S. Hrg. 107–854

ASLEEP AT THE SWITCH: FERC’S OVERSIGHT

OF ENRON CORPORATION—VOL. I

HEARING

BEFORE THE

COMMITTEE ON 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

NOVEMBER 12, 2002

Printed for the use of the Committee on Governmental Affairs

(

ASLEEP AT THE SWITCH: FERC’S OVERSIGHT OF ENRON CORPORATION—VOL. I

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WASHINGTON : 

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83–483 PDF 2003

S. Hrg. 107–854

ASLEEP AT THE SWITCH: FERC’S OVERSIGHT

OF ENRON CORPORATION—VOL. I

HEARING

BEFORE THE

COMMITTEE ON 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

NOVEMBER 12, 2002

Printed for the use of the Committee on Governmental Affairs

(

(II)

COMMITTEE ON GOVERNMENTAL AFFAIRS 

JOSEPH I. LIEBERMAN, Connecticut, Chairman 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

RICHARD J. DURBIN, Illinois 

ROBERT G. TORRICELLI, New Jersey 

MAX CLELAND, Georgia 

THOMAS R. CARPER, Delaware 

JEAN CARNAHAN, Missouri 

MARK DAYTON, Minnesota 

FRED THOMPSON, Tennessee 

TED STEVENS, Alaska 

SUSAN M. COLLINS, Maine 

GEORGE V. VOINOVICH, Ohio 

THAD COCHRAN, Mississippi 

ROBERT F. BENNETT, Utah 

JIM BUNNING, Kentucky 

PETER G. FITZGERALD, Illinois 

JOYCE A. RECHTSCHAFFEN, Staff Director and Counsel 

BETH M. GROSSMAN, Counsel 

DAVID M. BERICK, Professional Staff Member 

PATRICK J. HART, Professional Staff Member 

JASON M. YANUSSI, Professional Staff Member 

RICHARD A. HERTLING, Minority Staff Director 

GARY M. BROWN, Special Counsel to the Minority 

DARLA D. CASSELL, Chief Clerk 

(III)

C O N T E N T S 

Opening statements: Page 

Senator Lieberman ........................................................................................... 1

Senator Thompson ............................................................................................ 5

Senator Levin .................................................................................................... 49

Senator Collins ................................................................................................. 54

Prepared statement: 

Senator Bunning ............................................................................................... 73

WITNESSES 

TUESDAY, NOVEMBER 12, 2002

David M. Berick, Professional Staff Member, Committee on Governmental 

Affairs, U.S. Senate ............................................................................................. 9

Hon. Patrick H. Wood, III, Chairman, Federal Energy Regulatory Commission ........................................................................................................................ 33

Hon. Linda K. Breathitt, Member, Federal Energy Regulatory Commission ..... 35

Hon. Nora M. Brownell, Member, Federal Energy Regulatory Commission ...... 36

Hon. William L. Massey, Member, Federal Energy Regulatory Commission ..... 37

Paul L. Joskow, Ph.D., Director, Center for Energy and Environmental Policy 

Research, Massachusetts Institute of Technology (MIT) .................................. 60

Frank A. Wolak, Ph.D., Department of Economics, Stanford University ........... 62

ALPHABETICAL LIST OF WITNESSES

Berick, David M.: 

Testimony .......................................................................................................... 9

Prepared statement .......................................................................................... 74

Supplemental statement .................................................................................. 93

Breathitt, Hon. Linda K.: 

Testimony .......................................................................................................... 35

Brownell, Hon. Nora M.: 

Testimony .......................................................................................................... 36

Joskow, Paul L., Ph.D.: 

Testimony .......................................................................................................... 60

Prepared statement .......................................................................................... 146

Massey, Hon. William L.: 

Testimony .......................................................................................................... 37

Wolak, Frank A., Ph.D.: 

Testimony .......................................................................................................... 62

Prepared statement .......................................................................................... 159

Wood, Hon. Patrick H., III: 

Testimony .......................................................................................................... 33

Prepared statement with an attachment ....................................................... 130

APPENDIX 

Responses to Post-Hearing Questions from: 

The Hon. Patrick H. Wood, III ........................................................................ 177

The Hon. Linda K. Breathitt ........................................................................... 202

The Hon. Nora M. Brownell ............................................................................ 209

The Hon. William L. Massey ........................................................................... 212

(IV)

APPENDIX 

Volume I 

Materials Submitted for the Record by Chairman Lieberman 

A. Majority Staff Memorandum on Committee Staff Investigation of the Federal Energy Regulatory Commission’s Oversight of Enron Corp., November 

12, 2002 ............................................................................................................... 220

Supporting Documents (footnote numbers indicate footnote in Majority 

Staff Memorandum where document was first referenced)

1. ‘‘Enron Federal Government Affairs-Outlook & Goals for 1999’’ (Enron 

document) (footnote 11) .................................................................................... 271

2. ‘‘Overview of Key Energy Policy Issues,’’ (Enron document) (footnote 11) .. 277

3. ‘‘Government Affairs Directory’’ (Enron document) (footnote 12) ................. 285

4. ‘‘Government Affairs,’’ November 2001 (Enron document) (footnote 12) ..... 294

5. Complaint, SEC v. Kopper, August 21, 2002 (footnote 22) ........................... 303

6. Information, United States v. Kopper, August 20, 2002 (footnote 22) .......... 309

7. Complaint, SEC v. Fastow, October 2, 2002 (footnote 22) ............................ 326

8. Indictment, United States v. Fastow, October 31, 2002 (footnote 22) .......... 342

9. Minutes, Enron Finance Committee Meeting, May 5, 1997 (excerpted) 

(footnote 24) ....................................................................................................... 374

10. ‘‘Project Storm: Draft Report,’’ July 6, 2001 (prepared by PriceWaterhouseCoopers) (excerpted) (footnote 27) .......................................................... 387

11. Zond Windsystems Holding Company, FERC Docket No. QF87–365 .......... 529

a. Request for Recertification of Qualifying Facility Status for Small 

Power Production Facility, May 14, 1997 (footnote 29) ............................ 530

b. Order Granting Application for Recertification as a Qualifying Small 

Power Production Facility, June 30, 1997 (footnote 30) ........................... 549

c. Notice of Self-Recertification of Qualifying Facility Status for Small 

Power Production Facility, August 3, 2000 (footnote 32) ......................... 555

12. Sky River Partnership, FERC Docket No. QF91–59 ...................................... 564

a. Request for Recertification of Qualifying Facility Status for Small 

Power Production Facility, May 14, 1997 (footnote 29) ............................ 565

b. Order Granting Application for Recertification as a Qualifying Small 

Power Production Facility, June 30, 1997 (footnote 30) ........................... 588

c. Notice of Self-Recertification of Qualifying Facility Status for Small 

Power Production Facility, August 3, 2000 (footnote 32) ......................... 593

13. Victory Garden Phase IV Partnership, FERC Docket No. QF90–43 ............. 605

a. Request for Recertification of Qualifying Facility Status for Small 

Power Production Facility, May 14, 1997 (footnote 29) ............................ 605

b. Order Granting Application for Recertification as a Qualifying Small 

Power Production Facility, June 30, 1997 (footnote 30) ........................... 626

c. Notice of Self-Recertification of Qualifying Facility Status for Small 

Power Production Facility, August 3, 2000 (footnote 32) ......................... 631

Page

V

14. Cabazon Power Partners LLC (Zond Cabazon Development Corp.), FERC 

Docket No. QF95–186 ....................................................................................... 641

a. Notice of Self-Recertification of Qualifying Facility Status for Small 

Power Production Facility, November 30, 1998 (footnote 46) .................. 642

b. Notice of Self-Recertification of Qualifying Facility Status for Small 

Power Production Facility, January 7, 1999 (footnote 48) ....................... 649

c. Notice of Self-Recertification of Qualifying Facility Status for Small 

Power Production Facility, January 8, 1999 (footnote 47) ....................... 656

d. Notice of Self-Recertification of Qualifying Facility Status for Small 

Power Production Facility, January 24, 2001 (footnote 32) ..................... 664

15. Notice of Self-Recertification of Qualifying Facility Status for Small 

Power Production Facility, Victory Garden Power Partners I LLC, FERC 

Docket No. QF99–92–001, January 24, 2001 (footnote 32) ........................... 672

16. Enron Corporation Form U–1, Application under the Public Utility Holding Company Act of 1935, April 14, 2000 (footnote 35) ................................. 690

17. Letter from Joanne C. Rutkowski (LeBoeuf, Lamb, Greene & MacRae) 

to Catherine A. Fisher (SEC), April 13, 2000 (footnote 39) .......................... 699

18. ‘‘Alternative PUHCA Exemption for QF Relief, SEC Staff Presentation,’’ 

July 27, 2001 (Enron document) (footnote 39) ............................................... 702

19. Order Scheduling Hearing, Applications of Enron Corp. for Exemption 

Under the Public Utility Holding Company Act of 1935, SEC Administrative Proceeding File No. 3–10909. October 7, 2002 (footnote 40) ................. 715

20. a. Motion to Intervene and Opposition of Southern California Edison 

Company, Enron Corp., SEC File No. 070–09661, March 26, 2002 

(footnote 42) .................................................................................................. 721

b. 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 (footnote 42) .................................. 737

21. Letter from Magalie R. Salas (FERC) to James B. Woodruff (Southern 

California Edison Company), May 28, 2002 (footnote 43) ............................. 773

22. Order Initiating Investigation and Hearing, Investigation of Certain 

Enron-Affiliated QF’s, FERC Docket No. EL03–17–000, October 24, 2002 

(footnote 44) ....................................................................................................... 774

23. E-mail from Susan Kappelman (Southern California Edison Co.) to David 

Berick (Professional Staff Member, Committee on Governmental Affairs), 

September 6, 2002 (footnote 45) ...................................................................... 782

24. E-mail from Karen Berky (The Nature Conservancy) to David Berick 

(Professional Staff Member, Committee on Governmental Affairs), September 30, 2002 (footnote 49) .......................................................................... 784

25. Assignment Agreement between Zond Cabazon Development Corp. and 

The Nature Conservancy, November 18, 1998 (footnote 50) ......................... 785

26. Order Denying Applications for Recertification as Qualifying Facilities, 

Coso Energy Developers, et al., December 16, 1998 (footnote 52) ................. 790

27. Letter to Laurel Mayer (The Nature Conservancy) from John Lamb 

(Cabazon Power Partners LLC), January 11, 1999 (footnote 53) ................. 807

28. ‘‘Report on EnronOnline,’’ August 16, 2001 (FERC Staff Report) (footnote 

54) ...................................................................................................................... 808

29. Letter from Joseph I. Lieberman to the Honorable Pat Wood, III, May 

14, 2002 (footnote 55) ....................................................................................... 829

30. Letter from Pat Wood, III to the Honorable Joseph I. Lieberman, May 

28, 2002 (footnote 55) ....................................................................................... 836

31. ‘‘Credit Quality for U.S. Utilities Continues Negative Trend in Second 

Quarter,’’ Standard & Poor’s, July 12, 2002 (footnote 56) ............................. 844

Page

VI

Volume II 

32. ‘‘Initial Report on Company-Specific 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,’’ (FERC Staff Report), August 2002 (footnote 

58) ...................................................................................................................... 1

33. a. ‘‘Williams Traders Gave False Data,’’ Wall Street Journal, October 

28, 2002 (footnote 64) ................................................................................. 124

b. ‘‘AEP Dismisses Five for Providing Inaccurate Market Data for Indexes,’’ AEP Press Release, October 9, 2002 (footnote 64) ..................... 125

c. ‘‘Dynegy Dismisses Six Employees, Will Discipline Seven Others for 

Violations of Company Policies,’’ Dynegy Press Release, October 18, 

2002 (footnote 64) ....................................................................................... 126

d. ‘‘Williams Discloses Natural Gas Trade Reporting Inaccuracies,’’ Williams Press Release, October 25, 2002 (footnote 64) ............................... 127

34. Letter from Pat Wood, III to the Honorable Joseph I. Lieberman, March 

4, 2002 (footnote 66) ......................................................................................... 128

35. Letter from Pat Wood, III to the Honorable Joseph I. Lieberman, April 

12, 2002 (footnote 66) ....................................................................................... 132

36. Order Establishing Evidentiary Hearing Procedures, Granting Rehearing 

in Part, and Denying Rehearing in Part, San Diego Gas & Electric Co. 

v. Sellers of Energy and Ancillary Service, July 25, 2001 (footnote 67) ....... 137

37. Internal FERC memorandum on ‘‘Audit of the Component Costs of Generating Electric Power’’ (footnote 68) .................................................................. 185

38. ‘‘Electronic Platforms and Energy Trading, Talking Points addressing 

Common Misperceptions,’’ (Enron document) (footnote 72) .......................... 188

39. ‘‘Update on Federal Government Affairs Energy Crisis Campaign,’’ July 

27, 2001 (Enron document) (footnote 74) ........................................................ 197

40. ‘‘Enron Secures Commitments for Additional $1 Billion in Financing,’’ 

Enron Corp. Press Release, November 1, 2001 (footnote 81) ........................ 198

41. In Re Investigation of Certain Financial Data, FERC Docket No. IN02–

6–000 .................................................................................................................. 199

a. Order to Respond, August 1, 2002 (footnote 84) ....................................... 199

b. Order Approving Stipulation and Consent Agreement, August 8, 2002 

(footnote 85) ................................................................................................. 204

c. Response of Transwestern Pipeline Company, September 3, 2002 (footnote 86) ......................................................................................................... 211

42. ‘‘Structuring Summary, Project Bluehorseshoe,’’ September 17, 2002 (prepared by JP Morgan Global Syndicated Finance) (footnote 87) .................... 240

43. ‘‘Regulation of Cash Management Practices,’’ Federal Register, August 

7, 2002 (Notice of Proposed Rulemaking) (footnote 88) ................................. 253

44. ‘‘Account-146 Balances of Enron Owned Companies,’’ (table prepared by 

FERC staff) (footnote 89) ................................................................................. 260

45. 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, May 22, 2002 (footnote 94) ............ 264

46. Memorandum from John Mass (LeBoeuf, Lamb, Greene & MacRae, LLP), 

August 2, 1999 (footnote 96) ............................................................................ 287

47. Transcripts of Portland General Electric Scheduling Calls, April 15, 2000 

(footnote 97) ....................................................................................................... 291

48. Transcript of Scheduler Telephone Conversation, April 6, 2000 (footnote 

98) ...................................................................................................................... 333

Page

VII

49. Orders Initiating Investigation, and Establishing Hearing Procedures and 

Refund Effective Date, Portland General Electric Co., et al., FERC Docket 

No. EL02–114–000, and Avista Corporation, et al., FERC Docket No. 

EL02–115–000, August 13, 2002 (footnote 99) ............................................... 374

50. a. Letter from John M. Delaware (FERC) to Transwestern Pipeline Company, October 11, 2000 (footnote 100) ........................................................ 384

b. Letter from John M. Delaware (FERC) to Northern Natural Gas Company, October 11, 2000 (footnote 100) ....................................................... 386

51. ‘‘Preliminary Report on Operation of the Ancillary Services Markets of 

the California Independent System Operator (ISO),’’ August 19, 1998 

(prepared by the Market Surveillance Committee of California ISO) (footnote 101) ............................................................................................................ 390

52. ‘‘Report on Market Issues in the California Power Exchange Energy Markets,’’ August 17, 1998 (prepared by the Market Monitoring Committee 

of the California Power Exchange) (footnote 101) .......................................... 500

53. Market Order Proposing Remedies for California Wholesale Electric Markets, San Diego Gas & Electric Co. v. Sellers of Energy and Ancillary 

Services, November 1, 2000 (footnote 102) ..................................................... 530

54. ‘‘Staff Report to the Federal Energy Regulatory Commission on Western 

Markets and the Causes of the Summer 2000 Price Abnormalities,’’ November 1, 2000 (footnote 103) .......................................................................... 606

55. United States v. Timothy N. Belden ................................................................ 729

a. Plea Agreement, October 17, 2002 (footnote 106) ..................................... 729

b. Information, October 9, 2002 (footnote106) ............................................... 737

56. ‘‘Status of California Electricity Markets,’’ August 3, 2000 (presentation 

to FERC by Southern California Edison Co.) (footnote 108) ......................... 743

57. Memorandum from Christian Yoder and Stephen Hall (Stoel Rives LLP) 

to Richard Sanders, December 6, 2000 (footnote 109) ................................... 761

58. ‘‘Commission Addresses California Electricity Markets, Orders Investigation,’’ FERC Press Release, August 23, 2000 (footnote 113) ......................... 769

59. Order Initiating Hearing Proceedings to Investigate Justness and Reasonableness of Rates 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,’’ San Diego Gas & Electric Co. v. Sellers of Energy and Ancillary 

Services, August 23, 2000 (footnote 113) ........................................................ 771

60. ‘‘Report on California Energy Market Issues and Performance: May-June, 

2000,’’ August 10, 2000 (prepared by Department of Market Analysis, 

California Independent System Operator) (footnote 116) ............................. 791

61. Declaration of Eric W. Hildebrandt, San Diego Gas & Electric Co. v. 

All Sellers of Ancillary Services, October 20, 2000 (footnote 117) ................ 851

62. ‘‘California Electricity Markets: Issues for Examination,’’ August 17, 2000 

(presentation by Dr. Gary Stern, Southern California Edison Co.) (footnote 120) ............................................................................................................ 875

Volume III 

63. Order Directing Remedies for California Wholesale Electric Markets, San 

Diego Gas & Electric Co. v. Sellers of Energy and Ancillary Services,

December 15, 2000 (footnote 123) ................................................................... 1

64. Order Directing Staff Investigation, Fact-Finding Investigation of Potential Manipulation of Electric and Natural Gas Prices, February 13, 2002 

(footnote 124) ..................................................................................................... 100

65. Telephonic Deposition of Christian Good Yoder, Nevada Power Co. et 

al. v. Duke Energy Trading and Marketing et al., June 18, 2002 (footnote 

125) .................................................................................................................... 111

Page

VIII

66. Deposition of Stephen C. Hall, Nevada Power Co. et al. v. Duke Energy 

Trading and Marketing et al., July 11, 2002 (footnote 126) ......................... 197

67. Invoice from Stoel Rives LLP to Christian Yoder, Enron Capital & Trade 

Resources Corp., November 27, 2000 (footnote 126) ...................................... 305

68. E-mail from Mary Hain to James D. Steffes, et al., August 29, 2000 

(footnote 127) (Enron document) ..................................................................... 312

69. ‘‘Enron Hosts Annual Analyst Conference; Provides Business Overview 

and Goals for 2000,’’ Enron Corp. Press Release, January 20, 2000 (footnote 132) ............................................................................................................ 435

70. ‘‘Enron Announces Increased Earnings Target for 2001 to $1.70-$175 

per share,’’ Enron Corp. Press Release, January 25, 2001 (footnote 132) ... 437

71. Letter from Kevin F. Cadden (FERC) to David Berick (Professional Staff 

Member, Committee on Governmental Affairs), June 19, 2002 (footnote 

133) .................................................................................................................... 438

72. ‘‘What To Do About Western Wholesale Markets?’’ Enron Corp., August 

25, 2000 (presentation by Tim Belden, Enron North America) (footnote 

135) .................................................................................................................... 455

73. Letter from James J. Hoecker (Swidler Berlin Shereff Friedman, LLP) 

to Susan J. Court (FERC), March 12, 2002 (footnote 136) ............................ 507

74. ‘‘Progress Toward Deal to Cut Power Cost,’’ San Francisco Chronicle,

January 10, 2001 (footnote 136) ...................................................................... 510

75. ‘‘Advancing Electric Competition in the Wake of California,’’ February 

5, 2001 (Enron document) (footnote 138) ........................................................ 513

76. E-mail from Ed Gillespie to Andrew D. Lundquist, April 3, 2001, 3:47 

pm (footnote 139) .............................................................................................. 533

77. E-mail from Ed Gillespie to Andrew D. Lundquist, April 3, 2001, 9:48 

am (footnote 139) .............................................................................................. 534

78. ‘‘Advancing Electric Competition in the Wake of California: Enron’s Campaign to Affect Policy and Public Opinion,’’ May 4, 2001 (Enron document) 

(footnote 141) ..................................................................................................... 535

79. Letter from Alberto R. Gonzales, Counsel to the President, to the Honorable Joseph I. Lieberman, May 22, 2002 (footnote 142) ................................ 551

80. Letter from Kenneth L. Lay to Clay Johnson, January 8, 2001 (footnote 

142) .................................................................................................................... 561

81. Memorandum from Linda Robertson to Ken Lay, February 12, 2001 (footnote 144) ............................................................................................................ 564

82. Memoranda from Linda Robertson and Tom Briggs to Ken Lay re: Meeting with Vice President Cheney, April 13, 2001 (footnote 146) .................... 566

83. Letter from John Duncan (Department of the Treasury) to Senator Joseph I. Lieberman, April 22, 2002 (footnote 147) ........................................... 627

84. Order on Rehearing of Monitoring and Mitigation Plan for the California 

Wholesale Electric Markets, Establishing West-Wide Mitigation, and Establishing Settlement Conference, San Diego Gas & Electric Co. v. Sellers 

of Energy and Ancillary Service, June 19, 2001 (footnote 150) .................... 630

85. ‘‘Enron Reiterates Confidence In Operations and Earnings Outlook,’’ 

Enron Corp. Press Release, June 19, 2001 (footnote 151) ............................. 688

86. ‘‘Energy Markets: Concerted Actions Needed by FERC to Confront Challenges That Impede Effective Oversight,’’ General Accounting Office Report, (GAO–02–656) June 2002 (footnote 152) ............................................... 689

87. ‘‘Subject: Tip on Enron Corp’s crude oil price fixing,’’ April 26, 2002 

(unsigned memorandum received by FERC) (footnote 155) .......................... 790

88. Letter from Pat Wood, III, to the Honorable Joseph Lieberman, August 

28, 2002 (footnote 156) ..................................................................................... 791

89. FY 2003 Congressional Budget Request and Annual Performance Plan, 

Federal Energy Regulatory Commission, February 2002 (excerpted) (footnote 157) ............................................................................................................ 819

Page

IX

90. Letter from Pat Wood, III, to the Honorable Joseph Lieberman (footnote 

157) .................................................................................................................... 833

91. E-mail from Don Chamblee (FERC) to David Berick (Professional Staff 

Member, Committee on Governmental Affairs), February 25, 2002 (footnote 158) ............................................................................................................ 862

92. ‘‘Enforcement Activities at Selected Federal Agencies,’’ September 6, 2002 

(Congressional Research Service Memorandum) (footnote 160) ................... 865

Volume IV 

B. Reported Contacts Between Current and Former FERC Employees and 

Enron Corp. ........................................................................................................ 1

1. Letter from Chairman Joseph I. Lieberman and Ranking Minority Member Fred Thompson, U.S. Senate Committee on Governmental Affairs 

to Patrick H. Wood III, Chairman, FERC, February 15, 2002 ..................... 1

2. FERC’s Response to Question 3 of the Committee’s February 15, 2002 

letter, March 4, 2002 (as revised April 8, 2002) ............................................. 6

3. FERC’s First Supplemental Response to Question 3 of the Committee’s 

February 15, 2002 letter, March 21, 2002 (information as to current 

employees revised April 8, 2002) ..................................................................... 557

4. FERC’s Second Supplemental Response to Question 3 of the Committee’s 

February 15, 2002 letter, April 24, 2002 ........................................................ 640

5. FERC’s Third Supplemental Response to Question 3 of the Committee’s 

February 15, 2002 letter, May 8, 2002 ........................................................... 677

Materials Submitted for the Record by Ranking Member Thompson

C. Minority Views: FERC and its Oversight of Enron Corp. (with attachment) ................................................................................................................... 682

D. Documents:

1. Correspondence between Chairman Wood and Senators Lieberman and 

Feinstein concerning ethics violations of FERC Commissions (with GAO 

report attached) ................................................................................................ 690

2. Commissioner Breathitt’s response to invitation by the Minority staff 

of the Committee to supplement her reported contacts with Enron ............ 698

3. Chart of contacts between Commissioner Breathitt and Charles Bone ....... 699

4. Timeline of contacts between Commissioner Breathitt and Charles Bone .. 702

5. Typed up notes of Charles Bone regarding an August 23, 2000 meeting 

in Nashville with Commissioner Breathitt ..................................................... 708

6. Handwritten note by Charles Bone regarding conversation with Commissioner Breathitt ................................................................................................. 709

7. Charles Bone billing records from Wyatt, Tarrant & Combs, LLP (WTC) .. 710

8. Bone memo, dated February 6, 2002, detailing money transactions between the WTC and Enron .............................................................................. 734

9. WTC’s response, dated February 15, 2002, to Bone memo ........................... 777

10. Facsimile communication from Commissioner Breathitt to Charles Bone 

concerning transcript of Senator Peace’s comment about Governor 

Breathitt ............................................................................................................ 779

11. Facsimile communication from Commissioner Breathitt to Charles Bone 

regarding Governor Patton’s recommendation letter, dated August 23, 

2000, to President Clinton for Commissioner Breathitt to become Chairman of FERC ..................................................................................................... 781

12. Facsimile communication from Commissioner Breathitt to Charles Bone, 

dated August 29, 2000, regarding a news article predicting who will 

be the next Chairman of FERC ....................................................................... 783

(1)

ASLEEP AT THE SWITCH: FERC’S OVERSIGHT 

OF ENRON CORPORATION—VOL. I 

TUESDAY, NOVEMBER 12, 2002

U.S. SENATE, 

COMMITTEE ON GOVERNMENTAL AFFAIRS, 

Washington, DC. 

The Committee met, pursuant to notice, at 10:08 a.m., in room 

SD–342, Dirksen Senate Office Building, Hon. Joseph I. Lieberman, Chairman of the Committee, presiding. 

Present: Senators Lieberman, Levin, Thompson, and Collins. 

OPENING STATEMENT OF CHAIRMAN LIEBERMAN 

Chairman LIEBERMAN. Good morning and welcome. Today, we 

continue a series of Senate Governmental Affairs Committee hearings on what Federal and private sector watchdogs did and did not 

do to expose and prevent the unethical and illegal behavior of the 

Enron Corporation in the months and years leading to the company’s collapse. 

