[Senate Hearing 107-1035]
[From the U.S. Government Publishing Office]



                                                       S. Hrg. 107-1035
 
EXAMINING ENRON: DEVELOPMENTS REGARDING ELECTRICITY PRICE MANIPULATION 
                                  IN 
                               CALIFORNIA

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

                                HEARING

                               before the

     SUBCOMMITTEE ON CONSUMER AFFAIRS, FOREIGN COMMERCE AND TOURISM

                                 OF THE

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 15, 2002

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation






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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

              ERNEST F. HOLLINGS, South Carolina, Chairman
DANIEL K. INOUYE, Hawaii             JOHN McCAIN, Arizona
JOHN D. ROCKEFELLER IV, West         TED STEVENS, Alaska
    Virginia                         CONRAD BURNS, Montana
JOHN F. KERRY, Massachusetts         TRENT LOTT, Mississippi
JOHN B. BREAUX, Louisiana            KAY BAILEY HUTCHISON, Texas
BYRON L. DORGAN, North Dakota        OLYMPIA J. SNOWE, Maine
RON WYDEN, Oregon                    SAM BROWNBACK, Kansas
MAX CLELAND, Georgia                 GORDON SMITH, Oregon
BARBARA BOXER, California            PETER G. FITZGERALD, Illinois
JOHN EDWARDS, North Carolina         JOHN ENSIGN, Nevada
JEAN CARNAHAN, Missouri              GEORGE ALLEN, Virginia
BILL NELSON, Florida
               Kevin D. Kayes, Democratic Staff Director
                  Moses Boyd, Democratic Chief Counsel
      Jeanne Bumpus, Republican Staff Director and General Counsel
                                 ------                                

          SUBCOMMITTEE ON CONSUMER AFFAIRS, FOREIGN COMMERCE 
                              AND TOURISM

                BYRON L. DORGAN, North Dakota, Chairman
JOHN D. ROCKEFELLER IV, West         PETER G. FITZGERALD, Illinois
    Virginia                         CONRAD BURNS, Montana
RON WYDEN, Oregon                    SAM BROWNBACK, Kansas
BARBARA BOXER, California            GORDON SMITH, Oregon
JOHN EDWARDS, North Carolina         JOHN ENSIGN, Nevada
JEAN CARNAHAN, Missouri              GEORGE ALLEN, Virginia
BILL NELSON, Florida















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on May 15, 2002.....................................     1
Statement of Senator Boxer.......................................     6
    Prepared statement...........................................     9
Statement of Senator Cleland.....................................    22
Statement of Senator Carnahan....................................    23
Statement of Senator Dorgan......................................     1
Statement of Senator Hollings....................................     3
    Prepared statement...........................................     3
Statement of Senator McCain......................................    21
    Prepared statement...........................................    21
Statement of Senator Wyden.......................................     4

                               Witnesses

Davis, Gray, Governor, State of California, prepared statement...   100
Dunn, Hon. Joseph, California State Senator......................    71
    Prepared statement...........................................    74
Eshoo, Hon. Anna G., U.S. Representative from California.........   144
Fergus, Gary S., Esq., Brobeck Phleger & Harrison, LLP...........    17
Freeman, S. David, Chairman, California Power Authority..........    81
    Prepared statement...........................................    83
Frizzell, Jean C., Esq., Gibbs and Bruns, LLP....................    19
    Prepared statement...........................................    20
Hall, Stephen C., Esq., Director, Legal Services, UBS Warburg 
  Energy, LLC....................................................    12
    Prepared statement...........................................    14
Lynch, Loretta M., President, California Public Utilities 
  Commission.....................................................    45
    Prepared statement and slide presentation....................    48
Sanders, Richard B., Esq., Vice President and Assistant General 
  Counsel, Wholesale Group, Enron Corporation....................    16
Wolak, Frank A., Ph.D., Professor of Economics, Stanford 
  University.....................................................    85
    Prepared statement...........................................    88
Wood III, Hon. Patrick, Chairman, Federal Energy Regulatory 
  Commission.....................................................   105
    Prepared statement...........................................   108
Yoder, Christian G., Esq., Director, Legal Services, UBS Warburg 
  Energy, LLC....................................................    15






















                     EXAMINING ENRON: DEVELOPMENTS 
                      REGARDING ELECTRICITY PRICE 
                       MANIPULATION IN CALIFORNIA

                              ----------                              


                        WEDNESDAY, MAY 15, 2002

                                       U.S. Senate,
    Subcommittee on Consumer Affairs, Foreign Commerce and 
                                                   Tourism,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 9:35 a.m. in 
room SR-253, Russell Senate Office Building, Hon. Byron L. 
Dorgan, Chairman of the Subcommittee, presiding.

          OPENING STATEMENT OF HON. BYRON L. DORGAN, 
                 U.S. SENATOR FROM NORTH DAKOTA

    Senator Dorgan. The hearing will come to order. We will ask 
for the hearing room doors to be closed, please. This morning's 
hearing is a hearing of the Consumer Affairs Subcommittee. We 
are joined by the Chairman of the full Committee, Senator 
Hollings.
    This hearing is a follow-up to a number of hearings the 
Subcommittee has held dealing with the issue of the Enron 
Corporation and a series of things that have happened to Enron 
and to their employees and to investors and to California and 
to West Coast ratepayers. The hearing that we held most 
recently on Enron focused on what Enron was doing in the 
electricity markets on the West Coast. We had testimony from 
California officials and West Coast officials at that hearing. 
We had denials, of course, from the Enron Corporation that they 
were involved in any way with rigging or manipulating the 
marketplace in California. Since that time, some memorandums 
have surfaced dealing with specific strategies employed by the 
Enron Corporation and that will be the subject of this hearing.
    Some long while ago, Mr. Kenneth Lay and his attorney and 
others involved in Enron took great exception to a statement 
that I had made that, having studied Enron at some length 
following its collapse, that I felt there was a ``culture of 
corruption'' inside the Enron Corporation. Mr. Lay and his 
attorney took great exception to that.
    We then had Mr. Lay come before the Committee under 
subpoena. He took his Fifth Amendment rights and refused to 
testify. What we have learned in recent months is that the 
culture of corruption assessment was not only true, but more 
true than most any of us could possibly have expected.
    Mr. Powers testified before this Subcommittee. He was 
commissioned as a new member of the Board of Directors of 
Enron, to do a study of what was happening inside the Enron 
Corporation. They did a study of only three partnerships or 
SPEs, only three. Mr. Powers sat at that table and said what 
they found inside the Enron Corporation was ``appalling.'' 
This, remember, would be the best possible light put on this 
company because it was done by a member of the Board of 
Directors at the request of the Board of Directors. He found 
something inside that company that was appalling.
    Officers of that company, and people in the company, for 
example, invested $25,000 of their own money and took out $4 
million 60 days later. What we have discovered with respect to 
this corporation is, in fact, a culture of corruption.
    But today's hearing is going beyond that. It is a hearing 
to follow on the heels of a hearing we did earlier on the issue 
of what happened to electricity costs on the West Coast, and 
California especially, but also Oregon, Washington, and the 
West Coast generally. What we have learned since the last 
hearing was that a couple of confidential memorandums have 
surfaced dated December 6th, 2000, and December 8th, 2000, 
written by Mr. Christian Yoder and Stephen Hall. They are 
essentially the same memorandum with different dates, but with 
some slightly different language.
    But these two memoranda describe a strategy by which the 
Enron Corporation attempted to rig the energy market on the 
West Coast. Now, I think a culture of corruption perhaps is too 
mild.
    What I have learned is that there is, I think, significant 
legal problems, and I think perhaps a substantial amount of 
criminal activity.
    FERC needs to answer to Congress why were they shamelessly 
absent, where was the accountability for this federal agency 
that should have taken action, why did they not take action, 
and at whose behest were they sitting silent on their hands 
while California and West Coast ratepayers were being 
essentially stolen from?
    So the question is what do we do about all of this? Well, 
let us learn today what we can about these memoranda. I want to 
hold up a chart. The strategies were called Get Shorty, Fat 
Boy, Death Star, Load Shift. Death Star: ``Enron gets paid for 
moving energy to relieve congestion without actually moving any 
energy or relieving any congestion.'' Legal? Hardly.
    Load Shift: ``By knowingly increasing the congestion costs, 
Enron is effectively increasing the cost to all market 
participants in the real time market.''
    Exporting California Power: ``This strategy appears not to 
present any problems other than a public relations risk arising 
from the fact that such exports may have contributed to 
California's declaration of a Stage 2 Emergency yesterday.''
    Fat Boy: ``The answer is to artificially increase the load 
on the schedule submitted to ISO.''
    The memo is replete with that. It is disgusting corporate 
behavior without a moral base. It does, in fact, represent, in 
my judgment, a culture of corruption.
    This was a corporate strategy to cheat West Coast consumers 
of billions of dollars. It is, it seems to me, a demonstration 
of corporate greed. But, perhaps much, much more than that. I 
expect that we will want to see a special counsel of some type 
investigate not just this company, but all West Coast pricing. 
I suspect a special counsel is perhaps necessary to do that, 
No. 1.
    No. 2, I think a full investigation of FERC and its 
behavior and its contacts is necessary to evaluate why did the 
referee or the regulator sit silent, which is also a strategy, 
incidentally, that helped rip off consumers on the West Coast.
    Finally, we will call others to account to this 
Subcommittee for what we learn today and what we already know. 
It is my intention to call Mr. Thomas White to come and testify 
before this Committee. Mr. White, as we know, was the head of 
Energy Services. Ms. Lynch had a chart that shows the position 
of that organization inside Enron as a part of all of this. It 
is my expectation following this hearing to ask Mr. White to be 
present and testify, I expect within the next two weeks.
    So that is my take on it. This is an ugly mess. I think 
people in this country have been cheated out of billions of 
dollars and I think some sunlight here is the best 
disinfectant.
    But let me call on the Chairman of the full Committee, 
Senator Hollings.

             STATEMENT OF HON. ERNEST F. HOLLINGS, 
                U.S. SENATOR FROM SOUTH CAROLINA

    The Chairman. Well, Mr. Chairman, let me commend you and 
the Subcommittee for your leadership on this particular score. 
I will file my statement for the record. With respect to the 
work of the Subcommittee, it has been totally bipartisan. I 
have not been to all the hearings, but I have been observing it 
to make sure that we just did not have a partisan assault. Now, 
when the minority does not show at the hearing it could 
probably give that impression.
    I do not know whether they tried to avoid association with 
Kenny Boy. I know the President said ``Who is he?'' He is the 
one that flew the President's father to the Inauguration, in 
case he wants to know who he is. We have got all the evidence 
in the Lord's world that he was his best friend.
    I guess that crowd does not want to be identified with 
Death Star, Load Shift, Inc-ing Load, and Fat Boy. After last 
night with a $30 million fundraiser, they are the fat boy, I 
can tell you that.
    But I will file my statement and yield to the next 
gentleman.
    [The prepared statement of Senator Hollings follows:]

            Prepared Statement of Hon. Ernest F. Hollings, 
                    U.S. Senator from South Carolina
    During our past hearings regarding Enron, we heard some witnesses 
testify and some senators claim that Enron was just a poorly run 
company--an aberration of deregulation. They argued that deregulation 
of the energy markets still had enormous benefits for consumers.
    But some of us sensed that deregulation had created an environment 
for corporate mischief by Enron and other energy companies, especially 
during summer of 2000 when high energy costs shackled the California 
people and their economy. And now we have evidence to prove what we 
intuitively sensed earlier this year: three memoranda written by Enron 
lawyers and outside lawyers detail how Enron manipulated the California 
energy market. That market manipulation kept Enron's stock price 
artificially high so it could continue its pyramid scheme of debt 
partnerships and multi-million stock cashouts for its top executives.
    Former Enron CEO Jeffrey Skilling joked that California's ship 
would sink from problems of its own making. Vice President Dick Cheney 
told California's two senators that the energy crisis was caused by 
Californians consuming too much electricity. But it is now clear that 
Enron and the other energy companies exploited a vacuum of regulatory 
oversight to steal billions of dollars from the wallets of California's 
working families.
    Even the cheerleaders of deregulation across all industries 
recognize that any deregulatory scheme must be accompanied by tough 
enforcement of antitrust laws. Likewise, when energy markets are 
deregulated, it requires tough enforcement by the Federal Energy 
Regulatory Commission. But during the summer of 2000, when officials at 
the California Public Utility Commission called on FERC to investigate 
and take action against companies manipulating the California energy 
markets, FERC ignored their pleas. We are still waiting for an 
explanation as to why FERC ignored California's request for help--and 
listened instead to Enron's lobbyists who claimed everything was fine.
    FERC's indifference had real consequences for real people. The 
doubling and tripling of energy bills nearly broke some families--and 
endangered elderly residents needing air conditioning during the hot 
summer months. Soaring energy costs and blackouts forced some 
California businesses to cut back production and business hours, 
negatively impacting California's economy and jobs.
    This personal and economic damage could have been prevented by 
federal regulators whose primary responsibility is to protect Americans 
from such exploitation. FERC must not only answer to us here today, but 
also to the working families of California--the poor families who 
emptied their wallets and bank accounts to pay energy bills that were 
artificially inflated by fraud and collusion permitted by energy 
deregulation.

    Senator Dorgan. Senator Wyden.

                 STATEMENT OF HON. RON WYDEN, 
                    U.S. SENATOR FROM OREGON

    Senator Wyden. Thank you, Mr. Chairman, and thank you very 
much for holding this hearing on an issue that is so important 
to my constituents.
    Mr. Chairman and colleagues, more and more evidence is 
piling up that during the West Coast energy crisis Enron, and 
perhaps other traders, were engaged in what amounts to a 
protection racket, shaking down consumers up and down the West 
Coast of the United States. I would like to describe how this 
took place, including some documents that I received just last 
night.
    Oregon, California, and Washington, Mr. Chairman, are part 
of an integrated energy market. This means that every single 
day of the year energy is traded back and forth between the 
three states. If the market is manipulated anywhere on the West 
Coast, the repercussions are felt everywhere on the West Coast.
    Now, last night I obtained evidence that reported that 
energy prices in the Pacific Northwest during the West Coast 
crisis were inflated compared to what utilities in our region 
were actually paying. The recent admissions by energy traders 
that they engaged in phantom swaps of power and other sham 
transactions that drove up the prices is a likely explanation 
for the disparity between the Northwest reported prices and 
actual prices that utilities paid.
    I would like to illustrate this by a chart that was 
prepared by a Portland energy consultant, Robert McCullough. 
This chart compares actual prices paid by Northwest utilities 
with the reported prices at the most important pricing location 
for power contracts in the Northwest. That is the Dow Jones 
Mid-Columbia Index. What the data shows is that the reported 
prices were consistently higher than the prices that Northwest 
utilities actually paid.
    Manipulation of the market to inflate prices in both 
California and the Northwest panicked the buyers in my state 
into accepting higher prices than they ever paid before. The 
markets were so out of control that buyers were willing to lock 
themselves into high-priced, long-term contracts because they 
were worried that if they did not they would be forced to pay 
still higher prices in the future.
    This scheme locked ratepayers up and down the West Coast 
into overpriced contracts through what amounted in my view to a 
protection racket. The memos that were released last week make 
it clear that Enron manipulated the market to drive up the 
price of electricity using schemes with the names Fat Boy and 
Death Star. The Enron memos also show that several of the 
market manipulation schemes such as Death Star and Ricochet 
involved swapping or selling power outside of the State of 
California. In fact, for Death Star, the memos specifically 
identify the California-Oregon border trading hub as a key 
location for their scheme to collect congestion payments for 
scheduling transmission of energy that was, in fact, not put on 
the grid.
    Another link between California and the Northwest energy 
markets is that of questionable deals described in the Enron 
memos that were actually done on Enron's trading floor in my 
home town of Portland. Northwest ratepayers were clobbered by 
these skyrocketing power rates that resulted from Enron's deals 
and, as you can see from another chart, Mr. Chairman and 
colleagues, comparing California and Northwest energy prices, 
the price spikes in the Northwest were just as high and in some 
cases higher than they were in the State of California.
    That is why it is so important that the Congress go forward 
with this inquiry into what was happening all up and down the 
West Coast of the United States, because it is my view that if 
consumers in my state and certainly in other western states 
were duped into buying overpriced power by the market 
manipulation engaged in by these energy traders, ratepayers up 
and down the West Coast would be entitled to get relief from 
these overcharges.
    We have heard testimony already from key California 
officials. We know that Enron centered its West Coast 
operations in my home town and at the time that Enron was 
executing the schemes described in the memos and the California 
markets were going haywire, similar price spikes were going on 
throughout the Northwest.
    So I think it is extremely important that we go forward 
with this inquiry that you have described, including calling 
Mr. White. I would also add, Mr. Chairman, that what we have 
learned in the last week makes the case for the toughest 
possible provisions in the energy bill that is now before this 
conference committee that would lend new transparency and new 
openness to the way energy is bought and sold in this country. 
I think it is unacceptable to pass a bill out of conference 
without the transparency that would have blown the whistle on 
these sham activities that the memos outline.
    Second, I would hope that we could get that federal 
ratepayer advocate in the Department of Justice that is also 
part of the energy bill, because that too could have provided 
an early warning system that could have prevented the kind of 
ripoffs that we have seen documented in the last week.
    I commend you, Mr. Chairman, and the Chairman of the full 
Committee, Senator Hollings, for giving us this time and 
attention. This is of extraordinary importance to my 
constituents and warrants a full inquiry.
    Senator Dorgan. Senator Wyden, thank you very much.
    Before I call on Senator Boxer, let me note that 
Congresswoman Jane Harman and Congresswoman Anna Eshoo are with 
us, as well. We regret that we were not able to entertain all 
of the requests for testimony. We will perhaps have another 
opportunity. But we welcome your presence.
    Let me call on Senator Boxer.

               STATEMENT OF HON. BARBARA BOXER, 
                  U.S. SENATOR FROM CALIFORNIA

    Senator Boxer. Thank you so much, Senator Dorgan, for your 
leadership, Chairman Hollings. I also want to thank Ranking 
Member John McCain, who was very helpful in being present in 
case we had to issue subpoenas for today. You have all stood 
with me and with Ron as we try to get to the bottom of what 
happened to our states' electricity rates and what happened to 
our people.
    On December 6th and 8th, 2000, just as the electricity 
situation in California was reaching a crisis, Mr. Richard 
Sanders of Enron received memos from Mr. Christian Yoder and 
Mr. Stephen Hall. He received a similar memo from two other 
individuals, Mr. Gary Fergus and Mr. Jean Frizzell. These memos 
outlined in great detail a series of scams, and Senator Dorgan 
has named a few of them here: Death Star, Load Shift, Exporting 
California Power, Inc-ing. I am going to just show you a couple 
of others.
    What I think is important is to understand the language. 
These attorneys were really describing what was described to 
them after they talked to the traders. So let us get that. This 
is one called Ricochet: ``Enron's intent under this strategy'' 
is to beat the spread ``and not to serve load or meet 
contractual obligations.'' Imagine, a business that sets out a 
goal to meet contractual obligations. What business school 
taught that, I wonder?
    Here is another one: Selling Non-firm Energy as Firm: Enron 
is paid for ancillary services that ``Enron claims it is 
providing, but does not in fact provide.'' Another immoral 
scheme; illegal, it seems to me.
    Export of California Power--another scam. ``This strategy 
appears not to present any problems,''--listen to this one, 
that means legal problems--``other than a public relations risk 
arising from the fact that such exports may have contributed to 
California's declaration of a Stage 2 Emergency yesterday.''
    For those of you who don't know what a Stage 2 Emergency 
is, it means that everyone is panicked because the lights are 
about to go out, businesses are going to lose their power. That 
means Silicon Valley, the poultry business, the hospitals, 
everybody. That is Stage 2. It is a very frightening thing to 
live through, and we lived through a lot.
    We will not go into all the other scams, but let me say 
that right now we have a very big deficit in California. 
Senator Dunn will attest to that. Some people think the whole 
deficit is attributable to this problem. Some think it is in 
part. Be that as it may, it has hurt the state, it has hurt our 
people, and that is why the Congresswomen are here, because 
they bear this burden of sharing this grief with our people.
    Now let me tell you what these scams did on the ground, Mr. 
Chairman. It is not theory, it is reality. First of all, let us 
show this one chart. You have seen it before. I think it is 
worth showing. The overlay shows when Ken Lay sold out his 
stock. Let us take this back.
    The green line is what happened to the prices. The red line 
is what happened to demand. I will never forget when the 
Congresswomen who are here today and I remember Anna Eshoo 
confronting Vice President Cheney. You know what he said? ``You 
people use too much energy.'' And he lectured us. Well, clearly 
our demand was down.
    What happened to the free market? We had a decrease in 
demand and look what happened to the price. As soon as FERC 
acted and put the rate caps in, rate caps that Cheney told them 
not to do, said they should not do, they finally did it after a 
year of suffering, the whole problem resolved itself.
    So let me tell you, Mr. Chairman, what the scams did. They 
caused great anxiety for the families of my state. They 
affected 30 million people out of the 35 million people in my 
state. These memos prove what I and many members of our 
delegation have been saying for almost two years now: Something 
was rotten.
    Here you see what happened as a result of these memos, as a 
result of these scams that the memos describe. Look here, phony 
shortages, unprecedented electricity costs for consumers. We 
paid 266 percent more for electricity in 2000 than in 1999 
while the demand rose by 4 percent. Overcharges for 
electricity, $8.9 billion, which we have to get back from FERC. 
FERC has to order those refunds. Blackouts for 49 days, Mr. 
Chairman. Imagine your state going through these kind of 
blackouts, and we have listed the days. How about bankruptcies? 
Pacific Gas and Electric, a utility, in business since 1905, 
filed for bankruptcy on the 6th of April 2001. And our state 
debt went from a surplus of $12 billion to a deficit.
    So these are the real outcomes of these schemes with all 
those cute and clever names that I am sure people laughed 
themselves to sleep at night while they discussed it. These 
scams were manipulative and deceptive and I believe illegal. I 
will not go through all of them because my Chairman did that.
    But here is the point I want to make in closing here: The 
memos acknowledge that, should it discover such activities, the 
California ISO could take numerous actions against Enron, 
including fines, suspensions, and referral to the regulatory 
and antitrust enforcement authorities. But the memo is silent 
on potential federal crimes and federal action. I find it 
interesting, Mr. Chairman, that the memos mention possible 
state sanctions, but they are silent on federal sanctions.
    Was Enron so confident in its relationship with FERC that 
it knew FERC would never act against unjust and unreasonable 
rates or market manipulation, at least for a period of time? 
After all, Enron wined and dined FERC. After all, more than 20 
members of the Bush Administration had ties to Enron. After 
all, Enron was one of candidate Bush's biggest contributors and 
rewarded Ralph Reed, a very conservative Bush supporter whom 
many expected to support another candidate, with a job. After 
all, Army Secretary White was Vice Chairman of Enron Energy 
Services and in charge of securing the privatization of 
electricity at U.S. military bases. How about Bush's choice to 
head the Republican National Committee? He was a lobbyist for 
Enron. And it goes on.
    I am going to show you the list of federal crimes lawyers 
tell me are possible here: fraud and false statements, mail 
fraud, wire fraud, conspiracy, racketeering, securities fraud, 
insider trading, antitrust-collusion. These are just some of 
the crimes.
    Now, I am to close. I ask your indulgence. We had a 
situation where Ken Lay handed the Vice President a memo, Mr. 
Chairman, told him not to act on any price caps, and that is 
what FERC did, and we are going to talk to the FERC Chairman 
about that.
    I want to say that other companies are now implicated in 
this. We have seen articles in The New York Times, about 
Reliant and Dynegy. I ask unanimous consent to place into the 
record some new information on the insider trading at Duke 
Energy, Dynegy, and ask that it be part of the record, because 
it mirrors the action of Ken Lay, it mirrors the action of 
Jeffrey Skilling, and I think this was all about talking to 
each other and using these scams.
    [The material referred to follows:]

       U.S. Regulators Are Requiring Full Details Of Energy Sales
                    The New York Times, May 15, 2002
                        By Richard A. Oppel Jr.
    Washington, May 14--A new rule adopted by federal regulators will 
force electricity traders to report individual transactions in detail 
beginning in July, preventing them from concealing the sort of fake 
``round-trip'' trades that have allowed large energy producers to 
inflate their volumes and revenue, regulators say.
    Separately, Senator Joseph I. Lieberman, Chairman of the 
Governmental Affairs Committee, disclosed today that the Federal Energy 
Regulatory Commission investigated Enron's online-trading system last 
year but concluded that the ``chance of Enron failing financially was 
remote.''
    An internal report by the commission in August--just as Enron's 
facade was beginning to crumble--raised serious concerns about Enron's 
online-trading system, including the ``competitive advantage'' it gave 
Enron's traders, said Mr. Lieberman, a Connecticut Democrat, who 
obtained the report through his committee's inquiry into Enron. But the 
report ``settled for incomplete, unconvincing, or incorrect answers,'' 
he said, when a ``better investigation may well have exposed the cracks 
in Enron's foundation sooner.''
    ``Though the report identified a number of areas that ought to have 
troubled FERC as the federal government's lead energy regulator, it 
found no reason for concern and no cause for action,'' Mr. Lieberman 
wrote in a letter today to the commission's chairman, Patrick Wood III. 
``This, I am afraid, was a critical mistake.''
    In another development, the author of the December 2000 memorandums 
that outlined how Enron traders had increased profits by manipulating 
the California electricity markets says in testimony prepared for 
Congress that upon learning of the tactics, he immediately warned Enron 
officials, including the company's head trader, that the maneuvers were 
deceptive and should be stopped.
    The author, Stephen Hall, a lawyer at an outside law firm that was 
helping Enron prepare for litigation and investigations in California, 
is expected to deliver the testimony on Wednesday. In it, he said his 
supervisor edited the memos to make it clear to Enron that deceptive 
trading tactics may not only be in violation of the rules of the 
California electricity-grid operator, but ``also possibly of criminal 
statutes.''
    Also tonight, the attorney general of California, Bill Lockyer, 
disclosed what he said were newly uncovered Enron documents that 
originated in late 2000 and which he said outlined schemes to 
manipulate energy prices. The documents discuss the trading strategies 
described in the Enron memos released last week and include handwritten 
notes by Enron's head West Coast trader, Mr. Lockyer said.
    The notes suggest that Enron made large sums trading electricity in 
California. One note reads: ``Bought power cheap a long time ago--sold 
expensive. We made so much money.'' At another point, the handwritten 
notes state: ``Schemes = $10 million total.''
    And in an apparent reference to the Williams Companies and Powerex, 
two of the most active traders in the California market, the notes 
state: ``Show the Powerex/Williams--hogs at trough.''
    ``These new documents uncovered recently in Enron's Portland office 
provide strong confirmation that West Coast energy markets were harmed 
by price manipulations and distortions by a number of players,'' Mr. 
Lockyer said in a statement.
    Disclosures in the last week that Reliant Resources, Dynegy and CMS 
Energy used round-trip trades--in which companies swap blocks of energy 
in deals that essentially cancel each other--to artificially bolster 
aspects of their financial results continued to take a toll on the 
power marketing and generation sector.
    Shares of Reliant have fallen 40 percent since Thursday, including 
a drop today of $1.24, to an all-time low of $8.70. Reliant, based in 
Houston, acknowledged on Monday that round-trip trades in electricity 
and natural gas lifted its reported revenue by about 10 percent over 
the previous three years.
    The industry had been beaten down by the fallout of Enron's 
collapse and concerns that other companies in the industry might have 
used aggressive accounting. Disclosures about the round-trip trades 
have made investors even more wary of backing electricity-generation 
companies, and that, in turn, has regulators worried that the deluge of 
negative news will hamper efforts to put construction of power plants, 
transmission lines and other crucial infrastructure back on track.
    Officials at FERC say they are investigating these trades as part 
of their inquiry into whether Enron and other energy producers and 
traders manipulated the California electricity market during the 
state's power crisis in 2000 and 2001.
    Until now, power marketers have been allowed to report sales to the 
commission in vague, aggregated terms with few details. But under new 
rules approved with little notice last week, for every transaction they 
will have to state who they sold the power to, at what price, how much 
power was sold, and when.
    Officials at the agency say this information will be publicly 
available, allowing anyone to take records of one company's power sales 
and compare that with records of the companies it sold the power to, to 
see whether there were offsetting round-trip trades. The first 
quarterly reports under these rules are expected on July 31 and cover 
deals from April to June, officials say.
    Kevin F. Cadden, the director of external affairs at the 
commission, said the change in rules was in the works before concerns 
about round-trip trades became public last week and reflects the push 
by Mr. Wood to make the wholesale electricity markets more transparent 
and easily understood.
    ``Pat believes in bringing this transparency to the market,'' he 
said.

    Senator Boxer. I call these people the greed breeders. Why 
do I say that? Because that is what they were about, and they 
pocketed millions of dollars. It is not fair. I am just so 
grateful to be on this Committee, Mr. Chairman. I am grateful 
to be on the Subcommittee, and thank you very much. I ask that 
my full statement be included in the record at this time.
    [The prepared statement of Senator Boxer follows:]

               Prepared Statement of Hon. Barbara Boxer, 
                      U.S. Senator from California
    Mr. Chairman, I want to start by thanking this Committee--
particularly Chairman Hollings, Ranking Member McCain, and Subcommittee 
Chairman Dorgan--for standing with me so that we can get to the bottom 
of what happened to the people of California, and so that we can ensure 
this never happens again to my state or to any of your states.
    On December 6 and 8, 2000--just as the electricity situation in 
California was reaching a crisis point statewide--Mr. Richard Sanders 
of Enron received two memos from Mr. Christian Yoder and Mr. Stephen 
Hall. He received a similar memo from two other individuals--Mr. Gary 
Fergus and Mr. Jean Frizzell.
    These memos outlined, in great detail, a series of scams--scams 
with names like Death Star, Ricochet, Wheel Out, Fat Boy, and Get 
Shorty. But whatever they were called, they were scams--scams that 
created phony electricity shortages in California; scams that allowed 
electricity prices in California to be manipulated--sending the cost of 
electricity into the stratosphere; scams that caused blackouts that 
endangered the health and safety of millions of Californians; scams 
that resulted in an unprecedented bankruptcy of one utility company 
that had been in business since 1905 and the near bankruptcy of another 
utility company that had been in business since 1897; scams that forced 
the state of California to take over the buying of electricity under 
enormous budgetary pressure, causing the state to go from a $12 billion 
budget surplus to a $23.6 billion budget deficit; scams that caused 
great anxiety for the families of California; and scams that affected 
about 30 million out of the 35 million people in my state.
    These memos prove what I, and many members of the California 
Congressional delegation, have been saying for almost two years now--
that something was rotten in the electricity market of California--that 
the electricity market was being manipulated by outrageous schemes 
perpetrated by greedy energy companies. I call these companies the 
Greed Breeders.
    We should let the memos speak for themselves.
    Death Star: ``Enron gets paid for moving energy to relieve 
congestion without actually moving any energy or relieving any 
congestion.''
    Load Shift: ``The effect of this action is to create the appearance 
of congestion through the deliberate overstatement of loads.'' And: ``. 
. . by reverting back to its true load . . . Enron is deemed to have 
relieved congestion, and gets paid by the ISO for so doing.''
    Get Shorty: ``. . . in order to short the ancillary services it is 
necessary to submit false information that purports to identify the 
source of the ancillary services.'' And: ``The traders are careful, 
however, to be sure to buy services right at 9:00 a.m. so that Enron is 
not actually called upon to provide ancillary services.''
    Wheel Out: Enron gets paid ``without having to actually send energy 
through the inter-tie.''
    Ricochet: ``Enron's intent under this strategy'' is to beat the 
spread ``and not to serve load or meet contractual obligations.''
    Export of California Power: ``This strategy appears not to present 
any problems, other than a public relations risk arising from the fact 
that such exports may have contributed to California's declaration of a 
Stage 2 Emergency yesterday.''
    Selling Non-Firm Energy as Firm: Enron is paid for ancillary 
services--that is, stand-by electricity--that ``Enron claims it is 
providing, but does not in fact provide.''
    These scams were clearly manipulative and deceptive. I believe they 
will be found to be illegal as well.
    Under one of Enron's scams known as Fat Boy or Inc-ing--which 
stands for increasing load--Enron purposely lied to create the 
appearance of extra electricity on the grid and then was paid higher 
rates for it. The memos describe it as ``the oldest trick in the 
book.'' It sounds to me like the oldest crime in the book.
    The memos themselves acknowledge that ``Should it discover such 
activities,'' the California ISO could take numerous actions against 
Enron, including fines, suspensions, and referral to the regulatory and 
antitrust enforcement authorities.
    The memo is, however, silent on federal crimes and potential 
federal actions. I find it interesting, Mr. Chairman, that the memos 
mention possible state sanctions but are silent on possible federal 
sanctions. Was Enron so confident in its relationship with FERC that it 
knew FERC would never act against unjust and unreasonable rates or 
market manipulation?
    After all, Enron wined and dined FERC. After all, more than 20 
members of the Bush Administration had ties to Enron. After all, Enron 
was one of candidate Bush's biggest contributors and rewarded Ralph 
Reed--a very conservative Bush supporter--with a job.
    After all, Army Secretary White was Vice Chairman of Enron Energy 
Services and was in charge of securing the privatization of electricity 
at U.S. military bases. After all, Marc Raciot, Bush's choice to head 
the Republican National Committee, was a lobbyist for Enron.
    Some legal experts have told us that Enron may be guilty of 
violating numerous federal laws, including fraud and false statements, 
mail fraud, wire fraud, conspiracy, racketeering, and anti-trust and 
collusion--not to mention securities fraud and insider trading, which 
is another story. May I remind you of how many shares Ken Lay, Jeffrey 
Skilling, and others sold quietly as they were scamming California.
    I understand that the Justice Department has established a Task 
Force to look into the Enron situation. I hope to see quick action from 
this Task Force. It is unfortunate that Attorney General John Ashcroft 
had to recuse himself due to the contributions he received from Enron. 
I would like to see his outrage at these Greed Breeders.
    This Administration has disappointed me before. During the period 
of these outrageous and highly detailed schemes, the Bush 
Administration--the one party that could do something--sat on its hands 
and did nothing.
    In California, we were suffering from rolling blackouts. There were 
49 days of blackouts from December 2000 through early May 2001--and 
there were blackouts every day from mid-January to mid-February.
    We spent 266 percent more for electricity in 2000 than in 1999, 
while our demand increased only 4 percent. We were overcharged at least 
$8.9 billion for electricity. The state had to take over the purchase 
of energy, which has ripped a $23.6 billion hole in the state budget.
    But here in Washington, Enron was, as I said, wining and dining 
FERC. The Secretary of Energy was meeting with energy companies. Ken 
Lay was handing the Vice President a memo arguing against doing 
anything to help California--and the following day the Vice President 
told the Los Angeles Times that nothing would be done.
    The Vice President actually blamed California consumers for the 
whole thing, saying we used too much electricity. In fact, at the time, 
we were the second most energy efficient state on a per capita basis. 
Now we are the most efficient.
    Enron asked the Administration to do nothing--and that is exactly 
what this Administration did: nothing. Nothing is what Enron wanted, 
and nothing is what Enron got from this Administration.
    When the only agency that could have helped consumers did nothing--
doing nothing was in fact a policy. For nearly a year, FERC would not 
impose cost-based pricing. For nearly a year since, FERC has refused to 
require the payment of refunds and has refused to order the 
renegotiation of long-term contracts.
    And now FERC is talking about ending the requirement for cost-based 
pricing--even though the agency was asleep at the switch while all of 
this was going on and even though the agency still has no idea whether 
it is continuing.
    Today, as we look into these memos in an attempt to find out who 
blessed these schemes, I want to find out why FERC was not on Enron's 
radar screen when it is in FERC's charter to protect consumers from 
unjust and unreasonable prices.
    I also intend to ask who else was engaged in these scams. The memos 
claim that Inc-ing ``is now being used by other market participants.'' 
And, ``Although Enron may have been the first to use this strategy, 
others have picked up on it, too.''
    In describing another scam--``Selling Non-Firm Energy as Firm 
Energy''--the memos state, ``The traders claim that `everybody does 
this.' ''
    On Monday, Reliant Resources admitted that it had engaged in fake 
transactions--called ``wash trades''--with four other power companies. 
Last week, Dynegy admitted that it too, had engaged in these fake 
trades with CMS Energy.
    Only last week, FERC sent a questionnaire to numerous electricity 
companies asking if they engaged in any of these schemes. FERC should 
have asked that question more than a year ago.
    I also intend to ask about violations of federal law.
    But whatever is asked, let us not lose sight of the victims--the 
people of California. For justice to be done, indictments must be 
handed down, refunds must be ordered, long-term contracts must be 
renegotiated, and cost-based pricing must remain in effect. Thank you, 
Mr. Chairman.

    Senator Dorgan. Senator Boxer, thank you very much.
    We are going to change the order. We had indicated that we 
have three panels today. The first panel is going to be the 
folks who wrote the memorandums that are the subject of the 
hearing. Following that we will have the officials from 
California, and following that we will have the folks from 
FERC.
    I would like to ask Mr. Christian Yoder, Mr. Richard 
Sanders, Mr. Stephen Hall, Mr. Jean Frizzell, and Mr. Gary 
Fergus to please come forward to the witness table.
    [Pause.]
    Senator Dorgan. For purposes of this hearing, we will ask 
that you take the oath if you are on the witness table. Would 
you raise your right hand. Do you swear to tell the truth, the 
whole truth, and nothing but the truth, so help you God?
    Mr. Fergus. I do.
    Mr. Frizzell. I do.
    Mr. Hall. I do.
    Mr. Sanders. I do.
    Mr. Yoder. I do.
    Senator Dorgan. Let the record show an affirmative answer 
by all of the witnesses.
    Let me thank all of you for being here. Let the record note 
that you are not here under subpoena, that you have volunteered 
to testify voluntarily.
    Let us begin with Mr. Hall.
    Senator Dorgan. Mr. Hall, it is my understanding that you 
were the principal researcher and principal writer of the 
December 6th and December 8th memorandums, in consultation with 
Mr. Yoder; is that correct?
    Mr. Hall. Yes, I was, Mr. Chairman.
    Senator Dorgan. Do you have an opening statement?
    Mr. Hall. I do have a statement I would like to make at 
this time.
    Senator Dorgan. Why don't you proceed.

 STATEMENT OF STEPHEN C. HALL, ESQ., DIRECTOR, LEGAL SERVICES, 
                    UBS WARBURG ENERGY, LLC

    Mr. Hall. Thank you, Mr. Chairman, distinguished Senators.
    My name is Stephen Hall. As an attorney with the law firm 
of Stoel Rives LLP, which served as outside counsel to Enron 
North America on certain regulatory matters, I was asked in 
October 2000 to research and prepare a memorandum describing 
certain wholesale energy trading practices at Enron. That 
memorandum, delivered to Enron on December 6th, 2000, 
characterized certain of those practices as deceptive. At the 
same time, we advised Enron in a face-to-face meeting that 
deceptive trading practices could violate the ISO tariffs as 
well as state criminal laws. Enron has waived the attorney-
client privilege with respect to these matters, and I would be 
happy to assist the Committee in any way in its investigation 
of Enron's trading practices in the California wholesale energy 
markets.
    I would like to provide some brief background regarding the 
preparation of the memorandum. In fall 2000, as an associate at 
Stoel Rives, I did work for various clients of the firm in the 
energy industry, including Enron. I worked under the 
supervision of Marcus Wood, a partner at Stoel Rives with many 
years of experience in the energy industry. In October 2000, I 
attended a meeting in Portland convened by Enron's litigation 
counsel to address the company's response to a subpoena from 
the California Public Utilities Commission. Attorneys from the 
two law firms retained to advise Enron in this matter were in 
attendance. During the course of that meeting, Enron traders 
began describing certain strategies used in the California 
wholesale energy market. The strategies presented were 
extraordinarily complex and the descriptions given were highly 
technical. Following that meeting, Enron's counsel asked me to 
review the applicable tariffs, interview Enron traders, and 
seek to develop for the first time a written description of the 
trading strategies that were identified at the meeting. 
Subsequently, in addition to my other ongoing responsibilities, 
I talked with traders at Enron and, working with Mr. Wood and 
Enron inside counsel Christian Yoder, who is also testifying 
today, developed the memorandum that has been provided to the 
Committee.
    As I learned about Enron's trading practices, I became 
increasingly concerned. In the course of my discussions with 
the traders, I became aware that certain of these trading 
strategies involved deception. For example, one strategy, 
dubbed Load Shift, appeared to involve submitting schedules to 
the California Independent System Operator that intentionally 
overstated or understated the load in different zones to cause 
the ISO to make payments to relieve the supposed congestion in 
the overscheduled zone. As I learned of deceptive practices, I 
advised the traders with whom I spoke that such practices were 
deceptive and that they should stop such practices immediately. 
I also attended meetings in which Enron traders provided 
assurances that such practices had been discontinued.
    In addition to the descriptions of trading practices I had 
been asked to prepare, I took it upon myself to include in the 
memorandum a summary of the ISO tariff rules against gaming or 
deceptive practices, so that Enron would understand the ISO 
standards applicable to these practices and the sanctions for 
violations. I also discussed my findings with Mr. Yoder, who 
shared my concerns and requested that his name be included as a 
co-author of the memorandum. Mr. Yoder believed that sending a 
joint memorandum from both inside counsel and outside counsel 
criticizing these deceptive practices would assist in focusing 
the attention of Enron management on these issues and prevent 
any recurrence.
    Mr. Wood, my supervising partner, also had very strong 
concerns as a result of these findings and wanted to ensure 
that Enron management understood that these or any similar 
deceptive strategies were unacceptable. Accordingly, Mr. Wood 
revised the memorandum to emphasize the deceptive nature of 
certain of these strategies. On December 6th, I emailed the 
revised memorandum to both Enron in-house counsel and Enron's 
outside litigation counsel.
    On December 7th, 2000, Mr. Wood and I met personally with 
Mr. Yoder at his offices, and Mr. Wood delivered a hard copy of 
the final memorandum together with copies of California 
statutes on fraud and theft. Mr. Wood wanted it to be clear to 
Enron that deceptive practices could constitute violations not 
only of ISO rules, but also possibly of criminal statutes. 
Subsequently, Mr. Yoder and I----
    Senator Dorgan. Excuse me. Could you give me the date of 
that meeting?
    Mr. Hall. December 7th, 2000.
    Subsequently, Mr. Yoder and I met with the head trader at 
Enron--I would like to clarify; that was Portland--to 
communicate Stoel Rives' findings and conclusions to ensure 
that he understood our belief that many of the trading 
practices involved deception.
    In June of 2001, I accepted a position as an in-house 
attorney at Enron, where I remained for 8 months. From the time 
I delivered the memorandum through my brief tenure at Enron, I 
saw no evidence or received any indication that the deceptive 
practices which I discussed in my memorandum ever resumed.
    In sum, I was asked to talk with Enron's traders to learn 
about and summarize the trading strategies used. In the course 
of my review, my law firm developed an understanding of those 
strategies, identified in writing certain practices that 
appeared deceptive, advised Enron traders that those practices 
must be discontinued, understood that Enron had discontinued 
these practices, and advised our client that the future use of 
deceptive trading practices could violate ISO rules and/or 
criminal statutes. I appreciate the opportunity to appear 
before the Committee to discuss our findings and to answer any 
questions that the Committee may have.
    [The prepared statement of Mr. Hall follows:]

 Prepared Statement of Stephen C. Hall, Esq., Director, Legal Services,
                        UBS Warburg Energy, LLC
    Thank you, Mr. Chairman, distinguished Senators. My name is Stephen 
Hall. As an attorney at the law firm of Stoel Rives LLP, which served 
as outside counsel to Enron North America (``Enron'') on certain 
regulatory matters, I was asked in October 2000 to research and prepare 
a memorandum describing certain wholesale energy trading practices at 
Enron. That memorandum, delivered to Enron on December 6, 2000, 
characterized certain of those practices as deceptive. At the same 
time, we advised Enron in a face-to-face meeting that deceptive trading 
practices could violate the ISO tariffs as well as state criminal laws. 
Enron has waived the attorney-client privilege with respect to these 
matters, and I would be happy to assist the Committee in any way in its 
investigation of Enron's trading practices in the California wholesale 
energy markets.
    I would like to provide some brief background regarding the 
preparation of the memorandum. In fall 2000, as an associate at Stoel 
Rives, I did work for various clients of the firm in the energy 
industry, including Enron. I worked under the supervision of Marcus 
Wood, a partner at Stoel Rives with many years of experience in the 
energy industry. In October 2000, I attended a meeting in Portland 
convened by Enron's litigation counsel to address the Company's 
response to a subpoena from the California Public Utility Commission. 
Attorneys from the two law firms retained to advise Enron in that 
matter were in attendance. During the course of that meeting, Enron 
traders began describing certain strategies used in the California 
wholesale energy market. The strategies presented were extraordinarily 
complex and the descriptions given were highly technical. Following 
that meeting, Enron's counsel asked me to review the applicable 
tariffs, interview Enron traders and seek to develop, for the first 
time, a written description of the trading strategies that were 
identified at the meeting. Subsequently, in addition to my other 
ongoing responsibilities, I talked with traders at Enron and, working 
with Mr. Wood and Enron inside counsel Christian Yoder, who is also 
testifying today, developed the memorandum that has been provided to 
the Committee.
    As I learned about Enron's trading practices, I became increasingly 
concerned. In the course of my discussions with traders, I became aware 
that certain of these trading strategies involved deception. For 
example, one strategy dubbed ``Load Shift'' appeared to involve 
submitting schedules to the California Independent System Operator 
(``ISO'') that intentionally overstated or understated the load in 
different zones to cause the ISO to make payments to relieve the 
supposed congestion in the overscheduled zone. As I learned of 
deceptive practices, I advised the traders with whom I spoke that such 
practices were deceptive and that they should stop such practices 
immediately. I also attended meetings in which Enron traders provided 
assurances that such practices had been discontinued.
    In addition to the descriptions of trading practices I had been 
asked to prepare, I took it upon myself to include in the memorandum a 
summary of the ISO Tariff rules against ``gaming'' or deceptive 
practices, so that Enron would understand the ISO standards applicable 
to these practices and the sanctions for violations. I also discussed 
my findings with Mr. Yoder, who shared my concerns and requested that 
his name be included as a co-author of the memorandum. Mr. Yoder 
believed that sending a joint memorandum from both inside counsel and 
outside counsel criticizing these deceptive practices would assist in 
focusing the attention of Enron management on these issues and prevent 
any recurrences.
    Mr. Wood, my supervising partner, also had very strong concerns as 
a result of these findings and wanted to ensure that Enron management 
understood that these or any similar deceptive strategies were 
unacceptable. Accordingly, Mr. Wood revised the memorandum to emphasize 
the deceptive nature of certain of these strategies. On December 6, I 
emailed the revised memorandum to both Enron in-house counsel and 
Enron's outside litigation counsel.
    On December 7, 2000, Mr. Wood and I met personally with Mr. Yoder 
at his offices, and Mr. Wood delivered a hard copy of the final 
memorandum together with copies of California criminal statutes on 
fraud and theft. Mr. Wood wanted it to be clear to Enron that deceptive 
practices could constitute violations not only of ISO rules but also 
possibly of criminal statutes. Subsequently, Mr. Yoder and I met with 
the head trader at Enron to communicate Stoel Rives' findings and 
conclusions to ensure that he understood our belief that many of the 
trading practices involved deception.
    As a point of clarification, this committee has been provided two 
copies of the Stoel Rives memorandum, one of which bears the date 
December 6, 2000 and one of which bears the date December 8, 2000. The 
Committee should be aware that there is only one Stoel Rives 
memorandum, which was finalized on December 6. The two memoranda are 
identical, and we believe the date on each copy simply reflects the 
date that copy was printed off of the computer. There is also a third 
memorandum before the Committee that was subsequently prepared by the 
Brobeck law firm. Stoel Rives had no involvement in the preparation of 
the Brobeck memorandum.
    In sum, I was asked to talk with Enron's traders to learn about and 
summarize the trading strategies used. In the course of my review, my 
law firm developed an understanding of those strategies, identified in 
writing certain practices that appeared deceptive, advised Enron 
traders that these practices must be discontinued, understood that 
Enron had discontinued these practices, and advised our client that the 
future use of deceptive trading practices could violate ISO rules and/
or criminal statutes. I appreciate the opportunity to appear before the 
Committee to discuss our findings and answer any questions that the 
Committee may have.

