[Congressional Record Volume 148, Number 56 (Tuesday, May 7, 2002)]
[Senate]
[Pages S3938-S3943]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                       ENRON MARKET MANIPULATION

  Mrs. FEINSTEIN. Madam President, this morning I sent a letter to the 
Attorney General asking him to institute a criminal investigation 
against Enron and other energy companies. I will read that letter into 
the Record.
  The letter says:
       Dear Attorney General Ashcroft: I am writing to ask that 
     you institute a criminal investigation to determine whether 
     federal fraud statutes or any other laws were violated by 
     Enron and other energy companies engaged in energy trading 
     and delivery of natural gas and electricity to the Western 
     Energy Market in 2000 and 2001.
       In January, during a hearing before the Energy Commission I 
     asked Patrick Wood, Chairman of the Federal Energy Regulatory 
     Commission (FERC), to investigate whether Enron manipulated 
     prices in the Western Energy Market. The enclosed documents 
     released by FERC indicate that Enron was not only 
     manipulating prices in the West, but also engaged in a number 
     of calculated strategies such as ``Death Star,'' ``Fat Boy,'' 
     and ``Get Shorty'' to either receive payment for energy not 
     delivered or increase price. In my book, this is outright 
     fraud.
       Since Arthur Andersen (the entire company) has been 
     indicted by the Justice Department for shredding documents, 
     it seems to me that Enron is at least as culpable, if not 
     more so, for creating certain schemes to perpetuate acts of 
     fraud on consumers under the guise of corporate strategies.
       Because UBS Warbug has purchased Enron's trading entity, I 
     am particularly concerned that the same manipulative trading 
     strategies may continue to be in place today. I ask that you 
     launch a thorough investigation into this matter which may 
     well involve other energy companies that delivered energy 
     into the Western Energy Market in 2000 and 2001 and continue 
     to do so today.
       Thank you for your immediate attention to this matter.


[[Page S3939]]


  In the last 2 years I have listened to my colleagues, to FERC, and to 
energy companies tell me that the California energy crisis was caused 
by inherent problems in California.
  I have never disagreed that California's flawed energy deregulation 
laws helped precipitate an energy crisis. But I have also always 
believed that energy companies took advantage of California and the 
rest of the West to manipulate the market and to drive up prices. There 
is simply no other way that energy costing $30 a megawatt hour at one 
time, a few days later could cost $350 a megawatt hour.
  On March 7, one of my colleagues in this esteemed House said the 
following on the Senate floor to justify opposition to our futures 
derivatives amendment:

       I have seen no evidence--in fact I will point out that 
     Chairman Greenspan has seen no evidence--that derivatives by 
     Enron, or by anybody else, had anything to do with the energy 
     spikes in prices in California.

  So I would ask my esteemed colleague to read these documents which 
are today on the Federal Energy Regulatory Commission's Web site and 
tell us if he can still say that.
  These documents, released yesterday, are nothing short of 
astonishing. They discuss strategies with popular names such as Death 
Star and Get Shorty to describe in detail how energy prices can be 
manipulated. And then there is a document, by a law firm, Brobeck, 
which attempts to justify the strategies.
  I am not shocked to learn that this had occurred. I have been saying 
this for a long time now. But the arrogance of documenting such illicit 
and underhanded behavior, and using popular titles for it, I think 
speaks for itself.
  Make no mistake about it, this is a smoking gun.
  I ask unanimous consent these memoranda be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                        Brobeck, Attorneys at Law.
  As part of our preparation for the various investigations and 
litigation actually and potentially facing EPMI in connection with the 
California energy market, Jean Frizzell, Barrett Reasoner, Mike Kirby 
and Gary Fergus spent several full days over the past few months at 
EPMI for the purpose of learning and understanding more about the data, 
methodology, the various strategies used by the traders and the 
implementation of those strategies. This is a highly complicated 
subject matter and all of us are still learning.
  We used as our starting point the Preliminary Memorandum dated 
December 8, 2000, which we understand was prepared as the first step in 
educating you and outside counsel about EMPI trading practices. The 
Preliminary Memorandum was written by Steve Hall, an associate on loan 
from the Stoel Rives law firm, and co-authored by Christian Yoder, the 
in-house counsel at EMPI. Over the course of the past month, we have 
spent a fair amount of time with a number of traders. In some 
instances, we met the same traders more than once to try and understand 
the various practices. On January 11th, we spent another full day with 
Tim Belden, chief trader for EMPI in Portland going over the strategies 
that have been identified. Here is our summary of the status of our 
further investigation and present analysis of the EMPI trading 
practices:


