implication, 
that there was no directive from the Chairman, certainly, to 
the staff to----
    Senator Thompson. I know that, Mr. Chairman.
    Chairman Lieberman [continuing]. To go and kind of get the 
Republicans and protect the Democrats. This investigation and 
the conclusions that Mr. Berick and I, in my opening statement, 
reached fall equally, in fact, probably at least as much, maybe 
some would say more, on previous FERC commissioners than the 
current ones because the aim here is not partisan. The aim is 
to figure out how we can protect consumers from being taken 
again.
    Senator Thompson. Mr. Chairman, there is no question about 
that, and you have always been fair and even-handed as we 
approach these things. There are a lot of people involved. You 
and I both get the results of these things sometimes as we walk 
in, especially after having been off as long as we have. But 
unfortunately, we have a history of several months with regard 
to this issue and I think the record just needs to speak for 
itself with regard to all the other issues.
    There have been other good people. I cast no aspersion on 
any commissioner or any lobbyist. I have lobbied and I have 
been lobbied. But there have been other good people who have 
suffered from the subjections or implications and so forth that 
have been made in the public. I just think the record ought to 
be complete. And if Enron was fervently and feverishly lobbying 
other commissioners in 2000 and 2001, we ought to know about 
that.
    Chairman Lieberman. When the hearing is concluded, Mr. 
Berick, you and I can sit and talk and see what more can be 
done to pursue some of these matters, if appropriate, and then, 
dare I say, it will be up to Senator Collins as the next Chair 
to determine whether she wishes to proceed with those 
investigations.
    Mr. Berick, I thank you very much for an extraordinary 
piece of public service. I think there is a lot for all of us 
to learn from the conclusions you have reached, and 
particularly from the four cases that you focused on. I hope 
that we will do that together with the commissioners at FERC. 
Thank you very much for your work.
    Mr. Berick. Thank you, Mr. Chairman.
    Chairman Lieberman. Thank you.
    I now call the four commissioners of FERC as the second 
panel, the chairman, Hon. Patrick H. Wood, III, members Linda 
K. Breathitt, Nora Brownell, and William L. Massey. Would you 
please remain standing and raise your right hand. We are 
getting the alignment together with the name plates.
    Do you swear that the testimony you are about to give this 
Committee is the truth, the whole truth, and nothing but the 
truth, so help you, God?
    Mr. Wood. I do.
    Ms. Breathitt. I do.
    Ms. Brownell. I do.
    Mr. Massey. I do.
    Chairman Lieberman. Please be seated. The record will show 
that the four witnesses all answered the question in the 
affirmative.
    It is our understanding, Mr. Wood, that you are going to be 
testifying on behalf of the Commission, but we are going to 
give each of the other three commissioners a brief opportunity 
to make any additional comments that you think necessary and 
appropriate after Mr. Wood completes his testimony, and 
Commissioner Breathitt, obviously, you may want to respond to 
the questions Senator Thompson has raised.
    We understand that either all of you or most of you have 
had to rearrange your schedules to be here--this was a 
postponed hearing--and we thank you very much for that and for 
your cooperation in general.
    Commissioner Wood.

 TESTIMONY OF HON. PATRICK H. WOOD, III,\1\ CHAIRMAN, FEDERAL 
                  ENERGY REGULATORY COMMISSION

    Mr. Wood. Good morning, Senator Lieberman, and Senator 
Thompson. Thank you both for the opportunity to respond today.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Wood with attachments appears in 
the Appendix on page 130.
---------------------------------------------------------------------------
    In the mid-1980's, the Federal Energy Regulatory Commission 
began its effort to restructure the wholesale natural gas 
industry to take advantage of competition between and among 
producers and sellers of natural gas to reduce prices for end 
use customers and to incent the drilling and production of this 
important natural resource that just 10 years before was 
thought to be swiftly dwindling.
    Congress followed up the FERC's effort with the 1989 
Wellhead Decontrol Act, and independent calculations of 
customer savings of this FERC-initiated restructuring ranged 
from $200 billion to $600 billion to date. I was proud to be a 
part of that pro-customer effort as a staffer to a member of 
the Commission, and that is a big part of why I am back today.
    One of the other major industries under FERC regulation is 
the electric power industry, and thanks to the 1992 Energy 
Policy Act and subsequent FERC implementation of Congress's 
vision through the 1990's, restructuring of the power industry 
has begun, as well. For restructuring to be successful and 
yield benefits for customers, however, there must be some basic 
preconditions: Sufficient energy infrastructure, balanced 
market rules, and vigilant market oversight.
    Upon joining the Commission last summer, I concluded that 
none of these preconditions was firmly in place in the electric 
industry. After a summer of internal and external assessment 
with my colleagues here, we adopted a strategic plan which gave 
equal primacy to all three of these goals. In the past 
submissions to Congress by prior administrations, the oversight 
goal was subsumed in other strategies, and I would call 
attention to the strategic plan as the final three pages of my 
filed testimony.
    Unlike the other agencies that were cited earlier, ours is 
charged with a significant role in infrastructure and in 
compliance with the Nation's environmental and safety laws. We 
issue licenses for the Nation's non-Federal hydropower 
facilities. We oversee their environmental and safety 
compliance. We issue certificates for construction and 
expansion of the Nation's extensive natural gas pipeline 
network, including the many environmental and land owner issues 
and rate matters associated with such activity. We also 
regulate the rates and services of the similarly extensive oil 
and refined products pipeline network.
    These infrastructure responsibilities naturally dominate 
the agency's resource allocation and account for 53 percent of 
our program and support employees. Fifty-seven percent of the 
rest of our employees handle the market oversight function at 
FERC, which is a total of 335 program and support employees, 
and the other 250 staff are dedicated to our second strategy, 
which is balanced market rules. Employees from all nine of the 
agency's offices contribute to the achievement of our strategic 
plan.
    We look forward to getting our fiscal year 2003 request in 
place so that we can continue to hire the necessary expertise 
and talent to achieve the oversight goals that my colleagues 
and I have set for the agency. The increase of 50 staffers in 
my first budget request reversed a decade-long trend of agency 
downsizing by over 20 percent, and in my estimation, these new 
employees are badly needed.
    As with this summer's GAO report on FERC's oversight 
performance, I welcome constructive criticism of our agency's 
performance. I also appreciate, Senator Lieberman, your 
personal and sincere effort to help our agency do its job 
better. We owe our best effort to the Nation's energy market 
customers and to the many fine companies whose investment over 
the years has underpinned this national economy.
    To focus for just a moment on today's topic, vigilant 
market oversight, I am pleased with the progress that we have 
made in the past year. It started, quite frankly, with a 
mindset change at the top, a commitment from the four of us 
that our ability to oversee these industries for the benefit of 
customers must be second to none. For me, this is a need borne 
of my past job as a State utility regulator, which depended on 
FERC to do its job well so that I, as a State regulator, could 
do my job well. We are today in Chicago at a meeting of all the 
national State commissioners. In fact, Linda, Nora, and I have 
all formerly been on our respective home State commissions and 
share this commitment that we are partners with States in doing 
this job well.
    This commitment of mine and of ours has led to the creation 
of the Commission's Office of Market Oversight and 
Investigation, which reports directly to the commissioners in 
our now-frequent closed meetings. This is an idea I adapted 
from our sister agency, the Commodity Futures Trading 
Commission. No longer are investigation issues handled at the 
staff level alone. Now, they are all brought to the attention 
of the full Commission and senior staff management from all 
program offices as the open meeting laws allow.
    We hired the new office head, Bill Hederman, sitting here 
behind me, earlier this year after a national search. He has 
been very successful in attracting talent from within and from 
outside the agency to do the hard, probing work necessary to be 
a vigilant market policeman. Of course, OMOI is not the only 
part of the agency involved in market oversight functions, but 
now there is a primary office charged with leading this 
responsibility.
    The oversight role is also shared with States and with 
regional bodies, such as the Electric Independent System 
Operators and Regional Transmission Organizations. Full 
integration of this oversight capability into FERC's culture 
and processes is underway, and I share none of this gentleman's 
concern that it will not be successful. In fact, I am here to 
make sure that it is successful.
    Participants in the energy market know that we are serious 
now. Reports to our confidential hotline are up significantly, 
as are formal complaints filed with the Commission regarding 
issues of fair treatment. In our more proactive posture and 
with better analytical resources, the Commission has begun a 
number of non-public investigations of issues in all four of 
our industries. As the GAO report points out, it is not enough 
to wait for someone to file a complaint at FERC. We need to use 
all forms of inquiry to effectively police the industry.
    Everyone, from customers to investors, benefits when there 
are clear rules of the road. By and large, we have these in the 
gas, and had these in the gas industry since the 1980's and 
1990's, when a series of FERC rulemakings set forth the 
contours of a restructured wholesale natural gas marketplace.
    Clear rules are not present in the power industry, however. 
One of the key actions we took in my first meeting as chairman 
in September of last year was to initiate a broad and open 
process to develop a sensible framework for the Nation's 
wholesale power markets. This has led to publication of a 
formal proposal in July, referred to as the standard market 
design, and this is now open for public comment through January 
and February. Had this framework been in place 3 years ago, 
combined with the more methodical and objective oversight 
capability, as our next panel will discuss further, I believe 
the California experience would have been largely avoided.
    But we cannot live in the past. As the current Commission 
seeks to redress the past wrongs through pending enforcement 
trials and investigations, which we are doing in close 
coordination with our sister Federal agencies, we are focused 
on the future, focused on getting sufficient energy supply and 
demand infrastructure in place across the Nation, focused on 
establishing a sensible regulatory framework to govern the 
restructured energy markets, and focused on effective and 
watchful oversight of these crucial infrastructure industries 
so that customers continue to benefit from an efficient and 
reliable energy marketplace. Thank you.
    Chairman Lieberman. Thanks, Mr. Wood.
    Commissioner Breathitt, do you have a statement you would 
like to make?

 TESTIMONY OF HON. LINDA K. BREATHITT, MEMBER, FEDERAL ENERGY 
                     REGULATORY COMMISSION

    Ms. Breathitt. Yes. I have a brief opening statement. Mr. 
Chairman, and Senator Thompson, I am here today in a supporting 
role of Chairman Wood as he testifies with respect to the 
FERC's oversight of Enron Corporation and the lessons learned 
from its financial collapse. I associate myself with the 
content of his testimony.
    I do want to add that I have supported the initiates taken 
by the FERC after Enron's collapse. I believe the proceedings 
the chairman detailed in his testimony should go a long way 
toward ensuring that an Enron-type debacle does not happen 
again and toward ensuring that energy consumers receive 
adequate supplies at reasonable prices.
    Beyond these initiatives, I believe Chairman Wood's effort 
in forming the Office of Market Oversight and Investigations, 
that we call OMOI, should enhance the agency's ability to 
review energy market developments, identify problems in market 
function, and take corrective and punitive steps, as necessary. 
If this office successfully performs its mission, which I 
expect that it will, FERC will have taken an important step 
toward restoring confidence in regulatory oversight of the 
energy industry and restoring stability to this important 
component of our Nation's economy.
    Finally, I would note that as I near the end of my tenure 
as a FERC commissioner, I believe I will be leaving an agency 
that is well aware of the need for vigilant oversight of the 
entities it regulates. The fallout from the collapse of Enron, 
as well as WorldCom, Quest, Tyco, and others, have painfully 
reminded us of the dangers of unchecked corporate behavior. The 
need to effectively encourage appropriate corporate behavior by 
regulated entities and discipline bad corporate behavior when 
necessary will continue as the Commission moves to more 
competitive and transparent markets for energy products. Thank 
you.
    Chairman Lieberman. Thanks, Commissioner Breathitt.
    Commissioner Brownell, do you have a statement?

  TESTIMONY OF HON. NORA M. BROWNELL, MEMBER, FEDERAL ENERGY 
                     REGULATORY COMMISSION

    Ms. Brownell. I do, just a brief statement. I certainly 
join the Chairman and Linda Breathitt--in fact, I think you see 
before you a FERC that is working as effectively as any agency 
in government to address the tragedy that has occurred in our 
market, and let me tell you, when we came to the FERC, what we 
found was a market meltdown, an agency under siege, and a staff 
who were both overworked, overwhelmed, and looking for 
leadership.
    Under Chairman Wood's leadership, with the introduction of 
a business plan, we have addressed many of the issues that the 
report raised today. But I appreciate that report, because, 
frankly, we all need to work more productively and 
affirmatively in anticipating what markets need, because, 
Senator, you said markets have no conscience. Well, adolescent 
markets have no self-control and markets do not develop without 
rules, and we are making rules.
    We are, indeed, dealing with the past as effectively and 
efficiently as we can, but we can't rush to judgment because we 
need to get this right. We have seen a $90 billion market 
capital loss in the energy sector, a loss that this country 
cannot afford when our economy begins to grow again. We see 
growing transmission constraints. We see power quality 
disturbances which affect our industries, like the car 
manufacturing industries, very severely, in ways that we are 
not counting. We don't see the investment in technologies that 
can address many of the environmental issues that we face and 
our grandchildren will face.
    So I look forward to working with you, this Committee, and 
other committees in addressing these issues. But I feel quite 
confident that while we may have been slow out of the starting 
gate, we have addressed a wide range of issues in a very short 
period of time.
    Chairman Lieberman. Thanks very much, Commissioner 
Brownell. I accept the addendum to my comment. Maybe I would 
only add that this may be, instead of an adolescent market, an 
infant market, which definitely doesn't have a capacity to 
self-control and needs a little parental guidance every now and 
then.
    Ms. Brownell. To be sure, a lot of parental guidance.
    Chairman Lieberman. Thank you. Commissioner Massey.

