STAFF MEMORANDUM

To: Committee on Governmental Affairs

Members and Staff

From: Majority Staff

Date: November 12, 2002

Subject: Committee Staff Investigation of the Federal Energy Regulatory Commission’s

Oversight of Enron Corp.

INTRODUCTION .............................................................2

I. FERC: BACKGROUND .................................................4

A. Electricity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

B. Natural Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

C. Oil Pipelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

II. FERC’S OVERSIGHT OF ENRON . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

A. Enron Wind Farm Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

1. Regulatory Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

2. RADR Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

a. Wind Farm Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

b. Wind Farm Repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

3. Cabazon Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

B. Enron Online . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

C. Affiliate Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

D. California/Western Market Trading and Marketing Abuses . . . . . . . . . . . . . . . . 32

1. Power Crisis in California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

2. FERC’s Investigation of the California and Western Markets . . . . . . . . 36

3. Enron’s Efforts to Influence FERC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

III. CONCLUSION AND RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
2

INTRODUCTION

On December 2, 2001, Enron, then ranked as the nation’s seventh largest company, filed

for federal bankruptcy protection amid allegations of far reaching financial and other fraud. 

Enron’s collapse left thousands of employees without jobs and with severely diminished

retirement savings and erased billions of dollars of shareholder value. Perhaps most

significantly, it triggered a crisis of investor confidence in U.S. financial markets – and a

concomitant crisis in ratepayer and investor confidence in the energy markets. Enron’s

meltdown has had effects that have reverberated through the energy sector as well as other parts

of the U.S. economy, and its consequences continue to be felt today.

In January 2002, the Senate Committee on Governmental Affairs undertook an

investigation into the collapse of Enron. Specifically, the Committee examined a variety of

public and private entities that had responsibility for overseeing or monitoring aspects of Enron’s

activities and protecting the public against the type of calamities that resulted. The charge was

to seek to determine if these watchdogs did their jobs correctly and whether they could have

done anything to prevent, or at least detect earlier, the problems that led to Enron’s failure. 

Among the entities looked at closely by the Committee has been the Federal Energy Regulatory

Commission (FERC), the government’s primary energy regulator. Although Enron, at the end,

was involved in an assortment of far-flung activities, at its core, Enron was an energy company,

and many of its activities were subject to direct or indirect oversight by FERC. 

The Committee initiated its investigation through letters sent to the FERC Chairman on

February 15 and March 27, 2002, requesting information about FERC’s dealings with Enron and

its affiliates over the last ten years, information which FERC provided to the Committee. The

Committee also made follow-up requests to FERC for further information concerning

investigations, inquiries, and audits involving Enron subsidiaries and affiliates. In addition,

Committee staff had a number of interviews and discussions with FERC staff, officials of other

federal agencies, and non-Enron utility company employees concerning the specific matters

discussed in this memo. Committee staff also reviewed thousands of documents and e-mail

records from Enron and affiliated companies provided to the Committee and to its Permanent

Subcommittee on Investigations in response to subpoenas to Enron.

What Committee staff for the majority found was an agency that was no match for a

determined Enron and that has yet to prove that it is up to the challenge of proactively

overseeing changing markets. On a number of occasions, FERC was provided with sufficient

information to raise suspicions of improper activities – or had itself identified potential

problems – in areas where it had regulatory responsibilities over Enron, but failed to understand

the significance of the information or its implications. Over and over again, FERC displayed a

striking lack of thoroughness and determination with respect to key aspects of Enron’s activities

– an approach seemingly embedded in its regulatory philosophy, regulations, and practices. In

short, the record demonstrates a shocking absence of regulatory vigilance on FERC’s part and a

failure to structure the agency to meet the demands of the new, market-based system that the

agency itself has championed. In the end, this investigation reveals that FERC did not fulfill its
3

role to protect the consumer against abuses that can result if a market-based system is not

adequately patrolled by those charged with doing so. 

This memorandum will discuss four specific areas in which FERC failed to conduct

effective oversight of Enron’s activities. The first involves certain wind farms owned by Enron. 

In an effort to preserve these wind farms’ eligibility as so-called “qualifying facilities” eligible

for certain economic and regulatory benefits, Enron purported to transfer 50% ownership

interests in these wind farms to third parties. At least some of the transactions, however, appear

to have been sham sales. Enron, as required under FERC regulations, provided written notice to

FERC of each of these sales (as well as subsequent repurchases), along with certain telling

details; in some instances Enron in fact sought FERC’s affirmative approval of the transactions. 

Nonetheless, FERC failed to make any effective inquiry – or in some cases, any inquiry at all –

into these transactions, enabling Enron to receive substantial benefits for its wind farms to which

it may not have been entitled.

Second, the memo will look at an investigation that FERC staff conducted in May 2001

into the operations of Enron Online, Enron’s electronic trading platform used to buy and sell

electricity and natural gas. The inquiry included questions about the competitive advantage that

this trading operation gave Enron traders and whether that advantage could lead to abusive

practices in the market; in connection with this inquiry, FERC staff also looked at questions

concerning Enron’s financial viability. FERC staff asked some of the right questions about

Enron’s electronic trading activities and finances, but ultimately settled for incomplete,

unconvincing, or incorrect answers to those questions. Equally troubling, FERC failed to follow

up on some of the most serious concerns raised in the course of its inquiry – concerns that have

since been borne out. A critical legal memorandum regarding the basic question of whether

FERC had jurisdiction over such trading platforms as Enron Online – which were expected to

become the dominant way to trade both electricity and natural gas – was started but left to

languish until Chairman Lieberman raised questions about it in a May 15, 2002 letter to FERC

Chairman Wood. All this occurred at a time when Enron internal documents uncovered during

the Committee’s investigation show that the company placed a high priority on maintaining the

unregulated status of Enron Online. 

Third, the memo will examine questionable transactions between Enron and its FERCregulated affiliated companies. In particular, shortly before Enron declared bankruptcy, it

borrowed approximately $1 billion through two of its pipeline subsidiaries, securing the loans

with the pipelines’ assets. When Enron went bankrupt, the pipeline companies – and potentially

their ratepayers – were left to repay the loans. In addition, there is evidence suggesting that

Enron may have used its public utility affiliate, Portland General Electric (PGE), to engage in the

questionable export and reimportation of electricity from California during the Western energy

crisis of 2000-2001 and disguised these prohibited interaffiliate transactions. Although FERC

has now opened investigations into both matters, before Enron’s collapse it had been unprepared

and unwilling to act against suspect interaffiliate transactions either because the Commission’s

rules were inadequate or because it was not able to effectively monitor whether companies were

complying with the rules.
4

The fourth area involves the abusive trading practices that, according to recently released

documents, Enron traders engaged in during the California energy crisis. FERC waited nearly

two years after the first allegations of market abuse by individual companies arose before

launching a formal inquiry into the potentially abusive actions of individual companies. This

was despite the fact that FERC was provided with information raising concerns about the

exercise of market power in California as early as 1998. Not until February 2002 did FERC

pursue evidence that suggested that companies like Enron were manipulating the market. This

failure to look at the behavior of individual companies came while Enron, deeply concerned

about the effect the Western energy crisis could have on the course of deregulation and on its

business, engaged in an extensive public relations and lobbying campaign to influence FERC’s

actions in the California market. 

In addition to examining these areas of failed oversight, the memo will look at the efforts

the Commission has undertaken recently to more effectively oversee the contemporary energy

markets. Committee staff has serious concerns about whether, as currently constructed, such

efforts are likely to result in the proactive, aggressive agency that is needed to protect

consumers. 

* * *

While we do not know with certainty whether the disclosure of any of the individual

activities to be highlighted at the hearing would have prevented Enron’s collapse, it seems highly

likely that more vigilant, aggressive action by FERC would have limited some of the abuses that

appear to have occurred, raised larger questions about Enron’s trading practices and other

business activities, and unearthed at least some of the cracks in Enron’s foundation earlier. 

Perhaps scrutiny by a federal agency would have jolted the Enron Board of Directors and Enron

itself into acting to change direction. At a minimum, we believe it would have alerted investors,

analysts, and hopefully other regulators to look more closely at Enron. 

I. FERC: BACKGROUND

FERC is an independent, five-member regulatory commission within the Department of

Energy. It was created in 1977 as a successor to the Federal Power Commission, which had been

established in 1935 by the Federal Power Act. FERC regulates the interstate transmission and

wholesale sale of electricity and natural gas, while state and local governments regulate retail

sales and intrastate transmission. FERC also licenses hydroelectric projects and regulates the

transmission of oil by interstate pipelines. 

Over the past 25 years, FERC has overseen a fundamental change in the energy industry

from a set of highly regulated monopolies to a system increasingly based on market competition. 

The regulatory framework as it has evolved and is administered by FERC in three areas that

constituted a substantial portion of Enron’s energy business – electricity, natural gas, and oil – is,

very briefly, as follows:
1

 15 U.S.C. § 79 et seq.

2

 16 U.S.C. § 791a et seq.

3

 See 15 U.S.C. § 79k(b)(1).

4

 16 U.S.C. §§ 824d(a) and (b); see also 16 U.S.C. § 813.

5

 16 U.S.C. § 2601.

6

 42 U.S.C. § 13201.

5

A. Electricity

The federal regulatory scheme for electric utilities is set forth in the Public Utility

Holding Company Act1

 (PUHCA) and the Federal Power Act2 (FPA). Both laws were passed in

the mid-1930's in response to corporate abuse by utility holding companies. Holding companies

were taking advantage of the fact that they owned utilities in multiple states to engage in

interstate, intra-company transactions that could not be controlled by state public utility

commissions. The Securities and Exchange Commission (SEC) was given authority to regulate

matters relating to utilities’ corporate structures under PUHCA, including the ability to restrict

ownership of multiple utility companies by a single holding company.3

 Under the FPA, FERC’s

predecessor agency – the Federal Power Commission – was given the authority to regulate the

rates that could be charged for electricity sold by one utility to another. The FPA required that

these wholesale electric rates be “just and reasonable” and nondiscriminatory; rates that are not

just and reasonable or are discriminatory are unlawful.4 This statutory standard remains in place

today. State utility commissions continue to regulate retail rates charged to consumers within

their states.

The electricity industry in the U.S. has historically been characterized by vertically

integrated utility companies that owned and controlled generation, transmission and distribution

systems necessary to serve their own customers. These systems were primarily regulated by

state commissions which approved construction of the facilities necessary to provide electric

service and consumer rates to recover the cost of those facilities. Generally, sales of power

between utilities were overseen by FERC. The situation began to change with the passage of the

Public Utility Regulatory Policy Act5

 (PURPA) in 1979 and the Energy Policy Act6 (EPAct) in

1992. PURPA created a new category of independent generation facilities known as “qualifying

facilities” or “QFs,” which were allowed to sell electricity to electric utility companies. (QFs

include cogeneration facilities (i.e., facilities that simultaneously produce two forms of useful

energy, such as electric power and steam) and small power production facilities that use biomass,

waste, or renewable resources, including wind, solar and water, to produce electric power). In an

effort to develop this new, independent generation industry, utility companies were required to

purchase electricity from these QFs at preferential rates in lieu of using their own generation
7

 15 U.S.C. § 717.

8

 15 U.S.C. § 717(c).

6

capacity. PURPA also required that a QF be owned by an entity that was not already a utility

company.

EPAct expanded the universe of “independent” power generation facilities by authorizing

utility companies to own independent power generation facilities – that is, power generation

facilities that were not captive to a particular utility but could sell to multiple buyers – but

without the preferential rates available to QFs; such independent generation facilities are referred

to as “exempt wholesale generators” (EWGs). EPAct also required utilities to open up their

interstate transmission systems to accommodate wholesale sales of power by competing

producers. FERC has the responsibility to oversee these sales of electricity between utilities. 

FERC also reinterpreted the FPA’s requirement that wholesale electric rates be “just and

reasonable” to allow market-based prices to be considered just and reasonable rates. 

These changes, along with the decisions by individual states such as California to

reorganize their state electric markets along a similar model, resulted in a major shift in the way

electricity was generated, transmitted and sold. Rather than electricity being seen as a service

provided by regulated monopolies at regulated prices, it became a commodity to be produced

and sold at prices set by the market. This in turn created opportunities for energy companies like

Enron to enter into the market to buy and sell electricity and even to provide retail service to

customers.

B. Natural Gas

The evolution of the natural gas market had similar attributes to that of the electric

market. In this case, natural gas pipelines previously served in the role of the “integrated”

utility; they purchased gas from producers, transported it, and resold it to local natural gas

distribution utility companies. Here too, FERC through its authority under the Natural Gas Act

to regulate interstate pipelines,7 has moved to require pipelines to “unbundle” these services and

allow others to ship natural gas on their pipelines. In other words, FERC has essentially required

interstate pipelines to serve as interstate “common carriers” providing transportation to others

who purchase or sell natural gas directly.8

 As in the case of electricity, this has provided

opportunities for energy trading companies like Enron to buy and sell natural gas that were not

previously available. FERC continued to approve both the rates and construction of pipelines,

including those owned by Enron. 

C. Oil Pipelines

FERC regulates interstate oil pipelines, which Enron also owned, under the Interstate

Commerce Act, through which it has also begun to extend market-based rate authority.
9

 Cost-of-service based rates are rates that are based on how much it costs for the utility

company or pipeline to provide the service. It is calculated by analyzing the costs of building

generation equipment, transmission facilities, personnel, financing, and other costs. In contrast,

market-based rates are the price that the seller can get for the product in the marketplace. As

part of the transition from one rate system to another, FERC has both directly and indirectly

required the establishment of a variety of market mechanisms – from auctions by pipelines for

available capacity to centralized trading exchanges.

10 In the course of its investigation, Committee staff came across a number of Enronaffiliated entities, primarily QFs and EWGs, beyond those identified by FERC, that either had

filed certifications with FERC or were discussed in internal Enron documents.

11 Enron Corp., “Enron Federal Government Affairs - Outlook & Goals for 1999” (Enron

(continued...)

7

In all three areas – electricity, natural gas, and oil – FERC has been instrumental in

transforming the way energy products and services are bought and sold from one that relied upon

cost-of-service based rates established by FERC, to market-based rates where prices are

determined by a competitive marketplace.9

 Enron was at the forefront of these changes, both

arguing for their implementation and structuring its businesses and business strategy to take

advantage of them. In the process, Enron became the largest U.S. trader of electricity and

natural gas – and one of the most significant companies within FERC’s jurisdiction.

II. FERC’S OVERSIGHT OF ENRON

Although FERC does not directly regulate Enron Corp. (essentially a holding company

for the company’s many and diverse operating subsidiaries) as a corporation, per se, the

Commission has jurisdiction over many of Enron’s energy marketing, generation, and

transmission subsidiaries and activities. In response to the Committee’s request, FERC

identified 24 electricity marketers, generators or transmitters, 15 gas pipelines, and 5 oil

pipelines that are Enron subsidiaries or affiliates and that either are so-called “jurisdictional

entities” under the FPA, Natural Gas Act or Interstate Commerce Act or are QFs that must be

certified by FERC under PURPA. In addition, Enron appears to have several other electric

affiliates that are subject to FERC’s jurisdiction or certification requirements.10

Not surprisingly, therefore, FERC had thousands of contacts with Enron concerning

Enron’s FERC-regulated subsidiaries and affiliates over the ten-year period examined by

Committee staff. The vast majority of these involved routine matters such as rate filings,

reporting requirements, and system operation. In addition, Enron was very aggressive about

using, and seeking to use, the regulatory process to further its own strategic business goals and to

protect its economic interests in matters within FERC’s purview; these matters ranged from the

promotion of the deregulation of the electric and natural gas markets to FERC’s response to the

California energy crisis.11 Enron intervened in dozens, if not hundreds, of proceedings before the
11(...continued)

document nos. EC-W 000000228-000000234); Enron Corp., “Overview of Key Energy Policy

Issues” (Enron document nos. EC-W 000001131-000001139).