    Senator Dorgan. Mr. Hall, thank you very much.
    Next we will hear from Mr. Yoder. Mr. Yoder, would you 
proceed.

    STATEMENT OF CHRISTIAN G. YODER, ESQ., DIRECTOR, LEGAL 
               SERVICES, UBS WARBURG ENERGY, LLC

    Mr. Yoder. Good morning, Mr. Chairman, Senator Dorgan, and 
Members of the Subcommittee. My name is Christian Yoder. I am 
currently a Director in the Legal Department of UBS Warburg 
Energy, LLC, in Portland, Oregon. Prior to joining UBS Warburg 
in February of 2002, I was employed as Senior Counsel. I worked 
in Enron's Houston offices from 1994 to 1998, at which time I 
was relocated to its Portland, Oregon, offices.
    As a lawyer for Enron, my job was to provide legal advice 
to the company on transactional matters, including the 
negotiation and drafting of master agreements with other 
wholesale power trading entities. In September of 2000, Stephen 
Hall, a third-year associate attorney at the Portland law firm 
Stoel Rives, outside counsel for Enron, was detailed from his 
law firm to work in Enron's Portland office, although he 
remained an associate of Stoel Rives and was not an Enron 
employee at that time. Around that time, I and other members of 
Enron's Legal Department anticipated that litigation might be 
commenced against Enron and other power traders who conducted 
business in the Western United States, and especially in 
California. I asked Stephen Hall to attend litigation 
preparation meetings, perform some basic factual research, and 
draft a memorandum regarding Enron's trading practices, 
including any problematic aspects he might identify. In 
connection with this assignment, Mr. Hall produced a memorandum 
dated December 6th, 2000. There is also a December 8, 2000, 
version of the same memorandum, but I believe only the date is 
different. Although Mr. Hall drafted the memorandum, my name 
was added as a co-author to indicate that I had participated in 
discussions regarding its preparation and content. When I 
received the memorandum from Mr. Hall sometime in early 
December 2000, I provided a copy to my supervisor, Mark 
Haedicke, the Managing Director of the Legal Department of 
Enron North America. I also believe that Richard Sanders, the 
Associate General Counsel, who had responsibility for 
overseeing litigation matters, also received a copy, although I 
cannot recall whether I or Mr. Hall provided it to him.
    With respect to the issues the Committee is examining, I am 
here voluntarily and intend to fully cooperate with this 
Committee and any other congressional investigation into these 
matters. Because I learned much of the information in my 
possession in my capacity as a lawyer for Enron, under Texas 
and federal law the attorney-client privilege would normally 
prevent me from disclosing privileged information. However, 
Enron has provided me with a waiver of the attorney-client 
privilege that enables me to answer the Committee's questions 
even if my answers disclose attorney-client privileged 
material. I welcome the opportunity to answer, to the best of 
my ability, any questions that the Committee may have for me. 
Thank you.
    Senator Dorgan. Mr. Yoder, thank you very much.
    Mr. Sanders, you were the recipient or the intended 
recipient of the memorandum that is in question. Would you 
please present your testimony.

   STATEMENT OF RICHARD B. SANDERS, ESQ., VICE PRESIDENT AND 
 ASSISTANT GENERAL COUNSEL, WHOLESALE GROUP, ENRON CORPORATION

    Mr. Sanders. Good morning, Mr. Chairman, Senator Dorgan, 
and Members of the Subcommittee. My name is Richard Sanders. I 
am currently Vice President and Assistant General Counsel for 
Enron Wholesale Services, a division of Enron Corporation. I 
have been employed as a lawyer for Enron since 1977. Prior to 
joining Enron I was a partner in the trial section of Bracewell 
and Patterson, a Houston law firm.
    From the time I joined Enron's Legal Department until the 
present, my responsibility was to advise my clients--the 
company and its employees--with regard to pending and 
anticipated litigation matters.
    The trading of electricity in California by Enron traders 
has been the subject of much litigation. In the summer and fall 
of 2000, because of the California energy crisis, there was a 
great deal of media coverage regarding the activities of 
electricity traders, including Enron's traders. I and other 
members of the Enron Legal Department anticipated that 
litigation might be commenced against Enron and other power 
traders. In or about September 2000, Enron received a subpoena 
from the California Public Utilities Commission regarding its 
electricity trading activities in California. On November 29th, 
2000, Enron was sued in a class action lawsuit in California 
entitled Hendricks v. Dynegy Power Marketing Inc., et al., 
which was filed in San Diego Superior Court [GIC 758565]. In 
connection with this pending and anticipated litigation, in 
early December 2000 I was provided with a memorandum from 
Christian Yoder and Steve Hall regarding certain trading 
practices. I did not direct Mr. Yoder or Mr. Hall to prepare 
this memorandum. After receiving it and reviewing it, I was not 
confident that it completely or accurately described many 
aspects of the trading practices. However, I directed that 
certain trading practices described therein be suspended and I 
authorized additional outside counsel to review the memorandum 
and the trading practices and to prepare a subsequent 
memorandum on these matters, so I could provide appropriate 
legal advice to the company. I reported the substance of these 
memos, as they pertained to pending and anticipated litigation, 
to my superiors at Enron. I understood that the trading 
practices that I directed to be suspended in December 2000 did 
not continue.
    With respect to the issues the Committee is examining, I am 
here voluntarily and intend to fully cooperate with this 
Committee and any other congressional investigation into these 
matters. Because I learned much of the information in my 
possession in my capacity as a lawyer for Enron, under Texas 
and federal law the attorney-client privilege would act to 
prevent me from disclosing privileged information. However, 
Enron has provided me with a waiver of the attorney-client 
privilege that enables me to answer the Committee's questions 
even if my answers disclose attorney-client privileged 
material. I welcome the opportunity to answer to the best of my 
recollection, any questions that the Committee may have for me. 
Thank you.
    Senator Dorgan. Mr. Sanders, thank you very much.
    Mr. Fergus and Mr. Frizzell, you were commissioned by Mr. 
Sanders, as I understand it, to do another evaluation. Would 
you proceed.

              STATEMENT OF GARY S. FERGUS, ESQ., 
                BROBECK PHLEGER & HARRISON, LLP

    Mr. Fergus. Thank you, Mr. Chairman, Senators. My name is 
Gary Fergus. For approximately 21 years I was a trial lawyer at 
the firm of Brobeck Phleger & Harrison, LLP. My client, Enron, 
has instructed me it is waiving the attorney-client privilege 
with respect to my testimony before this Subcommittee.
    Brobeck was retained in late September 2000 to represent 
Enron in connection with threatened litigation in California 
arising out of the high energy prices in the wholesale 
electricity market during the summer of 2000. Enron used a 
concept that they called the ``virtual law firm'' to assemble a 
team of lawyers from different firms, each with their own areas 
of expertise. Brobeck was selected because of our jury trial 
experience in complex matters. Brobeck was not and is not an 
energy regulatory firm.
    By late November 2000, Enron had assembled a defense team 
that was headed by Mr. Robin Gibbs of the Gibbs & Bruns firm in 
Houston, Texas. Mr. Michael Kirby of Post Kirby Noonan & Sweat 
was added to the team as another experienced jury trial lawyer 
with extensive antitrust experience and familiarity with the 
San Diego County, California, courts, where a number of 
complaints had been filed.
    In addition, Enron had a number of other firms that 
regularly advised the company in areas of their expertise. 
These included the Stoel Rives firm located in Portland, 
Oregon, and Bracewell & Patterson, which has offices throughout 
the United States. Stoel Rives had an energy regulatory 
experience and routinely advised Enron with respect to such 
issues. At the time, Stoel Rives had what they called, 
``seconded,'' Mr. Stephen Hall to Enron to be available on 
premises in Portland to provide additional resources to Mr. 
Christian Yoder and to be available on the trading floor to 
respond to questions from traders.
    Brobeck was invited by Enron to attend a large two-day 
orientation session in Portland in early October 2000 along 
with a number of other firms, including Bracewell & Patterson. 
At this orientation session there was a presentation from the 
head trader giving an overview of the electricity market 
conditions that prevailed in the summer of 2000.
    In early November 2000, I spent an additional two days in 
Portland, beginning to learn the details of how the markets 
operated during the summer of 2000 and beginning to interview 
individual traders as to how they did their jobs. Mr. Sanders 
and Mr. Hall participated in some, but not all, of these 
meetings.
    It is my understanding that between the meetings in early 
November and the beginning of December 2000, Mr. Hall continued 
to meet with traders and gather more information. As a result 
of his interviews, he prepared the December 6th memorandum, 
which I believe is also dated December 8th.
    On December 11th and 12th, a meeting was held in Portland, 
Oregon, to further investigate the trading practices described 
in the December 8th memorandum. The meeting was chaired by Mr. 
Robin Gibbs and Mr. Richard Sanders. I, along with Mr. Michael 
Kirby and Mr. Stephen Hall, participated. At that time, the 
decision was made to suspend any of the trading strategies 
still in use that were described in the December 8, 2000, 
memorandum.
    Now, at that same time, the wholesale electricity market 
was undergoing extreme volatility. The Federal Energy 
Regulatory Commission had issued its November 1, 2000, order 
and it was known generally that the Commission was about to 
issue another order on December 15, 2000. There were also 
concerns about the credit risk of market participants. Because 
all these events were consuming the attention of Enron traders, 
a decision was made to set up a meeting as early as possible in 
January to further investigate the trading practices that had 
been used during the summer of 2000.
    In early January there was another meeting in Portland at 
Enron where the trading strategies described in the December 
8th, 2000, memorandum were discussed by the defense legal team 
and the head trader in Portland. At that time Mr. Richard 
Sanders reiterated that none of the trading strategies 
described in the December 8th, 2000, memorandum were to be used 
by Enron.
    The lawyers responsible for defending Enron in litigation 
pending in California were assigned the task of investigating 
the facts and evidence surrounding the events from the summer 
of 2000. Individual traders were interviewed by a team of 
defense lawyers from Brobeck Phleger & Harrison, Gibbs & Bruns, 
and Post Kirby Noonan & Sweat, to learn what information the 
traders had about the events that transpired during the summer 
of 2000. At the end of these meetings, all the defense lawyers 
who had been interviewing the witnesses jointly prepared the 
first draft of a memorandum summarizing what we had learned. 
This memorandum was circulated only to outside counsel and to 
Mr. Richard Sanders, who was part of the virtual team. There 
were several revisions that were exchanged amongst the lawyers 
in the next few days while the interviews were still fresh in 
our minds. This memorandum was a work in progress. The next 
step was to check back with the head trader in Portland to make 
certain that the lawyers had understood the facts correctly. 
Other events, however, such as the litigation with the 
California Power Exchange and the subsequent bankruptcy, motion 
practice in these California cases, and retention of experts 
overtook the defense team.
    It was not until April 2001 that the defense team was able 
to turn back to the draft memorandum. At that time, during 
discussions with the head trader, I learned that the lawyers 
still did not have all the facts correct about what had 
happened during the summer of 2000. I asked to see some 
documentary evidence that was relevant to some of the 
strategies that were used during the summer of 2000, and I 
found documents that were in conflict with some of the 
descriptions we had been given.
    The draft memorandum was never completed because we had not 
resolved the factual conflicts. Other events in litigation took 
precedence over the factual investigation of what had happened 
during the summer of 2000. On December 2, 2001, Enron filed for 
bankruptcy and all defense efforts ceased.
    I stand ready to answer any of your questions. Thank you.
    Senator Dorgan. Mr. Fergus, thank you for your testimony.
    Finally, we will hear from Mr. Frizzell.

             STATEMENT OF JEAN C. FRIZZELL, ESQ., 
                      GIBBS AND BRUNS, LLP

    Mr. Frizzell. Thank you, Senators. My name is Jean 
Frizzell. I am a partner in the law firm of Gibbs and Bruns, 
LLP, in Houston, Texas. Gibbs and Bruns is a litigation law 
firm whose practice consists primarily of the prosecution and 
defense of commercial disputes.
    My firm was hired in late November of 2000. We were engaged 
by Enron to defend Enron Power Marketing, Inc. and Enron Energy 
Services in previously filed class action lawsuits brought in 
California asserting claims that Enron and others had 
manipulated the markets in California for wholesale electrical 
power. Gibbs and Bruns was one of several firms that Enron 
hired, including Brobeck of San Francisco, to defend the class 
actions. Enron also hired regulatory specialists to represent 
the Enron entities in proceedings before the Federal Energy 
Regulatory Commission. The draft memo co-authored by me that is 
one of the subjects of this research was prepared by litigation 
counsel during the course of preparing to defend the class 
action lawsuits.
    As is required in the defense of any lawsuit, one of the 
immediate tasks undertaken by the defense team was to begin a 
preliminary investigation of the merits and the defenses of the 
existing lawsuits. In this case, very shortly after we were 
engaged, we received copies of a memorandum authored by Mr. 
Hall and Mr. Yoder. I and other members of the defense team 
were thereafter involved in a series of interviews with a 
number of Enron traders wherein the traders described the 
California market, the strategies outlined in the Stoel Rives's 
memorandum and their understanding of the impact of those 
strategies in the California marketplace.
    During the course of these interviews, we were informed 
that Enron had ceased trading in the real-time market, and that 
the strategies discussed in our memoranda were no longer being 
used.
    Following our interviews, I and other members of the 
defense team prepared the initial draft of the memorandum on 
Mr. Fergus' portable computer. Mr. Fergus agreed to send the 
draft to us for our review and comments, which he did. However, 
we decided that before it would be finalized Mr. Fergus would 
again visit with the head trader to make sure it was accurate.
    Approximately a week later, I received and reviewed a draft 
of the status report. About two weeks later, I received 
comments from another member of the defense team. My 
understanding was that, consistent with our original 
discussion, Mr. Fergus was going to meet with the head trader 
to discuss the draft report before finalizing it. I did not 
participate in those discussions and had no further involvement 
in the report.
    The defense team, including myself and my firm, were 
involved in the defense of existing class action lawsuits. As 
trial lawyers, we were attempting to gather information and 
develop arguments that would assist in the defense of Enron 
during the trial or trials of lawsuits brought in California, 
involving strategies that were no longer being used. We were 
not attempting to and did not condone or authorize the 
strategies themselves, and we played no part in their 
development or execution.
    In light of the fact that Enron has waived its attorney-
client privilege, I am prepared to answer any questions of the 
Committee and any questions they may have concerning my role as 
a trial lawyer in the defense of the class actions. Thank you.
    [The prepared statement of Mr. Frizzell follows:]

   Prepared Statement of Jean C. Frizzell, Esq., Gibbs and Bruns, LLP
    My name is Jean C. Frizzell. I am a partner in the law firm of 
Gibbs & Bruns, L.L.P. (``Gibbs & Bruns'') in Houston Texas. Gibbs & 
Bruns is a litigation law firm whose practice consists primarily of the 
prosecution and defense of commercial disputes.
    In late November of 2000, our law firm was engaged by Enron to 
defend Enron Power Marketing, Inc. and Enron Energy Services in 
previously filed class action lawsuits brought in California asserting 
claims that Enron and others had manipulated the markets in California 
for wholesale electrical power. Gibbs & Bruns was one of several firms 
that Enron hired, including Brobeck, Phleger & Harrison, L.L.P. of San 
Francisco, to defend the class actions. Enron also hired regulatory 
specialists to represent the Enron entities in related proceedings 
before the Federal Energy Regulatory Commission (``FERC''). The draft 
memorandum co-authored by Gary Fergus and me that is one of the 
subjects of this hearing was prepared by litigation counsel during the 
course of preparing to defend the class action suits.
    As is required in the defense of any lawsuit, one of the immediate 
tasks undertaken by the defense team was to begin a preliminary 
investigation of the potential merits of the claims and the potential 
defenses to the claims made in those suits. In this case, very shortly 
after we were engaged, Enron provided the defense team copies of the 
memorandum authored by Steve Hall and Christian Yoder. I and other 
members of the defense team were thereafter involved in a series of 
interviews with a number of Enron traders wherein the traders described 
the California electricity market, the strategies outlined in the Stoel 
Rives' memorandum and their understanding of the potential impact of 
those strategies on the California market.
    During the course of these interviews, we were informed that Enron 
had ceased trading in the real-time market, and that the strategies 
discussed in our draft memorandum were no longer being used.
    Following our interviews, I and other members of the defense team 
prepared the initial draft of the memorandum on Mr. Fergus' portable 
computer. Mr. Fergus agreed to send the draft to us for our review and 
comments. However, we decided that before we finalized the status 
report Mr. Fergus would have Enron's head trader in Portland review it 
to make sure it was accurate.
    Approximately a week later, I received and reviewed the draft of 
the status report. About two weeks later, I reviewed comments from 
another member of the defense team. My understanding was that, 
consistent with our original discussion, Mr. Fergus was going to meet 
with the head trader to discuss the draft status report before 
finalizing it. However, I did not participate in those discussions and 
had no further involvement in the draft status report.
    The defense team, including myself and my firm, were involved in 
the defense of existing class action lawsuits. As trial lawyers, we 
were attempting to gather information and develop arguments that would 
assist in the defense of Enron during a trial or trials of the civil 
lawsuits brought in California, involving strategies that were no 
longer being utilized. We were not attempting to and did not condone or 
authorize the strategies themselves, and we played no part in their 
development or execution.
    In light of the fact that Enron has waived its attorney client 
privilege, I am prepared to answer any questions the Committee may have 
concerning my role as a trial lawyer in the defense of the California 
class actions.

    Senator Dorgan. Mr. Frizzell, thank you very much.
    We have been joined by Senator McCain, the Ranking Member 
on the full Committee. Senator McCain, do you wish to make a 
statement?

                STATEMENT OF HON. JOHN McCAIN, 
                   U.S. SENATOR FROM ARIZONA

    Senator McCain. I would ask my statement be made for the 
record. We have a long hearing and should proceed with the 
testimony. Thank you, Mr. Chairman.
    [The prepared statement of Senator McCain follows:]

   Prepared Statement of Hon. John McCain, U.S. Senator from Arizona
    Thank you, Mr. Chairman, for holding this hearing on recent 
developments in the investigation of price manipulation in West Coast 
energy markets. Last month, this Subcommittee held a hearing to examine 
Enron's alleged gaming of the California energy market. While serious, 
there was little concrete evidence to substantiate widespread concerns 
that Californians and other West Coast consumers had been bilked by 
unscrupulous and largely unregulated companies.
    Last Monday, however, the Federal Energy Regulatory Commission 
revealed what has been called the ``smoking gun'': a legal memorandum 
written at the height of the California energy crisis in December 2000, 
to Enron from its own attorneys, that claims to describe the energy 
trading strategies the company was using to manipulate the California 
energy system.
    The memo is shockingly unvarnished--in it, a trader is quoted as 
talking about ``the oldest trick in the book''; the memo concludes in 
one section that ``The net effect of these transactions is that Enron 
gets paid for moving energy to relieve congestion without actually 
moving any energy or relieving any congestion''; and in another section 
that ``One concern here is that by knowingly increasing the congestion 
costs, Enron is effectively increasing the costs to all market 
participants in the real time market.'' Describing Enron's strategy of 
``shorting'' ancillary services, the memo further states that ``. . . 
in order to short the ancillary services it is necessary to submit 
false information that purports the source of the ancillary services.''
    In stark contrast to this ``smoking gun'' memo, FERC also released 
another memo written later for Enron by other lawyers, which dismisses 
many of the conclusions of the first memo, suggests that some 
strategies that were used were not used to a significant extent, 
questions the inflationary effect of Enron's actions, and generally put 
a much more legitimate, if not altruistic, spin on the activities 
previously documented. I am curious as to the circumstances that led to 
such differing perspectives.
    The facts surrounding the Enron's collapse have forced many to ask 
how one company could deceive so many people, at so many levels, in so 
many ways, for so long. I hope we will get some answers to these 
questions today. Disturbingly, however, while the focus of today's 
hearing is Enron, the memoranda released by FERC suggest that the 
manipulative practices described were widespread. I understand that 
FERC has recently asked scores of utilities to state whether or not 
they engaged in practices similar to those described in the Enron 
memos, and has instructed these companies to retain their records in 
anticipation of a thorough investigation.
    While I commend FERC for its new-found zeal, I would like to know 
why the Commission took so long to act to assuage the crisis in 
California, a crisis that rippled throughout the West. I would also 
like to know, if it is shown that energy companies did bilk consumers, 
what remedies exist to compensate them.
    Thank you Mr. Chairman, I look forward to today's testimony.

    Senator Dorgan. We are also joined by Senator Cleland and 
Senator Carnahan. If you wish to have a short statement we 
would be happy to entertain it.

                STATEMENT OF HON. MAX CLELAND, 
                   U.S. SENATOR FROM GEORGIA

    Senator Cleland. Mr. Chairman, thank you for holding this 
hearing.
    The studio promotions for the movie ``Get Shorty'' say: 
``In Hollywood everybody wants, but the way they get can be 
outrageous.'' It is ironic that Enron used the title ``Get 
Shorty'' to describe one of its schemes used to get profits 
while all California residents wanted was their lights on.
    However, this is not just about a company taking advantage 
of the system and making a profit. The Enron memos to me show a 
company on the prowl, like a young lion ready to spring on 
unsuspecting prey. The Enron memos show, in effect, no regard 
for the consumers of California, no regard for basic American 
energy policy, but a predator on people for profit.
    What made Enron believe they could get away with such 
practices as scheduling pretend transactions to get paid for 
relieving congestion without, as is described in one memo, 
actually moving energy or relieving congestion? It is much like 
the pretend 600 companies offshore that Enron pretended to have 
money in but did not.
    In the December 6th, 2000, memo drafted by Mr. Christian 
Yoder and Stephen Hall, the analysis of this practice, 
described in the memo by the name ``Death Star,'' is that the 
California Independent System Operator ``probably cannot 
readily detect this practice because the ISO only sees what is 
happening inside its control area, so it only sees half of the 
picture.'' Therefore, Enron sprang upon the State of California 
and took it for a ride.
    Enron was looking for ways to end run or circumvent the 
system to maximize profits without regard to the effect on 
California consumers. As we examine the practices used by Enron 
to manipulate California's energy markets, it is essential we 
keep in mind the effect these practices had on consumers. 
Between May 2000 and June 2001, California residents 
experienced 38 state 3 emergencies with rolling blackouts of 
electricity. Certainly a lesson to be learned from Enron is 
that we must work to ensure an environment of strong regulation 
and strict accountability to prevent consumers from suffering 
such a disaster like this anywhere in America.
    Thank you, Mr. Chairman.
    Senator Dorgan. Senator Carnahan.

               STATEMENT OF HON. JEAN CARNAHAN, 
                   U.S. SENATOR FROM MISSOURI

    Senator Carnahan. Thank you, Mr. Chairman, for convening 
this hearing.
    I was sickened to read of Enron's strategy for manipulating 
the California electricity market. It is evident that the so-
called energy services that Enron provided to California were 
as questionable as Enron's accounting. While electricity is 
just another commodity to Enron, another means of enriching 
itself, to Californians electricity is a daily necessity. 
Electricity is necessary to keep the lights on at the day care 
centers, to keep factories running, and to keep stores open for 
business. Without electricity, we have no economy. That gives 
suppliers of electricity tremendous power in a flawed market.
    Thirty-eight times California was forced to declare energy 
emergencies and during these emergencies the state initiated 
rolling blackouts. The lights went out, the food spoiled, 
workers lost wages. We will probably never be able to quantify 
the price paid by California during their energy crisis.
    But now we see clearly what kind of attitude Enron had to 
the suffering of Californians. Enron's own memos describe how 
Enron got paid for services it was not providing. These memos 
show how Enron created the appearance of congestion on 
transmission lines so it could be paid for alleviating 
congestion. That sounds to me like the arsonist who works for 
the fire department. They cause the problem, then rushed in to 
save the day.
    In one memo, an Enron employee claimed that the value of 
congestion payments can be greater than the value of energy 
itself. If you talk to business owners or senior citizens who 
had their lights turned out, I think they would tell you that 
Enron did not understand the true value of energy.
    While we thank competitive markets for so many improvements 
in the quality of life, clearly this was not a competitive 
market. This is an example of markets at their worst. This was 
a market open to gross abuse and in need of regulation and 
reform. Enron was a company in need of a very vigorous 
watchdog.
    I hope that the witnesses from California can share with 
the Committee the wisdom gained through their experience. How 
can government prevent such market abuses in the future and how 
can electricity markets be structured to truly reflect the 
value of the product being traded, and how can we protect 
Americans from being at the mercy of rolling blackouts in the 
future?
    I also was disturbed to learn that Enron Energy Services, a 
division managed by current Army Secretary Thomas White, was 
involved in market manipulation. I would be interested in 
hearing from today's witnesses exactly what Secretary White's 
level of involvement was in these transactions.
    Thank you, Mr. Chairman.
    Senator Dorgan. Senator Carnahan, thank you. I did mention 
at the beginning of the hearing that it will be my intention to 
call Secretary White as a witness at a hearing within the next 
two weeks.
    Mr. Hall, you indicated that in the fall of 2000 you became 
involved in writing this report and you said you became 
increasingly concerned about the deception that was involved. 
Then you described a December 7th meeting in which you said 
that there was possible criminal behavior. Can you amplify that 
for us? What kind of possible criminal behavior?
    Mr. Hall. The purpose of my memorandum was to understand 
and describe the trading strategies. As I noted in my opening 
statement, as I came to understand these strategies I realized 
there were deceptive aspects to certain pieces of them. 
Generally, the strategies involved taking advantage of 
loopholes in the tariffs.
    At the meeting on December 7th with Mr. Yoder, Mr. Wood, 
the supervising partner at my firm, was there and we discussed 
with Mr. Yoder that under California State criminal statutes 
that some of these deceptive practices might possibly violate 
those laws. Now, I am not a criminal lawyer, and neither is Mr. 
Wood. So, we never made a formal analysis of whether these 
practices constituted violations of the criminal law. We were 
just----
    Senator Dorgan. I understand that, but nonetheless you 
expressed concern about both the fact that these practices were 
both deceptive and potentially criminal?
    Mr. Hall. Yes, Mr. Chairman.
    Senator Dorgan. Is that correct?
    Mr. Hall. I'm trying my best to answer your question. I'm 
not sure what you're asking.
    Senator Dorgan. Well, Mr. Yoder, you seemed to back away 
just a bit. Mr. Hall said that you actually asked to have your 
name attached to this report. Is that the case?
    Mr. Yoder. Yes. They came over to the office and delivered 
the memo, Marcus and Steve, and we had a serious discussion of 
the issues. And I was advised as the in-house attorney dealing 
with general trading matters that there might be serious issues 
involved and----
    Senator Dorgan. What's that mean, ``serious issues''? Is 
that a euphemism for something I should know about?
    Mr. Yoder. Well, we didn't--the memo was not a legal 
opinion or obviously my name wouldn't have been on it. It was a 
preparatory memo to decide and help the litigation team with 
some factual analysis. And we knew there were some possible 
serious things under those statutes that others have cited, and 
so my response was to immediately get it down to Houston to the 
top legal officer in the company, Mr. Mark Haedicke, and make 
sure that the seriousness of the memo was reflected to upper 
management.
    Senator Dorgan. Mr. Sanders, this memo, December 6th or 8th 
memo, is directed to you. When you received that memorandum 
were you surprised?
    Mr. Sanders. In one way I was surprised, which is I had not 
directed them to write the memo.
    Senator Dorgan. I'm talking about the content. I'm not 
talking about whether you were surprised at receiving it. I'm 
talking about whether the content surprised you, because this 
memorandum suggests a company that was engaged in wholly 
deceptive marketing practices.
    Mr. Sanders. I was not surprised by the content of it 
because we had had several discussions with the traders prior 
to the memo coming out. I participated in two of them and I 
knew generally of the sophomoric nicknames, and I knew that 
there was some question about some of the trading strategies, 
yes.
    Senator Dorgan. How long had you known of names like ``Get 
Shorty,'' ``Fat Boy,'' ``Death Star''?
    Mr. Sanders. The first time we talked to the traders.
    Senator Dorgan. Which was when?
    Mr. Sanders. Which was October 3rd, 2000.
    Senator Dorgan. So, is this an activity that was going on 
inside the company without a lot of knowledge of others, or is 
it something that the company itself countenanced as a strategy 
in which they could maximize profits? The reason I ask the 
question is we've had at that table Mr. Skilling and Mr. Lay 
and they would have us believe this is a remote control 
company, that really no one is running it personally. And I'm 
trying to understand whether there was actually someone or some 
group of people, which is one of the reasons we'll call Mr. 
White. We want to know whether there were a group of people 
that understood these strategies, that, A) they were deceptive 
and, B) they were being employed.
    Mr. Sanders. As far as I could tell, the Portland office of 
Enron operated mostly on its own. The head trader did report to 
the head trader in Houston, so you had an electricity trader 
from the West that reported to other upper management in 
Houston. And I cannot say the extent to which they knew about 
these strategies, but my job was to identify them and then 
report them to my upper management when I learned of them.
    Senator Dorgan. Mr. Sanders, did you report this memorandum 
to Mr. Skilling?
    Mr. Sanders. I did not. I want to make a distinction 
between reporting the memorandum and reporting the content of 
the memorandum.
    Senator Dorgan. The content, did you share the contents of 
this memo with Mr. Skilling?
    Mr. Sanders. I did.
    Senator Dorgan. What was his response?
    Mr. Sanders. I told him in June, June 20th of 2001. He was 
preparing to travel to San Francisco to participate in a forum, 
I think called the San Francisco Forum, which many may remember 
because Mr. Skilling got hit with a pie in the face. I was 
trying to prepare him for questions that might come up in that 
forum, which was an open mike forum, and that's when I told him 
about the strategies, some of the nicknames and in general 
terms what had happened.
    Senator Dorgan. If I might take just 1 minute more, Mr. 
Hall, in your memorandum, page 3, relieving congestion, you say 
congestion was created by Enron traders in the PX day ahead and 
then the strategies used by traders involved structuring trades 
so Enron got paid the congestion charge. They created the 
congestion, then got paid a congestion charge for relieving it.
    And Death Star, you say: ``This strategy earns money by 
scheduling transmission in the opposite direction of 
congestion, but no energy is actually put onto the grid or 
taken off the grid,'' and they make money from that.
    Load Shift, you say: ``Our concern here is by knowingly 
increasing the congestion cost, Enron is effectively increasing 
the costs to all market participants in the real time market.''
    Based on what you've said with respect to these strategies, 
is it reasonable for this Committee to believe that the 
strategies by Enron would have cost California and West Coast 
consumers substantial additional electric costs?
    Mr. Hall. Mr. Chairman, with all due respect, I don't feel 
qualified to answer that question. Obviously, they must have 
had some impact, but the magnitude of it, I just, I never 
looked into that.
    Senator Dorgan. It was probably a rhetorical question. But 
let me thank you for your testimony and call on our colleague, 
the Ranking Member of the full Committee, Senator McCain.
    Senator McCain. Thank you, Senator Dorgan.
    Mr. Hall, in your memo you wrote that the practice of inc-
ing was being used by other market participants, right?
    Mr. Hall. Yes, sir.
    Senator McCain. What other ones?
    Mr. Hall. At the time that statement was based upon a 
comment of one trader who I had discussions with and he said 
that one or two of the people who had worked on the real time 
desk had left and gone to other companies. So it was based upon 
that that I felt that other people might be using that as well.
    Senator McCain. I'd like to repeat the question: What other 
companies?
    Mr. Hall. The company that I recall that was mentioned was 
Coral Trading.
    Senator McCain. In your testimony, you indicate that you 
met with the head trader at Enron to communicate your findings 
and conclusions that practices involved deception. What was the 
response?
    Mr. Hall. The response was, first of all, that he said that 
he understood Stoel Rives's advice, that he understood what I 
was saying. He disagreed with me on several facts, particularly 
with respect to Death Star. He said there were technical and 
physical things that I wasn't taking into account in my 
analysis.
    Senator McCain. Mr. Yoder, what did you do when you were 
made aware that certain strategies used by Enron appeared to 
violate ISO tariffs and maybe even violate criminal laws?
    Mr. Yoder. Well, you know, what I did was work with Steve 
to develop the memo and discuss the strategies and make sure we 
understood them as best we could. We weren't traders. We did 
not ever implement the strategies. They were in an area of the 
California ISO tariff that we normally didn't pay a lot of 
attention to because it was a FERC-approved tariff and it was a 
business that was running under legal conditions that were 
fixed. There were no contracts to negotiate. And so----
    Senator McCain. Go ahead, please.
    Mr. Yoder. And so what I did was work with Steve to go into 
that complex area and dig out as much as we could of the facts. 
He would come to me, we would discuss, and I was part of the 
preparation of the memo for giving to our litigation team that 
was already involved, that had come up to Portland and had 
meetings with us, for the purpose of getting serious legal 
analysis done for the company.
    Senator McCain. You got a memo. To any objective observer, 
even a non-expert such as myself, these strategies violated ISO 
tariffs and there was a potential violation of criminal law 
here. I think you clearly saw that. Didn't you see that they 
were in violation of ISO tariffs and potentially criminal law? 
Yes or no?
    Mr. Yoder. Well, there were arguments about the strategies, 
Senator.
    Senator McCain. Did you see a potential ``violation of 
criminal law?''
    Mr. Yoder. I saw a potential which I recognized as very 
serious and I conveyed it to the litigation team and my 
superiors at the highest level in the company.
    Senator McCain. And what was the response of your superiors 
in the company?
    Mr. Yoder. They were concerned, and I can't testify as to 
exactly what they did. I got the memo down to Mark Haedicke 
immediately and he would have to testify what he did in that 
regard.
    Senator McCain. So, there's no visible evidence of any 
action being taken. Is that correct?
    Mr. Yoder. Well, during that time the trading strategies 
were stopped. I mean, the first thing you do, even before we 
realized or had made a final--our team had not rendered a final 
legal opinion on the strategies, but out of prudence we 
suspended them, stopped them. It was always my belief that they 
had stopped.
    Senator McCain. Thank you.
    Mr. Fergus, Mr. Frizzell, either one or both of you can 
answer. Why did you write the memo to Mr. Sanders entitled 
``Status Report''? Was it requested or you thought it ought to 
be written? What was the circumstances there?
    Mr. Fergus. The memo was requested.
    Senator McCain. By Mr. Sanders?
    Mr. Fergus. Yes, it was requested by Mr. Sanders and I 
believe Mr. Gibbs.
    Senator McCain. Why did he say he wanted the memo?
    Mr. Fergus. Our job was to evaluate in the litigation that 
we were retained to give them advice on, was this all of the 
evidence? There were facts that were stated in the memo that 
some of us who had been in earlier meetings had different 
notes, different recollections, and so part of it was let's 
figure out what the facts are, what the evidence is, so we 
could give a recommendation to the client as to how they should 
approach the litigation.
    That was the purpose. We had three lawyers or four lawyers 
in the room trying to understand the trading strategies, and 
afterwards the four lawyers were trying to get it down on a 
piece of paper. We found that we just had different 
recollections, having just heard it. Part of it is because it's 
so complex.
    Senator McCain. Just from reading the memo,----
    Mr. Fergus. Yes.
    Senator McCain.--do you believe that any of the trading 
strategies that were outlined in the memo constitute violations 
of ISO tariffs or criminal statutes?
    Mr. Fergus. You're referring to the December 8th or the 
draft?
    Senator McCain. Yes, December 8th.
    Mr. Fergus. December 8th. Not being a regulatory lawyer, to 
be perfectly honest, at that time I had not read the tariff, so 
I had no opinion. I was concerned----
    Senator McCain. Didn't reading that memo cause you any 
concern that those strategies might not be really in keeping 
with corporate behavior?
    Mr. Fergus. I didn't understand that to be your question. 
My concern about the strategies that were described in that 
memo gave grave concerns about a number of different 
possibilities as to that those strategies could be violative 
of, absolutely. But my answer was----
    Senator McCain. Well, if that's true, if you had grave 
concerns, what did you do?
    Mr. Fergus. The first thing that was done is that those 
strategies were stopped. I believe that the memo came out on 
December 8th and that following Monday, by December 10th, they 
were stopped. There was a period of time in November and 
October where those of us who had just been hired were trying 
to understand what we were being told.
    But clearly, when the memo came out it was a very clear 
recollection that those strategies were suspended until we 
could reconvene in January and the decision was made again in 
January that they would stay suspended and stopped.
    Senator McCain. My time has expired. I thank the witnesses. 
Thank you, Mr. Chairman.
    Senator Dorgan. Senator McCain, thank you.
    Senator Hollings.
    The Chairman. Well, I haven't followed this case closely, 
but this chart was just put up this morning by Senator Boxer. 
Mr. Yoder, it's quite obvious that the shortages and the price 
stayed up until June the 19th, when FERC then put on the price 
caps, isn't that right? Do you disagree with the chart?
    Mr. Yoder. I'm not an economist. I don't know what----
    The Chairman. You don't have to be an economist. You've got 
20-20 eyesight. Look at this thing and see that the price is up 
all during 2001.
    Mr. Yoder. I can see the price is up on that chart.
    The Chairman. That's right, and it stayed up, and what 
brought it down, what stopped the practices, was FERC when they 
put on price caps, isn't that right?
    Mr. Yoder. I don't know. I'm not an economist.
    The Chairman. You don't see the chart?
    Mr. Yoder. I can see the two events coincided in time, 
sure.
    The Chairman. Well, maybe I can get some candor out of Mr. 
Hall. Mr. Hall, the proof of the pudding's in the eating. Now, 
we know that the practices that kept these prices going kept 
continuing until June the 19th, when FERC stepped in and put on 
price caps; isn't that correct?
    Mr. Hall. Senator, do I understand your question--I think 
you just said the practices continued until June?
    The Chairman. Yes. Everybody here at this witness table 
says, oh, they had the memorandum and their understanding was 
that they had stopped. My understanding from this chart, that 
they did not stop, because the prices stayed up, the shortages 
showed they stayed up all during 2001 after the memorandum of 
December 2000.
    So whatever continued to keep those prices up continued; 
isn't that correct?
    Mr. Hall. Senator, to the extent that you're saying that 
whatever was causing the prices to be up looked like it 
continued past December, I would agree with that statement.
    The Chairman. You would agree with it, thank you. I thought 
maybe I could get some candor out of the gentleman.
    Mr. Yoder, you didn't know it, but you signed this 
memorandum. I find Mr. Hall saying deceptive and criminal, but 
you signed ``dummied up,'' ``artificially increasing,'' and 
then ``the oldest trick in the book.'' That's what you signed 
in the memorandum in December, isn't that right? I've got the 
memorandum from Christian Yoder and Stephen Hall.
    Mr. Yoder. Yes, I signed, I had my name put on as an author 
to the memo.
    The Chairman. That's right. So you knew about all this Fat 
Boy and all of these funny things, isn't that correct?
    Mr. Yoder. We had discussed the strategies, yes.
    The Chairman. And then as the good experienced counsel that 
you are, you still wondered whether or not a crime was 
involved?
    Mr. Yoder. I knew that there was a possibility of crime and 
I was working with the litigation team that was studying it in 
depth and I kept my upper management fully apprised of the 
seriousness of the matters.
    The Chairman. Now let's get to that upper management. Who 
did you tell?
    Mr. Yoder. The Managing Director of Enron North America was 
Mark Haedicke at the time, and I sent him the memo immediately 
after Steve and Marcus delivered it to me.
    The Chairman. Who was above him?
    Mr. Yoder. Jim Derek, the General Counsel of Enron Corp.
    The Chairman. And who was above him, do we know? I'm just 
trying to get the chain.
    Mr. Yoder. Nobody was above Jim Derek.
    The Chairman. Nobody was in charge of him?
    Mr. Yoder. Well, I mean, the Board of Directors of the 
company, I guess. He was the General Counsel of Enron Corp., 
Jim Derek.
    The Chairman. The lawyers didn't institute this price-
fixing scheme of Fat Boy and shortages and all these other 
things. The lawyers didn't.
    Mr. Yoder. No.
    Senator Dorgan. You all were just investigating the thing.
    Mr. Yoder. We didn't--we were asked to get in there and try 
to understand.
    The Chairman. Find out what was going on.
    Mr. Yoder. Yes. We were an investigatory, fact-finding, 
first cut at the strategies team. That's what we were supposed 
to do.
    The Chairman. And as an investigatory team, who did you 
determine had set up this system?
    Mr. Yoder. Well, the commercial trading wing of the company 
was the wing that was doing the trading, doing the trading 
strategies, the commercial traders.
    The Chairman. The commercial traders are the ones that set 
up Fat Boy and shortages and everything else, is that it?
    Mr. Yoder. Yes, that was the team. We didn't trade energy.
    The Chairman. And what was the commercial team as you 
remember?
    Mr. Yoder. Well, in Portland there was a Managing Director 
of Trading who reported down to his superior in Houston.
    The Chairman. Who was he?
    Mr. Yoder. His name was Mr. Tim Beldin.
    The Chairman. Anybody else?
    Mr. Yoder. Well, all of the names of the--I can't recall. I 
could give you some of the names, but a list has been submitted 
to FERC of all the names of the participants in those trading 
strategies, and I would invite you to look at that list.*
    The Chairman. Will you advise the Committee and furnish it 
when you get a chance?
    Mr. Yoder. Yes. Yes, we will, of course.
    The Chairman. I appreciate it.
    Mr. Hall, did you have any other than these memoranda here? 
Did you have any emails or any other records? Is this your 
complete investigation as we know it or do you have any other 
papers that you would like to furnish the Committee, or maybe 
that you would not like to furnish the Committee?
    Mr. Hall. Mr. Senator, I'd be happy to furnish all of my 
notes that are back at my law firm.* There's a couple pouches 
of things there. However, I would add that all of my learning 
is put into this memorandum right here.
---------------------------------------------------------------------------
    * The information referred to was not available at the time this 
hearing went to press.
---------------------------------------------------------------------------
    The Chairman. Please do that for the Committee. I 
appreciate it.
    Thank you a lot.
    Senator Dorgan. Senator Hollings, thank you.
    Before I call on Senator Wyden, Mr. Sanders, you indicated 
that you advised Mr. Skilling of the contents of the 
memorandum, and I think Senator Hollings was trying to get at 
with his questions of Mr. Yoder, who's up the line here? You 
seem to suggest that the General Counsel reports to the Board 
of Directors and somehow is not involved in the line 
relationship. I suspect that the General Counsel has a 
relationship with the Board, but I suspect the General Counsel 
also has a relationship with Mr. Skilling and Mr. Lay; is that 
correct?
    [Pause.]
    Senator Dorgan. The answer is yes, right? I mean, this is 
not a virtual corporation.
    Mr. Yoder. No, the legal team within the company talks and 
advises and works with the commercial team at all levels, from 
the top to the bottom.
    Senator Dorgan. I understand.
    Mr. Sanders, the purpose of the question that we're trying 
to get an answer to is where does this strategy originate? 
These are very complicated, very sophisticated strategies by 
which people were bilked out of a lot of money, perhaps 
billions of dollars. Does that just originate at a corner bar 
someplace with some traders talking about how they might 
enhance revenue? Or is this a corporation in which those 
strategies are developed as a part of a management strategy 
about how to maximize profits in these markets? And I don't 
think you've answered that question. Could you give me your 
impression of where these strategies originated?
    Mr. Sanders. I believe they originated in Portland with the 
traders in Portland. Again, I cannot say to what extent the 
supervisors of Tim Beldin, the head trader in Houston, knew 
about these strategies. But each market, you have to 
understand, each market is different, so it really is incumbent 
upon the individual trading desk to develop strategies.
    Senator Dorgan. It seems to me it would have been very hard 
to have created these strategies without many others having 
known it.
    And I think the California witnesses will testify that 
you're wrong when you say these strategies stopped. You alerted 
somebody and they mysteriously, or predictably according to 
you, stopped. I think the California testimony will be that's 
not the case at all.
    As I turn to Senator Wyden, would you give us the evidence 
that these strategies stopped when you alerted the top level 
management of Enron? Anybody have any evidence of that?
    [No response.]
    Senator Dorgan. Hello?
    Mr. Hall. Mr. Chairman, I would echo the comments that were 
made earlier by Mr. Sanders. One objective confirmation that 
these strategies had stopped was that by January the Enron 
traders had stopped trading in the PX auction because the PX--
well, the decision was made early in January, but by January 
15th the California Power Exchange was bankrupt, and so there 
was no more strategies in that auction.
    Then with the California ISO, a commercial decision had 
also been made to withdraw from selling into that market.
    Senator Dorgan. My expectation is the California witnesses 
will contest that. Because you've all indicated you alerted 
upper management and that the strategies stopped, I would like 
you to, if you would, prepare in writing for this Committee any 
evidence that exists that you know of that these strategies 
stopped upon alerting management of the strategies.
    Let me apologize for taking the time and call on Senator 
Wyden.
    Senator Wyden. Thank you, Mr. Chairman.
    Last night, gentlemen, I got the handwritten notes that 
were prepared in conjunction with writing the December 6th 
memo. It sure looks to me as I review those handwritten notes 
that Enron was trying to keep the truth from coming out, 
finding excuses, and even encouraging the removal of the notes. 
I'm looking at one of the handwritten documents that says 
``Notes show Portland deals. Remove notes,'' exclamation point.
    Another one of the handwritten documents says ``No one can 
prove, given the complexity of our portfolio.''
    Gentlemen, any of this ring a bell? What it looks like are 
documents certainly that would have at some point gotten to 
you, Mr. Sanders, and could possibly have been prepared by you, 
Mr. Hall or Mr. Yoder. But I'd like to know if any of you are 
familiar with any of these handwritten documents.
    Mr. Sanders. I did review what I believe to be some of the 
documents you're talking about prior to my testimony. I do not 
know who wrote the notes. They certainly were not mine. I can 
say that there was no effort to conceal what was going on. My 
job as the litigation manager was to do the opposite: to find 
out what had happened, to formulate defenses to lawsuits, and 
to report it to upper management. So at least as far as I am 
concerned, there was no effort to conceal it.
    Mr. Hall. Senator, this is the first time I've heard of 
these notes.
    Mr. Yoder. If the notes you have are the same ones I saw 
late yesterday afternoon, they're not my notes and, in fact, I 
don't know who wrote them. I can't testify to anything about 
them.
    Senator Wyden. All right, let's go to the documents that I 
did get yesterday and start with Death Star. The Death Star 
document that is of special concern to the Northwest, it says 
``Sometimes we sold non-firm and didn't get to save on 
ancillary services. E.g., if the market in the Northwest is 
strong, this makes our case stronger.''
    Does this mean that Enron was selling non-firm power in the 
Pacific Northwest and claiming that it was firm power?
    Mr. Sanders. Let me answer that, Senator, because I recall 
discussions about this particular issue, and this is why I 
respectfully would say that it's just a very complicated issue. 
It is my understanding that Bonneville Power Authority did not 
sell firm power in the Northwest. They did not call their power 
firm. We were buying BPA power and selling it as firm in 
California, and at least the defense the traders gave me was 
that Bonneville Power Authority had never cut power ever and 
that non-firm BPA power was actually more firm than any other 
power that you could buy.
    So the answer was--and this just underlines the complexity 
of this--at least as far as that strategy was concerned, we had 
the arguments from the traders that that actually decreased 
prices in California by exporting into California non-firm 
power that they were calling firm.
    Senator Wyden. Now, another one of the background documents 
that were released last night that was used in preparing the 
Enron memo states: ``Analyzed the ISO tariff to determine if 
certain trading strategies violate the tariff.'' What trading 
strategies were being analyzed that were referred to in this 
document?
    Mr. Sanders. I would say all the trading strategies.
    Senator Wyden. Another document refers to ``Legal research 
on legislative history of the Bonneville Power Act.'' Why was 
Enron researching this particular matter?
    Mr. Sanders. I'm not sure the context of that. I do know 
that we had other issues with BPA that were not related to 
trading strategies in California.
    Senator Wyden. Another document, dated 10-3-2000, states: 
``PGE got hurt by high wholesale prices in California.'' Is 
that a reference to Portland General Electric, gentlemen?
    Mr. Sanders. I don't know, Senator.
    Senator Wyden. I got to tell you, folks, you just look at 
all these documents. They talk about removing notes, they talk 
about how complex everything is, and everything's hidden. Then 
you all basically say, well, look, we don't know much about it. 
It's awful hard to swallow all this.
    Let me just continue with this particular line of 
questioning and a couple of questions for you, if I might, Mr. 
Hall. The California-Oregon border trading hub is cited in the 
memo as a key location for the Death Star scheme. Are you aware 
of practices of megawatt laundering, round-tripping, or other 
real or phantom transactions that involved Oregon in the 
schemes to circumvent the California rules?
    Mr. Hall. Senator, the practices that I described in my 
memorandum, as they were described to me at that time, were not 
described as what is now being called megawatt laundering.
    Senator Wyden. What were they called at that time?
    Mr. Hall. I believe the practice that you're referring to 
is what was referred to in the memo as ``Export of California 
Power'' or possibly ``Ricochet.''
    Senator Wyden. After you wrote the memo, Mr. Hall, you went 
to work for Enron; that's correct?
    Mr. Hall. I joined Enron in June of 2001.
    Senator Wyden. At that time what did you do to notify the 
Enron management or Board about possible illegal activity that 
you've said this morning you were so concerned about?
    Mr. Hall. Senator, I had already notified Enron in-house 
counsel and talked with Enron traders about these practices 
back in December of 2000.
    Senator Wyden. And you felt that everything was so hunky-
dory at this point that you weren't going to work for anybody 
who had been involved in potentially criminal activity?
    Mr. Hall. My understanding was that these were isolated 
incidents. I had concerns because there were certain deceptive 
practices. I had brought those to the attention of in-house 
counsel and those practices had ended. In addition, I knew that 
I would be working with Christian Yoder, who is a man I know to 
be of high integrity and who shared my concerns about those 
practices.
    Senator Wyden. Mr. Sanders, after you got the Hall memo, 
I'm still not clear what you did after receiving the memo. Did 
you contact Ken Lay, for example?
    Mr. Sanders. I did not.
    Senator Wyden. Why? Why wouldn't you do that?
    Mr. Sanders. Let me back up in time----
    Senator Wyden. Did you contact Jeff Skilling?
    Mr. Sanders. Not at that time, I did not.
    Senator Wyden. Who did you contact? I mean, you all come 
and say continually that, by God, we were out there trying to 
make it clear we're not for these questionable practices, we're 
blowing the whistle, and yet I can't see any followup.
    So go ahead, Mr. Sanders. Tell us what you did to try to 
protect people on the West Coast. I mean, there is a trail of 
devastation now up and down the West Coast, and I'd like to 
know what you did to try to protect some of those people after 
you got this memo.
    Mr. Sanders. My role as a lawyer for the company was the 
litigation manager. I obviously wanted to get my hands around 
these very complex strategies to understand them so that I 
could either defend the company or cease the practices if I 
thought they needed to be stopped.
    After the first meeting in Portland on October 3rd, I had 
many discussions with Mark Haedicke, who at the time was the 
General Counsel of Enron North America. On October 31st, I had 
a meeting with David Delaney and John Lavaratto, who were, I 
believe, the brand new Chief Operating Officer and the 
President or Chairman of Enron North America, to explain to 
them what we had discovered in our first meeting in Portland.
    On November 20th, after the second meeting in Portland, I 
had a meeting with Jim Derek, who is the General Counsel at 
Enron, about the trading strategies. Mind you, the memos had 
not come out, but I'm already telling people the substance of 
my conversations with the traders and the substance of what had 
happened in these strategies.
    Then on December 15th, after the memo came out, there was a 
meeting with myself, Mark Haedicke, Jim Derek, and Robin Gibbs, 
who was the head of the defense team that had been hired and an 
excellent attorney, in Mr. Derek's office, in which we 
discussed the lawsuit and the strategies.
    Senator Wyden. Is it correct--I'd be interested, Mr. 
Sanders, and also for you, Mr. Yoder--is it correct that Jeff 
Skilling was aware of these memos?
    Mr. Sanders. I don't know that he was aware of the memo. He 
was aware of the content of the memos.
    Senator Wyden. Mr. Yoder?
    Mr. Yoder. I don't know whether Mr. Skilling saw the memo 
or not. All that I know is what Richard has said to me, that he 
talked to Jeff in June. That's all I know about that process.
    Senator Wyden. Mr. Yoder, one question for you because of 
your expertise in energy contracts: Is it correct the prices 
for contracts for energy in the Northwest went up 
astronomically as a result of what was happening to spot prices 
for energy in California?
    Mr. Yoder. Well, as an attorney that negotiates contracts, 
the commercial decisions and the commercial analysis of pricing 
and how markets work is not my area of expertise. I mean, 
that's a complicated market. There was a lot going on, and I 
negotiate boilerplate terms of master agreements. The prices 
were what they were then. But I'm not an expert on interpreting 
or understanding markets.
    Senator Wyden. But it's correct that long-term contracts 
were trading at around $30 a megawatt-hour before the 
California market went haywire and more than $200 per megawatt-
hour afterwards, isn't it?
    Mr. Yoder. I'm just simply not aware of the market analysis 
work. When I did the work and the litigation counsel got 
involved, it was my understanding that economists were at some 
point brought in to say whether these had an effect on that 
market. Those people are the people that need to explain and 
talk about that. I'm an attorney who doesn't know much about 
that.
    Senator Wyden. I think my time is up for this round. But 
here's where I'm left, gentlemen. We've got handwritten notes 
that certainly suggest to me that not only was Enron trying to 
find excuses for what went on on the West Coast of the United 
States, but that you all were actively engaged in an effort to 
cover this up. When I see things like removing notes, that's 
over the line. It's not just an abstract kind of concept. It 
says: ``Remove the notes!''
    So I will tell you that I find all of this awfully hard, 
awfully hard to believe.
    Mr. Sanders. May I respond to that?
    Senator Wyden. That would be great.
    Mr. Sanders. I do not believe that is accurate at all. When 
the litigation came up in Portland, Gary Fergus and I made a 
specific effort to remove shredders from the floor at Enron. We 
also undertook, because of the subpoena that had been issued, 
to save every scrap of paper that Enron had related to the 
Portland office. That included, in a fairly widely circulated 
story in California----
    Senator Wyden. Mr. Sanders, I'm going to hand you this 
document and I'd like to know what you'd say to people at a 
town hall meeting in my state, where we've got people who've 
been flattened by this. I mean, that's something that was 
prepared in connection with the December 6th memo. Take a look 
at that.
    Mr. Sanders. And I don't know where this memo came from, 
and I'm happy to answer. But if I could finish what I was 
saying, which is the extent to which we tried to save memos--so 
I don't know who wrote this, I don't know what the context was. 
But the reality was we saved every scrap of paper, including 
the recycling at Enron, and saved them into boxes. And it was 
widely reported when we produced those for the California 
authorities that we oversaved, to the point where we were 
saving pizza boxes and et cetera.
    Senator Wyden. You're saying no documents were destroyed? 
We had people from California who said documents had been 
destroyed.
    Mr. Sanders. To my knowledge, no documents were destroyed, 
and, in fact, we went to great lengths not to destroy them, 
including saving the recycling.
    Senator Dorgan. Mr. Sanders, let me just observe that the 
entire world knows that shredders were very busy at Enron. 
That's been widely reported.
    Mr. Sanders. Well, it has been widely reported, but if you 
go back to the facts of what was occurring in the Portland 
office where the trading was taking place, the shredders had 
been removed immediately when the subpoenas came in. Mr. Fergus 
and I personally removed them.
    Senator Dorgan. One wonders whether they were taken to 
Houston.
    Let me ask--I don't mean to make light of this, but let me 
just ask a question as I call on Senator Boxer. Do any of you 
have any knowledge of any sanctions that were employed against 
any trader that was engaged in this activity? I think to some 
extent, Mr. Sanders, you seem to say, well, this is a bunch of 
traders who got together and decided to do these things. If 
that were the case--I don't necessarily believe that was the 
case, but if that was the case and top management was alerted 
to that, including your alerting Mr. Skilling about it, do you 
have any evidence of any trader being sanctioned or losing 
their job or any action taken against any trader as a result of 
this?
    Mr. Sanders. I'm not aware of any action.
    Senator Dorgan. If action were taken, do you think you 
would be aware of it?
    Mr. Sanders. I don't know whether I would be or not.
    Senator Dorgan. If any of you have any information, please 
submit it to the Committee.
    Mr. Yoder. I don't have any information, sir.
    Senator Dorgan. OK.
    Mr. Hall. Obviously, I was outside counsel, but I did 
observe at that time that the head trader for the real-time 
desk was transferred to Houston.
    Senator Dorgan. Transferred to a warmer climate.
    The reason I ask this question is I think it speaks 
volumes, if, in fact, you create a memorandum here that talks 
about pretty widespread deception and you alert Mr. Skilling 
and top management and you're not aware of anyone essentially 
losing their job because of it. I merely ask the question.
    Senator Boxer.
    Senator Boxer. Thank you.
    I'm going to pick up on the issue of this memo. I just want 
to appeal to you gentlemen. You are not here as lawyers for 
Enron. You are here to help the people of the United States of 
America. This is serious stuff. We need you to help us, please. 
This is--you could say what you want here. You've been given 
that authority to do that, and I'm just telling you now as 
someone who's married to a lawyer, my son's a lawyer, my 
father's a lawyer, I like lawyers. Please understand your role 
here today. It's not to defend anybody; it's to help us. And 
you could really help us here if you think back.
    So I'm going to help you do that. We're going to give you 
the front page of this memo that Senator Wyden had shown you. 
You said you didn't know anything. You'll see four of you 
except for Mr. Frizzell, four of you were at this particular 
meeting you said you didn't remember. I'm going to give this to 
my colleague to follow along here. This is the document. Could 
you give it to Senator Dorgan, please?
    Now, you'll see your names are at the top. Maybe it will 
jog your memories. Mike Day was there, Mike Smith, Jeff 
Dosavitch, Paul Kaufman, Richard Sanders, Christian Yoder, 
Steve Hall, and Gary--they said the wrong names--Fergus. Now, 
obviously the person wrote ``Ferguson,'' so you didn't write 
that memo. I sort of feel like I'm a detective here.
    Now, you see this handwriting. Does anyone at all recollect 
this meeting you were at?
    Mr. Yoder. Yes, this was an October 3rd meeting. This was 
when Richard, the litigation team, including outside counsel, 
came to Portland and we had an all-day meeting to go over the 
trading strategies, and our head trader came to that meeting 
and drew on the board and talked to us about the strategies.
    Senator Boxer. Good. OK, good. Thank you.
    Mr. Sanders, you still don't remember this meeting?
    Mr. Sanders. Oh, no, I remember the meeting.
    Senator Boxer. You remember. OK, then let me get to this. 
It says ``FERC docs'' right there on that front page, ``I'll do 
this.'' Who do you think may have written that, ``FERC docs, 
I'll do this''?
    Mr. Sanders. I believe that these notes are Mary Hanes' 
notes.
    Senator Boxer. Mary Hanes, Mary Hanes.
    Mr. Sanders. Hanes.
    Senator Boxer. Who was Mary Hanes?
    Mr. Sanders. She was a regulatory lawyer who was in the 
first meeting that we had with the traders.
    Senator Boxer. This is very helpful. So Mary Hanes, you 
believe, wrote this memo?
    Mr. Sanders. I believe so.
    Senator Boxer. And it reflects her real-time notes * of 
what occurred. Now, one of the things she says is, ``Look like 
we're forthcoming, show the Power Ex/Williams hogs at the 
trough.''
---------------------------------------------------------------------------
    * The notes have been retained in the Subcommittee files.
---------------------------------------------------------------------------
    Who's ``Power Ex/Williams,'' Mr. Sanders? Do you know who 
that is?
    Mr. Sanders. Powerex is the state government in Canada.
    Senator Boxer. Sorry?
    Mr. Sanders. It's the Vancouver power, it's the trading 
arm.
    Senator Boxer. So ``hogs at the trough,'' ``hogs at the 
trough,'' what does that refer to?
    Mr. Sanders. I don't know.
    Senator Boxer. It says ``Look like we're forthcoming, show 
the Power Ex/Williams hogs at the trough.'' What do you think 
she meant? Can someone hazard a guess as to what she meant by 
that? Thank you, Mr. Yoder.
    Mr. Yoder. There was always a perception--there are many 
players in the market. Powerex is a big British Columbia 
government utility and many of the allegations that were thrown 
around involved mentioning their name. I think maybe that's 
what Mary is talking about. I don't know.
    Senator Boxer. But what does she mean, ``Look like we're 
forthcoming''?
    Mr. Yoder. I don't know.
    Senator Boxer. You don't know?
    Mr. Sanders. Senator, in looking at this----
    Senator Boxer. Wait a minute, wait a minute.
    You don't know?
    Mr. Yoder. Well, I didn't write those words.
    Senator Boxer. She says ``Look like we're forthcoming.'' 
She's taking contemporaneous notes. Let's move on.
    The next page says ``Schemes,'' ``Schemes.'' That sounds to 
me like you sat in a meeting and there were schemes being 
discussed. Would you agree that that's what you would take from 
this? Mr. Hall, do you remember this meeting?
    Mr. Hall. Yes, I do, I remember the meeting. I remember the 
trading strategies being described.
    Senator Boxer. Did you get upset when somebody may have 
said ``Look like we're forthcoming'' or that might have been 
discussed or the word ``schemes'' was used? Did it start to 
dawn on you that something was rotten here?
    Mr. Hall. Senator, I don't remember either of those things.
    Senator Boxer. You don't remember, OK. How about this. 
``Paid us for service we didn't provide.'' She was a lawyer, 
right?
    Mr. Sanders. Correct.
    Senator Boxer. And she's sitting there taking notes, ``Paid 
us for service we didn't provide, don't show up. Counterflow, 
you know you'll get paid congestion, no penalties if you don't 
show up. We weren't causing the congestion, say that. No one 
can prove, given the complexity of our portfolio.''
    This is a lawyer writing these contemporaneous notes.
    Mr. Hall. That sounds like a description of the strategies. 
That sounds like what's expressed in this memorandum.
    Senator Boxer. ``No emails except to Richard''--that must 
be you, Mr. Sanders--``at his discretion.'' Why would that be 
written? ``No emails except to Richard at his discretion''?
    Mr. Sanders. I remember giving the instructions that I 
didn't want legal analysis to be written other than with my 
instruction.
    Senator Boxer. Why would that be, you wouldn't want emails?
    Mr. Sanders. I wanted to control the flow of emails. I 
thought it was a prudent matter in light of the litigation risk 
we had.
    Senator Boxer. Because?
    Mr. Sanders. Because as a litigator I had seen many 
instances where memos that you would not have thought would be 
produced were in fact produced in litigation.
    Senator Boxer. So you ordered no emails except at your 
direction. So this sounded like this was a meeting that you had 
a big say in, is it not?
    Mr. Sanders. A big?
    Senator Boxer. Say in, this meeting?
    Mr. Sanders. When you're talking about litigation strategy, 
I was the litigation manager at Enron North America. So, yes.
    Senator Boxer. How about this line, ``We made so much 
money''? I thought that was interesting.
    How about this. What does this mean, Mr. Yoder, ``How long 
can we not disclose bookouts''? What does that mean?
    Mr. Yoder. I don't know.
    Senator Boxer. What does that mean, Mr. Sanders, ``How long 
can we not disclose bookouts''? What's a bookout?
    Mr. Sanders. I don't know that these are the same meetings 
that we attended, or if these notes that they're talking about 
are even in the same meetings.
    Senator Boxer. Well, they're in the same handwriting.
    Mr. Sanders. Well, it talks about meeting with Jim, Bob, 
and Jim, and ``fight with exceptions,'' which is not anything 
we were talking about.
    Senator Boxer. OK. Well, what is this? What is a bookout?
    Mr. Sanders. A bookout is when you had a trading partner 
who, if you were selling him power and he was selling you 
power, you would just agree to a financial settlement, which 
they called a bookout, to even out the two trades.
    Senator Boxer. And why wouldn't you want to disclose it?
    Mr. Sanders. I don't know the context of this. Certainly I 
can say that we weren't talking about bookouts in our meetings 
and not disclosing bookouts. So this must be another meeting.
    Senator Boxer. Well, we will verify if it's another 
meeting. It looks like the same handwriting, so it looks like 
this other lawyer was at the same.
    What's the benefit of not disclosing a bookout, Mr. Hall? 
Do you know? What do you know, Mr. Hall?
    Mr. Hall. I'm reluctant to speculate.
    Senator Boxer. Well, could you try? Just speculate. What do 
you think it means? But you can speculate. Help us. What does 
it mean, ``Don't disclose bookouts''? ``How long can we not 
disclose bookouts''?
    Mr. Hall. One regulatory question as it relates to power 
trading is physical transactions versus those that are netted 
out. There's lots of transactions back and forth and when power 
is scheduled to actually flow physically it's found to be 
efficient for companies to say, you're delivering 50 megawatts 
to me, I'm delivering 50 megawatts to you, the price difference 
is $10, send me $10 and we won't each flow the energy.
    So there were questions that came up over time about 
whether, do you include everything that was ever transacted or 
just the things that went physical. I think that's the context, 
but I'm speculating because you asked me to.
    Senator Boxer. Well, my question is what's the benefit? But 
I'll ask David Freeman that. He'll know the answer.
    Then we see the ``remove notes,'' ``remove notes.'' ``Put 
burden whether PUC has the jurisdiction, say no. Put burden on 
the PUC to go to superior court.'' ``Put burden on the PUC to 
go to superior court.'' ``PUC,'' that's the Public Utilities 
Commission, so it sounds like you wanted to push this all to 
court.
    I know that my time--can I do a second round later or 
should I finish up my questions?
    Senator Dorgan. Senator Boxer, I think we're going to ask 
the California witnesses to come next, and so if you'd just 
take another minute and then we will have the California 
witnesses.
    Senator Boxer. All right. Well, can we hold the record 
open?
    Senator Dorgan. Yes.
    Senator Boxer. Because I feel that we have not covered as 
much territory as we need to.
    Mr. Sanders, did you brief--this is a repeated question, 
but I want the answer on the record. Did you brief any top 
executives at Enron, such as Jeffrey Skilling or Ken Lay, about 
the information in the memos? If you did, when did you brief 
them?
    Mr. Sanders. I never talked to Ken Lay about the substance 
of the memos. I did talk to Jeff Skilling, as I said, prior to 
his trip to San Francisco, which I believe my meeting with him 
was on June 20th. It is reflected in my calendar.
    Senator Boxer. And you briefed him on the schemes?
    Mr. Sanders. We talked generally about many, many things 
that were going on in California.
    Senator Boxer. I'm asking you, did you brief him on the 
schemes? Did you translate to him your concern that these were 
illegal possibly and that you had ordered them stopped and 
that, according to the memos, it could be running afoul of 
California law? Did you brief him to that extent?
    Mr. Sanders. My recollection of talking to Mr. Skilling was 
I certainly told him the sophomoric nicknames that the traders 
had attached to the strategies, I certainly told him of at 
least three of the strategies that were discussed in the memo.
    Senator Boxer. What was his response?
    Mr. Sanders. I know he was surprised by the nicknames, 
which led me to believe that he had not heard the nicknames 
before, which surprised me.
    Senator Boxer. What about the practices?
    Mr. Sanders. The practices, I don't think I have any 
recollection of his reaction one way or another.
    Senator Boxer. OK. Well, let me tell you something. On June 
22nd, two days after you briefed him and expressed your concern 
about these practices, he was asked who was to blame for what 
was going on. His answer was: ``While the Governor is not to 
blame, neither is Enron or other producers.'' The ones who are 
at fault in his opinion he says are the members of the State 
Public Utilities Commission.
    I would like to submit for the record what he said and put 
that in the record, Mr. Chairman.
    Senator Dorgan. Without objection.
    [The material referred to follows:]