Our goal from the beginning of this investigation last January 

has been to determine whether Federal agencies and others responsible for safeguarding our markets did all they could to prevent 

this economic catastrophe so that we can now act to prevent another such catastrophe from ever occurring again. 

Today, we are going to focus on the role of an agency that had 

direct regulatory responsibility over Enron’s energy business and 

that is the Federal Energy Regulatory Commission, known as 

FERC. The Majority staff of this Committee has completed an exhaustive investigation into FERC’s role, and in my judgment, what 

they found is an embarrassing and unacceptable failure of the Federal Government to protect millions of consumers, stockholders, 

and workers. Again and again, FERC failed to ask critical questions about Enron’s business practices. In the few cases when they 

did ask pertinent questions, the people at FERC settled for incomplete or incorrect answers. 

The Committee’s investigation has found the most egregious examples of lax FERC oversight in four areas: One, the company’s 

treatment of certain wind farms and the special rate status for 

them, which Enron obtained and preserved; two, the operation of 

Enron Online, which was Enron’s electronic trading platform, 

which it now appears Enron leveraged unfairly to its advantage 

against customers in the marketplace; three, the handling of transactions between Enron and its affiliated companies; and four, 

Enron’s actions during the West Coast energy crisis last year, 

2

which raised electricity prices in California, Oregon, Washington, 

and other States by literally billions of dollars. 

In these four cases, FERC’s oversight ranged from naive, at best, 

to negligent, at worst, and they lead me to offer the following five 

observations. 

First, the agency more often than not trusted Enron’s assertions 

rather than questioning them. Indeed, in some cases, FERC failed 

to pursue questions even after Enron had presented specific evidence of potential abuses in documents Enron submitted directly to 

the agency. For example, when Enron applied to FERC for special 

permission to charge customers higher energy rates through a 

number of wind farms that it had acquired, and it in its application 

included many details that constituted red flags, or should have, at 

FERC, the agency failed to subject that application to anything but 

a superficial review. 

Under the special rate arrangement, Enron itself was not permitted to own wind farms, but in its application, Enron told FERC 

that it was providing the financing to the new owner of the 

projects, that Enron would retain a right to repurchase the 

projects, and that Enron would indemnify the new owner for tax 

liabilities incurred when it was repurchased. In other words, FERC 

was told many things that should have made Enron’s contention 

that it did not own the wind farms highly suspect. 

Yet, despite seeing all this information which was included in 

Enron’s application, FERC approved the ownership arrangement 

and the special rate status was granted to Enron, and that meant 

that Enron was able to charge customers higher energy rates than 

they were allowed to otherwise under law. 

Then, when Enron sought to have the special rate status extended, it submitted a self-recertification, which, like all such selfcertifications that FERC receives, was never looked at or reviewed. 

The folks at FERC simply filed the application away and allowed 

Enron thereby to claim the special status for an additional period 

of time. Only after this Committee’s investigation raised questions 

about FERC’s handlings of these transactions did FERC open an 

investigation into Enron’s original claims. 

Congress obviously did not create and empower and fund the 

Federal Energy Regulatory Commission so that it could be a filing 

cabinet. We created it to protect consumers, to ensure just and reasonable energy rates, and to level the playing field for all businesses and utilities. Those purposes are, of course, more crucial 

than ever in the newly deregulated energy markets. 

Second, the agency failed to anticipate or prepare for changes occurring in the energy markets, which are among the most volatile 

and rapidly evolving sectors of our economy. Americans depend on 

our regulatory agencies to keep the economy fair and efficient, to 

anticipate major developments, and to stay on top of where those 

markets they monitor are headed. 

Despite the fact that Enron Online and other electronic trading 

platforms had grown into a powerful force by the year 2000 and 

were expected to dominate energy trading, FERC failed to even 

complete a basic study of whether regulating those platforms was 

its job or the job of another governmental agency, in this case, 

probably the Commodity Futures Trading Commission. Without 

3

even that critical step completed, FERC and the rest of the Federal 

Government could not begin to develop any long-term public policy 

strategy about how to keep these emerging market tools fair and 

efficient. 

Third, FERC reacted belatedly to many serious offenses, letting 

possible market abuses go uncorrected and unchallenged for many 

months. Too often, in place of effective oversight, the agency offered 

timid hindsight. For instance, in November 2000, a FERC staff investigation into the causes of the California energy crisis concluded 

that power sellers had the potential to manipulate the power market. I’m tempted to add to my prepared statement what my teenage daughter would say here, duh, right? 

After coming to that obvious conclusion, which cried out for immediate follow-up, FERC took over a year to launch an investigation into the market behavior of individual companies during the 

California energy crisis, and that was only after Enron actually collapsed in early December of last year. Energy consumers on the 

West Coast should have had the Federal Government on their side 

during the energy crisis in 2000, not 6 months or a year later. 

And the companies who may have tried to manipulate the market, or, in fact, any who may be thinking about doing it in the future, need to understand that FERC will be a sophisticated and 

sharp watchdog, not a listless and lackadaisical bystander. 

Of course, this is made all the more clear and compelling by the 

recent plea of guilty by the head of trading for the Western markets for Enron in regard to—and we’ll get into this in further detail—in regard to manipulation of the markets that he, as a significant employee of Enron’s, was involved in. 

Remember, FERC is the regulatory agency that led the movement toward widespread deregulation of the energy business. Of 

course, there was plenty of support for the deregulation in the private sector. But FERC was a supporter, and, therefore, it makes 

it particularly ironic, and I would say irresponsible, that FERC exhibited little or no vigilance to ensure that participants obeyed at 

least minimal rules of fair play in the deregulated marketplace. 

FERC often seemed to view itself not as a regulator but as a 

facilitator, not as a market cop but as a market cheerleader, and 

that left consumers with nothing to cheer about. 

When market players are given unprecedented latitude in a previously regulated market, there must be some effective checks and 

balances. No matter how passionately we believe in competition 

and capitalism as the best system for economic growth and opportunity, the invisible hand cannot do it all. We have seen this over 

our history, over and over again. The fact is that markets inherently have no conscience. To ensure the integrity of our markets, 

the invisible hand needs to be assisted by the fair hand of government oversight in the public interest and private sector self-regulation. 

Fourth, FERC made no effort to address the gaps, flaws, and inadequacies in the regulatory structure that allowed Enron’s most 

questionable business practices to go without scrutiny. For example, Enron had applied to the SEC requesting a special exception 

to the Public Utility Holding Company Act. Under FERC’s rules, 

simply requesting such an exception allowed Enron to repurchase 

4

a number of its wind farms while retaining that special rate status 

I referred to earlier, and apparently allowed it to earn tens of millions of dollars above what it would otherwise have earned from 

those projects. 

For more than 21⁄2 years, the SEC sat on the application without 

reviewing it. Did anyone at FERC pick up the phone and ask the 

SEC about the status of those applications? Did these two lead regulatory agencies, FERC and the SEC, ever talk to each other about 

these applications? To the best of our staff’s ability to find an answer to those questions, the answer is a disquieting one, which is 

no. 

It’s frustrating enough when major market abuses escape government regulation because perpetrators are crafty enough to fly 

under the government’s radar, but it is really infuriating when 

clear signals are right there on the screen and the people manning 

the stations do not see them or keep their eyes closed. FERC and 

the SEC had the opportunity, indeed the responsibility, to close 

that regulatory gap and did not. 

Fifth, FERC all too often relied on shortcuts and cursory analysis 

of the markets to come to overly optimistic conclusions about the 

potential effects of market manipulation. An internal FERC staff 

report into the Enron Online trading platform which was released 

in August 2001 asked whether the possibility of financial problems 

at Enron could threaten the energy markets. That was August 

2001. Its answer, no, was based on what, by hindsight, certainly 

looks like incomplete and unrealistic assessments. 

First, FERC looked at the entire North American energy market 

rather than the individual regional markets, including, of course, 

most notably, the Western markets. And second, the report concluded that the chance of Enron failing financially was, in any 

event, remote. And though the same report recognized the competitive advantage Enron Online gave to Enron’s own trading units, it 

ultimately concluded that these advantages presented no cause for 

concern. In fact, to their credit, FERC’s staff itself later found that 

conclusion to be wrong. 

So FERC’s analysis here is really stunning, because Enron was 

a major player in our energy markets. By the time of its collapse, 

Enron had grown to become the seventh largest company in the 

Nation and the largest electricity and natural gas trading company, 

and that brings me finally to the larger policy question that is 

raised by the Enron scandal and by the staff investigation that will 

be presented this morning. 

Can deregulated markets be left alone to police themselves, or 

does government need to be vigilant in monitoring behavior in 

those markets? And when we use ‘‘deregulation’’ here, it may be a 

confusing term. What happened when we so-called deregulated the 

energy markets is that we went from a system where FERC, for 

instance, was setting the wholesale prices of energy to a system 

where we allowed the market, and presumably competition, to do 

that. But isn’t there still a need for a cop on the beat to make sure 

that those who are participating in the market competition are 

playing fairly and that there really is competition and transparency 

and honesty that will result in the best prices for consumers? 

5

For me, the results of this investigation answers that question. 

Government must vigorously and energetically enforce the law to 

protect consumers and investors from abuse, particularly when 

markets, as the term is meant here, are deregulated. 

Remember, it was James Madison who said that if men were angels—I should update that and say, if people were angels—no government would be necessary. Unfortunately, we see once again in 

this sad story that people are not always angels and that is why 

we continue to need government to protect the integrity of our markets and our economy. 

Obviously, the American economy cannot function without energy, and our Federal regulators on whom the people depend for 

protection cannot protect those markets if they systematically fail 

to exercise the powers that we give them. 

I hope that today’s hearing helps to expose and correct the shortcomings in FERC’s administration that we see here in this case so 

that American families and businesses can get the fair, transparent, and efficient energy markets they need and deserve. 

Senator Thompson, it is good to be back with you. I don’t know 

how to say it, but I am going to miss you. Not only are you going 

on to new roles in life, I will be going on to a new role in this Committee. But it is a pleasure to have you working with us today, together, as we have, whether each of us was Chair or Ranking 

Member, in pursuit of the authority that this Committee has and 

I look forward to your statement. 

OPENING STATEMENT OF SENATOR THOMPSON 

Senator THOMPSON. Thank you, Mr. Chairman. I appreciate that. 

I imagine that we are both a bit nostalgic this morning, but for different reasons. 

Chairman LIEBERMAN. Yes. [Laughter.] 

Senator THOMPSON. But I appreciate your comments and I have 

enjoyed very much our working together. I could not imagine, given 

all of the pressures of this place, being able to work with a Ranking 

Member or Chairman of the opposing party in any better fashion 

than you and I have worked together. 

Chairman LIEBERMAN. Thank you. 

Senator THOMPSON. I will never forget the campaign finance investigation when I was Chairman, when bipartisan support was 

very difficult to come by on occasion, and you always did what you 

thought was right, contrary to some of the wishes of Members of 

your own party. I will never forget that, and I have tried to remember that as you have been Chairman and taken some detours and 

things that I personally would not have taken, but I have always 

respected you. We have done a lot of good work with regard to this 

particular area that we are dealing with today, too. 

I cannot help but, before I get into the remarks I had intended 

to give, sitting here listening to you, to think back over the last 

several years and how what you were saying was relevant to what 

we have been hearing for a long period of time. 

When I was going out as Chairman about a year-and-a-half ago, 

I submitted a report called ‘‘Government at the Brink,’’ and it 

pointed out what we had been hearing. It was a compilation, really, 

of GAO reports and IG reports and Committee hearings and all, 

6

and basically, the conclusion was that we have got serious problems with regard to our government, our government departments, 

our government agencies, the way we do things. It is rife with 

waste and abuse and things are not operating the way they should 

and it is costing us a lot of money. Now, we know it is costing us 

in terms of our national security. 

So, unfortunately, you can pick your agency. We can talk about 

the details of FERC and what its responsibilities are and how they 

have performed, but it is one of any number—and it is a regulatory 

agency, somewhat different from some of the others we have had—

but we have had department after department, agency after agency, appear on the high-risk list every year. We are not doing much 

better than we did several years ago. 

We are striving to get some accountability into the system. We 

are trying to get a performance-based system, really, so that we 

can have more accountability. I don’t think it will do any good until 

we tie it to the budget process and there are some consequences 

to poor performance, but you can single out almost any agency. I 

think it has tremendous ramifications for homeland security. I 

think that it points out the need for the flexibility that the administration must have in reorganizing so many departments. We are 

talking about one little department here that a lot of people considered kind of a backwater until all of these problems hit. 

But the idea of getting the right people in the right places and 

being able to get rid of the wrong people in the wrong places and 

more funding and more accountability and things of that nature 

are all lessons that we need to learn, not only with regard to 

FERC, but with regard to our national defense and homeland security. So it is an important subject, but it is the very tip of a very 

big iceberg. 

It has been approximately a year since there were revealed financial matters that ultimately led to the collapse of Enron, then 

our country’s seventh-largest company. Much has happened in that 

year, particularly following Enron’s bankruptcy, the largest at the 

time until it was eclipsed by WorldCom’s. 

I am proud to say that much has happened and much has been 

revealed as a result of the hearings and investigations by our Committee, as well as our Permanent Subcommittee on Investigations. 

A review of recent criminal charges against Enron’s CFO Andrew 

Fastow, for example, reads as if it was written in large part from 

the results of our investigations. Much of our investigation has also 

been conducted on a very bipartisan basis, a fact of which I am also 

quite proud and a testament to what can be done when we work 

together. 

Our Committee and the Permanent Subcommittee on Investigations have investigated the roles of various actors in the Enron 

saga, the Board of Directors, auditors, securities analysts, credit 

rating agencies, and financial institutions, and we discovered that 

many of these actors with important roles in monitoring Enron or 

its financial condition generally adopted a ‘‘see no evil’’ approach 

that allowed Enron to present to the public a clean bill of financial 

health up until the company’s collapse. 

We are seeing positive movement addressing these issues raised 

in our investigations: Accounting oversight and other reforms manVerDate 0ct 09 2002 14:53 Jun 09, 2003 Jkt 083483 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 C:\DOCS\83483.TXT SAFFAIRS PsN: PHOGAN
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dated by Sarbanes-Oxley; tougher new SEC regulations and movement toward lessening conflicts of interest in the investment banking community; and tougher listing standards at security exchanges. Recently, we issued a bipartisan report with respect to the 

SEC, rating agencies, and security analysts that noted a number 

of deficiencies and areas of needed reform. We look forward to a response to that report, which brings us to the Federal Energy Regulatory Commission, FERC, and our hearings today. 

Sometimes, you have to play the cards that are handed you, and 

I have been given a hand today that I prefer not to have been my 

last hand on this Committee. But as I look over the report that we 

are considering today, I am concerned about it. 

Frankly, I think FERC fits a different category than some of 

these other regulatory agencies. I always thought FERC’s primary 

responsibility was to try to achieve just and reasonable rates. It 

doesn’t seem to me like they have the responsibility that a lot of 

these other entities have, and if the SEC and the Board of Directors and people who sit on auditing committees and security analysts and all these didn’t catch a lot of these things, I am wondering what kind of responsibility we can really fairly place on 

FERC in these areas. 

And as I look over the areas of concern, the wind farm transactions basically occurred between 1997 and 2000, as I understand 

it. With regard to the Enron Online issue, that ceased operation in 

December 2001. With regard to the affiliate transactions issue, 

FERC already has rules in place there and apparently responded 

pretty promptly to those issues. 

With regard to California trading, obviously, that has been very 

controversial and there is probably enough blame to go around 

there, but everyone has to acknowledge FERC has limited authority with regard to that. It shares authority with regard to that and 

California would not allow long-term contracts, and everyone acknowledges that the State had a poor regulatory system. 

So looking at all of that, it makes me wonder what the proper 

role is. Obviously, there are some shortcomings there that need to 

be addressed, but it seems to me somewhat of a different category 

than some of these other agencies that have more direct responsibility with regard to the investigative efforts and ferreting these 

things out part of things. They could stand improvement. 

We can talk about improvement, and that is another irony of it. 

It seems to me like this ought to be a good news hearing. From at 

least one of the experts that the Majority has called, apparently, 

some very good things have happened under the FERC watch of 

this administration. The things that are of most concern with regard to FERC happened while on the watch of appointees of the 

prior administration. 

I am not the one to partisanize the effort, but the fact of the matter is, up until now, when you think about FERC, most people’s 

minds immediately jump to the suggestions and accusations concerning one contact between Mr. Lay of Enron and a former member, a former chairman appointed by the Bush Administration to 

FERC. There was a letter by this Committee to Mr. Wood questioning the ethical standards of FERC. There was a GAO investigation with regard to that contact, a contact that, as I understand, 

8

Mr. He ́bert made, or Mr. Lay and Mr. He ́bert had with counsel, 

general counsel sitting in the room with Mr. He ́bert on his side of 

the telephone conversation, but we had a GAO investigation about 

that. 

And now, when I read the staff report that we are considering 

today, I see that we still have a section here, ‘‘Enron’s Effort to Influence the FERC.’’ Unfortunately, it is only with regard to Enron’s 

effort to influence the Bush appointees at FERC. It refers to documents that have been obtained and refers to a PR and lobbying effort campaign of Enron, which undoubtedly is true. It refers to a 

Republican lobbying firm that had been hired. It refers to efforts 

or support from Mr. Wood and Ms. Brownell, which, of course, supplies some modest taint to them. And then it concludes, it is difficult to evaluate Enron’s far-reaching efforts on decisions made at 

FERC and leaves that hanging out there. 

But unfortunately, there is no reference to numerous contacts, 

several during the height of the California contracts, between 

Enron lobbyists and a current FERC commissioner who was appointed by the prior administration. 

So I think to the extent that we can consider FERC, I think if 

you wanted to really get to the heart of decisions that were made 

that affected some of these problems, you would have more of the 

prior commissioners here to talk about it, quite frankly. Then we 

would be giving credit due to what is happening there. But if we 

want to really consider what we can do to make FERC stronger 

and better, I think that part of it is fine. 

But when you consider the history of all this and the continuing 

reference in the report, about five pages’ worth, of the implications 

of impropriety with regard to primarily one contact, I see, then we 

must put this in perspective as we go forward and try to make 

progress. Selective indignation is not going to work, and unfortunately, it overshadows some of the more positive aspects that we 

have been able to agree on and pursue together. 

Hopefully, as we go forward today, we can flesh some of these 

issues out and put things in a bit of perspective. Thank you, Mr. 

Chairman. 

Chairman LIEBERMAN. Thanks, Senator Thompson. You have 

raised some fair questions. Look, I would say, overall, the interest 

of the—as I believe the staff investigation, and certainly my opening comments of what I drew from it, suggest, the staff was not 

given any directions to limit their inquiry to events that occurred 

after the change of administrations in January 2001. In fact, they 

were asked to go back and look at the whole history here and let 

the truth of the investigation fall where it fell. So, clearly, a lot of 

the behavior that is criticized occurred before, and by FERC, occurred before January 2001. 

Second, I hope and expect that Mr. Berick, who is our first witness, will be able to respond to some of the specific questions you 

raised, or perhaps wait until you question him more specifically to 

respond to the suggestion about the one commissioner in contact 

with Enron. 

So at this point, I would like to go to David Berick. David is our 

first witness. He is a Senior Professional Staff Member on the Majority staff. He will summarize the findings of the Majority staff inVerDate 0ct 09 2002 14:53 Jun 09, 2003 Jkt 083483 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 C:\DOCS\83483.TXT SAFFAIRS PsN: PHOGAN
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1The prepared and supplemental statements of Mr. Berick appear in the Appendix on page 

74 and 93, respectively. 2The Governmental Affairs Committee Majority Staff Report appears in the Appendix on page 

219. 

vestigation into FERC’s oversight of Enron. Because the investigation covers a number of complicated issues, I suppose this is by 

way of warning, the staff testimony will be somewhat lengthy. But 

the importance of the subject definitely requires that. 

I will say for my part that I think the staff has done a very good 

job and performed the role of oversight that is uniquely this Committee’s in a way that is not only impressive, but is productive. Of 

course, that is why we have the current commissioners here, not 

just to defend the past, because some of them were not there, but 

to talk about what is happening now and what we can do to make 

sure that the shortcomings that the staff investigation has seen are 

not repeated in government oversight of our critically important 

energy markets. 

Mr. Berick, I am going to ask you if you would please stand and 

raise your right hand. Do you solemnly swear that the testimony 

you will give the Committee today is the truth, the whole truth, 

and nothing but the truth, so help you, God? 

Mr. BERICK. I do. 

Chairman LIEBERMAN. Thank you. Please be seated, and the 

record will show that the witness has answered the question in the 

affirmative. Mr. Berick, please proceed. 

TESTIMONY OF DAVID M. BERICK,1 PROFESSIONAL STAFF 

MEMBER, COMMITTEE ON GOVERNMENTAL AFFAIRS, U.S. 

SENATE 

Mr. BERICK. Thank you, Mr. Chairman, Senator Thompson. 

What I will describe to you this morning, as briefly as I can, are 

the findings of the Majority staff inquiry into the Federal Energy 

Regulatory Commission’s oversight of the Enron Corporation. The 

findings I will highlight can be found in greater detail in the accompanying staff memo being submitted in conjunction with today’s hearing, and I would ask that my written statement and the 

Majority staff memo be made part of the record.2

Chairman LIEBERMAN. Without objection, so ordered. 

Mr. BERICK. As you related this morning, Mr. Chairman, in January, you directed us to initiate a broad investigation into the role 

of the Federal Government and private sector watchdogs in what 

was at the time the largest corporate bankruptcy in American history. The purpose of the investigation was to determine whether, 

over a period of years, of the 10 years preceding Enron’s collapse, 

whether Federal regulators did their job correctly and took reasonable steps consistent with their missions and mandates to identify 

and, if possible, prevent the problems that led to Enron’s implosion. 

In investigating the role of FERC, the Federal Government’s lead 

energy regulator, the investigation identified four specific areas of 

concern, which you’ve identified this morning. These are Enron’s 

sale and repurchase of wind farms, activities related to Enron Online, the electronic trading platform run by Enron, and transactions 

conducted between Enron and Enron-affiliated companies, and finally, the role of Enron in the California power crisis. 

10

As you will see, the evidence in all four cases reveals a consistent 

pattern, that in the face of Enron’s tireless determination to game 

the system, FERC displayed a striking lack of determination to 

scrutinize the company’s activities, and this was not simply FERC 

becoming another victim of Enron’s misrepresentations. Rather, on 

a number of occasions, FERC was provided with sufficient information to raise suspicions of improper activities or had itself identified 

potential problems, but failed to follow through. 

In short, the record demonstrates a lack of 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. While we do not know with certainty whether the disclosure of any of the individual activities I will highlight here today 

could have prevented Enron’s collapse, it seems highly likely that 

a more proactive, aggressive action by FERC would have limited 

some of the abuses that appear to have occurred, would have raised 

larger questions about Enron’s trading practices and other business 

activities and would have exposed at least some of the cracks in 

Enron’s foundation earlier. Perhaps scrutiny by a Federal agency 

would have also 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 regulators of 

other regulatory agencies to look more closely at Enron. 

FERC had and continues to have jurisdiction over Enron Corporation’s many energy subsidiaries and activities. There were at 

least 24 electric, 15 gas pipeline, and 5 oil pipeline subsidiaries or 

affiliates of Enron subject to FERC regulation. Not surprisingly, 

then, FERC had thousands of contacts with Enron over the 10-year 

period examined by the Committee staff concerning Enron’s FERCregulated subsidiaries and affiliates. 

In addition to these contacts with FERC, our investigation also 

uncovered evidence of an aggressive public relations and lobbying 

campaign that Enron undertook in 2000 and 2001 to defend its role 

in the power crisis in California and to seek to influence the composition, policies, and practices of FERC, as well as to shape the 

debate over the California crisis. After all, Enron was heavily invested in the success of the deregulation of energy markets because 

it represented opportunities for Enron’s 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 on market systems or on individual market players, like Enron itself. 

The Majority staff has concluded that among the many Enronrelated questions that came before FERC in recent years, four 

stand out as egregious and cautionary examples of regulatory failure. In each case, despite ample opportunity and available information, FERC failed to answer, much less challenge, Enron’s behavior. It is likely that this passive regulatory stance enabled Enron 

to distort its financial condition, failed to protect energy consumers 

and the energy industry, and failed to prevent or mitigate the ultimate effects of the company’s collapse. 

The first area I would like to cover are the wind farms in California that the Chairman addressed earlier. In January 1997, 

Enron acquired a number of wind farm projects that were considVerDate 0ct 09 2002 14:53 Jun 09, 2003 Jkt 083483 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 C:\DOCS\83483.TXT SAFFAIRS PsN: PHOGAN
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ered qualifying facilities, or QFs, under Federal law and were, 

therefore, eligible for special rate treatment. Shortly after the acquisition of these wind farms, in August 1997, Enron completed its 

acquisition of a public utility company located in Oregon, Portland 

General Electric. Under Federal law, however, projects that are 

given special status as qualifying facilities cannot be owned by a 

public utility or its holding company. This has been interpreted by 

FERC to mean that it cannot own more than 50 percent of a qualifying facility. 

Thus, because Enron now owned a public utility company, the 

wind farm projects that 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 was necessary to divest itself of ownership 

in a number of these projects. In at least four cases, however, it 

appears that Enron did not truly divest itself of ownership, and, in 

fact, effectively retained the risks and benefits of ownership. 

FERC had the responsibility to certify that ownership requirements and other pertinent requirements of QF status were met. 

Critical details of these apparently sham transactions were revealed to FERC, but FERC failed to adequately scrutinize these 

particular transactions and wound up agreeing with Enron that 

they, in fact, met the ownership requirement. 

Specifically, in 1997, Enron sold a 50 percent interest in each of 

three wind farm projects to a special purpose entity named RADR, 

allegedly set up by Chief Executive Officer Andrew Fastow and his 

deputy, Michael Kopper. In August, as discussed in the staff memo, 

Mr. Kopper pled guilty to wire fraud and conspiracy to commit 

money laundering, based in part on a scheme he and others allegedly devised to enrich themselves and enable Enron to maintain secret control over California wind farms while appearing to maintain eligibility for QF status, and similar charges have now been 

filed against Mr. Fastow by the Justice Department. 

