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84–329 PDF 2005

S. HRG. 107–1138

EXAMINING ENRON: ELECTRICITY MARKET

MANIPULATION AND THE EFFECT ON THE

WESTERN STATES

HEARING

BEFORE THE

SUBCOMMITTEE ON CONSUMER AFFAIRS, FOREIGN 

COMMERCE AND TOURISM

OF THE

COMMITTEE ON COMMERCE, 

SCIENCE, AND TRANSPORTATION 

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

APRIL 11, 2002

Printed for the use of the Committee on Commerce, Science, and Transportation

(

(II)

SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

ERNEST F. HOLLINGS, South Carolina, Chairman 

DANIEL K. INOUYE, Hawaii 

JOHN D. ROCKEFELLER IV, West Virginia 

JOHN F. KERRY, Massachusetts 

JOHN B. BREAUX, Louisiana 

BYRON L. DORGAN, North Dakota 

RON WYDEN, Oregon 

MAX CLELAND, Georgia 

BARBARA BOXER, California 

JOHN EDWARDS, North Carolina 

JEAN CARNAHAN, Missouri 

BILL NELSON, Florida 

JOHN MCCAIN, Arizona 

TED STEVENS, Alaska 

CONRAD BURNS, Montana 

TRENT LOTT, Mississippi 

KAY BAILEY HUTCHISON, Texas 

OLYMPIA J. SNOWE, Maine 

SAM BROWNBACK, Kansas 

GORDON SMITH, Oregon 

PETER G. FITZGERALD, Illinois 

JOHN ENSIGN, Nevada 

GEORGE ALLEN, Virginia 

KEVIN D. KAYES, Democratic Staff Director 

MOSES BOYD, Democratic Chief Counsel 

JEANNE BUMPUS, Republican Staff Director and General Counsel 

SUBCOMMITTEE ON CONSUMER AFFAIRS, FOREIGN COMMERCE

AND TOURISM 

BYRON L. DORGAN, North Dakota, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

RON WYDEN, Oregon 

BARBARA BOXER, California 

JOHN EDWARDS, North Carolina 

JEAN CARNAHAN, Missouri 

BILL NELSON, Florida 

PETER G. FITZGERALD, Illinois 

CONRAD BURNS, Montana 

SAM BROWNBACK, Kansas 

GORDON SMITH, Oregon 

JOHN ENSIGN, Nevada 

GEORGE ALLEN, Virginia 

(III)

C O N T E N T S 

Page 

Hearing held on April 11, 2002 .............................................................................. 1

Statement of Senator Boxer .................................................................................... 4

Statement of Senator Burns ................................................................................... 4

Statement of Senator Dorgan ................................................................................. 1

Statement of Senator Fitzgerald ............................................................................ 30

Statement of Senator McCain ................................................................................. 102

Statement of Senator Nelson .................................................................................. 100

Statement of Senator Wyden .................................................................................. 2

WITNESSES

Dunn, Hon. Joseph, California State Senator ....................................................... 33

Prepared statement .......................................................................................... 36

Freeman, S. David, Chairman, California Power Authority ................................ 58

Prepared statement .......................................................................................... 59

Hauter, Wenonah, Director, Critical Mass Energy & Environment Program, 

Public Citizen ....................................................................................................... 62

Prepared statement .......................................................................................... 65

Lynch, Loretta, President, California Public Utilities Commission; Accompanied by Gary M. Cohen, General Counsel, California Public Utilities 

Commission ........................................................................................................... 44

Prepared statement .......................................................................................... 48

McCullough, Robert, Managing Partner, McCullough Research ......................... 67

Prepared statement .......................................................................................... 69

APPENDIX

Boxer, Hon. Barbara, U.S. Senator from California, legislation submitted 

for the record ........................................................................................................ 111

Filner, Hon. Bob, Congressman from California, prepared statement ................ 109

(1)

EXAMINING ENRON: ELECTRICITY MARKET 

MANIPULATION AND THE EFFECT ON THE 

WESTERN STATES 

THURSDAY, APRIL 11, 2002

U.S. SENATE, 

SUBCOMMITTEE ON CONSUMER AFFAIRS, FOREIGN

COMMERCE AND TOURISM, 

COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 9:36 a.m. in room 

SR–253, Russell Senate Office Building, Hon. Byron L. Dorgan, 

Chairman of the Subcommittee, presiding. 

OPENING STATEMENT OF HON. BYRON L. DORGAN,

U.S. SENATOR FROM NORTH DAKOTA 

Senator DORGAN. The hearing will come to order. This is a hearing of the Consumer Affairs, Foreign Commerce and Tourism Subcommittee of the Commerce Committee, and we are meeting today 

to discuss the Enron Corporation once again. 

If I might have the door to the hearing room closed, please. We’d 

ask the audience to please take seats. 

We, on previous occasions, have held hearings with respect to the 

Enron scandal, as it’s described in the press and elsewhere, and we 

had, in this room, testimony by the author of the Powers Commission report. That investigative report was empaneled by the Board 

of Directors of the Enron Corporation itself. 

We know that the Board of Directors found that what was happening inside the Enron Corporation was to quote the report ‘‘appalling.’’ The Board of Directors’ own report says that this corporation booked $1 billion in income that it didn’t receive in a year. Let 

me say that again. This is a corporation that claimed to have $1 

billion in income in a given year that it did not have. That’s according to the Board of Directors’ own investigative report. They also 

disclosed that substantial amounts of debt that the corporation had 

incurred were kept off the books. The Enron Corporation is the 

subject at the moment of a criminal investigation by the Justice 

Department. 

Given all of that, the question that Senator Boxer and others 

have asked—my colleague, Senator Wyden, as well—what was involved with Enron’s activities on the West Coast, particularly California? Enron was a corporation that had a climate of corruption 

inside of the company sufficient so their own Board of Directors 

says they were booking a billion dollars of income they didn’t reVerDate 0ct 09 2002 11:58 Sep 26, 2005 Jkt 084329 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 S:\WPSHR\GPO\DOCS\84329.TXT JACK PsN: JACKF
2

ceive and keeping debt off the books and so on. Did it play fair with 

the consumers on the West Coast? 

Well, Senator Boxer and Senator Wyden asked questions of 

Enron executives in previous hearings on that subject. And, of 

course, they insisted that things were just fine. There’s other evidence and other allegations that exist that this corporation did to 

consumers on the West Coast what it was doing inside its own 

company, and that is, they cooked the books. They created partnerships, bought and sold from partnerships they controlled and created, created sham transactions, effectively manipulated the market price for electricity, and took billions of dollars out of the pockets of consumers in California and in the West Coast. 

Enron was one of the largest participants in the electricity markets and had an enormous amount of market power. They helped 

create that market power and, some will say, manipulated that 

market power in a way that cheated consumers out of billions of 

dollars. 

The testimony we will hear today from a number of witnesses 

paints quite an appalling picture. I mentioned the word ‘‘appalling’’ 

was used by the Board of Directors looking inside their own company. They said what they found was, quote, ‘‘appalling.’’ The testimony that we will receive today suggests that there was some appalling behavior by this corporation with respect to the manipulation and distortion of markets for electricity in a manner that systematically cheated the consumers and ratepayers in California 

and on the West Coast. 