                                Overview

       The California energy market during calendar year 2000 was 
     an incredibly complex and dynamic environment. Weather, 
     supply shortages, physical limits and market volatility 
     contributed to this environment. During the past month, we 
     have had several outside law firm lawyers, each with varying 
     degrees of experience with California electricity market, 
     work together with the EPMI traders to understand the market 
     and the practices. From time to time, the understanding of 
     and interpretation by the lawyers interviewing the same 
     traders about the market and the trading practices were 
     inconsistent. When that happened, we would go back to the 
     traders to try and gain a common understanding of the 
     particular market and trading strategy. At this point in the 
     process, we realize that there are very few clearly defined 
     trading strategies. Depending upon the particular 
     circumstances of the day, trading strategies were modified 
     and applied in response to EPMI's portfolio, market 
     conditions, the individual trader's understanding of them, 
     and the individual trader's preference within a large overall 
     framework. In part, this is because trading is done 7 days a 
     week for many different schedules (e.g. PX day ahead, PX day 
     of, ISO hour ahead, ISO real time etc.
       EPMI is only one of the many market participants. We do not 
     have nearly enough information to gain a good understanding 
     of all of the impacts other participants, and whatever their 
     strategies might have been, had on the market. For these 
     reasons, you should consider this a work in progress, rather 
     than the definitive analysis of EPMI trading practices. We 
     may learn that some of the conclusions we have reached will 
     later turn out to be inaccurate. In fact, we learned during 
     this process that some of other information contained in the 
     Preliminary Memorandum, which resulted in some erroneous 
     assumptions and conclusions, cannot be supported by the facts 
     and evidence which are now known. In other instances, some 
     statements in the Preliminary Memorandum understandably mixed 
     trading strategies and schedules. In order to minimize the 
     risk of confusing matters further, we have taken the 
     additional step of having Tim Belden review this memorandum 
     to see if we have accurately described the trading practices 
     and to see whether he can spot any flaws in our analysis. We 
     tried to follow the same format of the Preliminary Memorandum 
     for easy cross reference.


               ``Incing'' Load into the Real Time Market

       ``Incing'' was a slang name (short for ``increasing'') for 
     a trading strategy used in response to the independently 
     owned utilities (IOU) well known and documented strategy of 
     significantly underestimating their load in the PX day ahead 
     market. This practice by the utilities apparently occurred 
     almost daily. Because the IOU's purchased their power through 
     the PX day ahead market, the PX thus became their scheduling 
     coordinator; the ISO's resulting schedules understated the 
     load for the next day. The IOU practice of underestimating 
     load artificially lowered the PX day ahead market clearing 
     price. Incing served to partially counteract the reliability 
     issues caused by this practice and, from the California 
     consumer's perspective, appears to have been preferable to 
     the alternative of selling outside of California. In 
     addition, incing may have increased the actual guaranteed 
     available supply of power in the California market depending 
     upon the shape of the demand curve. Incing reduced demand in 
     the ISO market, therefore reduced the ex post price and 
     potentially lowered the overall cost to California consumers. 
     When incing, EPMI was a price taker in the ISO ex post 
     market.


                               Death Star

       Death Star was a slang name for a strategy that addressed 
     congestion between northern and southern California. During 
     certain periods, there are transmission limits between 
     northern California and southern California on path 15 and 
     path 26. It appears that the source of the congestion may 
     have been the consistent underestimating of load by PG&E--the 
     same underestimating referred to above. Because the demand 
     was artificially lower in Northern California, it appears 
     supply was trying to move to southern California. By using a 
     combination of ISO approved scheduled counterflows and 
     alternative non-ISO transmission lines, EPMI increased the 
     transfer capability between the regions, reduced congestion, 
     and utilized underused pathways to increase the overall 
     supply of electricity in southern California. By virtue of 
     using multiple transmission paths, EPMI took on financial 
     risks, including having the transmission line derated, 
     assessment of additional congestion charges, and liability 
     for take or pay transmission charges on alternative 
     transmission lines to execute the strategy.
       Contrary to certain statements in the Preliminary 
     Memorandum, congestion was relieved and energy did flow 
     through otherwise underutilized paths.