  TESTIMONY OF HON. WILLIAM L. MASSEY, MEMBER, FEDERAL ENERGY 
                     REGULATORY COMMISSION

    Mr. Massey. Mr. Chairman and Senator Thompson, I will be 
brief. I agree that the Commission's response to the Western 
energy crisis was generally timid and ineffective. The agency 
should have imposed price controls immediately when the market 
skyrocketed in the summer of 2000. This is what I championed 
and was extremely disappointed that the Commission did not 
impose such price controls for almost a year, until June 2001. 
Such controls imposed early could have stopped a lot of the 
economic carnage which turned into a disaster.
    I agree that the Commission should have been more vigilant 
in its market oversight. I support Chairman Wood's new efforts 
in this respect. I believe that he has a strong commitment to 
oversight and market structure and is willing to put in place 
sufficient staff resources so that never again should we face 
the kind of travesty that we faced with the Western market 
meltdown.
    The agency needs to be very vigilant in its market 
monitoring and its oversight and intervene forcefully whenever 
abuses are found or whenever markets spin out of control. I 
believe this new unit that Chairman Wood has created is a 
strong step in the right direction. Of course, the proof will 
be in the pudding. If we're back here 2 years from now because 
of the failure of oversight, then I will be wrong about that. 
But I don't think we will be. I think the agency is moving in 
the right direction.
    I agree that the rules regarding affiliate abuses should be 
strengthened. We have a couple of proposed rulemakings that are 
being commented on now. One would substantially strengthen our 
affiliate abuse rules across the board for natural gas 
pipelines, electric utilities, power sellers, and others. That 
is pending and I hope that we can finalize that rulemaking 
soon. We also proposed a rulemaking with respect to the so-
called ``sweep accounts'' that pipelines and electric companies 
have with their affiliates, and we have proposed strong new 
affiliate regulations.
    With respect to Enron Online, perhaps the agency should 
take a very close look at whether we should be regulating 
platforms such as Enron Online, and I support any effort to 
come to reach a conclusion about this at the agency as soon as 
possible.
    Thank you, Mr. Chairman. I look forward to your questions.
    Chairman Lieberman. Thanks, Commissioner Massey. I remember 
when I was at law school we used to refer to a few of the 
Supreme Court Justices as the ``great dissenters,'' and maybe 
the record will show that going back some number of years, you 
deserve that title, which is a title of honor at the FERC. The 
record of what you have tried to do is clear and I appreciate 
it.
    Commissioner Wood, let me begin with the general question, 
which in some sense, I think, you dealt with in your opening 
statement, but am I correct that when you served on the, I 
forgot what it was called, but the utility commission in Texas, 
that was a traditional regulatory commission which heard 
petitions and applications by the local utilities for rate 
increases and then set the rates?
    Mr. Wood. Yes, sir. I should add, though, in our years, 
they were rate decreases that we were going through in Texas.
    Chairman Lieberman. Well, that is even better. [Laughter.]
    So it was a so-called regulated environment?
    Mr. Wood. It was similar to what we are doing here, quite 
frankly. Our State statutes were changed in 1995, which was the 
year I----
    Chairman Lieberman. OK. So you were one of the early ones 
that had it. In Connecticut, in my previous position, I was 
Attorney General of Connecticut. We had an assistant AG who was 
over at the Department of Public Utilities and the commission 
and represented ratepayers in rate proceedings and then, 
ultimately, the commission determined what rate of profit, 
essentially, the particular utility would have and set the 
rate.
    To make a complicated story more simple than I should, 
there was a similar process going on at FERC with regard to 
wholesale energy rates. We got to deregulation and, of course, 
we relied on the market then. But I take it you agree that in 
what I have just described as a deregulated market, where not a 
commission or government set the rates, but competition does, 
that there is at least as much need for governmental oversight, 
is that correct?
    Mr. Wood. Without question. I should add that in both the 
gas industry and the electric industry, the delivery of the 
commodity, so to speak, is still regulated by FERC and by 
States. The transmission of power, the transportation of 
natural gas, those are set by FERC. We have a staff and law 
judges that do the traditional rate case work for gas 
pipelines, for electric power companies.
    Chairman Lieberman. Right.
    Mr. Wood. It is the commodity of the power itself, much 
like the commodity of gas in the 1980's and 1990's, that is 
going through the more deregulated treatment, but not the 
conduit that moves the commodity.
    Chairman Lieberman. But there is definitely a role for 
oversight, or in another sense, normally, it would be called 
regulation, but it is to make sure that the players----
    Mr. Wood. Play by the rules, that they play by the rules.
    Chairman Lieberman. That they play by the rules, that they 
are playing fair, which obviously, looking back, did not happen 
here.
    Let me give you a chance to respond to the staff 
conclusions about the Office of Market Oversight and 
Investigations that you created. My inference is that they feel 
as I do, and as your fellow commissioners do, that this was a 
significant step forward, to establish the office, but that it 
may not have enough resources to be effective. You know, it is 
the ``We are from the Congress and we are here to help you'' 
commission, or maybe that is what we are saying. [Laughter.]
    So I want you to deal with some of that. But then the 
larger question, I think, is whether the rulemaking on market 
rules will actually address the larger institutional issues 
raised by the staff investigation, for example, the concern 
that FERC didn't look more closely at the wind farm 
transactions or Enron Online or was not adequately vigilant 
about transactions with holding companies because they are not, 
in the narrow sense, directly related to the oversight of 
market behavior.
    So as productive, constructive a step as setting up the 
Office of Market Oversight and Investigations at FERC is, will 
it, in fact, get to some of the shortcomings that the staff 
investigation found, I think convincingly, in the Enron case?
    Mr. Wood. I think, and to take the four issues, the Enron 
Online would actually be something that would come out of the 
new office. The type of expertise--I do take some umbrage, I 
suppose, at it being characterized as, I guess, a bureaucratic 
reshuffle, and not having seen the report, I don't know what 
the exact words were, but we have had, in fact, some extensive 
hiring from the outside of significant people with other 
Federal experience and a tremendous amount of private sector 
experience for the 90 employees that we have hired to date. It 
is, in fact, the farthest thing that this agency has had from a 
bureaucratic reshuffle.
    But again, it ties back, as I said in my opening statement, 
Senator Lieberman, to the mindset change. The staff on this 
agency now know that the four of us, and hopefully our future 
people that follow us, are intellectually thirsty about these 
issues that come forth and that we need to be trained, as the 
staff do, the commissioners need to be trained--it is a group 
effort--to understand the markets and to really engage on the 
issues that come forth.
    So, again, you could put 600 people in OMOI, but if the 
commitment is not there at the top that not only we want this, 
but we care about it and we view it as a core part of our 
mission, as we move away, as your first question pointed out, 
Senator, from the world of just traditional cost-of-service 
regulation to one that is more market-based, we have got to 
make that a core part of our mission. The staff have to know 
it. The staff have to know when they are coming to work here 
that this is not just a Pat Wood fad, but that this is a core 
part of what FERC is all about. I think people understand that 
now and I expect in my term as chairman that we will continue 
to deepen and expand the roots of the market oversight 
function.
    But there are more people than just market oversight that 
do the work that we are talking about. For example, the wind 
farms issue is kind of what fall in the traditional licensing 
and traditional regulation parts of our agency, which do 
involve market oversight but are not involved in the 
investigations and the kind of forward-looking training and the 
reviews of data that come in to see what has happened in prices 
in competitive markets or in handling the hotline complaints 
that come in from third parties, either confidentially or 
publicly filed with the Commission. So there are a number of 
things that would go on.
    To take the third item, the California investigation, we 
are presently doing that with existing staff because the Market 
Oversight Office was not set up at the time that we began the 
investigation into events in the West back in last January and 
February, but I would expect that future aspects of that type 
of work going forward would be centered out of this office, 
drawing upon resources across the agency. Certainly, an 
investigation of that breadth is going to overwhelm just one 
office and will necessarily require us to be a matrixed 
organization, and I like that. I want that.
    Chairman Lieberman. Let me ask you this. Understanding that 
the staff work went back over 10 years in FERC's records, most 
of which time, obviously, you were not there, do you take issue 
with any of the conclusions that the staff investigation has 
reached regarding the, let us say the timidity of FERC's 
actions with regard to the four issues that the staff chose to 
focus on, the Western markets--California obviously was one, 
the wind farms, the Enron Online, the holding company, and the 
inter-related entities transactions. Do you think that, since 
you are in charge now and you will be for some period of time, 
familiar as I believe you are with the staff investigation, do 
you think that they reached solid conclusions?
    Mr. Wood. I am on the record as saying I was concerned at 
the time, as a State commissioner looking in from the outside, 
that FERC's slowness to move on the wholesale market issues 
that were under their domain in 2000 were of concern to me, and 
they still are. I think we have got to be, if not ahead of the 
curve, right on it, not well after it, and I do think that that 
series of events, unprecedented, admittedly, would have 
probably taken anybody by surprise.
    But it is the kind of retooling that I am looking for that 
it would not take us by surprise, that we would be so on top 
of, as I should say, to our staff's credit, in recent weeks, 
the issues that come up in just looking at daily gas trades. We 
find the list, usually look into them.
    Chairman Lieberman. Yes.
    Mr. Wood. Those kind of things, when you nip them in the 
bud, they don't develop into catastrophes like you have out 
West. But I do think that one probably, I have said publicly 
and I will say again today, is along the valid track.
    The QF issue is an interesting one because it is a statute 
that----
    Chairman Lieberman. Why don't you spell it out for the 
record.
    Mr. Wood. I am sorry, the wind farms, the renewable power. 
Congress really wanted to make sure that we had renewable power 
when they passed the PURPA back in 1978, and that began a lot 
of the investment in renewables and in cogeneration and some of 
these more environmentally benign resources, and in that 
statute and in the late 1970's, the implementation of that by 
the FERC, there was a very strong desire to make sure that 
there was not a bureaucratic obstacle to those resources 
getting built. They were, in fact, as I think Mr. Berick 
pointed out, paid a premium over what the general power would 
be, so there was basically a legislative enticement for those 
resources to come to the marketplace.
    So the FERC set up a self-certification process that was 
reviewed in Mr. Berick's opening remarks that allowed a party 
to self-certify and then get into the marketplace without 
waiting for a 6-, 8-, or 10-month procedure at our agency to 
basically approve that they go forward. I think that there have 
been 9,000 of these since 1978 and we have had about 20 of them 
actually--and 90 percent of the 9,000 have taken the self-
certification route. About 10 percent have taken the route that 
we are going to go to the Commission and have them 
affirmatively rule on our case, because we need it for 
financing generally, have taken that route.
    And of the 90 percent, I think about 20 have been protested 
by the utility that has got to pay. I mean, it was set up in 
the Carter years' FERC to, in fact, get the incentives lined up 
so that the utility, and this was revisited back in 1995 when 
the Commission revisited these rules, there is a person there 
who has got an incentive to make sure that somebody is not 
lying, and that is the utility that is paying the extra charge 
and the State commission that stands behind that utility.
    For that reason, FERC in 1995 said, if, Enron, you come in 
and tell us that you are changing this or selling that, you 
have got to tell the local utility in California and you have 
got to tell the California PUC that you are doing that. That 
has been used about, probably again, 20 times over the past two 
decades to trigger an action at FERC, where we actually review 
and find out if, in fact, those people qualify for the benefits 
or not.
    I think this particular example has, of course, due to the 
Fastow admissions, been triggered by us into a proceeding of 
FERC to review the qualifications for the benefits. But quite 
frankly, I do think, over time, the balance of 9,000 
applications and 20 that were asked to be looked at and one 
that now has actually been found perhaps to be false--again, 
that is pending before our Commission. It may well be benign. I 
do not want to prejudge that. But I do think that one probably, 
I would say, is a little--maybe a bit of a hard slap that we 
deserve----
    Chairman Lieberman. But otherwise, accepting that, you 
would say that the staff conclusions have merit and that you 
will embrace them to the best of your ability as you go forward 
in your chairmanship?
    Mr. Wood. Sure. Absolutely. Again, as I mentioned, I 
appreciate constructive criticism. We are a public agency. We 
work for the good of the customer and we want to make sure that 
we do that as best we can.
    Chairman Lieberman. Let me ask you a final question before 
I yield to Senator Thompson. Just speak for a moment, if you 
would, about the changes in law that you request in your 
testimony and whether there are any additional changes that you 
might suggest for us in law or whether you think the remedy to 
the illnesses, the ailments that the staff report shows are 
largely going to come from the retooling that you are doing and 
perhaps from some more adequate staff--or more staff. Let us 
assume what you have got now is adequate to the task and more 
people----
    Mr. Wood. Well, we have asked for more, and I believe the 
conference report----
    Chairman Lieberman. Yes.
    Mr. Wood [continuing]. Does indicate our increase of that. 
I do think, again, as I mentioned, that a good part of this, a 
good part of our ability to do this job better, again, comes 
from our personal commitment to that, from an empowered staff 
who, despite what you have heard today, have done a fantastic 
job over the last decade. Again, as it has been downsized by 20 
percent from when I worked here as a staffer back in 1991-1992, 
it is 20 percent smaller than it was and has quite a bit more 
to do.
    Chairman Lieberman. Yes, it is a problem. Look, the big 
picture that I come away with is that the rules of the game 
changed. We went to a deregulated environment. Some, very 
aggressive, sophisticated, find the angles, be as clever as 
they can to make the most money they can. Players, including 
Enron, got into it and the FERC just did not keep up with them. 
The world had changed. This is a regulatory agency that was now 
operating in a deregulated environment and the consumer paid 
the price and it was an enormous price.
    But let me not go on further with that, and ask you to 
describe in a little more detail the legislative changes that 
you recommend in your report.
    Mr. Wood. Thank you. We had asked and was included in the, 
I guess now-retired energy bill, for an increase in civil 
penalty authority to be administered by the Commission in the 
Federal Power Act. We subsequently recognized that we did not 
have that in the Natural Gas Act, either, and have asked for 
that, but that was not in the electricity title because it is a 
gas issue.
    Chairman Lieberman. OK.
    Mr. Wood. So the civil penalty side would be as enhancing 
our authority at FERC to use those tools. We have also joined 
in the, I think, broad support for enhanced criminal authority, 
which would be administered, as it is today, by the Department 
of Justice for violations of the Power Act and of the Gas Act.
    Chairman Lieberman. OK. So part of reaching to the whole 
Enron saga and scandal is to beef up the enforcement authority 
of FERC and FERC working with the Department of Justice?
    Mr. Wood. Yes, sir.
    Chairman Lieberman. Thanks, Commissioner Wood. Senator 
Thompson.
    Senator Thompson. Thank you very much, Mr. Chairman.
    Ms. Breathitt, would you like the opportunity to respond to 
some of the things that have been said here this morning, 
specifically, the 46 or so contacts that you had with Enron 
lobbyists over 2000 to 2001?
    Ms. Breathitt. Yes, sir. I don't have the same information 
that you have. I don't know what the 46 are, and----
    Senator Thompson. We are going to be giving you copies of 
the listing of the Wyatt law firm.\1\
---------------------------------------------------------------------------
    \1\ Listing of contacts between Commissioner Breathitt and Charles 
Bone appear in the Appendix on page 699, Vol. IV.
---------------------------------------------------------------------------
    Ms. Breathitt. OK.
    Senator Thompson. We got these from the Wyatt law firm. And 
basically, as you can see there, telephone conferences with Mr. 
Bone, Mr. Hayes, and others.
    Chairman Lieberman. Commissioner Breathitt, if I might, 
with your permission, Senator Thompson, this information was 
obtained by the Committee staff as a result of requests and 
subpoenas in some cases, both to FERC and to Enron, which I 
presume gathered some of it from its attorneys.
    Senator Thompson. Yes, and the attorneys, in some cases, 
the attorneys themselves who represented Enron.
    Chairman Lieberman. Right.
    Senator Thompson. Including the Wyatt firm that Mr. Bone 
was affiliated with at that time.
    Ms. Breathitt. With respect to my wonderful father, he has 
been associated with the Wyatt firm for a number of years, as 