So, I think this will be an interesting hearing. I appreciate my 

two colleagues from Oregon and California in pressing for this inquiry. I think that it is a reasonable inquiry, given what the Board 

of Directors of this corporation has said about the behavior of the 

corporation itself inside the company. Would they have been cheating inside the company and expected not to cheat with respect to 

what they were doing with the manipulation of electricity markets? 

Well, we’ll see. I think the testimony today will bear on some of 

that, and it will be interesting testimony. 

This will not be the last hearing. We are scheduling a hearing 

on this subject with respect to some pension funds. I don’t have a 

date on that. That’s been set—I think it’s in a week-and-a-half or 

so from now. And, we will have some other activities, as well. 

But let me call on my colleagues, if they have statements. Senator Wyden. 

STATEMENT OF HON. RON WYDEN,

U.S. SENATOR FROM OREGON 

Senator WYDEN. Thank you very much, Mr. Chairman. I very 

much appreciate your holding this hearing and giving us a chance 

to examine issues that are so important to the consumers of Oregon, California, and Washington. I particularly want to commend 

our colleague, Senator Boxer, who has just been a persistent advocate for the consumer on so many issues and particularly has led 

the Subcommittee on these issues. 

There’s been considerable discussion, Mr. Chairman and colleagues, about the matter of there being a ‘‘smoking gun’’ to prove 

that Enron manipulated West Coast energy markets. Because of 

3

our requests, the request of West Coast senators, the Federal Energy Regulatory Commission is looking into the matter. 

But one thing is very clear. In this effort to find a smoking gun, 

what we do know is that Enron has clearly produced a smokescreen that is designed to obscure its role and its actions in this 

matter. For years, Enron was able to fly under the regulatory radar 

screen. It traded power among its various subsidiaries and divisions, in my view, specifically to make it hard to track Enron’s role 

in these energy markets. And, I think what we ought to do as we 

begin this morning’s inquiry is talk for a moment about what we 

know for sure with respect to Enron’s role in the West Coast energy markets. 

First, what we know for sure is that Enron clearly had the power 

to manipulate these markets. It’s been estimated that Enron controlled 30 percent of the trades at West Coast trading hubs, which 

gave Enron sufficient market power to influence prices. 

Second, we know for sure that Enron had a motive to use its 

market power to manipulate West Coast energy prices. The former 

CEO, Jeff Skilling, was even quoted in Business Week magazine as 

saying that Enron benefits from volatility in the West Coast market. 

Third, we know that in the summer of 2000, the West Coast energy markets experienced unprecedented volatility, with prices 

soaring to ten times what they had been just the year before. 

Enron capitalized on this volatility by developing and marketing 

energy contracts that supposedly protected consumers against the 

risk of skyrocketing prices. Meanwhile, the subsidiaries were trading power among themselves at extraordinary prices, and that 

clearly helped to drive up the overall market. 

Now, previously, under questioning that I and others asked after 

Enron filed for bankruptcy, we’ve learned that forward prices in 

West Coast electricity markets dropped 30 percent that day. Now, 

absolutely nothing else was occurring in the market at that time 

to explain that drop of 30 percent. The clear implication was, and 

the question remains, were prices artificially inflated by Enron’s 

presence in the West Coast market? 

The evidence also indicates that Enron knew West Coast energy 

prices were going to skyrocket even before the West Coast crisis 

began. The evidence includes Enron’s overall hedging strategy and 

its efforts to sell off a power plant in my home State of Oregon to 

one of its off-the-book partnerships. 

Finally, some have argued that the fact that there were no energy supply problems or price spikes following Enron’s collapse 

means that markets were working. But what does that say about 

the markets during the West Coast crisis when Enron was a major 

player and rolling blackouts and record price spikes were everyday 

occurrences? 

The bottom line here, what we know for sure, is that Enron had 

the market power and the motive to manipulate the West Coast energy markets. Not all the facts are in yet. And one of the reasons 

it’s hard to get the facts is because of this Enron pattern of setting 

up smokescreens and stonewalling to keep the evidence from coming out, but certainly there’s a lot of circumstantial evidence that 

4

raises troubling questions about whether market manipulation was 

taking place. 

The last point I would make, Mr. Chairman, and I appreciate 

your indulgence—given the fact that the derivatives measure, a 

measure that Senator Boxer and Senator Feinstein and so many of 

us worked for, does not look like it’s going to be in the energy bill—

we need to examine this morning’s specific measures that are going 

to protect consumers. I was able to add to the energy bill legislation that would set up a consumer advocate within the U.S. Department of Justice so as to regulate the kind of interstate wheeling and dealing that Enron was engaged in. Right now, the states 

don’t have any authority over those interstate activities. It now is 

in the Senate energy bill that goes to the Conference Committee. 

Hopefully, with your support and Senator Boxer’s, and obviously 

we’re anxious to work with our colleague from Montana, we can 

add to that. But right now, that’s one of the few tools that we have 

in place or have an opportunity to put in place to protect the consumer. I look forward this morning, under your leadership, Mr. 

Chairman, to examine other ways in which we can advocate for the 

consumer on these critical issues. 

Senator DORGAN. Thank you, Senator Wyden. Senator Burns. 

STATEMENT OF HON. CONRAD BURNS,

U.S. SENATOR FROM MONTANA 

Senator BURNS. I have no opening statement, Mr. Chairman. 

Thank you for holding this hearing. And we’ve come to listen to the 

witnesses this morning and learn. I have drawn no conclusion. I 

think we ought to caution ourselves not to draw any conclusions 

until all the facts are known. 

So thank you very much for this hearing. That’s the purpose of 

it. 

Senator DORGAN. Senator Boxer. 

STATEMENT OF HON. BARBARA BOXER,

U.S. SENATOR FROM CALIFORNIA 

Senator BOXER. Mr. Chairman, I want to thank you so very 

much on behalf of the people of California. This is the only Senate 

hearing that ever looked at the role of Enron in the California crisis. My colleague, Senator Wyden, his state suffered from what occurred. My state is still suffering the shock of what occurred. And 

I’m going to take, with your indulgence, probably about five minutes to make my opening statement. 

I want to welcome our panel that’s coming before us. Mr. Chairman and members, these people are good people. They were on the 

ground during all of this. They know what was happening, and 

they’re going to help us find the facts that Senator Burns is looking 

for. I can assure him of that. 

Just one year ago, California was suffering from an incredible en- ergy crisis. In April 2001, wholesale electricity was selling for $201 

per megawatt. A year earlier, before the crisis, it was selling for 

$32 per megawatt. That is a 528 percent increase. The result was 

that everyone in my state was paying more for electricity. Not only 

did prices go up, but people in industry were facing rolling blackouts. Silicon Valley clearly could not operate without electricity and 

5

a short supply of electricity. The agriculture industry faced great 

financial stress with the thought that they could lose refrigeration. 

Elderly people could have died in the summer without air conditioning. And, Mr. Chairman, from what I know so far, I believe 

that Enron played a key role in what happened to the people of 

California. 

Over the last several months, in dribs and drabs and piece by 

piece, we’ve begun to get a picture of exactly what Enron did and 

exactly how Enron used its influence with this Administration—

and, by the way, the one before—to continue to manipulate the 

California market. 

I have, on several occasions, laid out many of the pieces of the 

puzzle, and I’m not going to do that today, except for a couple of 

new pieces. And today we’ll get more pieces of the puzzle. But 

based on what we do know so far and what today’s witnesses will 

help us see far more clearly, the financially shaky Enron bled California dry, used us as a cash cow to keep that company afloat, to 

keep the price of the stock up so that the insiders could sell out. 