                               Land Shift

       Load shift is a general term used to describe a variety of 
     scheduling practices and trading strategies in the day ahead 
     and hour ahead markets. One variation of load shifting 
     involved scheduling ISO approved counterflows in the ISO day 
     ahead market, ISO hour ahead market or both. Generally 
     speaking, as an alternative to purchasing power in the north. 
     EPMI purchased power in the south and counterflowed that 
     power to the north. Such transactions had the effect of 
     providing congestion relief in the ISO day ahead market or 
     the ISO hour ahead markets. These transactions placed EPMI at 
     financial risk for the differences in price between the 
     regions.
       Another category of load shifting involves shifting the 
     load on paths for which EPMI purchased firm transmission 
     rights. This category was briefly discussed in the 
     Preliminary Memorandum. We have learned more about his load 
     shifting strategy since the Preliminary Memoranda was 
     written. As the result of several in depth interviews with 
     the traders and review of the public market surveillance 
     reports available in the public and all market participants, 
     if is apparent that the assumptions and conclusions contained 
     in the Preliminary Memorandum were inaccurate. First, in 
     hindsight, it now appears likely that the load shifting 
     strategy, without knowing the impact of other market factors, 
     sometimes may have reduced the prices in the north while 
     leaving prices in the south unchanged or minimally impacted. 
     Second, it appears that the estimate of profits from this 
     load shifting strategy in the Preliminary Memorandum was

[[Page S3940]]

     vastly overstated and indeed confused. It would appear that 
     the source of the confusion may have been that the 
     Preliminary Memorandum reported the total profit attributable 
     of the EPMI firm transmission rights on path 26, as reflected 
     in ISO public documents, as opposed to any calculation of the 
     profit of this particular strategy.


                               Get Shorty

       ``Get Shorty'' was the slang name for a trading strategy 
     involving the provision of ancillary services in the PX day 
     ahead and ISO hour ahead markets. EPMI committed to providing 
     the ancillary services in the PX day ahead market and covered 
     its position by purchasing those services in the ISO hour 
     ahead market. Accordingly, EPMI actually purchased the 
     services necessary to provide ancillary services if called 
     upon to do so. In fact, the ISO regularly called upon EPMI 
     for ancillary services that were provided. Based upon the 
     information we have so far, there was only one incident 
     where EPMI failed to cover its position. In that single 
     instance, EPMI promptly offered to, and ultimately did, 
     return the payment received for the ancillary services 
     that were not provided. Accordingly, the strategy did not 
     impact the reliability of the grid. This strategy, 
     however, did place EPMI at financial risk. On a number of 
     occasions, It appears the cost to cover exceeded the 
     amount received in the day ahead market and EPMI provided 
     services to the ISO at a loss.
       The Preliminary Memorandum incorrectly assumed that the 
     information provided to the ISO was inaccurate. It now 
     appears that, consistent with daily ISO practices, that EPMI 
     did not specify the source of the ancillary services at the 
     time of sale.


                                ricochet

       ``Ricochet'' was the slang term for a trading strategy that 
     existed because EPMI was not permitted to make adjustment 
     bids in SC to SC (scheduling coordinator) trades due to 
     limitations in the ISO software systems. Ricochet served the 
     dual purpose of allowing for adjustment bids and opening up 
     market options for EPMI including the supplemental and 
     bilateral markets. By using this strategy, EPMI was at 
     financial risk if the PX price exceeded either the 
     supplemental or bilateral market price. Furthermore, the ISO 
     software limitation forced EPMI to incur additional costs, 
     export charges, ancillary services on exports and line losses 
     on imports.
       Ricochet appears not to have been a strategy that was used 
     to a significant extent when compared to EPMI's overall 
     portfolio. It appears that other market participants with 
     control areas adjacent to California and access to extremely 
     flexible generation resources may have relied more 
     extensively on this strategy.
       At the present time, EPMI faces its own software 
     limitations in implementing ISO approved adjustment bids in 
     SC to SC transactions.


                            non-firm export

       This was a trading practice that involved scheduling 
     counterflows three hours ahead of the time energy would flow. 
     The schedule counterflow had the likely effect of reducing 
     the congestion charge on the scheduled path. Under this 
     strategy, EPMI qualified for the congestion relief payment 
     two hours before the scheduled flow. Ultimately, EPMI did not 
     flow the power. Based upon the information we have, this 
     practice does not appear to have had any demonstrable impact 
     on either the PX price or the ISO ex post price. However, in 
     August 2000, the ISO directed that the practice be 
     discontinued. The EPMI traders with whom we spoke confirmed 
     that EPMI has complied with that mandate.


                 selling non firm energy as firm energy

       This was a trading strategy that was occasionally used in 
     southern California to allow for the import of power that 
     would otherwise not be available. The net effect of this 
     practice, in conjunction with other market factors, was to 
     increase the overall supply with no apparent impact on PX 
     price. EPMI was subjected to financial risk in that if the 
     non-firm power was cut, EPMI would have to cover the energy 
     cut by purchasing that power in the ISO market at the ex post 
     price.
       At this time, it appears that the net result of this 
     practice was to bring additional supply into California.