12 Enron also appears to have sought more broadly to influence policy matters within the

Commission’s jurisdiction. Enron’s Government Affairs office had at least eight people

dedicated to working on FERC matters. See Enron Corp., “Government Affairs Directory,”

(Enron document no. EC-W 000003398–000003406), at 6. This was, of course, part of a much

reported on, broader effort on the part of Enron to shape its regulatory environment at both the

state and federal level: Enron’s internal government affairs department documents indicate that

the company budgeted $37.2 million for government affairs activities in 1999, $33.6 million in

2000 and $32.5 million in 2001. See Enron Corp., “Government Affairs,” November 2001

(Enron document nos. EC 000124004-000124010) at 7. It is unknown what portion of these

funds were spent on FERC-related activities. Given the company’s extensive interactions with

FERC, it may well have been a substantial amount. Enron internal government affairs

department documents, for example, indicate that Enron was spending $2 million per year just to

promote the creation of Regional Transmission Organizations. See id. at 5.

8

Commission to this end.12 Enron, moreover, was an active member of a number of industry

organizations and coalitions and the company’s employees often met with FERC commissioners

and staff either as participants in association events or as representatives of the associations

themselves.

 Among the many Enron matters that came before FERC, or were subject to FERC

oversight in recent years, four stood out as examples of significant regulatory failure. In each

case, the Enron practices left unpursued by FERC likely contributed, directly or indirectly, to the

company’s collapse, distorted the appearance of its financial condition, and/or inflicted harm on

energy consumers and the energy industry. The Committee staff’s findings with respect to each

of these matters is set forth in detail below. 

A. Enron Wind Farm Transactions

In January 1997, Enron purchased Zond Wind Energy Corporation, a manufacturer and

developer of wind energy generation equipment and projects. As a result, Enron became the

majority owner of a number of wind farm projects that were considered “qualifying facilities”

(QFs) under PURPA and so were eligible for preferential rate treatment. 

Shortly thereafter, in August 1997, Enron completed its acquisition of a public utility

company located in Oregon – Portland General Electric (PGE). Under PURPA, however, QFs

cannot be owned by a public utility or its holding company. Thus, because Enron now owned a

public utility company, the wind farm projects it had purchased would no longer be eligible for

QF status. In order to maintain the QF status of the wind farms, Enron found it necessary to

divest itself of ownership interests in a number of these projects. In a number of cases, however,
13 Although FERC reviewed and approved the Enron/PGE merger that triggered the QF

ownership requirement, FERC did not consider or attach any conditions to its approval to ensure

that the QF ownership requirement was met.

14 16 U.S.C. § 796(17).

15 18 C.F.R. § 292.206(b).

16 See CMS Midland, Inc., 38 FERC 61,244 (1987); Ultrapower 3, 27 F.E.R.C. 61,094

(1984). This analysis applies where the facility is held by a partnership, as was the case with

most of Enron’s wind farms discussed herein; where there is direct corporate ownership, FERC

is able to measure equity ownership more directly – by whether a utility owns more than 50% of

the project’s stock.

17 18 C.F.R. § 292.207(b).

9

Enron seems to have only appeared to divest itself of ownership, while in fact effectively

retaining the risks and benefits of ownership. Enron subsequently repurchased its interest in

some of these wind farms in 2000, relying on legal arguments that it was otherwise exempt from

the usual ownership requirements to retain the wind farms’ QF status.

With respect to both the sales and repurchases of its ownership interests in the wind

farms, Enron, as was required, filed documents with FERC informing it of the transactions. 

FERC, however, failed to give adequate – or, in some cases, any – scrutiny to these

submissions.13 

1. Regulatory Requirements

There are a number of technical and ownership requirements that a facility must meet in

order to qualify as a QF. Most relevant here, PURPA requires that a QF be owned by an entity

that is not primarily engaged in the sale or generation of electric power.14 FERC has interpreted

this requirement to mean that an applicant must demonstrate that “no more than 50 percent of the

equity interest in the facility is held by an electric utility or utilities, or by an electric utility

holding company.”15 To determine ownership, FERC looks to two factors: the exercise of

control and the stream of benefits accruing to each participant. That is to say, a public utility or

utility holding company may not have more than 50% control over the facility and may not

receive more than 50% of the stream of benefits – typically defined by FERC as profits, losses

and surplus after return of initial capital contribution.16 

FERC regulations provide two alternative means by which the owner of an eligible

facility may obtain QF status for that facility. First, the owner may file a formal application with

FERC requesting Commission certification of the facility’s QF status, which the Commission

may grant or deny.17 Or, at the owner’s option, it may file a “self-certification,” attesting that the
18 18 C.F.R. § 292.207(a).

19 18 C.F.R. § 292.207(d).

20 18 C.F.R. § 292.207(b)(4).

21 18 C.F.R. § 292.207(a)(1).

22 See Complaint, SEC v. Kopper, Civ. Action No. H-02-3127 (S.D. Tex. August 21,

2002); Information, United States v. Kopper, Cr. No. H-02-0560 (S.D. Tex. August 20, 2002);

Complaint, SEC v. Fastow, Civ. Action No. H-02-3666 (S.D. Tex. Oct. 2, 2002); Indictment,

United States v. Fastow, Cr. No. H-02-0665 (S.D. Tex. Oct. 31, 2002). 

23 Information, United States v. Kopper, Cr. No. H-02-0560 (S.D. Tex. August 20, 2002)

at 3; see also Indictment, United States v. Fastow, Cr. No. H-02-0665 (S.D. Tex. Oct. 31, 2002)

at 4.

10

facility meets the requirements for a QF.18 Whenever there are changes in material facts about

the facility, including changes in ownership, the owner must recertify the facility, again either by

formal application to the Commission or by “self-recertification.”19

When formal certification or recertification of QF status is sought, FERC publishes a

notice of the application in the Federal Register and allows interested parties to move to

intervene before ruling on the application.20 When a facility owner files a self-certification or

self-recertification, no notice is published, although a copy of the self-certification notice must

be served on the utilities to which the QF expects to sell electricity and on state regulatory

authorities.21 As a matter of policy, FERC does not review self-certifications or selfrecertifications, unless an affected utility raises an objection to the certification.

In the case of its wind farm sales and repurchases, Enron in some cases requested formal

recertifications from FERC, while in others, it filed self-recertifications.

2. RADR Transactions

a. Wind Farm Sales

In or about May 1997, Enron sold a 50% interest in each of three wind farm projects to a

special purpose entity named RADR, which had allegedly been set up by Enron Chief Financial

Officer Andrew Fastow and his deputy, Michael Kopper. These transactions were among those

that underlay the civil and criminal charges recently brought against Fastow and Kopper.22 The

Justice Department and SEC have alleged that these transactions were entered into by RADR so

as to “enable Enron to retain secret control over the . . . wind farms while appearing to maintain

eligibility for QF status,”23 and that it was understood that Enron would repurchase its interests

in the wind farms from RADR at some point in the future.
24 Enron Finance Committee Meeting, May 5, 1997 (Enron document nos.

EC 000025710 - 000025733) at document no. EC 000025730 (“Conclusions”).

25 Id.

26 Id., at Enron document nos. EC 000025727 - 000025729.

27 PriceWaterhouseCoopers, Project Storm: Draft Report, July 6, 2001 (Enron Document

No. LJM 022403) at 100, 131.

28 Id. at 131.

29 Request for Recertification of Qualifying Facility Status for Small Power Production

Facility, Zond Windsystems Holding Company, FERC Docket No. QF87-365-003 (filed May 14,

(continued...)

11

Documents produced by Enron to the Committee and its Permanent Subcommittee on

Investigations further suggest that Enron may not have legitimately transferred its interest in

these wind farms. Minutes of a May 1997 meeting of the Finance Committee of Enron’s Board

of Directors, for example, strongly imply that Enron did not consider the transactions to be true

sales and fully expected to retain control over the projects. Thus, the minutes indicate that,

although the arrangement was expected to satisfy FERC’s requirements for transfer of

ownership, it was “not a sale for book purposes” and that Enron therefore could continue to

recognize revenues from the projects.24 In addition, the minutes describe Enron’s right to

repurchase the projects, noting that Enron would retain a “call option to repurchase the assets in

future and sell in ‘non-fire sale’ environment” – an indication that Enron, forced to divest its

interests in the wind farms quickly because of QF concerns, was using the sales to RADR to

temporarily “park” the projects until it could obtain what it hoped would be more lucrative

financial returns.25 Financially, the minutes reveal that Enron provided 97% of RADR’s initial

capital by way of a loan from one of its subsidiaries and that Enron intended to indemnify RADR

against future tax, environmental and other liabilities.26 

The nature of these wind farm transactions is further confirmed by a 2001 report by

PriceWaterhouseCoopers on its “due diligence” review for the Fastow-controlled partnership

LJM when LJM was contemplating purchasing Enron’s entire renewable energy subsidiary. The

report, consistent with the Finance Committee minutes, notes that, because Enron “retained all

the risks and rewards associated with the projects and retained an option to repurchase the

shares,” the transaction was not treated as a sale and revenue from the projects was accounted for

as income from joint ventures.27 The due diligence report further reveals that Enron also

guaranteed RADR a minimum return on its investment.28

FERC reviewed and accepted each of these transfers of ownership. With respect to each

of the three wind farm projects in which RADR was purportedly acquiring an interest, Enron,

through a subsidiary, filed with FERC a formal application for recertification of QF status.29
29(...continued)

1997); Request for Recertification of Qualifying Facility Status for Small Power Production

Facility, Sky River Partnership, Docket No. QF91-59-003 (filed May 14, 1997); Request for

Recertification of Qualifying Facility Status for Small Power Production Facility, Victory

Garden Phase IV Partnership, FERC Docket No. QF-90-43-002 (filed May 14, 1997).

30 Zond Windsystems Holding Company, FERC Docket No. QF87-365-003 (Order

Granting Application for Recertification as a Qualifying Small Power Production Facility, June

30, 1997); Sky River Partnership, Docket No. QF91-59-003 (Order Granting Application for

Recertification as a Qualifying Small Power Production Facility, June 30, 1997); Victory Garden

Phase IV Partnership, FERC Docket No. QF-90-43-002 (Order Granting Application for

Recertification as a Qualifying Small Power Production Facility, June 30, 1997). In each of

these cases, the determination to grant the application was made by FERC’s Director of the

Division of Opinions and Corporate Applications, acting under authority delegated from the

Commission.

31 In its applications to FERC, Enron represents only that the managing partner of RADR

(continued...)

12

FERC staff reviewed each of these applications, and on June 30, 1997, FERC issued orders

finding that the new ownership structure met the Commission’s requirements and granting the

applications.30 Regardless of whether FERC can have been expected to have uncovered the full

extent of the fraud arising out of these transactions, the applications submitted by Enron

provided sufficient information to have raised serious questions as to the legitimacy of the sales,

and FERC should have at least been alerted to the possibility that its own requirements for QF

status had not been met.

The applications do not disclose that Enron executives controlled RADR, but they do

reveal that Enron (through a subsidiary) will loan RADR all the money to purchase its interest in

the wind farm projects; that an Enron affiliate will indemnify the owners of RADR for certain

tax liabilities; that Enron (again, through a subsidiary) has an option to repurchase RADR’s

interest in the projects; that the land for the facilities will be leased from an Enron affiliate; and

that the same Enron affiliate will receive fees for providing operation and maintenance services

to the facilities. Taken together, these facts raise a substantial issue about whether ownership

has truly been transferred and strongly suggest that Enron is likely to retain more than 50%

control and receive more than 50% of the stream of benefits arising from the project.

In reviewing these applications, however, FERC does not appear to have understood or

even to have tried to understand the financial arrangements – loans, repurchase options,

indemnifications, and fees – described to it by Enron. According to FERC staff, QF applications

at the staff level are reviewed by engineers or others with technical expertise to determine the

QFs compliance with technical requirements, but typically no one with financial expertise

reviews the applications for conformity with the ownership requirements. FERC apparently

never probed the salient question of who controlled RADR,31 for instance, and Committee staff
31(...continued)

is owned by three individuals, who are left unidentified.

32 Notice of Self-Recertification of Qualifying Facility Status for Small Power

Production Facility, Zond Windsystems Holding Co., Docket No. QF87-365-004 (filed August 3,

2000); Notice of Self-Recertification of Qualifying Facility Status for Small Power Production

Facility, Sky River Partnership, Docket No. QF91-59-004 (filed August 3, 2000); Notice of SelfRecertification of Qualifying Facility Status for Small Power Production Facility, Victory

Garden Phase IV Partnership, Docket No. QF90-43-003 (filed August 3, 2000); Notice of SelfRecertification of Qualifying Facility Status for Small Power Production Facility, Cabazon

Power Partners LLC, Docket No. QF95-186-004 (filed January 24, 2001); Notice of Self-

(continued...)

13

could find no reference suggesting that FERC either knew or cared that Enron was not treating

the “sale” of these facilities as a sale on its own books. 

 Rather, in its orders granting the wind farms QF status, FERC is conclusory in its

analysis, largely parroting back Enron’s representations without further scrutiny. Thus, with

respect to the additional moneys Enron would receive from the wind farms’ lease payments and

from operations, maintenance and consulting fees to Enron affiliates, FERC unquestioningly

accepts that because Enron and RADR each formally have 50% control over the facility and the

agreements therefore theoretically could not be entered into without RADR’s assent, that these

fee agreements should be presumed to have resulted from “arm’s-length” negotiations. Because

FERC viewed these transactions as done at arm’s length, moreover, it determined that, in

accordance with its ordinary practice, these additional fees, as well as the money Enron will

receive from the loan it is providing to RADR, should not be counted as part of Enron’s share of

the “stream of benefits” from the facility. At no point did FERC question why, where there is

formally equal control, all the benefits would appear to accrue to one party nor did FERC see the

extent of these benefits as possible evidence that this was in fact not an arm’s-length transaction. 

Overall, FERC appears to have been far more concerned with the form, rather than the

substance, of these transactions.

Had FERC probed these transactions, it would have been difficult for it to certify that

these transactions met the QF ownership test. In fact, the transactions appear to have been sham

sales.

b. Wind Farm Repurchases

In 2000-2001, Enron reacquired a majority interest in a number of QF facilities,

including the three RADR projects as well as at least two others. In each of these cases, Enron

filed a “self-recertification” with FERC informing it of the change in ownership and asserting

that that facility – though now majority or entirely owned by a utility holding company –

maintained its eligibility for QF status.32 
32(...continued)

Recertification of Qualifying Facility Status for Small Power Production Facility, Victory

Garden Power Partners I LLC, Docket No. QF99-92-001 (filed January 24, 2001).

33 18 C.F.R. § 292.206(c)(1). These PUHCA sections provide that the SEC may exempt

from the requirements of PUHCA a company that is only “incidentally” a public utility holding

company and is primarily engaged in other businesses (15 U.S.C. § 79c(a)(3)) or a company that

“derives no material part of its income” from companies the principal business of which is that

of a public utility company (15 U.S.C. § 79c(a)(5)).

34 See Doswell Limited Partnership and Diamon Energy, Inc., 56 F.E.R.C. 61,170

(1997). FERC based this policy on an analogous provision in PUHCA, which provides that the

filing of an application in good faith shall exempt the applicant from any obligation imposed

under PUHCA. See 15 U.S.C. § 79c(c).