         Energy Executive Says Davis Isn't to Blame in Crisis 
              Enron CEO Also Is Critical of Bush Policies
                  San Jose Mercury News, June 22, 2001
                    By: Chris O'Brien, Mercury News
    Despite being smacked in the face with a pie from a protester, the 
chief executive of a Texas energy company with close ties to President 
Bush absolved Gov. Gray Davis of responsibility for the state's power 
woes in a speech Thursday.
    And, in another unexpected twist, Enron CEO Jeffrey Skilling 
criticized several major points of the Bush administration's energy 
plan. Skilling's remarks were surprising because Enron and its 
chairman, Ken Lay, have been the largest donors to Bush during his 
political career. His conciliatory remarks toward Davis come just four 
days before generators and state officials begin to negotiate over the 
$8.9 billion that Davis claims the energy companies have overcharged 
the state.
    Skilling also used his hour-long address to the Commonwealth Club 
in downtown San Francisco to deflect charges that Enron has gouged 
consumers or manipulated markets. He also repeated the company's 
assertions that the state's deregulation plan was flawed from the 
start.
    ``It is not the governor's fault,'' Skilling said. ``He was dealt a 
bad hand. But it is also not the generators' or the power marketers' 
fault.''
    Before Skilling could utter a word, he received a rude introduction 
to the city's history of protest and pranksterism. A woman who called 
herself ``Agent Chocolate'' rushed forward and threw a pie of 
unidentified flavor in Skilling's face.
    Police immediately escorted her out. Police later identified the 
woman as Francine Cavanaugh of Oakland and charged her with battery. 
Marla Ruzicka, a fundraiser for Global Exchange, was cited by police 
and asked to leave after interrupting Skilling later.
    ``I'd like to recognize the emotions around this issue,'' Skilling 
said at the start of his speech. ``I think you'll still be angry when 
I'm finished.''
    Skilling said several times that, while Davis could have handled 
the emergency better, overall the governor shouldn't be blamed for a 
bad deregulation scheme.
    ``I am being genuine when I say I feel for the man,'' Skilling 
said. ``He stepped into something not of his making.''
    Davis has made the Texas energy companies the main target of his 
charges that generators have manipulated the energy market.
    Skilling went on to disagree with Bush's call for building more 
nuclear power plants and providing incentives for more exploration and 
drilling of fossil fuels to increase supplies.
    Skilling said nuclear power is too expensive and generates waste 
that's dangerous to store. And he also said he doesn't believe there is 
a shortage of natural gas.
    In addition, Skilling said he strongly differed with Vice President 
Dick Cheney, a former energy executive, who said recently that 
conservation couldn't help Californians. He applauded Californians for 
reducing their consumption.
    ``That's simply unprecedented in markets in developed countries,'' 
he said.

    Senator Boxer. So two days after Mr. Skilling was told 
about these outrageous schemes, he goes and blames the state 
PUC in the newspaper.
    I have to say, Mr. Chairman, that I am very sorry that we 
can't have another round of questioning. First of all, there 
was a meeting two months before the memo was written. Now, Mr. 
Sanders, you knew about these practices at that meeting. They 
were described and discussed. We have the contemporaneous 
notes. You were at the meeting. It took you--you said in 
December you put a stop to it, but you don't really know--we 
don't really know who you told to stop. You didn't go to the 
top of the company, so I don't really get it.
    If I was in your position and I found out these schemes and 
these scams that you discussed, I would be excited about 
putting a call through to Mr. Lay and saying: I got to tell you 
as your lawyer what I just learned. But you waited until 
December to put a stop to it and yet you can't--none of you can 
prove that it ever stopped.
    I read these memos, Mr. Hall. I'm glad you wrote those 
memos, but I didn't get a sense of outrage from you in those 
memos. I didn't see clear language, I recommend the company 
stop this. You didn't really say that, did you? You started 
off, ``This practice is''--what is it--``the oldest trick in 
the book.'' Inc-ing, I think, was the oldest trick in the book.
    But you never once said in the memo--and Mr. Yoder, you 
joined Mr. Hall--stop these practices. And I'm concerned about 
that. Why didn't you tell them flat out, stop these practices, 
Mr. Hall?
    Mr. Hall. Senator, we did tell them to stop these 
practices.
    Senator Boxer. In the memo?
    Mr. Hall. The memo was one part of it. They were 
supplemented by face-to-face meetings with myself and with 
Marcus Wood.
    Senator Boxer. Why didn't you put in the memo how you felt?
    Mr. Hall. The purpose of this memo was to describe the 
strategies and they were extraordinarily complex, although----
    Senator Boxer. Well, they weren't complex enough so that 
you couldn't tell what state laws might have been broken. And 
by the way, why didn't you touch on--could you give me the 
federal laws--some of those federal laws that could have been 
broken?
    Did they ever ask you to give you a memo about what federal 
laws might have been broken?
    Mr. Hall. Senator, I'm not a criminal lawyer.
    Senator Boxer. OK, so none of these came to your----
    Mr. Hall. Senator, it wasn't necessary for me to go to that 
level. Once I understood there were deceptive practices there, 
I advised in-house counsel, and I understood the practices to 
stop.
    Senator Boxer. Well, I have to conclude. But it seems to me 
stunning that people of your caliber wouldn't in the memo be 
more direct. You said you stopped it afterwards. We want proof, 
I would love some proof of that. I'd like to know, and I would 
like the record to remain open, I want to know who each of you 
talked to about these shocking schemes that were called 
``Schemes'' at the meeting you sat in on--at least that's what 
our notes show. We'll have to get to it. Those are at the 
Attorney General in California.
    And you didn't in plain English in that memo say, until we 
talk I recommend you stop this immediately. I'm shocked after 
October, that meeting, none of you said--and I'd like to talk 
to the woman--say her name again?
    Mr. Sanders. Mary Hanes.
    Senator Boxer. Mary Hanes, who wrote that, who wrote things 
in there that I view with great alarm, with great alarm.
    Is there anything any of you want to add? I'm going to stop 
here.
    Mr. Sanders. I would like to add a couple things.
    Senator Boxer. Yes, please, if you would.
    Mr. Sanders. I appreciate your advice to help you 
understand what went on at the time. I know you say that we're 
not under attack. I've heard a couple things that make it sound 
like we were trying to hide what was going on. The truth is 
this is an extraordinarily complex matter. In fact, I described 
it early on and have described it many times, it was like 
learning calculus in French.
    We tried to understand what was going on. There were 
strategies, including one that I talked to some of the 
Committee lawyers about, that we put a stop to immediately 
because it was obvious that it was something that should not go 
on. The other strategies in talking to the traders there was an 
incredible amount of complexity and advocacy by the traders as 
to why it was good for California, why it didn't increase 
prices, and I think----
    Senator Boxer. Well, none of that came out at that meeting. 
I didn't see one word that said in these memos this is good for 
California, make that argument. I saw things like ``We made so 
much money,'' ``No one can prove, given the complexity of our 
portfolio.''
    So Mr. Sanders, I really, I am distressed that you're----
    Mr. Sanders. Well, I'm trying to explain to you what 
occurred.
    Senator Boxer. Well, I don't buy it; how's that? I don't 
buy it.
    Mr. Sanders. Well, I can't speak for what these memos, the 
context of these memos. But, in my notes, there was nothing 
about how much money we made in California. There was some 
notation as to whether it was good or not for California.
    Senator Boxer. Well, I'd like to see your notes of this 
meeting.
    Mr. Sanders. I'd be happy to provide them.*
---------------------------------------------------------------------------
    * The information referred to was not available at the time this 
hearing went to press.
---------------------------------------------------------------------------
    Senator Boxer. Thank you. I would appreciate it, because 
none of it, none of it, none of what you're saying in any way, 
Mr. Sanders, jibes with the reality, the fact you said it 
stopped and yet our prices went to the sky; the fact you said, 
oh, this is complex, as an excuse, that was used as a reason. 
No one can prove because of the complexity. It sounds like 
you're following her directions here.
    Mr. Sanders. No, not at all, Senator, not at all. It's to 
walk into an atmosphere where you're trying to learn things. As 
Mr. Fergus and any lawyer who was involved in the process will 
tell you, it was extraordinarily complex, and to try to get 
your arms around it I think was a difficult task.
    But having said that, shortly after the October 3rd 
meeting, I informed many people at Enron as to what I learned. 
So it wasn't a process of trying to hide it, trying to deceive 
anybody.
    Senator Boxer. I'd like a list of who you talked to and who 
you told. And I just have to say I'm very disappointed in your 
responses. I'm concerned, and the facts just don't, just don't 
equate to the things that you're saying.
    The last point I'll make, Mr. Chairman. When somebody says 
this is so complicated, watch out and hold onto your wallet. 
Nothing is that complicated. These were scams. Mr. Hall figured 
it out, he put it in writing. I can understand it. And I'll 
tell you something: You didn't do enough. It's my opinion. It's 
a matter of we differ on the point. That's all.
    You hurt our people, Mr. Sanders, by not stopping it, 
really stopping it right in that October. When somebody says 
hide behind the complexity, tear up the notes, no emails, and 
all that--I don't see how you helped us. We were suffering. Our 
old people were afraid that they couldn't get air conditioning 
or heating. It's not a matter of sitting in a nice suit in a 
nice meeting. It's a matter of what was happening to our 
people. You didn't help us and I'm really sorry. That's all I 
can say.
    Senator Dorgan. The time is expired.
    Mr. Sanders, you in a statement to Senator Boxer said that 
those that were ``clearly wrong'' were stopped immediately. 
Would you provide for the Committee a description of which of 
those practices were ``clearly wrong''?
    Mr. Sanders. It's not a practice that is reflected in the 
memos.
    Senator Dorgan. That's right, but I would ask that you 
describe those practices that were stopped immediately for this 
Committee following this hearing.
    Senator Wyden wishes to make one additional question, and 
then we will have the California witnesses.
    Senator Wyden. It's very straightforward, Mr. Sanders. You 
admitted in your questioning earlier that you were selling non-
firm Bonneville power as firm. Now, that just strikes everybody 
in my part of the world as plain old garden variety fraud. Now, 
I think what you are saying is, well, everybody in the 
neighborhood is doing it and that's kind of why it happened, 
and it's complicated.
    But why don't you just, in something resembling English, 
explain to people in my region how you can sell non-firm 
Bonneville power as firm power?
    Mr. Sanders. Let me take the questions one by one.
    Senator Wyden. No, there's only one question. How can you 
justify selling non-firm BPA power as firm?
    Mr. Sanders. Because it was so reliable that it was never 
going to be cut, because BPA, at least as I was informed, has 
never cut power to anyone that they have sold to.
    Senator Wyden. Well, I guess anybody who would look at what 
was happening in that period of time, and the risk that this 
would subject people to in the Northwest, would have been a 
little bit more careful, rather than just fliply saying, 
``well, gosh, it's not going to happen.''
    Mr. Sanders. I was not being flippant about it. I was 
trying to understand it, and I was illustrating that that was 
the complexity of the market.
    Senator Wyden. It's misrepresentation, Mr. Sanders. How is 
it anything else if you've got non-firm power and you're 
selling it as firm? Why wouldn't you tell people, well, gosh, 
we don't think it's going to happen, and be truthful with 
people? Why wouldn't you have been truthful with the people of 
the Pacific Northwest?
    Mr. Sanders. Senator Boxer is, I think, exactly right that 
we're here to assist you in understanding these things. I'm not 
here to advocate that that was correct or incorrect. The 
arguments that I heard from the traders, the people who I was 
talking to, was that the California Independent System Operator 
knew about it, that everybody knew about it. And when you talk 
about fraud--put my lawyer hat on for a second--there has to be 
some sort of reliance on representations, and if the ISO knows 
that you're doing it and is condoning you doing it, then that 
isn't necessarily fraud.
    I'm not here to provide a defense to it----
    Senator Dorgan. Well, Mr. Sanders, we will have California 
witnesses be able to respond to that in just a moment. Might I 
just make one additional point. It seems to me that the last 
point you and I engaged in just now suggested there were more 
demonstrably abusive practices going on that were not a part of 
Mr. Hall's memo that you stopped immediately. Is that the case?
    Mr. Sanders. There was one.
    Senator Dorgan. One?
    Mr. Sanders. That I know of, that I stopped personally.
    Senator Dorgan. And you stopped that immediately? What was 
that?
    Mr. Sanders. There was a trader in Portland who was 
scheduling megawatt sales in fractions, in increments. So he 
would schedule a sale of 22.49 megawatts. And when the power 
flowed, the ISO or whoever the authority was would round down 
in terms of delivery of the product, so they would only require 
delivery of 22, but they would round up for purposes of paying 
us.
    So the net effect was we were getting paid for 23 megawatts 
when only 22 flowed. That's the example. And the minute I heard 
that, I said, not only do you have to stop that, but you have 
to send the money back immediately. And I remember it 
specifically because they argued with me that if we send the 
money back they'll figure out what we did. And my response was: 
I don't care; send it back anyway.
    Senator Wyden. How much money was sent back, Mr. Sanders?
    Mr. Sanders. I believe it was $15,000. That's what I have 
in my notes as to what was----
    Senator Wyden. How long did this questionable practice go 
on for, in your opinion?
    Mr. Sanders. My notes reflect that it was only done twice. 
But I mean--and this goes to sort of trying to get our arms 
around it--there were clearly--that strategy, it wasn't 
complex, it wasn't anything other than dead wrong, and we told 
them that they had to stop doing it and send the money back.
    Senator Dorgan. Let me thank this panel. I note again you 
came here voluntarily. Mr. Hall and Mr. Yoder, without your 
memorandum, we would not have the road map with respect to 
these deceptions. I think that the memorandum is helpful to us 
to try to understand what is happening here.
    I know it is judgmental on my part, but having sat through 
many hours of hearings, I must say, Senator Boxer's comment 
rings true. One would think with what was happening here 
someone would just stand up and say: What in the hell is 
happening? This is grand theft. We cannot do this. And yet 
there was not that kind of outrage.
    But having said all of that, I believe that the memorandum 
represents a road map that is helpful to us and, Mr. Hall and 
Mr. Yoder, I'm pleased that you wrote the memorandum and that 
we have the advantage of being able to follow it and understand 
its consequences.
    Thank you all for coming to Washington, D.C., and appearing 
before this Committee. As I excuse you, I ask the California 
witnesses to come forward.
    Our next panel will be a panel comprised of Ms. Loretta 
Lynch, President of the California Public Utilities Commission; 
Senator Joseph Dunn of the State Senate in Sacramento, 
California; Mr. S. David Freeman, Chairman of the California 
Power Authority; and Dr. Frank Wolak, Professor of Economics at 
Stanford University.
    We ask that the room be cleared as quickly as possible and 
the witnesses on the next panel will please take their seats at 
the witness table.
    [Pause.]
    Senator Dorgan. Please clear the room, if we can, as 
quickly as possible.
    Let me thank the next panel of witnesses for being here. We 
have heard from a number of you before. Let me call first on 
Ms. Loretta Lynch, President of the California Public Utilities 
Commission. Ms. Lynch, you have had the benefit of hearing from 
our previous panel of witnesses, and I hope that you will 
consider that benefit in the testimony that you are about to 
give.

  STATEMENT OF LORETTA M. LYNCH, PRESIDENT, CALIFORNIA PUBLIC 
                      UTILITIES COMMISSION

    Ms. Lynch. Thank you, Mr. Chairman and Senators. I have 
submitted written testimony as well as charts and, while I want 
to refer to some charts, I believe you all have copies of that. 
I think I am going to let the written testimony speak for 
itself largely and actually address myself to what I have just 
heard.
    Certainly with the publication of the Enron memos we can 
all now not hide from a basic truth: The California energy 
crisis has never been about supply or demand or any other set 
of economic fundamentals. It has been about the complete lack 
of appropriate enforcement and lax or nonexistent federal 
regulation.
    The Enron memos describe only some of the means by which 
California was plundered. We now know that the regime of so-
called market-based rates approved by FERC simply has been a 
way of permitting sellers to avoid just and reasonable 
requirements of the Federal Power Act. The Enron memos are a 
catalogue of the misrepresentations that may be used to defeat 
the just and reasonable requirement. They misrepresented load, 
they misrepresented power plant deliveries, they misrepresented 
power destinations, they misrepresented transmission line 
loadings. We now know they misrepresented the amount of power 
they got paid for. We now know that they misrepresented non-
firm power as firm power, although the people who sold them 
that power did not engage in such misrepresentations.
    The sellers protest that they are merely following the 
rules, although the panel before us admits that they were not. 
The Enron memos demonstrate that the FERC-enforced ISO tariffs 
were broken, even as loosely as those tariffs were written, and 
that the scofflaws were pursuing trading strategies designed to 
defeat the just and reasonable standard as a matter of 
corporate policy. Laws were broken and laws were bent.
    My first few slides demonstrate the laws that I believe 
were broken.
    If you go to slides 1 to 4, you will see Enron's unlawful 
behavior.
    I believe that Enron's unlawful behavior consisted of fraud 
and misrepresentation, as outlined on slide 1; collusion and 
conspiracy, as outlined on slide 2; and FERC and ISO 
violations. Get Shorty is admitted by Enron to be unlawful 
under the FERC rules. Gaming, taking unfair advantage of ISO 
and PX tariff rules, violate the ISO market monitoring and 
information protocols, as I describe there. The anomalous 
market behavior of what are unusual trades and transactions in 
pricing and bidding patterns that are inconsistent with 
prevailing market supply conditions also violate the ISO rules. 
And I believe that these strategies and practices also are 
potential violations of the California Public Utilities Code, 
as I have listed.
    But even more than that, Enron's behavior demonstrates an 
intent to manipulate and increase prices and costs. And if they 
intended and did so with other companies, that may well be 
sufficient for conspiracy and beyond. I am going to actually 
leave it to Senator Dunn to talk about the criminal 
implications of that.
    I would note, however, that all of the panelists said, 
well, some of these strategies ended. Well, of course they did. 
On December 8th the ISO petitioned the FERC on an emergency 
basis to eliminate California's price caps and elimination 
occurred on December 8th. So no longer did they need to 
manipulate strategies through ricocheting or parking power out 
of state because the FERC was letting them charge any price 
they wanted.
    They also very carefully stated that the strategies were no 
longer occurring in certain markets. Of course they were not, 
because those markets had been destroyed by bankruptcy. The 
Power Exchange went bankrupt in December and thereafter power 
was not traded on the Power Exchange between at some point in 
December and January. So, at that point, these strategies, the 
particularized strategies mentioned in the December memos, may 
not have been used, or they may not have been used to increase 
price, because after December 8th they could charge whatever 
price they wanted.
    That does not mean that they did not use similar strategies 
to make sure that they could withhold supply or they could game 
the market to make sure that they got the kinds of laws in 
California they wanted.
    I would note I believe that Mr. Sanders said that he 
informed the Enron General Counsel on November 20th of some of 
these strategies and his concerns about the strategies. If you 
will go to slides 6 and 7, I have just pulled representative 
samplings of what Enron told the FERC on November 22nd and 
December 4th. The General Counsel knew, according to Mr. 
Sanders, about these activities on November 20th. On November 
22nd and December 4th, they filed these statements at the FERC: 
``At all times Enron complied with the market rules in effect. 
In the current California market, market participants are 
unable to explain or predict the incidence or severity of 
system congestion. Enron's rates are consistent with the market 
rules established under the ISO and the PX tariffs. The rates 
charged by Enron this summer in California and to our knowledge 
all other sellers are fully permissible and consistent with the 
ISO's and PX's market rules.''
    They knew those statements were not true when they filed 
them at FERC. FERC relied upon Enron's statements and other 
sellers' statements in the November 22nd and December 4th 
filings to file their order on December 15th which completely 
obliterated any semblance of rationality in California's 
market. By the way, California has not yet been able to 
challenge the December 15, 2000, order in any federal court 
because of administrative manipulations by the FERC to keep us 
at the administrative level and deny us a fair judicial 
hearing.
    I would note on slides 8 and 9 specifically how FERC has 
denied us that hearing by manipulating their administrative 
process.
    I also would note at this time California had issued 
subpoenas to all the sellers and, in November of 2000, I 
specifically went to FERC to ask for help to enforce the 
subpoenas. To this date, FERC has not responded to our requests 
and our motions to compel the documents we requested in 
September of 2000.
    But I would like to just turn to one element of my 
testimony because I think it encapsulates in fact the market 
power that Enron had. I note in my testimony about a meeting 
that occurred in Los Angeles on January 13th of 2001. This was 
after the California PUC had increased rates on an emergency 
basis, a multi-billion dollar rate increase. Members of the 
Clinton Administration and all the sellers' representatives, as 
well as California elected leaders and California energy 
officials, gathered in Los Angeles to talk about how we were 
going to keep the lights on.
    At that meeting Mr. Lay stated, and my contemporaneous 
notes quote him saying: ``If there is not a plan that is 
resolved this weekend, the supplies will dry up. You saw that 
last Thursday.'' And, in fact, that last Thursday California 
had experienced a Stage 2 Emergency.
    Keith Bailey, CEO of Williams, followed. Quoting from my 
notes: ``If we do not have a deal/public statement re the 
law''--meaning if California does not agree to change its law 
to pay any price from the sellers.
    Lay later in that meeting pressed again for legislative 
changes and he stated and my notes quote: ``It gets more and 
more difficult every day starting Monday morning until the 
comprehensive solution happens and is shown.'' And, in fact, 
starting Tuesday morning California began to experience 
blackouts. On Wednesday, the Governor called a state of 
emergency, a bill was introduced in the legislature and passed 
and signed in 48 hours to have the state step in and buy power 
at any price that the generators and sellers were demanding. 
And only then did the California January blackouts stop.
    I would just refer you to chart 13 in my presentation, 
which shows the blue are Stage 2 Emergencies. That is every day 
before January 16th. And the red are Stage 3 Emergencies. That 
is every day after January 16th except for, of course, those 
two yellow days when the law was being considered in California 
and California was blacked out. These sellers, especially 
Enron, knew what they were doing. They knew what they were 
doing when they filed at FERC, and FERC has ignored our pleas 
for 18 months, actually 20 months now, will not let us go to 
court, and, in the mean time, happily continues to grant 
market-based power authority to seller after seller. Charts 14 
and 15 show the 48 sellers who have been granted market-based 
authority since the December Enron memos were written.
    I would ask Congress to make FERC do its job. Keep the 
price caps and rational price controls that are on California's 
market until they can get to the bottom of this, and make sure 
that FERC allows the State of California to have the documents 
it obtains in real time so that we can also go after them.
    Thank you.
    [The prepared statement and slide presentation of Ms. Lynch 
follow:]

          Prepared Statement of Loretta M. Lynch, President, 
                 California Public Utilities Commission
    Mr. Chairman, Senators, thank you for the opportunity to discuss 
the Enron memos and what must be done to stop the further plundering of 
the California economy. Thirteen months ago I testified before Mr. 
Burton's House Committee on Government Reform in April 2001. I said at 
that time in my prepared testimony:

        FERC's failure to enforce the law--to require that wholesale 
        electric rates be just and reasonable--has created an untenable 
        situation. California faces an unbounded wholesale price risk 
        and a dysfunctional market, characterized by pervasive market 
        power of the sellers to demand and receive unconscionable 
        prices and profits. Under these circumstances, no one--not the 
        utilities, not the banks, not the state, not the ratepayers--
        will accept and fund an unlimited risk. California is literally 
        being plundered, with the full knowledge and consent of the 
        FERC.