counsel on a fixed-priced salary, and a rather low one at that. 
He wanted to be able to come and go as he pleased in his 
retirement years and did not share in any of the profits of the 
firm. He has since retired and has no financial arrangement 
with the firm and has not had for a year.
    With respect to the California energy crisis and whether or 
not there was a relationship with Enron lobbyists, I don't know 
how Mr. Bone and/or Mr. Hayes accounted for the contacts, but 
the trip that I made to Nashville in August was a vacation day 
that I recall I went to visit my aunt and uncle, had lunch with 
my nephew, and I did visit the Gore campaign that day and saw 
Charles and Johnny, who gave me the tour of the Gore campaign. 
But that was a day that I went to Nashville to visit my aunt 
and uncle and have lunch with my nephew, as well. I grew up 70 
miles north of Nashville and it was a town that I frequented a 
lot.
    Senator Thompson. I might say, Mr. Bone's memo,\1\ which we 
will make a part of the record, also says that you wanted to 
make sure you emphasized that you were in Nashville visiting 
family.
---------------------------------------------------------------------------
    \1\ The Bone memo, dated February 6, 2002, appears in the Appendix 
on page 734, Vol. IV.
---------------------------------------------------------------------------
    Ms. Breathitt. I don't know what he said, but I do have 
family there and have had for 50 years.
    Senator Thompson. That is consistent with what you said. 
That is my point.
    Ms. Breathitt. Yes. The Enron contacts that I have 
disclosed were ones that I had records of. We don't keep 
telephone logs in my office, and to the best of my 
recollection, I disclosed to the Committee everything that we 
had records of and that I could remember. Enron and Enron's 
lobbyists, the times spent that I talked to them were very 
disappointed that I had not been a proponent of mandatory RTOs.
    Chairman Lieberman. Just define RTO for the record.
    Ms. Breathitt. Regional Transmission Organizations. They 
were very interested in having mandatory RTOs having 
unfettered, open access through the transmission lines. They 
were very interested in having a single transmission tariff. 
They were a big proponent of unbundled retail sales, and I have 
probably been the most reticent member of the Commission on 
those issues.
    With respect to California, on the December 15, 2000, order 
that you referenced, Senator Thompson, we began and continued 
in successive orders putting in price controls, each one going 
further than the one before, and that particular order also 
eliminated the tariff for the power exchange, which, in some 
regards, one of the Enron trading strategies called ``Fat 
Boy,'' which was a strategy to sell power when the IOUs under-
scheduled their load, that was impacted when the Commission 
instituted an under-scheduling penalty back in December 2000 
when we eliminated the California power exchange and put in 
that under-scheduling penalty. We also allowed resources owned 
by the IOUs to directly serve their own load rather than 
selling them through an exchange.
    In all of the ensuing orders, we continued to go further 
with our price controls, and in April 2001, we adopted a ``must 
offer'' provision, which has been considered the regulatory 
response by the three-member Commission at the time, that had 
the most positive effect in controlling the California energy 
collapse and the high prices, and that was the April 2001 
order.
    It was around that time that we began to consider capping 
the whole Western market and it was, I believe, my idea for all 
of us to go to Boise and talk to Western members about whether 
we should extend our price plans and price caps West-wide. We 
came back and we did so in June, and when my new colleagues 
joined me and Commissioner Massey at the time, it was the June 
order that was in the process of being written when they came 
that furthered the price controls.
    So I would like an opportunity to, Senator Thompson, to 
look at this document and be able to respond to it. It is 
difficult for me to do so today when it has just first been 
handed me, but----
    Senator Thompson. I might say, Ms. Breathitt, and you will 
have all the time that you want, that it is true that we asked 
you for these contacts and asked you in a supplement and you 
responded. We have many more here than what you responded to, 
but it is understandable that the firm would have better 
records and more complete records than a commissioner would. I 
understand that.
    I am trying to establish some basic points here without 
casting aspersion on you, certainly not your father or your 
father's firm. He is a distinguished public servant. But this 
is relevant information, and if I can do it in a short fashion, 
I will try to do so.
    What seems to be the case is that Enron, and I am looking 
again at one particular memo that I hopefully will make a part 
of the record, from the firm and Mr. Bone,\1\ that apparently 
Enron went to Mr. Hayes and Mr. Hayes went to the firm and they 
wound up representing Enron. The firm did some work for Enron 
with regard to TVA and Mr. Hayes and Mr. Bone in the firm did 
some work with regard to FERC.
---------------------------------------------------------------------------
    \1\ The Bone memo, dated February 6, 2002, appears in the Appendix 
on page 734, Vol. IV.
---------------------------------------------------------------------------
    So let me see if we can establish it by the numbers here. 
It is accurate, anyway, Mr. Bone was a partner in the Wyatt law 
firm, is that correct?
    Ms. Breathitt. Yes, and he was at the time, and Mr. Bone 
has been a friend of mine for a number of years, and I don't 
know how he recorded our phone conversations, but during that 
time, I have to assume that a lot of them were more than likely 
political in nature.
    Senator Thompson. Well, there are several--I can understand 
that. Mr. Bone has been a friend of mine for a number of years. 
If you look here, there are a number of phone conversations, 
very few of them are with Mr. Bone alone. They are Mr. Bone and 
Mr. Hayes; Mr. Bone and Mr. Hayes and Mr. Shapiro, who is with 
Enron; Mr. Bone, Mr. Hayes, and Mr. Delaney, who is with Enron; 
Mr. Bone, Mr. Hayes----
    Ms. Breathitt. I don't know a Mr. Delaney, and I----
    Senator Thompson. Telephone conference with Commissioner 
Breathitt with Charles Bone, Johnny Hayes, and Mr. Delaney, 
October 19----
    Ms. Breathitt. I don't know who that is.
    Senator Thompson. OK.
    Ms. Breathitt. And I don't recall conference calls.
    Senator Thompson. What about Stan Horton with Enron?
    Ms. Breathitt. Stan has been in my office to see me as head 
of the pipelines----
    Senator Thompson. As he has other commissioners, I am sure.
    Ms. Breathitt. We have numerous courtesy visits. But I--I 
don't know how--I have talked to Stan on the phone. He has also 
been in my office numerous times.
    Senator Thompson. Steve Kean.
    Ms. Breathitt. I have known Steve since I was a State 
commissioner in 1993. He was very prominent at NARUC meetings 
and did State regulatory work.
    Senator Thompson. Linda Robertson.
    Ms. Breathitt. Linda Robertson ran their Washington office 
and has come to see me in my office. I don't recall ever 
talking to her on the phone----
    Senator Thompson. Kathleen Magruder.
    Ms. Breathitt. I don't know who Kathleen Magruder is.
    Senator Thompson. She is with Enron, also, but you can't 
testify to what you don't know, but Mr. Bone's, the firm's 
records indicate that all of these conversations--most all 
these telephone conferences, is the way they describe them 
anyway, had to do with, often with Mr. Hayes, often with one or 
more of these other Enron people, which gets down to the point, 
is it fair to assume that these Enron--and you know during this 
period of time, August 2000 through 2001, Mr. Bone was 
representing Enron and the firm was representing Enron, were 
they not?
    Ms. Breathitt. I don't know when Mr. Bone started 
representing Enron, because----
    Senator Thompson. Well, you know it is some----
    Ms. Breathitt [continuing]. I just don't--yes, he did 
disclose that to me.
    Senator Thompson. And you know Mr. Hayes was, although he 
is not a lawyer, he was representing Enron?
    Ms. Breathitt. I don't know about Mr. Hayes representing--
--
    Senator Thompson. Well, he was talking to you on behalf of 
Enron, was he not?
    Ms. Breathitt. He was with Mr. Bone twice when we had 
dinner, but I don't know what his relationship was with Enron.
    Senator Thompson. Well, according to their records here, 
over that period of time, there are either nine telephone 
conversations or meetings that involved Mr. Hayes. During that 
time, do you recall the subject of Enron ever coming up?
    Ms. Breathitt. Yes.
    Senator Thompson. And, of course, it came up with regard to 
Mr. Bone and, I assume, these other Enron lobbyists? That is 
all I am trying to establish.
    Ms. Breathitt. Yes. I have----
    Senator Thompson. Everybody has got their pitch to make and 
they were making theirs and this was before a lot of the 
problems that we now know Enron had were surfaced.
    Ms. Breathitt. Yes, and I don't think I was one of Enron's 
most popular commissioners.
    Senator Thompson. Well, that----
    Ms. Breathitt. I didn't share a lot of their points of view 
and philosophies.
    Senator Thompson. I am making no assertions about that. 
Were you aware of the fact that--well, you were aware of the 
fact, I assume, that the Wyatt law firm was being compensated 
for their work. Were you aware of how much they were being 
paid?
    Ms. Breathitt. No, not at--I was not.
    Senator Thompson. Were you aware that Mr. Hayes was being 
paid by the law firm----
    Ms. Breathitt. No.
    Senator Thompson [continuing]. For the work that he was 
doing?
    Ms. Breathitt. No.
    Senator Thompson. Let me hand you a copy of a fax and a 
copy of, I don't know if the staff can give that to 
Commissioner Breathitt, a fax apparently from you to Charles 
Bone in August 2000.\1\ Now, the accompanying letter where 
Governor Patton is recommending you for Chairman of FERC----
---------------------------------------------------------------------------
    \1\ Communication from Commissioner Breathitt to Charles Bone, 
dated August 23, 2000, appears in the Appendix on page 781, Vol. IV.
---------------------------------------------------------------------------
    Ms. Breathitt. Yes.
    Senator Thompson [continuing]. Is dated August 23, 2000. Do 
you recall when you faxed--apparently, you faxed a copy of that 
letter to Charles Bone. Do you recall when that was, because 
the date is not reflected on the fax.
    Ms. Breathitt. No, I don't.
    Senator Thompson. Do you----
    Ms. Breathitt. In August--no, I don't. August of--let me 
see what this is.
    Senator Thompson. This letter, I might state while you are 
looking at that, this letter is a recommendation from Governor 
Patton to President Clinton. It says, ``I am writing you about 
a matter concerning a citizen of the Commonwealth, Linda 
Breathitt, having been appointed by you on October 24, 1997, 
and confirmed by the Senate. She is a sitting Commissioner,'' 
and then he says, should the chairman leave the Commission 
before his nomination is confirmed, ``I would urge you to 
appoint Linda Breathitt to be the next FERC Chairman,'' native 
Kentuckian, excellent choice for a number of reasons, goes 
ahead and gives your experience there as chairman of the 
Kentucky Public Service Commission, outstanding service on FERC 
and what not.
    So the governor was recommending you for the chairmanship 
and you sent a copy of that, apparently, to Mr. Bone. What was 
the purpose of your doing that?
    Ms. Breathitt. I don't--I am not arguing that I sent it, 
because here is the fax cover sheet, but I don't recall why I 
would have sent it to Mr. Bone.
    Senator Thompson. Well, you said a lot of your 
conversations were political, and we know, of course, that 
before the election, during this period of time, Mr. Hayes was 
the treasurer of the Gore campaign and Mr. Bone was actively 
involved in it. If you look on his website, he, of course, 
points out that he has been very active with Mr. Gore for a 
long time. I can only assume that you were trying to get Mr. 
Bone to assist you with this nomination to be chairman, would 
that be a fair assessment?
    Ms. Breathitt. I don't remember sending this, but I am sure 
I did because there is a fax cover sheet that is in my 
handwriting. But it is known to many people that Mr. Bone and 
Mr. Hayes, as being from the same city as Mr. Gore, were well 
known to him.
    Senator Thompson. When did you become aware that Mr. Bone 
and the Wyatt firm was representing or was going to represent 
Enron?
    Ms. Breathitt. Sometime in the latter part of the year 
2000.
    Senator Thompson. Well, Ms. Breathitt, you had 21 
conversations or meetings with Mr. Bone from August 2000 to 
December 8. The files indicate that----
    Ms. Breathitt. But I don't--see, there is an entry here 
that I--I have no idea who a Mr. Delaney is. What if these were 
about me?
    Senator Thompson. Well, is there anybody else on either of 
those two pages who you do not recognize, other than Mr. 
Delaney?
    Ms. Breathitt. But what if--I am not--I don't know if I had 
conversations on all these days. What if they could have been 
about me?
    Senator Thompson. Well, no. These are records that the law 
firm has submitted to this Committee----
    Ms. Breathitt. Oh, but there----
    Senator Thompson [continuing]. Which indicate law firm 
contacts with you. That is what they purport to be. One of the 
records that they sent was an August 1, 2000, letter confirming 
recent conversations with Enron, that the firm had about 
representation of Enron with regard to TVA. Then there is 
another letter of August 22 concerning representation of the 
Wyatt firm for Enron with regard to development of policies at 
the DOE and the Federal Energy Regulatory Commission.
    Ms. Breathitt. We don't regulate the Tennessee Valley 
Authority.
    Senator Thompson. I understand that. That is why I didn't 
understand our previous witness's testimony that he thought all 
these contacts with you had to do with TVA. That wouldn't make 
much sense, would it? It certainly, and again, I am not casting 
aspersion because of this. Enron was very active and they had 
contacts with everybody that they could have contacts with. 
Here, they chose to go a particular route that had to do very 
close to you in terms of the law firm affiliation and all, 
long-term friends and your father's affiliation with the firm.
    But I would think that we could agree that they were, from 
August 2000 through at least the end of 2001, that 
representatives of the firm and Enron were talking to you from 
time to time about Enron matters. Isn't that the clear import 
of this?
    Ms. Breathitt. Yes.
    Senator Thompson. All right.
    Ms. Breathitt. And as I mentioned, I have been the most 
reticent, least philosophically attuned to where Enron was 
going, in my opinion----
    Senator Thompson. I can appreciate that, because there are 
a lot of people with regard to the administration who try to 
point out time and time again that they did exactly the 
opposite of what some of these people wanted them to do, but 
that does not keep them from having to do investigations for 
several months.
    Ms. Breathitt. That is right. And I certainly am not 
faulting your being critical of this inquiry and line of 
questioning because I think it is appropriate to get any 
lingering questions or concerns addressed that the initial 
questionnaire, as we were calling it at FERC, that we received 
in March, be discussed.
    But there were numerous contacts by Enron over the 5 years 
that I was there, and I am certain that colleagues of mine, 
former and present, have had Enron contacts, as well, because 
they came to see us frequently. They were an aggressive company 
and they were not shy about advocating what they wanted with 
respect to what was legal to talk about, and pending matters 
are not permissible to discuss.
    Senator Thompson. Well, Mr. Bone says in his memo of your 
meeting in Nashville that the FERC will be responding today to 
the request of President Clinton and Secretary Richardson. FERC 
will be very responsive to the crisis with investigations in 
California and possibly hearings in California. Linda did not 
want to address the issue specifically today, but indicated she 
would be pleased to meet with us in Washington at an early 
date. She is very impressed with Steven Kean and spoke highly 
of him.
    Ms. Breathitt. Yes, I have known, as I mentioned----
    Senator Thompson. I might add this. She acknowledged that 
this is not a partisan issue in any way and is very 
conscientious about trying to solve the crisis. Is this a 
fair----
    Ms. Breathitt. Yes.
    Senator Thompson [continuing]. Recounting of the meeting, 
do you think? All right.
    Ms. Breathitt. It was not a lengthy meeting. I was taking a 
vacation day to go see relatives, have lunch with my nephew. I 
wanted to see the Gore campaign. I had never seen a 
Presidential campaign in operation, and they were both friends 
of mine, and I considered it an informal trip to Nashville with 
multiple reasons.
    Senator Thompson. Well, I think any time you have an 
opportunity to go to Nashville, you ought to take it, would be 
my feeling. [Laughter.]
    Mr. Chairman, I have no further questions. I would think it 
would be appropriate for all of our sakes to make a part of the 
record these documents that we have been referring to that came 
from the Wyatt law firm. I hate to get into the details of any 
one's records or firm's records, but I believe that they all 
have to do with the issues that we have been dealing with here 
today. Perhaps, if you would prefer, staff could get together 
and agree upon a submission to make sure that no privacy is 
unnecessarily violated. But I do think the basic documents 
would be well served to make a part of the record and let them 
speak for themselves.
    Chairman Lieberman. Senator Thompson, I have no objection 
to that and I think I would like to take you up on your offer 
that our staffs get together, and I think in fairness to 
Commissioner Breathitt, we ought to have similar responses to 
the questionnaires, including, by Mr. Berick's recollection, 
Commissioner Brownell, Commissioner Massey, both of whom had 
contacts with representatives of Enron, as well. I think, 
Commissioner Wood, you indicated that you had not after you 
came onto the Commission, but in any case----
    Mr. Wood. I did, a few.
    Chairman Lieberman. You have? OK. Then in fairness, we 
ought to agree on some system for reflecting----
    Senator Thompson. I agree with that.
    Chairman Lieberman. Thank you.
    Senator Levin, I suppose it is appropriate to begin by 
congratulating you on your reelection.
    Senator Levin. Thank you so much, Mr. Chairman.
    Chairman Lieberman. Though you return with me in the 
Minority, nonetheless, maybe that makes it even a happier turn 
of events that you did come back, so we get ever closer to that 
magic number. Anyway, welcome. Thank you for taking the time to 
be here today.