35 Enron Corp. Form U-1, Application under the Public Utility Company Holding Act,

SEC File No. 70-9661 (April 14, 2000).

36 Notice of Self-Recertification of Qualifying Facility Status for Small Power Production

Facility, Zond Windsystems Holding Co., Docket No. QF87-365-004 (filed August 3, 2000);

Notice of Self-Recertification of Qualifying Facility Status for Small Power Production Facility,

Sky River Partnership, Docket No. QF91-59-004 (filed August 3, 2000); Notice of SelfRecertification of Qualifying Facility Status for Small Power Production Facility, Victory

Garden Phase IV Partnership, Docket No. QF90-43-003 (filed August 3, 2000); Notice of SelfRecertification of Qualifying Facility Status for Small Power Production Facility, Cabazon

Power Partners LLC, Docket No. QF95-186-004 (filed January 24, 2001); Notice of SelfRecertification of Qualifying Facility Status for Small Power Production Facility, Victory

Garden Power Partners I LLC, Docket No. QF99-92-001 (filed January 24, 2001).

37 Id.

14

Enron based its self-recertification on FERC regulations issued pursuant to PURPA that

provide an exception to the utility ownership limitations for QFs for utility holding companies

that are exempt “by rule or order” pursuant to section 3(a)(3) or 3(a)(5) of PUHCA.33 FERC’s

practice, moreover, is to treat a company’s “good faith” application to the SEC for an exemption

under these sections of PUHCA – unless and until it is denied by the SEC – to be sufficient to

qualify for this PURPA exception.34 As Enron had recently filed such an exemption application

with the SEC,35 the company asserted that it should be deemed exempt for purposes of the utility

ownership limitations.36 In addition, Enron noted that it was in the process of selling PGE, its

sole electric utility subsidiary; once the sale was complete, Enron explained, it would no longer

be a utility holding company and so no longer subject to the QF ownership restrictions.37

Because Enron proceeded by self-recertifications in these cases and the recertifications

were not initially subjected to challenge by an affected utility company, the self-recertifications
38 In a meeting with Committee staff, one FERC staff member observed that, with

respect to self-certifications, the Commission does nothing other than to “put a number on a

piece of paper.”

39 See Enron Corp. Form U-1, Application under the Public Utility Company Holding

Act, SEC File No. 70-9661 (April 14, 2000); Letter from Joanne C. Rutkowski, LeBoeuf, Lamb,

Greene & MacRae to Catherine A. Fisher, Assistant Director, Office of Public Utility

Regulation, Division of Investment Management, Securities and Exchange Commission, dated

April 13, 2000. In a 2001 presentation to SEC staff, Enron asserted that “the SEC and Enron

agreed to delay pursuing a formal order on the Application pending the PGE sale.” Enron Corp.,

“Alternative PUHCA Exemption for QF Relief - SEC Staff Presentation,” July 27, 2001. In an

interview with Committee staff, SEC staff denied that there was such an agreement, but stated

that it was nonetheless their priority to complete the regulatory review of the PGE sale before

turning their attention to Enron’s exemption application.

40 See Applications of Enron Corp. for Exemptions Under the Public Utility Holding

Company Act of 1935, SEC Administrative Proceeding File No. 3-10909 (Order Scheduling

Hearing, October 7, 2002). This announcement was made coincident with the release of the

Committee staff’s report on the SEC’s oversight of Enron.

15

were, per FERC staff’s standard practice, left unreviewed.38

FERC’s failure to review the self-recertifications was compounded by the SEC’s inaction

on Enron’s application for the PUHCA exemption. At the time it filed the application with the

SEC, Enron was already exempt from PUHCA on other grounds. From an SEC standpoint,

therefore, the further exemption request was unnecessary. Nonetheless, Enron made clear in its

application to the SEC that its purpose in applying for the additional PUHCA exemption was

solely to get out from under FERC’s QF ownership rules. Enron, moreover, strongly suggested

that it had no interest in the SEC’s ruling on the exemption application before the sale of PGE

was either completed or abandoned.39

The SEC to date has not ruled on Enron’s application for the PUHCA exemption,

although it recently announced it would hold a hearing on the matter.40 Since the application

was initially filed, Enron’s intended sale of PGE was abandoned and a subsequent proposed sale

to another buyer also fell through; thus, Enron still owns PGE. Coupled with FERC’s lack of

review of the self-certifications, the net result of all this is that Enron’s mere application to the

SEC has allowed it to continue to avoid FERC’s QF utility ownership restrictions.

Throughout the two-and-half years that Enron’s exemption application has been pending

with the SEC, furthermore, neither FERC nor the SEC has questioned whether that application

was, or continues to be, in “good faith,” as FERC requires for it to serve as a basis for exemption

from ordinary QF ownership requirements. Indeed, each suggests this is the responsibility of the
41 In conversations with Committee staff, SEC staff asserted that the decision to rely on a

good faith application was FERC’s and suggested that it was up to FERC to determine if the

application met that agency’s standards for good faith. FERC staff, for its part, argued that the

application was made to the SEC and that an attempt by FERC to determine whether such an

application was in good faith before the SEC had a chance to rule on it would be preemptively

second guessing its sister agency’s decision. 

42 Motion to Intervene and Opposition of Southern California Edison Company, Enron

Corp., SEC File No. 70-09661 (filed March 26, 2002); Motion to Intervene of Southern

California Edison Company, In re Victory Garden Power Partners I, LLC (FERC Docket No.

QF99-92), ZWHC LLC (FERC Docket No. QF87-365), Victory Garden Phase IV Partnership

(FERC Docket No. QF90-43), Sky River Partnership (FERC Docket No. QF91-59), and

Cabazon Power Partners LLC (Docket No. QF95-186) (filed April 3, 2002). 

43 Letter from Magalie R. Salas, Secretary, Federal Energy Regulatory Commission, to

James B. Woodruff, Esq., Senior Attorney, Southern California Edison Company, dated May 28,

2002. 

44 Investigation of Certain Enron-Affiliated QFs, FERC Docket No. EL03-17-000 (Order

Initiating Investigation and Hearing, issued October 24, 2002). FERC’s investigation appears

only to encompass the RADR wind farms and not the at least two other QFs in which Enron

reacquired a majority interest.

16

other.41 According to their own accounts, at no point did either agency contact the other to

discuss the pending application.

Finally, outside prodding has done little to mitigate FERC’s disregard for ensuring that

its PURPA requirements are met. In March and April 2002, Southern California Edison

(SoCalEd) filed motions with the SEC and FERC, respectively, seeking to intervene in the

agencies’ respective proceedings in these matters.42 SoCalEd argued that Enron’s substantially

changed circumstances following its collapse rendered its application to the SEC for the PUHCA

exemption no longer in “good faith” (if it ever had been) and that, as a result, the validity of the

QF status of the relevant wind farms had been brought into question. Until the SEC recently

announced it was scheduling a hearing in this matter, neither agency had acted on SoCalEd’s

motions. In fact, not only did FERC not act on this application, FERC responded to SoCalEd by

letter informing the company that there was no pending proceeding in which to intervene, but

that if SoCalEd wished to have its motion treated as a “petition for declaratory order” and so

considered by the Commission, the company would need to submit a $16,000 filing fee.43 Only

after the Committee announced the instant hearing did FERC initiate an investigation into the

appropriate status of three of the wind farms.44

In sum, the failure of either agency to act vigilantly in these matters – with respect to the

wind farms self-recertifications or the related PUHCA exemption application – left a regulatory

“black hole” that Enron has been able to exploit. It has enabled Enron to retain QF status for
45 SoCalEd estimates that from July 1997 to April 2002, the wind farms at issue have

been able to collect as much as $176 million more than if they had not had QF status. E-mail

from Susan Kappelman, Southern California Edison Co. to David Berick, Professional Staff,

Senate Committee on Governmental Affairs, dated September 6, 2002. Committee staff has not

attempted to independently confirm this number nor have we been able to quantify other

financial benefits, such as tax credits and depreciation, that Enron may have received from its

ownership interests in these projects.

46 Notice of Self-Recertification of Qualifying Facility Status for Small Power

Production Facility, Zond Cabazon Development Corporation, FERC Docket No. QF95-186-001

(filed November 30, 1998). It is not clear why Enron waited until a year after Enron acquired

PGE and thus became a utility holding company to make such a certification of ownership.

47 Notice of Self-Recertification of Qualifying Facility Status for Small Power

Production Facility, Zond Cabazon Development Corporation, FERC Docket No. QF95-186-003

(filed January 8, 1999).

48 Notice of Self-Recertification of Qualifying Facility Status for Small Power

Production Facility, Zond Cabazon Development Corporation, FERC Docket No. QF95-186-002

(filed January 7, 1999).

49 E-mail from Karen Berky, Director, Government Relations, The Nature Conservancy,

to David Berick, Professional Staff, Senate Committee on Governmental Affairs, dated

(continued...)

17

projects which may not be eligible for it – and in so doing, permitted Enron to collect higher

rates than it may be legitimately entitled to.45

3. Cabazon Transaction

In addition to the three RADR sales, Enron sought to transfer its ownership interest in

another wind farm project, Cabazon, apparently also in order to retain that project’s QF

eligibility. In contrast to the RADR wind farms, in the case of Cabazon, Enron did not file a

formal application for certification of QF status. Instead, on November 30, 1998, Enron

(through a subsidiary) submitted a self-recertification to FERC, asserting that it had transferred a

50% ownership interest in the facility to The Nature Conservancy (TNC), a non-profit

organization, thereby complying with the utility ownership limitations.46 Approximately six

weeks later, Enron implicitly represented that it had reacquired this interest. In a selfrecertification filed on January 8, 1999, Enron claimed to now own 40% of the project and that

the remaining 60% interest was now owned by another outside party.47 Just the previous day,

Enron had represented in yet another self-recertification for the same project that it and TNC

each had a 50% ownership interest.48

According to TNC, however, it never acquired an ownership interest in Cabazon.49 On
49(...continued)

September 30, 2002.

50 Assignment Agreement between Zond Cabazon Development Corporation and The

Nature Conservancy, dated November 18, 1998 (Enron document nos. EVE 1788500.0002 -

1788500.00006).

51 Indeed, the Assignment Agreement specifically provides that “[n]otwithstanding any

other provision of this Assignment, Assignee [TNC] is not a partner, joint venturer, alter ego,

manager, controlling person or other business associate or co-participant of any kind or nature

whatsoever of Assignor [Zond Cabazon Development Corp., an Enron subsidiary] and Assignee

does not intend to assume such status.” Id. at 5.

52 See Coso Energy Developers et al., 85 F.E.R.C. 61,355 (Order Denying Applications

for Recertification as Qualifying Facilities, December 16, 1998)

53 Letter from John A. Lamb, Cabazon Power Partners LLC to Laurel Mayer, Esq., The

Nature Conservancy, dated January 11, 1999, (Enron document no. EVE 1788500.0001).

18

November 18, 1998, Enron did assign TNC the rights to receive 50% of the net profits from the

Cabazon project.50 There is no indication, however, that Enron transferred any ownership

interest in, or any right of control over, the facility to TNC,51 and according to TNC

representatives, TNC did not understand this assignment to be the transfer of an ownership stake

in Cabazon. Under FERC interpretation, the right to 50% of the stream of benefits from a

facility, without more, is insufficient to establish ownership for QF eligibility purposes.52

Effective January 8, 1999, Enron terminated the assignment agreement.53

The fact that Enron’s filings indicated that it was engaging in a series of ownership

changes with respect to the Cabazon QF, including an apparent year-end, short-term assignment

of ownership rights to a tax-exempt organization, should clearly have raised concerns with

FERC, had FERC staff so much as examined the self-recertifications. Consistent with its policy

and practice, FERC, however, did not examine the self-recertifications, nor did it provide public

notice that the recertifications had even been filed. Consequently, it did not ask Enron for the

supporting details of the ownership arrangement (only an assertion of the ownership allocation

was made in the filings, with none of the underlying details reported or relevant documents

provided), nor did it contact TNC about the recertification. The result was that FERC missed

another opportunity to identify possible wrongdoing by Enron and to ensure that only legitimate

QFs were receiving the benefits of that designation.
54 Memorandum from Marvin Rosenberg and Perry L. Brown, Economists, Office of

Markets, Tariffs and Rates; Kim G. Bruno, Attorney, Office of General Counsel; and Mary C.

Lauerman, Auditor, Office of the Executive Director to Kevin P. Madden, General Counsel;

Daniel L. Larcamp, Director, Office of Markets, Tariffs and Rates; Donald J. Gelinas, Associate

Director, Office of Markets, Tariffs and Rates; and John M. Delaware, Deputy Director, Office

of the Executive Director, Re: Inquiry into EnronOnline, August 16, 2001 (hereinafter “Enron

Online Report”) at 9 (citing Forrester Research, Inc., “Net Energy Hits Hypergrowth”April

2001).

55 Enron Online Report, note 54, above. On May 14, 2002, Chairman Lieberman wrote

to FERC Chairman Pat Wood to express concern about a number of issues raised by this FERC

staff report. Chairman Wood responded with a letter to Chairman Lieberman on May 28, 2002. 

The instant memo reviews the problems identified in Chairman Lieberman’s May 14 letter,

supplemented by additional information that has since become available.

19

B. Enron Online

In October 1999, Enron launched an internet-based electronic trading platform, Enron

Online, to trade natural gas and electric power and, later, other commodities. Online energy

trading quickly became a significant portion of the energy trading market: in 2001, it was

estimated to account for approximately 38% of natural gas and 17% of electric power marketed

in the U.S.; at the time, these figures were projected to grow to 72% for natural gas and 45% for

electric power by 2005.54 Until Enron’s bankruptcy, Enron Online was widely acknowledged to

be the leading platform for such trading. 

Despite these developments in online trading, FERC appears initially to have been

largely indifferent to their significance. It was not until May 2001 that FERC's General Counsel

initiated a staff-level inquiry into the status of electronic trading in the electric power and natural

gas markets, in general, and the role played by Enron Online, in particular. FERC staff were

asked to evaluate Enron Online’s dominant position in electronic trading in the energy industries

and to determine its impact on natural gas and electric markets. A report discussing these

matters was completed on August 16, 2001.55

The report found that, unlike some online trading platforms which operate as third-party,

"many-to-many" exchanges matching willing buyers and sellers, Enron Online operated as a

proprietary extension of Enron's trading units, including entities regulated by FERC. In other

words, in this so-called “one-to-many” exchange, an Enron trader was a party, either as a buyer

or seller, to every trade on Enron Online. Therefore, only Enron would know valuable

information about the actual volumes and prices transacted on its trading platform – and, of

course, how the prices charged in any particular transaction were set or how they compared to

those charged in other, similar transactions.

The report also observed that Enron Online simply served as a trading platform for other
20

Enron subsidiaries, shouldering no financial risk on its own. In other words, the financial risk of

all the trades conducted through Enron Online remained with these other subsidiaries. This

meant the solvency of Enron as a whole was important to the viability of Enron Online and to

Enron’s trading activity.

With that observation in mind, the report asked whether financial problems at Enron

would threaten the energy markets. The report answered the question in two ways. First, it

concluded that Enron did not have sufficient market share to disrupt the energy market if it

failed. According to the report, Enron accounted for 16 percent of gas trading and 13 percent of

electric power trading in North America, with the majority of Enron’s trading transacted through

Enron Online. In the report’s view, the energy market could continue functioning smoothly

absent Enron’s market share. Second, the report concluded that, in any event, the chance of

Enron failing financially was remote. The report provided little support for this conclusion.

Finally, the report found that Enron Online gave a competitive advantage to Enron’s own

trading units by reducing their transaction costs, giving them wider access to the market, and

providing them better market intelligence, but concluded that there was no reason for concern. 