         scheduling energy to collect the congestion charge ii

       The net effect of this strategy was to schedule counterflow 
     thereby reducing congestion in hour ahead market. This was a 
     high risk strategy because EPMI was exposed to the ex post 
     market price that could exceed the congestion price. This 
     strategy could have potentially lowered the congestion charge 
     depending upon a wide variety of other market factors.
                                  ____



                                              Stoel Rives LLP,

                                                 December 8, 2000.
     To: Richard Sanders
     From: Christian Yoder and Stephen Hall
     Re: Traders' Strategies in the California Wholesale Power 
         Markets/ ISO Sanctions

     Confidential: Attorney/Client Privilege/Attorney Work Product

       This memorandum analyzes certain trading strategies that 
     Enron's traders are using in the California wholesale energy 
     markets. Section A explains two popular strategies used by 
     the traders, ``inc-ing'' load and relieving congestion. 
     Section B describes and analyzes other strategies used by 
     Enron's trades, some of which are variations on ``inc-ing'' 
     load or relieving congestion. Section C discusses the 
     sanction provisions of the California independent System 
     Operator (``ISO'') tariff.


                           A. The Big Picture

     1. ``Inc-ing'' load into the real time market
       One of the most fundamental strategies used by the traders 
     is referred to as ```inc-ing' loan into the real time 
     market.'' According to one trader, this is the `oldest trick 
     in the book' and, according to several of the traders, it is 
     now being used by other market participants.
       To understand this strategy, it is important to understand 
     a little about the ISO's real-time market. One responsibility 
     of the ISO is to balance generation (supply) and loads 
     (demand) on the California transmission system. During its 
     real-time energy balancing functions the ISO pays/charges 
     market participants for increasing/decreasing their 
     generation. The ISO pays/charges market participants under 
     the schemes: ``instructed deviations'' and uninstructed 
     deviations.'' Instructed deviations occur when the ISO 
     selects supplemental energy bids from generators offering to 
     supply energy to the market in real time in response to ISO 
     instructions Market participants that increase their 
     generation in response to instructions (``instructed 
     deviation'') from the ISO are paid the ``inc'' price. Market 
     participants that increase their generation without an 
     instruction from the ISO (an ``uninsured deviation'') and 
     paid the ex post ``dec'' price. In real-time, the ISO 
     issues instructions and publishes ex post prices at ten-
     minute intervals.
       ``Inc-ing load' into the real market'' is a strategy that 
     enables Enron to send excess generation to the imbalance 
     energy market as an uninstructed deviation. To participate in 
     the imbalance energy market it is necessary to have at least 
     1 MV of load. The reason for this is that a generation cannot 
     schedule energy onto the grid without having a corresponding 
     load. The ISO requires scheduling coordinators to submit 
     balanced schedules, i.e., generation must equal load. So, if 
     load must equal generation, how can Enron end up with excess 
     generation in the real-time market?
       The answer is to artificially increase (``inc'') the load 
     on the schedule submitted to the ISO. Then, in real-time, 
     Enron sends the generation it scheduled, but does not take as 
     much load as scheduled. The ISO's meters record that Enron 
     did not draw as much load, leaving it with an excess amount 
     of generation. The ISO gives Enron credit for the excess 
     generation and pays Enron the dec price multiplied by the 
     number of excess megawatts. An example will demonstrate this. 
     Enron will submit day-ahead schedule showing 1000 MW of 
     generation scheduled for delivery to Enron Energy Services 
     (``EES''). The ISO receives the schedule, which says ``1000 
     MW of generation'' and ``1000 MW of load. The ISO sees that 
     the schedule balances and, assuming there is no congestion, 
     schedules transmission for this transaction. In real-time, 
     Enron sends 1000 MW of generation, but Enron Energy Services 
     only draws 500 MW. The ISO's meters show that Enron made a 
     net contribution to the grid of 500 MW, and so the ISO pays 
     Enron 500 times the dec price.
       The traders are able to anticipate when the dec price will 
     be favorable by comparing the ISO's forecasts with their own. 
     When the traders believe that the ISO's forecast 
     underestimates the expected load, they will inc load the real 
     time market because they know that the market will be short, 
     causing a favorable movement in real-time ex post prices. Of 
     course, the much-criticized strategy of California's 
     investor-owned utilities (``IOUs'') of underscheduling load 
     in the day-ahead market has contributed to the real-time 
     market being short. The traders have learned to build such 
     underscheduling into their models, as well.
       Two other points bear mentioning. Although Enron may have 
     been the first to use this strategy, other have picked up on 
     it, too. I am told this can be shown by looking at the ISO's 
     real-time metering, which shows that an excess amount of 
     generation, over and above Enron's contribution, is making to 
     the imbalance market as an uninstructed deviation. Second, 
     Enron has performed this service for certain other customers 
     for which it acts as scheduling coordinator. The customers 
     using this service are companies such as Powerex and Puget 
     Sound Energy (``PSE''), that have generation to sell, but not 
     native California load. Because Enron has native California 
     load through EES, it is able to submit a schedule 
     incorporating the generation of a generator like Powerex or 
     PSE and balance the schedule with ``dummied-up'' load from 
     EES.
       Interestingly, this strategy appears to benefit the 
     reliability of the ISO's grid. It is well known the 
     California ISOs have systemically underscheduled their load 
     in the PXs's Day- Ahead market. By underscheduling their load 
     into the Day-Ahead market, the IOUs have caused the ISO to 
     have a call on energy in real time in order to keep the 
     transmission system in balance. In other words, the 
     transmission grid is short energy. By deliberately 
     overscheduling load, Enron has been offsetting the ISO's 
     real time energy deficit by supplying extra energy that 
     the ISO needs. Also, it should be noted that in the ex 
     post market Enron is a ``price taker,'' meaning that they 
     are not submitting bids or offers, but are just being paid 
     the value of the energy that the ISO needs. If the ISO did 
     not need the energy, the dec price would quickly drop to 
     $0. So, the fact that Enron was getting paid for this 
     energy shows that the ISO needed the energy to balance the