               OPENING STATEMENT OF SENATOR LEVIN

    Senator Levin. Thank you. I am delighted to be back here 
with Senator Collins, if I may take the liberty of saying so.
    Chairman Lieberman. Yes, indeed.
    Senator Thompson. Already buttering her up. [Laughter.]
    Senator Levin. Mr. Chairman, I have an opening statement 
which I would ask to be included in the record.
    Chairman Lieberman. Without objection.

                  PREPARED STATEMENT OF SENATOR LEVIN
    The Enron scandal continues to teach us painful lessons about 
corporate misconduct and the need for government action to police our 
markets, protect consumers and investors, and punish corporate 
wrongdoing.
    The Enron scandal began by exposing dishonest accounting at a 
number of major U.S. companies that, unbeknownst to most, had begun to 
eat away at the reliability of their financial statements. It has since 
exposed the conflicts of interest that have made investors distrust 
investment reports issued by leading U.S. financial firms. It has 
exposed how those firms have become willing participants in shell 
companies, phony trade deals, and complex financial transactions used 
to inflate earnings, hide debt, and increase stock prices. And Enron 
has exposed how, all too often, corporate executives have walked away 
from corporate disasters with millions in their pockets, often from 
exercising stock options, while pension funds, investors, employees, 
and creditors have lost everything.
    Today's hearing provides another painful lesson in corporate abuse. 
The spotlight today is on U.S. energy markets and how lax government 
oversight failed to protect U.S. consumers and markets from false data 
and price manipulation by corporate wrongdoers.
    Energy companies today are reeling from media reports of deliberate 
market manipulation, round-trip trading, and bogus derivatives that are 
really bank loans. These allegations are not confined to Enron, but 
have spread to other energy companies as well. Prominent energy firms 
have seen their credit ratings slashed, their profits collapse, and 
their stocks nosedive. Employees are being laid off by the tens of 
thousands. Public trust in energy deregulation has suffered a serious 
blow.
    While most of this market turmoil is attributable to corporate 
misdeeds, a portion of the blame also falls on the shoulders of 
regulators who failed to police the energy markets. Those markets have 
undergone sweeping change over the last decade, moving from a system of 
highly regulated monopolies to one that is supposed to incorporate 
market-based competition. But market-based systems are not 
automatically fair, efficient or honest, because there are always those 
who engage in deceptive and unfair practices. That's why it is the job 
of government to police the markets, determine what is happening, and 
put a stop to those unfair or deceptive practices.
    We will hear today that the Federal Energy Regulatory Commission, 
FERC, has not kept pace with the changes in the energy marketplace and 
has failed to ensure just and reasonable rates as it is required to do.
    While part of FERC's inaction can be attributed to statutory 
limitations on what it can regulate, another part comes from a hands-
off approach to market-based pricing that resulted in FERC's failing to 
detect significant market manipulation and other corporate misconduct. 
And Enron is apparently not the only wrongdoer that has evaded FERC 
oversight. News reports of possible misconduct by other major U.S. 
energy companies have become commonplace. They include reports of 
company traders' giving false price data to reporting firms, companies 
engaging in billions of dollars in phony roundtrip trades, and 
deliberate strategies to manipulate California energy prices.
    If we are to restore confidence in these circumstances, we need a 
re-invigorated FERC that is explicitly dedicated to promoting 
transparent and fair energy markets, safeguarding investors and 
consumers, and stopping corporate misconduct. FERC has recently taken 
steps to rectify its shortcomings and strengthen its market oversight. 
Congress also has a role to play in clarifying and strengthening FERC's 
oversight and enforcement authority. I congratulate our Chairman, 
Senator Lieberman, for his efforts to shed light on these problems and 
to get us all to learn from the lessons taught by the Enron scandal.