However, minutes of a May 1997 meeting of the Finance Committee of Enron’s Board of Directors indicate that there was formal 

corporate consideration of the RADR transactions. 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, planned to continue 

to recognize revenues from the project. 

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 the future and sell in non-fire sale environment,’’ an indication that the company saw itself as forced to divest 

its interest in the wind farms quickly because of its purchase of 

Portland General and was using the sales to RADR to temporarily 

park the projects until it could obtain a more lucrative financial return. 

The minutes also reveal that Enron provided 97 percent 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. 

The nature of these wind farm transactions is further confirmed 

by a 2001 PriceWaterhouse Coopers due diligence report, prepared 

in anticipation of another related Enron transaction, which notes 

12

that because Enron ‘‘retained all the risks and rewards associated 

with the projects,’’ and retained an option to repurchase the shares, 

the wind farm deal was not treated as a sale and the revenue from 

the projects was accounted for as income from joint ventures. 

Information revealed to FERC in Enron’s formal applications for 

QF status should have, in our opinion, raised serious questions at 

FERC as to whether or not the wind farms’ ownership arrangements entitled them to this QF status. Among other things, 

Enron’s application stated that the company would loan RADR the 

money to purchase its interest in the wind farm projects, that an 

Enron affiliate would indemnify the owners of RADR for tax liabilities if the project was repurchased, that Enron would retain an option to repurchase RADR’s interest in the projects, and that land 

for the facilities would be leased from an Enron affiliate and that 

the same Enron affiliate would receive fees for providing operation 

and maintenance service for the facilities. 

However, despite Enron offering up all this information, FERC 

appears either not to have understood or not to have tried to understand the actual financial arrangements described to it by 

Enron and their implications, and it seems that this was not out 

of the ordinary for FERC’s review of QFs. 

A similar lack of scrutiny repeated itself in 2000 and 2001, when 

a number of the wind farm projects, including the three RADR 

projects, were reacquired by Enron and FERC once again was 

given the opportunity to review the transactions. However, in each 

of the repurchase agreements, Enron filed a self-recertification with 

FERC, informing it of the ownership changes and asserting that 

the facility, now majority or entirely owned by Enron, which was 

still then a utility holding company, should maintain its eligibility 

for QF status. Remember, Mr. Chairman, that the QF status is 

supposed to be granted only when facilities are not controlled by 

a public utility or its holding company. 

Two fundamental weaknesses in the regulatory system emerge. 

First of all, as a matter of policy, FERC never reviewed the RADR 

self-certifications, and to this day still never reviews self-certifications for QF status no matter what the applications may say unless an outside party raises an objection. Instead, FERC simply 

files them away as it did in the case of RADR. 

I want to note that these repurchase agreements and filings for 

RADR were not the only time that Enron took advantage of the 

weaknesses inherent in FERC’s self-certification system. In November 1998, Enron self-certified a new ownership arrangement for another wind farm project known as Cabazon. In this case, Enron 

self-certified that it had transferred 50 percent ownership in the 

project to a nonprofit organization, The Nature Conservancy, within the meaning of FERC’s QF ownership requirements. 

In fact, Enron did not actually transfer an ownership interest. 

Rather, it only transferred a right to 50 percent of the net profits, 

a condition which did not actually meet the FERC ownership test. 

Indeed, The Nature Conservancy did not consider itself to have any 

ownership interest in the Cabazon project. However, because this 

ownership change was the subject of a self-certification, it was not 

reviewed or contested by FERC. 

13

Second, Enron also took advantage of a regulatory black hole between FERC and the Securities and Exchange Commission on the 

RADR repurchase transactions as well as other wind farm repurchases. Enron told FERC in its self-recertification application that 

it was now eligible to own the wind farms because it had applied 

to the SEC, requesting a special exemption under the Public Utility 

Holding Company Act, which would permit it to retain QF status 

for the wind farms. 

It did have such an exemption pending at the SEC. The application remained pending, however, for 21⁄2 years, and, in fact, the 

SEC is only now scheduling a hearing to consider the merits of the 

application. Meanwhile, from the moment the application was on 

file at the SEC, for FERC’s purposes, it was deemed to have been 

approved. The two agencies never communicated with each other 

about the substance of the application. Instead, FERC’s practice 

was and still is to treat a company’s good faith application to the 

SEC alone as sufficient for the company to qualify for this exception. As a result, Enron got the benefits of the QF status and retains them to this day. 

The second area that the staff believed was significant was 

FERC’s review of Enron’s electronic trading platform, Enron Online. In 1999, Enron Corporation played a leading role in a fundamental shift in the way natural gas and electric power were traded 

by creating Enron Online, an Internet-based trading platform for 

natural gas and electric power. Online energy trading quickly became a significant portion of the energy trading market. In 2001, 

it was estimated to account for approximately 38 percent of natural 

gas and 17 percent of electric power marketed in the United States. 

Until Enron’s bankruptcy, Enron Online was widely acknowledged 

to be the leading platform for such trading. Enron, in turn, lauded 

itself for its trading capabilities and rapidly expanded the range of 

commodities it traded on Enron Online, from paper to broadband 

communications capacity. 

The public implications of this fast emerging energy trading 

method did not greatly interest FERC until May 2001. At that 

point, 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 in particular. 

FERC staff were asked to evaluate Enron Online’s dominant position in electronic trading in the energy industries and to determine 

whether that position might be exploited to manipulate prices and 

otherwise distort the energy market. 

A non-public report discussing these matters was completed on 

August 16, 2001. 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 a 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 

changed in any particular transaction were set, or how they comVerDate 0ct 09 2002 14:53 Jun 09, 2003 Jkt 083483 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 C:\DOCS\83483.TXT SAFFAIRS PsN: PHOGAN
14

pared to those charged in other similar transactions, or even 

whether the transactions actually had occurred. 

The financial risks of all the trades conducted on Enron Online 

remained with Enron subsidiaries, and since Enron’s traders were 

a party to every trade, this risk was substantial. It also meant that 

the solvency of Enron as a whole was important to the viability of 

Enron Online and to Enron’s trading activities. 

With this 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. As we describe in our staff memorandum, this 

conclusion was based on a cursory analysis of the entire North 

American energy market rather than a more thorough attempt to 

scrutinize individual regional markets, which would have yielded a 

much more complex, and, we believe, a much more troubling, picture. 

Second, the report concluded that, in any event, the chance of 

Enron failing financially was remote. The report provided little 

support for this conclusion and it has obviously been disproved over 

the last year. 

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 yet it concluded that there 

was no reason for concern. This conclusion also appeared the result 

of wishful thinking, and there is now evidence, described in an August 2002 FERC staff report concerning FERC’s own investigation 

of Enron and other participants in the Western energy market, 

that Enron, in fact, likely did exploit this advantage to manipulate 

prices, particularly in the California and Western markets. 

In short, though the FERC report identified a number of areas 

that could have and should have raised concerns with the Federal 

Government’s lead energy regulator, FERC staff concluded that 

there was no reason for concern and no cause for action. Quite simply, FERC’s review was too cursory, settled for incomplete answers, 

drew the wrong conclusions, and the agency ultimately failed to follow up on the warning signs it did raise. 

Another troubling facet of the 2001 report is that it was not distributed to any of FERC’s commissioners prior to or during Enron’s 

collapse to inform their decisionmaking with regard to this event. 

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. 

Another serious concern is that FERC did not initially even address the question of whether or not, and the extent to which, 

FERC and the Commodity Futures Trading Commission, both of 

which had some regulatory responsibility for energy trading, had 

jurisdiction over Enron Online and other similar electronic trading 

platforms. This was despite the fact that Enron and other similar 

systems were at the time expected to become the dominant way in 

which both electricity and natural gas were traded. 

15

A FERC legal memorandum analyzing FERC’s jurisdiction over 

Enron Online and other electronic trading was to have been prepared in conjunction with the August 2001 report I mentioned earlier. This jurisdictional memorandum was not, however, completed 

until July 2002, after you, Chairman Lieberman, raised questions 

about it. This failure to address the agency’s jurisdictional authorities created yet another regulatory black hole, leaving any thorough scrutiny of Enron Online and other electronic trading platforms to languish. And as we discuss in the staff memo, there is 

indication at Enron that they believed that this trading platform, 

for all intents and purposes, was virtually unregulated. 

One final footnote about the 2001 Enron Online inquiry is that 

it also examined the issue of how pricing information from Enron 

Online might distort published price indices, such as those reported 

by trade publications like Natural Gas Intelligence and Gas Daily. 

The FERC staff noted that such indices were comprised of anecdotal, unconfirmed information and that information provided from 

a source such as Enron Online could be subject to manipulation. 

At the time the staff was examining this very issue, the Commission was promulgating its order on refunds for the California market, which included a methodology for determining baseline electricity generation costs tied to these published price indices. The 

concerns expressed by the Enron Online inquiry staff concerning 

these indices were apparently never communicated to the commissioners considering the refund issue, nor was other relevant information compiled by the Office of the Chief Accountant concerning 

electricity generation costs in the California market. 

The significance of these failures is highlighted by the FERC 

staff’s August 2002 report in its ongoing Enron investigation, which 

found that published price indices in the California market were 

unreliable and may have been distorted or even manipulated by 

data from Enron Online. The 2002 report recommends that, as a 

result, the Commission modify its California refund——

Chairman LIEBERMAN. Mr. Berick, let me just interrupt you for 

a moment. In a few cases here, you have described FERC staff reports which were not communicated to or conveyed to the commissioners. Did you reach a conclusion about why that happened, why 

they were not transferred to the commissioners? 

Mr. BERICK. Well, we didn’t reach a conclusion, Mr. Chairman. 

We tried to understand as best we could what happened, why this 

information was not passed on, and it just seems to have been a 

variety of factors, some that it was not deemed to be a priority. In 

other cases, it appears that there was a change in administration. 

The general counsel, who asked for the Enron Online investigation, 

and the Chairman that he worked for, Mr. He ́bert, left the Commission at about the time that this was being completed and the 

ball was apparently simply not passed on to the incoming team. 

Chairman LIEBERMAN. So you found no evidence that there was 

a decision by the staff to suppress their work. They just, for various 

reasons such as you have described, or perhaps just decisions that 

in hindsight by the bureaucracy don’t make sense, decided not to 

convey those reports to the commissioners. 

Mr. BERICK. Right, but we concluded that there was important 

information that was relevant to deliberations that the Commission 

16

had ongoing and it should have been communicated to the commissioners. It was something that should not have ended up on the 

shelf. 

Chairman LIEBERMAN. OK. Please proceed. 

Mr. BERICK. Our third area of review was Enron’s affiliated 

transactions. Obviously, whenever a company conducts transactions among its own affiliates, there may be cause for concern 

about fair dealing. One concern is that where one affiliate has captive rate payers, a one-sided deal may impose financial burdens on 

those rate payers. Another concern obviously is that one affiliate 

may treat its sister affiliate with favoritism at the expense of other 

companies or customers, or in ways that are detrimental to the 

market as a whole. 

Based on our review, we concluded that the existing regulatory 

rules and tools in the hands of FERC proved inadequate to deter 

Enron, as the company now appears to have engaged in a number 

of inappropriate inter-affiliate transactions. 

Just one example are the loans of two of Enron’s pipelines obtained on behalf of the parent company, Enron, in November 2001. 

As Enron struggled to avoid bankruptcy, the company announced 

that J.P. Morgan Chase and Citigroup had committed to loan it a 

total of $1 billion. But the loans were actually made to two of 

Enron’s FERC-regulated interstate pipeline subsidiaries, Northern 

Natural Gas Company and Transwestern Pipeline Company, and 

were secured by assets of those pipeline companies. The vast majority of these loan proceedings were subsequently transferred to 

Enron in the form of unsecured loans from the pipelines to their 

parent company. 

After Enron declared bankruptcy a few weeks later, 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 natural gas customers. 

In this case and in other cases discussed in the staff memo, 

FERC is now investigating potential wrongdoing concerning 

Enron’s inter-affiliate transactions and seeking to strengthen some 

of the relevant accounting rules. However, it is troubling that the 

agency failed to address the broader policy question earlier. As 

parts of the energy markets have been deregulated under FERC’s 

watch and at FERC’s urging, the issue of transactions among a 

company’s affiliates have taken on increased importance. 

Until Enron’s collapse, however, FERC failed to adequately identify such transactions, especially the financial transactions, and as 

in the case of the—or in the case of the transactions between marketing affiliates, like Portland General, traditional utilities, FERC’s 

regulations proved to be inadequate. Thus, it turns out that this is 

another area where the agency did not adequately anticipate problems in the market that it was instrumental in constructing. 

The final area in which the Committee staff reviewed FERC’s 

oversight of Enron regards the company’s role in the California energy crisis. As you will recall, severe energy shortages in California 

began in the spring of 2000, about 2 years after the State’s energy 

deregulation plan was put in place. The State’s investor-owned utilities and regulators blamed the crisis on power sellers and marketVerDate 0ct 09 2002 14:53 Jun 09, 2003 Jkt 083483 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 C:\DOCS\83483.TXT SAFFAIRS PsN: PHOGAN
17

ers, who they said were unfairly manipulating the system to gin up 

profits. The power sellers and marketers, on the other hand, 

claimed that the flaws lay in the actual structure of the new California system and they, in turn, were the chief culprit for the crisis. 

However, FERC as far back as 1998 had received reports from 

energy experts in California raising concerns about the exercise of 

market power and began a staff investigation into the causes of the 

California crisis in the summer of 2000. The investigation reached 

what might be considered a curious conclusion, that power sellers 

had the potential to manipulate the power market, but that there 

was no evidence to indicate whether an individual company engaged in actual market abuse. The report concluded that identifying individual cases of market abuse would require further investigation. 

Despite this initial report clearly articulating the potential for 

market abuse and the Commission’s own orders essentially agreeing with that conclusion, it would take a full 15 months, until February 2002, after Enron’s collapse, for FERC to order a formal staff 

investigation into the market behavior of Enron and other individual companies. 

Even as FERC was avoiding the question of what individual companies were doing, Enron itself initiated an internal investigation 

into its own trading practices in California in October 2000——

Chairman LIEBERMAN. Excuse me again. What motivated Enron 

to initiate that investigation of its own practices? 

Mr. BERICK. They were concerned about the legal implications of 

those practices. They had received a subpoena from the California 

Public Utility Commission and there was concern about additional 

regulatory actions that would be taken—might be taken against 

them, and in terms of preparing for their own defense, they began 

to investigate the extent and characteristics of the trading practice 

that they had engaged in. 

Chairman LIEBERMAN. OK. 

Mr. BERICK. And that internal investigation would ultimately result in a now well publicized memorandum that was produced in 

December 2000 which asked some searching questions about a 

range of strategies that Enron traders use, such as the so-called 

‘‘Get Shorty,’’ ‘‘Death Star,’’ ‘‘Fat Boy,’’ ‘‘Ricochet’’ trading strategies, and it also discussed the sanction provisions of the California 

Independent System Operator Tariff. 

Unfortunately, as we discussed, Enron appears to have been 

more concerned about its own behavior than was the government’s 

leading energy regulator. As stated earlier, FERC itself did not 

begin to investigate these practices until more than a year later, 

after Enron’s collapse. 

In August 2002, that investigation—and again, I am referring to 

FERC’s ongoing Enron investigation—that investigation produced 

an interim report describing the manipulating trading practice that 

Enron traders allegedly engaged in. Those findings have, in fact, 

further prompted three formal FERC investigations into the behavior of individual companies, including Enron. 

More confirmation about what FERC may have found, had it 

been more vigilant and diligent, was revealed last month when 

Timothy Belden, who headed Enron’s Western trading desk, pled 

18

guilty to a charge of conspiracy to commit wire fraud based on allegations that he and others at Enron engaged in trading strategies 

designed to manipulate energy markets in California from 1998 to 

2001. 

The Committee Majority staff believes that the rules and regulations of a Federal agency such as FERC cannot effectively deter 

unreasonable market action if the agency fails to hold market participants accountable. It should not have taken Enron’s collapse to 

finally trigger FERC’s investigation of the role of Enron and other 

individual companies in the California energy crisis. 

In conclusion, Mr. Chairman, all four stories convey the same 

general message. The Federal Energy Regulatory Commission was 

a poor match for Enron’s efforts to subvert the spirit, if not the letter, of the regulatory system. FERC’s failure cannot be attributed 

simply to Enron’s aggressive public relations and lobbying campaigns or to the deviousness of its methods. 

In many cases, the Commission had specific and sufficient information that should have raised suspicions about improper behavior 

on Enron’s part. In other cases, FERC recognized potential problems, but through poor management or poor internal communication or sheer lack of will, never followed its suspicions through to 

their logical ends. Even after Enron declared bankruptcy, FERC 

dragged its feet, for example, in the case of the wind farms, and 

failed to step into the breach, reinforcing a pattern of performing 

too little, too late. 

To be fair, FERC has taken some tentative steps to remedy this 

unacceptable state of affairs, such as creating a new Office of Market Oversight and Investigation. But simply rearranging the bureaucracy is not sufficient. FERC must work in concert with other 

regulatory agencies. It must request and be given sufficient resources to monitor and police the marketplace. And it must be 

more cognizant of what goes on under its own regulatory roof. 

But most importantly, FERC must reorient itself to a changed 

and increasingly complex regulatory environment, an environment 

that FERC itself has fostered but failed to adapt to. Had FERC 

proven more aggressive on any one of the fronts I have described 

in my testimony today, it might have unearthed Enron’s abuses 

sooner, perhaps mitigating the company’s collapse, protecting consumers from hardships, and competitors from Enron’s alleged market manipulations. Instead, through a striking lack of vigilance, 

FERC abdicated many of its core responsibilities as a Federal regulator. 

Thank you, and I look forward to answering your questions and 

Senator Thompson’s questions. 

Chairman LIEBERMAN. Thank you very much, Mr. Berick. I 

thank not only you, but all the members of the staff who worked 

so hard over a long period of time to assemble the information and 

reach the conclusions that you have presented to us this morning 

on their behalf and yours. 

I am going to go to the end and then go back to the beginning. 

Let me ask you this, and this goes to the broader question I discussed in my opening statement about what is the role or necessity 

of Federal oversight in a deregulated energy market environment. 

As I said, I reached the conclusion that you can’t just say, OK, 

19

FERC is not going to set the prices after an administrative process, 

wholesale prices of energy anymore, go out and let the market 

reach the right conclusion, because as we see here in your testimony, in your report, private parties, human nature unfortunately 

being what it is, particularly in a very increasingly sophisticated 

climate with Enron Online and all the rest, will seek advantage for 

themselves and there will be consequences that can, as they were 

in this case, be disastrous, particularly for Western American energy markets and billions of extra dollars that consumers, including business consumers, obviously, had to pay. 

In your conclusion, you talk about the importance of more aggressive implementation of regulatory oversight authority that 

FERC has and the need, I think, for additional staff, dedication of 

FERC staff to these matters. Is there any need for additional law 

here, or do you think that the law, as it exists, gives the Federal 

Energy Regulatory Commission the authority it needs to protect 

the energy markets in a deregulated environment, it is just that 

they didn’t use the power they had? 

Mr. BERICK. Well, I think they did not use the authority that 

they had. That doesn’t mean that they couldn’t benefit from enhanced authority, and in FERC’s testimony today, they asked for 

additional authority for criminal and civil penalties under their organic statutes, the Natural Gas Act, Federal Power Act, to try to 

expand the range of regulatory tools that they have. This was 

something that was also a recommendation in the General Accounting Office report that was prepared for you, again, suggesting 

that they have a significant amount of authority today, but they 

could, in fact, benefit from some additional enhancements and expansions of that authority. 

Chairman LIEBERMAN. I take it you would agree with that request that the Commission will make today, and I agree with it 

also, but it also highlights the fact that we are asking, based on 

the work that was done, the investigation and the report, that 

FERC not only have oversight but enforcement authority when the 

rules of the road are violated, is that correct? 

Mr. BERICK. Yes. One of our basic conclusions here is that 

FERC’s role is fundamentally changing, and I think FERC has acknowledged this, but has not been able to deliver on the need to 

change the way it approaches its role from one of being a rate setter to a market overseer. I mean, it is endemic to the restructuring 

of the regulatory process and FERC is now no longer in the process 

of setting rates. They are now in the process of overseeing the market and the behavior of participants in that market. And consequently, they have to change their view and their institutional 

structure to better deal with that challenge. 

Chairman LIEBERMAN. And part of that is to have the authority 

to take action—to initiate action, civil and criminal, against those 

who are not playing fair, is that correct? 

Mr. BERICK. Yes, but they have other authorities which they can 

use, such as denying the ability of a company to have market-based 

rate authority. Again, it is a fairly, maybe draconian or overly draconian measure, and that is why they are requesting this additional expansion. But there are tools that they have and there is 

20

authority that they have to take action against companies that manipulate or abuse the market or operate unfairly in the market. 

Chairman LIEBERMAN. OK. Let me go back to some questions 

that were raised in earlier parts of your testimony, which covered 

a number of issues—wind farms, the Western energy market crisis, 

Enron Online—but a central and very troubling point from your 

testimony is that FERC had direct oversight of a number of 

Enron’s activities that now appear to have been at least improper, 

and in some cases illegal. 

The fact is that Mr. Kopper of Enron has now pleaded guilty to 

criminal and civil fraud with regard to the wind farm transactions 

that you have described. Mr. Belden, the head energy trader in the 

Western region for Enron, has also now pleaded guilty to a Federal 

criminal charge in connection with trading practices in the California market, which had disastrous consequences for that market. 

Am I correct that you are saying that FERC had a direct regulatory role in these areas which might have prevented some of the 

abuses from occurring that have now been acknowledged by Mr. 

Kopper and Mr. Belden? 

Mr. BERICK. Precisely. That is, I think in some ways, one of the 

most troubling aspects of the investigation that we did, was that 

FERC looked, for example, in the wind farm issue, specifically at 

the ownership issue. That was the principal purpose of the reviews 

that they conducted of all three wind farm transactions, was to 

look at whether or not these transactions met the ownership test, 

which was that they could not be owned more than 50 percent by 

Enron. They looked specifically at that issue. 

Regardless of whether or not we can have expected FERC to 

have caught all of the fraudulent activities that Mr. Fastow or Mr. 

Kopper are alleged to have engaged in, we have, and we cite this 

in the staff memo, we have the internal Finance Committee minutes that indicate that, in fact, this was a corporate decision to 

structure these transactions this way. 

So our point is that if FERC had probed, there would have been 

something to find, even within the official corporate records, irrespective of the ultimate frauds that may have been committed. 

Chairman LIEBERMAN. In the wind farms case, I referred in my 

opening statement to a regulatory gap between FERC and the 

SEC. Is it fair to say that you concluded and the staff concluded 

that Enron skillfully took advantage of that gap? 

Mr. BERICK. Precisely. They knew that FERC would consider—

well, they knew that because they were using the self-certification 

process that it was something that would not receive, or was not 

likely to receive actual review, and they approached the SEC in 

such a way that they did not expect the SEC to actually act on the 

application. So they very carefully took advantage of the sort of 

regulatory black hole, the regulatory gap that existed between the 

two agencies. 

The fact that it was allowed to go on for 21⁄2 years just simply 

speaks to how extensive and continuing that gap was, because the 

two agencies never discussed this issue, not just with regard to 

these particular applications, but they never discussed this issue in 

a generic way to make sure that, in fact, as people, as companies 

like Enron were making applications to the SEC that might have 

21

been relevant to proceedings underway or decisions that needed to 

be made at the FERC, that they were in coordination with one another. So it was not done specifically and it was not done generically. 

Chairman LIEBERMAN. Let me finally in this round just deal 

briefly with another regulatory vacuum that Enron seems to have 

been able to exploit, which was with regard to Enron Online, the 

Internet-based commodity trading system. We have the issue of 

whether FERC can regulate Enron Online and should have, and 

second, we have the question of whether the CFTC also had regulatory jurisdiction over Enron Online and what the two agencies do 

or don’t do to resolve that issue, which I presume is still an issue. 

I wonder if you could briefly address that question. 

Mr. BERICK. Well, as I mention in my testimony, Enron considered, at least some at Enron considered Enron Online to be virtually unregulated because of this sort of regulatory gap. FERC 

had never asserted jurisdiction over these trading platforms, even 

though they had been in place for quite a while. As I mentioned, 

Enron Online was created in 1999. We don’t see FERC actually 

even beginning to look at the question of its jurisdiction or the implications of these trading platforms until May 2001, and then they 

never actually resolved the issue of their own jurisdiction and how 

it might interact with those of another agency, in particular, the 

Commodity Futures Trading Commission. The memorandum was 

just never completed until the question was raised by this Committee. 

Chairman LIEBERMAN. And as your testimony indicated, in the 

meantime, Enron not only set up the system, but was using it and 

in that sense was gaining advantages. It was gaming the system 

that it had created in the absence of any oversight of that system, 

correct? 

Mr. BERICK. That is correct, and again, what is striking is the 

findings in the August 2002 FERC staff report——

Chairman LIEBERMAN. Right. 

Mr. BERICK [continuing]. Which concludes that, in fact, the very 

nature of Enron Online, how it was structured, the one-to-many 

type of structure that allowed only Enron to actually know what 

was being traded on that system, was likely to have been used by 

Enron to manipulate prices in the California market. 

Chairman LIEBERMAN. OK. I have used up my time on the first 

round. It is a very disquieting picture of a system that has 

changed, gone to deregulation, and the private sector players, including Enron, just seemed to be so far ahead of those who are supposed to be protecting the rest of us that they gamed the system, 

with disastrous effects for consumers, investors, and employees of 

a lot of companies, and for the economy of the Western part of our 

country. So there are some very striking lessons I hope we will 

learn, and together go on to try to act in a way that prevents any 

such gaming from occurring again. 

Senator Thompson. 

Senator THOMPSON. Thank you very much, Mr. Chairman. 

Mr. Berick, over what period of time did the wind farm transactions take place? 

22

Mr. BERICK. They occurred in 1997, were the initial sales to 

RADR, and the repurchases were in 2000. 

Senator THOMPSON. I beg your pardon? 

Mr. BERICK. The repurchases occurred in 2000. The initial sales 

were in 1997. 

Senator THOMPSON. All right. And with regard to Enron Online, 

you mentioned that it started up in 1999? 

Mr. BERICK. That is correct. 