In short, 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. This was a critical mistake.

First, though FERC staff identified the potential risk inherent in (a) a trading model that

exposed the corporation to very large financial risks, and (b) the company’s dependence on its

corporate credit worthiness to maintain its trading capability and to fulfill its trading

commitments, FERC staff failed to take the logical next step to thoroughly understand the

significance of this finding. Instead, they conducted only a cursory analysis of Enron’s financial

standing, concluding that Enron was unlikely to fail as a result of overextending credit to its

trading customers. This was obviously a mistake; although the scenario imagined in the report

did not come to pass, in fact Enron was financially unstable, and within a few months, had

collapsed completely.

Second, the analysis that led to the conclusion that Enron’s market share was insufficient

to negatively impact the market in the event of the company’s failure was far too cursory. The

report based its conclusion upon limited industry-supplied data that looked only at the national

picture. FERC should have based its conclusion on more thorough data from regional markets,

where market concentration would likely have been of greater concern. Moreover, although

Enron’s failure did not result in major short-term disruptions of energy markets, FERC failed to

foresee the broader market effect of Enron’s collapse. In Enron’s wake, the entire energy trading

sector has suffered significant financial distress. As Standard & Poor’s (S&P) observed in a

recent evaluation of the U.S. utility industry, “[t]he general weakening of credit quality in the

U.S. power industry began well before the California and Enron Corp. debacles of 2001, but it
56 S&P, “Credit Quality for U.S. Utilities Continues Negative Trend in Second Quarter,”

July 12, 2002.

57 Id.

58 Staff of the Federal Energy Regulatory Commission, “Initial Report on CompanySpecific Separate Proceedings and Generic Reevaluations; Published Natural Gas Price Data;

and Enron Trading Strategies. Fact-Finding Investigation of Potential Manipulation of Electric

and Natural Gas Prices,” Docket No. PA02-2-000, August 2002 (hereinafter, “Initial Report on

the Western Energy Markets”)

59 Id. at 53.

60 Id. at 54.

21

has certainly been exacerbated by them.”56 In the first six months of 2002, S&P reported “an

unprecedented 78 downgrades among holding companies and operating subsidiaries.”57

Third, while FERC staff concluded that the Commission need not worry about the

competitive advantage that Enron Online provided to Enron traders, there is now evidence that

Enron in fact likely exploited this advantage to manipulate prices, particularly in California and

the Western markets. Much of this evidence is set out in FERC’s own post-mortem investigation

of energy company activities during the Western energy crisis of 2000-2001, an “initial report”

issued in August 2002.58 One of the key advantages apparently misused by Enron was one

identified in the 2001 Enron Online report – the enhanced “market intelligence” available to it

through Enron Online, that is, the ability to see the details of the individual trades going on

behind the scenes, while competitors were limited to the summary results posted online. For

example, FERC staff’s 2002 report on the Western energy markets describes one case where

Enron and an unidentified counterparty made 174 trades with each other on Enron Online in a

single day for natural gas being delivered into the California market at the height of the energy

crisis.59 Other users of Enron Online, however, could only see the bid and ask prices for these

transactions; they could not see that the same parties were involved in all of these trades. The

net effect of these trades – which, the FERC staff report notes, took place at higher prices than

trades with other parties – was to increase the price throughout the day. Though FERC staff

stopped short of affirmatively concluding that Enron was attempting to use Enron Online to

manipulate market data, it found in its 2002 report that the level of trading activity was “difficult

to rationalize as normal or standard business practice.”60 In short, the 2001 staff inquiry

concluded that there was no reason for concern about Enron Online’s competitive advantage; the

2002 initial investigation report reaches the opposite conclusion. 

The effect of any such price manipulation was magnified, furthermore, by another

characteristic of Enron Online (also identified by FERC staff in its 2001 Enron Online report) –

its use as a significant, but unverifiable, source of price discovery for other market participants. 

That is to say, energy traders throughout the industry routinely relied on Enron Online to find out
61 Id. at 51.

62 FERC staff’s Initial Report on the Western Energy Markets notes that in response to

agency staff requests to National Gas Intelligence (NGI), NGI reported that a number of its

sources relied on Enron Online as their primary price discovery mechanism, even by traders who

did not transact on Enron Online. See id. at 52.

63 Enron Online Report at 15-16.

64 The apparent distortion of published price indices by data from Enron does not appear

to be an isolated problem. In the past month, three other energy trading companies – Dynegy,

American Electric Power, and Williams Cos. – have publicly disclosed that their traders

provided inaccurate information to energy industry publications that compile and publish price

indices. See Chip Cummins, “Williams Traders Gave False Data,” Wall Street Journal, October

28, 2002; “AEP Dismisses Five for Providing Inaccurate Market Data for Indexes,” AEP Press

Release, October 9, 2002; “Dynegy Dismisses Six Employees, Will Discipline Seven Others for

Violations of Company Policies,” Dynegy Press Release, October 18, 2002; “Williams Discloses

Natural Gas Trade Reporting Inaccuracies,” Williams Cos. Press Release, October 25, 2002.

65 Report of the Staff of the Senate Committee on Governmental Affairs on “Financial

Oversight of Enron: The SEC and Private-Sector Watchdogs,” S. Prt. 107-75 (October 7, 2002)

(continued...)

22

current market prices. Indeed, FERC staff, in its 2002 report on the Western energy markets,

found that Enron Online had “played [] a significant, even a dominant, source of price discovery

for natural gas products” in the California market.61 Moreover, Enron Online’s reported prices

were a significant component of industry price indices published by third parties.62 Thus, the

effect of any price manipulation by Enron through Enron Online would be compounded as the

inflated prices infected these supposedly independent reports as well. Enron Online’s lack of

price transparency and the potential therefore for price manipulation were noted in the 2001

Enron Online report; indeed, FERC staff recommended that, if requested, the Commission

should not approve a price index based on Enron Online transactions unless more detailed

transaction information was made publicly available.63 Despite highlighting these issues,

however, FERC took no further action to investigate whether Enron was manipulating prices or

otherwise abusing the advantages with which Enron Online provided it.64

Fourth, FERC staff failed to follow up on many of the issues raised by the report. 

Particularly troubling, given the concerns identified in the report related to Enron's financial risk,

it appears that there was never any formal process established within FERC for monitoring the

financial status of Enron – North America's largest energy trader – not even following the

unexpected resignation of Enron CEO Jeffery Skilling on August 14, 2001. This was a key red

flag that occurred just days before the final report was transmitted to FERC managers and, along

with news reports about some of Enron’s questionable financial practices, helped persuade staff

at the SEC to begin that agency's investigation into Enron's financial condition.65 Even once the
65(...continued)

at 28.

66 See Letter from Pat Wood, III, Chairman, FERC to the Honorable Joseph I.

Lieberman, Chairman, Committee on Governmental Affairs, dated April 12, 2002 (listing

telephone conversations between Rob Gramlich from the Office of the Chairman of FERC to the

White House National Economic Council and the Federal Reserve Board of San Francisco);

Letter from Pat Wood, III, Chairman, FERC to the Honorable Joseph I. Lieberman, Chairman,

Committee on Governmental Affairs, dated March 4, 2002, (response to question 3(a), at 188)

(noting that there were multiple communications between FERC and Enron, including a

communication between William Scott Miller of FERC’s Office of Markets, Tarriffs and Rates

and Rick Shapiro of the Enron Corp.).

67 San Diego Gas & Electric Co. v. Sellers of Energy and Ancillary Service, 96 F.E.R.C.

61,120, 61,518 (Order Establishing Evidentiary Hearing Procedures, Granting Rehearing in

Part, and Denying Rehearing in Part, issued July 25, 2001) (adopting the recommendation to

“use daily spot gas prices” based on the average of spot prices as reported by Gas Daily, NGI’s

Daily Gas Price index and Inside FERC’s Gas Market Report, in calculating refunds).

23

full magnitude of Enron's financial problems began to take shape in mid-October following

Enron's restatement of earnings and public confirmation of the SEC's investigation of the

company, there appears to have been no formal effort within FERC to monitor the financial

condition of the company or assess possible market impacts. FERC even failed to follow the

recommendation made in the staff’s August 16, 2001 report that the team that prepared it

continue to monitor effectively developments at Enron Online and other electronic trading

platforms. There was no effort made at the agency to ensure that this recommendation was

heeded.

The significance of FERC’s failures to pay more attention to Enron’s financial condition

is underscored by the agency’s reaction, late last year, to news of Enron’s collapse. When

Enron's demise became evident in November 2001, FERC officials were apparently troubled

enough about the potential impacts of the collapse on the energy market – the very concern

dismissed in their August report – to raise these matters with representatives of the Federal

Reserve, the White House National Economic Council, and Enron itself.66

Another very troubling facet of the August 2001 report is that it was not distributed to

any of FERC’s commissioners prior to, or during, Enron's collapse to inform their

decision-making, and it is unclear at what point any of the information contained in the report

may have been provided to the Commission. Thus, a report that might have served as a warning

wound up being little more than a footnote in the story of Enron's collapse. Moreover, at the

same time the report was being prepared, the Commission was debating the appropriate

methodology to calculate refunds to consumers in California and the Western markets. The

methodology adopted relies, in part, on the energy prices reported in certain public indices.67

Had the Commission been given the information uncovered by staff, it could have learned the
68 This was not the only instance where the Commissioners may not have been given

information relevant to the refund proceeding. In July 2001, FERC’s Chief Accountant prepared

a memorandum describing the findings of a staff audit to determine whether the books and

records of power companies selling power in California inappropriately reflected the cost of

generating electric power. The memo noted that “our initial work disclosed various preliminary

observations about the costs of generating electricity that may be useful to Commission staff

involved in the refund negotiations for overcharges by numerous sellers of energy into the State

of California.” Memorandum from John M. Delaware, Deputy Executive Director and Chief

Accountant to Walter C. Ferguson, Chief of Staff, Daniel L. Larcamp, Director, Office of

Markets, Tariffs and Rates, and Kevin P. Madden, General Counsel on “Audit of the Component

Costs of Generating Electric Power,” undated, at 1 (FERC staff informed Committee staff that

the memo was prepared on July 20, 2001). The memo was addressed to the Chief of Staff,

FERC’s General Counsel, and the Director of the Office of Markets, Tariffs and Rates, but was

apparently neither formally submitted to the Commission nor relied upon by the Commission in

its initial determination on a refund methodology.

69 Memorandum from Dennis Lane, Solicitor, Larry Gasteiger, Beth Pacella, and Laura

Vallance, through Cynthia Marlette, General Counsel, to the Commission, re: The Commission’s

Legal Authority to Regulate “One-To-Many” Internet-Based Trading of Energy Products, July

24, 2002.

24

important fact that the prices reported in such indices were potentially unreliable and subject to

manipulation.68

Finally, in examining new online markets such as Enron Online, FERC initially did not

even bother to address a critical but unresolved question – whether the Commission had

jurisdiction over such online trading platforms – even though it was generally understood by

FERC staff that electronic platforms such as Enron Online were expected to become the

dominant way in which both electricity and natural gas were traded. At the time of the Enron

Online inquiry, an accompanying legal memorandum analyzing FERC's jurisdiction over online

trading, including Enron Online, was to have been prepared. The memorandum, however, was

not completed until July 2002; in fact, nothing was done about finishing it until Chairman

Lieberman raised questions about it in his May 15, 2002 letter to Chairman Wood. Ultimately,

FERC staff concluded that the Commission likely had jurisdiction over one-to-many type trading

platforms for physical electric energy.69 Without completing its jurisdictional analysis, however,

FERC was poorly positioned to take any action with respect to abusive practices by Enron

Online.

Completion of this analysis would also have been useful in clarifying the jurisdictional

boundaries between FERC and the Commodity Futures Trading Commission (CFTC) regarding

energy trading activities and products, including online trading, and to better define the two

agencies' respective market monitoring responsibilities in these developing markets. CFTC does

not have general regulatory authority over a one-to-many trading platform such as Enron
70 7 U.S.C. § 2(h)(1).

71 7 U.S.C. §§ 2(h)(2)(B) and 2(h)(2)(C).

72 Enron Corp., “Electronic Platforms and Energy Trading, Talking Points addressing

Common Misperceptions,”undated (Enron document nos. EC 000124057-124065), at 3.

73 Enron Corp., “Enron Government Affairs,” November 2001 (Enron document nos. EC

000124004-000124010), at 3.

74 Enron Corp., “Update on Federal Government Affairs Energy Crisis Campaign,” July

27, 2001 (Enron document no. ECp000060512).

25

Online,70 but it does have authority to take action against certain fraudulent or manipulative

trading practices.71 Thus, both FERC and CFTC have at least some regulatory responsibility for

online energy trading. Yet, until after Enron filed for bankruptcy, there were no meaningful

discussions between the two agencies to identify and coordinate their respective roles in

overseeing these sorts of trading platforms, apart from some FERC staff visits to CFTC to

educate themselves about the regulation of commodity markets in general.

The jurisdictional analysis was also important to clarify FERC’s authority in the face of

Enron’s apparent determination to avoid regulation of Enron Online and exploit the regulatory

gap between FERC and CFTC. The company asserted to FERC that its online trading

operations were already subject to “federal oversight” by FERC and CFTC, and an internal

memo titled “Talking Points addressing Common Misperceptions” suggested the talking point

“There is no regulatory gap.”72 In fact, however, Enron acknowledged only very limited

jurisdiction by either agency over its online trading. A November 2001 internal Enron

Government Affairs Department document lists as a current activity “Preserve EnronOnline’s

unregulated status,”73 and a July 2001 internal Enron memo – written contemporaneously with

FERC’s investigation into Enron Online – speaks of Enron’s “strategy to defend regulatory

structuring surrounding EOL [Enron Online] and EOL products.”74 Thus, an earlier assertion of

jurisdiction may have made clear to Enron that its electronic trading was in fact subject to FERC

oversight.

Enron Online and other electronic trading platforms are precisely the sort of emerging

market institutions that one would expect FERC to anticipate, understand, monitor and address

as it moved to deregulate energy markets. Even though FERC eventually initiated an inquiry

examining such trading platforms – suggesting some level of concern within the agency about

their growing influence – and found that, in fact, the use of online trading platforms and their

trading volume were expected to grow dramatically, the agency failed to give these mechanisms

the scrutiny they deserve. It is particularly troubling that FERC identified so many red flags –

about the financial risks inherent in a one-to-many trading model, about the potential for price

manipulation in such a system – and yet, underestimating or misunderstanding their significance,

did not take action on any of them. And it is indicative of FERC’s failure to live up to its
75 One concern is that where one affiliate in a transaction has captive customers, a onesided deal between affiliates can saddle those customers with additional financial burdens. 

Another concern is that one affiliate will treat another with favoritism at the expense of other

companies or in ways detrimental to the market as a whole. 

76 See, e.g., 15 U.S.C. § 79a(b)(2) (setting forth the legislative basis for PUHCA,

including that investors and consumers may be adversely affected “when subsidiary

public-utility companies are subjected to excessive charges for services, construction work,

equipment, and materials, or enter into transactions in which evils result from an absence of

arm's-length bargaining or from restraint of free and independent competition”).

77 See Violet v. FERC, 800 F.2d 280, 282 (1st Cir. 1986).

78 18 C.F.R. Parts 101 (electric utilities), 201 (natural gas companies), and 352 (oil

(continued...)

26

responsibilities that it did not even finish its legal analysis of the scope of its jurisdiction over

these new fast-growing electronic markets until prodded by Chairman Lieberman. Had FERC

followed up on its observations, continued to closely monitor Enron and asserted its authority

over Enron Online, it might have stopped some of Enron’s abusive practices, lessened the harm

to energy consumers, and prevented the substantial effects on the energy sector as a whole.

