[Federal Register Volume 68, Number 62 (Tuesday, April 1, 2003)]
[Notices]
[Pages 15712-15714]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-7796]


-----------------------------------------------------------------------

DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Docket Nos. EL03-77-000 and RP03-311-000]


Order Proposing Revocation of Market-Based Rate Authority and 
Termination of Blanket Marketing Certificates

Issued March 26, 2003.
    Before Commissioners: Pat Wood, III, Chairman; William L. 
Massey, and Nora Mead Brownell: Enron Power Marketing, Inc. and 
Enron Energy Services, Inc.; Bridgeline Gas Marketing L.L.C., Citrus 
Trading Corporation, ENA Upstream Company, LLC, Enron Canada Corp., 
Enron Compression Services Company, Enron Energy Services, Inc., 
Enron MW, L.L.C., and Enron North America Corp.

    1. This order directs Enron Power Marketing, Inc. and Enron Energy 
Services, Inc. (collectively, Enron Power Marketers) to show cause to 
the Commission in a paper hearing why their authority to sell power at 
market-based rates \1\ should not be revoked by the Commission in light 
of their apparent engagement in gaming, in violation of Section 205(a) 
of the Federal Power Act's (FPA) requirement that rates be just and 
reasonable, as well as their apparent failure to disclose changes in 
their market shares to the Commission in violation of their market-
based rate authority.\2\ This order also initiates a proceeding under 
Section 206 of the FPA,\3\ in Docket No. EL03-77-000, where the show 
cause filing will be considered.
---------------------------------------------------------------------------

    \1\ Enron Power Marketers are authorized to sell power at 
market-based rates. See Enron Power Marketing, Inc., 65 FERC ]] 
61,305 (1993); Enron Energy Services Power, Inc., 81 FERC ]] 61,267 
(1997).
    \2\ 16 U.S.C. 824d(a) (2000).
    \3\ 16 U.S.C. 824e (2000).
---------------------------------------------------------------------------

    2. This order also directs Bridgeline Gas Marketing L.L.C., Citrus 
Trading Corporation, ENA Upstream Company, LLC, Enron Canada Corp., 
Enron Compression Services Company, Enron Energy Services, Inc., Enron 
MW, L.L.C., and Enron North America Corp. (collectively, Enron Gas 
Marketers) to show cause to the Commission in a paper hearing why the 
Commission should not terminate their blanket marketing certificates 
under Section 284.402 of the Commission's regulations \4\ to make sales 
for resale at negotiated rates in interstate commerce of categories of 
natural gas subject to the Commission's Natural Gas Act (NGA) 
jurisdiction.\5\ This order also institutes a proceeding under Sections 
5 and 7 of the NGA, in Docket No. RP03-311-000, where the show cause 
filings will be considered.
---------------------------------------------------------------------------

    \4\ 18 CFR 284.402 (2002).
    \5\ See 15 U.S.C. 717 et seq. (2000).
---------------------------------------------------------------------------

    3. This order is necessary to fulfill the Commission's obligation 
to monitor competitive markets in order to protect wholesale 
electricity and natural gas customers from unjust and unreasonable 
rates.

Background

    4. On February 13, 2002, the Commission directed a Staff fact-
finding investigation into whether any entity manipulated prices in 
electricity or natural gas markets in the West or otherwise exercised 
undue influence over wholesale electricity prices in the West, since 
January 1, 2000.\6\
---------------------------------------------------------------------------

    \6\ Fact-Finding Investigation of Potential Manipulation of 
Electric and Natural Gas Prices, 98 FERC ]] 61,165 (2002) (February 
13 Order).
---------------------------------------------------------------------------

    5. On August 13, 2002, Staff released its Initial Report in Docket 
No. PA02-2-000.\7\ In that Report, Staff recommended the initiation of 
various company-specific proceedings \8\ to further investigate 
possible misconduct, and recommended several generic changes to market-
based tariffs to prohibit the deliberate submission of false 
information or the deliberate omission of material information and to 
provide for the imposition of both refunds and penalties for 
violations.
---------------------------------------------------------------------------