Senator THOMPSON. And was first looked at by the Commission 

in May 1999—I am sorry, May of——

Mr. BERICK. May 2001. 

Senator THOMPSON. OK. And with regard to the California trading and marketing abuses, the California electricity supply crisis 

apparently began in May 2000, and in June 2000, California suffered its largest planned blackout since World War II, is that correct? 

Mr. BERICK. Yes, sir. 

Senator THOMPSON. All right, sir. So with regard to the situation 

that Mr. Wood and others came into, you call in your report recent 

initiatives by the FERC as tentative. You say the newly-created 

Office of Oversight and Investigation is nothing more than rearranging the bureaucracy. In contrast, Mr. Joskow, one of your expert witnesses, I might add, has said he is very pleased that this 

office was created and that the office is off to a good start. 

I will give you a two-part question. The other part is that nowhere in your statement do you refer to one of FERC’s most visible 

recent reforms, and that is the standard market design rulemaking. Mr. Joskow, in his statement, calls this a courageous reform effort, intended to facilitate market competition and improve 

performance. 

So apparently the issue here is whether or not you are really giving appropriate credit to Mr. Wood and FERC as it is currently 

constituted with regard to its overall performance, and specifically 

with regard to the Office of Oversight and Investigations and the 

standard market design rulemaking. Would you comment on that? 

Mr. BERICK. Certainly. Obviously, it is too early to tell how well 

the Office of Market Oversight is going to perform, since it is just 

now being established. We did look, with the help of the Congressional Research Service, at sort of the resources and staffing that 

office was being given by FERC and it raised some fundamental 

concerns with us. 

Less than 10 percent of the agency’s FTEs are going to be in that 

office. 

Chairman LIEBERMAN. Why don’t you define FTEs for the record. 

Mr. BERICK. Full-time equivalent. That is essentially one individual working full time. 

Less than 10 percent of FERC’s FTEs are going to be assigned 

to that office, and even if we give FERC the benefit of the doubt 

and concede that all 250 FTEs that are identified in its budget request as having something to do with enforcement and market 

oversight are included, so we are essentially giving credit for more 

than double the number of people actually in that office, that number is still significantly less. It is less than 20 percent. 

23

And if we compare that to other Federal agencies that engage in 

similar types of activities, the Commodity Futures Trading Commission, the FCC, we find that those agencies have significantly 

larger resource commitments, both in terms of FTEs and in terms 

of dollars. So while it seems to be a step in the right direction, it 

seems to be too small a step in the right direction. 

And the other thing that we would observe, and this is sort of 

fundamental to the staff investigation, is that there are a range of 

activities which we have discussed—the wind farms, for example—

that are not going to be fixed by the new office. They are regulatory 

responsibilities that FERC has. Another example would be the 

inter-affiliate transactions, the holding company transactions, 

which are not going to be fixed or addressed by this new office. 

So our point is twofold. The steps that they appear to be taking 

seem to be too small, and that the steps that they are taking are 

not broad enough to encompass the range of regulatory shortcomings that we identified in the investigation. 

Senator THOMPSON. So you are concerned about the allocation of 

resources, and I understand the issue. I think you may find yourself in the minority with regard to the witnesses here today on that 

issue, but we have had bigger disagreements on this Committee 

than one as to whether or not there are sufficient resources allocation. 

Chairman LIEBERMAN. I got kind of uneasy when you said, ‘‘you 

may find yourself in the minority.’’ [Laughter.] 

Senator THOMPSON. Some of us——

Chairman LIEBERMAN. Until I heard you conclude that question. 

Senator THOMPSON. Some of us almost certainly will, yes. 

[Laughter.] 

But on another subject, how do you view the Commission’s decision back on December 15, 2000, FERC’s order? In an effort to remedy the California dysfunctions, as a part of the order, FERC rejected wholesale rate caps in California. A lot of people consider 

that a significant action and not enough, insufficient, all of that. 

Did your analysis encompass that and what do you think about it? 

Mr. BERICK. We didn’t really look at that issue. It was obviously 

an issue that we covered fairly extensively last year in the Committee’s hearings on the California energy crisis. This would have been 

last June, in 2001. We had two hearings on this issue and we did 

not spend a significant amount of time on it in this review, other 

than to acknowledge that, in fact, the Commission had made that 

decision and that it did raise the question as to whether or not—

we raised the question as to whether or not that was sufficient. 

Senator THOMPSON. Mr. Berick, I think, in looking at your report 

here, you have done a lot of good work, thorough in many respects. 

I think there is a question as to whether or not you are giving sufficient credit due and whether you are placing blame where that 

is due. We have spent an awful lot of time with regard to FERC, 

and you heard my opening statement, including a GAO investigation about a contact that a former FERC commissioner had with 

a representative of Enron. Of course, the dates speak for themselves. Quite clearly, a lot of these problems, or most of these problems started—all of these problems, I guess you might say, started 

during the prior administration. We can argue whether or not the 

24

new people who really had a majority on the Commission, according to my notes here, only on June 14, 2001. 

But more specifically than that, and it goes to the fairness of 

your assessment here, is the fact that when we got to looking 

through the documents here that were subpoenaed or gathered by 

the Majority, it appears that there were several contacts between 

Enron lobbyists and Commissioner Breathitt that were not referred 

to in any way, and you spent quite a bit of time, once again, reminiscent of prior hearings and prior actions of this Committee, about 

five pages on Enron’s efforts to influence FERC, but nowhere are 

those contacts mentioned. 

You do mention Enron’s lobbying campaign, and clearly they did 

lobby. Clearly, they did whatever they felt like they could do and 

get away with. You mentioned, of course, again, that Lay met with 

various individuals. You mentioned that they met with members of 

the Clinton Administration, but in the context of discussing an 

open meeting, discussing the current crisis in California and what 

to do about it, and I assume there were many people in that meeting, but you mentioned their lobbying-public relations campaign designed to indirectly influence the outcome of FERC’s decisionmaking with regard to California. 

So if the issue is whether or not Enron was influencing FERC’s 

decisionmaking, that is very precise. I must ask whether or not you 

have been fair in your assessment here. You mention Enron’s corporate head of government affairs, with the assistance of a Washington, DC, lobbying firm. You mention the firm. It is a Republican 

lobbying firm. 

You mentioned its effort to strongly support Pat Wood as chairman, and also Ms. Brownell. Of course, now they have to deal with 

that. Mr. Lay called Karl Rove to express support for Ms. Brownell, 

talking about their nominations further. Mr. Skilling met with Secretary O’Neill, Ken Lay, Linda Robertson, a 30-minute meeting 

with the Vice President, Larry Lindsey apparently somewhere 

along the line. 

You say it is difficult to evaluate the impact of Enron’s far-reaching efforts to influence decisionmaking at FERC, and unless we are 

missing something here, when staff went through the records, it 

appears that there were 46 contacts, most of them telephone conferences, between lobbyists for FERC and Commissioner Breathitt 

from August 2000. Of course, we know the California blackout was 

in June 2000. From August 2000 through December 2001. Were 

you aware of those contacts? 

Mr. BERICK. Yes, we were, Senator Thompson. As you know, we 

asked FERC for all of their contacts, all of the agency’s contacts, 

staff contacts and commissioner contacts, and there were, you 

know, hundreds of pages of just identification of individual contacts. 

What we tried to focus on in the contacts you are referring to are 

contacts related to the California energy crisis. There were lots of 

other issues. There were issues on deregulation of the market, and 

the establishment of regional transmission organizations. There 

were lots of other issues before FERC that Enron had interest in 

and that, obviously, commissioners spanning many years had communications with. 

25

Where we devoted our effort was to the specific issue of the California market, because that is where there was the greatest concern about whether or not Enron had manipulated that market, 

and we were also struck by the scope of Enron’s efforts to shape 

the debate of both FERC and the influences on FERC for resolving 

that issue. There was really a very pronounced——

Senator THOMPSON. Let me make a couple of observations. How 

can you tell from looking at a document whether or not California 

was at issue when that conversation took place, when that conversation, that conference call, whatever it is, is at the height of 

the California crisis, and it is between an Enron lobbyist and a 

member of the Commission? Why would you assume, on the one 

hand, that one commissioner’s conversation would not have to do 

with California, and on the other hand, some member of the Bush 

Administration’s conversation would have to do with California? 

Mr. BERICK. Well, we went on the documentation that was provided. We did not interview any of the commissioners on any of 

their contacts. We went on the basis of the documentation that was 

provided to us, and we did go back. We did ask for documentation 

from former commissioners who are no longer on the Commission. 

FERC was very good about helping us go back and get additional 

information from past commissioners. We went on the basis of the 

information that was provided to us in the documents. 

Senator THOMPSON. But the issue, according to your report here, 

the fact that they had a public relations campaign designed to directly or indirectly influence the outcome of FERC’s decisionmaking 

with regard to California assumed that their support of Pat Wood 

only had to do with California, because it is in here. Enron’s support of Ms. Brownell was a California issue? It is in here. 

Mr. BERICK. If I may, Senator, it is——

Senator THOMPSON. Yes, one more point and then I will let you 

respond. You have testified that your concern with Enron goes back 

a number of years, and that you had concern concerning the wind 

farms transaction. You had concerns concerning Enron Online 

transactions. You had affiliate transactions concerns. And then you 

had the California situation. 

When it comes to contact with commissioners, then, why would 

you only focus on the California aspect? Was it because of the fact 

that some members of the current administration, or Mr. He ́bert, 

who was disappointed, had a one-time contact apparently with Mr. 

Lay? Was that the reason that you focused in on the California aspect of the four areas of concern? That is the only area of pursuit 

that is the subject of your report here, about five pages, when all 

the time, the issue was how the Commission was being affected or 

how Enron was trying to affect the Commission and there is clearly 

more than one commissioner. 

Mr. BERICK. The Enron documentation on California is fairly explicit about the fact that they were very concerned about the implications for energy deregulation and for the future of that part of 

their business with regard to California, and the documentation is 

very explicit about the fact that they viewed FERC as being central 

to resolving that crisis. And they also make it clear—again, this is 

Enron making it clear—that the membership of the Commission 

26

was a very important element to them in terms of making this 

problem, this political problem, go away. 

Senator THOMPSON. Well, then by that same token, when you 

have got a California crisis that certainly goes from May 2000 until 

the end of that year—we all remember December 15, when FERC 

rejected wholesale cap rates, which some people interpreted as a 

pro-Enron decision by the Commission—you have that crisis brewing all this time and you have records in your file showing numerous meetings between Enron lobbyists and Commissioner 

Breathitt. 

I think the proper way to handle this is wait until Commissioner 

Breathitt has an opportunity to address these sheets. But May, August 23 and 24; September 7, 15, 28, 29, and 30; October 18, 19, 

26, 30, and 31; November 7, 16, 27, and 28; December 4, 5, and 

8; all these are in your file and in your record, Mr. Berick. 

I think in view of the fact that we have spent so much time, including letters and GAO investigations of criminal activity and everything else with regard to Mr. He ́bert’s telephone conversation he 

had with Ken Lay and the issue of Ken Lay’s support for his chairmanship, let us just assume for the moment you were only concerned about California with regard to the Commission. I find it 

difficult to understand why you wouldn’t in your report, since you 

are dealing specifically with that issue, why you wouldn’t in your 

report mention that fact. Were you aware? 

I understand you had a lot of information and you are focusing 

on specific things, and I am not necessarily saying that you were 

attempting to skew the results here. I do question your fairness in 

the way you treated this. In retrospect, don’t you think it would 

have been better to deal with this on more of an even basis? If you 

are going to mention contacts with the administration, or even 

more relevant, contacts with the Commission, should these not 

have been referred to in your report also, in view of the long history that we have had, this Committee has had, with FERC and 

questions of undue influence and things of that nature? 

Mr. BERICK. Senator, I guess I am going to repeat what I said 

before, is that there were, as you know, voluminous documentation 

of contacts. There were many contacts with current commissioners, 

former commissioners, on a variety of subjects. There are a lot of 

other areas that we could have pursued in the investigation and 

which we did pursue in the investigation. But at the end of the 

day, we based our analysis on the documentation that was provided 

to us. 

Senator THOMPSON. We also had documentation—excuse me. 

Mr. BERICK. I am sorry. 

Senator THOMPSON. No, go ahead and finish if you want to. I 

started to say, we also have—and I am not implying that there was 

anything wrong with these contacts any more than I would have 

suggested there was anything wrong with Mr. He ́bert’s contact. But 

he had to undergo a criminal investigation because of his one contact. I am just talking about what has been in the press and what 

people have been subjected to for all of this time and questions of 

a level playing field, and it pours over into the rest of your report, 

unfortunately, and the question as to whether or not you are giving 

due credit for what is happening now. 

27

We have records here in the file also from the law firm that represented Enron, and apparently, it is Ms. Breathitt’s father’s law 

firm that represented Enron and partners in that firm, along with 

Enron in-house lobbyists, with these numerous meetings and they 

were paid hundreds of thousands of dollars, apparently, including 

Johnny Hayes, who was with the TVA and then during most of 

when this was going on was the treasurer for the Gore campaign. 

I mean, it is hard—this is my last day on the Committee. This 

is not what I wanted to be doing my last day. But as I say, some 

days you have got to play the hand that is dealt you and we can’t 

not recognize what is sitting in the living room. 

Were you aware of what I just said? It is in your records, in your 

files. 

Mr. BERICK. We had—yes——

Senator THOMPSON. We have no independent subpoena power or 

authority. These are all Committee records——

Mr. BERICK. Yes, sir——

Senator THOMPSON [continuing]. In the Majority’s possession 

where we had to go to look through them. Were you aware of these 

things? 

Mr. BERICK. Yes. We have the documents, and I have reviewed 

those documents. 

Senator THOMPSON. You just didn’t consider them to be relevant 

for your purposes? 

Mr. BERICK. Didn’t consider them relevant to the California issue 

that we were examining. There are, again, many issues, including 

an issue you discussed this morning about the He ́bert-Ken Lay contacts. As you have observed, the Committee did ask the general—

actually, the Committee did not. At that time, it was Senator 

Lieberman on his own behalf asking for that investigation. We did 

not pursue that issue in this staff memorandum and in this staff 

investigation. 

Senator THOMPSON. Well, I appreciate——

Mr. BERICK. We could have raised that issue, but we didn’t. We 

focused on particular areas that we believed had important policy 

relevance to the Commission and its behavior and to very significant questions involving the energy markets and——

Senator THOMPSON. Do you think the Quinn, Gillespie lobbying 

firm had more impact on those policy issues than Commissioner 

Breathitt did? 

Mr. BERICK. What we say in the memo is where we came out on 

this, which was it is clear that Enron engaged in a very extensive 

campaign to influence deliberations by the Commission directly 

and indirectly on the California issue. 

Senator THOMPSON. Well, I think we are——

Mr. BERICK. At the end of the day, we have acknowledged that 

the Commission, in adopting the price caps in June 2001, took a 

position contrary to what Enron stated its position was. But the 

facts——

Senator THOMPSON. But on December 15, 2000, it didn’t take a 

position that it was totally contrary to what Enron wanted. December 15, rejecting wholesale rate caps. 

My only point is, and I think you are making my point, Mr. 

Berick, in what you just said. You say in your report it is difficult 

28

to evaluate the impact of Enron’s far-reaching efforts in decisionmaking with FERC. I am totally at ease with the notion that 

Enron did whatever it could wherever it could, and I am not suggesting that there is necessarily anything improper. Unfortunately, 

I come across the names of people I know here, some of these 

Enron lobbyists, lawyers, friends of mine. At least they were until 

today when they hear about this hearing. [Laughter.] 

But it is there. It is in the records, it is in the files, and I felt 

compelled to raise the issue with you. But as I say, you have made 

a very extensive report, and I think for the most part, made a valuable contribution with most of this report. 

Thank you very much, Mr. Chairman. 

Chairman LIEBERMAN. Thanks, Senator Thompson. 

Let me just do a few follow-ups. The first, I suppose, I should say 

in defense of the Quinn, Gillespie firm, that it is not a Republican 

firm but, for better or worse, a bipartisan firm. Mr. Quinn would 

probably want to assert his strong Democratic lineage. 

The second is that this is the first that I have heard of this question of the law firm, which I gather Commissioner Breathitt’s father has some part in. I was troubled when you mentioned at the 

start of the hearing you were going to bring it up, that I hadn’t 

heard about it. 

I have heard Mr. Berick’s answers. I actually asked my staff 

about it back here and they went out and did a—with the options 

that the modern world provides—a NEXIS search and find a number of news stories at the end of October of this year, including, not 

surprisingly, from some newspapers in Tennessee because of the 

presence of the two people in the firm in Tennessee about this matter that they were lobbying on behalf of Enron and did have communication with Commissioner Breathitt. I regret that I didn’t 

know about that before, but has, I gather, been a matter of public 

record, and, of course, all the documents that the staff, the Majority subpoenaed were shared with the Minority staff, as well. 

I just want to give you the opportunity, Mr. Berick, and I think 

I understand what you are saying, that the contacts with this firm, 

which I gather from Senator Thompson and I communicating informally up here is a Louisville-based firm——

Senator THOMPSON. I think so. 

Chairman LIEBERMAN [continuing]. But has some connection to 

these two folks from Tennessee. 

Senator THOMPSON. They have offices in Nashville. 

Chairman LIEBERMAN. This firm didn’t jump out at you and its 

contacts with Commissioner Breathitt didn’t jump out at you because the information that we subpoenaed and got showed a very 

significant number of, I presume, law firms and other lobbyists 

having contact with all the FERC commissioners on Enron’s behalf. 

Am I hearing your explanation correctly? I understand that is part 

of it, and the other part of it is that you were focused on the California energy transactions and didn’t see any connection between 

this context and that matter. 

Mr. BERICK. First of all, Mr. Chairman, there were, again, voluminous contacts. I hope you will forgive me for this, but Bill 

Massey’s declaration of the number of contacts he had with Enron 

goes on for several pages in the documentation he reported to us. 

29

Again, it doesn’t mean that there weren’t contacts. There were a 

number of contacts that both current commissioners and former 

commissioners had with Enron. We did not pursue all those because they did not appear to us to be significant issues related to 

anything that went to the heart of Enron’s corporate activities and 

Enron’s collapse, which was where we tried to go with this hearing. 

What activities that FERC engaged in or that Enron engaged in 

were related to Enron and Enron’s collapse and what we could do 

to make sure that, as you said in your opening statement, we didn’t 

find ourselves in a similar situation with the collapse of the largest 

energy trader, seventh largest corporation in the United States? 

What kinds of lessons should we learn here? 

The particular matter that Senator Thompson has raised with 

the law firm, as I understand the record, involved an Enron dispute with Tennessee Valley Authority over some power contracts, 

and at the time, again, it didn’t—at the time then, at the time now, 

it wasn’t really at the heart of the kinds of policy issues that we 

felt were critical to examining. We could have. We could go back 

to those issues. 

There were many issues that came up in this investigation which 

we could have pursued, but the selection we made was based upon 

those that we felt were relevant to the future of the way in which 

these markets are regulated and that is how we made the decision 

of which issues to pursue and which issues not to pursue. 

Chairman LIEBERMAN. So your understanding, and again, we 

should save most of these questions for Commissioner Breathitt to 

answer, but your understanding from the documents obtained 

under subpoena was that the matter that the Louisville and Nashville offices of this particular firm was discussing with the FERC 

had to do with the TVA, is that correct? 

Mr. BERICK. Yes. 

Chairman LIEBERMAN. OK. And just to clarify, and I don’t know 

if you could put a number on it. I presume that in the documents 

the staff went over, can you put any number on—did all of the 

Enron commissioners during the period you investigated—were all 

of them contacted by lobbyists, individually by lobbyists on behalf 

of Enron? 

Mr. BERICK. I don’t know. I would have to say many commissioners reported contacts with Enron in one form or another, either 

direct contacts or meetings involving industry associations or those 

kinds of things, workshops, industry conferences——

Chairman LIEBERMAN. Right. 

Mr. BERICK. I have no idea how many total we are talking about, 

because we went back 10 years. We went back to all the commissioners. 

Chairman LIEBERMAN. So you would say most of them had contacts with Enron lobbyists? 

Mr. BERICK. Or with Enron. Not just through lobbyists——

Chairman LIEBERMAN. Or with Enron directly? 

Mr. BERICK [continuing]. But with Enron itself or representatives 

of Enron. 

Chairman LIEBERMAN. And just to understand why you didn’t 

focus on Commissioner Breathitt and her contacts, but you tell me 

30

1The Bone Memo appears in the Appendix on page 734, Vol. IV. 

and we will review this internally, were her contacts more numerous than other commissioners, do you recall? 

Mr. BERICK. No, they weren’t. 

Chairman LIEBERMAN. They were not? Her contacts with people 

on behalf of Enron were not more numerous than the contacts that 

other FERC commissioners had? 

Mr. BERICK. No, they weren’t. 

Chairman LIEBERMAN. I don’t have any further questions. I am 

inclined to go on to the next panel, unless you would like to——

Senator THOMPSON. No, Mr. Chairman, I think I must follow up 

a bit. Maybe we ought to ask the question more precisely. Were 

there any other commissioners who had that level of contact with 

Enron lobbyists through 2000 and 2001, because as you said, you 

went back and asked for contacts over a 10-year period. If the point 

is that there are other—during the focus of your investigation, 

which I understand is 2000 and 2001, basically, there are other 

commissioners with other contacts, we should be talking about 

them, too. We should not be singling out one commissioner. 

This is just the information that we had. We started out with the 

information that the commissioners themselves provided for us, 

and at least I am not aware of anywhere near this level of contact. 

But the records speak for themselves. I would suggest, Mr. Chairman, we go back and check on that. Maybe Mr. Berick cannot remember that. 

But I would say that you need to think through your answer to 

the TVA question. Now, it is true that some of these meetings were 

with Johnny Hayes, who had been commissioner of TVA. This is 

on August 24. I assume that his prohibited activity, his banned activity was past and I think he has a 2-year ban with regard to Federal agencies on things he was directly involved in, but the facts 

will speak for themselves. I can only assume that he is OK as far 

as that is concerned, and there are some meetings there with Mr. 

Hayes. It is also true that Mr. Hayes apparently received $200,000 directly from Enron and also another $300,000 from this law firm, 

the Wyatt law firm, and that was a part of a $500,000 fee that the 

Wyatt law firm had been paid by Enron. So perhaps we can find 

out about the TVA aspect. 

But there is a memo in the file here. We went to the law firm 

of Mr. Hayes—of course, he is not a lawyer, but the Wyatt law 

firm, and they supplied information that is in the Committee files 

and Mr. Bone, who was a partner in that firm, who was in most 

all of these meetings with Commissioner Breathitt made a memorandum.1 I am not sure what the date of it is. I am not sure it is 

dated, but it was clearly during the Presidential campaign, and Mr. 

Bone, who was at that time, as I say, lobbying for Enron, said, 

‘‘very friendly meeting with Linda Breathitt.’’ I won’t read all of it. 

We can go over it with Ms. Breathitt. 

‘‘We had a good opportunity to talk about the issues and her position as the swing vote. We visited Gore headquarters and had 

lunch with Johnny Hayes. Next point, the FERC will be responding 

today to the request of President Clinton and Secretary RichardVerDate 0ct 09 2002 14:53 Jun 09, 2003 Jkt 083483 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 C:\DOCS\83483.TXT SAFFAIRS PsN: PHOGAN
31

1 Records from 10 year-period appears in the Appendix beginning on page 1 of Vol. IV. 

son. FERC will be very responsive to the crisis with investigations 

in California and possibly a hearing in California. She is very impressed with Steven Keene and spoke highly of him.’’ Steven 

Keene, of course, is with Enron, also. This has nothing to do with 

TVA. This has to do with California. 

I have no further questions, Mr. Chairman, unless the witness 

wants to respond to that. 

Chairman LIEBERMAN. Do you want to respond to that? 

Mr. BERICK. No——

Chairman LIEBERMAN. Let me ask, and then I do want to move 

on to FERC, but why did you make the reference to TVA? Was that 

in the information that was submitted by Commissioner Breathitt 

or FERC to——

Mr. BERICK. No. The files that I think that Senator Thompson 

is referring to were provided to us from Enron, our request from 

Enron for contacts with FERC and my review of those documents 

showed that, to the extent that there was an issue involving FERC, 

it had to do with the TVA contact. 

Chairman LIEBERMAN. Right. In fairness, we ought to give you 

a chance to go back and look at it. You looked at tens of thousands 

of documents to get to the priority choices you made about the four 

areas you were going to investigate. These are all the pages that 

were submitted to us, and every one of these pages contains, depending on the size of the description, between five and ten individual contacts between Enron employees or representatives and 

commissioners or staff of FERC. There have got to be several hundred contacts here, and I would——

Senator THOMPSON. Mr. Chairman, if I may, I would suggest, if 

that is not public, that ought to be made a part of the public 

record.1 I assume what you have got there goes back over a 10-year 

period and it may or may not be relevant. But I think that the 

record ought to speak for itself and let people decide for themselves 

what is relevant. 

Chairman LIEBERMAN. That is fine with me, and I guess I want 

to just state for the record, and I know you are not questioning 

this, but just in case there is an implication, that there was no directive from the Chairman, certainly, to the staff to——

Senator THOMPSON. I know that, Mr. Chairman. 

Chairman LIEBERMAN [continuing]. To go and kind of get the Republicans and protect the Democrats. This investigation and the 

conclusions that Mr. Berick and I, in my opening statement, 

reached fall equally, in fact, probably at least as much, maybe 

some would say more, on previous FERC commissioners than the 

current ones because the aim here is not partisan. The aim is to 

figure out how we can protect consumers from being taken again. 

Senator THOMPSON. Mr. Chairman, there is no question about 

that, and you have always been fair and even-handed as we approach these things. There are a lot of people involved. You and I 

both get the results of these things sometimes as we walk in, especially after having been off as long as we have. But unfortunately, 

we have a history of several months with regard to this issue and 

32

I think the record just needs to speak for itself with regard to all 

the other issues. 

There have been other good people. I cast no aspersion on any 

commissioner or any lobbyist. I have lobbied and I have been lobbied. But there have been other good people who have suffered 

from the subjections or implications and so forth that have been 

made in the public. I just think the record ought to be complete. 

And if Enron was fervently and feverishly lobbying other commissioners in 2000 and 2001, we ought to know about that. 