[[Page S3941]]

     transmission system and offset the IOU's underscheduling 
     (if those parties own Firm Transmission Rights (``FTR'') 
     over the path).
     2. Relieving Congestion
       The second strategy used by Enron's traders is to relieve 
     system-wide congestion in the real-time market, which 
     congestion was created by Enron's traders in the PX's Day 
     Ahead Market. In order to relieve transmission congestion 
     (i.e., the energy scheduled for delivery exceeds the capacity 
     of the transmission path), the ISO makes payments to parties 
     that either schedule transmission in the opposite direction 
     (``counterflow payments'') or that simply reduce their 
     generation/load schedule.
       Many of the strategies used by the traders involve 
     structuring trades so that Enron gets paid the congestion 
     charge. Because the congestion charges have been as high as 
     $750/MW, it can often be profitable to sell power at a loss 
     simply to be able to collect the congestion payment.


                  B. Representative Trading Strategies

       The strategies listed below are examples of actual 
     strategies used by the traders, many of which utilize the two 
     basic principles described above. In some cases, the 
     strategies are identified by the nicknames that the traders 
     have assigned to them. In some cases, i.e., ``Fat Boy,'' 
     Enron's traders have used these nicknames with traders from 
     other companies to identify these strategies.
     1. Export of California Power
       a. As a result of the price caps in the PX and ISO 
     (currently $250), Enron has been able to take advantage of 
     arbitrate opportunities by buying energy at the PX for export 
     outside California. For example, yesterday (December 5, 
     2000), prices at Mid-C peaked at $1200, while California was 
     capped at $250. Thus, traders could buy power at $250 and 
     sell it for $1200.
       b. 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.
     2. ``Non-firm Export''
       a. The goal is to get paid for sending energy in the 
     opposite direction as the constrained path (counterflow 
     congestion payment). Under the ISO's tariff, scheduling 
     coordinators that schedule energy in the opposite direction 
     of the congestion on a constrained path get paid the 
     congestion charges, which are charged to scheduling 
     coordinators scheduling energy in the direction of the 
     constraint. At times, the value of the congestion payments 
     can be greater than the value of the energy itself.
       b. This strategy is accomplished by scheduling non-firm 
     energy for delivery from SP-15 or NP-15 to a control area 
     outside California. This energy must be scheduled three hours 
     before delivery. After two hours, Enron gets paid the 
     counterflow charges. A trader then cuts the non-firm power. 
     Once the non-firm power is cut, the congestion resumes.
       c. The ISO posted notice in early August prohibiting this 
     practice. Enron's traders stopped this practice immediately 
     following the ISO's posting.
       d. The ISO objected to the fact that the generators were 
     cutting the non-firm energy. The ISO would not object to this 
     transaction if the energy was eventually exported.
       Apparently, the ISO has heavily documented Enron's use of 
     this strategy. Therefore, this strategy is the more likely 
     than most to receive attention from the ISO.
     2. ``Death Star''
       a. This strategy earns money by scheduling transmission in 
     the opposite direction of congestion; i.e., schedule 
     transmission north in the summertime and south in the winter, 
     and then collecting the congestion payments. No energy, 
     however, is actually put onto the grid or taken off.
       b. For example, Enron would first import non-firm energy at 
     Lake Mead for export to the California-Oregon border 
     (``COB''). Because the energy is traveling in the opposite 
     direction of a constrained line, Enron gets paid for the 
     counterflow. Enron also avoids paying ancillary service 
     charges for this export because the energy is non-firm, and 
     the ISO tariff does not require the purchase of ancillary 
     services for non-firm energy.
       c. Second, Enron buys transmission from COB to Lake Mead at 
     tariff rates to serve the import. The transmission line from 
     COB to Lake Mead is outside of the ISO's control area, so the 
     ISO is unaware that the same energy being exported from Lake 
     Mead is simultaneously being imported into Lake Mead. 
     Similarly, because the COB to Lake Mead line is outside the 
     ISO's control area, Enron is not subject to payment of 
     congestion charges because transmission charges for the COB 
     to Lake Mead line are assessed based on imbedded costs.
       d. The ISO 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.
       e. 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.
     3. ``Load Shift''
       a. This strategy is applied to the Day-Ahead and the real-
     time markets.
       b. Enron shifts load from a congested zone to a less 
     congested zone, thereby earning payments for reducing 
     congestion, i.e., not using our FTRs on a constrained path.