C. Affiliate Transactions

Whenever a company conducts transactions among its own affiliates there are inherent

issues about the fairness and motivations of such transactions.75 Indeed, concerns about selfserving affiliate transactions were part of what led to the original passage of PUHCA and the

FPA in the 1930's.76 Among Enron’s dubious practices, the company on various occasions

appears to have improperly used transactions with its affiliates to further its own financial ends. 

FERC, however, either had no rules or inadequate rules to address these practices, or, where it

had put rules into place, no effective means of monitoring whether companies such as Enron

were complying with them.

There are a number of ways in which FERC-administered rules and policies attempt to

discourage improper interaffiliate transactions. Most basic, there is the requirement that entities

within FERC’s jurisdiction may charge only “just and reasonable rates.” Were a company

whose rates are set in whole or part by FERC – like Enron’s natural gas pipeline subsidiaries – to

imprudently enter into an unfavorable transaction with an affiliate, the company would not, in

principle, be able to collect the additional costs associated with that transaction, because rates

based on such costs would not be reasonable.77 In addition, FERC, pursuant to statute, has

issued rules for “Uniform Systems of Accounts” for electric utilities, natural gas companies and

oil pipelines that require these companies to maintain detailed accounting records, including

information concerning loans and other transfers between jurisdictional entities and their

affiliates.78 Such records are subject to FERC inspection and review, presumably a deterrent to
78(...continued)

pipelines). The relevant statutes require these companies to keep financial accounts, records and

memoranda such as may be prescribed by the Commission as necessary or appropriate. 16

U.S.C. § 825(a) (Federal Power Act); 15 U.S.C. 717(g) (Natural Gas Act); 49 App. U.S.C. 20

(Interstate Commerce Act).

79 16 U.S.C. § 825(a); 15 U.S.C. 717(g); 49 App. U.S.C. 20.

80 18 C.F.R. Part 37 (standards of conduct for electric utilities); 18 C.F.R. Part 161

(standards of conduct for natural gas companies). The Commission has recently proposed a

single, new set of standards of conduct that would apply to both natural gas pipelines and electric

utilities and would broaden the affiliate relationships covered by the standards. Standards of

Conduct for Transmission Providers, 66 Fed. Reg. 50919 (Notice of Proposed Rulemaking,

October 5, 2001). Though not a codified requirement, individual companies typically also have

“codes of conduct” that govern the relationship between the company’s power marketing arm

and its traditional public utility affiliates. See, e.g., Heartland Energy Services, Inc., 68 F.E.R.C.

61,223, 62,064-65 (1994) (describing the actions the company, as a condition of it being granted

the authority to charge market-based rates, has agreed to take in order to prevent “affiliate

abuse”).

81 “Enron Secures Commitments for Additional $1 Billion in Financing,” Enron Corp.

Press Release, November 1, 2001. The loans were made through the banks’ investment banking

arms, JPMorgan and Salomon Smith Barney Inc., respectively. A portion of the loan made by

Citigroup was used by Enron to pay off an earlier, unsecured loan from Citigroup, with the

(continued...)

27

improper interaffiliate financial transactions.79 Most specifically directed at the potential

problems of interaffiliate transactions are FERC’s “standards of conduct” that apply to

companies engaged in interstate electricity or natural gas transmission. The standards of conduct

are designed to prevent electric utility companies or gas pipelines, which often exercise

monopoly or near-monopoly control over transmission in a given geographic area, from offering

to sell and transmit electricity and natural gas to or for their affiliates except to the same extent

and under the same terms that the deals are offered to others. Among other things, the standards

of conduct require generally that employees involved in the transmission of electricity or natural

gas must function independently of those engaged in the wholesale trading of these

commodities.80

All in all, however, such measures are relatively modest and apparently proved

completely inadequate to deter Enron, as the company now appears to have engaged in a number

of inappropriate interaffiliate transactions. Perhaps most notable of these interaffiliate

transactions are loans that two of Enron’s natural gas pipeline subsidiaries obtained for their

parent company last November. Specifically, on November 1, 2001, as Enron struggled to avoid

bankruptcy, the company announced that JP Morgan Chase & Co. and Citigroup Inc. had

committed to loan it a total of $1 billion.81 The loans were actually made to two of Enron’s
81(...continued)

apparent result that Citigroup was able to replace its unsecured debt with secured debt shortly

before Enron’s bankruptcy. See In re Investigation of Certain Financial Data, FERC Docket

No. IN02-6-000 (Order to Respond, issued August 1, 2002) at 3.

82 Transwestern and Northern Natural provided the loans to Enron in exchange for

promissory notes that stated they were subordinated to prior payment of all senior indebtedness

upon the dissolution, liquidation, or reorganization of Enron. See In re Investigation of Certain

Financial Data, FERC Docket No. IN02-6-000 (Order to Respond, issued August 1, 2002). The

loans transactions with Transwestern was entered into November 13, 2001; the transaction with

Northern Natural was entered into November 19, 2001.

83 Specifically, the investigation was regarding “financial data related to transactions,

activities and accounting practices that may have impaired the financial condition of entities

subject to the Commission’s jurisdiction for the benefit of corporate parents or other affiliates or

associated entities of jurisdictional companies.” See In re Investigation of Certain Financial

Data, FERC Docket No. IN02-6-00 (Order to Respond, Issued August 1, 2002) at 2.

84 In re Investigation of Certain Financial Data, FERC Docket No. IN02-6-00 (Order to

Respond, Issued August 1, 2002), at 1.

85 In re Investigation of Certain Financial Data, FERC Docket No. IN02-6-00 (Order

Approving Stipulation and Consent Agreement, issued August 8, 2002).

28

FERC-regulated, interstate pipeline subsidiaries – Northern Natural Gas Company ($450

million) and Transwestern Pipeline Company ($550 million) – and were secured by the assets of

those pipeline companies. The vast majority of these loan proceeds were subsequently

transferred to Enron in the form of unsecured loans from the pipelines to their parent company.82 

After Enron declared bankruptcy a few weeks later, it made no payments on these loans, and the

pipeline companies (which did not file for bankruptcy) were left to pay off the entire amount of

the obligations to the banks – a matter of concern because ordinarily such costs would be passed

on to shippers who use the pipelines, and ultimately to retail natural gas customers.

In March 2002, FERC began a nonpublic investigation relating, in part, to these

transactions and related financial practices,83 and on August 1, 2002, issued an Order to Respond

to Northern Natural and Transwestern, directing those companies to “state why they have not

violated the Commission’s Uniform System of Accounts for natural gas companies, and why the

costs and indebtedness associated with [the November loans] were not imprudently incurred and

therefore unrecoverable by the pipelines in any future rate proceedings before [FERC].”84 One

of the pipeline companies, Northern Natural (which is no longer owned by Enron), has entered

into a consent agreement with FERC and agreed not to include the costs associated with the

controversial loan in any future rate proceedings;85 the other, Transwestern, continues to dispute

FERC’s allegations, arguing that the loans were in fact prudent given the facts known at the
86 Response of Transwestern Pipeline Company, In re Investigation of Certain Financial

Data, FERC Docket No. IN02-6-00 (filed September 3, 2002).

87 JP Morgan Global Syndicated Finance, “Structuring Summary, Project

Bluehorseshoe,” September 17, 2002, at 3.

88 Such cash management practices can provide benefits, such as ensuring that money

from all affiliates are invested rather than sitting idle. They also have risks, however: funds

swept into a parent’s account typically become the property of the parent and the subsidiary

loses all legal interest in those funds. As became apparent in the case of Enron, this arrangement

can be particularly problematic when one of the companies files for bankruptcy. See Regulation

of Cash Management Practices, 67 Fed. Reg. 51150, 51151 (Notice of Proposed Rulemaking,

August 7, 2002).

89 According to data made available by FERC to Committee staff, Enron-affiliated gas

pipeline companies in 2000 had an average balance in their Accounts 146 – accounts used to

record receivables from associated companies – of approximately $195 million, while non-Enron

pipelines had an average Account 146 balance of slightly over $6 million. “Account 146

(Accounts Receivable from Associated Companies) balances as of year end,” table prepared by

FERC staff.

90 The average Account 146 balance for Enron-affiliated gas pipelines companies

increased from approximately $44 million in 1997 to approximately $195 million in 2000. 

“Account 146 (Accounts Receivable from Associated Companies) balances as of year end,” table

prepared by FERC staff.

29

time.86

In addition to these enormous loans, there is preliminary evidence suggesting that Enron

may have engaged in a more extensive practice of exploiting the cash generating powers of its

pipeline subsidiaries. Documents prepared by JP Morgan Chase in connection with its

consideration of the November pipelines loans note that “for years, cash from the pipelines has

been used to support operations at Enron Corp.”87 At minimum, accounting practices by Enron’s

pipeline subsidiaries leave open questions about the nature of Enron’s interaffiliate transactions. 

The pipeline companies, as well as certain other Enron subsidiaries regulated by FERC, had

“cash management agreements” with Enron, whereby, at the end of each day, all remaining cash

at the subsidiaries was transferred to Enron, which held and invested it; the subsidiaries

themselves maintained no cash reserves. This cash management practice is not unique to

Enron.88 Nonetheless, Enron appears to have made more extensive use of it than did other

energy companies. Information provided by FERC reveals that the amounts transferred by

Enron-owned pipeline companies to Enron in 2000 was substantially greater than the amounts

transferred by subsidiaries owned by others in the industry to their parents.89 Moreover, the

amount transferred by Enron subsidiaries itself grew sharply from 1997 to 2000.90
91 Regulation of Cash Management Practices, 67 Fed. Reg. 51150, 511152 (Notice of

Proposed Rulemaking, August 7, 2002).

92 In re Investigation of Certain Financial Data, FERC Docket No. IN02-6-000 (Order

to Respond, issued August 1, 2002) at 4. Transwestern has disputed these allegations. See

Response of Transwestern Pipeline Company, In re Investigation of Certain Financial Data,

FERC Docket No. IN02-6-000 (filed September 3, 2002) at 23-28.

93 Regulation of Cash Management Practices, 67 Fed. Reg. 51150, 51151 (Notice of

Proposed Rulemaking, August 7, 2002).

94 Response of Portland General Electric Company to the Commission’s May 8, 2002

Data Request and Request for Admissions, Fact-finding Investigation of Potential Manipulation

of Electric and Natural Gas Prices, FERC Docket No. PA02-2-000 (filed May 22, 2002).

95 Id. at 6. For more on Enron’s allegedly abusive practices in the California market, see

Subsection D, below.

30

In investigating the cash management practices of Enron and others in the industry,

FERC found that the records kept were often inadequate to enable a clear understanding of the

companies’ financial practices, including, for example, whether and to what extent the parent

companies were paying interest to the subsidiaries on the moneys that had been transferred to the

parent.91 With respect to Enron, FERC has alleged that its pipeline subsidiaries did not even

have written agreements with Enron governing their cash management practices.92 As a result of

its investigation, FERC recently proposed to amend its rules governing the Uniform Systems of

Accounts to mandate changes in how cash management agreements are administered and

reported. FERC’s proposal would also limit the amount of funds that can be swept from a

subsidiary subject to FERC’s jurisdiction to a parent company; under the proposed rules,

subsidiaries would have to maintain at least 30% of their capital in their own accounts.93

In addition to possibly exploiting its pipelines to boost its own financial position, it

appears that Enron also used another affiliate, Portland General Electric (PGE), to engage in

improper transactions affecting the California power market.

On May 22, 2002, PGE responded to a FERC request that participants in the California

and Western markets document whether they had engaged in alleged abusive trading practices.94

This request was made as part of the Commission’s on-going investigation into Enron’s trading

practices in the California market. While stating in its response that it “does not believe that it

has engaged in the strategy contemplated in the Enron memoranda or by the Commission’s

request for admission,” PGE nonetheless acknowledged that “some transactions conducted by

Portland General during 2000-2001 may have resulted in the company purchasing power from

the Cal PX [California Power Exchange] and reselling power from its portfolio of supplies at

prices higher than those paid to the Cal PX.”95
96 Memorandum from John Mass, LeBoeuf, Lamb, Greene & MacRae L.L.P., to File,

August 2, 1999, at 3; (Attachment II.B.-133 to Response of Portland General Electric Company

to the Commission’s May 8, 2002 Data Request and Request for Admissions, Fact-finding

Investigation of Potential Manipulation of Electric and Natural Gas Prices, FERC Docket No.

PA02-2-000 (filed May 22, 2002)).

97 Transcript of Portland Scheduling Calls, April 15, 2000, at 2 (Attachment III.B.-87 to

Response of Portland General Electric Company to the Commission’s May 8, 2002 Data Request

and Request for Admissions, Fact-finding Investigation of Potential Manipulation of Electric

and Natural Gas Prices, FERC Docket No. PA02-2-000 (filed May 22, 2002)).

98 Transcript of Scheduler Telephone Conversation, April 6, 2000, at 29 (Attachment

III.B.-46 to Response of Portland General Electric Company to the Commission’s May 8, 2002

Data Request and Request for Admissions, Fact-finding Investigation of Potential Manipulation

of Electric and Natural Gas Prices, FERC Docket No. PA02-2-000 (filed May 22, 2002)).

99 Portland General Electric Company et al., FERC Docket No. EL02-114-000 (Order

Initiating Investigation and Establishing Hearing Procedures and Refund Effective Date, issued

(continued...)

31

As part of its response to the Commission, PGE also included transcripts of some of its

trading transactions, which include discussions of a series of transactions that PGE engaged in at

the request of Enron traders in the spring of 2000. The apparent purpose of some of these

transactions was to assist Enron in exporting power from California, with the intention of

reimporting it back to the state at a higher price. According to a legal analysis done in 1999 at

PGE’s request, Enron’s power marketing arm believed that they had found a “loophole in the

design of the new competitive marketplace in California which can be exploited to make a

profit. . . .”96 These transactions also included so-called “sleeve transactions,” where a thirdparty is used to facilitate transactions between affiliates who are otherwise prohibited from

trading by FERC’s standards of conduct and the companies’ codes of conduct. In one of the

transcripts provided by Portland General, a power scheduler for Washington Water Power –

which served as a third party in one transaction – explained to his PGE counterpart that he was

“. . . sleeving it [the power] just because you can’t buy it. They [Enron] can’t sell it to you.”97

The transcripts also suggest that some Portland General personnel may have been

uncomfortable with some of these transactions. For instance, one PGE employee responsible for

scheduling power transmission, told another employee “I’ll sure be glad when we’re sold and

they can’t pull this [expletive] anymore.”98 Despite the scheduler’s stated concern, the

transactions she was discussing were processed. 

In August 2002, FERC opened formal investigations into questionable transactions in

the California energy markets between Enron and PGE and between Enron and others using PGE

as a middleman, looking at whether, among other things, the companies violated the

Commission’s standards of conduct; these investigations are ongoing.99
99(...continued)

August 13, 2002); Avista Corporation et al., FERC Docket No. EL02-115-000 (Order Initiating

Investigation and Establishing Hearing Procedures and Refund Effective Date, issued August 13,

2002).

100 FERC staff had performed audits of Transwestern and Northern Natural in 2000 for

the years 1997-1998, for the limited purpose of validating the annual charges to be paid by the

pipeline companies to the agency (which were based on gas revenues). See Letter from John M.