Chairman LIEBERMAN. When the hearing is concluded, Mr. 

Berick, you and I can sit and talk and see what more can be done 

to pursue some of these matters, if appropriate, and then, dare I 

say, it will be up to Senator Collins as the next Chair to determine 

whether she wishes to proceed with those investigations. 

Mr. Berick, I thank you very much for an extraordinary piece of 

public service. I think there is a lot for all of us to learn from the 

conclusions you have reached, and particularly from the four cases 

that you focused on. I hope that we will do that together with the 

commissioners at FERC. Thank you very much for your work. 

Mr. BERICK. Thank you, Mr. Chairman. 

Chairman LIEBERMAN. Thank you. 

I now call the four commissioners of FERC as the second panel, 

the chairman, Hon. Patrick H. Wood, III, members Linda K. 

Breathitt, Nora Brownell, and William L. Massey. Would you 

please remain standing and raise your right hand. We are getting 

the alignment together with the name plates. 

Do you swear that the testimony you are about to give this Committee is the truth, the whole truth, and nothing but the truth, so 

help you, God? 

Mr. WOOD. I do. 

Ms. BREATHITT. I do. 

Ms. BROWNELL. I do. 

Mr. MASSEY. I do. 

Chairman LIEBERMAN. Please be seated. The record will show 

that the four witnesses all answered the question in the affirmative. 

It is our understanding, Mr. Wood, that you are going to be testifying on behalf of the Commission, but we are going to give each 

of the other three commissioners a brief opportunity to make any 

additional comments that you think necessary and appropriate 

after Mr. Wood completes his testimony, and Commissioner 

Breathitt, obviously, you may want to respond to the questions 

Senator Thompson has raised. 

We understand that either all of you or most of you have had to 

rearrange your schedules to be here—this was a postponed hearing—and we thank you very much for that and for your cooperation 

in general. 

Commissioner Wood. 

33

1The prepared statement of Mr. Wood with attachments appears in the Appendix on page 

130. 

TESTIMONY OF HON. PATRICK H. WOOD, III,1 CHAIRMAN, 

FEDERAL ENERGY REGULATORY COMMISSION 

Mr. WOOD. Good morning, Senator Lieberman, and Senator 

Thompson. Thank you both for the opportunity to respond today. 

In the mid-1980’s, the Federal Energy Regulatory Commission 

began its effort to restructure the wholesale natural gas industry 

to take advantage of competition between and among producers 

and sellers of natural gas to reduce prices for end use customers 

and to incent the drilling and production of this important natural 

resource that just 10 years before was thought to be swiftly dwindling. 

Congress followed up the FERC’s effort with the 1989 Wellhead 

Decontrol Act, and independent calculations of customer savings of 

this FERC-initiated restructuring ranged from $200 billion to $600 

billion to date. I was proud to be a part of that pro-customer effort 

as a staffer to a member of the Commission, and that is a big part 

of why I am back today. 

One of the other major industries under FERC regulation is the 

electric power industry, and thanks to the 1992 Energy Policy Act 

and subsequent FERC implementation of Congress’s vision through 

the 1990’s, restructuring of the power industry has begun, as well. 

For restructuring to be successful and yield benefits for customers, 

however, there must be some basic preconditions: Sufficient energy 

infrastructure, balanced market rules, and vigilant market oversight. 

Upon joining the Commission last summer, I concluded that none 

of these preconditions was firmly in place in the electric industry. 

After a summer of internal and external assessment with my colleagues here, we adopted a strategic plan which gave equal primacy to all three of these goals. In the past submissions to Congress by prior administrations, the oversight goal was subsumed in 

other strategies, and I would call attention to the strategic plan as 

the final three pages of my filed testimony. 

Unlike the other agencies that were cited earlier, ours is charged 

with a significant role in infrastructure and in compliance with the 

Nation’s environmental and safety laws. We issue licenses for the 

Nation’s non-Federal hydropower facilities. We oversee their environmental and safety compliance. We issue certificates for construction and expansion of the Nation’s extensive natural gas pipeline network, including the many environmental and land owner 

issues and rate matters associated with such activity. We also regulate the rates and services of the similarly extensive oil and refined products pipeline network. 

These infrastructure responsibilities naturally dominate the 

agency’s resource allocation and account for 53 percent of our program and support employees. Fifty-seven percent of the rest of our 

employees handle the market oversight function at FERC, which is 

a total of 335 program and support employees, and the other 250 

staff are dedicated to our second strategy, which is balanced market rules. Employees from all nine of the agency’s offices contribute 

to the achievement of our strategic plan. 

34

We look forward to getting our fiscal year 2003 request in place 

so that we can continue to hire the necessary expertise and talent 

to achieve the oversight goals that my colleagues and I have set for 

the agency. The increase of 50 staffers in my first budget request 

reversed a decade-long trend of agency downsizing by over 20 percent, and in my estimation, these new employees are badly needed. 

As with this summer’s GAO report on FERC’s oversight performance, I welcome constructive criticism of our agency’s performance. 

I also appreciate, Senator Lieberman, your personal and sincere effort to help our agency do its job better. We owe our best effort to 

the Nation’s energy market customers and to the many fine companies whose investment over the years has underpinned this national economy. 

To focus for just a moment on today’s topic, vigilant market oversight, I am pleased with the progress that we have made in the 

past year. It started, quite frankly, with a mindset change at the 

top, a commitment from the four of us that our ability to oversee 

these industries for the benefit of customers must be second to 

none. For me, this is a need borne of my past job as a State utility 

regulator, which depended on FERC to do its job well so that I, as 

a State regulator, could do my job well. We are today in Chicago 

at a meeting of all the national State commissioners. In fact, Linda, 

Nora, and I have all formerly been on our respective home State 

commissions and share this commitment that we are partners with 

States in doing this job well. 

This commitment of mine and of ours has led to the creation of 

the Commission’s Office of Market Oversight and Investigation, 

which reports directly to the commissioners in our now-frequent 

closed meetings. This is an idea I adapted from our sister agency, 

the Commodity Futures Trading Commission. No longer are investigation issues handled at the staff level alone. Now, they are all 

brought to the attention of the full Commission and senior staff 

management from all program offices as the open meeting laws 

allow. 

We hired the new office head, Bill Hederman, sitting here behind 

me, earlier this year after a national search. He has been very successful in attracting talent from within and from outside the agency to do the hard, probing work necessary to be a vigilant market 

policeman. Of course, OMOI is not the only part of the agency involved in market oversight functions, but now there is a primary 

office charged with leading this responsibility. 

The oversight role is also shared with States and with regional 

bodies, such as the Electric Independent System Operators and Regional Transmission Organizations. Full integration of this oversight capability into FERC’s culture and processes is underway, 

and I share none of this gentleman’s concern that it will not be successful. In fact, I am here to make sure that it is successful. 

Participants in the energy market know that we are serious now. 

Reports to our confidential hotline are up significantly, as are formal complaints filed with the Commission regarding issues of fair 

treatment. In our more proactive posture and with better analytical 

resources, the Commission has begun a number of non-public investigations of issues in all four of our industries. As the GAO report points out, it is not enough to wait for someone to file a comVerDate 0ct 09 2002 14:53 Jun 09, 2003 Jkt 083483 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 C:\DOCS\83483.TXT SAFFAIRS PsN: PHOGAN
35

plaint at FERC. We need to use all forms of inquiry to effectively 

police the industry. 

Everyone, from customers to investors, benefits when there are 

clear rules of the road. By and large, we have these in the gas, and 

had these in the gas industry since the 1980’s and 1990’s, when a 

series of FERC rulemakings set forth the contours of a restructured 

wholesale natural gas marketplace. 

Clear rules are not present in the power industry, however. One 

of the key actions we took in my first meeting as chairman in 

September of last year was to initiate a broad and open process to 

develop a sensible framework for the Nation’s wholesale power 

markets. This has led to publication of a formal proposal in July, 

referred to as the standard market design, and this is now open for 

public comment through January and February. Had this framework been in place 3 years ago, combined with the more methodical 

and objective oversight capability, as our next panel will discuss 

further, I believe the California experience would have been largely 

avoided. 

But we cannot live in the past. As the current Commission seeks 

to redress the past wrongs through pending enforcement trials and 

investigations, which we are doing in close coordination with our 

sister Federal agencies, we are focused on the future, focused on 

getting sufficient energy supply and demand infrastructure in place 

across the Nation, focused on establishing a sensible regulatory 

framework to govern the restructured energy markets, and focused 

on effective and watchful oversight of these crucial infrastructure 

industries so that customers continue to benefit from an efficient 

and reliable energy marketplace. Thank you. 

Chairman LIEBERMAN. Thanks, Mr. Wood. 

Commissioner Breathitt, do you have a statement you would like 

to make? 

TESTIMONY OF HON. LINDA K. BREATHITT, MEMBER, 

FEDERAL ENERGY REGULATORY COMMISSION 

Ms. BREATHITT. Yes. I have a brief opening statement. Mr. 

Chairman, and Senator Thompson, I am here today in a supporting 

role of Chairman Wood as he testifies with respect to the FERC’s 

oversight of Enron Corporation and the lessons learned from its financial collapse. I associate myself with the content of his testimony. 

I do want to add that I have supported the initiates taken by the 

FERC after Enron’s collapse. I believe the proceedings the chairman detailed in his testimony should go a long way toward ensuring that an Enron-type debacle does not happen again and toward 

ensuring that energy consumers receive adequate supplies at reasonable prices. 

Beyond these initiatives, I believe Chairman Wood’s effort in 

forming the Office of Market Oversight and Investigations, that we 

call OMOI, should enhance the agency’s ability to review energy 

market developments, identify problems in market function, and 

take corrective and punitive steps, as necessary. If this office successfully performs its mission, which I expect that it will, FERC 

will have taken an important step toward restoring confidence in 

36

regulatory oversight of the energy industry and restoring stability 

to this important component of our Nation’s economy. 

Finally, I would note that as I near the end of my tenure as a 

FERC commissioner, I believe I will be leaving an agency that is 

well aware of the need for vigilant oversight of the entities it regulates. The fallout from the collapse of Enron, as well as WorldCom, 

Quest, Tyco, and others, have painfully reminded us of the dangers 

of unchecked corporate behavior. The need to effectively encourage 

appropriate corporate behavior by regulated entities and discipline 

bad corporate behavior when necessary will continue as the Commission moves to more competitive and transparent markets for 

energy products. Thank you. 

Chairman LIEBERMAN. Thanks, Commissioner Breathitt. 

Commissioner Brownell, do you have a statement? 

TESTIMONY OF HON. NORA M. BROWNELL, MEMBER, FEDERAL 

ENERGY REGULATORY COMMISSION 

Ms. BROWNELL. I do, just a brief statement. I certainly join the 

Chairman and Linda Breathitt—in fact, I think you see before you 

a FERC that is working as effectively as any agency in government 

to address the tragedy that has occurred in our market, and let me 

tell you, when we came to the FERC, what we found was a market 

meltdown, an agency under siege, and a staff who were both overworked, overwhelmed, and looking for leadership. 

Under Chairman Wood’s leadership, with the introduction of a 

business plan, we have addressed many of the issues that the report raised today. But I appreciate that report, because, frankly, we 

all need to work more productively and affirmatively in anticipating what markets need, because, Senator, you said markets 

have no conscience. Well, adolescent markets have no self-control 

and markets do not develop without rules, and we are making 

rules. 

We are, indeed, dealing with the past as effectively and efficiently as we can, but we can’t rush to judgment because we need 

to get this right. We have seen a $90 billion market capital loss in 

the energy sector, a loss that this country cannot afford when our 

economy begins to grow again. We see growing transmission constraints. We see power quality disturbances which affect our industries, like the car manufacturing industries, very severely, in ways 

that we are not counting. We don’t see the investment in technologies that can address many of the environmental issues that 

we face and our grandchildren will face. 

So I look forward to working with you, this Committee, and other 

committees in addressing these issues. But I feel quite confident 

that while we may have been slow out of the starting gate, we have 

addressed a wide range of issues in a very short period of time. 

Chairman LIEBERMAN. Thanks very much, Commissioner 

Brownell. I accept the addendum to my comment. Maybe I would 

only add that this may be, instead of an adolescent market, an infant market, which definitely doesn’t have a capacity to self-control 

and needs a little parental guidance every now and then. 

Ms. BROWNELL. To be sure, a lot of parental guidance. 

Chairman LIEBERMAN. Thank you. Commissioner Massey. 

37

TESTIMONY OF HON. WILLIAM L. MASSEY, MEMBER, FEDERAL 

ENERGY REGULATORY COMMISSION 

Mr. MASSEY. Mr. Chairman and Senator Thompson, I will be 

brief. I agree that the Commission’s response to the Western energy crisis was generally timid and ineffective. The agency should 

have imposed price controls immediately when the market skyrocketed in the summer of 2000. This is what I championed and 

was extremely disappointed that the Commission did not impose 

such price controls for almost a year, until June 2001. Such controls imposed early could have stopped a lot of the economic carnage which turned into a disaster. 

I agree that the Commission should have been more vigilant in 

its market oversight. I support Chairman Wood’s new efforts in 

this respect. I believe that he has a strong commitment to oversight and market structure and is willing to put in place sufficient 

staff resources so that never again should we face the kind of travesty that we faced with the Western market meltdown. 

The agency needs to be very vigilant in its market monitoring 

and its oversight and intervene forcefully whenever abuses are 

found or whenever markets spin out of control. I believe this new 

unit that Chairman Wood has created is a strong step in the right 

direction. Of course, the proof will be in the pudding. If we’re back 

here 2 years from now because of the failure of oversight, then I 

will be wrong about that. But I don’t think we will be. I think the 

agency is moving in the right direction. 

I agree that the rules regarding affiliate abuses should be 

strengthened. We have a couple of proposed rulemakings that are 

being commented on now. One would substantially strengthen our 

affiliate abuse rules across the board for natural gas pipelines, electric utilities, power sellers, and others. That is pending and I hope 

that we can finalize that rulemaking soon. We also proposed a rulemaking with respect to the so-called ‘‘sweep accounts’’ that pipelines and electric companies have with their affiliates, and we have 

proposed strong new affiliate regulations. 

With respect to Enron Online, perhaps the agency should take a 

very close look at whether we should be regulating platforms such 

as Enron Online, and I support any effort to come to reach a conclusion about this at the agency as soon as possible. 

Thank you, Mr. Chairman. I look forward to your questions. 

Chairman LIEBERMAN. Thanks, Commissioner Massey. I remember when I was at law school we used to refer to a few of the Supreme Court Justices as the ‘‘great dissenters,’’ and maybe the 

record will show that going back some number of years, you deserve that title, which is a title of honor at the FERC. The record 

of what you have tried to do is clear and I appreciate it. 

Commissioner Wood, let me begin with the general question, 

which in some sense, I think, you dealt with in your opening statement, but am I correct that when you served on the, I forgot what 

it was called, but the utility commission in Texas, that was a traditional regulatory commission which heard petitions and applications by the local utilities for rate increases and then set the rates? 

Mr. WOOD. Yes, sir. I should add, though, in our years, they were 

rate decreases that we were going through in Texas. 

Chairman LIEBERMAN. Well, that is even better. [Laughter.] 

38

So it was a so-called regulated environment? 

Mr. WOOD. It was similar to what we are doing here, quite frankly. Our State statutes were changed in 1995, which was the year 

I——

Chairman LIEBERMAN. OK. So you were one of the early ones 

that had it. In Connecticut, in my previous position, I was Attorney 

General of Connecticut. We had an assistant AG who was over at 

the Department of Public Utilities and the commission and represented ratepayers in rate proceedings and then, ultimately, the 

commission determined what rate of profit, essentially, the particular utility would have and set the rate. 

To make a complicated story more simple than I should, there 

was a similar process going on at FERC with regard to wholesale 

energy rates. We got to deregulation and, of course, we relied on 

the market then. But I take it you agree that in what I have just 

described as a deregulated market, where not a commission or government set the rates, but competition does, that there is at least 

as much need for governmental oversight, is that correct? 

Mr. WOOD. Without question. I should add that in both the gas 

industry and the electric industry, the delivery of the commodity, 

so to speak, is still regulated by FERC and by States. The transmission of power, the transportation of natural gas, those are set 

by FERC. We have a staff and law judges that do the traditional 

rate case work for gas pipelines, for electric power companies. 

Chairman LIEBERMAN. Right. 

Mr. WOOD. It is the commodity of the power itself, much like the 

commodity of gas in the 1980’s and 1990’s, that is going through 

the more deregulated treatment, but not the conduit that moves 

the commodity. 

Chairman LIEBERMAN. But there is definitely a role for oversight, 

or in another sense, normally, it would be called regulation, but it 

is to make sure that the players——

Mr. WOOD. Play by the rules, that they play by the rules. 

Chairman LIEBERMAN. That they play by the rules, that they are 

playing fair, which obviously, looking back, did not happen here. 

Let me give you a chance to respond to the staff conclusions 

about the Office of Market Oversight and Investigations that you 

created. My inference is that they feel as I do, and as your fellow 

commissioners do, that this was a significant step forward, to establish the office, but that it may not have enough resources to be 

effective. You know, it is the ‘‘We are from the Congress and we 

are here to help you’’ commission, or maybe that is what we are 

saying. [Laughter.] 

So I want you to deal with some of that. But then the larger 

question, I think, is whether the rulemaking on market rules will 

actually address the larger institutional issues raised by the staff 

investigation, for example, the concern that FERC didn’t look more 

closely at the wind farm transactions or Enron Online or was not 

adequately vigilant about transactions with holding companies because they are not, in the narrow sense, directly related to the 

oversight of market behavior. 

So as productive, constructive a step as setting up the Office of 

Market Oversight and Investigations at FERC is, will it, in fact, 

39

get to some of the shortcomings that the staff investigation found, 

I think convincingly, in the Enron case? 

Mr. WOOD. I think, and to take the four issues, the Enron Online 

would actually be something that would come out of the new office. 

The type of expertise—I do take some umbrage, I suppose, at it 

being characterized as, I guess, a bureaucratic reshuffle, and not 

having seen the report, I don’t know what the exact words were, 

but we have had, in fact, some extensive hiring from the outside 

of significant people with other Federal experience and a tremendous amount of private sector experience for the 90 employees that 

we have hired to date. It is, in fact, the farthest thing that this 

agency has had from a bureaucratic reshuffle. 

But again, it ties back, as I said in my opening statement, Senator Lieberman, to the mindset change. The staff on this agency 

now know that the four of us, and hopefully our future people that 

follow us, are intellectually thirsty about these issues that come 

forth and that we need to be trained, as the staff do, the commissioners need to be trained—it is a group effort—to understand the 

markets and to really engage on the issues that come forth. 

So, again, you could put 600 people in OMOI, but if the commitment is not there at the top that not only we want this, but we 

care about it and we view it as a core part of our mission, as we 

move away, as your first question pointed out, Senator, from the 

world of just traditional cost-of-service regulation to one that is 

more market-based, we have got to make that a core part of our 

mission. The staff have to know it. The staff have to know when 

they are coming to work here that this is not just a Pat Wood fad, 

but that this is a core part of what FERC is all about. I think people understand that now and I expect in my term as chairman that 

we will continue to deepen and expand the roots of the market 

oversight function. 

But there are more people than just market oversight that do the 

work that we are talking about. For example, the wind farms issue 

is kind of what fall in the traditional licensing and traditional regulation parts of our agency, which do involve market oversight but 

are not involved in the investigations and the kind of forward-looking training and the reviews of data that come in to see what has 

happened in prices in competitive markets or in handling the hotline complaints that come in from third parties, either confidentially or publicly filed with the Commission. So there are a number 

of things that would go on. 

To take the third item, the California investigation, we are presently doing that with existing staff because the Market Oversight 

Office was not set up at the time that we began the investigation 

into events in the West back in last January and February, but I 

would expect that future aspects of that type of work going forward 

would be centered out of this office, drawing upon resources across 

the agency. Certainly, an investigation of that breadth is going to 

overwhelm just one office and will necessarily require us to be a 

matrixed organization, and I like that. I want that. 

Chairman LIEBERMAN. Let me ask you this. Understanding that 

the staff work went back over 10 years in FERC’s records, most of 

which time, obviously, you were not there, do you take issue with 

any of the conclusions that the staff investigation has reached reVerDate 0ct 09 2002 14:53 Jun 09, 2003 Jkt 083483 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 C:\DOCS\83483.TXT SAFFAIRS PsN: PHOGAN
40

garding the, let us say the timidity of FERC’s actions with regard 

to the four issues that the staff chose to focus on, the Western markets—California obviously was one, the wind farms, the Enron Online, the holding company, and the inter-related entities transactions. Do you think that, since you are in charge now and you 

will be for some period of time, familiar as I believe you are with 

the staff investigation, do you think that they reached solid conclusions? 

Mr. WOOD. I am on the record as saying I was concerned at the 

time, as a State commissioner looking in from the outside, that 

FERC’s slowness to move on the wholesale market issues that were 

under their domain in 2000 were of concern to me, and they still 

are. I think we have got to be, if not ahead of the curve, right on 

it, not well after it, and I do think that that series of events, unprecedented, admittedly, would have probably taken anybody by 

surprise. 

But it is the kind of retooling that I am looking for that it would 

not take us by surprise, that we would be so on top of, as I should 

say, to our staff’s credit, in recent weeks, the issues that come up 

in just looking at daily gas trades. We find the list, usually look 

into them. 

Chairman LIEBERMAN. Yes. 

Mr. WOOD. Those kind of things, when you nip them in the bud, 

they don’t develop into catastrophes like you have out West. But 

I do think that one probably, I have said publicly and I will say 

again today, is along the valid track. 

The QF issue is an interesting one because it is a statute 

that——

Chairman LIEBERMAN. Why don’t you spell it out for the record. 

Mr. WOOD. I am sorry, the wind farms, the renewable power. 

Congress really wanted to make sure that we had renewable power 

when they passed the PURPA back in 1978, and that began a lot 

of the investment in renewables and in cogeneration and some of 

these more environmentally benign resources, and in that statute 

and in the late 1970’s, the implementation of that by the FERC, 

there was a very strong desire to make sure that there was not a 

bureaucratic obstacle to those resources getting built. They were, 

in fact, as I think Mr. Berick pointed out, paid a premium over 

what the general power would be, so there was basically a legislative enticement for those resources to come to the marketplace. 

So the FERC set up a self-certification process that was reviewed 

in Mr. Berick’s opening remarks that allowed a party to self-certify 

and then get into the marketplace without waiting for a 6-, 8-, or 

10-month procedure at our agency to basically approve that they go 

forward. I think that there have been 9,000 of these since 1978 and 

we have had about 20 of them actually—and 90 percent of the 

9,000 have taken the self-certification route. About 10 percent have 

taken the route that we are going to go to the Commission and 

have them affirmatively rule on our case, because we need it for 

financing generally, have taken that route. 

And of the 90 percent, I think about 20 have been protested by 

the utility that has got to pay. I mean, it was set up in the Carter 

years’ FERC to, in fact, get the incentives lined up so that the utility, and this was revisited back in 1995 when the Commission reVerDate 0ct 09 2002 14:53 Jun 09, 2003 Jkt 083483 PO 00000 Frm 00052 Fmt 6633 Sfmt 6633 C:\DOCS\83483.TXT SAFFAIRS PsN: PHOGAN
41

visited these rules, there is a person there who has got an incentive 

to make sure that somebody is not lying, and that is the utility 

that is paying the extra charge and the State commission that 

stands behind that utility. 

For that reason, FERC in 1995 said, if, Enron, you come in and 

tell us that you are changing this or selling that, you have got to 

tell the local utility in California and you have got to tell the California PUC that you are doing that. That has been used about, 

probably again, 20 times over the past two decades to trigger an 

action at FERC, where we actually review and find out if, in fact, 

those people qualify for the benefits or not. 

I think this particular example has, of course, due to the Fastow 

admissions, been triggered by us into a proceeding of FERC to review the qualifications for the benefits. But quite frankly, I do 

think, over time, the balance of 9,000 applications and 20 that were 

asked to be looked at and one that now has actually been found 

perhaps to be false—again, that is pending before our Commission. 

It may well be benign. I do not want to prejudge that. But I do 

think that one probably, I would say, is a little—maybe a bit of a 

hard slap that we deserve——

Chairman LIEBERMAN. But otherwise, accepting that, you would 

say that the staff conclusions have merit and that you will embrace 

them to the best of your ability as you go forward in your chairmanship? 

Mr. WOOD. Sure. Absolutely. Again, as I mentioned, I appreciate 

constructive criticism. We are a public agency. We work for the 

good of the customer and we want to make sure that we do that 

as best we can. 

Chairman LIEBERMAN. Let me ask you a final question before I 

yield to Senator Thompson. Just speak for a moment, if you would, 

about the changes in law that you request in your testimony and 

whether there are any additional changes that you might suggest 

for us in law or whether you think the remedy to the illnesses, the 

ailments that the staff report shows are largely going to come from 

the retooling that you are doing and perhaps from some more adequate staff—or more staff. Let us assume what you have got now 

is adequate to the task and more people——

Mr. WOOD. Well, we have asked for more, and I believe the conference report——

Chairman LIEBERMAN. Yes. 

Mr. WOOD [continuing]. Does indicate our increase of that. I do 

think, again, as I mentioned, that a good part of this, a good part 

of our ability to do this job better, again, comes from our personal 

commitment to that, from an empowered staff who, despite what 

you have heard today, have done a fantastic job over the last decade. Again, as it has been downsized by 20 percent from when I 

worked here as a staffer back in 1991–1992, it is 20 percent smaller than it was and has quite a bit more to do. 

Chairman LIEBERMAN. Yes, it is a problem. Look, the big picture 

that I come away with is that the rules of the game changed. We 

went to a deregulated environment. Some, very aggressive, sophisticated, find the angles, be as clever as they can to make the most 

money they can. Players, including Enron, got into it and the 

FERC just did not keep up with them. The world had changed. 

42

1Listing of contacts between Commissioner Breathitt and Charles Bone appear in the Appendix on page 699, Vol. IV. 

This is a regulatory agency that was now operating in a deregulated environment and the consumer paid the price and it was an 

enormous price. 

But let me not go on further with that, and ask you to describe 

in a little more detail the legislative changes that you recommend 

in your report. 