       c. This strategy requires that Enron have FTRs connecting 
     the two zones.
       d. A trader will overschedule load in one zone, i.e., SP-
     15, and underschedule load in another zone, i.e., NP-15.
       Such scheduling will often raise the congestion price in 
     the zone where load was overscheduled.
       The trader will then ``shift'' the overscheduled ``load'' 
     to the other zone, and get paid for the unused FTRs. The ISO 
     pays the congestion change (if there is one) to market 
     participants that do not use their FTRs. The effect of this 
     action is to create the appearance of congestion through the 
     deliberate overstatement of loads, which causes the ISO to 
     charge congestion charges to supply scheduled for delivery in 
     the congested zone. Then, by reverting back to its true load 
     in the respective zones, Enron is deemed to have relieved 
     congestion, and gets paid by the ISO for so doing.
       e. 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.
       f. Following this strategy has produced profits of 
     approximately $30 million for FY 2000.
     4. ``Get Shorty''
       a. Under this strategy, Enron sells ancillary services in 
     the Day-ahead market.
       b. Then the next day, in the real-time market, a trader 
     ``zeroes out'' the ancillary services, i.e., cancels the 
     commitment and buys ancillary services in the real-time 
     market to cover its position.
       c. The profit is made by shorting the ancillary services, 
     i.e., sell high and buy back at a lower price.
       d. One concern here is that the traders are applying this 
     strategy without having the ancillary services on standby. 
     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. However, once, by accident, a 
     trader inadvertently failed to cover, and the ISO called on 
     those ancillary services.
       e. This strategy might be characterized as ``paper 
     trading,'' because the seller does not actually have the 
     ancillary services to sell. FERC recently denied Morgan 
     Stanley's request to paper trade on the New York ISO.
       The ISO tariff does provide for situations where a 
     scheduling coordinator sells ancillary services in the day 
     ahead market, and then reduce them in the day-of-market. 
     Under these circumstances, the tariff simply requires that 
     the scheduling coordinator replace the capacity in the hour-
     ahead market. ISO Tariff, SBP 5.3, Buy Back of Ancillary 
     Services.
       f. The ISO tariff requires that schedules and bids for 
     ancillary services identify the specific generating unit or 
     system unit, or in the case of external imports, the selling 
     entity. As a consequence, in order to short the ancillary 
     services it is necessary to submit false information that 
     purports to identify the source of the ancillary services.
     5. ``Wheel Out''
       a. This strategy is used when the interties are set to 
     zero, i.e., completely constrained.
       b. First, knowing that the intertie is completely 
     constrained, Enron schedules a transmission flow through the 
     system. By so doing, Enron earns the congestion charge. 
     Second, because the line's capacity is set to ``0,'' the 
     traders know that any power scheduled to go through the 
     inter-tie will, in fact be cut. Therefore, Enron earns the 
     congestion counterflow payment without having to actually 
     send energy through the intertie.
       c. As a rule, the traders have learned that money can be 
     made through congestion charges when a transmission line is 
     out of service because the ISO will never schedule an energy 
     delivery because the intertie is constrained.
     6. ``Fat Boy''
       a. This strategy is described above in section A(1).
     7. ``Ricochet''
       a. 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 buys it back to sell the energy to the ISO real-time 
     market.
       b. The effect of this strategy on market prices and supply 
     is complex. First, it is clear that Enron's intent under this 
     strategy is solely to arbitrage the spread between the PX and 
     the ISO, and not to serve load or meet contractual 
     obligations. Second, Ricochet may increase the Market 
     Clearing Price by increasing the demand for energy. 
     (Increasing the MCP does not directly benefit Enron because 
     it is buying energy from the PX, but it certainly affects 
     other buyers, who must pay the same, higher price.) Third, 
     Ricochet appears to have a neutral effect on supply, because 
     it is returning the exported energy as an import. Fourth, the 
     parties that pay Enron for supplying energy to the real time 
     ex post market are the parties that underscheduled, or 
     underestimated their load, i.e., the IOUs.
     8. Selling Non-firm Energy as Firm Energy
       a. The traders commonly sell non-firm energy to the PX as 
     ``firm.'' ``Firm energy,'' in this context, means that the 
     energy includes ancillary services. The result is that the 
     ISO pays EPMI for ancillary services that Enron claims it is 
     providing, but does not in fact provide.
       b. The traders claim that ``everybody does this,'' 
     especially for imports from the Pacific Northwest in to 
     California.