    \7\ The Initial Report is available on the Commission's Web site 
at http://www.ferc.gov/electric/bulkpower/pa02-2/Initial-Report-
PA02-2-000.pdf.
    \8\ These proceedings, which are currently pending before the 
Commission, are Docket Nos. EL02-113-000, EL02-114-000, and EL02-
115-000.
---------------------------------------------------------------------------

    6. As noted in Staff's Final Report, being publicly released 
concurrently with this order,\9\ evidence indicates that the Enron 
Power Marketers appear to have engaged in gaming and misrepresentation, 
and also failed to disclose significant changes in their market shares 
to the Commission. In addition, the Staff's Final Report identifies 
evidence which indicates that certain Enron Gas Marketers apparently 
engaged in the manipulation of prices in natural gas markets.
---------------------------------------------------------------------------

    \9\ Final Report on Price Manipulation in Western Markets 
(Docket No. PA02-2-000 (Docket No. PA02-2-000 (March 2003). The 
Staff Final Report is available on the Commission's website. We will 
incorporate the Staff Final Report, and the underlying record in 
Docket No. PA02-2-000, by reference into the records in these 
proceedings.
---------------------------------------------------------------------------

Discussion

A. Proposed Market-Based Rate Revocation

    7. We find that the Enron Power Marketers, based on the evidence 
discussed in the Final Report appear to have engaged in gaming, and 
failed to disclose significant changes in their market shares to the 
Commission.
    8. The Commission's grant of authority to sell power at market-
based rates, as opposed to at cost-based rates, depends on a 
functioning, competitive market for wholesale power unimpaired by 
market manipulation. Moreover, implicit in Commission orders granting 
market-based rates is a presumption that a company's behavior will not 
involve fraud, deception or misrepresentation. Companies failing to 
adhere to such standards are subject to revocation of their market-
based rate authority.\10\ In addition, the Enron Power Marketers were 
directed, when they were granted market-based rate authority, to inform 
the Commission promptly of changes in status that reflect a departure 
from the characteristics that the Commission relied upon in granting 
market-based rate authority.\11\
---------------------------------------------------------------------------

    \10\ Fact Finding Investigation of Potential Manipulation of 
Electric and Natural Gas Prices, 99 FERC ]] 61,272 at 62,153-54 
(2002); accord Investigation of Terms and Conditions of Public 
Utility Market-Based Rate Authorizations, 97 FERC ]] 61,220 at 
61,975-77 (2001); GWF Energy, LLC, et al., 98 FERC ]] 61,330 at 
62,390 (2002); New York Independent System Operator, Inc., 91 FERC 
]] 61,218 at 61,798-800 (2000), order on reh'g, 97 FERC ]] 61,155 
(2001); Washington Water Power Company, 83 FERC ]] 61,097 at 61,462-
64, order in response to show cause presentation, 83 FERC ]] 61,282 
(1998); Kansas City Power & Light Company, 74 FERC ]] 61,066 at 
61,175, order on reh'g, 75 FERC ]] 61,244 (1996).
    \11\ 65 FERC at 62,405; 81 FERC at 62,319.
---------------------------------------------------------------------------

    9. The information in Staff's Final Report indicates that the Enron 
Power Marketers appear to have violated FPA Section 205(a) by engaging 
in gaming. It also indicates that Enron Power Marketers appear to have 
acted inconsistently with their market-based