Mr. WOOD. Thank you. We had asked and was included in the, 

I guess now-retired energy bill, for an increase in civil penalty authority to be administered by the Commission in the Federal Power 

Act. We subsequently recognized that we did not have that in the 

Natural Gas Act, either, and have asked for that, but that was not 

in the electricity title because it is a gas issue. 

Chairman LIEBERMAN. OK. 

Mr. WOOD. So the civil penalty side would be as enhancing our 

authority at FERC to use those tools. We have also joined in the, 

I think, broad support for enhanced criminal authority, which 

would be administered, as it is today, by the Department of Justice 

for violations of the Power Act and of the Gas Act. 

Chairman LIEBERMAN. OK. So part of reaching to the whole 

Enron saga and scandal is to beef up the enforcement authority of 

FERC and FERC working with the Department of Justice? 

Mr. WOOD. Yes, sir. 

Chairman LIEBERMAN. Thanks, Commissioner Wood. Senator 

Thompson. 

Senator THOMPSON. Thank you very much, Mr. Chairman. 

Ms. Breathitt, would you like the opportunity to respond to some 

of the things that have been said here this morning, specifically, 

the 46 or so contacts that you had with Enron lobbyists over 2000 

to 2001? 

Ms. BREATHITT. Yes, sir. I don’t have the same information that 

you have. I don’t know what the 46 are, and——

Senator THOMPSON. We are going to be giving you copies of the 

listing of the Wyatt law firm.1

Ms. BREATHITT. OK. 

Senator THOMPSON. We got these from the Wyatt law firm. And 

basically, as you can see there, telephone conferences with Mr. 

Bone, Mr. Hayes, and others. 

Chairman LIEBERMAN. Commissioner Breathitt, if I might, with 

your permission, Senator Thompson, this information was obtained 

by the Committee staff as a result of requests and subpoenas in 

some cases, both to FERC and to Enron, which I presume gathered 

some of it from its attorneys. 

Senator THOMPSON. Yes, and the attorneys, in some cases, the 

attorneys themselves who represented Enron. 

Chairman LIEBERMAN. Right. 

Senator THOMPSON. Including the Wyatt firm that Mr. Bone was 

affiliated with at that time. 

Ms. BREATHITT. With respect to my wonderful father, he has 

been associated with the Wyatt firm for a number of years, as 

counsel on a fixed-priced salary, and a rather low one at that. He 

wanted to be able to come and go as he pleased in his retirement 

43

1The Bone memo, dated February 6, 2002, appears in the Appendix on page 734, Vol. IV. 

years and did not share in any of the profits of the firm. He has 

since retired and has no financial arrangement with the firm and 

has not had for a year. 

With respect to the California energy crisis and whether or not 

there was a relationship with Enron lobbyists, I don’t know how 

Mr. Bone and/or Mr. Hayes accounted for the contacts, but the trip 

that I made to Nashville in August was a vacation day that I recall 

I went to visit my aunt and uncle, had lunch with my nephew, and 

I did visit the Gore campaign that day and saw Charles and Johnny, who gave me the tour of the Gore campaign. But that was a 

day that I went to Nashville to visit my aunt and uncle and have 

lunch with my nephew, as well. I grew up 70 miles north of Nashville and it was a town that I frequented a lot. 

Senator THOMPSON. I might say, Mr. Bone’s memo,1 which we 

will make a part of the record, also says that you wanted to make 

sure you emphasized that you were in Nashville visiting family. 

Ms. BREATHITT. I don’t know what he said, but I do have family 

there and have had for 50 years. 

Senator THOMPSON. That is consistent with what you said. That 

is my point. 

Ms. BREATHITT. Yes. The Enron contacts that I have disclosed 

were ones that I had records of. We don’t keep telephone logs in 

my office, and to the best of my recollection, I disclosed to the Committee everything that we had records of and that I could remember. Enron and Enron’s lobbyists, the times spent that I talked to 

them were very disappointed that I had not been a proponent of 

mandatory RTOs. 

Chairman LIEBERMAN. Just define RTO for the record. 

Ms. BREATHITT. Regional Transmission Organizations. They were 

very interested in having mandatory RTOs having unfettered, open 

access through the transmission lines. They were very interested in 

having a single transmission tariff. They were a big proponent of 

unbundled retail sales, and I have probably been the most reticent 

member of the Commission on those issues. 

With respect to California, on the December 15, 2000, order that 

you referenced, Senator Thompson, we began and continued in successive orders putting in price controls, each one going further than 

the one before, and that particular order also eliminated the tariff 

for the power exchange, which, in some regards, one of the Enron 

trading strategies called ‘‘Fat Boy,’’ which was a strategy to sell 

power when the IOUs under-scheduled their load, that was impacted when the Commission instituted an under-scheduling penalty back in December 2000 when we eliminated the California 

power exchange and put in that under-scheduling penalty. We also 

allowed resources owned by the IOUs to directly serve their own 

load rather than selling them through an exchange. 

In all of the ensuing orders, we continued to go further with our 

price controls, and in April 2001, we adopted a ‘‘must offer’’ provision, which has been considered the regulatory response by the 

three-member Commission at the time, that had the most positive 

effect in controlling the California energy collapse and the high 

prices, and that was the April 2001 order. 

44

1The Bone memo, dated February 6, 2002, appears in the Appendix on page 734, Vol. IV. 

It was around that time that we began to consider capping the 

whole Western market and it was, I believe, my idea for all of us 

to go to Boise and talk to Western members about whether we 

should extend our price plans and price caps West-wide. We came 

back and we did so in June, and when my new colleagues joined 

me and Commissioner Massey at the time, it was the June order 

that was in the process of being written when they came that 

furthered the price controls. 

So I would like an opportunity to, Senator Thompson, to look at 

this document and be able to respond to it. It is difficult for me to 

do so today when it has just first been handed me, but——

Senator THOMPSON. I might say, Ms. Breathitt, and you will have 

all the time that you want, that it is true that we asked you for 

these contacts and asked you in a supplement and you responded. 

We have many more here than what you responded to, but it is understandable that the firm would have better records and more 

complete records than a commissioner would. I understand that. 

I am trying to establish some basic points here without casting 

aspersion on you, certainly not your father or your father’s firm. He 

is a distinguished public servant. But this is relevant information, 

and if I can do it in a short fashion, I will try to do so. 

What seems to be the case is that Enron, and I am looking again 

at one particular memo that I hopefully will make a part of the 

record, from the firm and Mr. Bone,1 that apparently Enron went 

to Mr. Hayes and Mr. Hayes went to the firm and they wound up 

representing Enron. The firm did some work for Enron with regard 

to TVA and Mr. Hayes and Mr. Bone in the firm did some work 

with regard to FERC. 

So let me see if we can establish it by the numbers here. It is 

accurate, anyway, Mr. Bone was a partner in the Wyatt law firm, 

is that correct? 

Ms. BREATHITT. Yes, and he was at the time, and Mr. Bone has 

been a friend of mine for a number of years, and I don’t know how 

he recorded our phone conversations, but during that time, I have 

to assume that a lot of them were more than likely political in nature. 

Senator THOMPSON. Well, there are several—I can understand 

that. Mr. Bone has been a friend of mine for a number of years. 

If you look here, there are a number of phone conversations, very 

few of them are with Mr. Bone alone. They are Mr. Bone and Mr. 

Hayes; Mr. Bone and Mr. Hayes and Mr. Shapiro, who is with 

Enron; Mr. Bone, Mr. Hayes, and Mr. Delaney, who is with Enron; 

Mr. Bone, Mr. Hayes——

Ms. BREATHITT. I don’t know a Mr. Delaney, and I——

Senator THOMPSON. Telephone conference with Commissioner 

Breathitt with Charles Bone, Johnny Hayes, and Mr. Delaney, October 19——

Ms. BREATHITT. I don’t know who that is. 

Senator THOMPSON. OK. 

Ms. BREATHITT. And I don’t recall conference calls. 

Senator THOMPSON. What about Stan Horton with Enron? 

45

Ms. BREATHITT. Stan has been in my office to see me as head of 

the pipelines——

Senator THOMPSON. As he has other commissioners, I am sure. 

Ms. BREATHITT. We have numerous courtesy visits. But I—I don’t 

know how—I have talked to Stan on the phone. He has also been 

in my office numerous times. 

Senator THOMPSON. Steve Kean. 

Ms. BREATHITT. I have known Steve since I was a State commissioner in 1993. He was very prominent at NARUC meetings and 

did State regulatory work. 

Senator THOMPSON. Linda Robertson. 

Ms. BREATHITT. Linda Robertson ran their Washington office and 

has come to see me in my office. I don’t recall ever talking to her 

on the phone——

Senator THOMPSON. Kathleen Magruder. 

Ms. BREATHITT. I don’t know who Kathleen Magruder is. 

Senator THOMPSON. She is with Enron, also, but you can’t testify 

to what you don’t know, but Mr. Bone’s, the firm’s records indicate 

that all of these conversations—most all these telephone conferences, is the way they describe them anyway, had to do with, 

often with Mr. Hayes, often with one or more of these other Enron 

people, which gets down to the point, is it fair to assume that these 

Enron—and you know during this period of time, August 2000 

through 2001, Mr. Bone was representing Enron and the firm was 

representing Enron, were they not? 

Ms. BREATHITT. I don’t know when Mr. Bone started representing Enron, because——

Senator THOMPSON. Well, you know it is some——

Ms. BREATHITT [continuing]. I just don’t—yes, he did disclose 

that to me. 

Senator THOMPSON. And you know Mr. Hayes was, although he 

is not a lawyer, he was representing Enron? 

Ms. BREATHITT. I don’t know about Mr. Hayes representing——

Senator THOMPSON. Well, he was talking to you on behalf of 

Enron, was he not? 

Ms. BREATHITT. He was with Mr. Bone twice when we had dinner, but I don’t know what his relationship was with Enron. 

Senator THOMPSON. Well, according to their records here, over 

that period of time, there are either nine telephone conversations 

or meetings that involved Mr. Hayes. During that time, do you recall the subject of Enron ever coming up? 

Ms. BREATHITT. Yes. 

Senator THOMPSON. And, of course, it came up with regard to Mr. 

Bone and, I assume, these other Enron lobbyists? That is all I am 

trying to establish. 

Ms. BREATHITT. Yes. I have——

Senator THOMPSON. Everybody has got their pitch to make and 

they were making theirs and this was before a lot of the problems 

that we now know Enron had were surfaced. 

Ms. BREATHITT. Yes, and I don’t think I was one of Enron’s most 

popular commissioners. 

Senator THOMPSON. Well, that——

Ms. BREATHITT. I didn’t share a lot of their points of view and 

philosophies. 

46

1 Communication from Commissioner Breathitt to Charles Bone, dated August 23, 2000, appears in the Appendix on page 781, Vol. IV. 

Senator THOMPSON. I am making no assertions about that. Were 

you aware of the fact that—well, you were aware of the fact, I assume, that the Wyatt law firm was being compensated for their 

work. Were you aware of how much they were being paid? 

Ms. BREATHITT. No, not at—I was not. 

Senator THOMPSON. Were you aware that Mr. Hayes was being 

paid by the law firm——

Ms. BREATHITT. No. 

Senator THOMPSON [continuing]. For the work that he was doing? 

Ms. BREATHITT. No. 

Senator THOMPSON. Let me hand you a copy of a fax and a copy 

of, I don’t know if the staff can give that to Commissioner 

Breathitt, a fax apparently from you to Charles Bone in August 

2000.1 Now, the accompanying letter where Governor Patton is recommending you for Chairman of FERC——

Ms. BREATHITT. Yes. 

Senator THOMPSON [continuing]. Is dated August 23, 2000. Do 

you recall when you faxed—apparently, you faxed a copy of that 

letter to Charles Bone. Do you recall when that was, because the 

date is not reflected on the fax. 

Ms. BREATHITT. No, I don’t. 

Senator THOMPSON. Do you——

Ms. BREATHITT. In August—no, I don’t. August of—let me see 

what this is. 

Senator THOMPSON. This letter, I might state while you are looking at that, this letter is a recommendation from Governor Patton 

to President Clinton. It says, ‘‘I am writing you about a matter concerning a citizen of the Commonwealth, Linda Breathitt, having 

been appointed by you on October 24, 1997, and confirmed by the 

Senate. She is a sitting Commissioner,’’ and then he says, should 

the chairman leave the Commission before his nomination is confirmed, ‘‘I would urge you to appoint Linda Breathitt to be the next 

FERC Chairman,’’ native Kentuckian, excellent choice for a number of reasons, goes ahead and gives your experience there as 

chairman of the Kentucky Public Service Commission, outstanding 

service on FERC and what not. 

So the governor was recommending you for the chairmanship 

and you sent a copy of that, apparently, to Mr. Bone. What was the 

purpose of your doing that? 

Ms. BREATHITT. I don’t—I am not arguing that I sent it, because 

here is the fax cover sheet, but I don’t recall why I would have sent 

it to Mr. Bone. 

Senator THOMPSON. Well, you said a lot of your conversations 

were political, and we know, of course, that before the election, during this period of time, Mr. Hayes was the treasurer of the Gore 

campaign and Mr. Bone was actively involved in it. If you look on 

his website, he, of course, points out that he has been very active 

with Mr. Gore for a long time. I can only assume that you were 

trying to get Mr. Bone to assist you with this nomination to be 

chairman, would that be a fair assessment? 

47

Ms. BREATHITT. I don’t remember sending this, but I am sure I 

did because there is a fax cover sheet that is in my handwriting. 

But it is known to many people that Mr. Bone and Mr. Hayes, as 

being from the same city as Mr. Gore, were well known to him. 

Senator THOMPSON. When did you become aware that Mr. Bone 

and the Wyatt firm was representing or was going to represent 

Enron? 

Ms. BREATHITT. Sometime in the latter part of the year 2000. 

Senator THOMPSON. Well, Ms. Breathitt, you had 21 conversations or meetings with Mr. Bone from August 2000 to December 8. 

The files indicate that——

Ms. BREATHITT. But I don’t—see, there is an entry here that I—

I have no idea who a Mr. Delaney is. What if these were about me? 

Senator THOMPSON. Well, is there anybody else on either of those 

two pages who you do not recognize, other than Mr. Delaney? 

Ms. BREATHITT. But what if—I am not—I don’t know if I had 

conversations on all these days. What if they could have been about 

me? 

Senator THOMPSON. Well, no. These are records that the law firm 

has submitted to this Committee——

Ms. BREATHITT. Oh, but there——

Senator THOMPSON [continuing]. Which indicate law firm contacts with you. That is what they purport to be. One of the records 

that they sent was an August 1, 2000, letter confirming recent conversations with Enron, that the firm had about representation of 

Enron with regard to TVA. Then there is another letter of August 

22 concerning representation of the Wyatt firm for Enron with regard to development of policies at the DOE and the Federal Energy 

Regulatory Commission. 

Ms. BREATHITT. We don’t regulate the Tennessee Valley Authority. 

Senator THOMPSON. I understand that. That is why I didn’t understand our previous witness’s testimony that he thought all these 

contacts with you had to do with TVA. That wouldn’t make much 

sense, would it? It certainly, and again, I am not casting aspersion 

because of this. Enron was very active and they had contacts with 

everybody that they could have contacts with. Here, they chose to 

go a particular route that had to do very close to you in terms of 

the law firm affiliation and all, long-term friends and your father’s 

affiliation with the firm. 

But I would think that we could agree that they were, from August 2000 through at least the end of 2001, that representatives of 

the firm and Enron were talking to you from time to time about 

Enron matters. Isn’t that the clear import of this? 

Ms. BREATHITT. Yes. 

Senator THOMPSON. All right. 

Ms. BREATHITT. And as I mentioned, I have been the most reticent, least philosophically attuned to where Enron was going, in 

my opinion——

Senator THOMPSON. I can appreciate that, because there are a lot 

of people with regard to the administration who try to point out 

time and time again that they did exactly the opposite of what 

some of these people wanted them to do, but that does not keep 

them from having to do investigations for several months. 

48

Ms. BREATHITT. That is right. And I certainly am not faulting 

your being critical of this inquiry and line of questioning because 

I think it is appropriate to get any lingering questions or concerns 

addressed that the initial questionnaire, as we were calling it at 

FERC, that we received in March, be discussed. 

But there were numerous contacts by Enron over the 5 years 

that I was there, and I am certain that colleagues of mine, former 

and present, have had Enron contacts, as well, because they came 

to see us frequently. They were an aggressive company and they 

were not shy about advocating what they wanted with respect to 

what was legal to talk about, and pending matters are not permissible to discuss. 

Senator THOMPSON. Well, Mr. Bone says in his memo of your 

meeting in Nashville that the FERC will be responding today to 

the request of President Clinton and Secretary Richardson. FERC 

will be very responsive to the crisis with investigations in California and possibly hearings in California. Linda did not want to 

address the issue specifically today, but indicated she would be 

pleased to meet with us in Washington at an early date. She is 

very impressed with Steven Kean and spoke highly of him. 

Ms. BREATHITT. Yes, I have known, as I mentioned——

Senator THOMPSON. I might add this. She acknowledged that this 

is not a partisan issue in any way and is very conscientious about 

trying to solve the crisis. Is this a fair——

Ms. BREATHITT. Yes. 

Senator THOMPSON [continuing]. Recounting of the meeting, do 

you think? All right. 

Ms. BREATHITT. It was not a lengthy meeting. I was taking a 

vacation day to go see relatives, have lunch with my nephew. I 

wanted to see the Gore campaign. I had never seen a Presidential 

campaign in operation, and they were both friends of mine, and I 

considered it an informal trip to Nashville with multiple reasons. 

Senator THOMPSON. Well, I think any time you have an opportunity to go to Nashville, you ought to take it, would be my feeling. 

[Laughter.] 

Mr. Chairman, I have no further questions. I would think it 

would be appropriate for all of our sakes to make a part of the 

record these documents that we have been referring to that came 

from the Wyatt law firm. I hate to get into the details of any one’s 

records or firm’s records, but I believe that they all have to do with 

the issues that we have been dealing with here today. Perhaps, if 

you would prefer, staff could get together and agree upon a submission to make sure that no privacy is unnecessarily violated. But I 

do think the basic documents would be well served to make a part 

of the record and let them speak for themselves. 

Chairman LIEBERMAN. Senator Thompson, I have no objection to 

that and I think I would like to take you up on your offer that our 

staffs get together, and I think in fairness to Commissioner 

Breathitt, we ought to have similar responses to the questionnaires, including, by Mr. Berick’s recollection, Commissioner 

Brownell, Commissioner Massey, both of whom had contacts with 

representatives of Enron, as well. I think, Commissioner Wood, you 

indicated that you had not after you came onto the Commission, 

but in any case——

49

Mr. WOOD. I did, a few. 

Chairman LIEBERMAN. You have? OK. Then in fairness, we ought 

to agree on some system for reflecting——

Senator THOMPSON. I agree with that. 

Chairman LIEBERMAN. Thank you. 

Senator Levin, I suppose it is appropriate to begin by congratulating you on your reelection. 

Senator LEVIN. Thank you so much, Mr. Chairman. 

Chairman LIEBERMAN. Though you return with me in the Minority, nonetheless, maybe that makes it even a happier turn of events 

that you did come back, so we get ever closer to that magic number. Anyway, welcome. Thank you for taking the time to be here 

today. 

OPENING STATEMENT OF SENATOR LEVIN 

Senator LEVIN. Thank you. I am delighted to be back here with 

Senator Collins, if I may take the liberty of saying so. 

Chairman LIEBERMAN. Yes, indeed. 

Senator THOMPSON. Already buttering her up. [Laughter.] 

Senator LEVIN. Mr. Chairman, I have an opening statement 

which I would ask to be included in the record. 

Chairman LIEBERMAN. Without objection.

PREPARED STATEMENT OF SENATOR LEVIN 

The Enron scandal continues to teach us painful lessons about corporate misconduct and the need for government action to police our markets, protect consumers and investors, and punish corporate wrongdoing. 

The Enron scandal began by exposing dishonest accounting at a number of major 

U.S. companies that, unbeknownst to most, had begun to eat away at the reliability 

of their financial statements. It has since exposed the conflicts of interest that have 

made investors distrust investment reports issued by leading U.S. financial firms. 

It has exposed how those firms have become willing participants in shell companies, 

phony trade deals, and complex financial transactions used to inflate earnings, hide 

debt, and increase stock prices. And Enron has exposed how, all too often, corporate 

executives have walked away from corporate disasters with millions in their pockets, often from exercising stock options, while pension funds, investors, employees, 

and creditors have lost everything. 

Today’s hearing provides another painful lesson in corporate abuse. The spotlight 

today is on U.S. energy markets and how lax government oversight failed to protect 

U.S. consumers and markets from false data and price manipulation by corporate 

wrongdoers. 

Energy companies today are reeling from media reports of deliberate market manipulation, round-trip trading, and bogus derivatives that are really bank loans. 

These allegations are not confined to Enron, but have spread to other energy companies as well. Prominent energy firms have seen their credit ratings slashed, their 

profits collapse, and their stocks nosedive. Employees are being laid off by the tens 

of thousands. Public trust in energy deregulation has suffered a serious blow. 

While most of this market turmoil is attributable to corporate misdeeds, a portion 

of the blame also falls on the shoulders of regulators who failed to police the energy 

markets. Those markets have undergone sweeping change over the last decade, 

moving from a system of highly regulated monopolies to one that is supposed to 

incorporate market-based competition. But market-based systems are not automatically fair, efficient or honest, because there are always those who engage in deceptive and unfair practices. That’s why it is the job of government to police the 

markets, determine what is happening, and put a stop to those unfair or deceptive 

practices. 

We will hear today that the Federal Energy Regulatory Commission, FERC, has 

not kept pace with the changes in the energy marketplace and has failed to ensure 

just and reasonable rates as it is required to do. 

While part of FERC’s inaction can be attributed to statutory limitations on what 

it can regulate, another part comes from a hands-off approach to market-based pricVerDate 0ct 09 2002 14:53 Jun 09, 2003 Jkt 083483 PO 00000 Frm 00061 Fmt 6633 Sfmt 6621 C:\DOCS\83483.TXT SAFFAIRS PsN: PHOGAN
50

ing that resulted in FERC’s failing to detect significant market manipulation and 

other corporate misconduct. And Enron is apparently not the only wrongdoer that 

has evaded FERC oversight. News reports of possible misconduct by other major 

U.S. energy companies have become commonplace. They include reports of company 

traders’ giving false price data to reporting firms, companies engaging in billions of 

dollars in phony roundtrip trades, and deliberate strategies to manipulate California 

energy prices. 

If we are to restore confidence in these circumstances, we need a re-invigorated 

FERC that is explicitly dedicated to promoting transparent and fair energy markets, 

safeguarding investors and consumers, and stopping corporate misconduct. FERC 

has recently taken steps to rectify its shortcomings and strengthen its market oversight. Congress also has a role to play in clarifying and strengthening FERC’s oversight and enforcement authority. I congratulate our Chairman, Senator Lieberman, 

for his efforts to shed light on these problems and to get us all to learn from the 

lessons taught by the Enron scandal.

Chairman LEVIN. First, let me compliment the Committee and 

its staff on a very detailed and objective report which really 

deepens our understanding of what went wrong and how FERC 

oversight needs to be strengthened in order to restore investor and 

consumer confidence. Commissioner Brownell spoke of a $90 billion 

loss of capitalization in the U.S. energy markets. That is a loss to 

all of us. 

To restore these investments and the confidence of investors in 

the energy industry, we need a market that people are confident 

is not rife with deceptive and unfair practices, and that means we 

need a lot stronger market oversight by FERC, and I believe this 

report and this hearing will contribute to that goal. 

I want to start with Chairman Wood with the wind farm issue. 

As you have indicated, Congress adopted a number of laws which 

were aimed at encouraging alternative energy sources, such as 

solar and wind power. One of those laws allows alternative energy 

generators that are independently owned—not owned by a regulated public utility or a utility holding company—it allows them to 

charge higher rates for electricity and to sell all the power that 

they want to public utilities, which must buy it at the higher rates. 

Now, those benefits, higher rates and guaranteed electricity 

sales, as you know, are supposed to go only to the qualified facilities that meet the law’s requirements, the ‘‘QFs.’’ And those benefits mean that every alternative power generator wants to be a 

qualified facility, a QF, eligible to charge the higher rates. 

We have heard the story of how Enron had three wind farms 

that were in danger of losing QF status because Enron was buying 

a public utility and then would become a utility holding company, 

in turn, which meant that the wind farms would no longer meet 

the law’s requirements to be independent of a public utility. We 

heard how Enron, in order to help the wind farms keep their QF 

status, supposedly sold them to a shell company called, I think it 

is called RADR, that was allegedly independent of Enron. 

That was 5 years ago. We now have found out that RADR was 

not independent of Enron. It was secretly controlled by Enron officials, and both the Justice Department and the Securities and Exchange Commission have filed legal action against those Enron officials, Fastow and Kopper, for their actions regarding RADR. 

The indictment of Kopper states that Mr. Kopper and other 

Enron officials had ‘‘devised a scheme to enrich themselves and enable Enron to retain secret control over the California wind farms 

51

while appearing to maintain eligibility for QF status.’’ That is the 

background. 

Now, the hypothetical question. What if numerous public utilities 

that owned alternative energy generators, like a solar or wind 

power generator, sold their facility to a special purpose entity that 

was owned or controlled by one of the utility’s senior officers? The 

individuals who owned the facilities would not themselves be utility owners. They would just be officers of the utilities. Would that 

arrangement comply with the FERC regulations that require the 

qualified facilities to be independently owned? 

Mr. WOOD. I don’t have an answer to that because I haven’t 

thought about it, quite frankly, and looked at those regulations in 

that light. I will be glad to do that and respond to you, Senator. 

Senator LEVIN. Would you do that and get back to us? I think 

you indicated there were about 9,000 qualified facilities, is that correct? 

Mr. WOOD. Nine thousand filings at FERC to certify or self-certify, yes, sir. 

Senator LEVIN. And how many of those QFs are 50 percent 

owned by public utilities? 

Mr. WOOD. Of the—I would think it should be none, if they are 

not——

Senator LEVIN. None? 

Mr. WOOD. If they are not qualified, then they should not be eligible for the benefits. 