I would say that Enron used its influence with this government 

to ensure that it could continue to manipulate that market. And 

the one entity that could have helped California, the only one, 

FERC, they did not help us until almost a year later. 

At this point, I want to make sure the record of this hearing is 

very complete. From the beginning of the crisis, there were desperate calls for help, and I want this record to be complete. I sent 

numerous letters to FERC asking for cost-based pricing. Senator 

Feinstein did the same. Forty-one members of the congressional 

delegation of California—this was bipartisan, Mr. Chairman—

wrote to the President and to FERC asking for relief. The Governor 

asked for relief. The California State Legislature asked this Administration for relief. Mr. Chairman, I would like to submit for the 

record letters from myself, Senator Feinstein, the California delegation, the Governor, and the California State Legislature——

Senator DORGAN. Without objection. 

Senator BOXER.—put those in the record. 

Senator DORGAN. Without objection. 

Senator BOXER. Thank you. 

[The information referred to follows:]

6

January 12, 2001

President-Elect GEORGE W. BUSH, Bush-Cheney Presidential Transition Foundation, Inc., 

McLean, VA.

Dear President-Elect Bush:

You recently commented about the current energy situation in this country. One 

of the first opportunities you will have to address the problem is through appointments to the Federal Energy Regulatory Commission (FERC). There are two vacancies that need filling, and you will also be charged with designating one of the Commissioners as the Chairman. 

Unfortunately, no current FERC Commissioner hails from further west than Arkansas. Therefore, I ask that you appoint a Commissioner from California to remedy 

this problem. Not only is California’s economy larger than all but five nations in 

the world, California is the site of America’s most acute energy problem. It is imperative that whomever you appoint to the Commission and whomever you designate 

as its Chairman fully comprehend the California crisis and fully understand California’s concerns. 

The San Diego area was the first region to experience a crisis of unprecedented 

proportions. In many cases, electricity rates doubled and tripled there last summer. 

Small business owners and people on small or fixed incomes, especially the elderly, 

were hit hardest. In recent weeks, supply and demand problems have plunged the 

state into emergencies that could result in brownouts or rolling blackouts. Utility 

companies report that they have lost billions of dollars; natural gas prices have 

quadrupled; and some suppliers may be taking advantage of the situation. 

This crisis threatens to have economic ramifications. If the lights go out in California, there will be a brownout across the country. FERC has taken partial, but 

not adequate, steps. Much work still lies ahead. 

Thank you for your consideration, and please let me know your thinking on this. 

Sincerely, 

BARBARA BOXER, 

United States Senator. 

February 2, 2001

Hon. CURT HE ́ BERT, JR., Chairman, 

Federal Energy Regulatory Commission, 

Washington, DC.

Dear Mr. Chairman:

I appreciated the opportunity to meet with you recently in my Washington office. 

I was encouraged to hear that you believe energy conservation is an important 

part of the solution to our energy problems. As I mentioned, I have introduced legislation, which would provide a refundable tax credit to consumers who install conservation measures, grants to schools for energy conservation retrofits and additional information for consumers showing electricity use during peak and off-peak 

hours to further encourage conservation. I have enclosed a copy of the legislation 

for your review. 

It was disappointing to hear directly from you, and from other Administration officials, that there is currently no Administration support for the concept of a Western 

Regional Price Cap. Both Senator Feinstein and I have introduced legislation—my 

bill is the Filner-Boxer bill—in support of such a cap. I have enclosed a copy of my 

bill. 

It is clear to me, given the outrageous profits of generating companies and the 

suspicious supply shortage that we have been experiencing, that a Western Regional 

Cap on wholesale electricity prices would provide immediate relief for consumers 

and assist in stabilizing a dysfunctional market. 

California’s problem has been receiving the most attention. However, it is reported that utilities are imposing or asking for double digit rate increases in Oregon, Washington, Idaho, Utah and Montana as well. Western Governors, meeting 

today in Portland, are suggesting ‘‘cost-plus’’ price caps as an immediate solution to 

protect consumers. 

In light of this growing bi-partisan support for a regional price cap, I ask you to 

reconsider your objection and act as soon as possible to spare consumers, both business and residential, the agony of enormous increases in their bills. 

7

Please do not hesitate to call me if you believe I can be of assistance to you in 

your important work. 

Sincerely, 

BARBARA BOXER, 

United States Senator. 

CONGRESS OF THE UNITED STATES

Washington, DC, February 21, 2001

CURT HE ́ BERT, Chairman, 

WILLIAM L. MASSEY, 

Commissioner, 

LINDA KEY BREATHITT, 

Commissioner, 

Federal Energy Regulatory Commission, 

Washington, DC.

Dear Mr. Chairman and Commissioners:

We are contacting you regarding the ongoing energy crisis facing the Western 

United States. 

As you know, the State of California is in the process of finding a solution to the 

short-term problem of skyrocketing energy prices. Currently, Governor Davis and 

the California Legislature are attempting to allow the State to enter into long-term 

contracts with generators and marketers which will eliminate the need for the California Independent System Operator (ISO) to buy most of its power on the spot market. Clearly, the current situation of the ISO buying enormous amounts of power 

from the spot market is contributing to the extremely high energy prices we face 

today. While we fully support efforts to take the California ISO out of the spot market, we must recognize that success in these efforts, at least in the short-term, is 

not certain. 

The current energy regulatory system in California has created unnatural and obviously dangerous market conditions throughout the West. Under these extraordinary circumstances, we believe a temporary ‘‘time-out,’’ in the form of price caps 

in the energy market, is needed until we can fix the underlying problems of this 

distorted market. 

To avoid any future energy crisis, we are all looking for long-term solutions, such 

as investments in renewable energy, serious conservation measures, and appropriate construction of new generation. Clearly, however, before any serious consideration can be given to these proposals, we must deal with the short-term problem 

at hand. 

We strongly urge you, as commissioners of the Federal Energy Regulatory Commission (FERC), to use your authority to immediately implement wholesale energy 

price caps for all Western states employing the following conditions:

• The caps are set at cost-based rates, plus a reasonable level of return for the 

seller

• The caps are temporary, with a finite time limit, or until energy prices in the 

West stabilize

• The caps are not applied to new generation, as doing so may remove incentives 

for new generation

We are requesting this action recognizing that this authority must be used in a 

very judicious manner and only in extraordinary situations. We believe that the current energy crisis facing our region qualifies for such action as intended by the authority vested in FERC. 

Thank you for your attention to this matter, and we look forward to hearing from 

you soon. 

Sincerely,

Jay Inslee, M.C. 

Peter DeFazio, M.C. 

David Wu, M.C. 

Jim McDermott, M.C. 

Gary Condit, M.C. 

Adam Smith, M.C. 

Sam Farr, M.C. 

Brian Baird, M.C. 

Lois Capps, M.C. 

Darlene Hooley, M.C. 

Bob Filner, M.C. 

8

UNITED STATES SENATE

Washington, DC, February 28, 2001

Mr. CURTIS HE ́ BERT,

Chairman, 

Federal Energy Regulatory Commission, 

Washington, DC.

Dear Chairman He ́bert:

Since the Federal Energy Regulatory Commission experimentally suspended a 

price cap on the cost of transporting natural gas to Southern California, the prices 

have increased exponentially dramatically escalating the state’s electricity crisis. 