Delaware, Deputy Executive Director and Chief Account, Office of the Executive Director,

FERC to Robert Chandler, Director, Accounting and Reporting, Transwestern Pipeline

Company, dated October 11, 2000; Letter from John M. Delaware, Deputy Executive Director

and Chief Account, Office of the Executive Director, FERC to Robert Chandler, Director,

Accounting and Reporting, Northern Natural Gas Company, dated October 11, 2000. In

addition, regulated companies must submit certain financial information annually to FERC,

including the amount of receivables from associated companies (so-called Account 146 data).

101 Market Surveillance Committee of the California ISO, “Preliminary Report on

Operation of the Ancillary Services Markets of the California System Operator (ISO),” August

19, 1998; Market Monitoring Committee of the California Power Exchange, “Report on Market

Issues in the California Power Exchange Energy Markets,” August 17, 1998.

32

While it is a positive development that FERC is now investigating potential wrongdoing

concerning Enron’s interaffiliate transactions and seeking to strengthen some of the relevant

accounting rules, at the same time it is troubling that FERC failed to address these issues at an

earlier stage. In the case of the pipeline loans, the Commission seems to have been largely blind

to the possibility of financial chicanery in interaffiliate transactions. Despite periodic audits of

company accounts and records, FERC apparently did not fully appreciate the inadequacy of

much of the information being kept or the significance, for example, of large interaffiliate

financial transfers, and such practices were not identified as problems warranting Commission

action until after Enron’s collapse.100 With respect to Enron’s transactions with PGE, FERC

already has rules restricting interaffiliate sales of power or power transmission capacity that

apparently prohibited these transactions. The Commission, however, has not developed the

capacity to monitor whether interaffiliate transactions are in fact taking place or the terms or

circumstances of those transactions. Unfortunately, it is not enough to simply set up the market

rules; to fulfill its mission FERC must understand what is actually happening in the market. 

Without doing so, FERC is left to hope, but not to know, that the rules are being followed.

D. California/Western Market Trading and Marketing Abuses

Severe energy problems in California began in the spring of 2000, only two years after

the state’s energy deregulation plan was put into place. FERC had already received reports from

energy experts in California that raised concerns about the exercise of market power as far back

as 1998.101 The state’s investor-owned utilities placed the blame for the crisis on power sellers

and marketers who, they said, were unfairly manipulating the system to score tremendous
102 San Diego Gas & Electric Co. v. Sellers of Energy and Ancillary Services, 93

F.E.R.C. 61,121, 61,350 (Market Order Proposing Remedies for California Wholesale Electric

Markets, issued November 1, 2000).

103 “Staff Report to the Federal Energy Regulatory Commission on Western Markets and

the Causes of the Summer 2000 Price Abnormalities,” FERC, November 1, 2000, at 5-16.

104 Initial Report on the Western Energy Markets, note 58, above.

105 Portland General Electric Company et al., FERC Docket No. EL02-114-000 (Order

Initiating Investigation and Establishing Hearing Procedures and Refund Effective Date, issued

August 13, 2002); Avista Corporation et al., FERC Docket No. EL02-115-000 (Order Initiating

Investigation and Establishing Hearing Procedures and Refund Effective Date, issued August 13,

2002); El Paso Electric Company et al., EL02-113-000 (Order Initiating Investigation and

Establishing Hearing Procedures and Refund Effective Date, issued August 13, 2002).

33

profits. The power marketers, on the other hand, pointed to flaws in the structure of the new

California system.

FERC staff investigated allegations of possible market abuses in the summer and fall of

2000. They concluded that power sellers had the potential to manipulate the power market, but

the Commission staff stated that there was no evidence to indicate whether any individual

company engaged in actual market abuse. In its response to the staff report, the Commission

agreed with this conclusion, stating: “While this record does not support findings of specific

exercises of market power, and while we are not able to reach definite conclusions about the

actions of individual sellers, there is clear evidence that the California market structure and rules

provide the opportunity for sellers to exercise market power when supply is tight and can result

in unjust and unreasonable rates under the [Federal Power Act].”102

The staff report suggested that further investigation was needed before determining

whether the power sellers and marketers did, in fact, manipulate the system.103 However, it took

15 months – until February 2002, after Enron had collapsed and questions were raised about its

business practices – before the Commission would order an investigation into the market

behavior of individual companies. Once begun, however, this preliminary investigation would

uncover evidence suggesting that some of the types of abuses that had been alleged to take place

in California did, in fact, occur.

In August 2002, Commission staff produced an interim investigative report that described

the manipulative trading practices that Enron’s traders and others had allegedly engaged in.104

Based on the findings of this report, the Commission is now conducting three formal

investigations to further review allegations that individual companies, including Enron,

manipulated the California market.105 Last month, Timothy Belden – who headed Enron’s

Western trading desk – pled guilty to a charge of conspiracy to commit wire fraud based on

allegations that, from 1998 to 2001, he and others at Enron engaged in trading strategies
106 Plea Agreement, United States v. Belden, No. CR 02-0313 MJJ (N.D. Cal. October

17, 2002); Information, United States v. Belden, No. CR 02-0313 (N.D. Cal. October 9, 2002).

107 The California IOUs retained their nuclear plants, and some other assets, but were

required to sell the electricity produced by these plants into spot markets established by the

California Power Exchange (PX).

34

designed to manipulate energy prices in the California market.106

As noted earlier, we cannot say with certainty that an earlier investigation and more

aggressive activities by the Commission would have prevented Enron’s collapse. However,

because of the California power crisis in 2000 and early 2001, FERC specifically examined the

operation of those markets and was presented with the opportunity, if not the obligation, to

review Enron’s trading practices. An earlier examination by the Commission of the type of

practices engaged in by Enron could have led to an earlier investor and regulatory review of

Enron’s vaunted commodity trading business, and then to larger questions about its business

activities. This did not occur. 

The fact that the Commission is only now investigating allegations of market abuse by

individual companies is deeply troubling, particularly for the many consumers who were

adversely affected by the California power crisis. Without the threat of timely enforcement by a

regulatory agency to hold market participants accountable, rules cannot serve their purpose as a

deterrent to abusive market action. 

1. Power Crisis in California

In the late 1990s, California became one of the first states to deregulate its electricity

industry. As part of its deregulation plan, the State’s large investor-owned utilities (IOUs) were

required to divest themselves of large portions of their generating capacity.107 Instead of

generating it themselves, the IOUs were required to purchase electricity on several complex

wholesale spot markets established by the California Power Exchange (PX) and the California

Independent System Operator (ISO). Through these markets, thousands of transactions were

conducted each day. Electricity was bought and sold for the “day-ahead” market, for the “sameday” market, and for other electricity supply components, such as extra generating reserves. 

Once the IOUs purchased the electricity on the wholesale market, they could, in turn, deliver it

to their customers through the state-wide electric grid. The California deregulation plan also

established the ISO to operate this grid and to ensure that there was an adequate supply of

electricity to meet customers’ demands. When there was a shortage in the supply of electricity

relative to the demand on the California PX, the ISO would purchase additional energy. The

price the ISO would pay power sellers and marketers, such as Enron, for this additional energy

was capped when the power was purchased from in-state sources; when the ISO purchased from

out-of-state sources, however, there was no price cap.

In addition to wholesale price caps, California’s deregulation plan also required a freeze
108 According to a presentation made by Southern California Edison to the Director of

FERC’s Office of Markets, Tariffs, and Rates (OTMR), the total cost of electricity for California

for the month of June 2000 even under the $750 cap was over $3.6 billion, roughly half of what

the state had spent for electricity for the entire year of 1999. Southern California Edison

Company, “Status of California Electricity Markets,” August 3, 2000.

109 By contrast, the State of California was primarily responsible for overseeing retail

power sales. To the extent that the ISO had been delegated authority by FERC to set rate caps

(continued...)

35

on retail electricity rates. While this freeze was often described as a “cap” on retail prices, it was

originally considered a minimum floor price that the IOU could charge its customers. This floor

price would allow the IOUs to recover the cost of investments, known as “stranded costs,” that

were made during their tenure as regulated monopolies. Retail rate freezes are common in

essentially all deregulation plans. In California’s case, the freeze stayed in effect until all of the

individual utilities’ stranded costs were recovered or until March 2002, whichever came first. 

Consequently, when San Diego’s IOU recovered all of its stranded costs in 1999, retail rate

“caps” for the area were lifted. Rate caps remained in place for other consumers who were

served by IOUs that had not recovered all of their stranded costs.

The energy crisis in California began in the spring of 2000 when a power shortage in the

wholesale market increased the price of electricity that IOUs were purchasing on the California

PX. The absence of retail rate caps for the San Diego IOU meant that the additional costs on the

wholesale market could be transferred directly to its ratepayers. As a result, these ratepayers saw

their electric bills increase by 200 to 300 percent. However, consumers served by the other

California IOUs were not immediately affected by the wholesale price spikes. Their IOUs had

not fully recovered their stranded costs, and as such, were still operating under the retail price

caps. Because of these caps, the IOUs were not allowed to transfer their additional costs to

consumers. As a result, IOUs began losing large sums of money. One IOU was even forced into

bankruptcy. 

On June 28, 2000, the California ISO responded to the crisis by lowering the wholesale

price caps for power generated within the state and purchased by the ISO on its spot market. 

The cap was reduced from $750 per megawatt hour to $500, and later $250, in an attempt to

lower how much the power sellers and marketers were charging the ISO and, in turn, reduce the

rates for consumers.108

2. FERC’s Investigation of the California and Western Markets

As problems arose in 2000, there is a strong argument that the Commission – which had

jurisdiction over trades through the California PX and ISO because they involved wholesale

sales of electricity – should have shown greater concern based on previous reports it received of

possible anti-competitive behavior in the market.109 Certainly, problems in the California market
109(...continued)

for wholesale power, these caps only applied to in-state generators. It is alleged that Enron took

advantage of this situation by exporting power from California with the intention of re-importing

it back to the state. See Memorandum from Christian Yoder and Stephen Hall, Stoel Rivers

LLP, to Richard Sanders, re: Traders Strategies in the California Wholesale Power Markets/ISO

Sanctions, December 6, 2000, at 6-7. By doing so, the company could apparently avoid the price

caps that the ISO placed on California-generated power and receive higher payments for

electricity that appeared to be generated out-of-state. Only FERC had the authority to regulate

power imported from one state to another.

110 Market Surveillance Committee of the California ISO, “Preliminary Report on

Operation of the Ancillary Services Markets of the California System Operator (ISO),” August

19, 1998.

111 Market Monitoring Committee of the California Power Exchange, “Report on Market

Issues in the California Power Exchange Energy Markets,” August 17, 1998.

112 San Diego Gas & Electric Co. v. Sellers of Energy and Ancillary Services, 92

F.E.R.C. 61,172 (Order Initiating Hearing Proceedings To Investigate Justness And

Reasonableness Of Rate Of Public Utility Sellers In California ISO and PX Markets And To

Investigate ISO and PX Tariffs, Contracts, Institutional Structures And Bylaws; And Providing

Further Guidance To California Entities, issued August 23, 2000).

113 “Commission Addresses California Electricity Markets, Orders Investigation,” FERC

Press Release, August 23, 2000; see also San Diego Gas & Electric Co. v. Sellers of Energy and

Ancillary Services, 92 F.E.R.C. at 61,603.

36

were not a new issue to FERC. For example, in an August 19, 1998 report to the ISO board that

was transmitted to FERC the same day, the Market Surveillance Committee for the PX found

that the market was not functioning in a competitive manner.110 Even more forcefully, in another

report to FERC from the same time period, the Market Monitoring Committee for the PX found

that “the current market problems are sufficiently severe that they call for short-term intervention

in the markets, such as price caps.”111

On July 26, 2000, FERC ordered its staff to investigate the five so-called “bulk power”

markets in the U.S. to examine how the electricity markets in different regions were functioning. 

On August 23, 2000, FERC initiated a second, formal investigation in response to a complaint

filed by San Diego Gas & Electric pursuant to Section 206 of the Federal Power Act.112 The

FERC Chairman also directed the staff to accelerate the portion of the bulk power investigation

relating to the California and Western markets so that it could be used to inform the

Commission’s decisions regarding the California market.113

On November 1, 2000, the FERC staff released its report on the California and Western

bulk power market and the causes of the summer 2000 electricity price spikes. The report, and
114 “Staff Report to the Federal Energy Regulatory Commission on Western Markets and

the Causes of the Summer 2000 Price Abnormalities,” November 1, 2000.

115 Although the report lists entities with whom interviews were done, many of the listed

“interviews” were group meetings with FERC staff and not what Committee staff view as

investigative interviews.

116 Department of Market Analysis, California Independent System Operator, “Report on

California Energy Market Issues and Performance: May-June, 2000,” August 10, 2000, at 5.

117 Declaration of Eric Hildebrandt, San Diego Gas & Electric Co. v. All Sellers of

Ancillary Services, F.E.R.C. Docket No. EL00-95-000, attached to Letter from Edward Berlin,

Swidler Berlin Shereff Friedman, LLP to the Honorable David B. Boerges, Secretary, FERC,

dated October 20, 2000.

37

the subsequent changes proposed by the Commission, focused on the structural problems in the

California market, rather than on the specific actions of individual companies operating within

the market.114

The investigation leading up to the November 1 report was extremely limited in scope

and duration – the staff conducting the investigation was not even given subpoena authority, and

the investigation was completed in a very short period of time (roughly three months). Although

the Commission directed the staff to focus on California and the Western markets in its August

23, 2000 order, there does not in fact appear to have been any significant shift in investigative

priorities. Staff reports for all five bulk power regions, including the California/Western report,

were issued on the November 1, 2000 date originally established in July. In addition, key market

participants, observers and regulators, such as utility commissions in surrounding Western states

and the Bonneville Power Administration, were never interviewed even though the report

repeatedly acknowledges that the Western market is an interconnected, interdependent market.115

Because of the limited scope of their investigation, FERC staff did not pursue all of the

major potential problems that existed in the California market. Most notably, FERC staff failed

to fully address allegations of market manipulation by individual power selling companies

operating in California. For instance, FERC staff appears not to have given sufficient attention

to reports done by a variety of California sources regarding market behavior. On August 10,

2000, for example, the Department of Market Analysis of the California ISO issued a report that

examined price spikes that had occurred in May - June 2000. The ISO report found that market

participants were exercising market power, stating “the observed market power was the

combined effect of the bidding activity of in-state and out-of-state generation resources.”116 An

even more detailed analysis of the California market was submitted to the Commission by the

ISO on October 20, 2000.117

As they acknowledge in their November 1, 2000 report, FERC staff was aware of such

“concerns” about market abuses, including the exporting of power out of California. They noted
118 “Staff Report to the Federal Energy Regulatory Commission on Western Markets and

the Causes of the Summer 2000 Price Abnormalities,” FERC, November 1, 2000, at 5-14, 5-15.

119 Id. at 5-15.

120 Gary Stern, Southern California Edison, “California Electricity Markets: Issues for

Examination,” August 17, 2000.

121 “Staff Report to the Federal Energy Regulatory Commission on Western Markets and

the Causes of the Summer 2000 Price Abnormalities,” November 1, 2000, at 5-16.

38

that one of these concerns was “that generators exporting power were gaming the system in

order to increase prices.”118 Their report goes on to observe that “(t)he concern seems to be that

megawatts are exported by the very same entities who then sell the megawatts back in real time

at high prices. Several generators reported contracting a significant proportion of their supply

forward outside of California, and the buyers of that power may have exported it back to

California at some later date.”119

Representatives of California’s investor-owned utilities also met with the co-director of

the FERC investigation and other FERC staff on August 17, 2000, to discuss this export issue

and other allegations of market abuse. One of the utilities, Southern California Edison,

presented a detailed list of alleged trading abuses such as intentional creation of transmission

system congestion and megawatt laundering – the export of power out of California and the

subsequent re-importation at higher prices.120 

Despite this evidence of possible market abuse that FERC staff had received, their

November 1, 2000 report concluded that there was nothing to indicate whether an individual

company engaged in actual market abuse. Instead, the staff suggested that power sellers and

marketers had merely the potential to exercise market power in the summer of 2000. They stated

that further investigation was needed to “substantiate any charges of market power abuse,” and

presented the Commission with the option of continuing the investigation to examine these

alleged market power abuse issues in greater detail.121
122 San Diego Gas & Electric Company v. Sellers of Energy and Ancillary Services, 93

F.E.R.C. 61,121, 61,350 (Order Proposing Remedies for California Wholesale Electric Markets,

issued November 1, 2000).