Senator LEVIN. Well, but you can be 50 percent owned by a public——

Mr. WOOD. I am sorry. Can you ask that again, Senator? 

Senator LEVIN. Sure. 

Mr. WOOD. I think I missed it. 

Senator LEVIN. Apparently, you can retain your qualification to 

be a QF provided you are no more than 50 percent owned by a public utility. 

Mr. WOOD. That is how I read PURPA, yes, sir. 

Senator LEVIN. So now my question is, how many of those QFs 

are 50 percent owned by——

Mr. WOOD. Or less. 

Senator LEVIN [continuing]. Not more, 50 percent or less? 

Mr. WOOD. I will get back to you on that, too, sir. 

Senator LEVIN. Well, about how many? 

Mr. WOOD. I would have no idea to even say if it is 10 percent 

or 90 percent. I have no——

Senator LEVIN. Well, but shouldn’t you know? 

Mr. WOOD. I don’t know. 

Senator LEVIN. I mean, given the experience we have had with 

those wind farms, shouldn’t FERC know? 

Mr. WOOD. Well, if they are eligible, sir, I think that is not the 

problem. But I don’t——

Senator LEVIN. Well, it is a problem——

Mr. WOOD. If they are 49 percent——

Senator LEVIN [continuing]. Because we have SEC and we have 

the Justice Department saying that can just be a sham ownership. 

Mr. WOOD. Right. That would be——

Senator LEVIN. So if we have——

52

Mr. WOOD. If you pierce the sham, it is clearly more than 50 percent. 

Senator LEVIN. But if you see a pattern that public utilities are 

owning 50 percent of these QFs, isn’t it important, then, to see 

whether or not, in fact, there is an independent QF or not? 

Mr. WOOD. Sure. Yes, sir. 

Senator LEVIN. Shouldn’t you then be piercing some of the veils 

here? 

Mr. WOOD. I think so, but as I mentioned in my address to, or 

in response to a question from Senator Lieberman, we have kind 

of a front line for this effort, as well, that is, the company actually 

paying the payment to the QF, and that would be a large utility 

or a co-op or mostly large utilities, and the State commission standing behind that. So we do have other people that are helping us 

in this effort and we have, in fact, used that trigger line up to now, 

certainly, as really the first check for when we ought to look deeper, and we have in the past looked deeper at some of these that 

were a little harder to understand. 

Senator LEVIN. Yes, but that first check didn’t work. 

Mr. WOOD. It didn’t work here. 

Senator LEVIN. And may not be working other places. So isn’t 

there an obligation and responsibility to take some initiative to, at 

least on a random basis, look at these QFs that may be 50 percent 

owned, and then isn’t there some obligation on the part of you as 

a regulator to see if that other 50 percent might not be some special purpose entity that was created by that public utility? 

Mr. WOOD. I think that is a reasonable request, sir. Yes, sir. 

Senator LEVIN. As of this moment, until you said that was a reasonable request, there was no——

Mr. WOOD. We have not done any further investigation of that 

since we initiated the—we have the particular transaction that 

came up with regard to these series of renewable facilities that 

came forth, set for an enforcement trial as we speak, and I think 

we will learn a lot from that effort as to how these transactions 

were structured and that should certainly inform if we want to do 

any further investigation of related transactions. 

Senator LEVIN. I would hope that FERC would undertake a systematic review of these QFs, particularly the ones where there is 

a significant percentage of the ownership which is in the hands of 

a utility. 

Mr. WOOD. Of a utility, yes, sir. 

Senator LEVIN. The whole self-certification troubles me, as well. 

How many of these challenges have come—I think you said there 

is a total of 16? 

Mr. WOOD. Twenty, or 16? 

Senator LEVIN. Twenty? 

Mr. WOOD. I will take 16, if that is something we have got. 

Senator LEVIN. Twenty. What you hope the market would automatically produce would be people who have an interest in keeping 

the prices lower would file the protest or the request for investigation. You have had 20 of the 9,000. Now, how many of those have 

come from competitors and how many of those 20 have come from 

consumer groups? 

53

Mr. WOOD. I would—I do not know, the 16 or the 20, how those 

break down, but I think primarily they are coming from the utility 

who is paying the payment——

Senator LEVIN. I didn’t mean the competitors, I mean the utilities that are paying. 

Mr. WOOD. Right. That would be a competitor, I suppose, yes, sir. 

Senator LEVIN. They have to file, don’t they, a filing fee there of 

$16,000? 

Mr. WOOD. For a declaratory order for those, is that what—yes, 

sir, that would be correct. 

Senator LEVIN. And then, if they prevail, do they get that 

$16,000 back? 

Mr. WOOD. I hadn’t thought about that. I don’t know. I could look 

into that. I don’t know that we have got that. 

Senator LEVIN. Take the consumer group out there——

Mr. WOOD. The State PUC certainly can file, as well. 

Senator LEVIN. Right, but just take a consumer organization, a 

public interest group or a consumer’s group. They may not have 

$16,000, right? So for them, that is an impediment. What I am saying here is I would hope FERC would be a lot more aggressive in 

doing policing. Sometimes, the market will do the policing for you, 

but sometimes it won’t. It seems to me you have got to be a lot 

more aggressive, because you have a responsibility here to make 

sure that there are just and reasonable prices that are charged by 

utilities. That is the requirement of law, is that correct? 

Mr. WOOD. That is correct. 

Senator LEVIN. It seems to me we already know the market does 

not do that automatically. For a number of reasons, it does not do 

it. First, you may have entities in there that are willing to, as the 

Chairman said, go beyond what is legal, that are pushing the envelope here, that are cutting corners. Second, you may have people 

that are simply defrauding others. And then you have this financial 

barrier also, the $16,000, which may not be a lot to a public utility 

but could be to a consumer organization that wants to challenge it. 

So it seems to me that you have that responsibility and you acknowledge, I think in response to the Chairman’s questions, that 

the staff report relative to those recommendations is a constructive 

report and that you intend to carry it out. I would look forward to 

this random sampling, as well, of these QFs in order to see whether or not there is a pattern here—that this is not a unique situation where there was a phony, a sham ownership of 50 percent that 

was set up——

Mr. WOOD. Right. 

Senator LEVIN [continuing]. In order to make sure that the intent 

of the statute is carried out. 

I see the red light is on, so my time is up. 

Chairman LIEBERMAN. Senator Levin, because of the small number of Senators that have been here today, we have been quite generous with time, so if you have a few more questions you want to 

ask on this round, you are welcome to. 

Senator LEVIN. I do, but I think I see Senator Collins looking at 

me like she has another commitment to go to. 

Senator COLLINS. I do, actually. 

54

Senator LEVIN. If that is all right with the Chair, let me yield 

at this time and perhaps come back. 

Senator COLLINS. Thank you, Senator Levin. 

Chairman LIEBERMAN. Thanks. 

Senator COLLINS. You read that correctly. [Laughter.] 

Chairman LIEBERMAN. Senator Collins, congratulations to you, 

both on your reelection and what I presume will be your, dare I 

say, ascension to the Chairmanship. This is a wonderful Committee, which you have been just a superb member of, and you are 

very prepared in every way, ability and honor, to be an excellent 

Chair of the Committee and I look forward in my new capacity and 

yours to working together with you to fulfill the mandate of the 

Committee. 

OPENING STATEMENT OF SENATOR COLLINS 

Senator COLLINS. Thank you, Mr. Chairman. I look forward to 

continuing to work with both you and Senator Levin. We have been 

partners on a number of investigations over the years and I am 

sure I will enjoy working with you in my new capacity, as well. 

Chairman Wood, I know that you would agree that consumers 

are entitled not only to a well-designed market, but also one that 

is carefully monitored for market power abuses, and I believe that 

under your leadership, there are many encouraging signs that 

FERC now understands that dual mission. 

However, the potential profits from gaming a market in a necessity for which there is often no short-term substitute would seem 

to be so enormous that I can envision a scenario where the gamers 

continually come up with new schemes and the regulators are constantly scrambling to catch up with the latest innovative scam. 

Why should consumers feel confident that we now have the ability to police the markets in a way that will prevent the kind of 

gaming that has occurred, particularly when, although you have requested additional authority and additional resources, you have got 

to receive what you have asked for? 

Mr. WOOD. I think as to the last point, Senator Collins, I think 

we can certainly, within the context of what we have got today, 

move forward assertively on the market oversight, the monitoring. 

We have the ability under current law today, if there is a violation 

of a rule, some gaming incident that was in violation of a rule, that 

any profits from that transaction could be remitted back to the customer who paid them. Certainly in New England and New York, 

in the Mid-Atlantic here, there are more sophisticated efforts that 

have been underway in those more open markets for the last 5 

years or so that do monitor these transactions on a transaction-bytransaction basis and look at patterns and look at specifics and do 

the spot audits that Senator Levin was talking about in a different 

context. 

So I do think, quite frankly, in the parts of the country where 

we have moved to a more open market on at least the wholesale 

level, where there are predictable rules of the road, where there 

are independent institutions that oversee those regional marketplaces, that there has been—not perfectly, to be sure, but there 

have been, in large measure, a very responsible market, even in 

times of relative scarcity because of the stress. 

55

It is important, however, to—I mean, there are two preconditions 

in addition to oversight that we have got to have, which are infrastructure, both the power plants, the power lines, the gas lines to 

get it there, the abilities of customers to reduce their demand at 

times of peak because they get a price signal, which I think we visited last summer. I was reviewing our transcript from you. 

And then also balanced market rules, a good institution set up 

to look at the rules. As a full Commission, about 4 or 5 months ago, 

we put forth our vision in response to a lot of these issues, that 

we do need a standardized approach toward markets that has a 

lessons learned aspect to it, from what has worked well in markets 

and what has not worked well. 

But that is not a fixed-in-time process. I think we learn from 

what has worked well in New England, in PJM, in Texas, Australia, England, and other places. We learn what doesn’t work well 

in those places and in California to craft a vision for the future 

that, while it is getting a lot of vetting right now, I think it is absolutely critical to make sure that we address your core issue, which 

was how can we convince customers that they will be better off? 

We have to actually do the full bore of the infrastructure rules and 

oversight to make sure that works. 

I do appreciate the attention of the Committee today toward the 

oversight issues, but the infrastructure and the balanced market 

rules are just as critical to making sure we have an effective marketplace for customers. 

Senator COLLINS. Let me follow up with two questions, one on infrastructure and one on the consumer side. Let me do the consumer 

side first. 

One of our expert witnesses on the next panel tells us that much 

more attention needs to be paid to the development of an active demand side in electric markets so that consumers will be able to respond to short-term swings in market prices. But I must say, creating a demand side in many ways seems to me to be equivalent 

to talking about the weather. Everybody talks about it, but nobody 

seems to be able to do anything about it. 

Are there really, truly concrete, practical programs that can be 

currently implemented to create a meaningful opportunity for consumers to respond to price changes, and if so, what are they? The 

average consumer has no idea when prices are going up and down. 

Mr. WOOD. Right. 

Senator COLLINS. We have talked about having special meters 

that perhaps large industrial users could use. I would like to get 

your thoughts on that issue. 

Mr. WOOD. A great question. In fact, I will tip my hat to Tom 

Welch from your State and Bill Nugent and then the other commissioners in New England for—and Nora has been kind of our lead 

on this, so if she wants to pipe in, feel free. 

But we have engaged in basically a laboratory with FERC as the 

wholesale regulator and the six New England States as the retail 

counterparts to put together a demand side or demand response 

initiative, to try to see how can we integrate this resource that we 

need so bad. We need it like we need a new power plant in certain 

regions of the country. It is that effective to basically check market 

power on a scarce day or to avoid building a new power plant. 

56

Sometimes, you do not need new power plants if people have an incentive to reduce their demand at the summer peak, for example. 

So the test case, the pilot project in New England, we have approved—prior to this summer, we approved the first one in the 

PJM, which is here in the Mid-Atlantic, demand response initiative 

as a FERC-regulated item, as well, and we have got an item on 

next week’s agenda dealing with that still. But the response to that 

was mixed. I think it is certainly better than not having done it 

at all, but I think of all the things in our kind of vision of the future that are so critical to make work well so that this really does 

deliver consistent benefits for consumers, the demand side is the 

one with the fewest data points underpinning it. Even looking at 

foreign countries, we don’t have a real clear market-driven demand 

response. 

You can certainly regulate them, where you are cutting checks, 

as we are having in the PJM. You are basically paying people a 

fixed amount—it is not very precise, but you are paying them a 

fixed amount of dollars to shut off at peak. 

Senator COLLINS. Commissioner Brownell, do you have anything? 

Ms. BROWNELL. Yes. In fact, I met with some of the people working on the NEDRI project in New England, which is a wonderful 

laboratory, by the way, lots of cohesive vision among the State commissions there, and they have come up with a number of suggestions that I think will be implemented in the not-too-distant future. 

But I think the important message that we took away from our 

discussions during RTO and SMD development was there is agreement that everyone needs demand side management, but no one 

knows how to price it, no one is as familiar as they need to be with 

the technologies, the real-time pricing technologies that will enable 

customers, even the smallest customers, to manage these loads 

more effectively. 

And we treated them like programs. They are temporary. They 

are pilots. They get enacted late. That was one of the problems in 

PJM, that when we approved it in May, because it came in so late, 

it was difficult for customers to really participate. 

So we need to institutionalize them. We need to recognize there 

is a real value. This is not something that you just throw subsidies 

at. This is an important part of balancing the market and allowing 

customers to speak. And you have probably heard me say before, 

I think we have been very condescending about the ability of customers to make buying choices, including to manage their electric 

load. I think they are fully capable, and, in fact, in some of the experiments we have seen, they are willing to do so. 

So I think that the secret is, get the technology right, get the 

pricing right, empower people, and make these an institutional 

part of the market. There are lots of competing forces, of course, 

for whom that is a very difficult concept to grasp. But I think we 

are getting there and we will have some measurable results in New 

England in the not-too-distant future. 

Senator COLLINS. Thank you. Chairman Wood, I want you to pretend that the Chairman of this Committee is not here for this next 

question. There is a clear need for additional transmission, but I 

am very concerned about the question of who pays for it. 

57

For example, last week, the system operator in New England announced that because Southwest Connecticut does not have sufficient power to meet its demand, it needs a transmission upgrade 

slated to cost at least $600 million. Now, some people have argued 

that the cost should be borne not only by those who live in Southwest Connecticut, but by consumers throughout New England, and 

I question the fairness of that approach, especially since Connecticut has the highest residential electricity consumption of any 

New England State. Indeed, the average monthly household consumption in profligate Connecticut is 711 kilowatt hours, compared 

to just 479 kilowatt hours in thrifty Maine. [Laughter.] 

Now, under these circumstances, is it fair to impose on the rest 

of New England the cost of this upgrade, and similarly, a related 

question would be, is it consistent with relying on market forces to 

spur people to respond to higher prices? In other words, if people 

in Connecticut are using an inordinate amount of electricity that 

produces this need for a transmission upgrade, why should consumers in Maine, who have limited their electricity use, have to 

pay for part of that upgrade, and doesn’t that send us in exactly 

the wrong direction as far as using market forces to control demand? 

Chairman LIEBERMAN. Forget all those nice things I said about 

Senator Collins. [Laughter.] 

Mr. WOOD. This is actually in our standard market design rulemaking one of the most, I don’t want to say contentious, because 

as you are, people are civil about this, but it is a gut issue about 

cost allocation and cost responsibility following the people who 

cause the cost to be incurred. 

We had a full-day conference that we all sat in on with a lot of 

what we call the very smart guys and gals from around the country 

last Wednesday, in fact, on this issue of funding for transmission 

expansions, and there was a curious alignment of people in the 

deep South with New England about this approach, which is called 

participant funding, which is more directly defined as ‘‘the beneficiary pays.’’

I think the take-away from that was, in a market environment 

where you have price signals, which you have got certainly coming 

in New England with the implementation of some new market 

rules later this year, with proper rights being vested in transmission rights, which we have in New England, New York, and 

PJM, and an independent administrator, which you have certainly 

got in New England, that it is a lot easier to allocate the cost and 

identify the beneficiaries and allocate them. 

So in your case, I think of all the places in the country, New 

England, New York, and PJM are probably closest to being able to 

discretely identify who the beneficiary is and then make sure that 

that party pays for it. 

The current policy, however, with ISO New England and with 

the six States up there is kind of a split one, which was explained 

to us pretty eruditely by Chairman Dworkin from the State of 

Vermont, who was very kind to point out that they are always 5 

percent of the total amount of load, and I don’t know if he is 

thriftier than Maine or not, but he was definitely of a mindset that 

58

we ought to move to the more beneficiary pays approach on transmission, but they are not there yet. 

There is a two-part work. There are very big transmission facilities there, spread over the region, because they are viewed as benefitting the entire reliability of the region. If there are more localized facilities, lower voltage, for example, that can pretty much 

keep the power located in the neighborhood, then those are billed 

directly too. 

So I am not sure what the actual transmission needed in Connecticut would be, but I think under the current rules in New England, some of that could, in fact, be spread across the entire region, 

but some of it would also be direct billed to the people that take 

service in that particular area. 

So it is in transition in New England, from the world of just 

dump it in the bucket and spread it over everybody, the peanut 

butter method, to the more, I guess, precise method of allocating. 

But it is not all the way there yet. For instance, Mr. Dworkin 

pointed out from Vermont, we have ‘‘rolled in.’’ We, Vermont, have 

paid for some of these upgrades in the Boston area, in central Massachusetts and in the Rhode Island area, but we haven’t built anything in Vermont yet to get our fair share. 

So I think when you are halfway through a policy of peanut butter going to direct bill, you have got to make sure everybody got 

their fair share of peanut butter the first time, and then you can 

call an end and then move to the new system. So I think that is 

going to be kind of hairy to work through, but I think we can get 

there in New England, to that ‘‘beneficiary pays’’ system. But recognize that they are partly down the other road than the one your 

question advocates and I think it is going to take some careful 

unknitting of that garment to get it back. 

So I think we will work with them and we will work with you 

on that, and I think we certainly want to, at the core, get the needed infrastructure in place. If we don’t have that infrastructure in 

place on both the gas side and the electric side, even good old sturdy New England, which has an overbuild of 20 to 30 percent extra 

generation, if they can’t get to where the customers are, it just as 

soon not ever be built anywhere. So you have got gas coming in 

from Nova Scotia, from Western Canada, from the South. I think 

New England is set off beautifully as far as an energy future. We 

just have to make sure the infrastructure is in place to bring it all 

the way to the end-use customer. 

So we will work on the cost allocations, and it is, admittedly, a 

hairy issue right now, but it is something we can certainly work 

through. But the core issue we want to really address through our 

rulemakings is that the incentive be given to build in the first 

place, because we do need it. 

Senator COLLINS. Thank you, Mr. Chairman. 

Chairman LIEBERMAN. Thanks, Senator Collins. I must tell you 

that the proposal for paying for the new transmission to the Southwest part of my State was made by the ISO. But thus far, the question of how this is going to be paid for has received very little attention in Connecticut because there is a tremendous controversy, 

as the Commission may know, about the siting, in other words, 

59

about whether additional transmission capacity should be built and 

a lot of residents of various areas don’t want it to be built. 

But it did sound to me like Commissioner Wood was suggesting 

just the kind of independent, centrist, moderate solution that you 

would typically—— [Laughter.] 

Chairman LIEBERMAN [continuing]. Be sympathetic to. Anyway, 

thank you. 

I just have a last question of you, Commissioner Wood, and obviously, I appreciate Senator Collins’ questions—before that last 

one—— [Laughter.] 

Because they obviously say, not surprisingly, that she shares the 

interest that I and other Members of both parties on the Committee have that FERC learn, as you have tried to do now, from 

the Enron scandal and that we feel that you are being as aggressive and sophisticated as the players out in the deregulated energy 

market and that we have an obligation sometimes to push and 

other times to support you, including with resources as best we 

can. 

My last question is that I gather that you have said somewhere 

that you hope to complete FERC’s investigation into the California 

and Western markets by next February. I always like deadlines 

and I understand that there may be a degree to which the Commission is under some pressure, explicit or implicit, to reach a judgment so that you can restore confidence in the markets, in some 

of the companies involved, but I would just give this precautionary 

word, which is that though we have concluded that Enron behaved 

very badly here, and on the basis of that, we cannot conclude that 

all the other participants in the energy markets in the West or 

elsewhere behaved badly. We also don’t know that they didn’t. 

I mean, at a certain point, obviously, you have got to decide that 

it is over, but I want to urge you not to feel the pressure to reach 

a conclusion before you really have the basis for reaching a conclusion that the other significant players in the Western energy market did not also act badly, because the worst thing, I think, from 

FERC’s institutional point of view would be to have someone or 

some entity afterward make a compelling case that some of the 

other players out there gamed the system as much as we now know 

Enron did. 

Mr. WOOD. Thank you for that. I think the main reason, Senator, 

we embarked last January and February on setting up the investigation is there have been and continue to be lingering doubts 

about what exactly happened in California, and we wanted to, I 

think as I mentioned to your colleagues on the Energy Committee, 

we want to really get as far down that food chain as we possibly 

can to understand what happened. If there are bad actors, take 

them out to the woodshed. As your question pointed out, there are 

some good actors who the world doesn’t think are good that are living under this cloud right now, and we are cognizant of the need 

to lift that cloud. 

It is a time line, quite frankly. I asked the lead of the investigation to tell me realistically how much time he needed to get 

through all this effort and he said that the first anniversary of its 

public starting would be sufficient time for them, and all the array 

of consultants that we have from the outside working with them, 

60

1The prepared statement of Mr. Joskow appears in the Appendix on page 146. 

to analyze terabytes worth of data to complete that effort and bring 

it to the public so that they know what we know. 

I appreciate that concern and welcome it, and we are not here 

to make short shrift of a very serious topic, but to do a thoughtful 

effort that you will be proud of, that we will be proud of, and that 

the customers of energy users in this country will think is respectable. 

Chairman LIEBERMAN. I appreciate that. Thank you all very 

much for your testimony, for your work. 

We will call the third panel. I thank them for their patience. 

Commissioner Massey, is your term ending soon, Commissioner 

Massey? 

Mr. MASSEY. My term ends in June 2003. 

Chairman LIEBERMAN. Oh, you have some time. Commissioner 

Breathitt, I thank you both for your service and we look forward 

to continuing to work with you, Commissioner Wood and Commissioner Brownell. 

On this last panel, I want to welcome back and again thank you, 

Dr. Paul Joskow and Dr. Frank Wolak. Both Dr. Joskow and Dr. 

Wolak testified before our hearing last year on June 13, and that 

was on the California energy crisis. We have asked them to come 

back today to share with us their thoughts about the events that 

have transpired since June 2001 and the lessons that we and 

FERC should learn, particularly, of course, from the Enron debacle, 

which happened, which collapsed officially or visibly after your testimony here in June 2001. We greatly benefited from your testimony on that occasion and we look forward to it now. 

I thank you for your patience, and obviously, your full testimony 

will be included in the record. 

Dr. Joskow, please proceed. 

TESTIMONY OF PAUL L. JOSKOW, PH.D.,1 DIRECTOR, CENTER 

FOR ENERGY AND ENVIRONMENTAL POLICY RESEARCH, 

MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT) 

Mr. JOSKOW. Thank you, Senator Lieberman. It is a pleasure to 

be here again. As you indicated, I last testified before the Committee in June 2001, and I thought it would be most useful for me 

to update the comments and observations I made at that time in 

light of 18 months of additional experience. 

A lot has happened in 18 short months and my written testimony 

contains a long list of lessons learned. I do hope it will be included 

in the record. 

Chairman LIEBERMAN. It will. 

Mr. JOSKOW. I would like to highlight a few of what I think are 

the most important lessons and then to offer a few comments about 

how FERC is doing. 

Creating well-functioning, competitive wholesale and retail electricity markets is a significant technical and institutional challenge. It is easy to do it badly and it is hard to do it well. Careful 

attention to the details of electricity market design and supporting 

institutions, drawing both on U.S. and international experience and 

active involvement by and cooperation between Federal and State 

61

regulators in defining and implementing these details is very important. 

Electricity’s unusual attributes also create unusual opportunities 

to exercise market power and to engage in a wide range of behavior 

to drive prices up to supra-competitive levels. If you doubted this 

18 months ago, I hope that you are convinced now. 

Good market designs and appropriate supporting contractual and 

institutional arrangements can help to reduce the incentives and 

ability of suppliers to drive up prices. However, that is not enough. 

An effective, credible, and professional market monitoring and enforcement system must be in place to measure and evaluate market 

performance, to identify actions necessary to improve market performance where it is poor, to enforce market rules, and to punish 

those who violate them. 

At the same time, it is important to guard against counter-productive regulatory initiatives that undermine the behavior and performance of well-functioning competitive markets. Hard competition is to be encouraged, while unfair competition, unreasonable 

levels of market power, and misleading or fraudulent presentations 

of financial and market information must be mitigated by effective 

oversight and appropriate sanctions when abuses are found. Finding the right balance between regulating too little and regulating 

too much continues to be an important challenge. 

More broadly, I think, as we look out into the future of the electric power industry, it is going to be important to adopt policies to 

support an evolution to an industry structure where merchant generators make most of their money by building and operating power 

plants cheaply and reliably and selling most of their output under 

longer-term contracts to financial intermediaries, to load-serving 

entities, and directly to large consumers. That is, we want to design markets so that firms earn their money by being the lowestcost suppliers, rather than being good at engaging in behavior to 

increase price spikes and to game market rules. 

In response to the events and revelations of the last 18 months, 

public and investor confidence in competitive electricity markets 

has been shaken and several States that planned to introduce restructuring, wholesale and retail competition initiatives have delayed or suspended their programs. Unless the credibility of the 

markets, the market participants, and those who regulate them is 

restored, it is unlikely that there will be support from additional 

States to extend electricity restructuring and competition initiatives or that capital will be forthcoming at a reasonable cost to pay 

for needed investments in generating capacity and vitally needed 

transmission infrastructure. A credible commitment by FERC to 

protect consumers from poor wholesale market performance is a 

necessary condition to restore public confidence. 

In my June 2001 testimony, I was extremely critical of FERC’s 

responses to the California electricity crisis, and I have reproduced 

some of those criticisms in my written testimony here. While there 

is plenty of blame to go around for those events, it is quite clear 

that FERC did too little and acted too late to avert the crisis. The 

question is, has anything changed, and I think the answer is yes. 