    It took FERC another two months to impose west-wide market controls 
and returned to California to a semblance of normalcy with its June 19, 
2001 order, an order that FERC announced will expire in just over four 
months on September 30, 2002. Senators, we are all at the beginning of 
understanding what really happened in California. You cannot permit 
FERC to let these basic consumer protections expire until a 
comprehensive scheme of enforcement of the just and reasonable 
electricity pricing requirements has not only been established but has 
also been proven to work.
    With the publication of the Enron memos, none of us can hide from a 
basic truth: the California energy crisis has never been about supply 
or demand or any other set of economic fundamentals. It has been about 
a complete lack of appropriate enforcement, and lax or nonexistent 
federal regulation. The Enron memos describe some of the means by which 
California was plundered. It is now past time to assess how devastating 
FERC's failure to enforce the law has been to California's economy and 
to California's families.
    We now know that the regime of so-called ``market-based rates'' 
approved by FERC has been simply a way of permitting sellers to avoid 
the just and reasonable price requirements of the Federal Power Act. By 
refusing to state their prices in advance through a public filing at 
FERC, sellers are placed in a position to commit deception or fraud. 
The Enron memos are a catalog of the misrepresentations that may be 
used to defeat the just and reasonable legal requirement--misrepresent 
load, misrepresent powerplant deliveries, misrepresent power 
destinations, misrepresent transmission line loadings.
    The new disclosures about the prevalence of ``round-trip'' trading 
among the affiliates of a handful of huge energy merchants in order to 
create false impressions of large volumes and high prices that drive 
indices are additional evidence that the market-based rate regime 
extracts unconscionable prices from California's consumers far in 
excess of what the just and reasonable standard would permit.
    The sellers protest that they were merely following the rules. That 
lie can now be put to rest. The Enron memos demonstrate that the FERC-
enforced ISO tariffs were broken, as loosely as those tariffs were 
written; that the scofflaws were pursuing ``trading strategies'' 
designed to defeat the just and reasonable standard as a matter of 
corporate policy. Laws were bent, to be certain. But laws were also 
broken, as slides 1-4 show.
FERC's Failure to Investigate or Act
    These practices are not news to FERC. FERC was warned that these 
kinds of practices were occurring. California has been complaining to 
the FERC about just these kinds of behaviors, since at least September 
2000. Governor Davis and I and key California legislative leaders 
called on FERC to investigate these kinds of behaviors as early as 
August and September of 2000 and the CPUC offered to partner with FERC 
in the investigation. FERC never responded. California has been 
complaining to both the Clinton and the Bush Administration FERC for 
over 20 months now about the kinds of practices detailed in the Enron 
memos to no avail. Slide 5 details FERC's inaction. The CPUC offered on 
numerous occasions in the Summer and Fall of 2000 to cooperate with the 
FERC staff in pursuing the investigation that led to the December 15, 
2000 order. We were rebuffed. Indeed, subpoenas that we asked FERC to 
enforce in November 2000 are still unenforced. Our offers to the new 
FERC to jointly investigate California's market failures and seller 
behaviors have similarly not been accepted.
    In order to maximize the value of these strategies to the sellers, 
price caps had to be eliminated without change to any other structural 
element of grid management, which FERC did on December 8, 2000. FERC 
took this, and its subsequent action on December 15, 2000, on the basis 
of explicit findings that the types of misrepresentations and 
malfeasance described in the memos were not taking place. Either the 
FERC was misled by seller interests in the course of its investigation 
or it deliberately ignored without comment evidence in its possession 
that illegal acts were possibly taking place. Enron did do its best to 
mislead the FERC in its filings during this period, as slides 6 and 7 
demonstrate.
    Instead of joining with California to get to the bottom of the 
market manipulation and fix the loose or nonexistent market rules, FERC 
has done its best to put off in depth investigations, refused to work 
with the state on investigating these problems jointly and by 
manipulating their own administrative processes, has refused to allow 
California to present its case to a neutral judge in a federal court.
FERC Fights Judicial Review of its California Orders
    The attached timeline in slide 8 shows how it is that 18 months and 
many billions of dollars after FERC first decided the issues, 
California is still not able to obtain judicial review. Slide 8 is just 
one example of how California has been stymied in its efforts to 
challenge FERC's decisions that caused the California energy market to 
careen out of control. FERC began relaxing what little price cap 
controls California had in place with the publication of its draft 
ruling November 1, 2000. California immediately protested by objecting 
and filing administrative briefs in front of FERC as we were required 
to do.
    To date, that draft ruling, the December 8th emergency action and 
FERC's December 15th complete elimination of price caps continue to be 
stuck in FERC. See Slide 9. FERC has opposed California's attempts to 
get California's complaints about FERC's lack of process, lack of 
evidence supporting the elimination of price caps and lack of evidence 
demonstrating that FERC's lax regulations would prevent market power 
and gaming in front of any federal court through arcane procedural 
moves that use the FERC's rehearing process to defeat federal court 
jurisdiction.
    Given this record of delay, Congress needs to ensure that the 
courts enforce the Federal Power Act's existing provision which 
provides that if FERC has not acted on a petition for rehearing within 
30 days, it is deemed denied and the parties may proceed to the 
appellate court. FERC currently evades this provision by issuing non 
substantive ``tolling'' orders, hindering judicial review.
The Effects of FERC's Failure to Enforce--A Market Unbounded
    It is critical to set the lack of FERC action in Fall 2000 and 2001 
against the broader context of what was occurring in the CA market. 
Slide 10 compares natural gas prices nationally against those in CA. As 
is demonstrated, CA natural gas prices spiked to over eight times the 
price of natural gas nationally. The chart also shows California's 
attempts to stop the manipulation. Within a month after I was appointed 
President of the CA Commission the CPUC filed an action against El Paso 
and its subsidiaries for illegally manipulating California's natural 
gas markets. We knew then that El Paso had perfected using its 
affiliates and its market power to illegally create artificial 
shortages and to drive up the price of natural gas. FERC refused even 
to grant CA a hearing to present its evidence for over a year after the 
filing date--and throughout the huge run-up in natural gas prices 
during the winter of 2000-01.
    But the natural gas facts turn much more sinister when overlaid 
against what was happening at FERC concerning electricity regulation. 
The sellers had been complaining for months by November 2000 that 
rising natural gas prices meant that the price caps would not allow 
them to function profitably. FERC took those assertions at face value. 
Natural gas prices spiked just before CA ISO Executive Director Terry 
Winter ran to the FERC on December 8th, 2000 claiming that CA's price 
caps must be eliminated. FERC relied on what we now know to be false 
shortages in early December, 2000, shortages Enron admits in its 
December 6th memo having partially caused, and on high natural gas 
prices, prices about which FERC had California's complaint on which it 
was sitting, to justify blowing out the only protection CA had against 
the gouging that was occurring. The Enron memos show us exactly why 
FERC's enabling actions were so devastating.
    FERC failed to investigate in the early fall, failed to allow CA to 
present its evidence of natural gas manipulation, failed to accept CA's 
offers to work together; failed to enforce the CPUC's subpoenas for 
basic information from the sellers and their scheduling coordinator 
representatives, but saw fit in four hours to remove the price caps. 
And FERC continues to this day to fight California's efforts to 
challenge their actions in a neutral venue--a federal court.
    Chart 12 shows what happened to wholesale electricity prices when 
FERC removed the price caps. California's prices spun out of control, 
quadrupling in a matter of days, and the utilities, which were bleeding 
up until that time, began to hemorrhage rapidly. California again and 
again called upon FERC to act. We at the PUC swung into action and 
began emergency rate relief proceedings the next week, culminating in a 
multi-billion dollar retail price increase on January 4th, 2001, within 
a month of FERC's elimination of wholesale prices.
Enron and the Sellers' Ability to Manipulate the Market to Influence 
        Governmental Decisions
    Emboldened by FERC's inaction, the sellers increased their 
audacious practices. The week after the PUC instituted emergency retail 
price increases, as prices rose and supplies tightened, stage two 
emergencies were called in CA on January 9th, 10th and 11th, although 
peak demand on those days only reached normal low mid-winter levels. 
Meetings occurred in Washington D.C. on January 9th and 10th with 
California elected officials, energy officials, sellers and Clinton 
Administration officials at which no agreement was reached.
    Another round of meetings was called, this time for Los Angeles. On 
Saturday, January 13th, 2001 we gathered in Governor Davis' offices to 
discuss the CA electricity crisis further. At that meeting, as the 
sellers pushed Governor Davis and legislative leaders to guarantee 
payment for power at any price and pushed to change CA law, my 
contemporaneous notes of that meeting reflect Ken Lay, CEO of Enron 
stating the following: ``if there is NOT a plan that is resolved this 
weekend, the supplies will dry up. You saw that last Thursday.'' Keith 
Bailey, CEO of Williams followed: ``If we don't have a deal/public 
statement re: the law.'' Lay was referencing the Stage Two power 
emergencies CA had just experienced.
    Later in that meeting, as Lay pressed for legislative changes, he 
stated: ``It gets more & more difficult every day starting Monday 
morning until the comprehensive solution happens & is shown.'' And lo 
and behold, that is exactly what happened. Slide 13 graphically depicts 
what was occurring during these key meetings and during key 
governmental decisions. That next week, as the CA Legislature debated 
whether to change California law to allow the State to step in and buy 
outrageously-priced power for the utilities, California experienced 
Stage Three emergencies on Tuesday, January 16th, necessitating turning 
off interruptible customers and water project power; CA experienced a 
blackout of power on Wednesday January 17th, in hindsight as 
``motivation'' for the CA elected officials to do what the sellers 
demanded. An emergency purchasing bill, SB 7x, was introduced on 
Thursday January 18th as CA experienced its second January blackout, 
back to back with the first. Within 48 hours after introduction, that 
bill was passed and signed, prompted in no small part by the back to 
back blackouts occurring during deliberations about this change in law.
    The rest of that week, on January 19th through the 21st, CA 
experienced Stage Three emergencies and had to drop nonfirm electric 
load as the state began purchasing power at the exorbitant rates 
demanded by the sellers.
    In retrospect and with the admissions in the Enron memos it is 
obvious that the sellers could and did hold CA hostage to their 
demands. Thus, the state's intervention into the power buying business 
was forged by a crisis of the sellers' own making. And FERC was nowhere 
to help.
    During this time, FERC was busily granting market price authority 
for scores of the major power sellers, however. Slides 14-15 detail all 
the applications and reapplications for market-based pricing authority 
that FERC has granted since the December Enron memos were written. 
Those memos alone show the market was broken, that illegal and 
unethical market power abounded. FERC should have determined, on the 
basis of sound evidence, that the market was truly competitive--namely 
that it worked without gaming--before it granted any market based 
authority. Additional applications for market based pricing authority 
are still pending at FERC. In the face of the pervasive unethical and 
illegal behavior, admitted by Enron, FERC should revoke all market-
based pricing authority and should grant no further market based 
pricing authority until it can assure this Congress and this nation 
that the market works to provide California with just and reasonable 
wholesale electricity rates as required by federal law.
Summary of Needed Action
    FERC must assure this Congress and this nation that it can perform 
its job and get to the bottom of this pervasive fraud. Until it 
completes a thorough investigation, in which the evidence it obtains is 
open to the state of California and to the public, Congress should 
ensure that the following protections are taken (slide 16):

   The regime of market based rates as it presently functions 
        at FERC must be fundamentally overhauled,

   West-wide market price caps, ``must-offer'' orders and anti-
        Enron pricing protections (collectively often called ``market 
        mitigation measures'') must remain in place so that creative 
        minds cannot find new forms of manipulation for taking the 
        money of California businesses and families.

   FERC should be required to finalize its orders so that CA 
        can finally have its day in court and Congress should require 
        the courts to enforce the ``deemed denied'' provision to FERC's 
        rehearing process;

   FERC must revoke the market based pricing authority that 
        rests on false and fraudulent assumptions of competitive 
        markets that simply do not exist in California.

   FERC must give Californians their money back--both for past 
        market manipulation in 2000 and 2001 and for future excessive 
        long term contract prices paid because California was forced to 
        negotiate long term contracts at excessive prices just in order 
        to keep the lights on last year.

   In those FERC refund proceedings, CA should have access to 
        all the data and documents FERC obtains in its investigation 
        into the sellers' activities.

    Thank you for your courtesy.



    
    
    
    Senator Dorgan. Ms. Lynch, thank you very much.
    Next we will hear from State Senator Joseph Dunn. Senator 
Dunn, you have been with us before. Please proceed.

                STATEMENT OF HON. JOSEPH DUNN, 
                    CALIFORNIA STATE SENATOR

    Senator Dunn. Thank you, Mr. Chairman, fellow members, 
particularly our home state Senators, Senator Boxer. It is a 
privilege to be here. Also to thank California's Congressional 
Representatives who are here, as well, today. I appreciate 
their presence.
    As most of you are aware, I chair the Senate Select 
Committee that has been investigating the energy crisis in 
California in the California State Legislature for over 14 
months now. I proudly say that we are probably the one entity 
that has issued more subpoenas, taken more depositions, 
reviewed more documents, conducted more hearings than probably 
anybody in the country with respect to the energy crisis.
    Senator Dorgan. Senator Dunn, how many people do you have 
working on this investigation?
    Senator Dunn. It depends upon the particular event, Mr. 
Chairman, but probably somewhere between 10 to 12 full- and 
part-time combined, Mr. Chairman.
    I am here to comment on two distinct issues. One of them is 
the issue of whether criminal violations have occurred; and 
second, I want to make some comments with respect to the 
December 8th issue. Before I do that, I want to make just some 
very brief preliminary comments if I may, Mr. Chairman.
    I have been asked many times since Monday of last week when 
the documents by Enron were released what the significance of 
those documents are to our and other investigations. My answer 
has always been the same. The contents of the memorandums are 
no surprise. We have known about these strategies for a long 
time and, with all due respect to Commissioner Wood, so has 
FERC.
    The significance is not its contents. The significance is 
that they are the first, in my view, honest admission by a 
market participant of the real root cause of the California 
energy crisis. I have referred to the Enron memos as the 
jailhouse confession of the crimes we have known were 
committed.
    The release of those documents has allowed us to move past 
the excuses, past the excuses we have heard for over two years 
now that it is a shortage of electricity--not true--it is a 
sharp rise in demand--not true--bad deregulation process--not 
true--and even when Enron went bankrupt many of the other 
market participants said, well, the real root cause is Enron 
and it is a rogue player. Not true. All excuses, all lies.
    In fact, in the last week since the release of the Enron 
documents, the dominos have begun to fall within the industry. 
You have already read the press accounts of other market 
participants admitting to certain manipulative behavior and I 
can assure this Committee that many more dominos will fall in 
the coming months.
    But the memos show something else, a deliberate plan to 
attack California. Fat Boy, Death Star, Get Shorty, all show an 
intent well beyond anyone's imagination. It underscores what 
many of us in California have said for a very long time: 
California should not have declared a state of emergency in 
January 2001; it should have declared a state of war, because 
that is, in fact, what we have been in in California.
    Now let me go directly to the two points that I know the 
Committee is most interested in, the potential criminal conduct 
issue and the impact of December 8th because it is referenced 
in those Enron memoranda. So let me go to the one question. You 
have heard other lawyers dance around it, to be perfectly frank 
with you, and I will acknowledge that lawyers can have 
reasonably different opinions on the same set of facts and the 
application of the law.
    But with respect to my opinion, based on the work that we 
have done thus far in our investigation committee, the question 
to me is whether the Enron documents released last week 
evidence criminal conduct, the answer is an unequivocal yes. 
Bear with me, Mr. Chairman. I am not going to talk about, as 
referenced before in the questioning, garden variety fraud. I 
am going to get to something that is uniquely Californian. 
There is an obscure penal code section in California, Penal 
Code section 395. It was enacted many, many, many years ago, 
not in any reference to the energy crisis in California.
    It says very simply that it is illegal, it is a crime, to 
employ any fraudulent means to impact a market price. It is my 
view that every one of these acts of manipulation, every day, 
every instance they exercise these manipulative strategies, 
they engaged in a fraudulent practice for the purposes of 
impacting the market price.
    Now, most people look at section 395 and dismiss it because 
the crime is a misdemeanor, and I suspect everybody here today 
would say, you know, with all due respect, Senator Dunn, no one 
really has any interest in pursuing a whole bunch of 
misdemeanors against these market participants. But that view 
forgets what that underlying repetitive criminal behavior lays 
the foundation for. So let me move to the more serious nature.
    Those series of misdemeanors day in and day out, not only 
by Enron but by other market participants, along with the use 
of wire and mail services, including Internet services, serve 
as a basis for a violation in my opinion of a well-known 
criminal statute. It is called the Racketeering-Influenced 
Corrupt Organization Act, or RICO. That underlying series of 
misdemeanors in my view leads potentially to convictions under 
the RICO statutes.
    Third, while we have believed for a long time that 
circumstantial evidence exists for potential antitrust or at 
the federal level Sherman Act claims, the memos provide in my 
opinion the first direct evidence of antitrust violations. 
Please remember that antitrust can be shown by direct 
collusion, i.e., the Fat Boy strategy, or other means, such as 
patterning their behavior after one another, called conscious 
parallelism. I believe that the evidence now exists to pursue 
such claims.
    One final note on the violations of the law. The underlying 
section 395 sections noted above also may give rise in my view 
to a per se violation of the California Civil Unfair Business 
Practices Act, probably the one place California will see the 
reimbursements it is entitled to, because I have no faith that 
they will occur at FERC.
    With your indulgence, Mr. Chairman, just a few more 
comments. Let me turn to the December 8th issue. The Enron 
memos released last week reference December 6th, 7th, and 8th. 
Those were perhaps the most critical time periods, period, in 
the California energy crisis. I raise this issue because I 
believe the manipulative strategies referenced in those 
memorandums, which are not alone to Enron, were used not only 
for the purposes of extracting excess profits, they were also 
used for purposes of driving policy decisions in California. 
Allow me to explain.
    I have referred to the day of December 8th as the palace 
coup, the day that the ISO management went around the ISO 
board, who was responsible for the direction the ISO will go, 
and made an emergency application to FERC to eliminate, as 
President Lynch indicated, the California price caps. However, 
if you look at the memorandum and other documents that we have 
reviewed, it appears that there may have been an intent in the 
works for several weeks before December 8th to create an 
artificial impression that there was a shortage of electricity 
that could only be alleviated by the removal of California's 
price caps.
    The ISO CEO testified in his sworn deposition in front of 
our investigation committee that he made the decision to make 
that filing on December 7th. Yet, in reviewing some of the 
traders' logs of some of the market participants, we believe 
they were preparing for the removal of those price caps several 
days before that.
    We implore this Committee and FERC to look deeply into the 
events surrounding December 8th, because we are fearful that 
there was a much grander conspiracy in play for the purposes of 
giving the industry what it sought, and that was the removal of 
the price caps that were in place via ISO with FERC approval. 
This includes looking into not only ISO and FERC, but the law 
firms that are associated with it, as well. In my written 
testimony, I reference as an example one of those law firms. 
And I implore this Committee to examine that aspect of it 
because they are probably outside the reach of our Committee.
    Let me conclude. Where are we now with respect to our 
investigation committee? Following the release of those memos, 
seemingly almost in sync with FERC for the first time ever, we 
issued a set of written questions to each of the other market 
participants, yes or no questions, asking them to admit or deny 
whether they engaged in the same strategies outlined in the 
Enron memos.
    Those responses were due yesterday. No one has responded. 
Tomorrow, back in the California State Senate we will have a 
compliance hearing, at which time if we do not receive 
satisfactory explanations as to why the answers have not been 
given, we will move forward with contempt charges against all 
the market participants that have failed to respond to those 
set of interrogatories.
    In conclusion, I said it before when I was here last time, 
I will say it again: I do not have any problems with 
deregulation, but this deregulation was perhaps the greatest 
fraud ever perpetrated on the American consumer. I plead with 
you, as I did before, to use the full weight of your 
investigative powers to look at all aspects of this market. You 
will only get it via subpoena. That is the only way it will 
come. And I think you will find yourself in the same position 
that we are now, concluding very reluctantly that, yes, there 
was anticompetitive behavior, yes, there was unethical 
behavior, and yes, there was illegal behavior.
    We stand ready and willing to help this Committee in all of 
its endeavors in any way possible, and I end with the same 
request as President Lynch: In the meantime, to stop the damage 
while we can figure this all out and complete the 
investigation, we need those price caps extended beyond 
September and we need the market-based rate authority revoked 
until a real competitive market can be established.
    Thank you, Mr. Chairman.
    [The prepared statement of Senator Dunn follows:]

    Prepared Statement of Hon. Joseph Dunn, California State Senator
    Good morning, Subcommittee Chairman Dorgan, Senator Boxer and 
members of the Committee on Commerce, Science and Transportation.
    I am Joseph Dunn, a California state senator and chair of the state 
Senate Select Committee to Investigate Price Manipulation of the 
Wholesale Energy Market. I testified before your committee last month, 
and at that time I detailed my familiarity with the California market 
and the ongoing crisis in our energy markets. My committee's 
investigation has provided me with unique insight into Enron's role in 
the market's dysfunction and its arrogance toward California consumers, 
as well as that of other market participants. The committee is 
continuing its extensive investigation into all aspects of the energy 
crisis. We have held numerous hearings, taken countless depositions, 
conducted various interviews and meetings with experts and interested 
parties and reviewed millions of documents throughout the United 
States.
    In light of the most recent disclosure of Enron's trading 
strategies in the California market, I appreciate the opportunity to 
testify again before this committee. The three memoranda released by 
Enron last week are the products of a dogged determination to get to 
the truth and to employ the powers of government--in this case the 
power of the California state legislature--to seek justice. The content 
however is no surprise. We and the FERC have known about the behavior 
for some time. Justice will not be fully served until the unlawful 
behavior outlined in the memoranda is stopped, is punished and measures 
are taken to ensure that the misconduct does not occur again.
    Most significantly, these memoranda allow us to finally put aside 
the ``evolution of excuses'' we have faced since the opening bell of 
the energy crisis. Prices skyrocket and consumers are told they are 
suffering the short-term ``pain'' of deregulation. Prices remain high 
and generators falsely explain that California is a victim of its own 
demand--despite ranking 48th of the 50 states in per capita energy 
usage and a demand growth of just four percent year after year. Then we 
are told there is an outright shortage--a myth that persists today. 
Next they tell us that the crisis is the result of ``bad market 
rules,'' the generators' and traders' way of justifying manipulative 
behavior. When Enron declared bankruptcy, we heard the refrain from 
other market participants that these were the acts of a ``rogue 
company.'' It's time to stop listening to the excuses. The Enron 
memoranda and the recent admissions by other market participants reveal 
the truth about the cause of the energy crisis: certain market 
participants gamed the system to reap excess profits on the backs of 
Californians.
    You should be aware that these documents were obtained due to the 
relentless pressure of our investigation, and others', and specifically 
because of the subpoena power invoked by, among others, our state 
legislature. I believe our committee stands alone in the duration and 
tenacity of our search for the truth. Although I have hope for the 
Federal Energy Regulatory Commission (FERC) under Chairman Wood's 
direction, Californians are deeply skeptical of the FERC's intentions. 
Despite protestations to the contrary, the FERC has known of the 
manipulative strategies since at least the beginning of 2000, if not 
earlier. This knowledge should buoy your resolve to investigate other 
market participants where warranted. Enron's admission about one aspect 
of its manipulation, ``Inc-ing,'' is ample reason for alarm: ``Although 
Enron may have been the first to use this strategy, others have picked 
up on it too.'' The evidence seems to show this is true for all of its 
strategies outlined in the memoranda.
    Why did all that has happened occur? A likely answer lies in 
Enron's (and probably others') approach to risk management. As told to 
Congress in January 2002, by Professor Frank Partnoy:

          Enron's risk management manual stated the following: 
        ``Reported earnings follow the rules and principles of 
        accounting. The results do not always create measures 
        consistent with underlying economics. However, corporate 
        management's performance is generally measured by accounting 
        income, not underlying economics. Risk management strategies 
        are therefore directed at accounting rather than economic 
        performance.'' This alarming statement is representative of the 
        accounting-driven focus of U.S. managers generally, who all too 
        frequently have little interest in maintaining controls to 
        monitor their firm's economic realities.

    I focus my testimony today on a specific discussion of the unlawful 
behavior I believe is demonstrated in these memoranda and a broader 
narrative of what makes them so troubling. I attempt to put these 
memoranda in context, for it is no coincidence that two of these 
memoranda are dated in early December 2000. You need to understand and 
question more than the content of the memoranda; you need to understand 
the timing of their creation and the timing of their release to the 
public. As of December 7, 2000, it appears from market participant 
documents that some of the market participants were experimenting with 
scenarios that could push the post cap price past $3,000 per MWh.
    I also admonish you not to be duped by the conveniently undated 
third memorandum released by Enron. After reading the damning laundry 
list of offenses contained in the first two memoranda, dated December 
6, 2000 and December 8, 2000, counsel for Enron made a feeble attempt 
to put a positive spin on the manipulative strategies, presumably for 
the very occasion of their future discovery. They did so by attaching 
tempering monikers like ``draft'' and ``preliminary'' to the first two 
memoranda. Neither memorandum was identified as such and should not be 
considered as such. Do not fall for this attempt to diminish the 
adverse impact, prevalence or intention of these strategies. The 
undated memorandum was damage control. It should offend you that acts 
of plunder could be so glibly given names as they were so cavalierly 
given life.
                            Unlawful Conduct
    Let me address the one question on everyone's mind: Do I believe 
the market participants engaged in illegal conduct? While reasonable 
attorneys may disagree on interpretations of the law, I believe the 
answer is an unequivocal ``yes.''
Antitrust Violations
    These memoranda take us another step forward in making a case that 
Enron and others engaged in antitrust behavior in the California 
electricity market. This claim is not made lightly--our committee has 
focused on a ``subset'' of antitrust law, an anti-competitive market 
condition called market power, which I discussed with you last month. 
Market power is illegal in this market, and I believe many market 
participants have exercised it. Professor Wolak, testifying before you 
today, has also testified before our committee on this very point. I 
agree with him that the market is broken. These memoranda, however, may 
indicate why. Certainly, the memoranda seem to provide direct evidence 
that Enron and others were engaged in better-understood antitrust 
behavior--collusion.
    The most direct evidence of collusion from the memoranda is: ``In 
some cases, i.e, `Fat Boy' Enron's traders have used these nicknames 
with traders from other companies to identify these strategies.'' In 
other words, the traders' collusive manipulation and coordination was 
so pervasive and advanced the parties actually developed signals in the 
form of nicknames to communicate among themselves about their unlawful 
acts.
    In addition to the direct evidence of collusion, there is ample 
evidence the market participants violated antitrust laws through 
conscious parallelism. Conscious parallelism is a legal concept defined 
as the coordination of collusion without an actual (or explicit) 
agreement in which each party signals the others by their conscious 
parallel behavior. The above reference to the ``Fat Boy'' strategy is 
not only evidence of collusion, but is also an example of conscious 
parallelism.
Violations of California State Laws
    California Business & Professions Code section 17200 prohibits 
unfair competition, which means and includes any unlawful, unfair or 
fraudulent business act or practice.
    I believe there is little doubt that the strategies outlined in the 
memoranda constitute at a minimum, unfair business practices and acts. 
For example, one of the strategies called ``Get Shorty,'' and 
characterized as ``paper trading,'' requires that ``false information'' 
be submitted to the California Independent System Operator (CAISO).
    Enron's ``Ricochet'' strategy, known more commonly as megawatt 
laundering, is another example of potentially illegal conduct. ``Enron 
buys energy from the PX in the Day Of market, and schedules it for 
export. The energy is sent out of California to another party, which 
charges a small fee per MW, and then Enron bought it back to sell the 
energy to the ISO real-time market.''
    This strategy requires complicity from the out-of-state party 
purchasing the energy--the entity ``scheduled for export.'' In this 
case, Enron uses the out-of-state party as a virtual escrow account as 
a way to avoid price caps in the in-state market. This behavior 
implicates other companies and provides evidence that Enron's behavior 
rises to the level of fraudulent and anti-competitive behavior.
    California Penal Code Section 395 also prohibits the conduct 
described in the memoranda. California Penal Code section 395 provides:

        Frauds Practiced To Affect The Market Price. Every person who 
        willfully makes or publishes any false statement, spreads any 
        false rumor, or employs any other false or fraudulent means or 
        device, with the intent to affect the market price of any kind 
        of property, is guilty of a misdemeanor. (Emphasis added).

    The memoranda describe the ``Load Shift'' trading strategy in which 
Enron creates the appearance of artificial congestion by deliberately 
overstating its loads. Enron then reverts back to its true load and is 
paid congestion charges from the CAISO. The memoranda state: ``One 
concern here is that by knowingly increasing the congestion costs, 
Enron is effectively increasing the costs to all market participants in 
the real time market.'' This amounts to an admission that Enron knows 
that it is affecting the price in the congestion market and that it 
deliberately overstated its load in order to drive up the congestion 
price. This load shift trading is an example of a violation of Penal 
Code section 395.
    Enron's misbehavior in the market may also be a violation of Penal 
Code section 396, which prohibits excessive and unjustified price 
increases in essential goods and services during a declared state of 
emergency. On January 17, 2001, California Governor Gray Davis declared 
a state of emergency due to the energy crisis and electricity is 
clearly an ``essential good.'' The memoranda acknowledge that the 
strategies Enron employed resulted in lower energy supplies in 
California and caused higher energy prices. The memoranda further admit 
that the strategies may have contributed to Stage 2 emergencies. 
Violations of Penal Code section 396 are also deemed violations of 
Business & Professions Code section 17200.
    Finally, Penal Code section 182 provides that it is a felony to 
conspire to commit any crime. These memoranda indicate that persons 
from separate corporations may have conspired to commit fraud on the 
regulators, consumers and managers of the state's energy markets.
Commodities and RICO Violations
    In addition to these instances of violations of California law, I 
believe that Enron and others broke federal law as well. As James 
Newsome, chairman of the Commodities Future Trading Commission, has 
testified before the Senate, while the bilateral and multilateral 
trading markets maintained by the energy traders were exempt from the 
registration provisions of federal law, they are not exempt from its 
anti-fraud and anti-manipulation provisions.
    I am troubled by recent admissions by Reliant that it engaged in 
phantom trading practices intended to create false stock valuation, a 
violation for which Dynegy also stands accused. Reliant announced on 
Monday that it had engaged in transactions involving simultaneous 
purchases and sales with the same counterparty and the same price--so-
called ``round trip'' trades. These transactions, involving more than 
100 million megawatt hours and 45 billion cubic feet of gas over the 
last three years, increased Reliant's revenues by about 10 percent 
during that period. The company's CEO has blamed these violations on 
``misguided employees,'' but the problem is much more deeply rooted--
industry players have admitted that ``round-tripping'' was a common 
practice among the major players. Though Dynegy has not admitted guilt, 
we believe its argument that the trades were intended to test a 
computer system is specious. To the extent that this practice falsely 
inflated corporate earnings, these companies are in violation of 
federal securities disclosure laws.
    Put together, the evidence suggests that Enron and other market 
participants used the mail and wires to defraud the State of California 
and its consumers. Given this, I believe they may have violated the 
Racketeering Influence Corrupt Organizations Act, commonly referred to 
as RICO.
The CAISO Complicity
    I have talked about the unlawful conduct we believe Enron and 
others engaged in. Now I address a troubling aspect of the memoranda. 
The date, December 6, 2000, of the first memorandum is not, in my mind, 
coincidental. It implicates the CAISO as a willing or, or at best, 
unwitting participant in the process.
    I have previously detailed to the committee how Enron successfully 
lobbied for the market rules that allowed for later exploitation. What 
is important for you to understand, and to act upon, is that by the 
time these memoranda were written Enron was the market. It was the 
market regulator, a key market participant, a market speculator and, as 
the memoranda reveal beyond any doubt, a market manipulator.
    Committee members and staff have struggled for months with the 
question of regulatory oversight during the energy crisis. We have 
asked many times, ``Who was watching the store?'' Others have recounted 
the shortcomings of our federal regulatory bodies, including the FERC, 
but I will focus on one of FERC's charges, the CAISO. I contend that 
CAISO management knew, or should have known, about the games Enron and 
others perpetrated on the market. Further, I believe CAISO management 
was either co-opted by Enron and the marketers participating in the 
California market, or it was incompetent in the handling of the 
manipulative strategies. Either way, CAISO failed in its duty to 
regulate the market.
    I call CAISO a regulator very much against its will. CAISO 
officials object to the label--they argue that their duty is simply to 
``keep the lights on.'' By way of background, CAISO is a non-profit, 
public-benefit corporation charged with the neutral management of the 
state's electricity grid. In lay terms, CAISO was responsible for 
sending the proper amount of megawatts across the state's electric 
wires.
    Inherent to this responsibility is the management of ``load,'' or 
the demand of consumers. CAISO has the real-time duty of figuring out 
exactly how much electricity is needed, minute-to-minute. By design, 
the balancing of real-time load was CAISO's job--maybe shedding 50 
megawatts in San Francisco when demand was less than anticipated, or 
finding 150 megawatts for San Diego when the load turned out to be 
greater than expected. The shedding and acquisition of load took place 
in a neutral auction market, called the imbalance energy market, run by 
CAISO. The auction was supposed to represent a small share of the 
state's overall need--somewhere in the neighborhood of five percent on 
a bad day.
    But managing load made CAISO a de facto regulator, and despite its 
protests, it is impossible to deny. Its duty to regulate is the reason 
why it sought the ability to employ price caps, and it is the reason 
why it employs a staff of economists for its Department of Market 
Analysis (DMA), which is charged with monitoring the market to ensure 
there is no manipulation of load or of its neutral auction.
    Given that CAISO was supposed to regulate the market, one might 
reasonably expect that it had been granted certain regulatory powers--
perhaps to mete out discipline to participants it found guilty of 
market manipulation, or something more banal, like failing to fill out 
a form or failing to provide notification in a timely fashion.
    Instead, its behavior is governed by a voluminous, complicated 
tariff subject to varied interpretations, which even the CEO, Terry 
Winter, testified he has never read. Penalizing bad behavior is 
apparently not part of the tariff, if not in theory, then certainly in 
practice. The tariff is a lengthy, complex legal document whose 
enforcement provisions are rarely used by the CAISO to protect 
consumers and ratepayers. It appears to me that the legal teams 
composed by every single market participant understand the nuances and 
use the tariff more adeptly, albeit in more self-interested ways, than 
CAISO. This should not be surprising in light of the fact that Mr. 
Winter reportedly views the market participants as CAISO's constituency 
as opposed to consumers and ratepayers.
    The tariff, like speed limit signs, was intended to manage 
behavior. In both cases, behavior is only modified when there are 
penalties for violations. Radar guns make costly speeding tickets more 
likely, turning the decision to speed into a calculation of expense in 
a risk-reward equation. This is exactly the model that should have been 
employed by CAISO, only the radar gun, in this case a host of DMA 
reports of the exercise of market power, was consistently ignored by 
the ``officer,'' CAISO management.
    How did it get this bad? The energy crisis in California can be 
divided into two discrete periods, before and after December 8, 2000. 
Intending no disrespect, this is a date that will live in infamy for 
California consumers.
What Lead to the Crisis?
    As noted in my prior testimony, symptoms of a pending crisis were 
noticed as early as May 1999, when Enron deliberately overscheduled 
hundreds of megawatts of electricity through a line equipped to handle 
a tiny fraction of that. It was an admitted ``test'' of the system, 
Enron said, a loophole that exposed problems in one of the markets. But 
it was more than another strategy put to the test and given a Hollywood 
nickname--it was a watershed event that proved how ill equipped, or 
unwilling, the markets' protectors were to remedy market flaws and to 
punish bad actors.
    I use this term, ``protectors,'' quite intentionally. I use it to 
underscore the faith that consumers, small business owners, taxpayers 
and especially the poor, placed in the regulators' stewardship of a 
deregulated electricity market. This was no small task. It remains a 
job of extraordinary importance, one that requires untiring vigilance 
and unerring, unbending discipline. I can say without equivocation that 
not a single protector--no regulator, no market manager, no market 
monitor--did right by the California consumer or ratepayer. The energy 
crisis was not only a failure of the market participants to behave 
legally and ethically, but was also a failure of oversight and a 
failure of protection.
    Not the least of these failures was that of CAISO. Though May 
1999's ``test'' of the market took place on the watch of its sister 
market manager, the California Power Exchange (CalPX), CAISO was aware 
of the event and did little to protect consumers from similar practices 
to which it would later fall victim. Instead, both CalPX and CAISO kept 
their respective markets in check with price caps, the bane of free 
marketeers and a major taboo to the energy industry.
    Caps had been in place almost since the beginning of the market. 
The first cap was quickly put in place in 1998 in a move that 
illustrates the reactive nature of CAISO. Shortly after the market 
opened, an ``unnamed'' generator submitted a $9,999.99/MWh bid, an 
anomalous event that rightfully raised red flags within CAISO. What is 
interesting about the bid is that its rather curious amount was limited 
only by a generator's misunderstanding of the CAISO computer system's 
capabilities--in other words, the generator did not believe the 
computer could handle a bid higher than $10,000. Caps remained through 
the end of 1999 and into 2000, when the issue became politicized.
    The CAISO ``stakeholder board,'' as it was then known, was a 
microcosm of differing viewpoints, as any stakeholder board would be. 
We have been told during numerous depositions that, despite these 
differences, the board was cohesive and ``acted in the best interest'' 
of the state.
    Price cap votes (there were six in 2000) were always privately 
contentious. At first, the votes represented consensus opinions, and 
however acrimonious the behind-the-scenes discussions may have been, 
the board usually presented a united front on the issue. By summer 2000 
this began to change as San Diego Gas & Electric (SDG&E) was the first 
to cross the still-deregulating market's expected finish line, as the 
utility became eligible to charge its customers the ``true'' price of 
electricity.
    SDG&E's wholesale costs were passed on to an unsuspecting public 
that summer, inspiring a well-documented political firestorm that 
fractured the CAISO board. Coupled with the state's first rolling 
blackout in Northern California on June 14, the board's price cap 
decisions helped usher ``CAISO'' into the vernacular of the rate-paying 
public. Imagine how strange it must have seemed to the volunteer 
stakeholder appointee: their once-obscure board of an unknown 
corporation, which functioned to monitor something everyone took for 
granted, was suddenly a topic for watercooler discussions.
    The board was the public face of CAISO, but not where its power was 
centered. Price cap decisions framed CAISO's public persona, and not 
surprisingly, the board voted with a shaky certitude to ratchet down 
price caps each time the issue was decided. Generators represented on 
the board, including an Enron representative and the president of the 
generators' trade association, who acted as Chair of the CAISO board, 
railed at their inability to win a majority and keep the caps from 
being lowered.
    The generators argued throughout the summer and fall of 2000 that 
price caps limited future investment in the state and that the caps 
were fast approaching (and surpassing) the break-even point of 
generators. To drive this point home, each time the cap was lowered, 
power mysteriously grew more scarce. The relationship between 
availability and price was impressed upon fellow board member, CAISO 
CEO Terry Winter.
    The price cap issue reached a fever pitch in October 2000, when a 
consumer-representative to the board introduced a proposal referred to 
as ``load-differentiated price caps.'' Put simply, CAISO would set a 
fluctuating, maximum price for electricity as it related to demand, 
with a maximum price of $150; as demand fell, the price for each 
megawatt would fall in concert, and as load grew, the maximum price 
grew with it. The board tabled a vote on the proposal when it was first 
introduced, to allow CAISO's staff to run a full work-up on the idea. 
On October 26, the CAISO board gave the nod to the proposal by the 
narrowest of margins.
    Enter CAISO management and its self-proclaimed ``constituents,'' 
Enron and the market participants. Like any corporation, CAISO was run 
by a board to which management was supposed to report. It was the 
custom that management would carry out the orders of the board after 
any change in direction or policy. This might require management to 
prepare legal filings, put in motion tariff amendments for review by 
the FERC or institute upgrades in software to accommodate such changes 
as load-differentiated price caps.
    Not so this time--CAISO management declared mutiny. Not a single 
effort was undertaken to implement the board's load-differentiated 
price cap decision after it was made. No memorandum was written, no 
phone call made, no software ordered.
    Instead, Enron, including Ken Lay himself, and every generator, 
appealed to the FERC in writing to intervene and to do away with the 
most recent price cap. Each and every letter was dated October 31, 
2000. The very next day, November 1, 2000, in a now-infamous missive 
that revealed its allegiance, the FERC overturned the CAISO board's 
decision, reinstated a previous price cap threshold of $250 and ordered 
the stakeholder board reconstituted.
    It was an unmitigated victory for Ken Lay, Enron and other market 
participants. But it only solved part of the problem--they next set 
their sights on price caps of any kind.
    We asked Mr. Winter if he heard rumblings of the October 31 
letters. He told us he had not. We asked him if he recognized that the 
generators seemed to be withholding supply because of a disagreement 
with their compensation. Sort of, he said. He said he had asked the 
generators to bid more capacity into the market, but the requests got 
no results. The only solution, he felt, was to increase the 
compensation for each megawatt.
    The problem grew worse between the FERC ruling on November 1 and 
early December. The market grew thinner. Fewer megawatts were available 
to light the state's lights. Outages soared. Did Mr. Winter form a task 
force to determine why supply was not being bid into the market? No. 
Did CAISO investigate the outages? No. Mr. Winter had reached the 
conclusion that the only way to increase supply was to pay more for 
each megawatt. Not coincidentally, this was also the opinion of Enron 
and the generators.
    Where were the megawatts? The memoranda disclosed last week by 
Enron prove what many have long known--they were being intentionally 
laundered out of state to avoid the caps. We asked Mr. Winter about 
this laundering, and he told us he had only heard rumors of the 
practice, and said, ``Well, I don't like to use that term.'' Enron also 
preferred not to be so crass, which is why it gave the practice a 
nickname--``Ricochet.'' He knew the megawatts were being withheld, but 
instead of punishing the traders and generators who withheld them, he 
decided to reward them with more money.
The December Crisis
    As stated above, other documents suggest market participants were 
preparing for the removal of price caps prior to the CAISO's December 
8, 2000 emergency petition.
    On December 6, CAISO declared a Stage 2 emergency, a public 
declaration that electric reserves had fallen below five percent. Enron 
claims its manipulation of the market may have caused this shortage, 
though that was never investigated by CAISO. Instead, Mr. Winter 
instructed lawyers at Swidler Berlin Sheriff & Friedman, LLP, CAISO's 
outside counsel, to begin preparing a FERC filing that would eliminate 
the $250 price cap. He did so in direct contravention of the known will 
of the board and without consulting the board or the governor. He told 
our committee that the governor ``had no concept'' of the problems 
faced by CAISO staff, but more troubling was his unilateral decision to 
go against the board. His rationale for not seeking approval from the 
board was based on his understanding that the board would not grant 
approval for such a filing. ``I had already made up my mind what I was 
going to do, so if [the board] said no . . . I would have gone ahead . 
. .''
    According to Mr. Winter, the ``decision to make the filing'' began 
on December 7. Just a few hours later, a draft was given to CAISO 
management, and less than 24 hours later, a 48-page filing was 
delivered to the FERC at 4:20 p.m. on Friday, December 8, 2000, in 
Washington, D.C. The state was in the midst of another Stage 2 
emergency and rumored to be headed for blackouts that weekend. The 
Enron memoranda states that one of the trading strategies ``may have 
contributed to California's declaration of a Stage 2 emergency.'' Mr. 
Winter claims he had a very brief conversation on Friday with FERC 
Chairman James Hoecker, alerting him of a forthcoming filing, but that 
his conversation was the only preparation CAISO undertook to make the 
FERC aware of its filing. Despite the lack of preparation, 
approximately two hours after the filing, the FERC issued a ruling 
granting CAISO's request to remove price caps. The December 8 palace 
coup was complete.
    This explanation of events is incredible. It is difficult to 
believe that such a long, detailed filing was not already underway 
prior to December 7, that FERC would or could act so quickly and that 
this was the only solution to a patently artificial crisis. At no time 
has FERC acted as quickly on any request that would negatively impact 
the industry.
    We have heard every manner of explanation for the price of 
electricity during December 2000, most notably the price of natural gas 
during this time and the price of NOx credits. We have found these 
explanations to lack merit for a host of reasons, including a spike in 
the price of electricity during January 2001, subsequent to the 
leveling of natural gas prices. Moreover, Enron's short-term exposure 
in the natural gas market leads us, and others, to believe that it was 
positioning itself to manipulate the shortages it was helping to 
create.
    In a two-day period in the week following the November 1 FERC 
ruling, Enron's open position in the U.S. natural gas market went from 
a short position of more than 33 Bcf to a long position of more than 
168 Bcf. By December 4, Enron was long almost twice that amount, 304 
Bcf, a staggering amount that most certainly contributed to the price 
of natural gas so far above national averages. This data demonstrates 
Enron's motive and ability to pressure regulators for the removal of 
price caps, while the protectors stood by and let it happen.
The Lawyers Involvement
    Our committee has asked the familiar question of each of the 
participants in the December 8 filing: ``What did you know and when did 
you know it?'' We believe that the answer to this may be found in the 
relationship between CAISO and the Swidler Berlin law firm. Swidler 
Berlin is an influential law firm that has been described, among other 
things, as a ``FERC law firm.'' It is easy to understand why, since the 
firm has employed a number of former FERC commissioners, including 
former Commissioner Hoecker. My committee does not have the power to 
make Swidler Berlin cooperate in any meaningful way, but your committee 
does. I believe there are a number of questions you should ask of 
Swidler Berlin.
    When did CAISO first request Swidler Berlin to begin work on the 
December 8, 2000 FERC filing? We have been told the first time Swidler 
was informed of the intent to make such a filing was December 7. FERC's 
absurd ex parte rules allow energy companies, and their law firms, to 
contact FERC staff and commissioners before filings are ``officially'' 
handed over the desk. This practice is rightfully prohibited in the 
criminal and civil justice system as potentially prejudicial--it is 
tantamount to influencing a judge about the character of a witness 
prior to the witness being called to the stand. If Mr. Winter is to be 
believed, however, the FERC was prepared to rule on a 50-page filing in 
a matter of minutes, with only a brief and unspecific phone 
conversation.
    Additionally, the firm represents former Enron executives 
subpoenaed by our committee. We have also learned that Swidler Berlin 
is counsel to a trade association that represents a substantial number 
of the market participants in California. Despite this, CAISO maintains 
an employee in the Swidler Berlin office in Washington, D.C.--an 
employee who answers the phone, ``Hello, California ISO . . .'' This 
relationship raises serious concerns of conflict of interest.
    This brings us to the question of the timing of Enron's first two 
memoranda. It is our belief that these memoranda were prepared in 
anticipation of the actions by CAISO management and the FERC to 
eliminate price caps in the California market. I believe that Enron's 
legal counsel commissioned a ``study'' of Enron's trading practices. 
With an expected ``deadline'' on or near December 8 to blow out the 
price caps, Enron counsel needed to become more familiar with these 
practices, if for none other than the ``public relations'' reasons 
cited in the December 6 and 8 memoranda. Whether or not Mr. Winter knew 
that this was the goal of such strategies is unimportant. Neither he 
nor anyone else on his management team took the necessary steps to 
prevent this from happening, or for that matter, to investigate its 
likelihood. Nor did he take any steps to implement the October 26 load-
differentiated price cap. We consider this a failure of CAISO and of 
the FERC to ferret out, punish and prevent these practices. Enron used 
the market to siphon money from consumers and it used CAISO management 
to ensure that the market operated to allow this to continue to happen.
    Just as Enron's current board of directors has waived its privilege 
for these documents, I believe the current CAISO board should waive any 
claims of privilege over many documents, including all documents 
relevant to the December 8 filing. If it can be demonstrated that there 
was a plan to have caps removed, I believe Enron will not be the lone 
company implicated.
                               Conclusion
    Does the market participants' conduct suggest unlawful behavior? 
Were the strategies outlined in the Enron memoranda used not only for 
the purpose of generating huge profits, but also to impact critical 
policy decisions? We believe the answer to these questions is ``yes.''
    We suspect other market participants have knowledge of Enron's 
strategies, even if they themselves did not participate in such a 
manner. This committee has the power to discover the truth. I urge you 
to subpoena the executives and CEOs, the company presidents, the board 
chairmen, march them before your committee, and require them to testify 
under oath. Many companies serve California, but you could begin your 
queries with only a handful: Duke, Dynegy, Williams, and Reliant. Ask 
them to swear that their companies did not engage in these or other 
manipulative strategies and that they knew nothing of such practices. I 
am reminded of tobacco company executives raising their right hands in 
front of a similar congressional body. Getting these statements on the 
record in such a setting will go a long way to finding the truth.
    My wish is that FERC's requests for admission are not a carefully 
crafted ploy for market participants to avoid such charges, but an 
earnest attempt to bring more light to the market, past and present.
    Without it, we are forced to wait for the next bankruptcy, the next 
scandal. Regulators should not passively observe the next scar upon the 
national economy. Rather, we strongly urge the United States Senate and 
the FERC to leave in place the June 19, 2001 price cap order, to revoke 
market-based rate authority until a functioning competitive market is 
established and to focus vigorously your investigations on the 
privilege logs of each of the market participants and the role of legal 
counsel in the market participants' conduct.