[[Page 15713]]

rate authority, not only by engaging in gaming, but also by failing to 
inform the Commission in a timely manner of significant changes in 
their market shares by gaining influence/control over others' 
facilities. In view of the foregoing, we are therefore requiring the 
Enron Power Marketers to show cause why the Commission should not 
revoke their market-based rate authority. The Commission will institute 
a Section 206 proceeding and direct Enron Power Marketers to show cause 
to the Commission in a paper hearing in that proceeding.
    10. In cases where, as here, the Commission institutes a Section 
206 proceeding on its own motion, Section 206(b) requires that the 
Commission establish a refund effective date that is no earlier than 60 
days after publication of notice of the Commission's investigation in 
the Federal Register, and no later than five months subsequent to 
expiration of the 60-day period. In order to give maximum protection to 
customers, we will establish the statutorily-directed effective date, 
in this context the date that we would revoke their market-based rate 
authorities, at the earliest date allowed,\12\ 60 days after 
publication of the order initiating the Commission's investigation in 
Docket No. EL03-77-000 in the Federal Register. In addition, Section 
206 requires that, if no final decision has been rendered by that date, 
the Commission must provide its estimate as to when it reasonably 
expects to make such a decision. Given the times for filing identified 
in this order, and the nature and complexity of the matters to be 
resolved, the Commission estimates that it will be able to reach a 
final decision by July 31, 2003.
---------------------------------------------------------------------------

    \12\ See, e.g., Canal Electric Company, 46 FERC ]] 61,153, reh'g 
denied, 47 FERC ]] 61,275 (1989).
---------------------------------------------------------------------------

B. Proposed Blanket Marketing Certificate Termination

1. Statutory Origins
    11. The Enron Gas Marketers are affiliates of Transwestern Pipeline 
Company, Citrus Corp., and/or Northern Plains Natural Gas Company.\13\ 
Section 284.402 of the Commission's regulations grants any person who 
is not an interstate pipeline a blanket certificate of public 
convenience and necessity pursuant to Section 7 of the Natural Gas Act 
to make sales for resale at negotiated rates in interstate commerce of 
any category of natural gas that is subject to the Commission's NGA 
jurisdiction.\14\ The Commission's NGA sales jurisdiction currently 
extends to sales for resale of natural gas that are made by pipelines, 
local distribution companies, and their affiliates.\15\ Thus, natural 
gas marketers who fall into those categories, including the Enron Gas 
Marketers, require the blanket marketing certificate in order to make 
sales for resale.
---------------------------------------------------------------------------

    \13\ On March 19, 2003, Enron Corp. made a Form 8-K filing with 
the Securities and Exchange Commission, under file number 1-13159, 
proposing to place ownership of Transwestern Pipeline Company, 
Citrus Corp., and Northern Plains Natural Gas Company with a newly 
created company called PipeCo.
    \14\ 18 CFR 284.402 (2002). Affiliates of pipelines are not 
engaged in first sales, see 15 U.S.C. 3301(21) (2000), and, so, are 
subject to the Commission's jurisdiction.
    \15\ The NGA gives the Commission jurisdiction over sales for 
resale of natural gas in interstate commerce. However, this 
jurisdiction has been limited by Sections 601(a)(1)(A) and (b)(1)(A) 
of the Natural Gas Policy Act as amended by the Natural Gas Wellhead 
Decontrol Act (NGPA), which remove all ``first sales'' from the 
Commission's NGA jurisdiction as of January 1, 1993. NGPA Section 
2(21) defines first sales to include all sales other than sales by 
interstate or intrastate pipelines, local distributions companies, 
and their affiliates. Reporting of Natural Gas Sales to the 
California Market, 96 FERC ]] 61,119 at 61,463, order on reh'g, 97 
FERC ]] 61,029 (2001); San Diego Gas and Electric Co., 101 FERC ]] 
61,161 at 61,656 (2002).
---------------------------------------------------------------------------