I think that FERC has made a lot of progress in the last 18 

months under Chairman Pat Wood’s leadership and has responded 

62

1The prepared statement of Mr. Wolak appears in the Appendix on page 159. 

positively to the criticisms that I made in mid-2001. I am generally 

pleased with the tone that has now been set at the top, the institutions that are being created to monitor electricity and gas markets, 

and with the electricity market reform initiatives that have been 

undertaken. 

The Chairman and the other FERC commissioners have repeatedly made it clear to market participants that they are committed 

to creating well-functioning, competitive wholesale markets and 

that they will not tolerate efforts to manipulate prices, violate market rules, engage in fraud and other market abuses, and they have 

taken some actions to show that they are serious about these commitments. 

However, as Commissioner Massey said a little while ago, the 

proof is in the pudding. Several important investigations and 

rulemakings are in progress and their outcomes and consequences, 

necessarily, remain uncertain. Institutional cultures also can take 

a long time to change. Only time will tell whether this view at the 

top has been fully institutionalized within the agency and whether 

FERC delivers on its renewed commitment to mitigate market 

power, punish those who violate market rules, and ultimately to 

adopt sound policies that improve electricity market performance. 

Let me just end, if I could have 10 more seconds——

Chairman LIEBERMAN. You can take a little more time, if you 

want. 

Mr. JOSKOW. I have been working on electric power regulation 

and industry restructuring and competition for 30 years, and I 

really want these reforms to work. It is especially important for us 

in New England. We have gone very far down this path. Clearly, 

this was a much more difficult initiative than many had anticipated, but I do feel, finally, that we have leadership at FERC that 

is taking these challenges very seriously. While I don’t agree with 

all of their proposals, I do very much hope that we will all encourage them to continue the efforts that they have begun in the last 

12 or 18 months. Thank you. 

Chairman LIEBERMAN. Thanks, Dr. Joskow. 

Dr. Wolak, welcome back and thank you for being here. 

TESTIMONY OF FRANK A. WOLAK, PH.D.,1 DEPARTMENT OF 

ECONOMICS, STANFORD UNIVERSITY 

Mr. WOLAK. Senator Lieberman, thank you very much for the opportunity to appear before you. Although my oral comments focus 

on the lessons learned from the California crisis, my testimony also 

provides a diagnosis of the crisis and the interventions that led to 

its solutions. 

At the start, I would like to emphasize that the California crisis 

was not a market failure but a regulatory failure, and consequently, the key to preventing future California crises or even 

Enron bankruptcies is for the Federal Energy Regulatory Commission to focus on regulating rather than simply monitoring wholesale energy markets. 

Under the former vertically integrated regime, aggressive wholesale market regulation was largely unnecessary because State regVerDate 0ct 09 2002 14:53 Jun 09, 2003 Jkt 083483 PO 00000 Frm 00074 Fmt 6633 Sfmt 6601 C:\DOCS\83483.TXT SAFFAIRS PsN: PHOGAN
63

ulators were the primary line of defense for consumers. They set 

the retail prices that the utility could charge for all its customers, 

and this effectively set the maximum wholesale price at which a 

utility could produce or purchase power. And in addition, the integrated resource planning process between State regulators and 

utility insured that the utility had sufficient energy capacity in 

generating facilities or long-term contracts to meet its load obligations. 

But as the events in California from May 2000 to June 2001 visibly demonstrate, if all electricity is purchased from a wholesale 

market, State regulators have little, if any, ability to control wholesale prices. The wholesale market regulator is the primary line of 

defense for consumers, and under this market structure, lighthanded wholesale market regulation can lead to enormous consumer harm. 

As discussed in detail in my written testimony, there was no 

shortage of effective market monitoring in the California market 

from the time it started in April 1998 to the present. Both the California Power Exchange and the ISO had their own internal market 

monitoring units, and the PX and ISO each had independent market monitoring committees overseeing the performance of the markets, and all of these entities, as David Berick discussed, had presented reports starting in the summer of 1998 on the performance 

of the California market, documenting the exercise of market 

power. 

What allowed the California crisis to occur was the fact that 

none of these entities had the authority to implement market rule 

changes or penalty mechanisms to limit the incentive suppliers had 

to exercise unilateral market power or violate California market 

rules. Consequently, the California crisis occurred not because of a 

shortage of observers with radar guns recording the speed of cars 

on the highway, it occurred because of a lack of traffic cops writing 

tickets and imposing fines on cars that exceeded the legal speed 

limit. 

Only FERC has the authority to implement market rule changes 

and make the regulatory interventions necessary to improve market performance. Consequently, it should concentrate on designing 

proactive protocols for rapid regulatory intervention to correct market design flaws as quickly as possible and order refunds as soon 

as unjust and unreasonable prices are found. In this regard, I have 

four recommendations I will briefly outline. 

First, FERC must provide a transparent definition of what constitutes unjust and unreasonable prices in the wholesale market. 

These markets have been in existence in the United States for 

more than 4 years and FERC has still yet to provide such a definition. This makes the job of market monitor much like that of a 

snipe hunter at summer camp. The camper is given a burlap bag 

and a flashlight and sent out into the night to look for a snipe, but 

no one has ever told him what a snipe looks like. For the exact 

same reason that no camper has ever caught a snipe, it’s impossible for the market monitor to ever find the evidence of unjust and 

unreasonable prices to bring to FERC’s attention because it has 

never been told by FERC what those are. 

64

This FERC policy creates unnecessary regulatory uncertainty 

and increases the likelihood of a California crisis in another part 

of the United States. Setting a transparent ex ante standard for 

what constitutes unjust and unreasonable prices is substantially 

less difficult than doing what FERC is currently attempting to do 

in its refund proceedings. 

Moreover, several parties have made detailed submissions to 

FERC outlining suggested methodologies for such a standard, and 

given its statutory mandate to protect consumers and the growing 

evidence that all suppliers possess significant market power under 

certain conditions, what FERC really must address is whether—essentially, the concept of harm, specifically, what wholesale prices 

reflect sufficient market power for a long enough period of time 

over a long enough geographic area to justify being called unjust 

and unreasonable and, therefore, worthy of regulatory intervention. 

My second recommendation is that FERC should also specify in 

advance what regulatory intervention will occur if this standard is 

violated with as much clarity as possible. If all market participants 

are able to construct the index used to determine prices are unjust 

and unreasonable, then the market will become self-regulating because participants can take unilateral actions to avoid this regulatory intervention, and in this way, there will once again be less 

regulatory undertaint and less likelihood of a California crisis. 

My third recommendation concerns FERC’s current methodology 

for determining whether prices are unjust and reasonable and refunds are due. Specifically, in both public statements and many of 

the statements made today, the commissioners have stated that it 

must find the bad actors and punish them for causing unjust and 

unreasonable prices. While I think it is important to find market 

participants that violated market rules and take back their ill-gotten gains, as well as penalize them for their violation of market 

rules, I think it is important, as emphasized in my testimony, that, 

essentially, the legal actions of privately-owned firms to serve the 

interest of their shareholders can result in the exercise of enormous 

market power. 

In short, there is no need for malicious or manipulative behavior 

by any market participant for wholesale markets to produce unjust 

and unreasonable prices, and moreover, the Federal Power Act 

does not specify that prices must be the result of malicious behavior by market participants in order for them to be deemed unjust 

and unreasonable. It only requires that prices be unjust and unreasonable as determined by FERC and, hence, they must order refunds. 

The final recommendation that I would like to make concerns the 

necessity of comprehensive and accurate data on the physical characteristics of plants, input, prices, and a variety of other characteristics of the wholesale market. This is necessary for effective regulation. And in particular, it is effective for demonstrating essentially the first—it is very necessary for the process of determining 

what are unjust and unreasonable and wholesale prices, and finally, I think, more important, it is necessary to provide tangible 

evidence of how well FERC is doing in delivering the economic benefits to consumers that they would not have received under the 

former vertically integrated utility regime. 

65

So, consequently, particularly during this initial period, FERC 

should substantially increase and not reduce the amount of data it 

collects from market participants if it would like to be an effective 

and credible market monitor. 

In conclusion, I would just like to emphasize that I think FERC 

has made enormous progress over the last year addressing many 

of these issues, but I also believe that a number of significant challenges remain, as I have discussed above, but I am confident that 

with Chairman Wood at the helm, FERC will overcome these. 

Thank you. 

Chairman LIEBERMAN. Thanks, Dr. Wolak. 

It is significant that both of you have been encouraged by the 

last year under Chairman Wood’s leadership. I have to say that we 

have been, too, although we think that a lot more has to be done, 

and I guess you would agree with that, as well. 

I was interested, Dr. Wolak, that you view the California crisis 

not as a market failure but as a regulatory failure, and I do think 

you are right. It strikes me that what we are all saying here, including the commissioners, is that deregulated markets still require regulation. Perhaps we have to find a new terminology. In 

other words, when we go from rate setting by a public authority 

to rate setting by the market, there is still a need for the traffic 

cop on the beat or on the highway. Do you both agree? 

Mr. JOSKOW. Yes, Senator. I think maybe it is a different kind 

of regulation. It is a function of establishing market rules, market 

oversight, and identifying problems in the markets and finding 

remedies for them that is quite different from the process of gathering costs together and setting traditional public utility rates. 

And I don’t think that is just true of electricity markets. There 

is no such thing in a market economy like ours as completely unregulated markets. The New York Stock Exchange has market 

rules. We have a regulator, the CFTC. There are a variety of rules 

that govern many markets, and especially in the electric power industry, because of its unique characteristics and because it is in a 

transition from an old system to what we hope is a new system, 

but very much in transition. It is very important that regulators 

play a role in monitoring and regulating the essential activities 

they have to do to ensure that these markets perform well and 

progress in the directions that we hope they will. 

Chairman LIEBERMAN. Dr. Wolak, did you want to add anything? 

Mr. WOLAK. Yes. I really think that you hit the nail right on the 

head and that the way I like to characterize it is that the regulatory process evolved from something that is very lawyer- and accountant-intensive to something that is very, I guess the best way 

to say it is economist intensive, in the sense that what you are designing is no longer just and reasonable prices through a regulatory mechanism and setting them. You are interested in setting 

just and reasonable rules, in other words, setting up incentive 

structures where the privately profit maximizing actions of the 

market participants result in outcomes that you, as the regulator, 

perceive as just and reasonable. 

And in that sense, it really does require a tremendous shift in 

how you think about doing your business as a regulator, and I 

think many of the comments that were presented earlier today, emVerDate 0ct 09 2002 14:53 Jun 09, 2003 Jkt 083483 PO 00000 Frm 00077 Fmt 6633 Sfmt 6601 C:\DOCS\83483.TXT SAFFAIRS PsN: PHOGAN
66

phasize that fact, that it really requires a tremendous change in 

how FERC thinks about its business. 

Chairman LIEBERMAN. I thank you. Let me go back just a bit to 

the history here, and Dr. Wolak, you were involved as a participant. Your market monitoring committee was providing reports to 

FERC, raising concerns about the exercise of market power by 

players in the Western markets going back, I believe, to 1998. 

There were other participants, including the California Independent System Operator, which, of course, operates the electric 

grid in California, and the investor-owned utilities like Southern 

California Edison that also were raising concerns. 

But FERC did not seem to respond. When the prices began to 

spike in 2000, they seemed genuinely to be surprised and they conducted the investigation that I described long ago in my opening 

statement today and talked about the danger of excess market 

power being exercised, but didn’t find any particular players in the 

market who were doing so. 

As we now know, Mr. Belden, the Enron trader, now has acknowledged participating in fraudulent trading schemes occurring 

as far back as 1998. The California ISO in 2001 did an analysis of 

15 companies, including Enron, showing that they exercised market power excessively during the crisis. But throughout this, FERC 

never initiated an investigation of the behavior of individual companies and, in fact, didn’t start, as Commissioner Wood said, until 

February of this year. 

This just seems to underlie what you were trying to do earlier 

in your role with the market monitoring committee. I wonder if you 

can respond to that story, that series of facts that I have described, 

indicate perhaps some of the information that you gave, the market 

monitoring committee gave, to FERC during that period and indicate whether you think that in the current reality under Commissioner Wood, that having had the experience we have had, that 

FERC’s reaction would be different. 

Mr. WOLAK. Yes. This gets back to my major, what I would argue 

is my single recommendation, is that you have to define what is 

unjust and unreasonable prices in order to ever find it. So, effectively, what the market surveillance committee that I chaired did 

is we said, well, we haven’t been given any guidance what the 

snipe looks like. So what we are going to do is essentially use economic theory and standard economic methods to define what we 

think it should be and then we are going to tell you that we think 

that it—and then we are going to go look for it, and then that was 

effectively what each of the reports did, was said this is what we 

think the exercise of market power is, this is the extent to which 

we think it is occurring, and then we presented that information 

to FERC. 

But, as I said, the difficulty was—there was no definition from 

FERC given as to what would constitute the unjust and unreasonable rates. It was much more of a ‘‘we will know it when we see 

it,’’ and it took a long time to see it. 

Chairman LIEBERMAN. Is that an area that Congress should 

tread into, or is that really something we should push FERC to do, 

that definition that you have just talked about? 

67

Mr. WOLAK. I think it is definitely the second one, of certainly 

pushing them to do. I think they certainly have the capability to 

do it and I, as I said in my testimony, have been provided with a 

lot of input. I will freely admit, it is a difficult process, just in the 

same sense of determining what are prudently incurred costs in a 

regulatory hearing is a very difficult process. 

The same sort of thing is true here, but that is why we have regulators. They make the tough decisions, and I think that is what 

we need FERC to really do and that will, I think, provide this certainty to market participants to know, look, if things get this out 

of hand, intervention is coming as sure as the sun will come up, 

and in that sense, we will have a strong interest to working to 

solve the problems, rather than what happened in California was 

it was almost no end to the largess that was available to be taken 

by essentially market participants, particularly once the State 

started buying, because the State has the power to tax. 

Chairman LIEBERMAN. So that definition has not really been 

forthcoming yet? 

Mr. WOLAK. No, unfortunately. 

Chairman LIEBERMAN. And notwithstanding your encouragement, and with the way Commissioner Wood and the Commission 

has been going, you would say that remains the most significant 

piece of unfinished business for them? 

Mr. WOLAK. Yes. With that sort of metric in place, I think that 

it becomes—then what you have given is teeth to the just and reasonable rate standard in a wholesale market regime and you have 

given clarity to it, so that I think it then enables the regulatory 

process to function in a transparent manner around that. 

Mr. JOSKOW. Senator, if I could just add to that, I think it is not 

that complicated. Frank, I, and others have advocated basically developing a set of market performance indices that the FERC staff 

would look at on a continuing basis to signal when markets seem 

to be performing in ways that appear to be inconsistent with competition. That doesn’t mean that there is necessarily a problem. It 

does not mean there are necessarily bad actors. But it becomes a 

signal for further investigation. 

I think, quite frankly, the current effort to run around and try 

to find evil doers is not the right way to do it. First of all, it is very 

time consuming. It waits for complaints. I would rather see them 

focus first on evaluating the performance of the markets in different parts of the country, and when they see what appears to be 

a performance failure, to then trigger a more detailed investigation 

of what is going on. 

I will just give you an example with natural gas. In the fall and 

early winter of 2000, natural gas prices delivered to California rose 

to enormously high levels, levels no one had ever seen before. I 

have no idea why it happened. I haven’t studied it. But I can tell 

you, if I had been at FERC at that time, we would have done a 

study, we would have done an investigation then, not now, but 

then just to understand that was going on and not just to assume 

that it must be the result of the interplay of supply and demand. 

It might have been completely innocent, but an indicator like that, 

when gas prices are ten times normal, should trigger the idea that 

it requires further exploration. 

68

So I think it requires a change in mindset of a regulatory agency 

that was used to respond to complaints and used to setting rates 

based on accounting costs to one that really has to have an ongoing 

feeling for what is going on in these markets and engaging in an 

ongoing assessment of how these markets are performing. My hope 

is that the new Office of Market Oversight and Investigations will, 

in fact, develop this kind of capability in much the same way as 

the self-regulating exchanges, like the New York Stock Exchange 

and the CFTC, have protocols to look for unusual trading behavior, 

and when they see unusual trading behavior, they will go and they 

will investigate it. We need that kind of a mindset here. 

Chairman LIEBERMAN. Let me just pick up on your last point and 

ask you if you want to say any more about the Office of Market 

Oversight and Investigations. As you heard, Mr. Berick said it was 

a good step and didn’t think it was adequately staffed yet, but was 

concerned also about whether—or let me put it another way—that 

the creation of the office was not sufficient indication yet to show 

that FERC understood that effective regulation is not just better 

rules, but more active enforcement. 

Mr. JOSKOW. I have been urging FERC to set up an office like 

this since 1996, and the models I had were the Antitrust Division 

of the Justice Department, the Federal Trade Commission, the 

CFTC. So I am very pleased that they have taken the steps they 

have to create an office with the kind of staff and the kind of goals 

they have. 

Obviously, as I said, the proof is in the pudding. We haven’t seen 

yet what they are going to do and how they are going to perform, 

so I think we need to continue to observe how this new office operates and performs. However, and I haven’t seen your report, when 

I heard there were 250 people, my reaction was, that is an awful 

lot of staff, not the opposite. I think the Antitrust Division, the 

Economic Policy Office has about 40 professionals and the Federal 

Trade Commission has about 40, as well. But I think we will just 

have to evaluate over time whether FERC’s market monitoring office has the resources to make this happen. 

I am more concerned about institutionalizing this perspective in 

the agency. I don’t think it should be something that just depends 

on Pat Wood. I mean, President Bush could appoint Pat Wood to 

some other job, and I think we wouldn’t want this new perspective 

and this new focus to be dependent on one individual. I think we 

should be looking at whether Pat Wood and the other commissioners are successful in bringing in senior managers and staff who 

have this new view of what their jobs should be. 

Chairman LIEBERMAN. Dr. Wolak. 

Mr. WOLAK. Thank you. I just wanted to respond to the issue of 

resources and the role of the new part of FERC, and that is that 

I think one of the other lessons from the California crisis was that 

these markets require day-to-day, on-the-ground monitoring, and I 

think it is extremely difficult for the Office of Market Oversight 

and Investigations to really get involved in that. 

So what I guess I would say is I am not sure that they really 

need more resources, but I just think that they need to delegate the 

responsibilities for undertaking the duties that they are charged 

with to the ISO market monitoring units and the like. In parVerDate 0ct 09 2002 14:53 Jun 09, 2003 Jkt 083483 PO 00000 Frm 00080 Fmt 6633 Sfmt 6601 C:\DOCS\83483.TXT SAFFAIRS PsN: PHOGAN
69

ticular, there are lots of—it is just many of the FERC orders, particularly during the 2000 period, reflected a misunderstanding of 

many of the California market rules. This is clearly, I think, explainable by the fact that all these markets are very complex and 

there is also 3,000 miles between Washington and California. 

So that really, I think, the proper way to do it is to allow much 

more discretion to the monitor at the ISO, and if you are worried 

about independence, then you can certainly put restrictions on 

that. But then have the Office of Market Oversight and Investigations handle the big problems and really set the policy for the other 

monitors, because I think trying to get in, as Commissioner Wood 

said, there are literally terabytes of data. You have to look through 

it carefully, and if you don’t understand the real details of things, 

you can really make a mess of it. 

So in that sense, I think that the better way to go is the 

hierarchial structure, where you are essentially delegating most of 

the responsibility for the, if you like, dirty stuff to the ISO, whereas FERC is setting the policy agenda and really listening to appeals from the ISO. 

Chairman LIEBERMAN. Thank you. Interesting. 

Mr. JOSKOW. The standard market design rule that has been proposed includes a requirement that each region have an independent market monitor, and I agree with Frank. I think one of 

the keys here is to find a way for the market monitoring and oversight people at FERC to interact closely with the market monitors 

in the regions to give the market monitors in the regions substantial discretion on a day-to-day basis and to have a very close working relationship with them. 

Frank is probably too modest to say this, but his market surveillance committee, as well as the market surveillance committee of 

the California Power Exchange, wrote numerous reports identifying 

problems in the markets long before 2000 and wrote numerous reports and made numerous suggestions during 2000 and 2001 which 

were largely ignored by FERC. And that is a problem, I think, that 

really needs to be fixed. If we are going to have these market monitoring units, as I think we should, they have to be able to work in 

a close, collaborative fashion with the staff at FERC, as well. 

Chairman LIEBERMAN. I appreciate your pointing that out, and 

I took that to be one of the conclusions of our staff report, as well, 

and thank Dr. Wolak for what he did in that regard. 

If I continue this hearing much longer, I will be accused of not 

wanting to yield the Chairmanship, ever, by just keeping the hearing going, so I will ask this final question. But your testimony has 

been very substantive. As always, I wish we got you on earlier. But 

it has affected us and we will circulate the record. 

Coming out of the Enron scandal and particularly the crisis in 

the Western energy markets, California, Oregon, Washington, etc., 

there has been a lot of second looking at energy market deregulation generally. There are some States that had been on the way to 

doing deregulation and have now pulled back. We talked about this 

a bit just a few moments ago, but what is your counsel here? Am 

I correct that neither of you would say that energy deregulation 

was a bad idea, but that other kinds of regulation have to stay in 

effect for it to work? You just can’t say, OK, no more rate setting 

70

and walk away. You have got to have the State trooper on the 

highway, making sure people don’t go way over the speed limit. 

Mr. JOSKOW. I think the changes that have been initiated to promote wholesale and retail competition in the long run can accrue 

to the benefit of consumers, but it has to be done right. It requires 

appropriate industry structures and restructuring. It requires appropriate market rules, and it requires appropriate ongoing regulatory oversight and actions by FERC and the market monitors in 

the regions. 

I think, in a way, the Northeast is going to be a laboratory for 

this. We are very far along down the path. We share a vision with 

FERC for what wholesale and retail markets should look like. I 

don’t think it would be unreasonable, if I were the governor of a 

State like North Carolina or South Carolina or Georgia, to say, before we change our system, which seems to work pretty well, we 

have low prices, reliable supplies of electricity, why don’t you guys 

show us if you can make it work? 

So I think the challenge I feel, both as an academic and as a citizen of New England, is to work with public policy makers and the 

market participants to demonstrate that these reforms can work to 

the benefit of consumers, as it has in a number of other countries. 

Chairman LIEBERMAN. Thank you. Well said. Dr. Wolak. 

Mr. WOLAK. Yes. I would like to say it as we should have demand pull restructuring rather than supply push restructuring, in 

the sense of rather than FERC going out and saying, you must restructure your market and sort of forcing States kicking and 

screaming into joining RTOs and the like, I think a better way to 

go is exactly the way Paul Joskow suggested, is make sure you get 

the markets that you currently have restructured working very 

well so that then people look over and they say, I want some of 

that. That is a market that works. That is delivering low prices to 

consumers. I would like to join that RTO. I would like to get the 

benefits that people who are located in that State are getting, rather than the other way, where you are pushing States into it. 

Another lesson I think we can learn from California is that if the 

State infrastructure isn’t in place to support a competitive market 

at the wholesale level, and by that I mean the retail market infrastructure, then disastrous results can occur for the wholesale market, which can impose significant consumer harm. So in that sense, 

unless you have the States really working to cooperate, it really 

makes FERC’s job much more difficult. So, therefore, certainly 

given the point that we are at, a far superior, I think, strategy is 

to make the ones that we have got work very well so that then people in the other States will say, I will make the necessary changes 

to make it work well in my market, as well. 

Chairman LIEBERMAN. Well said. Once again, both of you have 

contributed very significantly and substantively to the work of the 

Committee. I thank you very much for your time and for your testimony. 

I am going to, without objection, make documents referenced in 

the staff memo, such as have been designated by staff, part of the 

public record, as was discussed earlier. 

I do want to thank David Berick and the staff for the enormous 

contribution they made in the report today. I know some of the 

71

questioning took them off the four major cases that they had been 

on, but I think the substance and constructiveness of the work 

speaks for itself and I certainly heard Commissioner Wood and the 

other commissioners welcome the work that was done here, even 

accept some constructive criticism, and I am very hopeful that it 

will be part of an ongoing effort by all of us to make our energy 

markets deregulated as they are now, in that sense, nonetheless 

function with some remaining oversight and monitoring to the benefit of all concerned, particularly the consumers. 

I will leave the record of the hearing open for a couple of weeks, 

if any Members have additional questions to submit, and if so, we 

will submit them to the witnesses. 

With that, I thank you all and the hearing is adjourned. 

[Whereupon, at 2:21 p.m., the Committee was adjourned.] 

(73)

A P P E N D I X 

PREPARED STATEMENT OF SENATOR BUNNING 

Thank you, Mr. Chairman. 

The Governmental Affairs Committee started off the year holding hearings on 

Enron’s collapse, so I suppose it is fitting that we end the year on the same note. 

Today, we look at whether FERC could have done more to detect the corruption 

and mismanagement at Enron. 

Unfortunately, when you look at the Enron scandal, it appears that many people 

both in the public and private sectors needed to be asking harder questions. 

What is so shocking about Enron is that so many of the safeguards we have in 

place all failed at the same time—both within the government and in the private 

sector. 

In June of this year, GAO issued a report on changes FERC needs to make to 

be more effective in its oversight of competitive energy markets. 

Among other things, the report mentions that FERC needs to make some significant internal structural changes. 

It also recommends that FERC hire more employees knowledgeable about these 

markets as well as improving training of existing employees. 

Finally, the report also mentions that FERC needs more legal authority to go 

after those who engage in anti-competitive or illegal activities. 

In his testimony, Chairman Wood listed the actions FERC is taking to address 

some of these problems. Including working closer with other Federal agencies and 

creating the new Office of Market Oversight and Investigations. 

Similar to the GAO report, Mr. Wood also mentioned that FERC needs Congress 

to increase its civil and criminal penalty authority. 

If you can find a silver lining in Enron’s collapse, I suppose it would be that we 

now have the opportunity to fix and strengthen our system of oversight. 

We need to make the necessary changes to ensure there isn’t another Enron fiasco. 

I would like to thank all of our witnesses who are here today to testify, and I 

am looking forward to hearing from them. 

I especially would like to say ‘‘hello’’ to a fellow Kentuckian, Linda Breathitt. 

Thank you.

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Æ


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