    Senator Dorgan. Senator Dunn, thank you very much. Again, 
you have appeared before this Committee prior to this and we 
appreciate your testimony.
    I must be absent for about 40 to 45 minutes for another 
schedule and Senator Hollings, the Chairman of the full 
Committee, will be here and Senator Boxer. Next we'll have Mr. 
David Freeman, Chairman of the California Power Authority, who 
also has appeared previously before this Committee. Mr. 
Freeman, welcome and thank you very much for being here.

           STATEMENT OF S. DAVID FREEMAN, CHAIRMAN, 
                   CALIFORNIA POWER AUTHORITY

    Mr. Freeman. Thank you, sir.
    The Chairman. That is why I was staying, Mr. Chairman, to 
hear this fellow.
    Senator Dorgan. I have heard Mr. Freeman before. I regret 
that I am going to miss your testimony, but I have read your 
testimony.
    Mr. Freeman. I take great personal pleasure in appearing 
before Chairman Hollings. I worked for him in the seventies 
and, to refresh his recollection, remember Kenny Boy was 
lobbying for deregulation of natural gas back then. So you and 
I have an inkling of his capabilities.
    The Chairman. And he left Nebraska holding the bag, if I 
remember. Go ahead.
    Mr. Freeman. That is correct.
    Well, before I deal with the testimony of hear no evil, see 
no evil, there is no evil, which was the panel that preceded 
us, I have a few things that I would like to say out of my 
prepared testimony which I submit for the record.
    I had a personal conversation with Ken Lay in the latter 
part of the year 2000 when I was head of the L.A. Department of 
Water and Power and he was trying to persuade me that we did 
not need price caps. And I argued with him for 45 minutes over 
the phone, and he did not persuade me. At the end he said: 
Well, Dave, I do not care what you crazy people in California 
do; I have got folks down here that will figure out how to make 
money.
    I did not realize exactly what he was talking about until 
these memos came out. Indeed, he did have people down there 
that could figure out how to make money, and they made a whole 
lot of money.
    I want to remind the Committee that it was Enron that was 
the leading lobbyist to fashion the rules and put the loopholes 
into the California system which they slid through. This was 
not any one-shot proposition on their part. They have been at 
this a long, long time, and they developed a system that they 
were able to manipulate.
    Now, about a year ago, Governor Davis and the California 
delegation were trying to tell the world this was happening, 
but the folks at the White House were not listening and the 
folks at FERC were not listening. Well, now that we have the 
confession, I trust that the whole world is listening. And we 
have a simple message: We want our money back. We want our 
money back.
    There are four ways in which FERC needs to take action. 
One, they need to order the refunds. We did not know the extent 
of this when we filed. We only asked for $9 billion. We are 
probably entitled to close to $30 billion. But that proceeding 
is dragging over there at FERC. And they admitted that we are 
entitled to refunds, but we have not gotten any.
    We need just and reasonable rates for these long-term 
contracts that we negotiated while the market was 
dysfunctional. It is up to FERC to accelerate that proceeding 
and give us just and reasonable rates.
    They have got to continue the mitigation that they put in, 
which your chart shows helped us. The Federal Power Act, Mr. 
Chairman, does not expire on September 30th and there is no 
West Coast exception to the Act. They are duty-bound as a 
matter of law to continue the mitigation that they have in 
place.
    Then of course, the investigations must go on with great 
vigor.
    Now, there is a lesson that I think we need to learn from 
this, and it is sort of fundamental. It has been expressed 
before. Electricity is different. The reason they could do 
these sham transactions is no one has ever seen a kilowatt-
hour. They can move it anywhere they want to and lie about it, 
but you cannot prove they did not. You cannot do without it for 
even a nanosecond, and it is just not subject to the ups and 
downs of the market. It is a public good that cannot be allowed 
to be abused by private companies.
    I have a new version of Murphy's Law that I want to offer 
to the Committee: Any system that can be gamed will be gamed at 
the worst possible time. It is the gaming practices that they 
did not discover that probably have gotten us as much as the 
vivid names that they have. The market approach to electricity 
is inherently gamable and we just cannot allow a system where a 
company can operate in secret and has no responsibility for 
power supply.
    We need to go back to companies that own power plants and 
sell electricity from power plants with real power that goes to 
real customers. There is no place in the electric power 
business for a company like Enron that really just owned an 
electronic telephone book and manipulated the market to jack 
the price up.
    With this confession, some people are saying that Governor 
Davis and the California delegation is vindicated. Well, Mr. 
Chairman, there is no vindication until we get our money back. 
Now that the whole world is watching, I think that the burden 
is on the Federal Energy Regulatory Commission to move ahead, 
let the refunds take place, let the contracts be brought down 
to a just and reasonable rate, and let the mitigation continue 
and the investigations begin.
    Now, what we heard this morning from these witnesses is 
that they knew about these practices back in October, did not 
do anything but write what they thought was a cover-yourselves 
memo, and then did not tell Mr. Skilling about it until the 
next June, and only because he was coming to California to get 
a pie thrown in his face.
    Now, these folks have no moral compass. This company had no 
moral compass. They were all obviously hired just to help cover 
it up. We heard it this morning. The real concern is that those 
prices stayed jacked up for the next six months. That is when 
they took us to the cleaners after these guys supposedly 
stopped--they did not stop anything except defending lawsuits, 
and all the practices that occurred that have not been 
identified probably even make the ones that they have 
identified look small in comparison.
    The arrogance of saying they stopped this when they 
bankrupted the Power Exchange has got to be galling to those of 
us in California. They wipe out the only open market where 
there was any record. That was killed. And then they make a 
killing off of us for the next six months.
    I have heard a lot of testimony in my life, and I am sure 
this Committee has heard a lot more. That was some of the--I 
think it could be described only as hear no evil, see no evil, 
and there is no evil. But there is plenty of evil, and we want 
our money back.
    Thank you.
    [The prepared statement of Mr. Freeman follows:]

           Prepared Statement of S. David Freeman, Chairman, 
                       California Power Authority
    It is a pleasure to be back to testify before this committee today. 
Two weeks ago, I was only able to speculate as to Enron's invisible 
role in the rip-off of California consumers. Now we have a confession 
by Enron that it did in fact game the system.
    A fundamental point I would like to repeat from my previous 
testimony is that Enron was the leading advocate for the most extreme 
deregulation in California at every step in the Road and thus helped 
create the loopholes to manipulate the market. Enron successfully 
lobbied for the loosest rules and then stretched them to create a 
volatile market that helped to bring them profits while gouging the 
consumers of California to the tune of billions of dollars.
    Allow me to share from my previous testimony the recollection of a 
long phone argument I had with Ken Lay in 2000 on the subject of price 
caps. I rejected his arguments and he said to me gleefully that no 
matter what we ``crazy people in California'' did that he had people 
working for him at Enron that could figure out a way to make money. I 
now realize just how true he was. Fat Boy, Death Star and the others 
were strategies that made Enron a whole lot of money.
    For a long time last year we in California felt that Governor Davis 
and our delegation were not being heard in claiming that Enron and the 
generators were manipulating the market and cheating us out of billions 
of dollars. But now that Enron has confessed, we repeat that claim in a 
voice that I trust will now be heard:

        We want our money back!

    Now that the whole world, and that must include the FERC, realizes 
we were overcharged as no one in the history of electricity has been 
overcharged, we insist on the simple justice required under the law. To 
be specific, the FERC must:

        (1) Order refunds of $9 billion or more
        (2) Fix just and reasonable rates for our long-term contracts
        (3) Continue to mitigate the Western market
        (4) Investigate all the gougers
(1) Refunds
    Fortunately a process is underway at FERC which has acknowledged 
that California consumers are entitled to refunds. But the process is 
moving at a snail's pace. In light of the recent evidence that confirms 
California's claims, all the prior rulings need to be reviewed. The 
Commission needs to take charge and order the refunds at once.
(2) Long-term contracts
    The long-term contracts California entered into of necessity under 
a manipulated, dysfunctional market need to be reformed to a just and 
reasonable level, and done so promptly. The process is, to FERC's 
credit, underway. The Commission needs to let the generators know that 
FERC will insist on the just and reasonable rate standard. It is the 
law and needs to be enforced. FERC needs to assure that the process 
does not just drag on because every day that is delayed means more 
dollars of overcharge.
(3) Market mitigation
    Continuing the mitigation measures to assure the continuous flow of 
power from the generators at controlled prices is absolutely essential. 
The present plan to cease those measures on September 30, 2002, cannot 
be reconciled with the FERC's duty to assure just and reasonable rates 
at wholesale. The Federal Power Act does not cease in September, nor is 
there a California exemption from its mandate that the rates shall be 
just and reasonable.
(4) Price gouging investigation
    Of course the FERC must now investigate all the generators with 
renewed vigor. There is every reason to believe that the practices so 
colorfully described by Enron were and are widespread. They need to be 
exposed.
    Let me say that we hope and expect FERC to do their duty. Governor 
Davis and the rest of us have been favorably impressed by FERC 
President Pat Wood, Nora Brownell, and Bill Massey. They instituted the 
mitigation measures last summer that helped California tame the market. 
But it happened only after a horrible year before the new majority was 
appointed and in which the State suffered the largest transfer of money 
out of consumers' pockets in utility history.
    There is one fundamental lesson we must learn from this experience: 
electricity is really different from everything else. It cannot be 
stored, it cannot be seen, and we cannot do without it, which makes 
opportunities to take advantage of a deregulated market endless. It is 
a public good that must be protected from private abuse.
    If Murphy's Law were written for a market approach to electricity, 
then the law would state ``any system that can be gamed, will be gamed, 
and at the worst possible time.'' And a market approach for electricity 
is inherently gameable.
    Never again can we allow private interests to create artificial or 
even real shortages and to be in control. Enron stood for secrecy and a 
lack of responsibility. In electric power, we must have openness and 
companies that are responsible for keeping the lights on
    We need to go back to companies that own power plants with clear 
responsibilities for selling real power under long-term contracts. 
There is no place for companies like Enron that own the equivalent of 
an electronic telephone book and game the system to extract an 
unnecessary middleman's profits. Companies with power plants can 
compete for contracts to provide the bulk of our power at reasonable 
prices that reflect costs.
    People say that Governor Davis has been vindicated by the Enron 
confession. But real vindication will only come if those that 
manipulated us are made to pay back the overcharges and trim back the 
contracts signed when they had us over a barrel. We deserve no less, 
and the whole world will now be watching whose side FERC is on.
    Now let the refunds, contract reforms and investigations begin.

    The Chairman [presiding]. Thank you very much, Mr. Freeman.
    Our next witness is Dr. Frank Wolak of Stanford University. 
Dr. Wolak.

  STATEMENT OF FRANK A. WOLAK, Ph.D., PROFESSOR OF ECONOMICS, 
                      STANFORD UNIVERSITY

    Dr. Wolak. Thank you. Thank you for the opportunity to be 
here today. I will focus on four issues. The first is what new 
information about the causes of the California crisis is 
revealed by the Enron memos. The second is I would like to draw 
the distinction between unilateral exercise of market power and 
market manipulation and the critical role that the exercise of 
market power played in the California electricity crisis. The 
third is to clarify how these two concepts fit into FERC's 
statutory mandate to set just and reasonable wholesale prices. 
And finally, to propose a long-term market monitoring program 
that would guarantee that FERC would fulfill its statutory 
mandate to protect consumers from unjust and unreasonable 
wholesale prices going forward.
    The Enron memos reveal one important fact about the 
behavior of electricity suppliers that was strongly disputed by 
many observers and that is that sellers want to make as much 
money as possible and will use all available strategies to 
achieve this goal. Although some of the strategies outlined in 
the memo may be violations of California market rules or 
illegal under state or U.S. antitrust law, it is extremely 
difficult to tell for sure because of the incomplete and 
sometimes inconsistent descriptions given.
    However, the vast majority of the remaining strategies are 
simply arbitrage strategies that were known to members of the 
independent market monitoring committees, as well as other 
market participants well before the summer of 2000. Power 
markets are not fundamentally different from common stock, 
commodity, and foreign exchange markets. Traders in financial 
markets constantly attempt to earn profits from arbitraging 
differences in prices for the same product over time, space, 
and maturity.
    For example, if the price of gold in San Francisco is 
significantly less than the price in New York, traders will buy 
gold they have no intention of consuming in San Francisco and 
sell it in New York until the price difference is less than the 
cost of transporting the gold between the two locations. 
Because one kilowatt-hour of electricity consumes the same 
amount of energy regardless of which firm produces it and the 
cost of transporting power over very long distances is low, we 
would expect there is many opportunities for power traders to 
earn profits from arbitraging very small price differences 
across locations, space, and time in the transmission network.
    There are explanations involving attempts to arbitrage 
price differences over time and location in the ancillary 
services and congestion management markets that can be 
constructed for the vast majority of the strategies described 
in the memos. However, it is important to emphasize four points 
in this regard.
    The first is that versions of most of these strategies 
exist in wholesale electricity markets operating in the Eastern 
U.S., as well.
    Second, none of these strategies involve zero risk on the 
part of the trader executing them.
    Third, all the arbitrage strategies described in the Enron 
memos were available to all buyers and sellers in the 
California market and likely were pursued by those traders in 
the California market.
    Finally, like all arbitrage strategies, their profitability 
most likely declined as more market participants gained 
experience participating in the California market.
    This logic implies that the strategies described in the 
Enron memos are at best a small part of the cause of the 
California electricity crisis. Of the more than $10 billion of 
refunds California's ISO has calculated are due to California 
consumers from unjust and unreasonable prices over the period 
of the crisis, the strategies outlined in this memo in my view 
account for less than a half a billion dollars when aggregated 
over the California market participants, and that is a very 
conservative estimate.
    The major cause of the California crisis, however, was the 
unilateral exercise of market power by suppliers to the 
California market. A firm exercises its unilateral market power 
by withdrawing generating capacity from the market either by 
bidding extremely high prices or refusing to sell its capacity 
at any price. The goal of both of these strategies is to create 
an artificial scarcity of energy in order to drive up the 
market price.
    There are a growing number of studies by independent market 
monitoring committees, in particular the one that I chair, as 
well as the ISO's department of market analysis and many other 
independent entities, that have shown that this unilateral 
exercise of market power was the cause of the unjust and 
unreasonable rates in California during the period of the 
crisis.
    However, at this point, it is important to emphasize that 
it is not illegal under U.S. antitrust law for a firm to 
exercise its unilateral market power. Moreover, all privately 
owned firms in all markets continually attempt to exercise all 
available unilateral market power. Their shareholders' demand 
to earn the highest possible returns on their investment forces 
the firm to engage in this.
    However, the competitiveness of the market suppliers sell 
into and the responsiveness of consumer demand to price 
increases determines the amount of unilateral market power that 
firms are ultimately able to exercise. Unfortunately, 
electricity markets are extremely susceptible to the exercise 
of market power. The demand at any hour of the day is virtually 
insensitive to the hourly price. It is very costly to store 
electricity. Its production is subject to extreme capacity 
constraints.
    All these factors imply that a single firm owning 5 to 10 
percent of the generating capacity in the market can under a 
range of demand levels increase the price of electricity 
substantially by withholding only a very small fraction of its 
capacity from the market.
    Now I would like to make the distinction between the 
unilateral exercise of market power and market manipulation. To 
reiterate, unilateral exercise of market power is simply 
equivalent to a firm using all legal means to serve its 
fiduciary responsibility to its shareholders to earn the 
highest return possible on their investment. Market 
manipulation, on the other hand, does not have a generally 
agreed upon definition. However, most would agree that market 
manipulation implies an intent to harm competition or market 
efficiency and certainly implies bad behavior on the part of 
the manipulator.
    However, it is virtually impossible to tell intent from a 
firm's actions. Unless the market participant tells us their 
goal is to harm competition or market efficiency, we cannot 
tell.
    Fortunately, the designers of the Federal Power Act 
understood the problem of distinguishing market manipulation 
from unilateral exercise of market power. They also recognized 
the extreme susceptibility of electricity markets to the 
unilateral exercise of market power and the tremendous harm 
that consumers could endure if this resulted. The Federal Power 
Act requires FERC to ensure that wholesale electricity prices 
paid by consumers are just and reasonable. The Federal Power 
Act does not require that FERC show that wholesale prices are 
the result of market manipulation in order for them to be 
unjust and unreasonable. Market prices simply have to reflect 
the exercise of significant market power for them to be unjust 
and unreasonable.
    Consequently, it is unnecessary to prove market 
manipulation by suppliers to the California market in order for 
California to receive refunds for unjust and unreasonable rates 
during the period June 2000 to June 2001 and for the forward 
contracts negotiated during the spring and winter of 2001. 
Whether any portion of this unilateral exercise of market power 
was in fact market manipulation is irrelevant. In either case, 
the Federal Power Act states it is illegal for FERC to allow 
consumers to pay unjust and unreasonable rates.
    I will now finish up by briefly describing a market 
monitoring program that will guarantee that FERC fulfills its 
statutory mandate to protect consumers from unjust and 
unreasonable wholesale prices so that a California electricity 
crisis will not occur in another electricity market at some 
future date. First, FERC must set a clear standard for unjust 
and unreasonable prices that, if violated, automatically 
triggers regulatory intervention. As Chairman of the Market 
Surveillance Committee of the California ISO, I find it wholly 
unacceptable that, despite the fact that competitive 
electricity markets have been in operation in the U.S. for 
almost four years, FERC has yet to set a standard for what 
constitutes unjust and unreasonable prices. This makes it 
impossible for California's independent market monitoring 
committees and the ISO's own department of market analysis, 
however vigilant they are, to find any evidence that wholesale 
prices are unjust and unreasonable and therefore illegal under 
the Federal Power Act.
    The California ISO in its Market Design 2002 filing with 
FERC has proposed a version of this market monitoring and 
regulatory intervention protocol. This market design details a 
12-month market performance index automatic intervention 
trigger and the required regulatory intervention by FERC and is 
discussed in detail in this filing. I strongly encourage 
Congress to require FERC to implement a version of this market 
monitoring protocol to avoid another California disaster.
    Thank you for your time.
    [The prepared statement of Dr. Wolak follows:]

 Prepared Statement of Frank A. Wolak, Ph.D., Professor of Economics, 
                          Stanford University
    Members of the Committee, I am pleased to submit this written 
statement on Enron's role
    California electricity crisis in the light of recently disclosed 
documents describing the strategies Enron's traders used in the 
California market. I am a Professor of Economics at Stanford 
University. I began my work on energy and environmental issues at the 
Los Alamos National Laboratory (LANL) in 1980. The following year I 
entered graduate school at Harvard University, where I received an S.M. 
in Applied Mathematics and Ph.D. in Economics. For the past fifteen 
years, I have been engaged on a research program studying 
privatization, competition, and regulation in network industries such 
as electricity and natural gas. A major focus of my work is the 
empirical analysis of market power and, more generally, market design 
issues in newly restructured electricity markets. I have studied the 
design and operation of the PJM (The Pennsylvania, New Jersey, and 
Maryland Interconnection), New York, New England and California 
electricity markets, as well as virtually all restructured electricity 
markets currently operating around the world. Since April 1, 1998, I 
have been the Chairman of the Market Surveillance Committee (MSC) for 
the Independent System Operator (ISO) of California electricity 
industry.
Market Surveillance Committee
    To provide further background on my expertise on the California 
electricity market, I will describe the role of the Market Surveillance 
Committee of the California Independent System Operator and the 
activities that I have undertaken as its Chairman. The MSC is an 
independent committee charged with monitoring the California 
electricity market for the exercise of market power and for market 
design flaws which may enhance the ability of market participants to 
exercise market power. The MSC was required by the Federal Energy 
Regulatory Commission (FERC) as part of the market monitoring protocols 
of the California ISO. Because the California ISO had a board of 
governors composed of employees from firms participating in the 
California market, as well as stakeholders from state agencies and 
regulatory bodies, FERC mandated the formation of an independent market 
monitoring entity to prepare and file with FERC periodic reports on the 
performance of the market. In this capacity I have written or co-
authored more than ten reports on aspects of the design and performance 
of the California electricity markets during my four years as Chairman 
of the MSC. In preparing these MSC reports I have analyzed confidential 
data made available by the ISO on bidding, scheduling and production by 
all generation unit owners selling into the California market. In 
addition, the MSC has worked closely with the Department of Market 
Analysis and management at the ISO in preparing these reports. These 
reports, along with other papers I have written on competitive 
electricity markets, are listed at the end of my testimony.
    My testimony focuses on four issues. The first is the what new 
information about the causes of the California electricity crisis is 
revealed by the recently released memos describing the strategies 
pursued by Enron's traders in California. The second is to describe the 
distinction between the unilateral exercise of market power and market 
manipulation, and the role that the unilateral exercise of market power 
played in the California electricity crisis. The third is to clarify 
the role these two concepts play in the Federal Regulatory Commission's 
(FERC) statutory mandate to set just and reasonable wholesale 
electricity prices. The fourth is to propose a long-term market 
performance measure and market monitoring protocol that FERC should 
adopt to fulfill its statutory mandate to protect consumers from unjust 
and unreasonable wholesale electricity prices.
Enron Memos and Causes of California Electricity Crisis
    The Enron memos reveal one an important fact about the behavior of 
electricity suppliers that was strongly disputed by many observers of 
competitive electricity markets but is a maintained assumption for 
economists studying these markets. That is, sellers intend to make as 
much money as possible and will use all available strategies to achieve 
this goal.
    Although some of the strategies outlined in the Enron memos may be 
violations of market rules or illegal under US anti-trust law, it is 
difficult to tell for sure because of the incomplete and sometimes 
inconsistent descriptions given in the memos. However, the vast 
majority of the strategies described in sufficient detail to understand 
them are standard arbitrage strategies that were known to the 
independent market monitoring committees for California ISO and Power 
Exchange well before the summer of 2000.
    Power markets are not fundamentally different from common stock, 
commodity, and foreign exchange markets. Traders in financial markets 
constantly attempt to earn profits from arbitraging differences in the 
prices for same product across time, space and maturity. For example, 
if the price of gold in London is sufficiently less than the price in 
New York, then traders will buy gold in London and sell it in New York 
until this price difference is less than or equal to cost of 
transporting gold between these two locations. Because 1 kilowatt-hour 
(KWh) of electricity contains the same amount of energy regardless of 
which firm produces it and the cost of transporting electricity over 
very long distances is extremely low, we would expect that there are 
many opportunities for power traders to earn profits from arbitraging 
small differences in electricity prices across locations in the 
transmission network.
    All electricity markets have a number of forward markets where 
power suppliers can sell energy in advance of actual delivery of the 
electricity to the transmission network. For example, before January of 
2001 in the California market, power delivered to the grid during each 
hour of the day could have been sold in the Power Exchange (PX) day-
ahead market, the PX day-of market, a variety of forward bilateral 
markets, or the California ISO's real-time market. These opportunities 
to buy and sell electricity in various markets in advance of delivery 
offer power suppliers ample opportunity to arbitrage price differences 
across these markets. For example, if a power supplier thought the 
price in the ISO's real-time market was going to be higher than PX's 
day-ahead price, then it could buy power that it had no intention of 
consuming in the PX market and sell it in the ISO's real-time market. 
This is one explanation for the ``Inc-ing Load Into the Real-Time 
Market'' strategy described in the Enron memos.
    Similar explanations involving attempts to arbitrage price 
differences over time and location in California's energy, ancillary 
services and congestion management markets can be constructed for the 
vast majority of the other strategies described in the Enron memos. It 
is important to emphasize three other points about these strategies. 
First, versions of most of these strategies exist in the wholesale 
electricity markets operating in the eastern US. Second, none of these 
strategies involved zero risk on the part of the trader executing them. 
For example, a trader would lose money from buying energy in the day-
ahead market and selling it in the real-time market if contrary to the 
trader's expectations, the price in the ISO's real-time market was less 
than the price in the PX's day-ahead market, a circumstance which often 
occurred in the California market. Third, all of the arbitrage 
strategies described in the Enron memos were available to all buyers 
and sellers in the California market. Like all arbitrage strategies, as 
more market participants gained experience participating in the 
California market, their profitability most likely declined.
    An argument can even be made that many of these strategies enhanced 
the efficiency of the California electricity market. Taking an analogy 
from the gold market, because gold traders are constantly looking to 
exploit profitable arbitrage opportunities due to geographic price 
differences, consumers in any location be assured of getting the best 
possible price for gold in their own location.
    The above logic implies that the strategies described in the Enron 
memos are, at best, a small part of the cause of the California 
electricity crisis. Of the more than $10 billion of refunds that the 
California ISO has calculated are owed to California consumers from 
paying unjust and reasonable wholesale electricity prices over the 
period June 2000 to June 2001, the strategies outlined in these memos, 
at most, account for $500 million when aggregated over all California 
market participants.
Market Power, Market Manipulation and the California Crisis
    The major cause of the California electricity crisis was the 
unilateral exercise of market power by suppliers to the California ISO 
control area. A firm exercises its unilateral market power by 
withdrawing generating capacity from the market either by bidding 
extremely high prices for some or all of its capacity or by refusing to 
make a portion of its capacity available to the market at any price. 
The goal of both of these strategies is to create an artificial 
scarcity of energy in order to drive up the market price.
    The extent to which firms find the unilateral exercise of market 
power profitable depends on the impact their capacity withholding has 
on the market price. For example, if a generator withholding 5 percent 
of its capacity from the market manages to increase the market-clearing 
price by 50% (not an unusual tradeoff in the California market during 
the period June 2000 to June 2001), this small amount of withholding is 
extremely profitable for the firm pursuing this strategy. Studies by 
the independent market monitoring committees for the California market, 
the ISO's Department of Market Analysis and other independent 
researchers have shown that the unilateral exercise of market power was 
the cause of the unjust and unreasonable electricity prices that 
occurred during the period June 2000 to June 2001.
    It is important to emphasize that it not illegal under US antitrust 
law for a firm to exercise its unilateral market power. Markets not 
dominated by a small number of firms face sufficient competition to 
discipline the unilateral attempts of these firms to raise market 
prices. Even in a market with a large number of firms, each one will 
still attempt to exercise all of its available unilateral market power. 
However, in a workably competitive market, each firm will find it 
unilaterally profitable to withhold very little supply from the market 
because the price increase it achieves from withholding very little 
supply from the market is very close to the price increase it achieves 
from withholding a significant amount. This logic implies that the 
firm's unilateral profit-maximizing strategy leads it to exercise very 
little market power.
    All privately-owned firms in all markets continually attempt to 
exercise all available unilateral market power. Their shareholders' 
demands to earn the highest possible returns on their investment 
require the firm to do it. However, the competitiveness of the market 
suppliers sell into and the responsiveness of consumer demand to price 
increases determines the amount of unilateral market power that firms 
are ultimately able to exercise.
    Wholesale electricity markets are extremely susceptible to the 
unilateral exercise of market power. The aggregate demand for 
electricity in any hour of the day is virtually insensitive to the 
hourly wholesale price. Electricity is very costly to store and its 
production is subject to extreme capacity constraints. A 500 megawatt 
(MW) generating unit can't produce much more than 500 MW-hours (MWh) in 
a single hour. All of these factors imply that, a single firm owning 5 
to 10 percent of the generating capacity in the market can, under a 
range of demand levels, increase the price of electricity substantially 
by withholding a very small fraction of its capacity from the market.
    The incentives for capacity withholding from the spot electricity 
market are even greater the larger is the fraction of the firm's 
capacity that receives this elevated spot price. In addition, the 
larger the fraction of demand that must be purchased on the spot market 
the greater the consumer harm that occurs as result this elevated spot 
price.
    This logic illustrates three important points. First, because of 
the characteristics of the electricity production process and how it is 
priced to final consumers, this market is extremely susceptible to the 
unilateral exercise of market power. Second, because price can increase 
substantially as result of the unilateral exercise of market power by 
firms in a wholesale electricity market, consumers can experience 
significant harm in a very short time. Finally, the incentive to 
exercise market power and the extent of consumer harm that it can cause 
is greater the larger is the fraction of demand that is served from the 
spot market.
    Now I would like to make the distinction between the unilateral 
exercise of market power and market manipulation. As discussed above, 
the unilateral exercise of market power is equivalent to the firm using 
all legal means to serve its fiduciary responsibility to its 
shareholders to earn the highest return possible on their investment. 
Market manipulation does not have a generally agreed upon definition. 
However, most would agree than market manipulation implies intent to 
harm competition or market efficiency and certainly implies ``bad'' 
behavior on the part of the manipulator. However, it is virtually 
impossible to infer intent from a firm's actions. Returning to my 
earlier example, how do we know if the intent of a power supplier in 
buying power in the day-ahead market and selling it the real-time 
market was to harm competitors, and not just attempt to serve its 
fiduciary responsibility to its shareholders? Unless the market 
participant tells us their goal is harm competition or market 
efficiency we cannot tell.
FERC's Statutory Responsibility Under the Federal Power Act
    The designers of the Federal Power Act understood this problem of 
distinguishing market manipulation from the unilateral exercise of 
market power. They also recognized the extreme susceptibility of 
electricity markets to the unilateral exercise of market power and the 
tremendous consumers harm that could occur if it happened. The Federal 
Power Act, the enabling legislation for the Federal Power 
Administration (the predecessor to FERC) requires that FERC ensure that 
wholesale electricity prices paid by consumers are just and reasonable. 
The Federal Power Act does not require that FERC show that wholesale 
prices are the result of market manipulation in order for them to be 
unjust and unreasonable. Market prices that reflect the exercise of 
sufficient unilateral market power are also unjust and unreasonable. As 
discussed above, because of a number of features of wholesale 
electricity markets, a small amount of withholding of generating 
capacity by a few electricity suppliers can result in price that 
reflect the exercise of significant market power under system 
conditions such as those that occurred during the period June 2000 to 
June 2001.
    Consequently, it is unnecessary to prove market manipulation by 
suppliers to the California market in order for California to receive 
refunds for unjust and unreasonable prices during the period June 2000 
to June 2001 and for the forward contracts negotiated during the winter 
and spring of 2001. As discussed above, there is definitive evidence 
from a variety of sources that significant unilateral market power was 
exercised in California during the period June 2000 to June 2001 and 
that this led to the unjust and unreasonable wholesale electricity 
prices that existed during that period and were expected to exist for 
next 18 months to 2 years. Whether a portion of this unilateral 
exercise of market power was in fact market manipulation is irrelevant. 
In either case, the Federal Power Act states that it is illegal for 
FERC to allow consumers to pay unjust and unreasonable wholesale 
electricity prices. Moreover, both FERC and California agree that 
prices during the period June 2000 to June 2001 were unjust and 
unreasonable.
Protecting Consumers from Unjust and Unreasonable Prices
    I now describe a market monitoring protocol that will guarantee 
that FERC fulfills its statutory mandate under the Federal Power Act to 
protect consumers from unjust and unreasonable wholesale electricity 
prices, so that a ``California electricity crisis'' will not occur in 
another electricity market at some future data. First, FERC must set a 
clear standard for unjust and unreasonable prices, that if violated 
automatically triggers regulatory intervention by FERC. This would 
require specifying a level, a duration, and geographic scope for what 
constitutes unjust and unreasonable prices. Despite the fact that 
competitive electricity markets have been in operation in the US for 
more than four years, FERC has yet to define a standard for what 
constitutes unjust and unreasonable prices. This makes it impossible 
for California's independent market monitoring committees and the ISO's 
own Department of Market Analysis to find any evidence that wholesale 
prices are unjust and unreasonable and therefore illegal under the 
Federal Power Act.
    All market participants should be able to compute this index of 
market performance using publicly available data. It is also important 
that the regulatory intervention that would result if this standard 
were violated is spelled out in detail and viewed as sufficiently 
undesirable to the power suppliers so that they have a strong incentive 
to work to fix market design flaws and other market inefficiencies 
before they develop into problems that can result in the significant 
consumer harm that would trigger this intervention. This would create a 
self-regulating market, rather than one that requires day-to-day 
intervention by the ISO, state agencies and often FERC that detracts 
from long-run market efficiency.
    The California ISO, in its Market Design 2002 filing with FERC, has 
proposed a version of this market monitoring and regulatory 
intervention protocol. The details of the 12-month market performance 
index, automatic intervention trigger, and the required regulatory 
intervention by FERC are discussed in detail in this filing. The April 
22, 2002 opinion of the Market Surveillance Committee strongly endorses 
this concept and discusses several important aspects of its 
implementation.
    This 12-month market performance index approach to defining a 
standard for unjust and unreasonable wholesale electricity prices 
requiring regulatory intervention by FERC does not distinguish between 
unjust and unreasonable prices due to the unilateral exercise of market 
power or market manipulation. Regardless of the cause, consumers are 
protected from the unjust and unreasonable prices, and intervention to 
correct the cause of these unjust and unreasonable rates is pre-
specified. Consequently, FERC and all of the stakeholders in the 
California market can immediately stop attempting to find ``bad'' 
behavior California market and instead focus on the far more productive 
goal fulfilling FERC's statutory mandate of protecting consumers.
             Market Surveillance Committee Reports/Opinions
``ISO Market Surveillance Committee Opinion on Firm Transmission Rights 
    Proposals,'' May 22, 1998.
``Preliminary Report on the Operation of the Ancillary Services Markets 
    of the California Independent System Operator (ISO),'' August 19, 
    1998.
``Report on the Redesign of the Markets for Ancillary Services and 
    Real-Time Energy,'' March 25, 1999.
``Reliability Must-Run Contracts for the California Electricity 
    Market,'' April 2, 1999.
``Report on the Redesign of the California Real-Time Energy and 
    Ancillary Services Markets,'' October 18, 1999.
``The Competitiveness of the California Energy and Ancillary Services 
    Markets,'' March 9, 2000.
Comments on `Comprehensive Congestion Management Reform--Zonal-Forward 
    Market--White Paper' by California ISO,'' April 24, 2000.
``Opinion on the California ISO's Proposal for Interim Locational 
    Market Power Mitigation (`Interim LMPM'),'' June 13, 2000.
``Recent Events in the California Electricity Industry and the Level of 
    Price Caps on the ISO's Energy and Ancillary Services Markets,'' 
    July 6, 2000.
``Market Surveillance Committee Opinion on the ISO's Proposal For 
    Congestion Management Reform,'' July 31, 2000.
``Designing the Market for Local Reliability Service,'' August 3, 2000.
``An Analysis of the June 2000 Price Spikes in the California ISO's 
    Energy and Ancillary Services Markets,'' September 6, 2000.
``Long-Term Price Cap Policy,'' September 20, 2000.
``Analysis of `Order Proposing Remedies for California Wholesale 
    Electric Markets (Issued November 1, 2000),' '' December 1, 2000.
``Proposed Market Monitoring and Mitigation Plan for California 
    Electricity Market,'' February 6, 2001.
Comments on ``Staff Recommendation on Prospective Market Monitoring and 
    Mitigation for the California Wholesale Electricity Market,'' March 
    22, 2001.
Comments on ``Market Design 2002 Project: Preliminary Draft 
    Comprehensive Design Proposal,'' February 20, 2002.
Comments on ``Market Design 2002 Project: Preliminary Draft 
    Comprehensive Design Proposal,'' April 22, 2002.
         Other Papers and Presentations on Electricity Markets
             Available from: http://www.stanford.edu/wolak.
The Impact of Market Rules and Market Structure on the Price 
    Determination Process in the England and Wales Electricity Market, 
    mimeo, February 1996 (with R. H. Patrick).
The Time Series Behavior of Market Prices and Output in the England and 
    Wales Electricity Market, mimeo, October 1996 (with R. H. Patrick).
Estimating the Customer-Level Demand for Electricity Under Real-Time 
    Market Prices, mimeo, August 1997, (with R.H. Patrick).
Market Design and Price Behavior in Restructured Electricity Markets: 
    An International Comparison, Competition Policy in the Asia Pacific 
    Region, EASE Volume 8, Takatoshi Ito and Anne Krueger (editors) 
    University of Chicago Press, 1999.
Regulation and the Leverage of Local Market Power in the California 
    Electricity Market, July 1999 (with James Bushnell).
Measuring Market Inefficiencies in California's Restructured 
    Electricity Market, September 2002 (with Severin Borenstein and 
    James Bushnell).
An Empirical Analysis of the Impact of Hedge Contracts on Bidding 
    Behavior in a Competitive Electricity Market, International 
    Economic Journal, Summer 2000, 1-40.
Identification and Estimation of Cost Functions Using Observed Bid 
    Data: An Application to Electricity, August 2000.
``Ten Myths About Competitive Electricity Markets: Lessons for 
    Designing Congestion Management Protocols,'' May 2001.
``Will FERC See the Light on the Law? (Los Angeles Times, 4/30/01).
``Want 10,000 megawatts? Use Variable Power Pricing'' (San Jose Mercury 
    News, May 4, 2001).
``A Comprehensive Market Power Mitigation Plan for the California 
    Electricity Market'' April 24, 2001.

    The Chairman. Dr. Wolak, you say it is hard to tell unless 
they tell you that that is what they are going to do. But, of 
course, they just about told us with that memo, is that not 
correct?
    Dr. Wolak. Well, I certainly think that that is one thing 
that the memo definitely gives that it did not give--what 
Senator Dunn said, that it certainly demonstrates clear intent. 
You no longer have to say you are not trying to exercise market 
power. The memo certainly makes that clear.
    The Chairman. I am going to yield my time to the others who 
have been intimate to this hearing and to the Enron procedures. 
But Mr. Freeman, let me ask this. When you talk about the daily 
price and the next day price, that system was set up in 
California--let me qualify you. You used to head up the TVA and 
have been an expert in energy for 30, 40 years now. What I am 
trying to get at is how in the world did California set this 
thing up where you could game inherently, the market was 
inherently gamable, as you have attested to?
    Mr. Freeman. It is my testimony, with the benefit of 
hindsight, you know, the word ``competition'' as you know is 
very seductive. When Pete Wilson was the Governor of California 
some years ago, California went for this deregulation scheme. 
But my testimony, and I think the testimony of just about 
everybody in California, is that deregulation for electricity 
is just inherently gamable.
    They have got 100 people on the floor down there in Houston 
for every one person we can hire, and they can dream up an 
almost endless number of schemes because no one has ever seen a 
kilowatt-hour. They can move it to Kansas and back and you 
cannot tell they are lying or they did not move it at all. They 
claim transactions between each other.
    The reason they did not want to tell you about the booking 
scheme is that sometimes it is a legitimate transaction, but 
they did a lot of it when there was no transactions at all and 
they pretended that power was sold and resold to make their 
volumes look higher when nothing happened at all.
    The fertile minds of the gamers will always be one game 
ahead of people trying to stop it. That is why Sam Rayburn and 
the Congress in 1935 had the wisdom to say the rates for 
electricity shall, shall be just and reasonable. The FERC has 
no authority to allow a dysfunctional market to continue. They 
have a duty to fix a price that reflects real competition, 
which is costs and a reasonable profit.
    Finally, to his credit, President Wood and Nora Brownell 
and Mr. Massey came in in June of 2001 and put some kind of a 
ceiling in there. We are hoping that with all this attention 
now they will not end that September 30th. We are scared to 
death that right now their controls expire on September 30th 
and we are afraid of an October surprise. It is an election 
year in California, and we want to see those controls stay in 
place because the law demands it.
    Now, between the time that these fellows that testified 
this morning first found out about this back in October of 
2000, and in June when they told Mr. Skilling about it, was a 
7- or 8-month period where everybody on the West Coast got 
taken to the cleaners. I mean to the tune of billions and 
billions of dollars, all the way from the State of Washington, 
through Oregon, through California. To suggest that there was 
any vigilance, that there was any morality, that there was any 
concern in that Enron Corporation when they testified this 
morning that there were people that knew about this back in 
October--and the irony of it is that they admitted that they 
did not tell Mr. Skilling, never told Mr. Lay about it. There 
was no sense of outrage. There was no sense of concern.
    These are people with no moral compass. It does not matter, 
Mr. Wolak, whether somebody who is picking my pocket did it out 
of market power or out of manipulation. I could care less what 
word you want to use. They did it and it was an outrage, and it 
was unjust and unreasonable, and we are here saying we want our 
money back.
    The Chairman. You talk about gamable and the crowd down in 
Houston. Is it not your testimony--I heard you; I want to be 
correct--you said one of the principal lobbyists was Mr. 
Kenneth Lay for this gamable system in California?
    Mr. Freeman. Oh, yes. He was in California from the year 
one and at every step of the way, whether it was the rules that 
the ISO put in place or the Power Exchange. All of these rules, 
the lobbying was led by Enron.
    The Chairman. I remember his wife appearing on my TV at 
home saying that he did not know what was going on.
    Mr. Freeman. Well, he may not have known exactly what was 
going on in Houston because he spent a lot of time in 
California.
    The Chairman. Let me yield to Senator Wyden.
    Senator Wyden. Thank you. Thank you for being willing to 
come back a second time.
    The witnesses earlier, a big part of what they were 
asserting as their defense is that California knew about all 
these kinds of things that were going on, that California knew 
about what certainly people in my part of the world think is 
pretty questionable: to take power that is non-firm and sell it 
as firm.
    Did California know about all these sleazy practices, as we 
heard the witnesses earlier say?
    Senator Dunn. Senator, let me take a shot at that one since 
I started my testimony with the relatively bold statement that 
we have known about these strategies, albeit not their 
nicknames. We have known about the strategies themselves or at 
least some of them for a long period of time, and so has FERC.
    Now, why did California not act in response to these 
strategies when they were picked up some time ago? I believe 
the best suited California entity, which is actually a FERC 
creation, that was in a position to respond was the California 
ISO. We deposed the CEO of the California ISO, a man by the 
name of Terry Winter. Let me tell you what he said specifically 
with respect to the strategy relating to what we call megawatt 
laundering. That is shipping megawatts out of the state at 
least in theory, bringing them back in the state for the 
purposes of avoiding the then-existing price caps that were 
installed by the California ISO with FERC approval.
    Mr. Winter indicated--now, he is the CEO of the ISO. He 
indicated yes, he was aware of the conduct, but he really did 
not like the term ``megawatt laundering.'' When pressed about 
what he did about those strategies, the best he could come up 
with: Well, we tried to tinker with the rules a little here and 
a little there.
    But what is most telling, Senator, at least in my view, is 
what Mr. Winter did in that critical time period referenced in 
the Enron memos of December 6th, 7th, and 8th, 2000. We are now 
faced with an unbelievable situation which I believe when 
ultimately the full truth comes out will end up to be a 
manufactured situation for purposes of blowing out the then-
existing California price caps. The CEO of ISO is now faced 
with Stage 2 and 3 Emergencies. In other words, in lay terms, 
the lights are about to go out in California, as Senator Boxer 
indicated before.
    Instead of commencing an emergency investigation into the 
behavior of the market participants that were refusing to sell 
into the market because of the price caps, he instead decided 
to go to FERC and ask for elimination of the price caps so the 
market participants could make more money. We asked him: Did 
you make any phone calls to market participants about why they 
were withholding? No. Did you commence an investigation? No. 
Did you review documents? No. Did you consider it may have been 
the result of the manipulative strategies you already admitted 
were in existence? No.
    All he did was march to the tune, in my view, of the 
industry's drums. I want to underscore this because what led 
to, in my view, the strategy to blow out the California price 
caps was a vote by the California ISO board in late October 
2000 when they instituted what is technically called the load-
differentiated price cap. Some folks refer to it as the $100 
price cap.
    When that vote was taken in late October, the activity 
within the industry went into overdrive to eliminate those 
price caps through a variety of different maneuvers. What did 
Terry Winter do as the CEO of the ISO board when his board 
voted to institute load-differentiated price caps? Nothing. 
Nothing. He did not order new software, he did not start an 
investigation or an examination of how to implement those new 
price caps. Nothing.
    Senator Wyden. What is striking is that, again, if you just 
look at what is on the record, Mr. Sanders said, for example, 
today that he had not been involved in any destruction of 
documents and he knew of nobody who had been involved in 
destroying documents. I went back and looked at the testimony 
you gave when you came before the Committee earlier. You 
pointed specifically to your concern about destruction of 
documents.
    I think it is helpful to have your reaction to the comments 
that we heard earlier. There are a number of areas that I asked 
about, particularly those affecting the Pacific Northwest, that 
just do not pass the smell test. I mean, to say that you can 
sell non-firm power as firm power is not being straight with 
people and at a minimum you ought to be disclosing that.
    Mr. Freeman. Senator Wyden, could I comment?
    Senator Wyden. Sure.
    Mr. Freeman. I ran the Tennessee Valley Authority. We sold 
power under interruptible rates. Even though we had plenty of 
power, we interrupted each customer each year so that they 
would know that it was interruptible rate. The idea of 
pretending that you are not going to interrupt someone--I mean, 
you give people a lower rate for the right to interrupt, and 
that right certainly in a crisis is likely to be exercised.
    So I do not think your words were too strong at all in 
describing that.
    If I could add a bit to Senator Dunn's comment. Mr. Winter 
testified in public that the reason he did not go to the 
Governor and brief him before he went to FERC to eliminate the 
caps is that he knew that the Governor would disagree with him 
and would not let him do it. This ISO is completely out of 
control in terms of the state government.
    Senator Wyden. I share your concern about the California 
ISO and, obviously, all of the activities in California have 
ramifications for my part of the country because it is an 
integrated market. What I have been trying to do through all of 
these hearings essentially is to point out how Enron has 
essentially been running a West Coast protection racket, 
essentially structuring these deals so as to bilk people all up 
and down the West Coast. You have helped to confirm our 
concerns.
    Just one other question for you, Mr. Freeman, if I might, 
again to look at the implications for the entire West. 
California has got long-term power contracts that are currently 
above market rates. It is my sense that the spiking of prices 
in the spot markets had a direct impact on long-term contracts, 
again not just in California, but all up and down the West 
Coast.
    Mr. Freeman. There is absolutely no doubt about it. I did 
the negotiating for California and they had us over a barrel. I 
mean, we had a choice of continuing paying 30, 35 cents a 
kilowatt-hour in the spot market or accepting long-term 
contracts at 7 cents or 6 cents, which compared to what we were 
paying looked pretty good, but comparing to a just and 
reasonable rate for long-term power is way too high.
    That is the reason that we are before FERC under section 
206 requesting that these contracts be trimmed down to a just 
and reasonable level. And we have renegotiated some of the 
contracts, but the rest of them are there. The spot market, the 
dysfunctional market, was the proximate cause of our having to 
pay over market for the long-term contracts. I am sure it is 
true in Oregon and true in Washington. It was all the same 
market.
    Senator Wyden. I have one last question, but I think, Ms. 
Lynch, did you want to comment on that, as well?
    Ms. Lynch. I just wanted to note that FERC knows it, too, 
that there is a relationship between long-term prices and 
short-term prices. In its December 15th, 2000, order that gave 
the sellers the ability to run amok in California, they drop a 
footnote and say: Well, there is a relationship between out of 
control short-term prices and long-term prices. However, when 
the California Public Utilities Commission sued on those long-
term contracts, saying that we have overpaid over $21 billion, 
FERC instituted a new evidentiary standard and said we not only 
have to prove the prices are unjust and unreasonable, we also 
have to prove that they are against public interest.
    So once we meet one evidentiary threshold, they raise the 
bar--all in the service of the sellers.
    Senator Wyden. My last question. We are at a critical time 
now with respect to energy legislation in the Congress. We have 
a House-Senate conference. We have the good fortune to have a 
strong advocate of the consumer in Senator Hollings who will be 
in the room when we are working on these provisions. I want to 
get your thoughts on the three areas that I think are key in 
terms of consumer protection. One is the transparency 
provisions, the openness requirements, because I think that 
would have made a real difference here.
    Second are tougher penalties, because it is clear that 
there really is not the deterrent that is needed in order to 
send a message with respect to this wrongdoing.
    Third is the ratepayer advocate that would get to the 
Department of Justice, so that instead of having all this 
dawdling at FERC that we have seen, that we would have a chance 
to have a tough enforcement office at Justice.
    I would be interested in your thoughts with respect to 
those provisions and whether there are any others. My reason 
for asking is that this is extraordinarily timely because in 
the next few weeks I think decisions are going to be made with 
respect to whether we are going to get consumer protections 
that can prevent this from happening again.
    Ms. Lynch. I believe all three provisions are necessary, 
but not sufficient to fix the California market because of the 
extent of the gaming and the illegal activity. I also believe 
that Senator Feinstein's derivative amendment, which narrowly 
failed, needs to be reconsidered by this Congress. The only way 
you are going to actually be able to know what is happening is 
to have public access to the information and reports that are 
under penalty of perjury.
    But, in addition, do not preempt the states any further. 
Please do not give additional state authority away to a do-
nothing, know-nothing FERC. I am glad that they have finally 
issued their own subpoenas in May of 2002. I am sad that they 
never helped us enforce our subpoenas that we issued in 
September of 2000.
    The problem is, even with a smoking gun, they are going to 
go slow. So please do not curtail the states' authority to fix 
their own markets in favor of a very distant and very lax FERC.
    Senator Wyden. Before we get Senator Dunn and Mr. Freeman, 
please know that I am strongly in support of those, as well. 
With Senator Cantwell, I am one of the original sponsors of 
Senator Feinstein's derivatives legislation. It seems to me if 
you are going to trade and sell pork bellies in this country 
with a degree of openness, you certainly ought to do it for 
energy, as well. I think we are going to have that legislation. 
It will not be in the conference because, as you know, we were 
not successful on the floor. But just know we are going to come 
back very, very aggressively on behalf of that legislation and 
stay at it. As far as the preemption, I share your view on it 
as well.
    Senator Dunn.
    Senator Dunn. Thank you, Senator. The only thing I would 
add to President Lynch's comments is we need at this time, in 
my view, to revoke the market-based rate authority. That is the 
goose that laid the golden egg for the industry. Yet, to obtain 
market-based rate authority, as I believe Professor Wolak 
indicated before, you as an industry player, you as a market 
participant, were required to come to the FERC and prove you do 
not have market power.
    We had one of the FERC lawyers testify before our Committee 
last year. He came and we explored the issue of defining market 
power and he expressed the view that the definition of market 
power at FERC is deliberately vague. I am adding a little to 
his testimony, taking a little liberties, and my apologies to 
Mr. Pease for doing so. But in essence that is how we 
interpreted his testimony.
    When we asked why the Commission was not pursuing the 
exercise of market power, which almost every economist 
acknowledges is prevalent in that market, and thus revoking the 
market-based rate authority due to that, his answer was: I do 
not know, Senator; you are going to have to ask the 
commissioners themselves--who have refused to appear before our 
Committee.
    I believe the revocation of the market-based rate authority 
is necessary until we have more definitive rules, as suggested 
by Professor Wolak.
    Senator Wyden. Mr. Freeman, then Mr. Wolak.
    Mr. Freeman. I agree with the testimony of my colleagues 
here. I would want to stress this issue of FERC making market-
based rates. It seems to me that either you need an amendment 
to the Act that forbids market rates or at the very least an 
amendment or maybe just language in the Committee report that 
says that FERC got it backward last time, they went to market-
based rates without knowing whether there was a competitive 
market, and that there has to be a hearing on the record with a 
finding that the market is in fact competitive before they can 
permit market-based rates. Because, otherwise, what happened in 
California will happen again.
    I think that is fundamental. They are now just wedded to 
this market deregulation scheme and, frankly, they are trying 
to do it with transmission, which is their next step. I think 
the Congress needs to tell them to stop. The Federal Power Act 
worked rather well for 40 or 50 years, rates have to be just 
and reasonable, and they cannot let anybody go to a market 
approach without first making a finding on the record that that 
market approach will come up with just and reasonable rates. 
Whether that would require an amendment to the Act or whether 
just strong language in the Committee report would do it, but 
that, I think, is absolutely essential to put a stop to this.
    Senator Wyden. Dr. Wolak.
    Dr. Wolak. I just want to followup on one of the points 
Senator Dunn made. The way that the FERC market-based rate 
authority works is that you as a generator make a filing to 
FERC with the various concentration measures and the like to 
demonstrate to FERC's satisfaction, which is very clearly a 
very low hurdle, that you do not have the ability to exercise 
market power. But then once you get market-based rate 
authority, you can exercise all the market power you want, 
because it is only the prices that reflect the exercise of 
market power that are illegal. But FERC has not said that 
exercising market power is illegal, nor have they defined what 
exercising market power is.
    As almost any, I think, economist will also tell you, it is 
virtually impossible to tell prospectively whether or not a 
market is going to be workably competitive or not. That is why 
I guess the thing that I would add to this, to your list, is 
this sort of market performance index, where what you are doing 
is you are monitoring on an ongoing basis market prices 
relative to some competitive benchmark, and to the extent that 
those prices get grossly out of whack with that, what we think 
should be coming from a competitive market, then automatic 
intervention is triggered, so that effectively you cannot have 
another California crisis. FERC is compelled to act, rather 
than have the discretion.
    The first step in that process is for them to set a 
standard for what constitutes a just and reasonable price, lay 
out a methodology for that to be the case, and allow this index 
to be computed by all market participants.
    Then the other is to make the intervention be something I 
think Senator Dunn alluded to, which is everybody returns to 
cost of service if this index is exceeded until the appropriate 
sorts of mitigation measures are put in place. This will make 
the market self-regulating. One of the things that happened in 
California that we learned during the 2001 runup is essentially 
at each step of the way market participants found that the 
amount of money that was available to take from California just 
kept getting bigger and bigger and there was no one telling 
them that they could not take more, and so they did.
    Senator Wyden. Thank you, Mr. Chairman.
    Senator Dunn. May I add one thing, Mr. Chairman, very 
quickly? My apologies.
    The Chairman. Go ahead.
    Senator Dunn. Please remember the core reason that 
California went down the deregulation route is not, as some 
have accused in my view, that we were duped. We really had the 
best of intentions as policymakers in California. We wanted one 
simple thing as policymakers. We wanted to deliver lower rates 
to our constituents. That was at the heart of it. We were 
promised that if we adopted deregulation that, in fact, the 
benefits of free competition would deliver better service at 
lower costs to our constituents.
    What we failed to take into account with that promise is 
that the move for deregulation was led by the industry. Tell 
me, why would any CEO of any generator or trader advocate for 
deregulation if they thought it would lower the income to that 
particular company and thereby benefit to stockholders? They 
would not. But the promise to each and every one of us is: 
Adopt our scheme and you will see lower prices. Not true.
    The Chairman. Senator Boxer.
    Senator Boxer. You did not know what the word ``scheme'' 
meant, right?
    Senator Dunn. Correct, Senator.
    Senator Boxer. Look what Jeffrey Skilling told you. He said 
under deregulation California would save about $8.9 billion per 
year. You should have quizzed him right then. We did not even 
spend $8.9 billion per year.
    Senator Dunn. Can I add to that, Senator?
    Senator Boxer. Yes, you can add to it.
    Senator Dunn. That is part of a quote, because what he did 
is going on in that testimony and tell us Californians what we 
could get for $8.9 billion.
    Senator Boxer. Oh, I understand. I am just saying, hey, 
they were behind it, that is it. We know it. And we know when 
California's problem was solved they went bankrupt, Professor 
Wolak. That is the truth.
    Look what he said. Look what Skilling said about it when 
asked about it. He said to The San Diego Union-Tribune, 
describing the company's condition when they were going broke: 
``Enron, he said, faced terrible problems because California's 
electricity crisis had been solved.'' I mean, this is an 
amazing story of greed and a complete lack of morality, as Mr. 
Freeman said.
    I would ask to put Governor Gray Davis' statement in the 
record at this point.
    The Chairman. It will be included.
    [The prepared statement of Governor Davis follows:]