    Chairman Levin. First, let me compliment the Committee and 
its staff on a very detailed and objective report which really 
deepens our understanding of what went wrong and how FERC 
oversight needs to be strengthened in order to restore investor 
and consumer confidence. Commissioner Brownell spoke of a $90 
billion loss of capitalization in the U.S. energy markets. That 
is a loss to all of us.
    To restore these investments and the confidence of 
investors in the energy industry, we need a market that people 
are confident is not rife with deceptive and unfair practices, 
and that means we need a lot stronger market oversight by FERC, 
and I believe this report and this hearing will contribute to 
that goal.
    I want to start with Chairman Wood with the wind farm 
issue. As you have indicated, Congress adopted a number of laws 
which were aimed at encouraging alternative energy sources, 
such as solar and wind power. One of those laws allows 
alternative energy generators that are independently owned--not 
owned by a regulated public utility or a utility holding 
company--it allows them to charge higher rates for electricity 
and to sell all the power that they want to public utilities, 
which must buy it at the higher rates.
    Now, those benefits, higher rates and guaranteed 
electricity sales, as you know, are supposed to go only to the 
qualified facilities that meet the law's requirements, the 
``QFs.'' And those benefits mean that every alternative power 
generator wants to be a qualified facility, a QF, eligible to 
charge the higher rates.
    We have heard the story of how Enron had three wind farms 
that were in danger of losing QF status because Enron was 
buying a public utility and then would become a utility holding 
company, in turn, which meant that the wind farms would no 
longer meet the law's requirements to be independent of a 
public utility. We heard how Enron, in order to help the wind 
farms keep their QF status, supposedly sold them to a shell 
company called, I think it is called RADR, that was allegedly 
independent of Enron.
    That was 5 years ago. We now have found out that RADR was 
not independent of Enron. It was secretly controlled by Enron 
officials, and both the Justice Department and the Securities 
and Exchange Commission have filed legal action against those 
Enron officials, Fastow and Kopper, for their actions regarding 
RADR.
    The indictment of Kopper states that Mr. Kopper and other 
Enron officials had ``devised a scheme to enrich themselves and 
enable Enron to retain secret control over the California wind 
farms while appearing to maintain eligibility for QF status.'' 
That is the background.
    Now, the hypothetical question. What if numerous public 
utilities that owned alternative energy generators, like a 
solar or wind power generator, sold their facility to a special 
purpose entity that was owned or controlled by one of the 
utility's senior officers? The individuals who owned the 
facilities would not themselves be utility owners. They would 
just be officers of the utilities. Would that arrangement 
comply with the FERC regulations that require the qualified 
facilities to be independently owned?
    Mr. Wood. I don't have an answer to that because I haven't 
thought about it, quite frankly, and looked at those 
regulations in that light. I will be glad to do that and 
respond to you, Senator.
    Senator Levin. Would you do that and get back to us? I 
think you indicated there were about 9,000 qualified 
facilities, is that correct?
    Mr. Wood. Nine thousand filings at FERC to certify or self-
certify, yes, sir.
    Senator Levin. And how many of those QFs are 50 percent 
owned by public utilities?
    Mr. Wood. Of the--I would think it should be none, if they 
are not----
    Senator Levin. None?
    Mr. Wood. If they are not qualified, then they should not 
be eligible for the benefits.
    Senator Levin. Well, but you can be 50 percent owned by a 
public----
    Mr. Wood. I am sorry. Can you ask that again, Senator?
    Senator Levin. Sure.
    Mr. Wood. I think I missed it.
    Senator Levin. Apparently, you can retain your 
qualification to be a QF provided you are no more than 50 
percent owned by a public utility.
    Mr. Wood. That is how I read PURPA, yes, sir.
    Senator Levin. So now my question is, how many of those QFs 
are 50 percent owned by----
    Mr. Wood. Or less.
    Senator Levin [continuing]. Not more, 50 percent or less?
    Mr. Wood. I will get back to you on that, too, sir.
    Senator Levin. Well, about how many?
    Mr. Wood. I would have no idea to even say if it is 10 
percent or 90 percent. I have no----
    Senator Levin. Well, but shouldn't you know?
    Mr. Wood. I don't know.
    Senator Levin. I mean, given the experience we have had 
with those wind farms, shouldn't FERC know?
    Mr. Wood. Well, if they are eligible, sir, I think that is 
not the problem. But I don't----
    Senator Levin. Well, it is a problem----
    Mr. Wood. If they are 49 percent----
    Senator Levin [continuing]. Because we have SEC and we have 
the Justice Department saying that can just be a sham 
ownership.
    Mr. Wood. Right. That would be----
    Senator Levin. So if we have----
    Mr. Wood. If you pierce the sham, it is clearly more than 
50 percent.
    Senator Levin. But if you see a pattern that public 
utilities are owning 50 percent of these QFs, isn't it 
important, then, to see whether or not, in fact, there is an 
independent QF or not?
    Mr. Wood. Sure. Yes, sir.
    Senator Levin. Shouldn't you then be piercing some of the 
veils here?
    Mr. Wood. I think so, but as I mentioned in my address to, 
or in response to a question from Senator Lieberman, we have 
kind of a front line for this effort, as well, that is, the 
company actually paying the payment to the QF, and that would 
be a large utility or a co-op or mostly large utilities, and 
the State commission standing behind that. So we do have other 
people that are helping us in this effort and we have, in fact, 
used that trigger line up to now, certainly, as really the 
first check for when we ought to look deeper, and we have in 
the past looked deeper at some of these that were a little 
harder to understand.
    Senator Levin. Yes, but that first check didn't work.
    Mr. Wood. It didn't work here.
    Senator Levin. And may not be working other places. So 
isn't there an obligation and responsibility to take some 
initiative to, at least on a random basis, look at these QFs 
that may be 50 percent owned, and then isn't there some 
obligation on the part of you as a regulator to see if that 
other 50 percent might not be some special purpose entity that 
was created by that public utility?
    Mr. Wood. I think that is a reasonable request, sir. Yes, 
sir.
    Senator Levin. As of this moment, until you said that was a 
reasonable request, there was no----
    Mr. Wood. We have not done any further investigation of 
that since we initiated the--we have the particular transaction 
that came up with regard to these series of renewable 
facilities that came forth, set for an enforcement trial as we 
speak, and I think we will learn a lot from that effort as to 
how these transactions were structured and that should 
certainly inform if we want to do any further investigation of 
related transactions.
    Senator Levin. I would hope that FERC would undertake a 
systematic review of these QFs, particularly the ones where 
there is a significant percentage of the ownership which is in 
the hands of a utility.
    Mr. Wood. Of a utility, yes, sir.
    Senator Levin. The whole self-certification troubles me, as 
well. How many of these challenges have come--I think you said 
there is a total of 16?
    Mr. Wood. Twenty, or 16?
    Senator Levin. Twenty?
    Mr. Wood. I will take 16, if that is something we have got.
    Senator Levin. Twenty. What you hope the market would 
automatically produce would be people who have an interest in 
keeping the prices lower would file the protest or the request 
for investigation. You have had 20 of the 9,000. Now, how many 
of those have come from competitors and how many of those 20 
have come from consumer groups?
    Mr. Wood. I would--I do not know, the 16 or the 20, how 
those break down, but I think primarily they are coming from 
the utility who is paying the payment----
    Senator Levin. I didn't mean the competitors, I mean the 
utilities that are paying.
    Mr. Wood. Right. That would be a competitor, I suppose, 
yes, sir.
    Senator Levin. They have to file, don't they, a filing fee 
there of $16,000?
    Mr. Wood. For a declaratory order for those, is that what--
yes, sir, that would be correct.
    Senator Levin. And then, if they prevail, do they get that 
$16,000 back?
    Mr. Wood. I hadn't thought about that. I don't know. I 
could look into that. I don't know that we have got that.
    Senator Levin. Take the consumer group out there----
    Mr. Wood. The State PUC certainly can file, as well.
    Senator Levin. Right, but just take a consumer 
organization, a public interest group or a consumer's group. 
They may not have $16,000, right? So for them, that is an 
impediment. What I am saying here is I would hope FERC would be 
a lot more aggressive in doing policing. Sometimes, the market 
will do the policing for you, but sometimes it won't. It seems 
to me you have got to be a lot more aggressive, because you 
have a responsibility here to make sure that there are just and 
reasonable prices that are charged by utilities. That is the 
requirement of law, is that correct?
    Mr. Wood. That is correct.
    Senator Levin. It seems to me we already know the market 
does not do that automatically. For a number of reasons, it 
does not do it. First, you may have entities in there that are 
willing to, as the Chairman said, go beyond what is legal, that 
are pushing the envelope here, that are cutting corners. 
Second, you may have people that are simply defrauding others. 
And then you have this financial barrier also, the $16,000, 
which may not be a lot to a public utility but could be to a 
consumer organization that wants to challenge it.
    So it seems to me that you have that responsibility and you 
acknowledge, I think in response to the Chairman's questions, 
that the staff report relative to those recommendations is a 
constructive report and that you intend to carry it out. I 
would look forward to this random sampling, as well, of these 
QFs in order to see whether or not there is a pattern here--
that this is not a unique situation where there was a phony, a 
sham ownership of 50 percent that was set up----
    Mr. Wood. Right.
    Senator Levin [continuing]. In order to make sure that the 
intent of the statute is carried out.
    I see the red light is on, so my time is up.
    Chairman Lieberman. Senator Levin, because of the small 
number of Senators that have been here today, we have been 
quite generous with time, so if you have a few more questions 
you want to ask on this round, you are welcome to.
    Senator Levin. I do, but I think I see Senator Collins 
looking at me like she has another commitment to go to.
    Senator Collins. I do, actually.
    Senator Levin. If that is all right with the Chair, let me 
yield at this time and perhaps come back.
    Senator Collins. Thank you, Senator Levin.
    Chairman Lieberman. Thanks.
    Senator Collins. You read that correctly. [Laughter.]
    Chairman Lieberman. Senator Collins, congratulations to 
you, both on your reelection and what I presume will be your, 
dare I say, ascension to the Chairmanship. This is a wonderful 
Committee, which you have been just a superb member of, and you 
are very prepared in every way, ability and honor, to be an 
excellent Chair of the Committee and I look forward in my new 
capacity and yours to working together with you to fulfill the 
mandate of the Committee.