[[Page S3942]]

       c. At least one complaint was filed with the ISO regarding 
     Enron's practice of doing this. Apparently, Arizona Public 
     Service sold non-energy to Enron, which turned around and 
     sold the energy to the ISO as firm. APS cut the energy flow, 
     and then called the ISO and told the ISO what enron had done.
     9. Scheduling Energy To Collect the Congestion Charge II
       a. In order to collect the congestion charges, the traders 
     may schedule a counterflow even if they do not have any 
     excess generation. In real time, the ISO will see that Enron 
     did deliver the energy it promised, so it will charge Enron 
     the inc price for each MW Enron was short. The ISO, however, 
     still pays Enron the congestion charge. Obviously a loophole, 
     which the ISO could close by simply failing to pay congestion 
     charges to entities that failed to deliver the energy.
       b. This strategy is profitable whenever the congestion 
     charge is sufficiently greater than the price cap. In other 
     words, since the ex post is capped at $250, whenever the 
     congestion charge is greater than $250 it is profitable to 
     schedule counterflows, collect the congestion charge, pay the 
     ex post, and keep the difference.


                             c. iso tariff

       The ISO tariff prohibits ``gaming,'' which it defines as 
     follows:
       ``Gaming,'' or taking unfair advantage of the rules and 
     procedures set forth in the PX or ISO Tariffs, Protocols or 
     Activity Rules, or of transmission constraints in period in 
     which exist substantial Congestion, to the detriment of the 
     efficiency of, and of consumers in, the ISO Markets. 
     ``Gaming'' may also include taking undue advantage of other 
     conditions that may affect the availability of transmission 
     and generation capacity, such as loop flow, facility outages, 
     level of hydropower output or seasonal limits on energy 
     imports from out-of-state, or actions or behaviors that may 
     otherwise render the system and the ISO Markets vulnerable to 
     price manipulation to the detriment of their efficiency.'' 
     ISO Market Monitoring and Information Protocol (``MMIP''), 
     Section 2.1.3.
       The ISO Tariff also prohibits ``anomalous market 
     behavior,'' which includes ``unusual trades or 
     transactions''; ``pricing and bidding patterns that are 
     inconsistent with prevailing supply and demand conditions''; 
     and ``unusual activity or circumstances relating to imports 
     from or exports to other markets or exchanges.'' MMIP, 
     Section 2.1.1 et seq.
       Should it discover such activities, the ISO tariff provides 
     that the ISO may take the following action:
       1. Publicize such activities or behavior and its 
     recommendations thereof, ``in whatever medium it believes 
     most appropriate.'' MMIP, Section 2.3.2 (emphasis added).
       2. The Market Surveillance Unit may recommend actions, 
     including fines and suspensions, against specific entities in 
     order to deter such activities or behavior. MMIP, Section 
     2.3.2.
       3. With respect to allegations of gaming, the ISO may order 
     ADR procedures to determine if a particular practice is 
     better characterized as improper gaming or ``legitimate 
     aggressive competition.'' MMIP, Section 2.3.3.
       4. In cases of ``serious abuse requiring expeditious 
     investigation or action'' the Market Surveillance Unit shall 
     refer a matter to the appropriate regulatory or antitrust 
     enforcement agency. MMIP, Section 3.3.4.
       5. Any Market Participant or interested entity may file a 
     complaint with the Market Surveillance Unit. Following such 
     complaint, the Market Surveillance Unit may ``carry out any 
     investigation that it considers appropriate as to the concern 
     raised.'' MMIP, Section 3.3.5.
       6. The ISO Governing Board may impose ``such sanctions or 
     penalties as it believes necessary and as are permitted under 
     the ISO Tariff and related protocols approved by FERC; or it 
     may refer the matter to such regulatory or antitrust agency 
     as it sees fit to recommend the imposition of sanctions and 
     penalties.'' MMIP, Section 7.3.