123 San Diego Gas & Electric Company v. Sellers of Energy and Ancillary Services, 93

F.E.R.C. 61,294 (Order Directing Remedies for California Wholesale Electric Markets, issued

December 15, 2000).

124 Fact-Finding Investigation of Potential Manipulation of Electric and Natural Gas

Prices, 98 F.E.R.C. 61,165 (Order Directing Staff Investigation, issued February 13, 2002).

39

Coincident with the publication of the bulk power investigation reports, the Commission

on November 1, 2000 also issued an order finding that “(w)hile this record does not support

findings of specific exercises of market power, and while we are not able to reach definite

conclusions about the actions of individual sellers, there is clear evidence that the California

market structure and rules provide the opportunity for sellers to exercise market power when

supply is tight, and can result in unjust and unreasonable rates under the FPA.”122 The order

went on to propose a variety of mitigation measures aimed at changing the operation of the

California spot markets operated by the California PX and the ISO; initial mitigation measures

were actually imposed by a further Commission order on December 15, 2000.123 (It should be

noted that this initial mitigation order would prove wholly inadequate to address the crisis in

California and FERC was forced to put substantially stronger measures in place the following

spring.)

While issuing its mitigation proposals, the Commission did nothing to address the

problem of individual companies’ abusive practices, including responding to staff’s proposal to

continue its investigation, for almost 15 months after receiving the staff bulk power report. This

was despite the fact that FERC continued to receive additional evidence that market abuse was

occurring. In February 2001, for example, the market oversight unit of the California ISO,

responding to reports that FERC had insufficient data on market abuse, submitted a new study of

the bidding behavior of 15 individual companies, including Enron. Finally, on February 13,

2002, the Commission ordered FERC staff to begin a preliminary investigation.124 

With one exception – a single, isolated instance involving standby generation units being

withheld from service – the February 13, 2002 order was the first action that FERC took to

independently investigate the market behavior of any electricity market participant in the

California and Western markets. And it took an additional six months before FERC initiated

formal investigations of such participants. Had the Commission agreed to start a more thorough

investigation immediately following the release of the November 2000 staff report, it may well

have uncovered earlier the type of evidence it believed necessary to substantiate the charges of

market abuse in California.
125 This internal investigation of its trading practices was initiated by Enron in order to

respond to subpoenas and inquiries from the California Public Utility Commission, and to related

inquiries and litigation. See Deposition of Christian Good Yoder, Nevada Power Company et al.

vs. Duke Energy Trading and Marketing et al., FERC Docket No. EL02-26-000 et al., June 18,

2002, at 20 (hereinafter, “Yoder Deposition”).

126 Deposition of Stephen C. Hall, Nevada Power Company et al. vs. Duke Energy

Trading and Marketing et al., FERC Docket No. EL02-26-000 et al., July 11, 2002, at 18

(hereinafter, “Hall Deposition”); Yoder Deposition at 27; Invoice from Stoel Rives LLP to

Christian Yoder, Enron Capital & Trade Resources Corp, re: Enron North America, California

Power Matters, dated November 27, 2000 (itemizing attorney services), available at

http://caag.state.ca.us/newsalerts/2002/02-058.htm.

127 E-mail from Mary Hain to James Steffes, et al, dated August 29, 2000 (Enron

document no. ECu000060541); Hall Deposition at 18.

128 Yoder Deposition at 48.

129 Id. at 50.

130 Memorandum from Christian Yoder and Stephen Hall, Stoel Rivers LLP, to Richard

Sanders, re: Traders Strategies in the California Wholesale Power Markets/ISO Sanctions,

December 6, 2000. There is another, nearly identical version of this memorandum that is dated

December 8, 2000. Both versions of the memorandum were released to the public by FERC on

May 6, 2002.

40

Indeed, on October 3, 2000 – nearly a month before the staff’s bulk power report was

issued – Enron itself began its own internal investigation125 of the company’s trading practices in

the California energy market when outside attorneys and senior Enron legal counsel and staff

met in an all-day session with Enron traders in Portland, Oregon.126 This meeting included,

among others, Timothy Belden, Richard Sanders, who headed litigation for Enron North

America, and Mary Hain, a director in Enron’s Government Affairs department, who, as

discussed below, had a couple of months earlier given a presentation to FERC staff on issues

related to the California market.127 A follow-up meeting with senior Enron legal staff (including

Sanders) was held on November 4-5, 2000.128 Another meeting took place in December 2000.129 

Enron’s internal investigation ultimately resulted in a December 6, 2000 memorandum

that analyzed in detail a range of strategies that Enron traders may have used to exploit the

structure of the California market to increase Enron’s profits – the so-called “Get Shorty,”

“Death Star,” “Fat Boy,” and “Ricochet” trading strategies – and discussed the “sanction

provisions of the California Independent System Operator (‘ISO’) tariff.”130 As the head of

Enron’s Western trading desk at the time, Timothy Belden was a participant in the internal

investigation that produced these memoranda. As noted above, Belden subsequently pled guilty

to a charge of conspiracy to commit wire fraud, related to allegations that he engaged in trading
131 Plea Agreement, United States v. Belden, No. CR 02-0313 MJJ (N.D. Cal. October

17, 2002); Information, United States v. Belden, No. CR 02-0313 (N.D. Cal. October 9, 2002).

132 For example, on January 20, 2000, Enron held its annual equity analyst conference,

announcing “(g)rowth prospects remain strong for Wholesale Energy Operations and Services,

Enron’s largest business. Wholesale energy growth in North America is expected to be driven by

the continuing deregulation of power markets in the United States and large-scale outsourcing

utilities and large energy consumers.” A year later, at the January 2001 conference, Enron

announced increased earning targets based in part on “Enron’s further strengthening of its longstanding lead in the North American wholesale energy market, significant expansion of its

European wholesale energy business, and extension of Enron’s business model into new, large

markets” as well as a doubling in its retail energy business. See “Enron Hosts Annual Analyst

Conference; Provides Business Overview and Goals for 2000,” Enron Corp. Press Release,

January 20, 2000; “Enron Announces Increased Earnings Target for 2001 to $1.70 - $1.75 Per

Share,” Enron Corp. Press Release, January 25, 2001.

133 E-mail from Mary Hain to James Steffes, et al., dated August 29, 2000 (Enron

document no. ECu000060541); Letter from Kevin F. Cadden, Director of External Affairs for

FERC, to David Berick, Senate Committee on Governmental Affairs, dated June 19, 2002.

41

strategies designed to manipulate prices in the California energy market. In his plea agreement,

Belden acknowledged that between 1998 and 2001, he and “other individuals at Enron agreed to

devise and implement a series of fraudulent schemes” in the California market that were

designed to “obtain increased revenue for Enron from wholesale electricity customers and other

market participants . . . .”131

3. Enron’s Efforts to Influence FERC 

Enron was heavily invested in the success of the deregulation of energy markets in

general and in California in particular.132 Deregulation represented opportunities for its energy

trading and energy services businesses, as well as new market opportunities in the United States

and overseas. It was important to Enron, therefore, that the California crisis not be blamed on

deregulation or market systems or on the market players in a deregulated environment.

Documents obtained by the Committee indicate that Enron attempted to directly and

indirectly influence FERC’s investigation of the California market and subsequent decisionmaking. As indicated by an internal e-mail obtained by the Committee, and confirmed by the

Commission staff, Enron representative Mary Hain made a presentation to the FERC “bulk

power” investigation team on August 24, 2000 as part of a meeting that the team held with a

group of power marketers.133 The message Enron sought to convey was that high prices in

California were the result of scarce supply and that FERC should be “discouraged . . . from

taking any action that would hurt the vibrant wholesale market in the [sic] California and the rest
134 E-mail from Mary Hain to James Steffes, et al., dated August 29, 2000, (Enron

document no. ECu000060541).

135 E-mail from Mary Hain to James Steffes, et al., dated August 29, 2000 (Enron

document no. ECu000060541); Tim Belden, Enron North America, Presentation on “What To

Do About Western Wholesale Markets?,” August 25, 2000 (Enron document nos.

ECu000060613-ECu000060664). FERC staff could not confirm that the discussion had taken

place, but acknowledged that they do have a copy of the presentation.

136 Letter from James J. Hoecker, Swidler Berlin Shereff Friedman LLP, to Susan J. Cort,

Esq., Office of General Counsel, FERC, March 12, 2002, at 3; Carolyn Lochhead, “Progress

Toward Deal to Cut Power Cost / D.C. energy talks run late into night,” San Francisco

Chronicle, January 10, 2001.

137 Letter from James J. Hoecker, Swidler Berlin Shereff Friedman LLP, to Susan J. Cort,

Esq., Office of General Counsel, FERC, March 12, 2002, at 3.

138 Enron Corp., “Advancing Electric Competition in the Wake of California; Enron’s

Campaign to Affect Policy and Public Opinion,” February 5, 2001 (Enron document nos.

ECp000061965-ECp000062027).

42

of the West. . . .”134 According to an internal Enron e-mail, on August 25, 2000, Timothy

Belden, then head of Enron’s Western trading desk, had a discussion with FERC investigators

and sent them another presentation – “What To Do About Western Wholesale Markets?” –

which reiterated this basic message that the price spikes were due to physical supply shortages

and structural flaws in the California market.135

Even after the Commission issued its initial mitigation order in December 2000, Enron

continued to be actively involved in efforts to address the California crisis. For example, Ken

Lay met with members of the Clinton Administration in early January 2001 to discuss the crisis. 

On January 9, 2001, Lay attended a “summit” organized by the White House to talk about

possible solutions to the energy crisis in California. The President’s chief economic advisor

Gene Sperling, FERC Chairman James Hoecker, Treasury Secretary Lawrence Summers and

Secretary of Energy Bill Richardson were among the 30-50 people that attended the summit.136

On January 13, 2001, Ken Lay also participated in what appears to be a follow-up meeting to the

January 9 summit.137

Thereafter, the company launched a major public relations and lobbying campaign in

early 2001 apparently designed to indirectly influence the outcome of FERC’s decision-making

with regard to California. The Enron campaign consisted of an extensive multi-faceted effort to

influence policy decisions not only in California, but throughout the Western U.S., in other key

markets such as New York, where it was feared that other potentially damaging electricity

shortages and price spikes would occur, and at the federal level.138 The campaign was directed

by Enron’s corporate head of government affairs with the assistance of the Washington DC-
139 Id. at Enron document no. ECp000061966. In addition to its work on Enron’s

California campaign, Quinn Gillespie and Associates also lobbied the White House on behalf of

Enron on other issues, such as the National Energy Policy. See, e.g., E-mail from Ed Gillespie to

Andrew D. Lundquist, dated April 3, 2001, 3:47 pm (Office of the Vice President document no.

188); E-mail from Ed Gillespie to Andrew D. Lundquist, dated April 3, 2001, 9:48 am (Office of

the Vice President document no. 479).

140 Enron Corp., “Advancing Electric Competition in the Wake of California; Enron’s

Campaign to Affect Policy and Public Opinion,” February 5, 2001 (Enron document nos.

ECp000061965-ECp000062027), at Enron document no. ECp000061967.

141 Enron Corp., “Advancing Electric Competition in the Wake of California; Enron’s

Campaign to Affect Policy and Public Opinion,” May 4, 2001 (Enron document nos.

000003222-000003237), at Enron document no. ECu000003226.

142 Letter from Alberto R. Gonzales, Counsel to the President, to The Honorable Joseph

I. Lieberman, dated May 22, 2002, Attachment at 2; Letter from Kenneth L. Lay to Clay

(continued...)

43

based lobbying firm Quinn, Gillespie and Associates.139

A February 5, 2001 briefing on the campaign identified six overall objectives – “Isolate

California and communicate a market based message; Retain a market-based electricity structure

in California; Minimize California impact and Governor Davis’ message across the West;

Facilitate federal action: FERC and Congress; Identify and manage potential energy crisis in

other states–New York, Florida, others?; Refine and increase public affairs effort among policy

makers, the media, opinion makers, electricity consumers.”140

As the campaign progressed, the goals and objectives were refined. A May 4, 2001

campaign briefing identified five federal goals relevant to FERC: to encourage FERC and the

White House to promote competition in electric markets; to convince FERC to extend its

jurisdiction over all aspects of electricity transmission, including over federal, state, and

municipal power agencies that are not otherwise subject to FERC jurisdiction; to encourage the

Administration to complete confirmation of its FERC nominees; to educate Members of

Congress and the Administration about the West Coast energy crisis and encourage them to

allow the market to work and to take efforts to increase supply and reduce demand; and to block

price cap legislation and administrative orders.141

As reflected in the May 4 briefing, one of Enron’s goals was to complete the

confirmation of FERC nominees in hope of creating a more proactive FERC that would address

the growing threat that the California crisis presented to deregulation. On January 8, 2001,

Enron’s Chairman and Chief Executive Officer Kenneth Lay wrote to Clay Johnson, Executive

Director of the Bush-Cheney Transition team, and Vice President-elect Cheney, to offer Enron’s

recommendations on “the kind of individuals we think you should be looking for” when filling

vacancies at FERC.142 Attached to the letter was a list of seven potential candidates, with brief
(...continued)

Johnson, dated January 8, 2001 (Executive Office of the President document nos. 980-982).

143 Letter from Alberto R. Gonzales, Counsel to the President, to The Honorable Joseph I.

Lieberman, dated May 22, 2002, Attachment at 2.

144 Memorandum from Linda Robertson to Ken Lay, dated February 12, 2001 (Enron

document nos. EC 000123909).

145 Letter from Alberto R. Gonzales, Counsel to the President, to The Honorable Joseph

I. Lieberman, dated May 22, 2002, Attachment at 1-2.

146 Memorandum from Linda Robertson and Tom Briggs to Ken Lay, re: Meeting with

Vice President Cheney, dated April 13, 2001, (Enron document nos. EC2 000026045-26105), at

(continued...)

44

biographies of each candidate, including Pat Wood and Nora Brownell. Lay called Johnson

twice to follow up on the January 8th letter.143 A February 12, 2001 memo to Mr. Lay from Linda

Robertson, head of Enron’s Washington office, described Enron’s priorities in preparation for a

call by Mr. Lay to Mr. Johnson concerning “. . .Commissioner vacancies at FERC.” The memo

stated that “Enron has strongly supported Pat Wood, a Republican, as Commission Chairman.” 

