[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
__________
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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.]