     Prepared Statement of Governor Gray Davis, State of California
    I am pleased to submit the following statement for the record.
    Thank you for holding these important hearings. In the last week, 
documents released by the Federal Energy Regulatory Commission (FERC), 
the Securities and Exchange Commission (SEC) and announcements by 
individual companies have revealed a disturbing pattern of deception 
and abuse by energy traders. The people of California and the U.S.--as 
consumers, taxpayers, businesses, retirees and shareholders--have been 
hurt. It is time to get to the bottom of these practices, ensure that 
they come to a stop and that the guilty pay.
    As I have said many times before, California's electricity market 
was and is broken. Traders and sellers have engaged in market 
manipulation and taken advantage of the flaws in the market to line 
their own pockets. Protections supposedly built into California's 
market design and subject to federal regulatory approval failed. 
Federal regulators for too long overlooked the obvious signs of market 
abuses and manipulation and ignored their own regulatory mandates. And 
it cost California consumers, businesses, treasury and economy 
literally billions of dollars in the last three years.
    We have been saying as much since 2000. We have been accused of 
blaming others for problems of our own making. We have been told 
repeatedly to ``trust the market.'' But FERC's revelation last week of 
Enron's confession to abusive, manipulative and possibly illegal 
electricity trading practices bear out what California has been saying. 
There is reason to believe that other traders engaged in similar 
practices. Also, the SEC announced it was investigating a practice by 
Dynegy and CMS Energy called ``round trip'' or ``wash'' trades--a kind 
of financial shell game where companies traded equal amounts of energy 
to inflate their trading volumes. Reliant Energy admitted it also 
engaged in ``wash'' trades. Now we learn that Enron has admitted to 
overstating the value of its assets by up to $24 billion.
    Electricity is too important to our economy and indeed our health 
and safety to tolerate the games these traders have been playing. It is 
time to insist that these industry trading practices be thoroughly 
investigated, those who did wrong be held accountable and that 
California consumers be made whole for the billions of dollars that 
flowed out of state as a result of these deceptions. It is also time 
for the regulators to step up to their responsibilities to ensure that 
consumers' interests are put first.
    There are three fundamental actions that must happen--first, there 
must be a thorough accounting and remedy of all these abusive and 
corrupt practices; second, there must be actions to ensure that 
effective protections are put in place and stay in place and third, 
there must be effective mechanisms to hold traders accountable for 
their actions.
    Enron's confession memos are truly astounding only in how many 
abusive practices they reveal. Unfortunately, we have long understood 
the effects of their manipulations--wildly volatile energy markets, 
unreasonably high prices, forced blackouts and tight supplies. We have 
also long known that these problems were not merely the consequence of 
the supply and demand situation in California and the West, but of 
deliberate attempts to manipulate the market to the detriment of our 
people and economy. We have taken steps to make sure there is enough 
electricity in California. We have built eleven new power plants with 
more coming on-line this summer. We have invested historic amounts in 
energy efficiency and in 2001, Californians achieved heroic levels of 
conservation.
    Some have labeled the Enron memo a ``smoking gun,'' but I believe 
it is also something else--the tip of the iceberg. Enron's memo labeled 
these fraudulent practices--Fatboy, Ricochet, Death Star and Get 
Shorty--trading practices that drove California to the brink of 
blackouts by creating ``phantom'' power supply shortages and congestion 
of power lines to drive up prices.
    According to the Enron memo, the only downside as one trading 
strategy was described was a ``public relations risk arising from the 
fact that such exports may have contributed to California's declaration 
of a Stage 2 emergency yesterday.'' The Enron memos allege that others 
in the industry engaged in these practices--FERC should follow up 
thoroughly. Asking other traders and sellers to admit to whether they 
engaged in similar practices as FERC did on May 8 is a good start but 
it is not enough. We believe and have submitted to FERC evidence of 
other abusive practices, such as withholding of power. FERC must 
thoroughly investigate and remedy any and all market abuses.
    Enron's influence went beyond just leading other traders in 
deceptive and fraudulent activities. It is well known that Enron sought 
to make political, legislative and regulatory changes to support their 
version of the brave new world. They tried through every means possible 
to unravel any regulatory oversight. Enron attempted to ensure they 
could conduct their business behind a veil of secrecy. They sought to 
convince regulators that price controls and effective market 
surveillance were unnecessary and would in fact harm competition. We 
never believed that the electricity market could function like that. 
Now the rest of the world knows that the deregulation Enron advocated 
was all just a part of Enron's deceptions.
    I applaud these committees' investigations of abusive practices. I 
urge you to call on federal regulators, both FERC and the SEC, to 
ferret out these market manipulations by energy traders, remedy them 
and put protections in place to make sure it does not happen again. If 
they do not act decisively, the Congress should.
    Last week I joined members of the California Congressional 
delegation in calling on Attorney General Ashcroft to initiate a 
criminal investigation of Enron's activities.
    In a May 7, 2002 letter to FERC Chairman Pat Wood, I outlined the 
steps we believe FERC must take:

        1)  FERC must thoroughly investigate these practices by all 
        energy traders, not just Enron. We are heartened to see that 
        FERC is asking all energy traders and seller whether they 
        engaged in these practices.

        2)  FERC must allow the California Independent System Operator 
        (CAISO) to adopt stronger rules to discourage, prevent and 
        punish abusive trading behavior. In the past year, FERC has 
        rejected some CAISO proposed rules--rules FERC allowed other 
        ISOs to use.

        3)  FERC must continue west-wide price caps and must offer 
        requirements beyond September 30, 2002. Not only do 
        California's markets continue to be vulnerable to manipulation, 
        but also it is clear from the Enron memo that a California-only 
        solution will not work.

        4)  FERC must act on California's refund request. California is 
        appealing an earlier FERC decision to exclude billions of 
        dollars from the refund proceeding.

        5)  FERC must also reform the long-term contracts as California 
        has requested in a proceeding brought by the Public Utilities 
        Commission and the Electricity Oversight Board.

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

    Senator Boxer. He talks about the refunds and the 
renegotiation.
    But, I have to say, Professor, that when you started your 
presentation, I used to be--I was an economics major in 
college. I started to sweat. It brought back the memory.
    But the thing I take away from your presentation is FERC 
has to act on unjust and unreasonable, bottom line, period. It 
does not matter if there was illegalities. You do not know; you 
are not a lawyer. But FERC must act on unjust and unreasonable 
prices. And by doing nothing it is an affirmative decision.
    Mr. Chairman, if I have to make that point a hundred times, 
I will, because that is the bottom line. That is their job. 
Even our professor comes together with our panel on that very 
important point.
    Ms. Lynch, I think you have a way of--all our panelists 
do--of painting the picture very clearly. So, I have summed up 
what I think you have said here. I am going to put it in my own 
words, because I believe this, and I want to know if you agree 
with me and if not, could you make me--because I want to 
explain it clearly.
    Enron held Californians' electricity supply hostage for 
astronomical, non-regulated gouging prices, and they were able 
to do it for so long because of their relationship with FERC, 
the only entity who could have stopped them.
    Ms. Lynch. I think that is absolutely right.
    Senator Boxer. Well, that is our story, one sentence. 
Clearly, others may have been part of this, but we know they 
took the lead from testimony of Senator Dunn, Mr. Freeman, just 
explaining how involved they were. This is the issue, and the 
reason that I felt like I wanted to make a citizen's arrest 
before, but held myself back, is because we could have been 
spared all this.
    Then Senator Dunn explains how the ISO did not work on 
behalf of consumers like they should have. The PUC did, 
Senator. The PUC wrote to FERC, Mr. Chairman, August 2000. PUC 
sought a FERC investigation and remedies for abuse of market 
power by Enron and other marketers. So when people say 
California did not speak up, that is not true.
    On November 6, 2000, the PUC asked the FERC to issue 
subpoenas to Enron and other marketers regarding abuses in the 
California market. FERC has not responded. Finally, in light of 
the smoking guns memos we now know what was going on, and now 
FERC has issued affidavits.
    So let us not say that California was not saying help us. I 
have not gone through what Senator Feinstein and I were doing 
and Congresswoman Eshoo, Congressmen Farr, and Miller. I mean, 
I could name the whole delegation, going at FERC for help.
    I just have to say again, doing nothing is an affirmative 
decision. Does anyone disagree with that on the panel? FERC 
doing nothing is an affirmative policy. Yes?
    Senator Dunn. Senator, if I can add one more credit to 
those, such as the PUC, that were consistently barraging FERC 
with this information back to 2000, and that is an individual I 
think most of the Congressional delegation and you, Senator 
Boxer, know. That is State Senator Steve Pease, because he was 
writing to FERC in late 1999, early 2000, complaining from the 
get-go of this market and laying out in great detail.
    Senator Boxer. Well, he had a lot at stake, did he not?
    Senator Dunn. He did indeed.
    Senator Boxer. He should have done that, and I am proud of 
him for doing that because a lot of people in his situation 
would not have done it.
    I do not want to start naming Members of Congress and 
Members of the Senate because I have got to get through. 
Loretta, did you want to add something?
    Ms. Lynch. I would just note that FERC did less than 
nothing. They affirmatively put barriers in our way in the 
investigation.
    Senator Boxer. Important, so I am going to amend that. They 
did nothing and, worse, they stopped the California PUC in 
every way that they could from pursuing legal action; is that 
correct?
    Ms. Lynch. Well, they did not help us and then they changed 
the rules, which would make it more difficult for us to pursue.
    Senator Boxer. They made it very difficult for the 
California PUC to pursue justice. Is that correct?
    Ms. Lynch. Yes. Then because we have to sue at FERC first, 
they have wrapped our legal suits up in procedural maneuvers 
for 20 months or 18 months such that we cannot get to court. In 
fact, as late as May 2002, FERC has moved to delay our appeals 
in the Ninth Circuit, repudiating their representations that we 
could go forward.
    This is our appeal of their December 8th action blowing out 
the price caps and their December 15th action opening this door 
to the sellers.
    Senator Boxer. So not only did they do nothing to protect 
consumers for us as we were begging them to do, they stopped 
you, made it very difficult, effectively stopped you. They 
effectively stopped you from having justice done in helping our 
consumers. My concern, Mr. Chairman--and that is why I asked 
FERC, did you meet with the people from Enron? Oh, yes, we got 
the information; they wined and dined them 25 times. There is 
too much coziness here and I do not have confidence because of 
the ties of this administration to Enron.
    When we talk to Mr. Wood, I hope he is going to reassure 
me. I heard there was a meeting this morning and I have some 
quotes from Commissioner Massey which are hopeful. But let 
there be no mistake about it from this hearing, the people from 
California want redress. I think Mr. Freeman said it in the 
most straightforward way: We want our money back. But more than 
that, we want our refunds, but we want to make sure we can 
renegotiate those long-term contracts.
    Mr. Chairman, they were made under duress, under stress, 
under a phony market that was riddled with schemes. Why it 
would take FERC this long is beyond me. This is not fair, to 
have the people of California hang out like this to dry, to 
have a state deficit which I understand Senator Dunn believes 
is all, if not almost all, related to what it has cost us.
    So, Mr. Chairman, I want to really thank you. Hearing, 
learning about these schemes, connecting the dots, hearing 
Loretta Lynch say she was back in August 2000 asking for 
investigations, not having gotten those investigations--now, I 
want to make it clear that Bill Clinton was President and that 
the FERC under Bill Clinton did find unjust and unreasonable 
prices, and they did have some must-sell orders.
    Under Bush we finally got something good eight months too 
late, after we were broke, and our Republican business people 
in the state said to the Bush Administration: You have got to 
step in here. You know, our friends from Washington State lost 
their whole aluminum industry, that is what they told me, 
because of the high cost of energy.
    So I just want to thank the panel very much.
    Is Mr. Wood here now? Is he? He is here, good. So I do not 
want to take up anything else. But I have one question for you, 
Loretta Lynch. You showed us that the order that FERC issued 
that enables these companies to go at market-based pricing--
does that just affect California or does that affect other 
states that have deregulation?
    Ms. Lynch. We focused on the California market-based rates, 
but I believe that they are broader than California.
    Senator Boxer. So it is possible if this thing goes awry 
that other states could have the same thing happen or close to 
the same thing? It is possible?
    Ms. Lynch. Oh, it is more than possible. We have 138 days 
until the Death Star comes back to California. On October 1st, 
Get Shorty, Fat Boy, Ricochet, and Death Star are going to 
occur again in California. I wouldsubmit that 138 days is way 
too short to first, get to the bottom of this and figure out 
exactly how they gamed us, and also create a system where they 
cannot game us, and hopefully this time test it instead of 
making sure that Californians are guinea pigs in the test.
    Senator Boxer. That is right. But I am saying it could 
happen to other states that have deregulation.
    Ms. Lynch. It will. I mean, if California's market spins 
out of control on October 1st, so will the West.
    Senator Boxer. Mr. Freeman, can I submit for the record 
what this means, ``How long can we not disclose bookouts?'' Do 
you understand that?
    Mr. Freeman. Yes, I understand that some of those 
transactions were make-believe, where they pretended to sell 
power to each other and did not. Other transactions, when there 
is a legitimate swap and you net it out, is perfect accounting. 
But they just did not want to report them. They did not want to 
make that distinction, and they jacked up the revenues that 
they supposedly made by having numbers that were unreal.
    So this is all part of the gaming.
    Senator Boxer. So they were trying to cover up the gaming 
by saying ``How long can we not disclose bookouts.'' It is 
interesting that you knew it, but none of the attorneys that 
are paid I-do-not-know-what an hour were unable to answer that 
question. I find that astounding. But, then again, you are just 
a country boy, right?
    Mr. Freeman. That is not much credit to me if you find it 
astounding.
    But, while I am speaking, could I help us clarify our 
opinion of the FERC commissioners. Chairman Hendrie was the guy 
that really socked it to us. He is a Clinton appointee.
    Senator Boxer. That is not the right name.
    Mr. Freeman. Hecker.
    Senator Boxer. Hecker.
    Mr. Freeman. Before him there was----
    Senator Boxer. There is some guy named Hendrie out there 
wondering, what did I do?
    Mr. Freeman. But basically they said that if California 
just quadrupled its rates everything would be fine. They wanted 
us to have a depression rather than a recession, and they did 
nothing during this period of grand larceny.
    You know, we had an 18-minute gap under Watergate. The 
witnesses this morning testified to an 8-month gap between the 
time that they discovered this stuff back in October until June 
when they told Mr. Skilling about it, only because they figured 
he might hear about it in California.
    But it was when President Pat Wood came on board that we 
finally got some relief, and we want to give him public credit. 
He did the right thing then. We have every hope and reason to 
believe that with this new information he will now do the 
things that FERC needs to do and do them promptly.
    Senator Boxer. I am forever hopeful that FERC will do the 
right thing. They have done a couple of right things. It took 
them too long to act the first time, way too long to act while 
this larceny went on. I do not like what PUC Chair Lynch tells 
me about them getting in the way of California finding justice. 
So those things are not happy for me.
    But I hope today that my problems will be resolved, that 
Mr. Wood will say, in light of this we are going to see those 
refunds, we are going to see the renegotiation, we are going to 
redo those caps because it is a dysfunctional market. If I hear 
that, I will be the happiest person in the Capitol. If I do, I 
will call you all. The call will be on me personally.
    So, I want to thank all of you. I do not know if anyone 
else has any, but I am done. Thank you.
    The Chairman. Thank you very much. Senator Dorgan takes 
over.
    Senator Dorgan. Mr. Chairman, thank you very much.
    Let us excuse these witnesses. Thank you very much for 
testifying once again today and contributing to this hearing.
    The Chairman. It was outstanding, I can tell you that.
    Senator Dorgan. Next we will have the testimony of Mr. Pat 
Wood, Chairman of the Federal Energy Regulatory Commission. Mr. 
Wood, would you please come forward and take a seat at the 
witness table, please.
    We are going to be in recess for two minutes.
    [Brief recess.]
    Senator Dorgan. The Committee will come to order and we 
will ask that the door be closed. We next will hear from Mr. 
Patrick Wood, Chairman of the Federal Energy Regulatory 
Commission. Mr. Wood, thank you for joining us. I believe you 
have a statement. Your entire statement will be made part of 
the record and you may summarize.

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

    Mr. Wood. Thank you, Mr. Dorgan, Mr. Chairman, Senator 
Boxer. It is a pleasure to be here. Not a pleasure; it is a 
hard time to be here, quite frankly. I have heard Senator 
Boxer's comments on the pain and I received your letter last 
week, ma'am, about the budget issues your state has to face and 
how this could be part of the mix. So I understand that, and we 
want to, to kind of cut to the chase, we want to get these 
issues resolved, to try to resolve what happened in the past as 
fairly and equitably as possible to all concerned, to talk 
about how to make the future better, not just for California--
but for all the other states that deal with changes in their 
energy markets. It is such a critical commodity to all 
Americans that it cannot be treated cavalierly, and please know 
that it is not.
    In fact, one of the principal reasons that I accepted the 
President's request to serve on the FERC about this time last 
year was to restore confidence in how the energy markets are 
working around the nation. The events in the Western markets, 
which you are very apprised of, in mid to late 2000 not only 
disrupted life out there, but made it very uncertain across the 
entire country about what is the future going to be like. 
Customers were nervous about the California experience, can it 
happen here. Even in very regulated states, the same concerns 
were happening about, ``Will we have sufficient power 
infrastructure to meet the needs of our growing economy?'' So 
please know that the ripple in the pond did not just stop at 
the California border. It went across the entire country.
    I had spent the prior six years of my professional career 
as a retail regulator in the State of Texas for telecom and the 
electric industry, and nothing, as I think my friend Loretta 
Lynch can tell you, brings home the job as clearly of what we 
need to do here than having served as a retail regulator at the 
state, where you see up and close personal the issues related 
to, of all your decisions relating to utility rates, service 
complaints, area codes, competitor issues, low income programs, 
renewable energy portfolios, and the like.
    The sort of behavior indicated in the Enron memos that I 
understand you visited with the authors of this morning is not 
what I have in mind when I talk about the benefits of 
competition in the nation's energy markets. One of the things 
that states needed when I was there was knowledge that FERC and 
the FCC, depending on which issue we were dealing with, would 
be supportive partners with the states as the states move 
forward to change the way that they are regulating these 
businesses.
    Market oversight is a great big part of that supportive 
partner relationship and it is one of the principal goals that 
I have set for the Commission from the day that I took over as 
Chairman last September. Building upon the front-line market 
monitoring units that we have at the California ISO and at the 
existing three ISO's here in the eastern markets, FERC has to 
have a better resource structure to address the needs of not 
only the regulators, but the customers in these different 
markets, as well as oversee the broader picture of energy 
infrastructure and balanced market rules.
    While there have been enforcement and hot line and market 
surveillance functions in our agency to date, I do not believe 
that they have had the mandate to pursue their job, the 
resources, or the visibility, to successfully oversee the 
markets in the nation. This is changing.
    Right before I took over as Chairman in December, Senator 
Domenici of New Mexico called and, based on some testimony I 
had made before the Senate Energy Committee in July of last 
year, asked if we needed more resources, and I said, yes, sir, 
we do; I need to be able to go out and hire some hot dogs to 
really oversee these markets, to lure them away from the 
private sector and to come work at the FERC, give some years to 
public service. I am pleased that the Congress did, after going 
through conference committee, add another $3 million to our 
budget, not ten as requested, but five of the high-paid 
positions, and that in the subsequent budget that has been 
before the Congress this year that has been added to a full 50 
additional people to staff that effort.
    We are reallocating resources within the agency to do it 
anyway. It is too important not to be done. But the greater 
ability I have to get that done with the resources--and please 
know that we have asked for it and I would love to be back up 
here to follow that all the way through later this year.
    But in any event, by the end of the year the full 
Commission agreed that market oversight is one of the three 
principal functions of what we do: infrastructure; balanced 
rules; and protection of customers through oversight. That 
third goal again was elevated to priority with the other two 
and we created the Office of Market Oversight and Investigation 
in January of this year, posted for the Director shortly 
thereafter, filled it with a well-credentialed and good leader, 
William Hederman, in late March, and they are staffing this 
process as we speak with auditors, investigators, data guys, 
engineers, economists, attorneys, analysts.
    We are doing not only the Office of Market Oversight and 
Investigation, but the actual investigation itself into the 
Western market. I committed on behalf of my colleagues to the 
Senate Energy Committee Members in January that we would look 
into market manipulation in the West and report back by this 
summer. We formally opened a docket. That is the docket from 
which the memoranda that you visited about earlier came. It is 
an unusual docket in that generally our investigations are 
private, they are not known. But because of my public 
commitment to the Committee to do those, we have made a web 
site available with all the public documents that come from the 
Commission.
    There are a number of confidential documents that were 
filed under seal and those will be kept that way. But the ones 
that we can make available we will and do.
    So I see my time has run out, but we have done a number of 
other things to make sure that the markets do catch this type 
of behavior before it happens, and where it does happen that we 
have sufficient ability to identify where it has happened and 
award the appropriate punishment to people who do not follow 
this.
    Finally, why we are doing this, why are we going through 
this transition of something that was working in most people's 
minds pretty well? I think if you look at your own PG&E in 
California, the embedded retail rate for the post-restructuring 
was $65 a megawatt-hour for the generation component. 
Competitive markets--I just pulled the strips today to look at 
before I came here--competitive markets in California today are 
$29 at wholesale, $21 on off-peak. A longer-term contract which 
carries through the summer is around $39.
    That is why we are doing this. There are significant 
savings from a well-functioning competitive wholesale market 
that customers ought to be able to put into their pockets. We 
saw this happen in the natural gas industry when FERC led an 
administrative effort with Congress making other changes to the 
statutes to open up the gas markets, and tens of billions of 
dollars have stayed in gas customers' pockets because of those 
efforts to make sure that a competitive wholesale market worked 
and worked well. So that is why we are in here fighting through 
these hard issues, and it would be very easy to retreat back 
into what we perceive worked well when in fact it was an 
expensive experience for customers and continues to be so 
today.
    So that is why we are here. We want markets that work for 
customers. When they play by the rules, market participants 
ought to get their fair reward. But, when they do not play by 
the rules, they ought to get their fair punishment. That is 
what I want our Commission to be about. We have got some 
changes to make, and please know, as the Committee that looks 
after consumer interests in the country, that the new FERC is 
committed to that and will follow through, not only in 
California, but everywhere, to make sure that that happens.
    I look forward to any of your questions or advice.
    [The prepared statement of Chairman Wood follows:]

 Prepared Statement of Hon. Patrick Wood III, Chairman, Federal Energy 
                         Regulatory Commission
I. Introduction and Summary

Mr. Chairman and Members of the Subcommittee:

    Thank you for the opportunity to testify concerning the 
developments and new evidence regarding Enron's role in manipulating 
western state electricity markets, focusing on California's electricity 
price increases and power shortage between May 2000 and June 2001.
    Two major events in the past two years have raised significant 
concern over how well competitive electric markets are working, whether 
our nation's regulatory institutions and expertise are adequate to deal 
with such markets, and the wisdom of continuing to move forward to 
promote competitive electric markets. These events are the California 
energy crisis and the collapse of the Enron Corporation. Since last 
year, FERC has moved aggressively to take steps within its authority to 
remedy problems in the California and Western wholesale electric 
markets and to investigate potential manipulation of wholesale markets. 
Just as importantly, the Commission is taking forward-looking measures 
to realign the wholesale electric industry and ensure that there are 
adequate market rules and appropriate market oversight in place to 
support fully competitive markets. While the recent California and 
Enron events have caused industry observers to reevaluate where we are 
on the road to competition, I continue to believe that competition is 
superior to traditional cost-based regulation for providing reliable 
and adequate electricity supplies at the lowest reasonable cost to the 
nation's electric customers. Just as competition is thriving in the 
natural gas industry today, so too can it thrive in the wholesale 
electric industry--but there is more work to be done.
    Let's confront the key issues head-on. Did California experience 
severe electric market problems? Clearly, yes. Were these problems the 
result of market manipulation? We are currently investigating that 
issue. Many observers agree that these problems stemmed in part from 
the poor design of the California electricity market and the lack of 
adequate reserves and demand response relative to growing electricity 
demand. Those conditions made it possible for Enron (apparently)--and 
possibly other market participants--to exploit, profit from, and 
possibly exacerbate the magnitude of California's problems. Did FERC 
respond properly to help California deal with these problems? Yes. It 
is clear that FERC took action to address problems in California and 
western markets, which became apparent in May 2000, by instituting a 
fact-finding investigation into the nation's electric bulk power 
markets on July 26, 2000, and has been dealing with those issues 
extensively ever since. Since I joined the Commission in June 2001, we 
have addressed California and western states issues in almost every 
single open meeting and have dealt with each issue using the best 
information and evidence available to us under the guidance and limits 
of the law.
    In the eleven months since I joined FERC, the nation has continued 
to reap the continuing benefits of wholesale electric and natural gas 
competition. The billions of dollars invested in efficient, economical, 
independent generation and gas pipelines and production over the past 
decade have caused wholesale electric prices across the nation to drop 
by 59 percent, while weighted average prices in California have dropped 
from almost $140 to about $25 per megawatt-hour. Approximately 41,000 
new megawatts of electric generation capacity have been built across 
the country--but only 2,922 megawatts have come on-line in California. 
Since I arrived in Washington, FERC has issued over 60 orders on issues 
relating to California and the western states electric market and 
instituted numerous proceedings relating to the California and western 
electric market. And to ensure adequate market oversight for all 
wholesale electric markets in the future, FERC has formed and is now 
staffing a new Office of Market Oversight and Investigation.
    My purpose today is not only to look backward, but to look to the 
future as well. I will begin this testimony by speaking about the 
Commission's ongoing investigation into potential market manipulation 
by Enron or other entities in the West, and then describe what steps 
the Commission has taken on California issues. But it is important to 
look forward, and address the broader issue of how we can assure that 
competitive electric markets work effectively across the nation, so all 
Americans can enjoy the benefits of vibrant wholesale electric 
competition. The Commission is working on numerous initiatives to build 
a sound foundation for competitive markets. These efforts--to improve 
and expand our nation's energy infrastructure, standardize and improve 
wholesale market design and rules, establish independent regional 
transmission organizations (RTOs) to manage our nation's electric grids 
and markets, ease and expedite new generation interconnection, enable 
the full participation of customer demand response, improve market 
transparency, and police market participants' behavior--should greatly 
improve the effectiveness of competitive wholesale markets, and assure 
that market power abuse does not compromise long-term market success.
II. The Commission's Western Markets Investigation
    It has been alleged that Enron, through its affiliates, used its 
market position to distort electric and natural gas markets in the 
West. In response to these allegations, on February 13, 2002, the 
Commission issued an order directing its staff to launch a non-public, 
fact-finding investigation. This on-going staff investigation is 
gathering information to determine whether any entity, including Enron 
Corporation, through any of its affiliates or subsidiaries, manipulated 
short-term prices for electric energy or natural gas markets in the 
West, or otherwise exercised undue influence over wholesale prices in 
the West since January 1, 2000.
    FERC staff members are collaborating with experts at the 
Commodities Futures Trading Commission (CFTC), pooling the agencies' 
expertise on the physical and derivative transactions involved. We have 
established information-sharing agreements with the CFTC and the 
Securities and Exchange Commission (SEC). In addition, FERC has 
contracted with leading experts in business and academia to assist in 
the investigation, and hired specialists in large-scale electronic data 
retrieval and analysis to perform needed data processing and analysis.
    On March 5, 2002, Commission staff issued an information request 
directing all jurisdictional and non-jurisdictional sellers with 
wholesale sales in the U.S. portion of the Western Systems Coordinating 
Council (WSCC) to report by April 2, 2002: (1) on a daily basis, their 
short-term and firm and non-firm wholesale sales transactions for years 
2000 and 2001; (2) on a monthly basis, monthly firm and non-firm 
capacity and energy wholesale transactions for years 2000 and 2001; and 
(3) long-term capacity and energy sales transactions executed for 
delivery on or after January 1, 2000. Enron filed a deficient filing on 
April 15, 2002, and was directed to remedy its filing immediately. In a 
letter to Enron's counsel, on April 18, 2001, the Commission's staff 
noted that the deficiencies of Enron's response signaled a breakdown in 
supervision and quality control and seriously impeded the Commission's 
investigation. In light of these concerns, the Commission has sent two 
computer specialists to Enron's Houston office to help access the Enron 
databases that contain the information the Commission's staff seeks. At 
this time, Enron has yet to fully comply with the March 5, 2002, 
information request, particularly with respect to providing affiliate 
sales data.
    On May 6, 2002, counsel for Enron turned over to Commission staff 
three internal Enron memoranda that were partially responsive to 
previous data requests issued by Commission staff. Two of the memoranda 
are dated from December 2000 and the other memorandum is undated. 
Enron's counsel informed Commission staff that Enron's Board of 
Directors had voted, on May 5, 2002, to disclose these documents and 
waived all claims of attorney-client privilege. Enron's counsel also 
informed the SEC, the Department of Justice, and the Attorney General 
of California about these documents. FERC promptly released these 
memoranda to the public on the Commission's website, along with a 
letter asking follow-up questions about the documents. Because the 
investigation is non-public, the Commission has not made available to 
the public questions issued under subpoena or companies' responses 
containing confidential information.
    The two dated Enron memoranda provide a detailed description of 
certain trading strategies engaged in during the year 2000 by Enron 
traders, and, allegedly, traders of other companies active in wholesale 
electricity and ancillary services markets in the West and, 
particularly, in California. The last section of the dated memoranda 
discusses the California Independent System Operator's (CAISO) tariff's 
definition of, and prohibition of, ``gaming'' and other ``anomalous 
market behavior.'' The memoranda then list and discuss actions that the 
CAISO could take if the CAISO were to discover that Enron was engaging 
in such activities.
    According to the memoranda, the trading strategies generally fall 
into two categories. The first category is described as ``inc-ing 
load''--slang for increasing load--into the CAISO real-time market, 
whereby a company artificially increases load on a schedule it submits 
to the CAISO with a corresponding amount of generation. The company 
then dispatches the generation it scheduled, which is in excess of its 
actual load, and the CAISO pays the company for the excess generation. 
Scheduling coordinators that serve load in California were apparently 
able to use this trading strategy to include generation of other 
sellers. The second category is described as ``relieving congestion'' 
and involves a company first creating congestion in the California 
Power Exchange (PX) market (which terminated January 31, 2001), and 
then ``relieving'' such congestion in the CAISO real-time market to 
receive the associated congestion payments. This trading strategy is 
accomplished through such actions as reducing schedules or scheduling 
energy in the opposite direction of a constraint (counterflows), for 
which the CAISO pays the company. The two dated Enron memoranda also 
outline ten ``representative trading strategies'' that were used to 
``inc load'' and ``relieve congestion'' for profit.
    On the same day Enron counsel divulged these documents, the 
Commission's staff sent a follow-up data request to Enron to elicit 
more information about the trading strategies described in the 
memoranda. The follow-up data request ordered Enron to give the 
Commission, by May 10, 2002, the names of the traders who were 
interviewed and whose trading strategies are the subject of the 
memoranda. The Commission's staff also requested the production of any 
comparable memoranda that discuss trading strategies and asked Enron to 
provide all correspondence related to the subject matter of the 
memoranda. At this time, Enron has partially complied with the 
Commission's follow-up data request.
    The Enron memoranda allege that traders from other companies also 
employed several of these trading strategies. Therefore, the 
Commission's staff issued a notice, on May 7, 2002, to all sellers of 
wholesale electricity and/or ancillary services in the West, alerting 
them that the Commission would seek information about their use of the 
trading strategies discussed in the Enron memoranda in a data request, 
and directing them to preserve all documents related to such trading 
strategies. Also on May 7, 2002, the Commission's staff issued a data 
request to the CAISO, seeking information for the two-year period 2000-
2001; FERC staff is currently analyzing this material.
    On May 8, 2002, the Commission's staff issued a data request to 
over 130 sellers of wholesale electricity and/or ancillary services in 
the West during the years 2000-2001, with a due date of May 22, 2002. 
This data request asks every company with wholesale sales during this 
period to admit or deny whether it has engaged in the types of trading 
activities specified in the Enron memoranda, as well as any other 
trading strategies. The data request asks for all internal documents 
relating to trading strategies that the company may have used during 
the relevant time period, including correspondence between companies, 
reports, and opinion letters, and information concerning megawatt 
laundering transactions that any of these sellers might have engaged in 
with Enron. The data request specifies that the company's response 
should be an affidavit signed under oath by a senior corporate officer, 
after a diligent investigation into the trading activities of the 
company's employees and agents.
    This investigation is non-public and confidential, as are all of 
the Commission's enforcement activities. From the start, we have made 
many of our activities public (such as the questions asked of industry 
participants) and have released the Enron documents for which privilege 
was waived, because of the high level of public interest and the right 
of the public to be confident in our conduct of the investigation. But 
at the same time, we must protect the integrity of the on-going 
investigatory process and the rights of those being investigated. We 
need a complete record and extensive analysis on which to base any 
findings, and we have not yet compiled such a record. Although the 
Enron memos clearly are very serious, we cannot and should not indict 
either a single company or an entire industry based on three memos. 
Once the facts are clear, FERC will take appropriate actions within our 
statutory authority. But first we must gather all the facts.
    The Commission staff's discovery process has elicited, and 
continues to elicit, important information about trading strategies 
that several sellers in the West may have used. The Commission's staff 
is currently assessing how best to respond in terms of further 
discovery, analysis and theories of the case. As soon as the fact-
finding investigation is complete, a thorough and timely report will be 
submitted to Congress and the public.
III. Other FERC Investigations Relating to California and the West
    The current Enron investigation should be placed in context with 
the Commission's other activities and investigations pertaining to 
California and the western states. The Commission has been working 
diligently on the evolving California issues, and will be acting on key 
pieces in the coming months. Some of these activities include:

   Requests for refunds for spot market sales through the CAISO 
        and the California Power Exchange are now in hearings initiated 
        by the Commission's order of July 25, 2001 (and supplemented on 
        December 19, 2001). This proceeding should determine the 
        appropriate mitigated market clearing price in each hour of the 
        refund period consistent with the rate pricing methodology 
        prescribed by the Commission; the amount of refunds owed by 
        each supplier according to the Commission's pricing 
        methodology; and the amount currently owed to each supplier, 
        with separate quantities due from each entity, by the CAISO, 
        the investor-owned utilities, and the State of California. 
        Consistent with refund authority under Section 206 of the 
        Federal Power Act, the effective refund period extends from 
        October 2, 2000, to June, 2001.

   The Commission's order of July 25, 2001, initiated hearings 
        on whether there may have been unjust and unreasonable charges 
        for spot market bilateral sales in the Pacific Northwest for 
        the period beginning December 25, 2000, through June 20, 2001. 
        The proceeding addresses the extent to which dysfunctions in 
        the California markets may have affected spot market prices in 
        the Pacific Northwest. The administrative law judge issued an 
        initial decision on September 24, 2001, recommending against 
        the ordering of refunds.

   On October 9, 2001, the Commission released a request for 
        proposal for an independent audit of the CAISO, which included 
        an evaluation of the CAISO's ability to manage the California 
        market, and appropriate recommendations. The audit, submitted 
        to the Commission on January 25, 2002, by Vantage Consulting, 
        Inc., confirmed FERC's prior findings that the CAISO board is 
        not fully independent, and offered recommendations to improve 
        the CAISO's management and processes. This matter is a pending, 
        contested proceeding before the Commission.

   On April 11, 2002, the Commission ordered a hearing for the 
        complaints filed by Nevada Power Company and Sierra Pacific 
        Power Company, Southern California Water Company and Public 
        Utility District No.1 Snohomish County, Washington. These 
        utilities allege that dysfunctions in the California 
        electricity spot markets caused long-term contracts negotiated 
        in the bilateral markets in California, Washington and Nevada 
        to be unjust and unreasonable; they ask that FERC remedy the 
        problem by modifying the contracts. The Commission directed the 
        parties to first participate in contractually mandated 
        mediation.

   On April 25, 2002, the Commission issued an order setting 
        for evidentiary hearing complaints by the Public Utilities 
        Commission of the State of California and the California 
        Electricity Oversight Board against a group of sellers under 
        long-term contracts with the California Department of Water 
        Resources. The state agencies allege that the prices, terms and 
        conditions of such contracts are unjust and unreasonable and 
        seek contract modification. Here too, the Commission strongly 
        encouraged the parties to pursue settlement.
IV. The Commission's Actions To Mitigate Market Manipulation or 
        Failures in California and the West
    To understand FERC's actions and their impacts in California and 
the western power markets, it is useful to first understand how Enron's 
trading strategies were designed to exploit the California market:

   Strategies that involved ``inc-ing load''--artificially 
        increasing load on schedules, dispatching generation in excess 
        of actual load, and getting paid for the excess generation at 
        the market clearing price;

   Strategies that exploited the congestion management system 
        by relieving real or artificial congestion;

   Strategies that exploited the California v. Western price 
        differential (e.g., megawatt laundering); and,

   Strategies that involve misrepresentation (paper trading of 
        ancillary services when the company doesn't actually have the 
        services to sell, submitting false information about the 
        identity of the plants providing the services, and selling non-
        firm energy as firm to the PX).

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

   On December 8, 2000, at the CAISO's request, the Commission 
        responded to the supply emergency and snowballing price 
        conditions in California by modifying the $250 price cap, so 
        that bids above that level would be accepted but would not set 
        the clearing price paid to all sellers. That order also limited 
        generators' ability to withhold generation (using scarcity to 
        drive up prices) by authorizing the ISO to penalize 
        participating generators that refuse to operate in response to 
        emergency dispatch instructions.

   FERC's December 15, 2000, order reduced the impact and 
        vulnerability of the spot market by ending the requirement that 
        California's three investor-owned utilities (IOUs) sell all of 
        their resources into and buy all of their requirements through 
        the California PX. By terminating the requirement, FERC 
        released a total of 40,000 MW of load from the spot market and 
        placed 25,000 MW of the IOUs' resources directly under the 
        jurisdiction of the California Public Utilities Commission.

   To reduce possible withholding of generation and increase 
        available supplies, FERC's April 26, 2001, order allows the 
        CAISO to order increased production from any on-line, 
        uncommitted in-state generation capacity in the real-time 
        market if the energy is needed. The June 19, 2001, order 
        expanded this must-offer requirement to include all utilities 
        in the Western Systems Coordinating Council (WSCC).

   FERC's April 26, 2001 order also established a prospective 
        mitigation and monitoring plan for wholesale sales through the 
        CAISO spot market, and established an inquiry into whether a 
        price mitigation plan should be implemented throughout the 
        Western Systems Coordinating Council (WSCC). This plan included 
        price mitigation for all sellers (excluding out-of-state 
        generators) bidding into the CAISO real-time market during a 
        reserve deficiency (i.e., when reserves fall below seven 
        percent), with a formula to calculate the market clearing price 
        when mitigation applies.