    12. The Commission adopted Section 284.402 of its regulations, 
granting a blanket marketing certificate, in Order No. 547.\16\ The 
purpose of Order No. 547 was to ``foster a truly competitive market for 
natural gas sales for resale in interstate commerce, giving purchasers 
of natural gas access to multiple sources of natural gas and the 
opportunity to make gas purchasing decisions in accord with market 
conditions.''\17\ Although the order was independent of Order Nos. 636 
and 636-A, it was promulgated for the same reasons, including the 
promotion of an active and viable spot market for natural gas.\18\ The 
Commission permitted affiliated gas marketers to sell gas at negotiated 
rates based on a finding that the sale of gas as a commodity would be 
sufficiently competitive to prevent affiliated gas marketers from 
exercising market power, that is, controlling prices or excluding 
competition. NGA Sections 4 and 5 require that jurisdictional gas sales 
be made at rates that are just and reasonable.\19\ The Commission also 
stated in Order No. 547 that it would monitor the operation of the 
market.\20\
---------------------------------------------------------------------------

    \16\ Regulations Governing Blanket Marketer Sales Certificates, 
Order No 547, FERC Stats. & Regs., Regulations Preambles January 
1991--June 1996 ]] 30,957 (1992), order on reh'g, 62 FERC ]] 61,239 
(1993).
    \17\ Id. at 30,719.
    \18\ Id. at 30,721.
    \19\ Id. at 30,726; see 15 U.S.C. 717c, 717d (2000).
    \20\ Id. at 30,727.
---------------------------------------------------------------------------

2. Apparent Manipulation
    13. The evidence developed in Staff's investigation indicates that 
certain Enron Gas Marketers apparently misused their authority under 
their blanket marketing certificates to make sales to and purchases 
from gas markets serving California at rates that were unjust and 
unreasonable from the summer of 2000 through the winter of 2000-2001. 
This evidence indicates that the Enron Gas Marketers, through their 
electronic trading platform, EnronOnline (EOL),\21\ apparently 
manipulated the price of natural gas at the Henry Hub located in 
Louisiana on at least one occasion to profit from positions taken in 
the over-the-counter (OTC) financial derivatives markets (OTC markets). 
Although the price change in the physical markets was only about $.10/
MMBtu, Enron Gas Marketers nevertheless profited due to the effect that 
this small change in the physical price had on its large financial 
position; Enron Gas Marketers earned approximately $3.2 million from 
this apparent manipulation.
---------------------------------------------------------------------------

    \21\ The EnronOnline system is administered by Enron Networks, 
an Enron Corp. subsidiary. EnronOnline is a free, Internet-based, 
transaction system which allows the Enron Gas Marketers to buy from 
and sell gas to third parties.
---------------------------------------------------------------------------

    14. On July 19, 2001 a number of traders entered relatively large 
short positions in the financial markets through OTC swaps and Gas 
Daily financial swaps. These traders continued to increase the short 
positions throughout the initial phase of the manipulation, which was 
the period when the EOL market maker (who was, at times, the desk 
manager) quickly and steadily raised prices on EOL, resulting in the 
purchase of a very large amount of next-day physical gas. This 
purchasing caused prices in the financial markets to rise, but by a 
lesser amount.
    15. The financial traders stopped increasing their short positions 
near the end of the EOL market maker's buying streak, at a point when 
the EOL market maker stopped raising prices and began to hold prices 
steady at the high levels. Once the EOL market maker leveled out 
prices, the OTC swap began to fall. The EOL market maker then began to 
lower the prices and sold a very large amount of gas at rapidly falling 
prices. The falling of the physical price then further pushed down the 
OTC swap price, generating significant profits for the financial 
traders. These profits greatly exceeded the losses that were generated 
from the impatient buying and selling of the physical gas.