While the suspension of this cap was meant to last for two years, the experiment 

is clearly a failure and I ask that you end it immediately. 

For your reference, I have enclosed a graph and chart that compare natural gas 

prices in California with its neighbors, Natural gas prices in Southern California 

reached $60 per decatherm in the middle of December and last week still averaged 

more than $25 per decatherm, almost five times higher than in the rest of the country. The result has been winter gas prices for 18 million consumers of Southern 

California that are more than 400% higher than last year. 

I recently met with the President of El Paso Merchant Energy who told me that 

the cost of transporting natural gas from San Juan, New Mexico, to Southern California is only about 67 cents per decatherm. Thus, if natural gas is selling for about 

$5 in San Juan it should be selling for $5.67 in Southern California, not $25. 

By issuing Order 637 in February 2000, FERC suspended for two years the price 

cap for short term capacity release transactions for service to the Southern California border and to points of interconnection between interstate pipelines and California local distribution companies. 

Until last year, the maximum charge to transport gas to Southern California from 

Texas and Oklahoma, where much of the production capacity exists was about 50 

cents per decatherm, which already included a reasonable rate of return. Had FERC 

not engaged in this questionable experiment, the price of natural gas in Southern 

California would have more closely paralleled the prices everywhere else. 

I am also asking that FERC require natural gas sellers to declare separately the 

transportation and commodity components of the bundled rate for gray market 

transactions. These transactions are not covered by Order 637. 

This requirement would at least provide the necessary transparency on the difference between the transportation and commodity prices for natural gas at the border. If FERC were to rescind Order 637, provide this transparency for the bundled 

rate and implement cost of service based rates, California’s electricity rates would 

return to ‘‘just and reasonable’’ for the first time in ten months. 

Thank you for your continued attention to this matter. 

Sincerely, 

DIANNE FEINSTEIN. 

CONGRESS OF THE UNITED STATES

Washington, DC, March 6, 2001

Hon. GEORGE W. BUSH, 

President of the United States, 

The White House, 

Washington, DC.

Dear Mr. President:

We are writing to request an opportunity to meet with you and the Administration’s energy task force regarding a plan to address the Western States energy crisis. 

As this crisis deepens, and its economic impacts become more pronounced, it becomes increasingly apparent that federal action is necessary to prevent this problem 

from injuring our economy on a longer term basis. We believe a wholesale price cap 

should be employed to address this situation, and that such a cap can be structured 

to ensure that it is short term and does not act as a disincentive for the creation 

of new generating capacity. We also look forward to discussing other aspects of a 

response plan to our energy crisis, including the use of renewable energy, energy 

efficiency, and conservation action that must be part of the solution. 

9

This is an issue of great urgency in the Western States and among the constituents we represent, and it is our hope that we can have an opportunity at your earliest convenience to meet with you and the task force to discuss our concerns. 

Thank you for your consideration of this request. 

Sincerely, 

(Signed by 26 Members of Congress) 

March 9, 2001

Hon. CURT HE ́ BERT, JR., Chairman, 

Hon. WILLIAM MASSEY, Commissioner, 

Hon. LINDA BREATHITT, Commissioner, 

Federal Energy Regulatory Commission, 

Washington, DC.

Dear Mr. Chairman and Commissioners:

This letter is to request on behalf of our three states, California, Oregon and 

Washington, that the Federal Energy Regulatory Commission take steps on an interim basis to restrain the unreasonably high wholesale costs of electricity in our 

region. Specifically, we would suggest something like the plan proposed by Commissioner William Massey of the Federal Energy Regulatory Commission in a February 

8 speech. He recommended:

‘‘. . . a temporary cost-based price cap on spot market sales in the western 

interconnection. Such a price cap could be calculated on a generator-by-generator basis at each generator’s variable operating costs plus a reasonable capacity adder perhaps in the range of $25/mwh. New generation sources should be 

exempt. In addition, such a cap should have a well-specified sunset provision, 

tied either to a date certain or the attainment of certain specific conditions, 

such as some measure or adequate reserves.’’

Such a price cap would allow generators to recover all of their operating costs plus 

a return. Of course, bilateral contracts and long-term contracts would be exempt in 

order to encourage a long-term, market-based solution. 

We understand that some of the federal power marketing agencies such as BPA, 

which are not controlled by the FERC, would voluntarily adhere to such a plan. 

While we fully recognize the benefits of a free market, our problem is that we 

have a shortage of electricity. In spite of our aggressive and urgent efforts, the problem will only get worse throughout the year and particularly this summer. This 

shortage has enabled, and, is enabling generators to receive ‘‘unjust and unreasonable’’ charges for their wholesale energy. A report prepared by the California ISO’s 

Department of Market Analysis concluded that 21% of real time energy costs during 

December 2000, and 63% of real time energy costs for January 2001, represent 

charges that may exceed just and reasonable levels. Indeed, last week the FERC determined that the wholesale prices for some power purchased in California during 

January, 2001, were not just and reasonable, and has ordered limited refunds. 

These excessive charges have virtually bankrupted California’s two largest utilities, Pacific Gas & Electric and Southern California Edison, while the generators 

have earned record profits which exceed 1999 levels by several hundred percent. 

The ISO report, which is on file with this Commission, indicates these changes are 

significantly above costs. 

The reasons for the shortages are well known. These include lower precipitation 

in the Northwest, a shortage of natural gas, a damaged natural gas pipeline, inadequate transmission, and the failure throughout the Western states over a period 

of years to build sufficient generating capacity to meet the expanding demand. 

We are taking aggressive actions in each of our states to deal with the problem. 

For example, in California since April 1999, nine new major power plants (eight of 

which will produce 500 MW or more) have been licensed. Six are under construction. 

These plants, together with new peaking and renewable facilities, will total approximately 5,000 MW of new power production on line. By summer 2002, approximately 

5,000 additional MW will be on line. 

We are also taking aggressive actions on energy efficiency and demand reduction. 

These actions include a $1 billion energy conservation program in California. In 

California, we are also creatively resolving environmental issues including emissions 

requirements. We are attaching news releases which describe these actions in more 

detail. 

10

We will continue to implement every reasonable action to meet this challenge. But 

in spite of our best efforts the present shortage may get worse. The California ISO 

forecasted a shortage of 4,100 MW in its report of November 30, 2000—before the 

drought of this winter further diminishes supplies. 

Under its new law California is seeking long-term contracts for its energy supply 

and has had some real success in doing so. However, short-term contracts signed 

by the Department of Water Resources have required prices averaging $228 per 

MWh. A substantial portion of the power necessary to serve load will still be required to be purchased in the more expensive hour/ahead and spot markets. Of 

course, the relief we are requesting will be necessary only in the event of a shortage 

and only for this year. 

The economy of our region depends, we believe, upon successfully managing this 

energy crisis. As Chairman Alan Greenspan stated in testimony before Congress in 

January, prolonged energy troubles in the world’s sixth largest economy could jeopardize the nation’s economic health. We urgently request your help. 

Sincerely, 

GRAY DAVIS, 

Governor of California. 

GARY LOCKE, 

Governor of Washington. 

JOHN KITZHABER, 

Governor of Oregon. 

March 19, 2001

Hon. DICK CHENEY, 

Vice President of the United States, 

Eisenhower Executive Office Building, 

Washington DC.