   FERC's June 19, 2001 order established price mitigation for 
        spot markets throughout the West, equalizing region-wide price 
        limits across all western states through September 30, 2002; 
        this reduced the incentive to megawatt launder. Key elements of 
        the mitigation plan, to be in effect from June 21, 2001, 
        through September 30, 2002, included: retaining the use of a 
        single market clearing price for sales in the CAISO's spot 
        markets in hours when reserve margins fell below 7 percent; 
        applying that market clearing price for sales outside the 
        CAISO's single price auctions (i.e., bilateral sales in 
        California and the rest of the WSCC); and establishing a 
        different price mitigation level formula for those hours when 
        California does not face a reserve shortage.
    Congestion management--The fundamental flaw in California's 
congestion management system is that it does not fully recognize the 
existence of major transmission constraints outside the real-time 
market. Therefore, the CAISO schedules buyers' and sellers' 
transactions without regard to the system's actual physical transfer 
capabilities, so that day-ahead pre-schedules are often not feasible. 
In such a case, the infeasible day-ahead schedule causes the CAISO to 
anticipate a congested system, so it pays entities in real-time to 
relieve the congestion. This can be prevented--as it has been in all 
other active ISO organized markets--by designing the day-ahead market 
to recognize all transmission system constraints and reliability 
limits, and limiting the number of transactions and transmission 
accordingly to avoid artificial congestion and reduce real congestion. 
Other ISOs also use some version of congestion pricing that charges the 
cost of congestion to the entities that cause it. These approaches 
limit the ability of market participants to manipulate congestion and 
to profit from such manipulation.
    The Commission told the CAISO in January, 2000, that California's 
congestion management system was flawed and needed to be fixed. 
Although the CAISO has proposed significant changes to the system, 
those reforms are not scheduled to be in place until 2003-2004. 
Similarly, the addition of much needed generation and transmission 
capability, which will also help relieve congestion, will not occur in 
the near future, but rather will take years to accomplish.

   In an order issued on January 7, 2000, FERC found the 
        CAISO's congestion management structure to be fundamentally 
        flawed and directed the CAISO to develop and submit a 
        comprehensive congestion management and market redesign.

   In the face of limited response from the CAISO, FERC issued 
        its December 15, 2000 order, requiring the CAISO to file a 
        comprehensive redesign of its congestion management program by 
        January 31, 2001. The CAISO, under a new state-appointed Board, 
        did not make the filing.

   To the degree that exploitation of the interplay between 
        trading on the Cal PX and the ISO's day-ahead market enhanced 
        the ability of traders to manufacture congestion for profit, 
        the Commission's termination of the California PX rate schedule 
        reduced the effectiveness of these strategies. Trading on the 
        California PX was halted in January, 2001.

   In an order issued May 25, 2001, the Commission clarified 
        that price mitigation applies to both energy and congestion 
        management, thus limiting congestion payments and disincenting 
        this behavior.

   One year after directing changes to the CAISO's congestion 
        management system, FERC's December 19, 2001 order again 
        directed the CAISO to file a revised congestion management 
        plan, due May 1, 2002.

   The CAISO filed a market redesign proposal on May 1, 2002, 
        which anticipates implementing some congestion management 
        reforms by fall 2003 and winter 2004. The aspects of the ISO's 
        proposal that are proposed to become effective by September 30, 
        2002, will not change the congestion market substantially.

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

   In early August, 2000, the CAISO prohibited non-firm 
        exports.

   FERC's April 26, 2001, order forced marketers outside of 
        California bidding into the CAISO to be price-takers, so they 
        could not bid a higher price for imports and set the price for 
        the entire market; rather, as price-takers, importers accept 
        whatever price is set by in-state, non-imported generation.

   The June 19, 2001, order treated sales within and outside 
        California uniformly and imposed uniform price mitigation 
        throughout the West. These measures eliminated incentives for 
        megawatt laundering.

    Attachment A is a detailed list of the significant FERC orders and 
actions pertaining to California and western states electric markets 
since November, 2000.
    Deliberate misrepresentation of information--This is clearly wrong. 
For instance, selling or reselling what is actually non-firm energy but 
claiming that it is ``firm'' energy is prohibited by the rules of the 
North American Electric Reliability Council. But it should be 
recognized that many of the trading strategies contained in the Enron 
memos were not necessarily prohibited under the CAISO tariff, except 
for the general prohibitions against gaming.
    Although we have not completed our fact-finding investigation with 
respect to sellers in California and the western electric markets, as a 
general matter it is clear that regulators must have two essential 
tools to prevent or mitigate significant misbehavior. First, the market 
regulator must have adequate monitoring and oversight capabilities, and 
a good understanding of market activities and patterns, to identify 
when and whether misrepresentation and manipulation is occurring. 
Second, regulators must have meaningful penalty authority, to ensure 
that market participants do not jeopardize reliability or manipulate 
market outcomes. FERC is working to develop and improve its 
understanding of markets and market manipulation through the new Office 
of Market Oversight and Investigation and its on-going cooperation with 
the CAISOs' Market Monitoring Units and other federal agencies. But it 
is clear that the Commission's penalty and enforcement authorities are 
limited and need to be expanded if they are to serve as effective 
deterrents to market misbehavior. I will discuss this issue further 
below.
    As the California situation evolved between 1996 and mid-2001, I 
was a state regulator, and I appreciated from afar FERC's deference to 
California's legislators and regulators as they worked to design 
competitive wholesale and retail markets for electricity. In 1996, 
California's restructuring legislation, AB 1890, was unanimously passed 
by the state's Legislature. In retrospect, the Commission may have been 
too deferential to California's market design, allowing it to go 
forward because California had gone through a great deal of stakeholder 
consensus and compromise--and because many crucial measures of the 
market design were dictated by state legislation. But as the magnitude 
of the problems in California and the West deepened, it has been 
difficult to find a constructive way out of the binds that our joint 
history has created.
    There are several other pertinent questions to consider here. 
First, are current disclosure rules sufficient to discover the kinds of 
behavior referred to in the Enron memos? That is not entirely clear. 
Based on a proposal issued in July, 2001, FERC recently adopted a rule 
requiring detailed, standardized, electronic reporting on electricity 
market transactions. We believe that these data will help to detect 
inappropriate behavior in energy markets, but it will take some time to 
assess whether the new information permits us to monitor markets 
effectively. We are also undertaking a comprehensive analysis of our 
information collection requirements to determine what information is 
needed to effectively monitor a competitive marketplace, and may seek 
to change reporting further in the future.
    Are there behavior patterns in the market that should be considered 
presumptively manipulative? I don't know yet. Clearly anything that 
involves deceit, fraud or misrepresentation is manipulative, but it is 
not always easy to detect and prove such behavior. I hope we will be 
able to answer this question more definitively after the Commission 
completes its on-going western states investigation.
    Are FERC's market rules sufficient to ensure that markets are not 
being manipulated? I believe that the rules now in effect across the 
organized markets in the eastern markets prevent major market 
manipulation of the type outlined in the Enron memos. And the Standard 
Market Design rules which we are now developing, through a public 
process, seek to prevent such market manipulation in the future. But 
the rules which have been in place in California have allowed some 
types of manipulation to be practiced. Until organized electric markets 
exist across the entire nation and transmission grid, it is still 
possible for market participants in vast areas of the country to engage 
in behaviors that can adversely affect both the long- and short-term 
markets. The Commission's goal is to rely on clear rules of the road 
under standard market design, and non-discriminatory transmission 
access, that would apply to all transmission owners and operators and 
all generators and load-serving entities. For this reason, we have 
placed the Standard Market Design effort at the top of our regulatory 
agenda.
V. Interaction Between the Commission and the CAISO
    There are two critical issues affecting the future of the CAISO and 
its ability to remedy the problems that have occurred in California's 
electricity markets. One is the degree to which the Commission works 
with the CAISO to monitor activities and developments in the California 
market. The other is the independence of the CAISO itself.
    In the past year, FERC staff has maintained frequent contact with 
members of the CAISO's staff, including its market monitoring staff. 
The Commission has also held a series of technical conferences, most 
recently on April 4 and 5, 2002, and May 9 and 10, 2002, to facilitate 
continued discussions between the CAISO, market participants, state 
agencies and other interested participants, on a revised market design 
for the CAISO. In addition, the CAISO's market monitoring staff 
routinely contacts FERC staff to discuss events and issues in the 
California markets. In an April 26, 2001, order, the Commission 
established a process to better track the developments in the 
California market. The CAISO now submits weekly reports to the 
Commission of schedule, outage and bid data to review current market 
performance, and includes any concerns such as possibly inappropriate 
bidding behavior.
    When the Commission's new Office of Market Oversight and 
Investigation (OMOI) is fully staffed, it will take over the task of 
working with ISO and RTO market monitoring units (MMUs). The OMOI will 
coordinate closely with MMUs with respect to local and regional market 
patterns and problems, but will also look for patterns and problems 
across multiple regions and markets. OMOI will conduct monitoring and 
oversight and issue regular reports on the status of the nation's 
energy markets. It will also have the responsibility of investigating 
possible market problems and participant misbehavior and recommending 
improvements and solutions to the problems it finds.
    The issue of the CAISO's independence remains pending before the 
Commission as a compliance issue. In its December 15, 2000, order, the 
Commission directed that the CAISO board should be replaced with a non-
stakeholder board that is independent of the market participants. The 
CAISO declined to respond to this directive. FERC hired consultants to 
conduct an independent audit of the CAISO, and has recently received 
public comments on that audit report. To avoid pre-judging the issue, I 
cannot state any conclusions now on this contested matter, but at a 
minimum we should note that the issue of ISO independence and 
credibility is critical not only for California but for every ISO and 
RTO. Participants in a competitive, effective market need to be 
confident that the entity which manages the grid and the market is 
independent and unbiased and will not act in a way that favors or 
disadvantages any market participant. I expect the Commission to take 
up this matter soon.
VI. CAISO's Comprehensive Market Redesign Plan
    On May 1, 2002, the CAISO submitted for filing a comprehensive 
market design proposal, as directed in the Commission's order on 
clarification and rehearing, issued on December 19, 2001. The CAISO 
states that its proposal largely reflects the market structure in the 
Commission's standard market design rulemaking, i.e., an integrated 
day-ahead and real-time congestion management, energy and ancillary 
services market based on locational marginal pricing.
    The market redesign issue is pending before the Commission, so I 
cannot offer any substantive comments on its merits. I can say that 
California is part of, and dependent upon, the broader western states 
grid, and there will be many issues to resolve with neighboring markets 
before we can realize seamless, efficient, full competition that 
benefits California and all of its western neighbors.
VII. Will Market Design Alone Save California?
    Even with the CAISO's proposed market redesign, California's 
electricity problems will not be over. As California and others have 
recognized, a combination of factors combined to cause the state's 
problems in the year 2000:

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

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

     California has built little new generation--only 3,055 
            megawatts of new generation have come on line since 2000, 
            so there is now a total of 50,345 MW in-state to serve a 
            peak demand of 54,255 MW projected for 2002. Power plant 
            developers have announced the cancellation of 17 plants 
            previously proposed to be built in California, for 1,296 
            MW, over the past year alone; Attachment B, a map of new 
            and cancelled power plants across the western states since 
            the year 2000, shows that many proposed plants have been 
            cancelled. Although the CAISO itself has stated that ``the 
            capacity reserve margin . . . should be 14% to 19% of the 
            annual peak load to promote a workably competitive market 
            outcome'' (``Preliminary Study of Reserve Margin 
            Requirements Necessary to Promote Workable Competition'', 
            Anjali Sheffrin, Market Analysis, CAISO, November 19, 
            2001), California remains dependent on out-of-state imports 
            for a significant share of its load, and on unpredictable 
            hydroelectric generation for 15% of its supply. In the year 
            2000, California's reserve margin was only 2%; for the 
            summer of 2002, the CAISO predicts a reserve margin of 8.4% 
            at expected peak.

     California has built no new bulk transmission, either to 
            link the north and south portions of the state grid or to 
            improve its import capabilities from out-of-state 
            generators. Recently, the Western Area Power 
            Administration, PG&E and TransElect filed a proposal to 
            upgrade California's Path 15 line.

     The ability of individual customers to receive price 
            signals and adjust their energy demands accordingly remains 
            limited. California has done much to reduce peak customer 
            loads, but more demand response is needed across the 
            western states, as a crucial check on the ability of 
            suppliers to exercise market power by raising prices.

    Most of the above problems can only be resolved by California 
itself; but FERC stands ready to assist the state within the limits of 
the law and our respective jurisdictions. For instance, over the past 
year this Commission has acted expeditiously to approve several natural 
gas pipeline applications to assure that additional gas supplies can be 
delivered to the California border to serve the state's growing load.
VIII. Making Markets Work for the Long Term
    The Commission believes firmly that sound, competitive wholesale 
electric markets serve America's energy users better than the cost-of-
service, vertically integrated utility alternative. FERC has been 
working hard to implement Congress' vision of this since the passage of 
the 1992 Energy Policy Act. Since that time, we have seen clear 
evidence in other countries and states that wholesale competition 
improves reliability, drives down delivered energy prices, sparks 
technological innovation, and enhances local economies with new capital 
investment. It is time to recommit ourselves to the challenge of 
completing the transition to fully competitive wholesale markets.
    The Commission's strategy to complete the task of making wholesale 
markets work has several key elements. Many of them are informed by 
what we have learned from observing markets in California and the 
western states over the past three years, and comparing them to other 
energy markets. Here are some of the lessons we have learned, which 
underlie the Commission's initiatives concerning competitive wholesale 
electric markets.
Standard Market Design
    Energy markets are geographically large and regionally inter-
dependent, so it is critical to promote clear, fair market rules to 
govern wholesale competition that benefits all participants, and assure 
non-discriminatory transmission access. Market rules must also specify 
what constitutes inappropriate behavior and the consequences for such 
behavior. Through its ongoing Standard Market Design (SMD) rulemaking 
initiative, the Commission intends to reform public utilities' open 
access tariffs to reflect a standardized wholesale market design. SMD 
will help enhance competition in wholesale electric markets and broaden 
the benefits and cost savings to all customers. The goals of the SMD 
initiative include providing more choices and improved services to all 
wholesale market participants; reducing delivered wholesale electricity 
prices through lower transaction costs and wider trade opportunities; 
improving reliability through better grid operations and expedited 
infrastructure improvements; and, increasing certainty about market 
rules and cost recovery for greater investor confidence to facilitate 
much-needed investments in this crucial economic sector. A sound market 
design, similar to the designs developed and tested in the East, will 
reduce the incentives and opportunities to manipulate the market.
Regional Transmission Organizations (RTOs)
    As long as they are properly structured and truly independent, RTOs 
will provide significant benefits to electric utility customers across 
the nation by eliminating obstacles to competition and making markets 
more efficient. RTOs facilitate wholesale competition and, where states 
choose to pursue it, retail competition. Even in the absence of retail 
competition, electricity customers benefit from increased competition 
in wholesale markets because it reduces bulk power prices and improves 
reliability. First, RTOs should eliminate ``pancaking'' of transmission 
rates, that raises the cost of moving power across multiple utility 
systems. Second, RTOs that have the proper tools can better manage 
transmission congestion, reduce the instances when power flows on 
transmission lines must be decreased to prevent overloads, and 
effectively solve short-term reliability problems. I believe that RTOs 
(and independent transmission companies operating under an RTO 
umbrella) will attract the capital and expertise needed to expand the 
grid and serve the generation capacity necessary for growing, 
competitive electricity markets. Third, RTOs should ensure that 
vertically-integrated transmission-owning utilities do not discriminate 
in favor of their own generation over another seller's generation. 
Fourth, RTOs can facilitate transmission planning across a multi-state 
region and, by operating the grid as efficiently as possible, should 
provide assurance to state siting authorities that new transmission 
facilities are proposed only when truly needed.
Infrastructure
    The Commission continues to work with others to promote adequate 
infrastructure by anticipating the need for new generation and 
transmission facilities, determining the rules for cost recovery of new 
energy infrastructure, encouraging the construction of new 
infrastructure, and licensing or certificating hydroelectric facilities 
and natural gas pipelines. Without adequate infrastructure, prices will 
rise due to scarcity and there will be greater opportunity for market 
manipulation. To speed the interconnection of new generation 
facilities, FERC has proposed a rule to standardize interconnection 
agreements and procedures, for use between all transmission owners and 
generators. The Commission is also assessing the available energy 
infrastructure across the nation, working by region-by-region with 
state officials and industry members to determine whether any problems 
or gaps exist and how joint effort and attention can help to remedy the 
deficiencies.
Market Monitoring and Mitigation
    The Commission has instituted measures to ensure market mitigation 
in the future in all RTO markets. The Commission's Office of Market 
Oversight and Investigation will interface with the RTOs' market 
monitoring units and will monitor markets to ensure that market rules 
are working. Furthermore, under the Commission's ongoing standard 
market design initiative, monitoring for physical and economic 
withholding will be an important focus of the market monitoring units 
within each RTO region. Each market monitor will report directly to the 
Commission and to the independent governing board of the RTO. The 
Commission will exercise oversight over market monitoring and the 
impact of RTO operations on the efficiency and effectiveness of the 
market.
IX. Legislative Actions That Could Help FERC Deal With Market Power
A. Earlier Refund Effective Date
    The Commission must rely on Federal Power Act section 206(b) for 
refund protections if it finds that market-based rates are no longer 
just and reasonable. Section 206(b) provides that whenever the 
Commission institutes a section 206 investigation of a rate or charge 
that may be unjust or unreasonable, the Commission must establish a 
refund effective date. If the investigation is based on a complaint, 
the refund effective date must be no earlier than 60 days after the 
complaint is filed. Congress can help the Commission protect customers 
against the exercise of market power by amending Section 206(b) to 
allow the Commission to establish a refund effective date that is as 
early as the date a complaint is filed.
    Permitting the Commission to set a refund effective date as of the 
date a complaint is filed will have two principal effects. First, it 
will increase the deterrent effect of refunds by increasing the period 
over which the Commission can require refunds for market manipulation 
or other improper conduct. Second, it will give customers a stronger 
incentive to notify the Commission immediately when they perceive 
manipulation--even very short-term manipulation--of the electricity 
markets, because customers will have greater access to refunds.
B. Increased Civil and/or Criminal Penalty Authority
    The White House has requested that Congress, as part of the energy 
bill, increase criminal penalties under the Federal Power Act. 
Specifically, the White House proposes that the penalty for a willful 
and knowing violation of the FPA be increased from the current $5,000 
level to $1 million and that the potential prison term be increased 
from two years to five years. For a violation of the Commission's 
regulations under the FPA, the White House proposes to increase the 
penalty from $500 per day to $25,000 per day. These changes will 
provide stronger deterrents to anti-competitive behavior, market 
manipulation, and other violations of the FPA and Commission 
regulations.
    Congress could create additional deterrents to anti-competitive and 
bad-faith behavior in the marketplace by broadening and strengthening 
the Commission's civil penalty authority. Currently, FPA section 316A 
provides for a civil penalty authority of up to $10,000 per day for 
violations of Section 211, 212, 213 or 214. These penalties could be 
broadened to all sections of the FPA and increased significantly.
C. Encouraging Construction of Needed Energy Infrastructure
    Congress could encourage construction of needed infrastructure--
particularly bulk transmission, to reduce costly (and manipulable) 
congestion--by adopting measures that include support for Regional 
Transmission Organizations and their regional planning function. 
Another crucial measure is to adopt needed tax code revisions to assure 
that municipally owned transmission owners can commit their assets to 
common grid use without losing the tax-exempt financing of those 
assets, and that investor-owned transmission owners can transfer or 
consolidate their assets without incurring a taxable event that raises 
the costs of the transaction. In May 2002, the Department of Energy 
released an excellent report, ``The National Transmission Grid Study,'' 
which explains the crucial need for and value of a sound national 
transmission grid. The Commission strongly supports the report's 
recommendations.
X. FERC Employee Contacts With Enron Between May, 2000 and August, 2001
    The Subcommittee's letter of invitation asked about Enron's 
contacts with FERC between May 2000 and June 2001. Over this period, 
FERC employees report 367 meetings with Enron-affiliated personnel--
including those representing FERC-regulated facilities and energy 
marketing activities across a number of Enron subsidiaries and 
affiliates as well as corporate representatives and electricity 
marketers and traders. During Enron Corporation's existence, FERC has 
had jurisdiction over 37 Enron affiliates (some of which may no longer 
be in existence). These affiliates have included electric generators, 
qualifying facilities, power marketers, one traditional electric 
utility (which owns FERC-regulated hydroelectric facilities), on-shore 
interstate natural gas pipelines, off-shore natural gas pipelines, 
intrastate natural gas pipelines (which engaged in FERC-jurisdictional 
activities), crude-oil pipelines and petroleum products pipelines (FERC 
sets transportation rates for oil pipelines under the Interstate 
Commerce Act).
    There were actually fewer meetings than the number above implies 
because each of these reported contacts represents a single FERC 
staffer at a meeting or event, and there was often more than one 
staffer at a meeting (thus one meeting may be reported numerous times). 
In addition, fewer staffers worked on Enron issues than the number 
implies because individual staffers attended numerous meetings over the 
course of the 14 month period. Numerous non-meeting ``communications'' 
were exchanged between FERC staff and Enron or Enron-affiliated 
companies over this time period. However, ``communications'' is 
interpreted broadly to include formal submittals of filings to the 
Commission and its staff, concerning Enron's or its affiliates' 
regulated activities before the agency.
    It is normal and necessary for the agency to have frequent contacts 
with a regulated entity such as Enron and its affiliates, since they 
control pipelines, hydroelectric projects and interstate transportation 
facilities under FERC jurisdiction. During the relevant time frame, 
Enron and its affiliated companies would have dealt with FERC as an 
applicant in some cases, as an intervener in others, and as an 
interested and affected industry member in broader policy matters. FERC 
meets with and communicates with members of industry and interest 
groups every day, as a necessary and integral part of our regulatory 
life and responsibilities--for perspective, the Commission receives on 
average 70,000 filings a year. Thus, it would not be uncommon for 
employees to have had contact with Enron (and its affiliated companies) 
in (among other things): audits, technical conferences, settlement 
conferences, pre-hearing conferences, alternative dispute resolutions 
sessions, pre- and post-license and certificate site inspections, 
environmental scoping meetings, field inspections, pre-filing 
conferences, field compliance inspections, planning seminars, facility 
tours, archeological surveys, periodic environmental inspections, 
annual project inspections, outreach programs, rulemaking conferences, 
fact-finding excursions, restructuring conferences to implement Order 
No. 637 (natural gas), joint industry meetings to review accounting 
issues, joint FERC-industry meetings to implement the Gas Industry 
Standards Board protocols, and industry demonstrations of new 
technologies.
    Such contacts are appropriate and valuable when conducted within 
the agency's regulatory procedures. Since I was not present at the 
Commission during most of the period in question, I cannot personally 
speak to whether Enron or its affiliates attempted to influence FERC's 
decision-making with respect to wholesale electric markets. But based 
on my experience, I do not believe that Enron's scope of contacts with 
our employees or managers have been inappropriate given the breadth of 
its regulated interests, nor that Enron or any of its affiliates has 
had any undue influence on the decision-making process at the 
Commission. The Commission has had strict ex parte rules for many years 
and I have made it clear to staff at all levels that these must be 
rigorously followed at all times.
XI. Conclusion
    The Commission is moving aggressively to investigate potential 
market manipulation in California and the West, whether by Enron or 
other market participants. We also are moving forward on initiatives 
that will put in place clear wholesale market rules and effective 
market monitoring to protect customers in every region of the country. 
We will continue to work with other federal agencies, with the states, 
and with Congress to protect the nation's electric customers and 
achieve the full benefits of wholesale electric competition.
    I look forward to sharing the results of our western markets 
investigation with you this summer and welcome your input and 
questions.
                               __________
                                                         Attachment
   Commission Staff Summary of Recent Commission Actions Concerning 
                            Western Markets
November 2000
   November 1: San Diego Gas & Elec. Co. (Complainant) v. 
        Sellers of Energy and Ancillary Services into Markets Operated 
        by CaISO and CalPX, 93 FERC para. 61,121 (order proposing 
        remedies for California crisis on complaint of 
        SDG&E)(``November 1 Order'')

   November 9: Public Conference re FERC-proposed remedies held 
        in Washington (see 93 FERC para. 61,122)

   November 22: California Power Exchange Corp., 93 FERC para. 
        61,199 (order accepting amendments to streamline and clarify 
        several provisions of the PX tariff)

   November 22: Pacific Gas & Elec. Co., 93 FERC para. 61,207 
        (order suspending PG&E transmission rate increase proposal)
December 2000
   December 8:

        San Diego Gas & Elec. Co., 93 FERC para. 61,238 (order waiving 
        operating efficiency and other regulatory requirements 
        governing ``QFs'' and other small power producers to boost 
        power output in California)

        California ISO Corp., 93 FERC para. 61,239 (order authorizing 
        ISO tariff amendments to: (1) convert existing $250/MWh hard 
        cap on bids in the real-time market into a $250/MWh breakpoint; 
        (2) impose a penalty on generators who fail to comply with an 
        ISO emergency order to provide power; and (3) assess costs 
        against parties that underschedule demand or fail to deliver 
        power.

   December 13: California Power Exchange Corp., 93 FERC para. 
        61,260 (order accepting settlement re PX dispute resolution 
        procedures)

   December 15: San Diego Gas & Elec. Co. (Complainant) v. 
        Sellers of Energy and Ancillary Services into Markets Operated 
        by CaISO and CalPX, 93 FERC para. 61,294 (Order adopting 
        remedial measures to reduce reliance on volatile spot markets, 
        including: (1) eliminating requirement that investor-owned 
        utilities sell all their generation into the PX markets; (2) 
        requiring 95 percent of demand to be scheduled in advance and 
        establishing a benchmark for long-term contracts; and (3) 
        imposing an interim $150/MWh soft cap or ``breakpoint'' on spot 
        markets pending development of longer term price mitigation 
        plan) (``December 15 Order'')

   December 22: Commission issues data request in response to 
        December 7 SDG&E complaint re natural gas prices

   December 29:

        Southern California Edison Co., 93 FERC para. 61,320 (order 
        analyzing and accepting SoCal Edison rates for scheduling and 
        dispatching)

        Pacific Gas & Elec. Co., 93 FERC para. 61,322 (order rejecting 
        PG&E filing regarding its scheduling on the ISO)

        San Diego Gas & Elec. Co., 93 FERC para. 61,333 (order 
        accepting SDG&E rate filing re so-called ``RMR'' generating 
        units-units that must run to assure system reliability)

        Southern California Edison Co., 93 FERC para. 61,334 (order 
        accepting RMR tariff for SoCal Edison)

        California ISO Corp., 93 FERC para. 61,337 (order accepting ISO 
        grid mgmt charges)
January 2001
   January 23: FERC staff conducts technical conference with 
        industry representatives re prospective spot market monitoring 
        and mitigation plan

   January 29: San Diego Gas & Elec. Co., 94 FERC para. 61,085 
        (order finding Cal PX in violation of December 15, 2000 order 
        for failing to implement $150/MWh breakpoint)
February 2001
   February 7: Pacific Gas & Elec. Co., 94 FERC para. 61,093 
        (order accepting settlement re PG&E transmission rates)

   February 14: California ISO Corp., 94 FERC para. 61,132 
        (order rejecting ISO and PX tariff amendments relaxing 
        creditworthiness standards for PG&E and SoCal Edison as applied 
        to transactions affecting third-party suppliers)

   February 15: FERC staff meets with PX regarding requirements 
        for implementing $150/MWh breakpoint

   February 21:

        California ISO Corp., 94 FERC para. 61,141 (order accepting 
        amended Transmission Control Agreement among ISO and 
        transmission owners and addressing complaints by City of Vernon 
        regarding conditions of becoming participating transmission 
        owner)

        California ISO Corp., 94 FERC para. 61,148 (order denying 
        rehearing of October 2000 order relating to ISO's Transmission 
        Access Charge)

        Pacific Gas & Elec. Co., 94 FERC para. 61,154 (order denying 
        intervention and rehearing of January 12 order authorizing PG&E 
        Corporation intra-corporate reorganization)

   February 23: San Diego Gas & Elec. Co., 94 FERC para. 61,200 
        (order on rehearing of December 29 order re reassignment of RMR 
        costs)

   February 28: Former FERC Chairman testifies before the House 
        Energy and Commerce Subcommittee on Energy and Air Quality 
        concerning rising natural gas prices, the squeeze on natural 
        gas supplies, and the role of natural gas in developing a 
        national energy policy.
March 2001
   March 9:

        San Diego Gas & Elec. Co. v. Sellers of Energy and Ancillary 
        Services into Markets Operated by CaISO and CalPX, 94 FERC 
        para. 61,245 (Order directing refunds or further justification 
        for charges)

        ``Staff Recommendation on Prospective Market Monitoring and 
        Mitigation for the California Wholesale Electric Power Market'' 
        (Docket Nos. EL 00-95-012, et al.)

        San Diego Gas & Elec. Co. v. Sellers of Energy and Ancillary 
        Services into Markets Operated by CaISO and CalPX, 94 FERC 
        para. 61,243 (Order dismissing rehearing request of 1/8/01 
        order)

   March 14:

        Order Removing Obstacles to Increased Electric Generation and 
        Natural Gas Supply in the Western United States and Requesting 
        Comments on Further Actions to Increase Energy Supply and 
        Decrease Energy Consumption, (Docket No. EL 01-47-000) (order 
        includes: (1) requirement that ISO and western transmission 
        owners file list of grid enhancements that can be implemented 
        in short term; (2) extension of waiver of QF regulations 
        through December 31, 2001; (3) authorization for western 
        businesses with back-up generators and customers who reduce 
        their consumption to sell wholesale power at market-based 
        rates; and (4) solicitation of comment on additional proposals)

        Cities of Anaheim, et al. v. ISO, 94 FERC para. 61,268 (order 
        dismissing in part and granting in part complaint alleging that 
        certain cities are being charged inappropriate costs when ISO 
        allocates the cost of power obtained through emergency orders 
        to generators)

        AES Southland, Inc., Williams Energy Trading & Marketing Co., 
        94 FERC para. 61, 248 (order directing parties to explain why 
        they should not be found in violation of the Federal Power Act 
        for engaging in actions that inflated electric power prices)

   March 15: Chairman testifies before the Senate Committee on 
        Energy and Natural Resources

   March 16: San Diego Gas & Elec. Co. v. Sellers of Energy and 
        Ancillary Services into Markets Operated by CaISO and CalPX, 94 
        FERC para. 62,245 (notice re proxy market clearing price and 
        refunds for February transactions)

   March 20: The Commissioners testify before the House 
        Committee on Energy and Commerce, Subcommittee on Energy and 
        Air Quality

   March 28: CPUC v. El Paso Natural Gas Co., et al., 94 FERC 
        para. 61,338 (order dismissing portion of complaint alleging 
        affiliate abuse but ordering public hearing on whether El Paso 
        exercised market power to drive up natural gas prices)
April 2001
   April 6:

        San Diego Gas & Elec. Co. v. Sellers of Energy and Ancillary 
        Services into Markets Operated by Cal ISO and CalPX, 95 FERC 
        para. 61,021 (Order dismissing rehearing, accepting compliance 
        filing, and directing the recalculation of lower wholesale 
        rates)

        Pacific Gas and Electric Co., et al., 95 FERC para. 61,020 
        (Order on complaints concerning use of chargebacks and 
        liquidation of collateral)

        Kern River Gas Transmission Co., 95 FERC para. 61,022 (Order 
        issuing certificate for facilities to transport natural gas 
        from Wyoming to California)

        California Independent System Operator Corporation, 95 FERC 
        para. 61,024 (Order granting motion of generators to compel ISO 
        to comply with creditworthiness requirements)

        California Independent System Operator Corporation, 95 FERC 
        para. 61,026 (Order granting clarification in part and denying 
        rehearing of order on PX tariff creditworthiness amendment)

        Southern California Edison Co and Pacific Gas and Electric Co, 
        95 FERC para. 61,025 (Order deferring action on request for 
        suspension of underscheduling penalty and issuing request for 
        information)

   April 10: Commission convenes Western Energy Issues 
        Conference in Boise, Idaho

   April 10-12: The Chairman and General Counsel testify before 
        the House Committee on Government Reform regarding wholesale 
        electricity prices in California and the West

   April 16: San Diego Gas & Elec. Co. v. Sellers of Energy and 
        Ancillary Services into Markets Operated by Cal ISO and CalPX 
        (unpublished notice of proxy price for March wholesale 
        transactions in Docket No. EL00-95-028, et al.)

   April 18: Public Utilities Commission of the State of 
        California v. El Paso Natural Gas Co., et al., 95 FERC para. 
        61,089 (Order on rehearing regarding allegations of affiliate 
        abuse and market power by gas pipeline)

   April 26:

        San Diego Gas & Elec. Co. v. Sellers of Energy and Ancillary 
        Services into Markets Operated by Cal ISO and CalPX, 95 FERC 
        para. 61,115 (Order establishing prospective mitigation and 
        monitoring plan for the California wholesale electric markets 
        and establishing an investigation of public utility rates in 
        wholesale Western energy markets)

        Avista Corporation, et al., 95 FERC para. 61,114 (Order 
        granting, with modification, RTO west petition for declaratory 
        order and granting Transconnect petition for declaratory order)

   April 27:

        Commission notices initiation of investigation of rates in the 
        WSCC (Docket No. EL01-68-000)

   April 30: AES Southland, Inc. and Williams Energy Marketing 
        & Trading Co., 95 FERC para. 61,167 (Order approving 
        stipulation and consent agreement with respect to issues raised 
        in the \3/14\ show cause order)

May 2001
   May 1:

        The Commissioners testify before the House Subcommittee on 
        Energy and Air Quality to discuss the proposed Electricity 
        Emergency Relief Act

        The Director of Markets, Tariffs and Rates issues a letter to 
        the ISO, PG&E, SDG&E, and SoCal Edison offering staff's 
        assistance to complete RTO filings

   May 2: The Commission institutes a proceeding under FPA 
        Sec. 210(d) in Docket No. EL01-72-000 to consider whether it 
        may need to order interconnection or transmission services to 
        alleviate generation capacity shortages in California

   May 3: The Commissioners submit a written statement at the 
        Senate Committee on Energy and Natural Resources oversight 
        hearing called to review the Commission's April 26, 2001 
        mitigation order.

   May 7: El Paso Natural Gas Co., 95 FERC para. 61,176 (Order 
        issuing a certificate permitting increased pipeline capacity to 
        California by converting an oil pipeline to gas service)

   May 9: Director of OMTR issues a letter to Southern 
        California Air Quality Management District requesting 
        information on its NOx Emission Program

   May 14:

        Cities of Anaheim, et al. v. Cal ISO, 95 FERC para. 61,197 
        (Order on rehearing concerning complaint about OOM costs)

        Edison Mission Energy, 95 FERC para. 61,198 (Order approving 
        corporate reorganization)

        San Diego Gas & Elec. Co. v. Sellers of Energy and Ancillary 
        Services into Markets Operated by Cal ISO and CalPX, 95 FERC 
        para. 62,125 (notice of proxy price for April wholesale 
        transactions in Docket No. EL00-95-033, et al.)

   May 16:

        Removing Obstacles To Increased Electric Generation And Natural 
        Gas Supply In The Western United States, 95 FERC para. 61,225 
        (Further order on removing obstacles to increased energy supply 
        and reduced demand in the Western United States and dismissing 
        petition for rehearing)

        San Diego Gas & Elec. Co. v. Sellers of Energy and Ancillary 
        Services into Markets Operated by Cal ISO and CalPX, 95 FERC 
        para. 61,226 (Order granting motions for emergency relief by 
        QFs in part and establishing further procedures)

        California Independent System Operator Corporation, 95 FERC 
        para. 61,199 (Order accepting in part and rejecting in part ISO 
        Tariff Amendment No. 38)

   May 18: Reporting of Natural Gas Sales to the California 
        Market, 95 FERC para. 61,262 (Order proposing reporting 
        requirements on natural gas sales to California markets and 
        requesting comments)

   May 22: San Diego Gas & Electric Co., et al., 95 FERC para. 
        61,264 (Order requesting comments on whether the Commission 
        should reimpose the maximum rate ceiling on short-term capacity 
        release transactions into California)

   May 24: Commission convenes a technical conference regarding 
        pipeline capacity into and adequacy within California (Docket 
        No. PL01-4-000)

   May 25: San Diego Gas & Electric Co., et al., 95 FERC para. 
        61,275 (Order providing clarification and preliminary guidance 
        on implementation of mitigation and monitoring plan)

   May 31: 

        Strategic Energy LLC v. Cal ISO, 95 FERC para. 61,312 (Order 
        rejecting as premature complaint that ISO overcharged for power 
        being bought out-of-market)

        CPUC v. El Paso Natural Gas Company, et al., 95 FERC para. 
        63,020 (Chief Judge's Report to the Commission, request to 
        waive initial decision date and request for guidance)
June 2001
   June 4: Cogeneration Council of California, et al. (Notice 
        of intent not to act re two petitions for enforcement filed 
        pursuant to PURPA Sec. 210(h) in Docket Nos. EL01-64-000 and 
        EL01-67-000)

   June 11: CPUC v. El Paso Natural Gas Co., et al., 95 FERC 
        para. 61,368 (Order granting in part rehearing of 3/28/01 order 
        and setting for hearing the allegations of affiliate abuse 
        raised by complainants)

   June 13: 

        California Independent System Operator Corporation, 95 FERC 
        para. 61,391 (Order denying rehearing of order granting motion 
        of generators to compel ISO to comply with creditworthiness 
        requirements)

        California Independent System Operator Corporation, 95 FERC 
        para. 61,390 (Order accepting ISO tariff amendments to conform 
        with FERC formatting requirements)

   June 15:

        San Diego Gas & Elec. Co. v. Sellers of Energy and Ancillary 
        Services into Markets Operated by Cal ISO and CalPX, et al. 
        (unpublished notice of proxy price for May wholesale 
        transactions in Docket No. EL00-95-037, et al.)

   June 19:

        San Diego Gas & Elec. Co. v. Sellers of Energy and Ancillary 
        Services into Markets Operated by Cal ISO and CalPX, et al., 95 
        FERC para. 61,418 (Order on rehearing of monitoring and 
        mitigation plan for the California wholesale electric markets, 
        establishing West-wide mitigation, and establishing a 
        settlement conference)

        The Commissioners and the General Counsel testify before the 
        Senate Committee on Energy and Natural Resources concerning the 
        June 19, 2001 West-wide mitigation order.

   June 20: The Commissioners testify before the Senate 
        Committee on Governmental Affairs on the role of the Commission 
        in its restructuring of the energy industries and its 
        implications for other states and regions.

   June 22: San Diego Gas & Elec. Co. v. Sellers of Energy and 
        Ancillary Services into Markets Operated by Cal ISO and CalPX, 
        et al., 95 FERC para. 61,425 (Order clarifying settlement 
        conference procedures established in June 19 order)

   June 25--July 9: Settlement conference convened regarding 
        refunds/offsets of past accounts, etc.

   June 26: Calpine Corporation, et al., 95 FERC para. 61,430 
        (notice of intent not to act re two petitions for enforcement 
        filed pursuant to PURPA Sec. 210(h) in Docket Nos. EL01-71-000 
        and EL01-77-000)
July 2001
   July 6: Cities of Anaheim, Azusa, Banning, Colton, and 
        Riverside, California v. California ISO, et al., 96 FERC para. 
        61,024 (Order establishing settlement proceedings in Docket 
        Nos. EL00-111-000 and EL01-84-000)

   July 11: Universal Studios, Inc. v. Southern California 
        Edison, 96 FERC para. 61,043 (Order dismissing complaint re 
        penalties Universal was charged for failing to interrupt its 
        service under its interruptible service contract)

   July 12:

        San Diego Gas & Elec. Co. v. Sellers of Energy and Ancillary 
        Services into Markets Operated by Cal ISO and CalPX, et al., 96 
        FERC para. 63,007 (Report and Recommendation of Chief ALJ and 
        Certification of the Record following settlement proceeding)

        San Diego Gas & Elec. Co. v. Sellers of Energy and Ancillary 
        Services into Markets Operated by Cal ISO and CalPX, et al., 96 
        FERC para. 61,051 (Order denying rehearing of 5/25/01 order 
        which clarified 4/26/01 price mitigation order)

   July 16: San Diego Gas & Elec. Co. v. Sellers of Energy and 
        Ancillary Services into Markets Operated by Cal ISO and CalPX, 
        et al., 96 FERC para. 61,088 (Order deferring action on 
        rehearing requests of the 5/16/01 order concerning QF issues 
        and on the issues that arise under FPA Sec. 210)

   July 25:

        San Diego Gas & Elec. Co. v. Sellers of Energy and Ancillary 
        Services into Markets Operated by Cal ISO and CalPX, et al., 96 
        FERC para. 61,120 (Order establishing the scope of and 
        methodology for calculating refunds for past periods in 
        California spot markets, initiating evidentiary hearing, and 
        instituting preliminary evidentiary hearing for Pacific 
        Northwest)

        San Diego Gas & Elec. Co. v. Sellers of Energy and Ancillary 
        Services into Markets Operated by Cal ISO and CalPX, et al., 96 
        FERC para. 61,117 (Order granting Mirant's emergency motion for 
        clarification of the must-offer requirement in the 4/26 and 6/
        19 price mitigation orders)

        Reporting of Natural Gas Sales to the California Market, 96 
        FERC para. 61,119 (Order imposing reporting requirements on 
        natural gas sales to California markets)
August 2001
   August 2: The General Counsel and the OMTR Deputy Director 
        testify before the House Government Reform Subcommittee on 
        Energy Policy, Natural Resources and Regulatory Affairs 
        concerning market monitoring.

   August 7: San Diego Gas & Elec. Co. v. Sellers of Energy and 
        Ancillary Services into Markets Operated by Cal ISO and CalPX, 
        et al. (Order of Chief Judge Adopting Protective Order)

   August 10: Automated Power Exchange, Inc., 96 FERC para. 
        61,199 (Letter Order re APX's role in the refund hearing)

   August 13: CAlifornians for Renewable Energy, 96 FERC para. 
        61,203 (Letter Order re intervention of CARE in EL00-95 
        proceeding)

   August 14: San Diego Gas & Elec. Co. v. Sellers of Energy 
        and Ancillary Services into Markets Operated by Cal ISO and 
        CalPX, et al., 96 FERC para. 63,021 (Order and Report to the 
        Commission granting late interventions and adopting trial 
        schedule)

   August 29: San Diego Gas & Elec. Co. v. Sellers of Energy 
        and Ancillary Services into Markets Operated by Cal ISO and 
        CalPX, et al., 96 FERC para. 63,030 (Chief Judge's Report to 
        the Commission and order convening prehearing conference)
September 2001
   September 6: San Diego Gas & Elec. Co. v. Sellers of Energy 
        and Ancillary Services into Markets Operated by Cal ISO and 
        CalPX, et al., 96 FERC para. 63,035 (Judge's Report to the 
        Commission adopting a revised trial schedule)

   September 7: San Diego Gas & Elec. Co. v. Sellers of Energy 
        and Ancillary Services into Markets Operated by Cal ISO and 
        CalPX, 96 FERC para. 61,254 (Order rejects wholesalers' cost 
        justifications for sales in excess of the mitigated price)

   September 12: San Diego Gas & Elec. Co. v. Sellers of Energy 
        and Ancillary Services into Markets Operated by Cal ISO and 
        CalPX, et al., 96 FERC para. 61,267 (Order rejects request for 
        rehearing concerning creditworthiness)

   September 24: Puget Sound Energy, Inc. v. All Jurisdictional 
        Sellers of Energy and/or Capacity Markets into Pacific 
        Northwest, 96 FERC para. 63,044 (Presiding Judge's 
        Recommendations and proposed findings of fact)

   September 26: San Diego Gas & Elec. Co. v. Sellers of Energy 
        and Ancillary Services into Markets Operated by Cal ISO and 
        CalPX, et al., 96 FERC para. 63,048 (Judge's Report to the 
        Commission adopting a revised trial schedule)

   September 27: Western Systems Coordinating Council, et al., 
        96 FERC para. 61,348 (order granting request to transfer 
        certain functions to Western Electricity Coordinating Council)

   September 28: Notice of Technical Conference issued 
        concerning the Western states electric and gas infrastructure
October 2001
   October 5: San Diego Gas & Elec. Co. v. Sellers of Energy 
        and Ancillary Services into Markets Operated by Cal ISO and 
        CalPX, et al., 97 FERC para. 61,012 (Order rejecting 
        wholesalers' cost justifications for sales in excess of the 
        mitigated price)

   October 9:

        CPUC v. El Paso Natural Gas Co., et al., 97 FERC para. 63,004 
        (Initial Decision of Chief Judge finding no evidence of the 
        exercise of market power)

        Issuance of solicitation for audit proposals concerning 
        operational audit of Cal ISO (Docket No. PA02-1-000)

   October 11: Removing Obstacles to Increased Electric 
        Generation and Natural Gas Supply in the Western United States, 
        97 FERC para. 61,024 (order on rehearing of 7/27/01 order)

   October 12: Notice of Technical Conference issued concerning 
        West-wide price mitigation for the winter season

   October 16: The Chairman testifies before the House 
        Government Reform Subcommittee on Energy Policy, Natural 
        Resources and Regulatory Affairs concerning natural gas 
        capacity, infrastructure constraints, and the promotion of 
        healthy natural gas markets, especially in California.