[[Page 15714]]

3. Commission Determination
    16. The Commission granted a blanket marketing certificate after a 
finding that the gas commodity market was sufficiently competitive to 
prevent certificate holders from manipulating prices. The Commission 
now has evidence that certain Enron Gas Marketers have apparently 
participated in practices that manipulate prices so as to charge unjust 
and unreasonable rates.
    17. The Commission has discretion to implement remedies when it 
finds conduct that has violated its policies or regulations. The agency 
is at its zenith in fashioning such remedies.\22\ Its discretion 
extends to denial of participation in a government program generally 
extended to business managers for the purpose of maintaining the 
fairness, equity, and efficiency of the program.\23\ Given the Enron 
Gas Marketers' conduct and their adverse effects on gas prices, the 
Enron Gas Marketers are directed to show cause why it still serves the 
public convenience and necessity for the Enron Gas Marketers to have 
blanket marketing certificates and why the Commission should not 
terminate their blanket marketing certificates. The Commission will 
institute a proceeding pursuant to the Commission's authority under NGA 
Sections 5 and 7,\24\ and direct the Enron Gas Marketers to show cause 
to the Commission in a paper hearing in that proceeding
---------------------------------------------------------------------------

    \22\ E.g., Niagara Mohawk Power Corp. v. FPC, 379 F.2d 153, 159 
(DC Cir. 1967). See also Connecticut Valley Electric Company, Inc. 
v. FERC, 208 F.3d 1037, 1044 (DC Cir. 2000); Louisiana Public 
Service Commission v. FERC, 174 F.3d 218, 225 (DC Cir. 1999).
    \23\ Niagara Mohawk Power Corp. v. FPC, 379 F.2d 153, 159 (DC 
Cir. 1967).
    \24\ 15 U.S.C. 717d, 717f (2000).
---------------------------------------------------------------------------

    The Commission orders:
    (A) The Enron Power Marketers are hereby directed, within 21 days 
of the date of this order, to show cause to the Commission in a paper 
hearing, in Docket No. EL03-77-000, why they should not be found to 
have violated Section 205(a) of the Federal Power Act and their market-
based rate authorizations and why their market-based rate authority 
should no be revoked.
    (B) The effective date in Docket No. EL03-77-000 will be 60 days 
following publication of this order in the Federal Register.
    (C) Pursuant to the authority contained in and subject to the 
jurisdiction conferred upon the Federal Energy Regulatory Commission by 
Section 402(a) of the department of Energy Organization Act and the 
Federal Power Act, particularly Section 206 thereof, and pursuant to 
the Commission's Rules of Practice and Procedure and the regulations 
under the Federal Power Act (18 CFR chapter I), the Commission hereby 
institutes an investigation of the Enron Power Marketers' market-based 
rates, in Docket No. EL03-77-000, as discussed in the body of this 
order.
    (D) The Enron Gas Marketers are hereby directed, within 21 days of 
the date of this order, to show cause to the Commission in a paper 
hearing, in Docket No. RP03-311-000, why the Commission should not 
terminate its blanket marketing certificate under 18 CFR 284.402 
(2002), as discussed in the body of this order.
    (E) Pursuant to the authority contained in and subject to the 
jurisdiction conferred upon the Federal Energy Regulatory Commission by 
Section 402(a) of the Department of Energy Organization Act and the 
Natural Gas Act, particularly Sections 5 and 7 thereof, and pursuant to 
the Commission's Rules of Practice and Procedure and the regulations 
under the Federal Power Act (18 CFR chapter I), the Commission hereby 
institutes an investigation of the Enron Gas Marketers' blanket 
marketing certificates, in Docket No. RP03-311-000, as discussed in the 
body of this order.
    (F) Any interested person desiring to be heard in these proceedings 
should file notices of intervention or motions to intervene with the 
Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426, in accordance with Rule 214 of the Commission's 
Rules of Practice and Procedure (18 CFR 385.214) within 21 days of the 
date of this order.
    (G) Responses to the show cause submissions filed pursuant to 
Ordering Paragraphs (A) and (D) above may be submitted within 15 days 
of the date of filing of the show cause submissions.
    (H) The Secretary shall promptly publish a copy of this order in 
the Federal Register.

    By the Commission.
Magalie R. Salas,
Secretary.
[FR Doc. 03-7796 Filed 3-31-03; 8:45 am]
BILLING CODE 6717-01-P