Dear Mr. Vice President,

We are writing to confirm Steven Ruhlen’s refusal, on behalf of Vice President 

Cheney and the Energy Task Force, to grant a meeting with the twenty-five bipartisan Members of Congress who requested an opportunity to discuss energy price 

caps in the Western States in writing on March 6, 2001. 

We are extremely disappointed in Vice President Cheney’s refusal to meet with 

Members from the Western States about price caps. By refusing to hear our 

thoughts and concerns about the energy crisis, the Administration is sending an unfortunate signal to Americans about how it intends to govern—based on ideological 

reaction, rather than factoring in local input or the particulars of a specific situation. 

President Bush told the nation today that he looks forward to hearing the recommendations of Vice President Cheney’s Energy Task Force. We feel that the Task 

Force, by refusing to hear the viewpoint of the states that are suffering the effects 

of the energy crisis, will base their recommendations on incomplete information at 

best. 

As a group representing California, Washington and Oregon, three states that are 

inextricably tied together in this energy crisis and in its solution, we repeat our disappointment in the Vice President’s decision not to meet with us. 

We are requesting a confirmation, in writing, that Vice President Cheney and the 

Energy Task Force refuses to meet with us as a group. We do hope for a reversal 

of this decision. 

Sincerely, 

JAY INSLEE, 

SAM FARR, 

PETER DEFAZIO. 

11

CALIFORNIA LEGISLATURE

STATE CAPITOL

Sacramento, CA, March 26, 2001

Hon. SPENCER ABRAHAM, 

Secretary of Energy, 

U.S. Department of Energy, 

Washington, DC.

Hon. CURTIS L. HE ́ BERT, JR., 

Chairman, 

Federal Energy Regulatory Commission, 

Washington DC.

Dear Secretary Abraham and Chairman He ́bert:

Although California was the first state to experience energy shortages and skyrocketing prices, California’s energy crisis is neither just a ‘‘California problem’’ nor 

limited solely to ‘‘energy’’ in terms of negative fallout. Despite unique wholesale 

pricing problems associated with its own dysfunctional market structure, California’s greater energy problem is part of a broader supply shortage throughout the 

westernmost states. Furthermore, the problem is so severe that it now threatens the 

very economic foundation of the state. And, increasingly, the economic well being 

of the nation. 

This is not just about California. Other states now have deregulated or are in the 

process of doing so. They soon may suffer similar problems if similar market conditions prevail. The Federal Energy Regulatory Commission (FERC) and the U.S. Department of Energy (DOE) have the power to stabilize the national energy environment by guaranteeing a free, competitive electricity market characterized by reasonable wholesale prices, and by supporting policies and programs that promote energy 

infrastructure management, energy efficiency, and renewables. 

This crisis threatens Californians in many ways. If it persists in driving capital 

and jobs out of the state, we face a serious economic downturn—with the concomitant loss of revenues that threaten crucial public programs such as education, 

health, and public safety. The electrical grid’s unreliability imposes high shutdown 

costs and eliminates the certainty needed by industrial consumers to produce goods 

and keep California workers on the payroll. The high-technology industry that has 

fueled the national and state growth cannot maintain its productivity without reliable, affordable power. Farmers and ranchers will suffer greatly if irrigation and 

water-pumping machinery cannot operate. Food cannot be processed if canneries are 

shut down. 

California is not standing idly by. The state recognizes it must do everything possible to solve its problems with all available tools. We are undertaking bold initiatives to enhance reform and expedite power-plant siting, expand the applications of 

innovative distributed energy technology, and encourage conservation by residential 

and commercial energy consumers. But responsibility for energy policy and regulation is bifurcated between the state and federal governments. 

Request for federal action. The federal government, especially the Commission, 

must maintain a strong regulatory presence to discourage price manipulation within 

California’s admittedly dysfunctional market. The Commission has acknowledged 

that some generators have overcharged for electricity, and appropriately required 

refunds—or justification for prices—on March 9 and 14. 

The California State Legislature Requests:

• That FERC aggressively pursue overcharges and order refunds whenever appropriate.

• That FERC use its authority to review wholesale electricity prices in the recent 

past and future to ensure they are ‘‘just and reasonable and not unduly discriminating or preferential.’’

• That DOE take steps to promote strategic energy infrastructure planning for 

electricity and natural gas, as well as continued support for renewable energy 

projects and energy efficiency programs and technologies.

12

FERC must take efforts to protect the integrity of wholesale prices to avoid catastrophic outcomes in California, and powerful, harmful ripples throughout the nation’s economy. Continued strong policy leadership by DOE and appropriate regulatory action by the Commission will provide our state the time and opportunity to 

reform our market structure before irrevocable damage is done to California’s economic and social well being. 

Sincerely, 

ROBERT M. HERTZBERG, 

Speaker of the Assembly.

JOHN L. BURTON, 

Senate President Pro Tempore. 

Signatories

1. Senator Mike Machado (D) 

2. Senator Joe Dunn (D) 

3. Senator Nell Soto (D) 

4. Senator Wesley Chesbro (D) 

5. Senator Martha Escutia (D) 

6. Senator Sheila Kuehl (D) 

7. Senator Jack Scott (D) 

8. Senator Jim Costa (D) 

9. Senator Richard Alarcon (D) 

10. Senator Byron Sher (D) 

11. Senator Jack O’Connell (D) 

12. Senator Debra Bowen (D) 

13. Senator Kevin Murray (D) 

14. Senator Don Perata (D) 

15. Senator Ed Vincent (D) 

16. Senator Dede Alpert (D) 

17. Senator Liz Figueroa (D) 

18. Senator Jackie Speier (D) 

19. Senator Deborah Ortiz (D) 

20. Senator Richard Polanco (D) 

21. Senator Betty Karnette (D) 

22. Senator Gloria Romero (D) 

23. Senator Tom Torlakson (D) 

24. Senator Steve Peace (D) 

CONGRESS OF THE UNITED STATES

HOUSE OF REPRESENTATIVES

Washington, DC, March 30, 2001

The Hon. GEORGE W. BUSH, 

The President, 

The White House, 

Washington, DC.

Dear Mr. President:

We are writing because our constituents and millions of Americans across the 

West need your intervention at the Federal Energy Regulatory Commission (FERC) 

in order to address serious problems with the Western energy market. 

As you know, California has been experiencing an electricity crisis that has resulted in blackouts throughout the state, inconvenienced millions of citizens and 

businesses, and disrupted the state’s and region’s economy. Indeed, this crisis seriously threatens to cause long-term damage to the economy of California, the Western region, and perhaps the entire country. 

The crisis is the result of a dysfunctional energy market where wholesale prices 

of electricity have spiked exorbitantly. For example, wholesale prices on December 

15, 2000, ranged from $429 per Mwh to $565 per Mwh, compared to prices from 

$12 per Mwh to $29 per Mwh one year earlier. Wholesale prices have jumped as 

high as $1400 per Mwh. In fact, the California Independent System Operator (ISO), 

the state’s power grid operator, has projected that electricity which cost $7 billion 

in 1999 will cost $70 billion this year. These skyrocketing prices can only partly be 

explained by natural gas price increases and increased energy demand. 

These exorbitant price spikes have led FERC Commissioner William L. Massey 

to state on February 8, 2001:

These high prices serve only to continue a massive wealth transfer out of the region. Is it worth dragging down an entire regional economy, or perhaps even the 

national economy, for the theoretical purity of unfettered price signals? I say no. I 

call on my fellow commissioners to consider a time out now. It’s our statutory obligation. . . . FERC’s timidity and hands-off approach is eroding consumer confidence 

and destroying the consensus that heretofore supported a market based approach.