              OPENING STATEMENT OF SENATOR COLLINS

    Senator Collins. Thank you, Mr. Chairman. I look forward to 
continuing to work with both you and Senator Levin. We have 
been partners on a number of investigations over the years and 
I am sure I will enjoy working with you in my new capacity, as 
well.
    Chairman Wood, I know that you would agree that consumers 
are entitled not only to a well-designed market, but also one 
that is carefully monitored for market power abuses, and I 
believe that under your leadership, there are many encouraging 
signs that FERC now understands that dual mission.
    However, the potential profits from gaming a market in a 
necessity for which there is often no short-term substitute 
would seem to be so enormous that I can envision a scenario 
where the gamers continually come up with new schemes and the 
regulators are constantly scrambling to catch up with the 
latest innovative scam.
    Why should consumers feel confident that we now have the 
ability to police the markets in a way that will prevent the 
kind of gaming that has occurred, particularly when, although 
you have requested additional authority and additional 
resources, you have got to receive what you have asked for?
    Mr. Wood. I think as to the last point, Senator Collins, I 
think we can certainly, within the context of what we have got 
today, move forward assertively on the market oversight, the 
monitoring. We have the ability under current law today, if 
there is a violation of a rule, some gaming incident that was 
in violation of a rule, that any profits from that transaction 
could be remitted back to the customer who paid them. Certainly 
in New England and New York, in the Mid-Atlantic here, there 
are more sophisticated efforts that have been underway in those 
more open markets for the last 5 years or so that do monitor 
these transactions on a transaction-by-transaction basis and 
look at patterns and look at specifics and do the spot audits 
that Senator Levin was talking about in a different context.
    So I do think, quite frankly, in the parts of the country 
where we have moved to a more open market on at least the 
wholesale level, where there are predictable rules of the road, 
where there are independent institutions that oversee those 
regional marketplaces, that there has been--not perfectly, to 
be sure, but there have been, in large measure, a very 
responsible market, even in times of relative scarcity because 
of the stress.
    It is important, however, to--I mean, there are two 
preconditions in addition to oversight that we have got to 
have, which are infrastructure, both the power plants, the 
power lines, the gas lines to get it there, the abilities of 
customers to reduce their demand at times of peak because they 
get a price signal, which I think we visited last summer. I was 
reviewing our transcript from you.
    And then also balanced market rules, a good institution set 
up to look at the rules. As a full Commission, about 4 or 5 
months ago, we put forth our vision in response to a lot of 
these issues, that we do need a standardized approach toward 
markets that has a lessons learned aspect to it, from what has 
worked well in markets and what has not worked well.
    But that is not a fixed-in-time process. I think we learn 
from what has worked well in New England, in PJM, in Texas, 
Australia, England, and other places. We learn what doesn't 
work well in those places and in California to craft a vision 
for the future that, while it is getting a lot of vetting right 
now, I think it is absolutely critical to make sure that we 
address your core issue, which was how can we convince 
customers that they will be better off? We have to actually do 
the full bore of the infrastructure rules and oversight to make 
sure that works.
    I do appreciate the attention of the Committee today toward 
the oversight issues, but the infrastructure and the balanced 
market rules are just as critical to making sure we have an 
effective marketplace for customers.
    Senator Collins. Let me follow up with two questions, one 
on infrastructure and one on the consumer side. Let me do the 
consumer side first.
    One of our expert witnesses on the next panel tells us that 
much more attention needs to be paid to the development of an 
active demand side in electric markets so that consumers will 
be able to respond to short-term swings in market prices. But I 
must say, creating a demand side in many ways seems to me to be 
equivalent to talking about the weather. Everybody talks about 
it, but nobody seems to be able to do anything about it.
    Are there really, truly concrete, practical programs that 
can be currently implemented to create a meaningful opportunity 
for consumers to respond to price changes, and if so, what are 
they? The average consumer has no idea when prices are going up 
and down.
    Mr. Wood. Right.
    Senator Collins. We have talked about having special meters 
that perhaps large industrial users could use. I would like to 
get your thoughts on that issue.
    Mr. Wood. A great question. In fact, I will tip my hat to 
Tom Welch from your State and Bill Nugent and then the other 
commissioners in New England for--and Nora has been kind of our 
lead on this, so if she wants to pipe in, feel free.
    But we have engaged in basically a laboratory with FERC as 
the wholesale regulator and the six New England States as the 
retail counterparts to put together a demand side or demand 
response initiative, to try to see how can we integrate this 
resource that we need so bad. We need it like we need a new 
power plant in certain regions of the country. It is that 
effective to basically check market power on a scarce day or to 
avoid building a new power plant. Sometimes, you do not need 
new power plants if people have an incentive to reduce their 
demand at the summer peak, for example.
    So the test case, the pilot project in New England, we have 
approved--prior to this summer, we approved the first one in 
the PJM, which is here in the Mid-Atlantic, demand response 
initiative as a FERC-regulated item, as well, and we have got 
an item on next week's agenda dealing with that still. But the 
response to that was mixed. I think it is certainly better than 
not having done it at all, but I think of all the things in our 
kind of vision of the future that are so critical to make work 
well so that this really does deliver consistent benefits for 
consumers, the demand side is the one with the fewest data 
points underpinning it. Even looking at foreign countries, we 
don't have a real clear market-driven demand response.
    You can certainly regulate them, where you are cutting 
checks, as we are having in the PJM. You are basically paying 
people a fixed amount--it is not very precise, but you are 
paying them a fixed amount of dollars to shut off at peak.
    Senator Collins. Commissioner Brownell, do you have 
anything?
    Ms. Brownell. Yes. In fact, I met with some of the people 
working on the NEDRI project in New England, which is a 
wonderful laboratory, by the way, lots of cohesive vision among 
the State commissions there, and they have come up with a 
number of suggestions that I think will be implemented in the 
not-too-distant future.
    But I think the important message that we took away from 
our discussions during RTO and SMD development was there is 
agreement that everyone needs demand side management, but no 
one knows how to price it, no one is as familiar as they need 
to be with the technologies, the real-time pricing technologies 
that will enable customers, even the smallest customers, to 
manage these loads more effectively.
    And we treated them like programs. They are temporary. They 
are pilots. They get enacted late. That was one of the problems 
in PJM, that when we approved it in May, because it came in so 
late, it was difficult for customers to really participate.
    So we need to institutionalize them. We need to recognize 
there is a real value. This is not something that you just 
throw subsidies at. This is an important part of balancing the 
market and allowing customers to speak. And you have probably 
heard me say before, I think we have been very condescending 
about the ability of customers to make buying choices, 
including to manage their electric load. I think they are fully 
capable, and, in fact, in some of the experiments we have seen, 
they are willing to do so.
    So I think that the secret is, get the technology right, 
get the pricing right, empower people, and make these an 
institutional part of the market. There are lots of competing 
forces, of course, for whom that is a very difficult concept to 
grasp. But I think we are getting there and we will have some 
measurable results in New England in the not-too-distant 
future.
    Senator Collins. Thank you. Chairman Wood, I want you to 
pretend that the Chairman of this Committee is not here for 
this next question. There is a clear need for additional 
transmission, but I am very concerned about the question of who 
pays for it.
    For example, last week, the system operator in New England 
announced that because Southwest Connecticut does not have 
sufficient power to meet its demand, it needs a transmission 
upgrade slated to cost at least $600 million. Now, some people 
have argued that the cost should be borne not only by those who 
live in Southwest Connecticut, but by consumers throughout New 
England, and I question the fairness of that approach, 
especially since Connecticut has the highest residential 
electricity consumption of any New England State. Indeed, the 
average monthly household consumption in profligate Connecticut 
is 711 kilowatt hours, compared to just 479 kilowatt hours in 
thrifty Maine. [Laughter.]
    Now, under these circumstances, is it fair to impose on the 
rest of New England the cost of this upgrade, and similarly, a 
related question would be, is it consistent with relying on 
market forces to spur people to respond to higher prices? In 
other words, if people in Connecticut are using an inordinate 
amount of electricity that produces this need for a 
transmission upgrade, why should consumers in Maine, who have 
limited their electricity use, have to pay for part of that 
upgrade, and doesn't that send us in exactly the wrong 
direction as far as using market forces to control demand?
    Chairman Lieberman. Forget all those nice things I said 
about Senator Collins. [Laughter.]
    Mr. Wood. This is actually in our standard market design 
rulemaking one of the most, I don't want to say contentious, 
because as you are, people are civil about this, but it is a 
gut issue about cost allocation and cost responsibility 
following the people who cause the cost to be incurred.
    We had a full-day conference that we all sat in on with a 
lot of what we call the very smart guys and gals from around 
the country last Wednesday, in fact, on this issue of funding 
for transmission expansions, and there was a curious alignment 
of people in the deep South with New England about this 
approach, which is called participant funding, which is more 
directly defined as ``the beneficiary pays.''
    I think the take-away from that was, in a market 
environment where you have price signals, which you have got 
certainly coming in New England with the implementation of some 
new market rules later this year, with proper rights being 
vested in transmission rights, which we have in New England, 
New York, and PJM, and an independent administrator, which you 
have certainly got in New England, that it is a lot easier to 
allocate the cost and identify the beneficiaries and allocate 
them.
    So in your case, I think of all the places in the country, 
New England, New York, and PJM are probably closest to being 
able to discretely identify who the beneficiary is and then 
make sure that that party pays for it.
    The current policy, however, with ISO New England and with 
the six States up there is kind of a split one, which was 
explained to us pretty eruditely by Chairman Dworkin from the 
State of Vermont, who was very kind to point out that they are 
always 5 percent of the total amount of load, and I don't know 
if he is thriftier than Maine or not, but he was definitely of 
a mindset that we ought to move to the more beneficiary pays 
approach on transmission, but they are not there yet.
    There is a two-part work. There are very big transmission 
facilities there, spread over the region, because they are 
viewed as benefitting the entire reliability of the region. If 
there are more localized facilities, lower voltage, for 
example, that can pretty much keep the power located in the 
neighborhood, then those are billed directly too.
    So I am not sure what the actual transmission needed in 
Connecticut would be, but I think under the current rules in 
New England, some of that could, in fact, be spread across the 
entire region, but some of it would also be direct billed to 
the people that take service in that particular area.
    So it is in transition in New England, from the world of 
just dump it in the bucket and spread it over everybody, the 
peanut butter method, to the more, I guess, precise method of 
allocating. But it is not all the way there yet. For instance, 
Mr. Dworkin pointed out from Vermont, we have ``rolled in.'' 
We, Vermont, have paid for some of these upgrades in the Boston 
area, in central Massachusetts and in the Rhode Island area, 
but we haven't built anything in Vermont yet to get our fair 
share.
    So I think when you are halfway through a policy of peanut 
butter going to direct bill, you have got to make sure 
everybody got their fair share of peanut butter the first time, 
and then you can call an end and then move to the new system. 
So I think that is going to be kind of hairy to work through, 
but I think we can get there in New England, to that 
``beneficiary pays'' system. But recognize that they are partly 
down the other road than the one your question advocates and I 
think it is going to take some careful unknitting of that 
garment to get it back.
    So I think we will work with them and we will work with you 
on that, and I think we certainly want to, at the core, get the 
needed infrastructure in place. If we don't have that 
infrastructure in place on both the gas side and the electric 
side, even good old sturdy New England, which has an overbuild 
of 20 to 30 percent extra generation, if they can't get to 
where the customers are, it just as soon not ever be built 
anywhere. So you have got gas coming in from Nova Scotia, from 
Western Canada, from the South. I think New England is set off 
beautifully as far as an energy future. We just have to make 
sure the infrastructure is in place to bring it all the way to 
the end-use customer.
    So we will work on the cost allocations, and it is, 
admittedly, a hairy issue right now, but it is something we can 
certainly work through. But the core issue we want to really 
address through our rulemakings is that the incentive be given 
to build in the first place, because we do need it.
    Senator Collins. Thank you, Mr. Chairman.
    Chairman Lieberman. Thanks, Senator Collins. I must tell 
you that the proposal for paying for the new transmission to 
the Southwest part of my State was made by the ISO. But thus 
far, the question of how this is going to be paid for has 
received very little attention in Connecticut because there is 
a tremendous controversy, as the Commission may know, about the 
siting, in other words, about whether additional transmission 
capacity should be built and a lot of residents of various 
areas don't want it to be built.
    But it did sound to me like Commissioner Wood was 
suggesting just the kind of independent, centrist, moderate 
solution that you would typically---- [Laughter.]
    Chairman Lieberman [continuing]. Be sympathetic to. Anyway, 
thank you.
    I just have a last question of you, Commissioner Wood, and 
obviously, I appreciate Senator Collins' questions--before that 
last one---- [Laughter.]
    Because they obviously say, not surprisingly, that she 
shares the interest that I and other Members of both parties on 
the Committee have that FERC learn, as you have tried to do 
now, from the Enron scandal and that we feel that you are being 
as aggressive and sophisticated as the players out in the 
deregulated energy market and that we have an obligation 
sometimes to push and other times to support you, including 
with resources as best we can.
    My last question is that I gather that you have said 
somewhere that you hope to complete FERC's investigation into 
the California and Western markets by next February. I always 
like deadlines and I understand that there may be a degree to 
which the Commission is under some pressure, explicit or 
implicit, to reach a judgment so that you can restore 
confidence in the markets, in some of the companies involved, 
but I would just give this precautionary word, which is that 
though we have concluded that Enron behaved very badly here, 
and on the basis of that, we cannot conclude that all the other 
participants in the energy markets in the West or elsewhere 
behaved badly. We also don't know that they didn't.
    I mean, at a certain point, obviously, you have got to 
decide that it is over, but I want to urge you not to feel the 
pressure to reach a conclusion before you really have the basis 
for reaching a conclusion that the other significant players in 
the Western energy market did not also act badly, because the 
worst thing, I think, from FERC's institutional point of view 
would be to have someone or some entity afterward make a 
compelling case that some of the other players out there gamed 
the system as much as we now know Enron did.
    Mr. Wood. Thank you for that. I think the main reason, 
Senator, we embarked last January and February on setting up 
the investigation is there have been and continue to be 
lingering doubts about what exactly happened in California, and 
we wanted to, I think as I mentioned to your colleagues on the 
Energy Committee, we want to really get as far down that food 
chain as we possibly can to understand what happened. If there 
are bad actors, take them out to the woodshed. As your question 
pointed out, there are some good actors who the world doesn't 
think are good that are living under this cloud right now, and 
we are cognizant of the need to lift that cloud.
    It is a time line, quite frankly. I asked the lead of the 
investigation to tell me realistically how much time he needed 
to get through all this effort and he said that the first 
anniversary of its public starting would be sufficient time for 
them, and all the array of consultants that we have from the 
outside working with them, to analyze terabytes worth of data 
to complete that effort and bring it to the public so that they 
know what we know.
    I appreciate that concern and welcome it, and we are not 
here to make short shrift of a very serious topic, but to do a 
thoughtful effort that you will be proud of, that we will be 
proud of, and that the customers of energy users in this 
country will think is respectable.
    Chairman Lieberman. I appreciate that. Thank you all very 
much for your testimony, for your work.
    We will call the third panel. I thank them for their 
patience. Commissioner Massey, is your term ending soon, 
Commissioner Massey?
    Mr. Massey. My term ends in June 2003.
    Chairman Lieberman. Oh, you have some time. Commissioner 
Breathitt, I thank you both for your service and we look 
forward to continuing to work with you, Commissioner Wood and 
Commissioner Brownell.
    On this last panel, I want to welcome back and again thank 
you, Dr. Paul Joskow and Dr. Frank Wolak. Both Dr. Joskow and 
Dr. Wolak testified before our hearing last year on June 13, 
and that was on the California energy crisis. We have asked 
them to come back today to share with us their thoughts about 
the events that have transpired since June 2001 and the lessons 
that we and FERC should learn, particularly, of course, from 
the Enron debacle, which happened, which collapsed officially 
or visibly after your testimony here in June 2001. We greatly 
benefited from your testimony on that occasion and we look 
forward to it now.
    I thank you for your patience, and obviously, your full 
testimony will be included in the record.
    Dr. Joskow, please proceed.

  TESTIMONY OF PAUL L. JOSKOW, PH.D.,\1\ DIRECTOR, CENTER FOR 
    ENERGY AND ENVIRONMENTAL POLICY RESEARCH, MASSACHUSETTS 
                 INSTITUTE OF TECHNOLOGY (MIT)

    Mr. Joskow. Thank you, Senator Lieberman. It is a pleasure 
to be here again. As you indicated, I last testified before the 
Committee in June 2001, and I thought it would be most useful 
for me to update the comments and observations I made at that 
time in light of 18 months of additional experience.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Joskow appears in the Appendix on 
page 146.
---------------------------------------------------------------------------
    A lot has happened in 18 short months and my written 
testimony contains a long list of lessons learned. I do hope it 
will be included in the record.
    Chairman Lieberman. It will.
    Mr. Joskow. I would like to highlight a few of what I think 
are the most important lessons and then to offer a few comments 
about how FERC is doing.
    Creating well-functioning, competitive wholesale and retail 
electricity markets is a significant technical and 
institutional challenge. It is easy to do it badly and it is 
hard to do it well. Careful attention to the details of 
electricity market design and supporting institutions, drawing 
both on U.S. and international experience and active 
involvement by and cooperation between Federal and State 
regulators in defining and implementing these details is very 
important.
    Electricity's unusual attributes also create unusual 
opportunities to exercise market power and to engage in a wide 
range of behavior to drive prices up to supra-competitive 
levels. If you doubted this 18 months ago, I hope that you are 
convinced now.
    Good market designs and appropriate supporting contractual 
and institutional arrangements can help to reduce the 
incentives and ability of suppliers to drive up prices. 
However, that is not enough. An effective, credible, and 
professional market monitoring and enforcement system must be 
in place to measure and evaluate market performance, to 
identify actions necessary to improve market performance where 
it is poor, to enforce market rules, and to punish those who 
violate them.
    At the same time, it is important to guard against counter-
productive regulatory initiatives that undermine the behavior 
and performance of well-functioning competitive markets. Hard 
competition is to be encouraged, while unfair competition, 
unreasonable levels of market power, and misleading or 
fraudulent presentations of financial and market information 
must be mitigated by effective oversight and appropriate 
sanctions when abuses are found. Finding the right balance 
between regulating too little and regulating too much continues 
to be an important challenge.
    More broadly, I think, as we look out into the future of 
the electric power industry, it is going to be important to 
adopt policies to support an evolution to an industry structure 
where merchant generators make most of their money by building 
and operating power plants cheaply and reliably and selling 
most of their output under longer-term contracts to financial 
intermediaries, to load-serving entities, and directly to large 
consumers. That is, we want to design markets so that firms 
earn their money by being the lowest-cost suppliers, rather 
than being good at engaging in behavior to increase price 
spikes and to game market rules.
    In response to the events and revelations of the last 18 
months, public and investor confidence in competitive 
electricity markets has been shaken and several States that 
planned to introduce restructuring, wholesale and retail 
competition initiatives have delayed or suspended their 
programs. Unless the credibility of the markets, the market 
participants, and those who regulate them is restored, it is 
unlikely that there will be support from additional States to 
extend electricity restructuring and competition initiatives or 
that capital will be forthcoming at a reasonable cost to pay 
for needed investments in generating capacity and vitally 
needed transmission infrastructure. A credible commitment by 
FERC to protect consumers from poor wholesale market 
performance is a necessary condition to restore public 
confidence.
    In my June 2001 testimony, I was extremely critical of 
FERC's responses to the California electricity crisis, and I 
have reproduced some of those criticisms in my written 
testimony here. While there is plenty of blame to go around for 
those events, it is quite clear that FERC did too little and 
acted too late to avert the crisis. The question is, has 
anything changed, and I think the answer is yes.
    I think that FERC has made a lot of progress in the last 18 
months under Chairman Pat Wood's leadership and has responded 
positively to the criticisms that I made in mid-2001. I am 
generally pleased with the tone that has now been set at the 
top, the institutions that are being created to monitor 
electricity and gas markets, and with the electricity market 
reform initiatives that have been undertaken.
    The Chairman and the other FERC commissioners have 
repeatedly made it clear to market participants that they are 
committed to creating well-functioning, competitive wholesale 
markets and that they will not tolerate efforts to manipulate 
prices, violate market rules, engage in fraud and other market 
abuses, and they have taken some actions to show that they are 
serious about these commitments.
    However, as Commissioner Massey said a little while ago, 
the proof is in the pudding. Several important investigations 
and rulemakings are in progress and their outcomes and 
consequences, necessarily, remain uncertain. Institutional 
cultures also can take a long time to change. Only time will 
tell whether this view at the top has been fully 
institutionalized within the agency and whether FERC delivers 
on its renewed commitment to mitigate market power, punish 
those who violate market rules, and ultimately to adopt sound 
policies that improve electricity market performance.
    Let me just end, if I could have 10 more seconds----
    Chairman Lieberman. You can take a little more time, if you 
want.
    Mr. Joskow. I have been working on electric power 
regulation and industry restructuring and competition for 30 
years, and I really want these reforms to work. It is 
especially important for us in New England. We have gone very 
far down this path. Clearly, this was a much more difficult 
initiative than many had anticipated, but I do feel, finally, 
that we have leadership at FERC that is taking these challenges 
very seriously. While I don't agree with all of their 
proposals, I do very much hope that we will all encourage them 
to continue the efforts that they have begun in the last 12 or 
18 months. Thank you.
    Chairman Lieberman. Thanks, Dr. Joskow.
    Dr. Wolak, welcome back and thank you for being here.