The memo continued, “(a) number of candidates are said to be under consideration for the

second Republican seat at FERC. Enron has on several occasions discussed with transition and

now Bush Administration officials the candidacy of Nora Brownell as our first pick for the

second open seat.” The memo noted that Ms. Brownell was under consideration “on the strength

of Enron’s interest,” but faced competition from another candidate reportedly supported by

Pennsylvania Governor Tom Ridge and that Enron was working to “. . .mitigate the Governor’s

alleged concerns with her candidacy.”144 In addition, Lay called Senior Advisor to the President

Karl Rove to express his support for Nora Brownell’s appointment to FERC.145

Even after Wood and Brownell were nominated, it appeared that Enron’s government

affairs office continued to push for a quick confirmation of their nominations. In a memo to Lay

prior to his April 17, 2001 meeting with the Vice President, Linda Robertson and Tom Briggs,

who oversaw federal regulatory affairs for Enron, urged him to “. . . take the opportunity to

convey to the Vice President the imperative of an expedited confirmation of Pat Wood and Nora

Brownell.” The memo suggested that their appointments would “. . . mitigate one of the

significant political problems confronting passage of the Administration’s energy agenda,

namely the call by Democrats and Western state members for price caps.” It further suggested

that these appointments would allow FERC to 

‘release some of the political steam in the system’ by adopting more visible

pricing steps in Western markets, such as the bid cap measures in place in Texas

and the Northeast ISO. Thus, more aggressive action by the FERC on both

market power issues and pricing issues would give the Administration enormous

political cover and would allow them to redefine the debate on their own terms.146
(...continued)

Enron document no. EC2 000026052.

147 Letter from John Duncan, Assistant Secretary for Legislative Affairs, Department of

the Treasury, to Senator Joseph I. Lieberman, Chairman, Committee on Governmental Affairs,

dated April 22, 2002, at 1.

148 Letter from Alberto R. Gonzales, Counsel to the President, to The Honorable Joseph I.

Lieberman, dated May 22, 2002, Attachment at 3.

149 Id. at 2.

150 San Diego Gas & Electric Co. v. Sellers of Energy Ancillary Service, 95 F.E.R.C.

61,418 (Order on Rehearing of Monitoring and Mitigation Plan for the California Wholesale

Electric Markets, Establishing West-Wide Mitigation, and Establishing Settlement Conference,

issued June 19, 2001).

151 “Enron Reiterates Confidence In Operations and Earnings Outlook,” Enron Press

(continued...)

45

According to Ms. Robertson, the confirmations were not actually discussed during the meeting

with the Vice President.

Beyond the matter of FERC nominees, Enron executives appeared to bring their message

on the California power crisis directly to key Bush Administration officials. On April 5, 2001,

Jeffrey Skilling met with Secretary of Treasury Paul O’Neill, and other Treasury Department

officials, to discuss the West Coast energy crisis.147 Ken Lay and Linda Robertson apparently

raised the California issue during their 30 minute meeting with the Vice President on April 17,

2001.148 The White House has indicated that Assistant to the President and Director of the

National Economic Council Larry Lindsey had "a few communications" with Ken Lay, "most

likely about the California electricity shortage.”149

It is, of course, difficult to evaluate the impact of Enron’s far-reaching efforts on

decision-making at FERC. As detailed above, for a long time FERC insisted (and to some extent

still does insist) that the problems in California were the result of structural flaws in market

design and declined to investigate the possibility that there had been abusive behavior on the part

of individual energy companies – a position consistent with that advocated by Enron. It is

impossible to know how much Enron’s lobbying campaign influenced FERC’s thinking on this

issue and how much FERC was simply predisposed to this view. It should be noted that when

the crisis in California became severe, FERC, on June 19, 2001, did ultimately issue an order

extending price caps and other mitigation measures to the entire Western market,150 a decision

contrary to one of Enron’s stated goals. In response, Enron found it necessary to immediately

issue a press release from then-CEO Jeffery Skilling, reiterating his confidence that price

controls would not have an impact on Enron’s earning targets for both the second quarter and the

year.151
151(...continued)

Release, June 19, 2001.

152 U.S. General Accounting Office, “Energy Markets: Concerted Actions Needed by

FERC to Confront Challenges That Impede Effective Oversight,” GAO-02-656, June 2002.

153 OMOI was formally created on August 12, 2002. The other initiatives include:

promotion of regional transmission organizations, revision of public utility filing requirements,

promulgation of standard market design rules, and promoting development of energy

infrastructure.

46

Nonetheless, documents reviewed by the Committee show that Enron did aggressively

pursue this campaign including contacts with Western governors and regulators and contacts

with the Administration to promote the nominations of Nora Brownell and Pat Wood, to discuss

the California energy crisis, and to promote open access and competition in electricity markets

during the Administration’s deliberations on energy policy.

III. CONCLUSION AND RECOMMENDATIONS 

For many years, FERC has been at the forefront of the restructuring of the wholesale

electricity and natural gas markets from ones based on FERC-determined cost-of-service rates to

markets based on competition. Throughout this process, FERC has both recognized the need,

and yet inexplicably failed, to establish a framework to effectively regulate the sale and delivery

of natural gas and electricity in the new, competitive markets it was creating. The General

Accounting Office (GAO)152 has previously told us as much. And now, Enron provides a

striking case study of many of the inadequacies of FERC’s current regulatory system –

inadequacies that apparently allowed Enron officials to engage in a variety of questionable and,

in some cases, allegedly fraudulent financial and commercial transactions at the expense of

customers, investors, and competitors. 

Although FERC’s Chairman has acknowledged some of these structural shortcomings in

both formal agency comments to GAO and in an August 12, 2002, letter to Chairman Lieberman,

the Committee staff investigation of FERC’s interactions with Enron indicates that the proposals

being made by FERC do not appear adequate to address the range of regulatory challenges that

confront FERC in this new environment – challenges exemplified by Enron Corp. as it

aggressively sought to take advantage of the flaws, gaps, and inadequacies in the regulatory

system.

One of FERC’s chief responses has been to create a new Office of Market Oversight and

Investigations (OMOI) dedicated specifically to oversee the electric and natural gas markets.153

While it is too early to conclude whether this new office will address the sorts of problems raised

by Enron’s trading practices and other types of market manipulation that occurred in the
154 As part of its effort to strengthen its enforcement activities, FERC has requested that

Congress expand its civil and criminal penalty authority under the FPA and Natural Gas Act. 

We support this request and believe that is important to give FERC additional and/or stronger

enforcement tools. We also note, however, that such tools will almost certainly be inadequate

without an overall reorientation of the Commission’s enforcement efforts.

155 Unsigned memo to Federal Energy Regulatory Commission, “SUBJECT: Tip on

Enron Corp’s crude oil price fixing,” filed by FERC April 26, 2002.

156 See Letter from Pat Wood, III, Chairman, FERC, to The Honorable Joseph H. [sic]

Lieberman re: FERC’s Compliance (RM02-11-000) with the 1990 Federal Civil Penalties

Inflation Act, As Amended, dated August 28, 2002.

47

California and Western energy markets, Committee staff seriously doubts that without more it

will transform the agency into the proactive, aggressive regulator needed to protect consumers

from the greed and subterfuge Enron’s collapse revealed.154

Simply rearranging the bureaucracy, however, is not the answer. FERC must work in

concert with other regulatory agencies; it must request and be given sufficient resources to

monitor the marketplace and carry out all of its regulatory responsibilities, and it must retool

what goes on under its own regulatory roof not only within OMOI, but throughout the agency. 

Simply put, FERC must reorient itself to a changed and increasingly complex competitive

industry – a change that FERC itself has fostered, but failed to adapt to.

Orienting the Mission Toward Proactive Oversight and Enforcement Throughout the Agency

FERC has not institutionally accepted regulation and enforcement as a primary mission,

nor has it taken sufficient steps to reassure Committee staff that it will. The new market

oversight office, even if staffed sufficiently and run well, is not designed to address problems

identified in the Committee staff investigation such as FERC’s ineffective handling of the status

of Enron’s wind farms or its QF certification process generally, or oversight of financial

transactions between regulated subsidiaries and holding companies. In other examples of

FERC’s lax attitude towards its regulatory duties, the agency received an anonymous complaint

on April 26, 2002, about pricing practices of Enron’s oil pipeline subsidiary, EOTT Partners. 

The complaint was filed into FERC’s information management system without any review by

FERC staff, even though the Commission was actively investigating other Enron trading

activities.155 Nor did FERC feel compelled to implement the Federal Civil Penalties Inflation

Act as amended by the 1996 Debt Collection Improvement Act, which required it to increase

civil penalties. It took a letter from GAO on July 16, 2002, asking about FERC’s compliance to

jog the agency to action.156 These are all regulatory functions outside the purview of the new

office. 

The establishment of the OMOI does not absolve FERC of the responsibility to

aggressively address problems throughout its jurisdiction. If FERC is to be an effective

protector, regulator, and overseer of the nation’s increasingly deregulated energy
157 Federal Energy Regulatory Commission, FY2003 Congressional Budget Request and

Annual Performance Plan, February 2002; Letter from Pat Wood, III, Chairman, FERC, to the

Honorable Joseph H. [sic] Lieberman, re: GAO Report Entitled Energy Markets: Concerted

Actions Needed by FERC to Confront Challenges that Impede Effective Oversight, dated August

19, 2002, at 2 and Attachment C.

158 E-mail from Don Chamblee, FERC, to David Berick, Senate Committee on

Governmental Affairs, dated February 25, 2002, and attached memorandum “Response to David

Berick Concerning the Need for an Additional $7 Million and 50 FTEs.”

159 The President’s FY2003 Budget Request for the Federal Energy Regulatory

Commission requests a total of 1250 FTEs for FERC.

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marketplace, it must recognize the need for a total cultural reorientation of its regulatory

approach.

Allocation of Resources

Examining FERC’s commitment to enforcement resources is one way to measure its

institutional priorities. Yet even in an area FERC claims is a high priority, it falls short. FERC

appears to have committed fewer staff and less resources to monitoring and policing the market

compared to the efforts of many other independent regulatory agencies.

In his letter to Chairman Lieberman outlining FERC’s response to the GAO report,

FERC Chairman Wood reported that the Commission had initially transferred 57 employees to

the new OMOI office, that it intended also to move attorneys involved in enforcement actions to

the new office, and that it was recruiting for additional positions. Altogether, in its FY 2003

budget request, FERC asked for 110 full-time equivalents (FTEs) for the new office and

identified a total of 250 FTEs as participating in agency-wide monitoring and enforcement

activities.157 The remaining 140 or more FTEs would be in other offices with responsibilities

involving litigation and dispute resolution, rulemakings, identification of data requirements,

mergers and other corporate applications, and financial auditing that could broadly be attributed

to market monitoring and enforcement.158

Based on the total number of FTEs requested for the entire agency for FY2003, FERC

intends to allocate only 8.8 percent of its FTEs to the OMOI. Even if we assume all 250 FTEs

are dedicated to market oversight, 20 percent of the agency’s FY2003 FTEs would be committed

to broadly defined market oversight and enforcement responsibilities.159

This resource commitment appears to be less than that of other independent regulatory

and enforcement agencies. A review by the Congressional Research Service estimates that the

CFTC, SEC and Federal Trade Commission (FTC) have committed FY2003 FTEs of roughly 28
160 “Enforcement Activities at Selected Federal Agencies,” Congressional Research

Service, September 6, 2002.

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percent, 33 percent, and 60 percent, respectively, of their total agency FTEs to enforcement.160

The same review reported that the Federal Communications Commission (FCC) allocated

approximately 14 percent of its FY2003 FTEs specifically to its Enforcement Bureau and overall

dedicated a total of approximately 31 percent of its FTEs to enforcement activities across several

bureaus. If we look at budget dollars, FERC intends to devote less than 15% of its FY2003

budget to these activities, whereas the CFTC budgets 28% and the FCC budgets 24%. 

Although these interagency comparisons are obviously not precise, they provide at least

one indicator of the priority given to enforcement and oversight activities by other federal

regulatory agencies. Given the array of problems FERC faces, it does not measure up well. 

FERC must devote more resources to market oversight and enforcement.

Coordination with Other Agencies

As the markets and activities FERC regulates become more complex, they frequently

involve the jurisdiction of more than one federal agency. FERC, however, has not made

coordination with other agencies a priority.

In the case of SEC-administered PUHCA exemptions, discussed above, that affected the

FERC-determined QF status of Enron’s wind farms, the SEC and FERC never discussed how to

coordinate even the exchange of information concerning exemption requests filed with the SEC. 

Indeed, even after Southern California Edison petitioned both the SEC and FERC about the

status of the wind farms last March and April, there was no interagency communication in

response. More fundamentally, FERC and the CFTC have yet to figure out their respective

roles in an increasingly sophisticated energy market that involves both physical energy products

and commodities futures and other derivatives – whether the issue involves oversight of online

trading platforms or some other aspect of the market. Notably, FERC does not even have

interagency information or regulatory coordination agreements with either the CFTC or the SEC,

nor with other key regulatory or financial agencies. Although interagency agreements are not a

necessity for agencies to work together, it is essential that the agencies in fact coordinate. These

types of agreements are a basic, first step for such coordination.

Subsequent to Enron’s collapse, FERC has begun to take some tentative steps toward

improved coordination with other federal agencies. In December, for example, the FERC

Chairman sent a letter to the Chairman of the CFTC asking to discuss how the two agencies

could better work together, and FERC is currently coordinating its investigation in the California

and Western markets with other federal agencies. Nonetheless, this coordination is not routine

for the agency nor fully embedded in its understanding of its mission. FERC must make

coordination with other federal regulatory agencies an institutional priority.
161 Memorandum from John M. Delaware, Deputy Executive Director and Chief

Accountant to Walter C. Ferguson, Chief of Staff, Daniel L. Larcamp, Director, Office of

Markets, Tariffs and Rates, and Kevin P. Madden, General Counsel on “Audit of the Component

Costs of Generating Electric Power,” undated, at 1 (according to FERC staff, the memo was

prepared on July 20, 2001).

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Intra-Agency Communication

Finally, this memorandum has highlighted a number of instances where important

information developed or uncovered by staff in one part of the agency has not made its way to

other parts of the agency or to the Commission. A failure to communicate or share important

information within the agency is a failure to perform the basics of the job.

One example is the FERC staff’s Enron Online report which looked at Enron’s highly

leveraged financial condition but was not given to the Commissioners even as Enron was

collapsing. Another example, with perhaps even clearer consequences, relates to the

Commission’s consideration of how to calculate refunds to consumers in the California

electricity market. At the same time the Commission was deliberating on this matter, there were

two FERC staff inquiries examining directly relevant issues. The first was the Enron Online

inquiry which looked at published price indices and ultimately concluded that they were

unreliable. The second was a series of audits conducted by the Office of the Chief Accountant

examining the cost of generating the electricity that was being sold by individual companies into

the California market; a memo was even written by the Chief Accountant to the Chief of Staff

and other senior managers at FERC stating that information contained in the audits would likely

be of value to those working on the refund matter.161 Yet, Committee staff found that none of

this information was presented to the Commission nor made available to participants in the

refund proceeding. The reliability of the Commission’s preferred refund methodology has

subsequently been brought into question; indeed, the FERC staff’s 2002 initial report on the

California markets has recommended that the refund methodology be revised because it’s based

on faulty price indices. This will likely result in further delays in getting deserved refunds to

consumers.

 Having capable staff able to ask the right questions is critical, but will not solve FERC’s

problems if the information the staff uncovers does not make its way to the Commission and

others at the agency who can make use of it. FERC must improve its internal coordination of

staff activities and communication with the Commissioners themselves. 

Conclusion

FERC’s experience with Enron demonstrates that the agency is no match for the

sophisticated, competitive, profit-driven companies it regulates. Although the creation of OMOI

is a positive development, unless it is adequately and appropriately staffed and supplemented

with more aggressive regulatory efforts throughout the Commission, it is unlikely to succeed in

transforming FERC into the effective market overseer it needs to be.
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FERC must do far more to be vigilant, to incorporate an aggressive enforcement ethic

into its everyday work, to effectively coordinate with other agencies, and to ensure that relevant

information is made available to those who need it in order for FERC to fulfill its mission and to

protect consumers and investors in the increasingly complex and continually evolving energy

markets.