The dysfunctional nature of the market has apparently allowed it to be manipulated. The California ISO last week presented FERC with findings of a comprehensive study of pricing data in California’s wholesale electricity market over the last 

13

10 months. According to the Los Angeles Times, the ISO’s study found ‘‘evidence of 

market manipulation and consistent patterns of bidding far above costs’’ and that 

‘‘suppliers commonly offered electricity at twice their costs.’’ The ISO has estimated 

the cost of the potential overcharges between May 2000 and last month are high 

as $6.3 billion. 

Unfortunately, FERC actions have fallen far too short. To date, FERC has not aggressively worked to address market manipulations, despite finding last fall that 

wholesale prices were not ‘‘just and reasonable.’’ Nor is FERC apparently willing to 

seriously consider addressing runaway wholesale rates. 

The state of California is taking heroic measures, but this is an issue California 

cannot address alone. In a February 28, 2001, meeting with the California delegation, FERC Chairman Curt He ́bert confirmed the widespread understanding that 

the California market is not working. He called the California market ‘‘broken,’’ and 

acknowledged the regional problems posed by the market. Additionally, Chairman 

He ́bert stated that ‘‘I don’t think there is any way California can pull itself out of 

this thing alone.’’ As Mr. He ́bert knows, California has no authority over wholesale 

electricity sales. These sales fall solely within the jurisdiction of the federal government. 

Despite FERC’s recognition that California cannot address this problem alone, 

FERC seems unwilling to assist California and the West. FERC’s March 9 order sets 

the arbitrary expectation that unjust and unreasonable prices cannot occur in the 

absence of a Stage 3 Emergency. Energy economist Severin Borenstein has stated 

that this expectation ‘‘defies economic logic.’’ The March 9 order is also inconsistent 

with FERC’s December 15 order and ignores the fact that when market power exists, prices can be unreasonable even when supply is not within 1.5% of demand. 

Mr. President, you have the authority to rein in the impacts of this dysfunctional 

market and protect the citizens of California from exorbitant wholesale price spikes. 

In October 2000, when you were in California, you stated, ‘‘I believe so strongly that 

part of this region is going to suffer unless you have a president who is willing to 

tell the FERC to do what is right for the consumer.’’ Now, we are respectfully calling upon you to do just that. 

This is not a partisan issue. There is widespread support in both the U.S. House 

of Representatives and the U.S. Senate for wholesale price caps throughout the region. Governor Davis of California, Governor Kitzhaber of Oregon, and Governor 

Locke of Washington have now requested that FERC implement a short-term pragmatic proposal that will preserve adequate incentives to attract additional generation. 

We believe that electricity generators should make a reasonable profit and that 

these profits should be sufficient to encourage the development of needed generation. Federal action to temporarily intervene in California’s failed wholesale market 

can accommodate these needs. Governors Davis, Kitzhaber, and Locke have referenced Commissioner Massey’s suggestion of a temporary cost-based price cap on 

spot market sales in the Western interconnection, combined with an exemption for 

new generation sources to ensure that new sources of energy are encouraged. Such 

an approach could reinstate consumer confidence in wholesale sales, ensure generators receive sufficient market signals, and prevent future economic hemorrhaging in 

the West.

14

Mr. President, we request that you help protect California’s economy, and indeed 

that of the Western region and the nation. Please support the Governors’ request 

on wholesale rates, investigate the recent allegations of overcharges, and act to prevent a dysfunctional electricity market from damaging our constituents and a major 

engine of the nation’s economy. 

Sincerely,

Signatories to the March 30, 2001 letter to the President regarding FERC

Henry A. Waxman 

Lois Capps 

Mike Thompson 

Joe Baca 

Sam Farr 

Robert Matsui 

Nancy Pelosi 

Norm Dicks 

Jim McDermott 

Hilda Solis 

George Miller 

Pete Stark 

Bob Filner 

Lucille Roybal-Allard 

Grace Napolitano 

Loretta Sanchez 

Peter DeFazio 

Dianne Feinstein 

Darlene Hooley 

Mike Honda 

Earl Blumenauer 

Anna Eshoo 

Jane Harman 

Jay Inslee 

Barbara Boxer 

Brian Baird 

Brad Sherman 

Susan Davis 

Gary Condit 

Zoe Lofgren 

Ellen Tauscher 

Barbara Lee 

Tom Lantos 

Xavier Becerra 

Adam Smith 

Rick Larsen 

Lynn Woolsey 

Juanita Millender-McDonald 

Howard Berman 

Adam Schiff 

Maxine Waters 

David Wu 

GOVERNOR GRAY DAVIS

April 10, 2001

The Hon. CURT HE ́ BERT, 

Chairman, 

Federal Energy Regulatory Commission, 

Washington, DC.

Dear Mr. Chairman,

I cannot be with you and the western state representatives this morning. Speaker 

Bob Hertzberg of the California State Assembly will be present with a legislative 

delegation. However, I must submit this letter to you to share my perspective on 

the energy crisis. 

As you know, I have appeared before you in person, by video tape and through 

letters submitted to the FERC over the last 10 months. Each time I have asked you 

to impose real and effective price restraint in what is obviously a dysfunctional electricity market in California and throughout the West. And during that time, nothing 

has changed your position against price controls . . . even when wholesale prices 

in California and other western states have skyrocketed by over 1000% in many 

cases. 

The FERC has recently issued orders to refund overpayments to consumers in 

California which I applaud. But these refunds, if ultimately made, represent a tiny 

fraction, just 2% or less, of the overpayments made in a wildly dysfunctional marketplace that, according the California Independent System Operator, may exceed 

$6 billion. 

Last month, Governor Kitzhaber of Oregon, Governor Locke of Washington and 

I called on the FERC to adopt a temporary cost-based regional price cap that would 

allow generators and marketers to recover all of their costs plus a reasonable rate 

of return. We believe that this plan would go a long way in protecting consumers 

and businesses from the unpredictable nature of the current market and almost certain disruptions this summer. 

Under our proposal, the proposed regional price cap would be temporary—no more 

than two years—and the generators would have the ability to recover all of their 

operating costs and receive a return. Such regional price relief would stabilize the 

15

market, reducing uncertainty in planning for new generation development and 

would not discourage the development of new generation facilities as some have 

stated. 

I want to reiterate that we are doing all we can to generate more power in California. In the 12 years before I took office, not a single major power plant was built 

in California. Since the start of my Administration, we have licensed 12 major 

power plants. Four will be online this summer. Three will be online next summer. 

Ten more are in the pipeline. And we are doing all this while maintaining our commitment to clean air and clean water. 

We significantly streamlined the permitting process and established an interagency Clean Energy Green Team to cut through state, federal, and local red tape. 

We are also moving to establish a public power authority. If the private sector fails 

to build all the plants California needs, the state will build them. 

Californians are conserving energy. We rank 49th in the nation in per capita electricity consumption. California is the most energy efficient state in the West, but 

we are doing even more to save energy. In February, consumers exceeded my challenge to save 7% by reducing electricity use by 8%. I am now asking everyone to 

conserve at least 10%. We are launching an aggressive $800 million conservation 

program. We are retrofitting our government buildings for energy efficiency and incorporating sustainable building designs into new state building projects. We have 

adopted the strongest energy efficiency standards in the world for residential and 

non-residential buildings and appliances. We have established an innovative rebate 

plan, otherwise known as the ‘‘20/20’’ program, that rewards those who conserve 

20% by a 20% rebate in their energy bills. And we have adopted ambitious demand 

reduction programs for the commercial sector. 