TESTIMONY OF FRANK A. WOLAK, PH.D.,\1\ DEPARTMENT OF ECONOMICS, 
                      STANFORD UNIVERSITY

    Mr. Wolak. Senator Lieberman, thank you very much for the 
opportunity to appear before you. Although my oral comments 
focus on the lessons learned from the California crisis, my 
testimony also provides a diagnosis of the crisis and the 
interventions that led to its solutions.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Wolak appears in the Appendix on 
page 159.
---------------------------------------------------------------------------
    At the start, I would like to emphasize that the California 
crisis was not a market failure but a regulatory failure, and 
consequently, the key to preventing future California crises or 
even Enron bankruptcies is for the Federal Energy Regulatory 
Commission to focus on regulating rather than simply monitoring 
wholesale energy markets.
    Under the former vertically integrated regime, aggressive 
wholesale market regulation was largely unnecessary because 
State regulators were the primary line of defense for 
consumers. They set the retail prices that the utility could 
charge for all its customers, and this effectively set the 
maximum wholesale price at which a utility could produce or 
purchase power. And in addition, the integrated resource 
planning process between State regulators and utility insured 
that the utility had sufficient energy capacity in generating 
facilities or long-term contracts to meet its load obligations.
    But as the events in California from May 2000 to June 2001 
visibly demonstrate, if all electricity is purchased from a 
wholesale market, State regulators have little, if any, ability 
to control wholesale prices. The wholesale market regulator is 
the primary line of defense for consumers, and under this 
market structure, light-handed wholesale market regulation can 
lead to enormous consumer harm.
    As discussed in detail in my written testimony, there was 
no shortage of effective market monitoring in the California 
market from the time it started in April 1998 to the present. 
Both the California Power Exchange and the ISO had their own 
internal market monitoring units, and the PX and ISO each had 
independent market monitoring committees overseeing the 
performance of the markets, and all of these entities, as David 
Berick discussed, had presented reports starting in the summer 
of 1998 on the performance of the California market, 
documenting the exercise of market power.
    What allowed the California crisis to occur was the fact 
that none of these entities had the authority to implement 
market rule changes or penalty mechanisms to limit the 
incentive suppliers had to exercise unilateral market power or 
violate California market rules. Consequently, the California 
crisis occurred not because of a shortage of observers with 
radar guns recording the speed of cars on the highway, it 
occurred because of a lack of traffic cops writing tickets and 
imposing fines on cars that exceeded the legal speed limit.
    Only FERC has the authority to implement market rule 
changes and make the regulatory interventions necessary to 
improve market performance. Consequently, it should concentrate 
on designing proactive protocols for rapid regulatory 
intervention to correct market design flaws as quickly as 
possible and order refunds as soon as unjust and unreasonable 
prices are found. In this regard, I have four recommendations I 
will briefly outline.
    First, FERC must provide a transparent definition of what 
constitutes unjust and unreasonable prices in the wholesale 
market. These markets have been in existence in the United 
States for more than 4 years and FERC has still yet to provide 
such a definition. This makes the job of market monitor much 
like that of a snipe hunter at summer camp. The camper is given 
a burlap bag and a flashlight and sent out into the night to 
look for a snipe, but no one has ever told him what a snipe 
looks like. For the exact same reason that no camper has ever 
caught a snipe, it's impossible for the market monitor to ever 
find the evidence of unjust and unreasonable prices to bring to 
FERC's attention because it has never been told by FERC what 
those are.
    This FERC policy creates unnecessary regulatory uncertainty 
and increases the likelihood of a California crisis in another 
part of the United States. Setting a transparent ex ante 
standard for what constitutes unjust and unreasonable prices is 
substantially less difficult than doing what FERC is currently 
attempting to do in its refund proceedings.
    Moreover, several parties have made detailed submissions to 
FERC outlining suggested methodologies for such a standard, and 
given its statutory mandate to protect consumers and the 
growing evidence that all suppliers possess significant market 
power under certain conditions, what FERC really must address 
is whether--essentially, the concept of harm, specifically, 
what wholesale prices reflect sufficient market power for a 
long enough period of time over a long enough geographic area 
to justify being called unjust and unreasonable and, therefore, 
worthy of regulatory intervention.
    My second recommendation is that FERC should also specify 
in advance what regulatory intervention will occur if this 
standard is violated with as much clarity as possible. If all 
market participants are able to construct the index used to 
determine prices are unjust and unreasonable, then the market 
will become self-regulating because participants can take 
unilateral actions to avoid this regulatory intervention, and 
in this way, there will once again be less regulatory 
undertaint and less likelihood of a California crisis.
    My third recommendation concerns FERC's current methodology 
for determining whether prices are unjust and reasonable and 
refunds are due. Specifically, in both public statements and 
many of the statements made today, the commissioners have 
stated that it must find the bad actors and punish them for 
causing unjust and unreasonable prices. While I think it is 
important to find market participants that violated market 
rules and take back their ill-gotten gains, as well as penalize 
them for their violation of market rules, I think it is 
important, as emphasized in my testimony, that, essentially, 
the legal actions of privately-owned firms to serve the 
interest of their shareholders can result in the exercise of 
enormous market power.
    In short, there is no need for malicious or manipulative 
behavior by any market participant for wholesale markets to 
produce unjust and unreasonable prices, and moreover, the 
Federal Power Act does not specify that prices must be the 
result of malicious behavior by market participants in order 
for them to be deemed unjust and unreasonable. It only requires 
that prices be unjust and unreasonable as determined by FERC 
and, hence, they must order refunds.
    The final recommendation that I would like to make concerns 
the necessity of comprehensive and accurate data on the 
physical characteristics of plants, input, prices, and a 
variety of other characteristics of the wholesale market. This 
is necessary for effective regulation. And in particular, it is 
effective for demonstrating essentially the first--it is very 
necessary for the process of determining what are unjust and 
unreasonable and wholesale prices, and finally, I think, more 
important, it is necessary to provide tangible evidence of how 
well FERC is doing in delivering the economic benefits to 
consumers that they would not have received under the former 
vertically integrated utility regime.
    So, consequently, particularly during this initial period, 
FERC should substantially increase and not reduce the amount of 
data it collects from market participants if it would like to 
be an effective and credible market monitor.
    In conclusion, I would just like to emphasize that I think 
FERC has made enormous progress over the last year addressing 
many of these issues, but I also believe that a number of 
significant challenges remain, as I have discussed above, but I 
am confident that with Chairman Wood at the helm, FERC will 
overcome these. Thank you.
    Chairman Lieberman. Thanks, Dr. Wolak.
    It is significant that both of you have been encouraged by 
the last year under Chairman Wood's leadership. I have to say 
that we have been, too, although we think that a lot more has 
to be done, and I guess you would agree with that, as well.
    I was interested, Dr. Wolak, that you view the California 
crisis not as a market failure but as a regulatory failure, and 
I do think you are right. It strikes me that what we are all 
saying here, including the commissioners, is that deregulated 
markets still require regulation. Perhaps we have to find a new 
terminology. In other words, when we go from rate setting by a 
public authority to rate setting by the market, there is still 
a need for the traffic cop on the beat or on the highway. Do 
you both agree?
    Mr. Joskow. Yes, Senator. I think maybe it is a different 
kind of regulation. It is a function of establishing market 
rules, market oversight, and identifying problems in the 
markets and finding remedies for them that is quite different 
from the process of gathering costs together and setting 
traditional public utility rates.
    And I don't think that is just true of electricity markets. 
There is no such thing in a market economy like ours as 
completely unregulated markets. The New York Stock Exchange has 
market rules. We have a regulator, the CFTC. There are a 
variety of rules that govern many markets, and especially in 
the electric power industry, because of its unique 
characteristics and because it is in a transition from an old 
system to what we hope is a new system, but very much in 
transition. It is very important that regulators play a role in 
monitoring and regulating the essential activities they have to 
do to ensure that these markets perform well and progress in 
the directions that we hope they will.
    Chairman Lieberman. Dr. Wolak, did you want to add 
anything?
    Mr. Wolak. Yes. I really think that you hit the nail right 
on the head and that the way I like to characterize it is that 
the regulatory process evolved from something that is very 
lawyer- and accountant-intensive to something that is very, I 
guess the best way to say it is economist intensive, in the 
sense that what you are designing is no longer just and 
reasonable prices through a regulatory mechanism and setting 
them. You are interested in setting just and reasonable rules, 
in other words, setting up incentive structures where the 
privately profit maximizing actions of the market participants 
result in outcomes that you, as the regulator, perceive as just 
and reasonable.
    And in that sense, it really does require a tremendous 
shift in how you think about doing your business as a 
regulator, and I think many of the comments that were presented 
earlier today, emphasize that fact, that it really requires a 
tremendous change in how FERC thinks about its business.
    Chairman Lieberman. I thank you. Let me go back just a bit 
to the history here, and Dr. Wolak, you were involved as a 
participant. Your market monitoring committee was providing 
reports to FERC, raising concerns about the exercise of market 
power by players in the Western markets going back, I believe, 
to 1998. There were other participants, including the 
California Independent System Operator, which, of course, 
operates the electric grid in California, and the investor-
owned utilities like Southern California Edison that also were 
raising concerns.
    But FERC did not seem to respond. When the prices began to 
spike in 2000, they seemed genuinely to be surprised and they 
conducted the investigation that I described long ago in my 
opening statement today and talked about the danger of excess 
market power being exercised, but didn't find any particular 
players in the market who were doing so.
    As we now know, Mr. Belden, the Enron trader, now has 
acknowledged participating in fraudulent trading schemes 
occurring as far back as 1998. The California ISO in 2001 did 
an analysis of 15 companies, including Enron, showing that they 
exercised market power excessively during the crisis. But 
throughout this, FERC never initiated an investigation of the 
behavior of individual companies and, in fact, didn't start, as 
Commissioner Wood said, until February of this year.
    This just seems to underlie what you were trying to do 
earlier in your role with the market monitoring committee. I 
wonder if you can respond to that story, that series of facts 
that I have described, indicate perhaps some of the information 
that you gave, the market monitoring committee gave, to FERC 
during that period and indicate whether you think that in the 
current reality under Commissioner Wood, that having had the 
experience we have had, that FERC's reaction would be 
different.
    Mr. Wolak. Yes. This gets back to my major, what I would 
argue is my single recommendation, is that you have to define 
what is unjust and unreasonable prices in order to ever find 
it. So, effectively, what the market surveillance committee 
that I chaired did is we said, well, we haven't been given any 
guidance what the snipe looks like. So what we are going to do 
is essentially use economic theory and standard economic 
methods to define what we think it should be and then we are 
going to tell you that we think that it--and then we are going 
to go look for it, and then that was effectively what each of 
the reports did, was said this is what we think the exercise of 
market power is, this is the extent to which we think it is 
occurring, and then we presented that information to FERC.
    But, as I said, the difficulty was--there was no definition 
from FERC given as to what would constitute the unjust and 
unreasonable rates. It was much more of a ``we will know it 
when we see it,'' and it took a long time to see it.
    Chairman Lieberman. Is that an area that Congress should 
tread into, or is that really something we should push FERC to 
do, that definition that you have just talked about?
    Mr. Wolak. I think it is definitely the second one, of 
certainly pushing them to do. I think they certainly have the 
capability to do it and I, as I said in my testimony, have been 
provided with a lot of input. I will freely admit, it is a 
difficult process, just in the same sense of determining what 
are prudently incurred costs in a regulatory hearing is a very 
difficult process.
    The same sort of thing is true here, but that is why we 
have regulators. They make the tough decisions, and I think 
that is what we need FERC to really do and that will, I think, 
provide this certainty to market participants to know, look, if 
things get this out of hand, intervention is coming as sure as 
the sun will come up, and in that sense, we will have a strong 
interest to working to solve the problems, rather than what 
happened in California was it was almost no end to the largess 
that was available to be taken by essentially market 
participants, particularly once the State started buying, 
because the State has the power to tax.
    Chairman Lieberman. So that definition has not really been 
forthcoming yet?
    Mr. Wolak. No, unfortunately.
    Chairman Lieberman. And notwithstanding your encouragement, 