  Mrs. FEINSTEIN. This proves, for the first time, active and 
purposeful manipulation of the energy market in order to drive up 
prices and increase profits.
  I thank the Federal Energy Regulatory Commission for the 
investigation which took place and began subsequent to our hearing on 
January 29 and my request to FERC that they conduct this investigation.
  As Chairman Wood told the Energy Committee hearing: Sunlight is the 
best disinfectant. I am very pleased that, under his leadership, FERC 
is now practicing what Mr. Wood has preached.
  But take note that these documents have sat within Enron for the last 
18 months. This is 6 months after a subpoena was issued for them. And, 
finally, after all this time, the Enron board decided it would release 
the documents.
  It is appalling that it took this long. It is precisely why the CFTC 
or FERC or some regulatory agency needs the authority to investigate. 
That was an authority that the CFTC had until the Commodity Futures 
Modernization Act was passed by this body in December of 2000.
  That is the same month these documents were actually produced. It is 
exactly what Senator Cantwell, Senator Wyden, and I have been saying in 
the Energy Committee for more than a year. Had our derivatives 
amendment been in place, at least it would have ensured that for online 
trades, a regulatory agency would have had access to these documents 
and would have been able to investigate right away. I hope the 50 of my 
colleagues who voted against our energy derivatives amendment will 
reconsider their opposition.
  Senator Harkin, who is present in the Chamber, the chair of the 
Agriculture Committee, has said he would take a look at our legislation 
and mark it up. I am once again calling on his committee to hold 
hearings and mark up our legislation as soon as possible.
  Congress must pass legislation to reinstate CFTC authority to oversee 
energy derivatives in the futures market and investigate fraud and 
manipulation of energy producers.
  What do these documents mean for California and the Western States? 
Until now, FERC has never said it thought there was manipulation in the 
California and western energy markets. As such, it has taken a very 
conservative view with respect to refund proceedings, interpreting 
``just and reasonable'' doctrines and reviewing long-term energy 
contracts. That means FERC-ordered refunds were very limited and very 
insignificant relative to ``unjust and unreasonable'' costs. Now all of 
a sudden the landscape has changed. Manipulated spot markets lead to 
forward markets that were also manipulated, and thus long-term 
contracts also reflect unjust and unreasonable rates. So this means 
everything needs to be put back on the table by FERC.
  I don't believe it was just Enron. I believe other companies were out 
there doing the same or similar things. In fact, one document, a 
December 2000 memo from two Enron employees named Yoder and Hall to 
another named Sanders, even fingers two other companies, Puget Sound 
and PowerEx, as having done the same thing.
  These documents suggest that this may be beyond FERC at this point. 
That is why I am calling for the Department of Justice to investigate 
these memoranda, the companies, and other companies. I am also calling 
on FERC to take another look at contracts signed by California and 
other Western States with energy companies to see if future prices of 
energy were also manipulated by Enron. The evidence is now very clear 
that this was in fact the case.
  I am also asking FERC to take another look at the refund proceedings. 
The evidence now exists that prices were unjust and unreasonable to a 
much larger extent than FERC had previously determined.
  As my colleagues know, I have asked the Department of Justice to 
investigate, and here is why I believe there may well be outright 
fraud. There are three easy ways.
  First, Enron sold power out of State and then bought it back. This 
enabled them to evade certain price caps and sell energy without a cap 
in order to receive a much higher price for their energy. This is 
referred to as megawatt laundering.
  Second, by knowing that transmission lines were constrained and 
oversubscribed for a set hour, the company scheduled deliveries in 
order to get paid and not deliver. The net effect was that Enron got 
paid for moving energy to relieve congestion that they had no intention 
of actually ever moving.
  Third, with simple sleight of hand, Enron could sell nonfirm energy 
to the power exchange as firm energy in order to get paid extra for 
ancillary services in the firm contracts when Enron was actually 
selling nonfirm power.
  There are other examples documented on the Web site. Some are much 
more technical, with suspicious names such as Fat Boy, Get Shorty, and 
Death Star. I am sure there are yet other ways to manipulate the 
system, and perhaps other companies figured out other ways to do it as 
well.
  I am also asking the Department of Justice to investigate the entire 
western energy market and those trading into it in the years 2000 and 
2001. If there ever was a bugle call to action to fix what was wrong 
with the California and western energy markets from May of 2000 to June 
of 2001, this is it.

[[Page S3943]]

  I yield the floor.

                          ____________________