Even with all these efforts, it has become increasingly clear that the Federal Energy Regulatory Commission’s failure to control costs has precipitated an increase 

in rates to keep our lights on and our economy strong. In this regard, last week 

I urged the California Public Utilities Commission (CPUC) to adopt a proposed rate 

increase that will protect average consumers, reward those who conserve and motivate the biggest users to cut back. These rate increases will give Californians some 

of the highest electricity rates in the nation. 

We are reducing our reliance on the spot market through long-term contracting. 

The state has more than 40 long-term contracts and agreements with major power 

companies that will deliver a total of 629,000,000 megawatt hours over the next 10 

years at prices 5–10 times lower than what we are paying today in the day-ahead 

and real-time markets. 

Although we cannot fix 12 years of inaction overnight, we are making real 

progress in California. It is critical that you fulfill your legal obligation to the people 

of California and the entire West to assure just and reasonable prices, and impose 

cost-based wholesale price controls at the earliest possible time. 

Sincerely, 

GRAY DAVIS. 

CONGRESS OF THE UNITED STATES

HOUSE OF REPRESENTATIVES

Washington, DC, May 4, 2001

The Hon. SPENCER ABRAHAM, 

Secretary, 

Department of Energy, 

Washington, DC.

Dear Secretary Abraham: 

We are writing to request your prompt action to direct the Federal Energy Regulatory Commission (FERC) to address the serious problems besetting electricity 

markets in California and other Western states. As we all know, consumer prices 

are skyrocketing, electricity marketers have reaped record profits, and Californians 

have endured repeated service interruptions. The outlook for this summer is hardly 

cheering, with forecasts of continuing price volatility and more blackouts. 

Mr. Secretary, consumers in California and other Western states need new electricity supplies. But until new supplies can be brought on line, western consumers 

need protection from blackouts and spiraling prices for this essential service. To 

make matters worse, the Chairman of FERC has declined to use his authority to 

protect western consumers. Last fall, the Commission found that electricity prices 

in California are not ‘‘just and reasonable.’’ Yet FERC has refused to impose cost 

of service prices that would fairly compensate suppliers without permitting them to 

exploit consumers, despite the fact that the Federal Power Act demands nothing 

16

less. In a recent series of orders, FERC has taken only marginal actions which purport to solve the crisis but in reality do little more than nibble at the edges. 

Mr. Secretary, we recognize that FERC is an independent commission and you are 

not authorized to take direct action on pricing matters. However, there is one step 

you can take that would force the Commission to do its duty to ensure just and reasonable prices. Under section 403 of the Department of Energy Organization Act, 

the Secretary of Energy is authorized to initiate rulemakings at FERC, and to set 

time limits for final action by the Commission. We respectfully request that you initiate a rulemaking at FERC to reimpose cost of service prices for all wholesale sales 

in California and the other twelve states in the Western Systems Coordinating 

Council (WSCC), including full refunds back to October 2, 2000, and to take final 

action by a date certain. There is nothing novel about section 403 authority, which 

has been available to the Department since its creation and used as recently as November 15, 2000. 

You can implement our request with no change to current law and without changing the principles of the Federal Power Act. Should market conditions change in the 

future, a later Commission could determine that cost of service rates are no longer 

necessary to ensure just and reasonable prices. Our proposal also avoids the dangers 

inherent in Congress attempting to devise new standards through new law which 

would have to be tested in the courts. 

Mr. Secretary, it is regrettable that FERC did not take aggressive action earlier, 

in time to avert problems in western electricity markets this summer that now appear inevitable. However, since FERC refuses to fulfill its statutory duty to ensure 

just and reasonable prices, we urge you to use your power to direct it do so. Without 

this action, further chaos will ensue and California and other western consumers 

will continue to pay the price. 

Sincerely, 

RICHARD GEPHARDT, 

Minority Leader.

JOHN D. DINGELL, 

Ranking Member, Committee on Energy and Commerce.

ROSA DELAURO, 

Co-Chair, Energy Task Force.

MARTIN FROST, 

Chairman, Democratic Caucus.

RICK BOUCHER, 

Ranking Member, Subcommittee on Energy and Air Quality.

ED MARKEY, 

Co-Chair, Energy Task Force.

and 38 other Members of Congress. 

July 10, 2001

Hon. CURT HE ́ BERT, JR., 

Chairman, 

Federal Energy Regulatory Commission, 

Washington, DC.

Dear Mr. Chairman:

I am writing to urge you to order $8.9 billion in refunds owed by the power generators to California consumers. 

I am very concerned about yesterday’s statement by FERC Chief Administrative 

Law Judge Curtis Wagner that California is owed no more than $1 billion. Although 

this is not his official recommendation to you under the June 18 FERC Order, I am 

concerned from his statement that his recommendation will not adequately address 

price gouging by the generators. 

The evidence is clear that the generators gouged California. Generators’ profits increased on average by 508 percent between 1999 and 2000. One company, Reliant 

Energy, experienced a 1,685 percent increase in profits in the same time period. 

This compares to a 16 percent increase in profits across the electric and gas industry and an increase in demand of only four percent. FERC failed to act to correct 

this part of the electricity crisis. Now you have the opportunity to rectify this oversight. 

17

I appreciate your consideration. I urge you to act strongly for the California consumer and order $8.9 billion in refunds. 

Sincerely, 

BARBARA BOXER, 

United States Senator.

Senator BOXER. We were all ignored. I, as well as other Members 

of Congress, also introduced legislation for cost-based pricing and 

refunds to help California. In the House, the legislation had Democratic and Republican support, with cosponsors including Representatives Capps, Matsui, Cunningham, and Issa. 

Mr. Chairman, I would like to submit for the record these various bills. May I do that? 

Senator DORGAN. Without objection, they’ll be put in the record. 

[The bills referred to are in the Appendix.] 

Senator BOXER. The FERC and the Administration opposed that 

legislation, as well. Why were all the efforts of all these elected officials, both Republican and Democrat, ignored? I believe because 

Enron did everything in its power to influence the Executive 

Branch to do nothing. And that is what they did. 

And let me state, Mr. Chairman, sometimes doing nothing is an 

affirmative action. It is what Enron wanted. It is what they got for 

almost a year. And we know this, because when Jeffrey Skilling 

made his statement to The San Diego Union-Tribune, once FERC 

did act, he stated in so many words, very clearly, that Enron really 

went under when the California crisis was, quote/unquote, ‘‘solved.’’

Enron lobbied FERC. We know there were at least 25 meetings 

during that California crisis between Enron officials and FERC decisionmakers. Mr. Chairman, I’d like to submit for the record a letter from FERC listing its meetings with Enron executives. 

Senator DORGAN. Without objection. 

[The information referred to follows:]

FEDERAL ENERGY REGULATORY COMMISSION

Washington, DC, February 21, 2002

The Hon. BARBARA BOXER,

United States Senate, 

Washington, DC. 

RE: MEETINGS AND PHONE CALLS WITH ENRON EXECUTIVES

Dear Senator Boxer:

This letter responds to your January 31, 2002 request for information on the number of meetings and telephone calls between Enron executives and FERC Commissioners and senior staff between August 2000 and June 2001. 