   October 17: Issuance of letter order accepting for filing 
        Duke Energy Oakland's revised reliability-must run service 
        agreements (Docket No. ER01-3034-000)

   October 18: San Diego Gas & Elec. Co. v. Sellers of Energy 
        and Ancillary Services into Markets Operated by Cal ISO and 
        CalPX, et al., 97 FERC para. 61,061 (Order clarifies earlier 
        order concerning wholesalers' cost justifications for sales in 
        excess of the mitigated price)

   October 24: San Diego Gas & Elec. Co. v. Sellers of Energy 
        and Ancillary Services into Markets Operated by Cal ISO and 
        CalPX, et al., 97 FERC para. 61,066 (Order addresses the Cal 
        ISO's outage coordination procedures)

   October 26: San Diego Gas & Elec. Co. v. Sellers of Energy 
        and Ancillary Services into Markets Operated by Cal ISO and 
        CalPX, et al., 97 FERC para. 63,011 (Judge's Report to the 
        Commission advising of the impact of an offer of settlement on 
        refunds)

   October 29: Technical Conference held concerning West-wide 
        price mitigation for the winter season (EL01-68-000)
November 2001
   November 2: Technical Conference held in Seattle concerning 
        Western states' electric and gas infrastructure (PL01-7-000)

   November 7: California Independent System Operator 
        Corporation, 97 FERC para. 61,151 (Order directing the ISO to 
        comply with the Commission's past creditworthiness orders and 
        rejecting Amendment No. 40)

   November 16: CPUC v. El Paso Natural Gas Co., et al., 97 
        FERC para. 61,191 (order granting motion to compel return of 
        protected material and requiring Southern California Edison to 
        show cause why protective order has not been violated)

   November 20: Reliant Energy Power Generation, Inc., 97 FERC 
        para. 61,215 (Order directs the ISO to operate in accordance 
        with the terms of its Tariff to ensure that all market 
        participants are treated in a non-discriminatory manner)

December 2001
   December 10: Letter issued requesting views of Northwest 
        state commissioners on RTOs

   December 19: Investigation of Wholesale Rates of Public 
        Utility Sellers of Energy and Ancillary Services in the Western 
        Systems Coordinating Council, 97 FERC para. 61,294 (Order 
        requires the ISO to temporarily recalculate the price 
        mitigation for spot market transactions under certain 
        conditions)

        San Diego Gas & Electric Co., et al., 97 FERC para. 61,275 
        (Order generally reaffirms key earlier decisions on pricing and 
        price mitigation measures and addressed a number of wide-
        ranging issues related to California and the Western energy 
        markets)

        San Diego Gas & Electric Company v. Sellers of Energy and 
        Ancillary Services, et al., 97 FERC para. 61,293 (Order accepts 
        in part and rejects in part three ISO compliance filings 
        submitted in 2001 concerning the minimum load costs that 
        generators can recover in complying with the must-offer 
        requirement; the declaration of system emergencies; elimination 
        of the penalty for failure to report a forced outage or to 
        respond to a dispatch request; and the requirement to submit 
        cost justification only in cases where bids above the mitigated 
        market clearing price are accepted)

        San Diego Gas & Elec. Co. v. Sellers of Energy and Ancillary 
        Services into Markets Operated by Cal ISO and CalPX, 97 FERC 
        para. 61,290 (Order rejects wholesalers' cost justifications 
        for sales in excess of the mitigated price)

        San Diego Gas & Elec. Co. v. Sellers of Energy and Ancillary 
        Services into Markets Operated by Cal ISO and CalPX et al., 97 
        FERC para. 61,301 (Judge's Report concerning the scope of the 
        evidentiary hearing)

        Mirant Delta LLC and Mirant Potrero LLC, 97 FERC para. 61,284 
        (order conditionally accepting and suspending revised RMR 
        agreements)

        Duke Energy Oakland LLC, 97 FERC 61,283 (order conditionally 
        accepting and suspending revised RMR agreements)

        Pacific Gas and Electric Co., 97 FERC para. 61,291 (order 
        conditionally accepting and suspending revised RMR agreements)

        Geysers Power Company, 97 FERC para. 61,295 (order 
        conditionally accepting and suspending revised RMR agreements)

        Geysers Power Company, 97 FERC para. 61,299 (order accepting 
        and suspending and setting for hearing and ADR revised RMR 
        agreements)

   December 27: CPUC v. El Paso Natural Gas Co., et al., 97 
        FERC para. 61,380 (order remanding proceeding for limited 
        supplemental hearing regarding available capacity)
January 2002
   January 4: Ramco, Inc., 98 FERC para. 61,004 (Letter order 
        rejects RAMCO's cost justification filing as unsupported)

   January 9: San Diego Gas & Elec. Co. v. Sellers of Energy 
        and Ancillary Services into Markets Operated by Cal ISO and 
        CalPX, 98 FERC para. 63,003 (Judge's Report to the Commission 
        adopting a revised trial schedule)

   January 11: Williams Energy Marketing & Trading, 98 FERC 
        para. 61,013 (order conditionally accepting and suspending 
        revised RMR agreement)

   January 16: Geysers Power Company, 98 FERC para. 61,031 
        (order conditionally accepting and suspending revised RMR 
        agreement)

   January 25:

        Issuance of Operational Audit Report of Cal ISO (Docket No. 
        PA20-1-000)

        California Independent System Operator Corp., 98 FERC para. 
        61,047 (order establishing schedule for submission of pleadings 
        regarding arbitrator's award)

   January 29: The Chairman testifies before the Senate 
        Committee on Energy and Natural Resources concerning Enron.

   January 30: Ramco, Inc., 98 FERC para. 61,057 (Letter order 
        rejects RAMCO's cost justification filing as unsupported)

        Dynegy Power Marketing, Inc., 98 FERC para. 61,074 (order 
        granting complaint in part and dismissing in part)

   January 31: California Power Exchange Corp., 98 FERC para. 
        61,097 (order granting petition for declaratory order in part)
February 2002
   February 1: Geysers Power Company, 98 FERC para. 61,114 
        (order granting rehearing of 10/17/01 order)

        Duke Energy South Bay, 98 FERC para. 61,110 (order 
        conditionally accepting and suspending revised RMR agreement)

   February 13: Fact-Finding Investigation of Potential 
        Manipulation of Electric and Natural Gas Prices, 98 FERC para. 
        61,165 (order directing staff investigation)

        San Diego Gas & Electric Co., 98 FERC para. 61,128 (letter 
        order accepting for filing proposed revenue requirement)

        Pacific Gas and Electric Co., 98 FERC para. 61,132 (letter 
        order accepting for filing revised RMR agreement)

   February 13: The Chairman testifies before the House Energy 
        and Commerce Subcommittee on Energy and Air Quality concerning 
        the effect of the Enron bankruptcy on energy markets.

   February 15: Staff issues data request issued to Enron 
        regarding its power supply contracts

   February 22: The Chairman testifies before the House 
        Government Reform Subcommittee on Energy Policy, Natural 
        Resources and Regulatory Affairs concerning electricity market 
        design in California.

   February 26: California Independent System Operator Corp., 
        98 FERC para. 61,187 (order accepting in part and rejecting in 
        part Tariff Amendment No. 41)

   February 27: CPUC v. El Paso Natural Gas Co., et al., 98 
        FERC para. 61,210 (order denying rehearing of 12/27/01 order)

        San Diego Gas & Elec. Co. v. Sellers of Energy and Ancillary 
        Services into Markets Operated by Cal ISO and CalPX et al., 98 
        FERC para. 61,202 (order accepting compliance filing re outage 
        coordination and directing further compliance filing

        San Diego Gas & Elec. Co. v. Sellers of Energy and Ancillary 
        Services into Markets Operated by Cal ISO and CalPX et al., 98 
        FERC para. 61,204 (order denying rehearing of 10/23/01 outage 
        coordination order)
March 2002
   March 1: NEO California Power LLC v. Cal ISO, 98 FERC para. 
        61,228 (order directing Cal ISO to file status report on 
        payments)

   March 5: Staff issues letter directing all sellers to report 
        on transactions in WSCC for years 2000 and 2001

   March 7: San Diego Gas & Elec. Co. v. Sellers of Energy and 
        Ancillary Services into Markets Operated by Cal ISO and CalPX, 
        98 FERC para. 61,254 (Order suspends implementation of the Cal 
        ISO re-running its past market clearing prices)

   March 15: Staff issues subpoena duces tecum to Enron 
        directing the production of documents

   March 27: San Diego Gas & Elec. Co. v. Sellers of Energy and 
        Ancillary Services into Markets Operated by Cal ISO and CalPX, 
        98 FERC para. 61,335 (order clarifying creditworthiness 
        requirement, denying rehearing in part, and rejecting 
        compliance filings)

        San Diego Gas & Electric Company, 98 FERC para. 61,332 (order 
        granting in part and denying in part petition for declaratory 
        order)

        California Independent System Operator Corp. 98 FERC 61,327 
        (order accepting in part and rejecting in part tariff amendment 
        and dismissing complaint)

   March 29: Notice of Technical Conference issued regarding 
        meeting convened by staff to facilitate discussion between the 
        Cal ISO, market participants, state agencies and others on 
        development of a revised market design for the Cal ISO
April 2002
   April 1: San Diego Gas & Elec. Co. v. Sellers of Energy and 
        Ancillary Services into Markets Operated by Cal ISO and CalPX 
        et al., 99 FERC para. 61,008 (order denying rehearing of 12/19/
        01 cost justification order)

   April 4-5: Technical Conference held in San Francisco 
        concerning the development of a revised market design for the 
        Cal ISO

   April 16: Public conference to take comments on staff's 
        recommended basis for assigning capacity and receipt points on 
        El Paso system held in Washington, DC

        Nevada Power Company and Sierra Pacific Power Company v. Duke 
        Energy Trading and Marketing, et al., 99 FERC para. 61,047 
        (order setting for hearing complaints filed by the Nevada 
        Companies, Southern California Water Company and PUD No. 1 
        Snohomish County, Washington alleging excessive long-term power 
        contracts)

   April 25: Public Utilities Commission of the State of 
        California v. Sellers of Long Term Contracts to the California 
        Dep't of Water Resources, et al., 99 FERC para. 61,087 (order 
        setting complaints for hearing)

   April 26: Geysers Power Company, 98 FERC para. 61,114 (order 
        denying rehearing of 1/16/01 order)
May 2002
   May 9-10: Technical Conference held in San Francisco 
        concerning the development of a revised market design for the 
        Cal ISO
Staff Investigations
        The Commission's staff has completed or initiated a number of 
        public investigations, audits, and studies of matters relating 
        to events in California, including the following:

   An audit of generation outages (report issued February 2, 
        2001)

   An analysis of the effect of a western region-wide price cap 
        (released in early February 2001)

   An analysis of causes of high prices in Pacific Northwest 
        and California (released in early February 2001)

   January 31, 2002: Commission Staff Report to Congress on the 
        Economic Impacts on Western Utilities and Ratepayers of Price 
        Caps on Spot Market Sales, (Report concludes that a wide 
        variety of factors other than the price cap, such as 
        conservation efforts, a downturn in the regional economy, and 
        adequate supply given low demand, affected sales prices in both 
        the spot and non-spot markets).

   Ongoing receipt and review of outage incident reports from 
        generators within 24 hours of the beginning or conclusion of a 
        unit's outage.

   Ongoing study of whether there have been any changes in 
        operational patterns of generation plants owned by major 
        independent marketers from patterns observed when they were 
        owned by IOUs.
     Court Cases (Decided and Pending) Concerning the Commission's 
  Restructuring, Monitoring, and Mitigation of Western Energy Markets
Decided
In re: California Power Exchange, Corp., et al., 9th Cir. Nos. 01-
70031, et al., 4/11/01, 245 F.3d 1110 (denying petitions for writ of 
mandamus to stay 12/15/01 mitigation order and to direct retroactive 
refunds).

In re: John L. Burton, et al. v. FERC, 9th Cir. No. 01-70812, 5/29/01, 
unpublished (denying petition for writ of mandamus directing price caps 
and return to cost-based pricing).

In re: Southern California Edison Co., D.C. Cir. No. 00-1543, 1/5/01, 
unpublished (denying petition for writ of mandamus directing cost-based 
pricing).

Western Power Trading Forum and Coalition of New Market Participants v. 
FERC, D.C. Cir. No. 99-1532, 4/10/01, 245 F.3d 798 (dismissing 
challenge to Commission's approval of governance over the California 
ISO).

Public Utilities Commission of the State of California v. FERC, D.C. 
Cir. No. 00-1203, 7/6/01, 254 F.3d 250 (denying challenge to 
Commission's allowing the California ISO to pass through the costs of 
reliability must-run contracts in its rates).

El Segundo Power, L.L.C. v. FERC, D.C. Cir. No. 00-1093, 5/22/01, 
unpublished (denying challenge to Commission's refusal to order the 
California ISO to refund to generators the differential between the 
capped price and the bid price for ancillary services).

California Municipal Utilities Assoc., et al. v. FERC, D.C. Cir. Nos. 
01-1156, et al., 7/31/01, unpublished (dismissing challenge to 12/15/01 
order on remedies for the California wholesale electricity market).
Pending
El Paso Merchant Energy and El Paso Natural Gas Co. v. FERC, D.C. Cir. 
Nos. 01-1286, 01-1287, 01-1443, 01-1444, 02-1140, 02-1142 (challenge to 
orders setting for hearing issues in CPUC complaint regarding possible 
affiliate abuse, anticompetitive conduct, and withholding of pipeline 
capacity into California gas market).

Amoco Production Co., et al. v. FERC, D.C. Cir. Nos. 01-1523, 01-1524 
(challenge to orders certificating expansion of pipeline to allow for 
additional transportation capacity into California).

Cal. Dept. Of Water Resources v. FERC, D.C. Cir. No. 01-1234 (challenge 
to requirement that DWR, if it becomes a member of the California ISO 
and assigns its transmission contracts to the ISO, must design its 
transmission revenue requirements and establish a transmission revenue 
balancing account like any other ISO member).

California Independent System Operator v. FERC, D.C. Cir. No. 01-1343 
(challenge to Commission order requiring California ISO to comply with 
earlier creditworthiness order).

Public Utilities Commission of the State of California v. FERC, D.C. 
Cir. No. 02-1108 (review of long-term power purchase agreements filed 
(or not needed to be filed) under blanket market-based sales tariffs).

State of California, ex rel. Bill Lockyer, et al. v. FERC, 9th Cir. 
Nos. 02-70336, et al. (challenge to orders authorizing intra-corporate 
reorganization of PG&E).

Turlock Irrigation District, et al. v. FERC, D.C. Cir. Nos. 01-1289, et 
al.

Public Utilities Commission of the State of California, et al. v. FERC, 
9th Cir. Nos. 01-71051, et al. (over 50 petitions for review of the 
Commission's 4/26/01, 6/19/01, 7/25/01, and 12/19/01 orders 
establishing comprehensive market restructuring, monitoring and 
mitigation of Western energy markets).

Pacific Gas & Elec. Co., et al. v. FERC, D.C. Cir. No. 01-1187, et al. 
(review of transmission revenue requirements of California ISO members 
that do not own transmission).



    Senator Dorgan. Chairman Wood, thank you very much. I must 
tell you that last evening I spent a lot of time late into the 
night reading all of these documents. By the time I went to 
bed, I was so angry with FERC that it was hard for me to 
describe. It is a good thing you were not close.
    I understand you were not there during much of this period, 
but still in all I get so upset with people who come to 
government really not interested in fulfilling their roles to 
be protective of the public's interest. That is what I think 
happened at FERC. I have accused FERC during the year and a 
half or so while we were having hearings of doing its best 
imitation of a potted plant, just sitting there doing nothing 
while people were dramatically injured.
    I do not know why that happened, but I want to ask you some 
questions about why it happened. I recall during this period, 
when we were having hearings on the Energy Committee, on which 
I serve, The New York Times broke a story. This was in May of 
last year. Mr. Ebert, your predecessor, Washington's top 
electric regulator, said he had barely settled into his new job 
when he had an unsettling telephone conversation with Kenneth 
Lay, the head of the nation's largest energy trader, the Enron 
Corporation.
    Mr. Ebert--this is in The New York Times--said that Mr. 
Lay, a close friend of President Bush's, offered him a deal. If 
he changed his views on electricity deregulation, Enron would 
continue to support him in his job. Mr. Ebert recalled that Mr. 
Lay prodded him to back a national push for retail competition 
and a faster pace in opening up access and so on.
    Mr. Ebert said he refused the offer. ``I was offended,'' he 
said. The fact is Mr. Ebert was replaced, as you know. You are 
from Texas. You came to replace him.
    You ultimately, over a period of time, put on some price 
caps in California. I understand, as a result of that, you got 
put on an OMB watch list. I do not know if that is true or not, 
but one of my colleagues who served with me in the House did 
something they did not like and OMB got him fired, I understand 
you are on a watch list. So you might want to walk slowly.
    Senator Boxer. Do not tell him that.
    Senator Dorgan. I am not suggesting he should act slowly. I 
am just suggesting he be observant of his surroundings.
    Let us talk about your agency and why it refused to act 
when it should have. Is it an agency that is incapable, 
incompetent, or corrupt? During this time when people were 
thieving Californians--and that is exactly what they were 
doing--what happened at FERC to persuade them to do nothing? 
Because the California agencies were busy as the dickens trying 
to figure out how to deal with this, and the Federal 
regulators, who were the only ones who had the capability to 
deal with it, did nothing.
    Was that a deliberate strategy and, if so, where did it 
come from?
    Mr. Wood. I do not believe it was deliberate, sir. In fact, 
I think there was some activity going on. I think, in 
retrospect, it was not sufficient. When the June 2000 price 
spike happened in San Diego and it appeared that it was 
sustained, FERC did begin an effort to analyze the bulk power 
markets. I have actually re-read the report yesterday on a 
plane. That came out on November 1 of 2000. It did analyze it 
in sufficient detail and actually a number of the items that 
were brought forth in the Enron memo also were discussed here 
as far as market issues that presented gaming opportunities.
    Names of people who gamed were not attached to that, but 
the behaviors were, and FERC six weeks later on December 15th 
of 2000 did put forth an order that in fact--after a bunch of 
people responded to this report and said, you are going the 
right direction, just hurry and get there--brought to an end a 
number of the behaviors in the Enron----
    Senator Dorgan. So you say FERC knew this was going on?
    Mr. Wood. I would say that FERC knew that these types of 
gaming opportunities existed.
    Senator Dorgan. But did they know it was happening?
    Mr. Wood. From reading this document and from what I have 
been able to understand, it is not clear, sir.
    Senator Dorgan. Well, it needs to be clear. Either they are 
incompetent or unwilling to take effective action. If this was 
going on and the California people knew it and the Oregon 
people knew it and everyone else had the suspicion that it was 
going on, and you were the only people that had the capability 
and the tools to get to the bottom of it and you are saying you 
do not know whether you knew it was going on, there is 
something wrong here.
    Mr. Wood. What I am saying, sir, is I do not know that we 
knew that particular identified people were engaging in this 
activity that we had evidence for, as we do now. But we knew 
that these opportunities existed and were being manipulated, 
yes. I would say that the answer to that is yes from reading 
this report. It is clear that the FERC at that time knew----
    Senator Dorgan. So if FERC knew that these markets were 
being manipulated, why did they not hit the emergency brake 
immediately and put caps on wholesale prices?
    Mr. Wood. Well, I think what they did in December was an 
attempt to do that. Again, sir, please recognize I was not 
there. It was not after some thought that we did the caps. It 
was my very first vote.
    Senator Dorgan. Well, you are right, but you were still 
running that agency and the bowels of that agency are still 
attached to the neck.
    Mr. Wood. Correct, but it has got a new head.
    Senator Dorgan. Well, it has got a new head, but the body 
still looks the same to me. I am trying to figure out whether 
there is a will and a heart and an interest in doing the right 
thing. As Senator Boxer described in her chart, these things 
ratcheted up and the California people believed that the 
interests were gaming this system and stealing from ratepayers.
    My question is why, if FERC knew that this system was being 
gamed and manipulated and deceptive practices were existing in 
the year 2000, why did we not see price caps until June of 
2001? What was FERC doing and why was it not taking action?
    Mr. Wood. I could stand corrected, but I believe throughout 
that whole period there were price caps. They did not work the 
same way that the price caps worked forward.
    Senator Dorgan. You put wholesale price caps on in June 
2001 and that is what stopped this. But my understanding is 
that you did that in contravention of the Administration's 
interests. They did not want you to do it; is that correct?
    Mr. Wood. I am sorry, Senator Dorgan?
    Senator Dorgan. The Administration was opposed to you 
applying these price caps in June 2001, is that not correct?
    Mr. Wood. I did not talk to them about the pending matters.
    Senator Dorgan. But you know they were displeased.
    Mr. Wood. In fact, I read it in the paper.
    Senator Dorgan. But you know they were displeased? You read 
that in the paper?
    Mr. Wood. I did.
    Senator Dorgan. Yes. Well, first of all, I want to thank 
you for taking that action. But what I am trying to understand 
is the agency that you head sat on the sidelines all during 
that period. Other people knew what was going on or at least 
were digging into it and it does not seem to me like FERC was. 
If you cannot rely on the referee or the regulator here, you 
know, you are at risk for losing billions of dollars in ill-
gotten gains for the company and taking billions of dollars 
from the customer they should not have to have taken from them.
    Mr. Wood. I would agree with your assessment that the FERC 
has got some changing to do and, quite frankly, it requires 
bringing in the new blood and that is why I am very grateful 
that Congress has given us the resources to allow us to do 
that.
    Senator Dorgan. But are you upset at the way FERC behaved 
during that period?
    Mr. Wood. That is why I took the job, sir. I wanted to come 
up and fix it.
    Senator Dorgan. Are you upset with them?
    Mr. Wood. Yes, sir. I wanted to come up here because I was 
a state regulator in the same shoes that President Lynch is 
today, not quite as dependent on FERC because of the nature of 
the Texas grid, but in some ways dependent on FERC, and wanted 
to make sure that, in fact, FERC did do its job, because it 
mattered to my home state just, as well.
    I think there might have been other things that I would 
have rather done with my life, but I felt that this was 
important, and I still believe it is important to fix it.
    Senator Dorgan. But I understand you were not here during 
that period, but you came here day to day preaching 
deregulation once again. I think--I will tell you what. I have 
had a belly full of being restructured and deregulated, only to 
find out that everybody else gets rich and the rest of the 
people lose their shirts.
    So I am very worried about somebody who says, boy, this has 
really worked well, when we have a regulatory agency that fails 
to regulate. We have got people coming to this town saying what 
we want is less government. Do we really want less government 
in the face of this kind of wholesale cheating? I do not think 
so. I think we want more effective, aggressive regulators who 
are willing to stand up and speak up and take effective action 
on behalf of ratepayers, especially in the electricity area.
    So Mr. Wood, I will let my colleagues continue to ask 
questions, as well, but it seems to me that that agency that 
you now head was shamefully absent during a critical period, 
and I cannot tell you how angry I am about that. I almost feel 
like we ought to abolish the agency and start over, because we 
want people in an agency like this to stop cheating when it 
happens.
    We had hearings, and I questioned the folks at FERC, and 
the fact is they sat there on their hands and did nothing. It 
was so enormously frustrating. We knew what was going on, and 
now we finally understand that the evidence exists of this 
massive deception, but FERC would not do anything.
    I hope that we are able to look back at your tenure, Mr. 
Wood, and say that you dramatically changed it, you had an 
emergency break, you had aggressive overseers, you were an 
aggressive regulator, you saw wrongdoing, and that you took 
action immediately. I hope that is the legacy you will leave at 
that agency.
    My colleagues have other questions. Senator Hollings.
    The Chairman. Mr. Wood, is that not the case, that you 
noticed this wrongdoing? Certainly the prices were out of 
control, and thereby you instituted price caps in June of last 
year; is that not correct?
    Mr. Wood. Yes, sir. We did refer to them as price 
mitigation, but I think either name is applicable.
    The Chairman. Price mitigation, that is a fancy word. Why 
did you not followup on the need for mitigation? Why did you 
not followup and investigate and do something about it after 
June and, in fact, according to the California witnesses, until 
now? I mean, from June until May of this year, the testimony 
before our Committee is to the effect that you not only did 
nothing, you blocked anything being done in California.
    I am just wondering. You saw mitigation was necessary in 
June and, bam, you put it in, and then nothing happened. 
Correct my thought.
    Mr. Wood. I attached to my testimony all the things we have 
done in a long period of time dealing with various aspects of 
the California markets. There is a refund hearing that began in 
July. We had settlements relating to that right after the June 
order. We sent the parties into settlement discussions about 
the refunds for the overcharges that happened prior to our 
price cap. There is a locked-in period of time in which under 
the law some refunds----
    The Chairman. They had requests from September of last 
year, I remember that, and they said they got no response.
    Mr. Wood. September of?
    The Chairman. September of 2001. Otherwise, they had 
subpoenas that they wanted to issue and you would not help them 
issue the subpoenas.
    Mr. Wood. I heard that, sir. I am not sure that FERC has 
any authority to give subpoena power to a state that the state 
cannot do. I am not sure what that referred to.
    The Chairman. It was some bureaucratic situation that you 
have control over that forbade them from moving forward with 
their particular case, as I understand it.
    Mr. Wood. The court case, and I have got it here attached 
on the back, we were in court on the court case from December 
of 2000, which is the court case with all the price caps. The 
California commission and others have sued the FERC over 
various and sundry rulings in that large order, and that is 
before the court now, and the record has been certified to the 
court.
    So there is plenty of litigation relating to this whole 
California experience, some of which has gone through the 
agency and some of which is out of the agency. But there is 
quite a bit, and I will confess it is not all finished. But the 
court case is in court as we speak today.
    The Chairman. Well then, let me ask another question, Mr. 
Wood, because I am a little nonplussed at the response that you 
made that you had not discussed the price caps with either the 
President, the Vice President, or anyone connected with the 
Administration. Because on May the 30th it is reported in the 
press, of course, that President Bush came out categorically 
opposed to price caps. You had no discussion whatsoever with 
anybody, with the President or anybody connected with him, is 
that right?
    Mr. Wood. That is correct, yes, sir.
    The Chairman. I hesitate because--well, were you not 
selected by Mr. Lay to be the commissioner in Texas?
    Mr. Wood. No, sir, I was not.
    The Chairman. I read a story to that effect, that you were 
Kenny Boy's boy in Austin, Texas.
    Mr. Wood. I was Governor Bush's man.
    The Chairman. You were Governor Bush's man, all right. 
Well, that is better. But it is sort of intriguing when you 
hear that Mr. Lay did approach Mr. Hebert and asked him to go 
along with his type price deregulation and he would not, then 
he selected you. Is that correct? Do you know anything about 
that?
    Mr. Wood. No, sir. I had discussions with then-Governor 
Bush's staff in October of 2000 about how I might wish to serve 
the Administration if the event happened, and I think my 
response, which at the time has proven itself out, was: Just 
give me something hard.
    The Chairman. How about the energy plan, now that we have 
the Administration's energy plan? How often did you meet to 
help them promulgate that plan, with Vice President Cheney?
    Mr. Wood. There was--well, actually I was on what was 
called the transition team, which was to write the energy 
action plan for the incoming Secretary of Energy, who I believe 
at the time had not been named, Senator Abraham. I was on that 
group, and we met once prior to the Inauguration, but I 
actually did not even make that meeting because I was not able 
to be there.
    But that was my involvement with the transition before the 
Inauguration. I was not involved in the energy advisory team 
other than providing the comments that I had given earlier to 
the transition team about general thoughts about what would be 
good for the energy future of the country.
    The Chairman. Did you meet with the Vice President in 
promulgating the energy plan?
    Mr. Wood. No, sir, I did not.
    The Chairman. You did not. Very good, I thank you, Mr. 
Chairman. Let me yield my time to the next witness.
    Senator Dorgan. Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman.
    Mr. Wood, I think probably nothing is going to determine 
whether FERC has learned its lessons as clearly as what you 
decide on September 30th when the price caps expire. I would 
like to get a sense of how you are going to approach it. At a 
minimum, at a bare minimum, it seems to me that FERC has an 
obligation to those on the West Coast, people who have been 
flattened, as Senator Boxer and I have been talking about for 
several hours now, that you have an affirmative obligation to 
show that there is going to be protection for consumers by what 
you do and that you do it in an open hearing.
    Suffice it to say I am very concerned that these caps are 
just going to expire by inertia. We cannot have a hearing here 
every day, as useful as it might be. So tell us what is going 
to be done to protect the Western ratepayer come September 
30th, and be as specific as you can, if you would.
    Mr. Wood. Let me just state up front, though, Senator 
Wyden, the restrictions on that.
    Senator. Wyden. I understand. I want to know how you are 
going to approach it. Specifically, do you think there ought to 
be an affirmative finding that is a foundation for your 
decision that there are consumer protections so people will not 
get gouged?
    Mr. Wood. In May, I think about 10, 15 days ago, the 
California ISO filed a request to extend the price caps, as 
they are referred to, or in the alternative to do other things 
that would replicate the benefits that the price caps had given 
while the market is healing.
    Senator Wyden. Right.
    Mr. Wood. That is a pending proceeding before the 
Commission. The four commissioners are looking at that. It is a 
front-burner item for us this summer. I will say what I said 
prior to its filing to the Governor of California directly, 
that we are not going to go from what we have now to something 
that is less effective. Basically, we are not going to drop the 
potato. We are going to move forward with what is appropriate 
for that market and for the customers out there.
    We have learned a lot in the last year living under the 
price caps, looking at other markets where price caps or some 
other types of tools exist, and putting those out there. But 
all that, it is not like an on or off switch, Senator Wyden.
    It is the order we gave California and the state agencies 
in California what they asked for, which will get us through 
two summers. We went to the end of September just in case 
September was hot. So we had done that. That is what the order 
last summer said. It is clear that all the conditions for a 
successful competitive market are not likely to be existing by 
that time.
    Senator Wyden. Then that is key.
    Mr. Wood. Correct.
    Senator Wyden. If there is evidence that there is not a 
competitive market on the West Coast----
    Mr. Wood. Then you cannot deregulate it, basically.
    Senator Wyden. Do you think that there should be a finding 
on that point specifically before the price caps are lifted?
    Mr. Wood. That there be----
    Senator Wyden. A finding that there is a competitive 
market, before you lift the price caps? Do you feel that that 
has to be found before you lift them? I would like a yes or no 
answer on that.
    Mr. Wood. Let me make one clarification to answer your 
question. You say the price caps. There are a lot of things in 
that order other than the cap and the formula itself that are 
part of the mitigation plan. I would say I think that you have 
to have--yes, you do have to have a competitive market before 
you eliminate a mitigation plan, and the price cap is part of 
that. But I do not know--I will just say, because there are a 
number of other tools, some of which I think were more 
effective than the price cap, that the price cap itself per se 
may not be the best tool to use in that market.
    Senator Wyden. Well, what would be a better tool, then?
    Mr. Wood. Well, the must-offer requirement, I think, has 
been a remarkably effective tool out there. It did not exist 
before the Commission adopted it. In fact, they adopted it in 
April before I was on board. But the must-offer requirement 
that says, unless you are off-line to do prescheduled 
maintenance or what have you, that you have got an obligation 
to sell your power into the market. That brought a lot of power 
into the market that was kind of sitting on the sidelines.
    In fact, since that time, at least since June, there has 
not been a shortage of power.
    Senator Wyden. If you are going to go that route, I hope 
that you will give people on the West Coast of the United 
States an opportunity to be heard on that, because I know there 
are a lot of people that are very skeptical about whether there 
is anything other than price caps in the short term that is 
going to protect the consumer. That is why I want to see you 
make a finding of fact that there is a competitive market 
before you lift the price caps on people on the West Coast of 
the United States.
    Certainly I will tell you I believe there ought to be an 
open hearing on alternative remedies if you are going to look 
at other things besides price caps, because I think my 
colleague and I have heard from a lot of constituents who 
really feel that there is no other alternative right now, given 
the pounding our region has taken, other than to continue the 
price caps.
    By the way, you might be interested, I was the West Coast 
Democrat who initially had some skepticism about price caps.
    Mr. Wood. I remember that.
    Senator Wyden. If I had seen all this market manipulation, 
I would have been out there earlier with my colleague Senator 
Boxer.
    Let me go next to the question of why it took FERC until 
recently to uncover these December memos. The memos date from 
December of 2000. FERC seemed to come up with it here just very 
recently. How did it take so long to come up with them?
    Mr. Wood. We began our investigation of the energy 
markets--as I committed I believe to you personally and to the 
other members of the Energy oversight committee--in January of 
this year and I think in February began issuing the subpoenas 
and data requests not only to Enron and its affiliates, but all 
the market participants in the West. I think this was a 
response to a request in a filing in March, to a data request 
in March that asked for some specific types of documents. I do 
not have the exact subpoena before me.
    But I will share your concern that it took as long to get 
from, I guess May the 5th or 8th or so, after a March 20th 
subpoena request for these documents. I am not sure I have 
gotten comfortable on what the right answer on that is, so I 
really do not have anything to share with you there. But it is 
not for me in the investigatory business a business-as-usual 
time line.
    Senator Wyden. How would you characterize selling non-firm 
interruptible power as a sale of firm power? That was what I 
was told this morning. That is what the Enron witness admitted 
was going on in the Pacific Northwest. I guess the defense is, 
well, everybody is doing it. Mr. Freeman basically, he thought 
it was not adequately disclosing to people what was going on.
    I would like to hear how FERC characterizes something that 
strikes my constituents as pretty much fraud.
    Mr. Wood. Well, I characterize it on page 11 of my 
testimony today as deliberate misrepresentation of information. 
That may be a longer way of saying fraud, but I think to me 
that--again, the full Commission will probably weigh in on this 
as a Commission. But for one commissioner, clearly that type of 
activity is wrong.
    Senator Wyden. I want it understood how significant this 
is. Mr. Sanders said in response to my question, he admitted to 
this, that Enron was characterizing non-firm power as firm 
power. You told me that that pretty much strikes you as fraud. 
You said that the Commission is going to, in your view, look at 
it.
    Describe to me how that would come about? I would like your 
assurance this afternoon that you personally will look into 
that matter and report back to me and other members of the 
Pacific Northwest. But describe to me how it is that the 
Commission would look into that?
    Mr. Wood. The pending investigation, sir, we have 
committed, and I think both you and Senator Boxer wrote me 
personally in late January to followup on this issue as it came 
up in the Energy Committee, to provide you a report, hopefully 
a final report, but also even an interim report by the summer 
break as to where we are on this issue and others.
    But one of the things----
    Senator Wyden. Let me ask one more. I think we probably 
have a vote. Just one other question and I want to let Senator 
Boxer ask one.
    You know, on this round-tripping issue where two companies 
swap the same amount of energy at the same price, what is the 
justification for that? I mean, it is illegal in the securities 
market. Why is it justifiable in the energy market?
    Mr. Wood. The issue I think first came up with regard to 
Dynegy and CMS, that the Securities and Exchange Commission is 
looking into, I am not sure that that is legal in the energy 
markets any more. It is not in violation of a law that we have 
because, quite frankly, we do not have one one way or the other 
on that. We have a disclosure requirement which was just re-
adopted about three weeks ago that says you have got to lay all 
these transactions out in the public record in your quarterly 
report and that is a publicly available report. You cannot net 
them out as a zero. You have got to put them out as a full 
quantity.
    But that is as far as our Commission has gone on those 
issues. They have not come up, quite frankly.
    Senator Wyden. It is our understanding that Bonneville's 
loads on the Oregon-California inter-tie were less than the 
capacity of the line while the ISO's scheduling was showing the 
line to be congested. Did you investigate why there is a 
discrepancy between actual loads and what the ISO thought the 
loads were?
    Mr. Wood. That sync-ing up of those data is exactly one of 
the things that we opened the investigation in January to do.
    Senator Wyden. You plan to do?
    Mr. Wood. We have got the data already to do that and we 
have got the help, honestly from the outside, to help us 
analyze all those types of issues. But loading up of 
congestion, the phantom congestion issue that was referred to 
in the memoranda, is one of those issues, yes, sir.
    Senator Wyden. We have got a vote. I want Senator Boxer to 
have her questions. I gather you and I are going to spend the 
afternoon together because I will be heading with you over to 
the Energy Committee. But suffice it to say we have got a lot 
to do to drain this swamp. I mean, there have been a lot of 
people hurt, and we need you to be far bolder than the agency 
has been in the past. I will have some more questions later on 
this afternoon.
    Mr. Wood. Thank you, Senator Wyden.
    Senator Dorgan. Senator Boxer.
    Senator Boxer. Thank you. I think the vote starts in about 
5 minutes.
    Thank you for being here, Mr. Wood. I like some of the 
things you say, but I am really nervous about what they really 
mean. So let me try to find out.
    You say you want to solve this crisis--I am quoting from 
you--and you want to make the future better for everybody. I 
like that. But you need to make the present better now for the 
people of California. We were robbed as sure as somebody hit 
us, all 30 million people, at the same time and grabbed our 
wallet.
    Now, if your grandma got hit on the head and a thief took 
her wallet, first you would want to stop the bleeding. You did 
that with your price cap and your must-order both together. 
That is in place now. You stopped the bleeding. Now, after your 
grandma gets better you want to get her money back.
    We need our money back. So you act to stop the bleeding. I 
am very afraid you are going to take off the bandage too soon, 
though.
    Mr. Wood. I hope my answer----
    Senator Boxer. No, your answer did not help me, because the 
point about must-offer as being a substitute, must-offer and 
price caps, does not sit well with me after we know clearly 
what these guys will do. Maybe they will act right for a few 
days or months and then they will say: We do not have enough 
power.
    Did you get to see any of the information that 
Congresswoman Eshoo and I provided to Dick Cheney about how 
many power plants were taken off line for so-called 
maintenance? Do you know about the issue?
    Mr. Wood. I recall. I cannot recall it specifically, but 
yes, ma'am.
    Senator Boxer. Well, I want to share that with you. You 
want to talk about gaming the system. Just unbelievable, Mr. 
Chairman. Every year they took off X percent for maintenance. 
Now this year where they ripped us off, it was like three 
times, four times the amount they took off line for 
maintenance.
    They will game it. If all it is a must-offer, they say: We 
want to offer, but we do not have any power. So be careful. I 
am telling you, I hope that you will not be afraid to do the 
right thing, sir.
    You know something, we are all watching. If you are taken 
off your position because you did the right thing, you will 
become a hero in our country. Do not be afraid to do the right 
thing. We need more people who are willing to do the right 
thing, because everyone is watching. If you are taken off 
because you keep these price caps on, the whole world will know 
why. If that is what you conclude in your heart is the right 
thing--and I only want to show you this chart, because what an 
opportunity it is to share my charts with you.
    Look what happened to us. Look what happened. You said that 
there were price caps at this point. We have doublechecked it, 
sir. No price caps.
    Mr. Wood. It was called a break point, you are right. It 
was a different type of deal.
    Senator Boxer. No price caps, sir. They went in here. And 
look at the wondrous thing that happened when you came on and 
you did that. You solved our problem.
    We do not mind paying a fair price. Californians are the 
most notoriously generous. We are the second most energy-
efficient state in the Union on a per capita basis. Actually, 
it used to be North Dakota, but a couple of those thieves got 
us out of the second position and now we are in the first 
position, and we will stay there. We do not mind doing our 
part.
    We are the fifth largest economy in the world if California 
were a country. Do you understand what you have in your hands 
here? Then add on Oregon and Washington; the region, we are 
huge. You need to make sure this economic engine does not go 
back to sputtering, please.
    We know what works. You do not have to sit around a table 
and say, gee, what will work in the California market? You know 
because you did it. It is working. Do not abandon us. That 
would be a terrible thing.
    So this must-offer without the price cap does not work and 
will not work.
    Now, I understand this morning there was a meeting of your 
Commission, is that correct? My staff sent me a little note----
    Mr. Wood. We met this morning, yes.
    Senator Boxer.--and said that Commissioner, I think it was 
Massey, right?
    Mr. Wood. Yes, ma'am, he made a statement about----
    Senator Boxer. Said some very good things, and you said you 
agreed with a lot of the things he said.
    Mr. Wood. I agree with 100 percent of what he said.
    Senator Boxer. 100 percent, OK.
    What he does not say is that California should get our 
money back. He said rebates should be issued to customers where 
there was abuse. Well, excuse me. We know where the abuse was. 
You have seen it, you know. I cannot even imagine what you 
thought when you saw those documents.
    By the way, who made those available to us? Who made those 
available?
    Mr. Wood. We did, the FERC.
    Senator Boxer. Thank you. As my Chairman said, that was a 
road map to this abuse.
    So here is the deal in my mind. You see what happened, how 
you acted and it helped us. You see what happened when you 
would not help us. You were not there then.
    Could you hold that up again. Look what happened when the 
former Commission did not help. We got killed, we got killed 
for months.
    By the way, there is an overlay to the chart that shows 
your friend Ken Lay selling out his shares that whole time, and 
also Jeffrey Skilling, at the same time they were telling 
employees buy more, put all your 401(k) into Enron. But that is 
not your problem. It just should make you mad.
    Mr. Wood. It does.
    Senator Boxer. Good, because now that we all know the 
truth, we need to get the rebates and we need to have the 
renegotiation of contracts.
    My final point and I will stop is this. You said your 
friend Loretta Lynch--and I am glad you called her a friend. 
She is a good woman in a difficult spot. As our friend Nancy 
Pelosi says, certain jobs are not for the faint of heart. Yours 
is not for the faint of heart. Her's is not for the faint of 
heart. Everyone was looking to blame everyone.
    Bottom line, she has detailed her problems with your agency 
today going back. Let me tell you, on May 1, 2002, that was 
just a few days ago, FERC's fourth motion to delay appeals 
pending issuance of final rehearing order--another example of 
stopping them from getting their court case heard.
    So I would like to keep the record open for you to write me 
answers as to her charges as to why FERC is blocking her, 
blocking her. FERC's rolling barrier to judicial review, FERC 
continues to bar California from challenging its 2000-2001 
orders. I am going to share this with you. This is an outrage, 
and this is on your watch. It continues. This has to stop. 
These are the people who are trying to find justice.
    You did not find justice. You put in a price cap. You still 
have not given us our $8.9 billion back.
    Mr. Wood. Can I?
    Senator Boxer. Yes.
    Mr. Wood. On that issue, we set that for hearing to 
basically calculate what the price should have been and use 
that as the cap to shop off the high prices and then give all 
that money back. We sent that to a hearing. We are critically 
dependent on the data from the California side, from the ISO 
and from the now-bankrupt Power Exchange, to fill in who 
actually got paid what. That data came in I think about two or 
three weeks ago. That is much later than had originally been 
anticipated.
    But the independent judge running that case is the one who 
is in charge of getting that data. He is having a hearing on 
that, I understand, in San Diego this summer, and we expect to 
have the final basic numbers on that. But it would have been, I 
think, much worse for the state had we gone forward with the 
evidence that the generators put in only. But the state needed 
more time to get its numbers right, and I think that that will 
make for a better hearing.
    Senator Boxer. Well, you may think that. Loretta Lynch is 
very upset. She calls it FERC's rolling barrier to judicial 
review. It is her opinion that FERC continues to bar California 
from challenging its 2000-2001 order. So I am just saying there 
is a strong disagreement here. I have to say, Loretta Lynch has 
been one of the strongest advocates for the consumer. So when 
she tells me FERC is barring California from challenging its 
orders, I tend to believe her.
    I do not question your candor with me, but you need, if you 
would, to answer this chart.
    Second, she also says you have a lack of response to unjust 
and unreasonable prices. I want to just say this is the ongoing 
feeling that we have. When you put it all together, it comes up 
with a very bad answer, which is that FERC has not protected 
the people of my state and the other western states from unjust 
and unreasonable prices. You can call it anything you will; you 
still have not done it. You have the proof. I would hope to see 
the checks written, and I would hope to see that we are made 
whole, because, sir, we cannot take it any more, because we 
have been robbed and we know it. And we know that there is 
redress, not only from Enron but from these other actors.
    Very last question; I am not even going to talk any more. 
Have you heard anything back from the other actors? You sent 
the affidavits, thank you. Have you heard anything back about 
whether they have engaged in any scams?
    Mr. Wood. I think we have given them until the 22nd. A few 
have done that early, and I think all those that have made it 
public in the press. I believe one of them said we have done 
two of the ten sins, and I think there were three others in the 
past 2 days that said no. I did not look at the file before I 
came, Senator Boxer, but we are looking at those.
    I expect most people will have it in their best interest to 
make those public documents. If, in fact, they do, we will post 
those.
    Senator Boxer. Well, go after them whether they do it 
publicly or not.
    Mr. Wood. We will.
    Senator Dorgan. Senator Boxer made the point, Chairman 
Wood, on chart 5 of Ms. Lynch's testimony she said, for 
example, ``The CPUC has sought FERC action to provide limits on 
Enron's Trans-Western Pipeline affiliate and FERC has never 
responded.'' ``PUC has filed opposition, yet FERC recently 
issued a new rule terminating the requirement for both 
generators and marketers like Enron to file their contracts at 
FERC.''
    So there are things that she has raised. Would you please 
ask your staff to respond to them or you respond to them to us, 
so that we understand that?
    Mr. Wood. We will.
    Senator Dorgan. And is it your intention to cooperate with 
Ms. Lynch and also cooperate with Senator Dunn's investigation? 
Is it the intent of FERC to cooperate with the California 
authorities who are doing these investigations?
    Mr. Wood. Yes, sir. I have traded phone calls with Senator 
Dunn for the last two days, but I expect that is what he and I 
will want to talk about. Certainly with regard to the 
California PUC, the only problem with some of these parties----
    Senator Dorgan. Senator Dunn is right there, by the way.
    Mr. Wood. I saw him packing up to go.
    Senator Dorgan. This would be a good opportunity.
    Mr. Wood. The only difficulty with some of these comes when 
the parties also are participating as litigants before the 
FERC. That is difficult, to have a co-investigatory role there. 
But that is just to protect everybody else's rights.
    Senator Dorgan. Mr. Wood, we want you to succeed.
    Mr. Wood. Thank you.
    Senator Dorgan. We want you to be aggressive, we want you 
to be a tiger as a regulator.
    I am going to do something unusual, with your forbearance, 
for about a minute and a half. Congresswoman Anna Eshoo has 
been here since 9:30 in the morning. We were not able to 
accommodate the Members of the House who wished to testify. 
This hearing has gone on a long, long time. I am going to give 
her the last word for a minute and a half.
    Would you take a seat next to Chairman Wood. Congresswoman 
Eshoo, I know how important this is to you and others, and you 
have sat here since 9:30. I want you to at least have the last 
word in this hearing. Thank you very much.

               STATEMENT OF HON. ANNA G. ESHOO, 
              U.S. REPRESENTATIVE FROM CALIFORNIA

    Ms. Eshoo. Well, thank you very, very much, Mr. Chairman 
and the distinguished Members of the Committee, all my friends.
    I have to tell you that in 4 hours and 15 minutes one 
overriding thought has riveted through me. That is that the 
American people tuned in to this hearing are hearing people 
standing up for them, and I want to thank you for that. I do 
not have to add to what has been said at this hearing.
    The sadness I have is that, as a Member of the House of 
Representatives, a deaf ear has been turned to our legislative 
attempts right up until last week when the memos came out. I 
salute Chairman Wood for pushing on that, I salute him. He is 
doing the right thing, but more has to be done.
    To this date, to this very moment, what you are doing here 
has not been done in the House. I hope that that will change. I 
think the entire Congress has to act on this so that the 
American people know that the laws that are on the books are 
not a sham, that the mission that directs the FERC and what we 
as legislators when we took our oath of office really is the 
truth, that we will get to the bottom of this, but not only get 
to the bottom of it, but we can assure them that the system 
that is in place now will not reproduce what we have 
experienced.
    I think that is really what the lesson of today is. I 
cannot thank you enough. I am very proud of the questions that 
you have asked, that you have made the determinations to get to 
the bottom of this. I pledge that I will work with Chairman 
Wood, but I want Chairman Wood to know that he can be really 
one of the great heros of our time. I could not mean that more. 
Have the strength to do what is the right thing to do. Do not 
make mush out of the law. It should not expire. We have to 
resurrect this and guarantee to the American people that we can 
do better, that we are going to, and that we are going to put a 
system in place that will not be manipulated by anyone. It is a 
disgrace to place next to the name of ``America.''
    So thank you for what you have done today and we will 
continue to work with you, and I hope that this will be 
replicated in the House.
    Senator Dorgan. Congresswoman Eshoo, thank you very much.
    Ms. Eshoo. Thank you.
    Senator Dorgan. Chairman Wood, thank you for being here.
    That is the last word. This hearing is adjourned.
    [Whereupon, at 1:50 p.m., the Subcommittee was adjourned.]

                                  
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