and with the way Commissioner Wood and the Commission has been 
going, you would say that remains the most significant piece of 
unfinished business for them?
    Mr. Wolak. Yes. With that sort of metric in place, I think 
that it becomes--then what you have given is teeth to the just 
and reasonable rate standard in a wholesale market regime and 
you have given clarity to it, so that I think it then enables 
the regulatory process to function in a transparent manner 
around that.
    Mr. Joskow. Senator, if I could just add to that, I think 
it is not that complicated. Frank, I, and others have advocated 
basically developing a set of market performance indices that 
the FERC staff would look at on a continuing basis to signal 
when markets seem to be performing in ways that appear to be 
inconsistent with competition. That doesn't mean that there is 
necessarily a problem. It does not mean there are necessarily 
bad actors. But it becomes a signal for further investigation.
    I think, quite frankly, the current effort to run around 
and try to find evil doers is not the right way to do it. First 
of all, it is very time consuming. It waits for complaints. I 
would rather see them focus first on evaluating the performance 
of the markets in different parts of the country, and when they 
see what appears to be a performance failure, to then trigger a 
more detailed investigation of what is going on.
    I will just give you an example with natural gas. In the 
fall and early winter of 2000, natural gas prices delivered to 
California rose to enormously high levels, levels no one had 
ever seen before. I have no idea why it happened. I haven't 
studied it. But I can tell you, if I had been at FERC at that 
time, we would have done a study, we would have done an 
investigation then, not now, but then just to understand that 
was going on and not just to assume that it must be the result 
of the interplay of supply and demand. It might have been 
completely innocent, but an indicator like that, when gas 
prices are ten times normal, should trigger the idea that it 
requires further exploration.
    So I think it requires a change in mindset of a regulatory 
agency that was used to respond to complaints and used to 
setting rates based on accounting costs to one that really has 
to have an ongoing feeling for what is going on in these 
markets and engaging in an ongoing assessment of how these 
markets are performing. My hope is that the new Office of 
Market Oversight and Investigations will, in fact, develop this 
kind of capability in much the same way as the self-regulating 
exchanges, like the New York Stock Exchange and the CFTC, have 
protocols to look for unusual trading behavior, and when they 
see unusual trading behavior, they will go and they will 
investigate it. We need that kind of a mindset here.
    Chairman Lieberman. Let me just pick up on your last point 
and ask you if you want to say any more about the Office of 
Market Oversight and Investigations. As you heard, Mr. Berick 
said it was a good step and didn't think it was adequately 
staffed yet, but was concerned also about whether--or let me 
put it another way--that the creation of the office was not 
sufficient indication yet to show that FERC understood that 
effective regulation is not just better rules, but more active 
enforcement.
    Mr. Joskow. I have been urging FERC to set up an office 
like this since 1996, and the models I had were the Antitrust 
Division of the Justice Department, the Federal Trade 
Commission, the CFTC. So I am very pleased that they have taken 
the steps they have to create an office with the kind of staff 
and the kind of goals they have.
    Obviously, as I said, the proof is in the pudding. We 
haven't seen yet what they are going to do and how they are 
going to perform, so I think we need to continue to observe how 
this new office operates and performs. However, and I haven't 
seen your report, when I heard there were 250 people, my 
reaction was, that is an awful lot of staff, not the opposite. 
I think the Antitrust Division, the Economic Policy Office has 
about 40 professionals and the Federal Trade Commission has 
about 40, as well. But I think we will just have to evaluate 
over time whether FERC's market monitoring office has the 
resources to make this happen.
    I am more concerned about institutionalizing this 
perspective in the agency. I don't think it should be something 
that just depends on Pat Wood. I mean, President Bush could 
appoint Pat Wood to some other job, and I think we wouldn't 
want this new perspective and this new focus to be dependent on 
one individual. I think we should be looking at whether Pat 
Wood and the other commissioners are successful in bringing in 
senior managers and staff who have this new view of what their 
jobs should be.
    Chairman Lieberman. Dr. Wolak.
    Mr. Wolak. Thank you. I just wanted to respond to the issue 
of resources and the role of the new part of FERC, and that is 
that I think one of the other lessons from the California 
crisis was that these markets require day-to-day, on-the-ground 
monitoring, and I think it is extremely difficult for the 
Office of Market Oversight and Investigations to really get 
involved in that.
    So what I guess I would say is I am not sure that they 
really need more resources, but I just think that they need to 
delegate the responsibilities for undertaking the duties that 
they are charged with to the ISO market monitoring units and 
the like. In particular, there are lots of--it is just many of 
the FERC orders, particularly during the 2000 period, reflected 
a misunderstanding of many of the California market rules. This 
is clearly, I think, explainable by the fact that all these 
markets are very complex and there is also 3,000 miles between 
Washington and California.
    So that really, I think, the proper way to do it is to 
allow much more discretion to the monitor at the ISO, and if 
you are worried about independence, then you can certainly put 
restrictions on that. But then have the Office of Market 
Oversight and Investigations handle the big problems and really 
set the policy for the other monitors, because I think trying 
to get in, as Commissioner Wood said, there are literally 
terabytes of data. You have to look through it carefully, and 
if you don't understand the real details of things, you can 
really make a mess of it.
    So in that sense, I think that the better way to go is the 
hierarchial structure, where you are essentially delegating 
most of the responsibility for the, if you like, dirty stuff to 
the ISO, whereas FERC is setting the policy agenda and really 
listening to appeals from the ISO.
    Chairman Lieberman. Thank you. Interesting.
    Mr. Joskow. The standard market design rule that has been 
proposed includes a requirement that each region have an 
independent market monitor, and I agree with Frank. I think one 
of the keys here is to find a way for the market monitoring and 
oversight people at FERC to interact closely with the market 
monitors in the regions to give the market monitors in the 
regions substantial discretion on a day-to-day basis and to 
have a very close working relationship with them.
    Frank is probably too modest to say this, but his market 
surveillance committee, as well as the market surveillance 
committee of the California Power Exchange, wrote numerous 
reports identifying problems in the markets long before 2000 
and wrote numerous reports and made numerous suggestions during 
2000 and 2001 which were largely ignored by FERC. And that is a 
problem, I think, that really needs to be fixed. If we are 
going to have these market monitoring units, as I think we 
should, they have to be able to work in a close, collaborative 
fashion with the staff at FERC, as well.
    Chairman Lieberman. I appreciate your pointing that out, 
and I took that to be one of the conclusions of our staff 
report, as well, and thank Dr. Wolak for what he did in that 
regard.
    If I continue this hearing much longer, I will be accused 
of not wanting to yield the Chairmanship, ever, by just keeping 
the hearing going, so I will ask this final question. But your 
testimony has been very substantive. As always, I wish we got 
you on earlier. But it has affected us and we will circulate 
the record.
    Coming out of the Enron scandal and particularly the crisis 
in the Western energy markets, California, Oregon, Washington, 
etc., there has been a lot of second looking at energy market 
deregulation generally. There are some States that had been on 
the way to doing deregulation and have now pulled back. We 
talked about this a bit just a few moments ago, but what is 
your counsel here? Am I correct that neither of you would say 
that energy deregulation was a bad idea, but that other kinds 
of regulation have to stay in effect for it to work? You just 
can't say, OK, no more rate setting and walk away. You have got 
to have the State trooper on the highway, making sure people 
don't go way over the speed limit.
    Mr. Joskow. I think the changes that have been initiated to 
promote wholesale and retail competition in the long run can 
accrue to the benefit of consumers, but it has to be done 
right. It requires appropriate industry structures and 
restructuring. It requires appropriate market rules, and it 
requires appropriate ongoing regulatory oversight and actions 
by FERC and the market monitors in the regions.
    I think, in a way, the Northeast is going to be a 
laboratory for this. We are very far along down the path. We 
share a vision with FERC for what wholesale and retail markets 
should look like. I don't think it would be unreasonable, if I 
were the governor of a State like North Carolina or South 
Carolina or Georgia, to say, before we change our system, which 
seems to work pretty well, we have low prices, reliable 
supplies of electricity, why don't you guys show us if you can 
make it work?
    So I think the challenge I feel, both as an academic and as 
a citizen of New England, is to work with public policy makers 
and the market participants to demonstrate that these reforms 
can work to the benefit of consumers, as it has in a number of 
other countries.
    Chairman Lieberman. Thank you. Well said. Dr. Wolak.
    Mr. Wolak. Yes. I would like to say it as we should have 
demand pull restructuring rather than supply push 
restructuring, in the sense of rather than FERC going out and 
saying, you must restructure your market and sort of forcing 
States kicking and screaming into joining RTOs and the like, I 
think a better way to go is exactly the way Paul Joskow 
suggested, is make sure you get the markets that you currently 
have restructured working very well so that then people look 
over and they say, I want some of that. That is a market that 
works. That is delivering low prices to consumers. I would like 
to join that RTO. I would like to get the benefits that people 
who are located in that State are getting, rather than the 
other way, where you are pushing States into it.
    Another lesson I think we can learn from California is that 
if the State infrastructure isn't in place to support a 
competitive market at the wholesale level, and by that I mean 
the retail market infrastructure, then disastrous results can 
occur for the wholesale market, which can impose significant 
consumer harm. So in that sense, unless you have the States 
really working to cooperate, it really makes FERC's job much 
more difficult. So, therefore, certainly given the point that 
we are at, a far superior, I think, strategy is to make the 
ones that we have got work very well so that then people in the 
other States will say, I will make the necessary changes to 
make it work well in my market, as well.
    Chairman Lieberman. Well said. Once again, both of you have 
contributed very significantly and substantively to the work of 
the Committee. I thank you very much for your time and for your 
testimony.
    I am going to, without objection, make documents referenced 
in the staff memo, such as have been designated by staff, part 
of the public record, as was discussed earlier.
    I do want to thank David Berick and the staff for the 
enormous contribution they made in the report today. I know 
some of the questioning took them off the four major cases that 
they had been on, but I think the substance and 
constructiveness of the work speaks for itself and I certainly 
heard Commissioner Wood and the other commissioners welcome the 
work that was done here, even accept some constructive 
criticism, and I am very hopeful that it will be part of an 
ongoing effort by all of us to make our energy markets 
deregulated as they are now, in that sense, nonetheless 
function with some remaining oversight and monitoring to the 
benefit of all concerned, particularly the consumers.
    I will leave the record of the hearing open for a couple of 
weeks, if any Members have additional questions to submit, and 
if so, we will submit them to the witnesses.
    With that, I thank you all and the hearing is adjourned.
    [Whereupon, at 2:21 p.m., the Committee was adjourned.]
                            A P P E N D I X

                              ----------                              


                 PREPARED STATEMENT OF SENATOR BUNNING
    Thank you, Mr. Chairman.
    The Governmental Affairs Committee started off the year holding 
hearings on Enron's collapse, so I suppose it is fitting that we end 
the year on the same note.
    Today, we look at whether FERC could have done more to detect the 
corruption and mismanagement at Enron.
    Unfortunately, when you look at the Enron scandal, it appears that 
many people both in the public and private sectors needed to be asking 
harder questions.
    What is so shocking about Enron is that so many of the safeguards 
we have in place all failed at the same time--both within the 
government and in the private sector.
    In June of this year, GAO issued a report on changes FERC needs to 
make to be more effective in its oversight of competitive energy 
markets.
    Among other things, the report mentions that FERC needs to make 
some significant internal structural changes.
    It also recommends that FERC hire more employees knowledgeable 
about these markets as well as improving training of existing 
employees.
    Finally, the report also mentions that FERC needs more legal 
authority to go after those who engage in anti-competitive or illegal 
activities.
    In his testimony, Chairman Wood listed the actions FERC is taking 
to address some of these problems. Including working closer with other 
Federal agencies and creating the new Office of Market Oversight and 
Investigations.
    Similar to the GAO report, Mr. Wood also mentioned that FERC needs 
Congress to increase its civil and criminal penalty authority.
    If you can find a silver lining in Enron's collapse, I suppose it 
would be that we now have the opportunity to fix and strengthen our 
system of oversight.
    We need to make the necessary changes to ensure there isn't another 
Enron fiasco.
    I would like to thank all of our witnesses who are here today to 
testify, and I am looking forward to hearing from them.
    I especially would like to say ``hello'' to a fellow Kentuckian, 
Linda Breathitt.
    Thank you.
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