Let me assure you that I do not think the Enron Corporation, or any of its subsidiaries, has had any undue influence on the decisionmaking process at the Commission. Although the period about which you have inquired effectively predates my 

tenure at the Commission (having arrived on June 5, 2001), I sincerely believe that 

the agency’s decisions have not been compromised or otherwise improperly shaped 

by any communication with Enron executives. I also assure you that I have not and 

will not countenance any effort by any company to influence Commission action, 

outside appropriate agency regulatory procedures. Indeed, as FERC Chairman, I 

have stressed strict compliance with the Federal government’s ethics rules, including the prohibition in the Administrative Procedure Act, 5 U.S.C. § 557, and the 

Commission’s own regulations, 18 C.F.R. § 385.2201, against communication between persons outside the agency and FERC decisional employees such as commissioners and senior staff on the merits of any issue in a contested FERC proceeding. 

To underscore my commitment to ethical behavior, I ordered every Commission employee to receive ethics training in the Fall of 2001, shortly after I became Chairman. I am pleased to report the Commission’s Designated Agency Ethics Official ulVerDate 0ct 09 2002 11:58 Sep 26, 2005 Jkt 084329 PO 00000 Frm 00021 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\84329.TXT JACK PsN: JACKF
18

timately trained 1,158 employees (out of a total 1,123 full-time permanent employees and 56 part-time or temporary employees as of November 1, 2001). 

After we received your January 31, 2002 letter, we e-mailed, hand-delivered, or 

FedEx’d a copy of the letter and a list of all Enron companies to the Commissioners 

and senior staff (office directors) who were at the Commission during the August 

2000 to June 2001 period. A compilation of their responses, organized alphabetically, with their titles during this period, is enclosed. (Individuals who are no longer 

at FERC are italicized.) In brief, for the relevant time, there were nineteen (19) people who served as FERC Commissioners and senior staff and over the eleven 

months in question, seven (7) report that they had no contact with Enron executives 

and twelve (12) recall having approximately twenty-five (25) meetings or telephone 

calls with Enron executives, addressing a variety of issues. (We counted participation in the same meeting or telephone call by more than one person as one event) 

As you can imagine, it is difficult to recall every chance meeting or brief telephone 

call one may have had over a year ago. I believe, however, that all of the respondents made a good faith effort to give us the information so that we could respond 

meaningfully to your request. 

If I can be of any further assistance in this or any Commission matters, please 

feel free to contact me. 

Best regards, 

PAT WOOD, III, 

Chairman. 

Enclosure 

RESPONSES TO SENATOR BOXER’S REQUEST

FOR NUMBER OF MEETINGS AND TELEPHONE CALLS

BETWEEN ENRON EXECUTIVES AND COMMISSIONERS

AND FERC SENIOR STAFF BETWEEN AUGUST 2000 AND JUNE 2001

February 21, 2001

Note: Commissioners or Senior Staff no longer at FERC are indicated by italics.

Name of FERC

Commissioner or

Senior Staff 

Description of Meeting or Telephone Calls 

Adamson, Daniel 

Former Director of 

Energy Projects

(1) Possibly met with Enron executives on natural gas pipeline matters.

(2) Met with some unrecallable Enron executives about a 

proposed pumped storage hydroelectric facility and the development of energy infrastructure on Indian lands.

19

Name of FERC

Commissioner or

Senior Staff 

Description of Meeting or Telephone Calls 

Breathitt, Linda K. 

Commissioner

(1) On September 7, 2000, in a courtesy visit, along with 

staff assistant, met with Rick Shapiro, Managing Director, 

Government Affairs—Enron (Houston) as well as Charles 

Bone, Nashville Attorney. General discussion of electric deregulation.

(2) On January 18, 2001, in a courtesy visit, along with 

staff assistant, met with representatives of Enron, EPSA 

(Electric Power Supply Assoc.), ELCON (Electric Consumers Resource Council), Reliant, and Dynegy. Discussion 

of need for demand response programs.

(3) On January 21, 2001, made a brief (15–20 minutes) 

stop at an Enron-hosted Inaugural Brunch at Red Sage 

Restaurant. Prior approval received by DAEO (designated 

agency ethics officer).

(4) In late January 2001, had a dinner meeting with Rick 

Shapiro, Managing Director, Government Affairs—Enron 

(Houston) along with Charles Bone and Johnny Hayes, 

both from Nashville. Discussed RTO’s and transmission access issues. Paid for own meal.

(5) In late March 2001, had a dinner meeting with Rick 

Shapiro, Managing Director, Government Affairs—Enron 

(Houston) along with Charles Bone and Johnny Hayes, 

both from Nashville. Discussed need for large RTO’s, FERC 

transmission jurisdiction and tariff reform. Paid for own 

meal.

Brownell, Nora Mead 

Commissioner

No meetings or telephone calls to report.

Chamblee, Donald A. 

Former Acting Director of External Affairs

No meetings or telephone calls to report.

Ferguson, Walter L. 

Chief of Staff for 

Former Chairman 

He ́bert

No meetings or telephone calls to report.

He ́bert, Curtis L. 

Former Chairman

On February 9, 2001, spoke on the telephone with Ken Lay 

regarding remaining FERC Chairman. This was the subject 

of the August 16, 2001 GAO Report, which found nothing 

illegal about the call.

Hirning, Kathleen M. 

Former Director of the

Office of External Affairs

No meetings or telephone calls to report.

20

Name of FERC

Commissioner or

Senior Staff 

Description of Meeting or Telephone Calls 

Hoecker, James J. 

Former Chairman

(1) On January 19 and 13, 2001, attended meetings convened by White House staff to arrive at a negotiated resolution of California’s electricity problems before Inauguration Day. General Counsel Doug Smith and electric policy 

advisor Pat Alexander attended with me. The meetings 

were presided over by Secretary of the Treasury Lawrence 

Summers and Secretary of Energy Bill Richardson participated in the first meeting. In all, 30 to 40 persons attended 

each of these meetings, although about half of the 

attendees participated in the January 13 meeting by video 

conference from Sacramento, California. Ken Lay attended 

the first meeting and probably attended the second, although from California. He may have been accompanied by 

other Enron executives. Among the other participants were 

Governor Gray Davis, members of his staff, President Loretta Lynch of the California Public Utilities Commission, 

leaders of the California legislature, senior executives of 

California’s three major utilities and other energy suppliers 

in the California market, and members of the Council of 

Economic Advisors.

(2) On September 18, 2000, had a courtesy visit Joe 

Hartsoe of Enron. There is no record of others in attendance.

(3) On October 19, 2000, had a courtesy visit from the Gas 

Industry Standards Board, which may have included Stan 

Horton, Enron executive and head of GISB at the time.

Herlihy, Thomas J. 

Executive Director and

Chief Financial Officer

(1) On December 7, 2000, was present at a lunch with Jeff 

Skilling, seven other FERC employees, and several other 

Enron employees participating in showing Enron’s trading 

room.

(2) During December 6–8, 2000, participated in a visit to 

Enron, Dynegy, and El Paso in Houston to talk with Information Technology staff and traders to ascertain what type 

of data sources and hardware set-up they use.

21

Name of FERC

Commissioner or

Senior Staff 

Description of Meeting or Telephone Calls 

Larcamp, Daniel L. 

Director of Markets,

Tariffs, and Rates

(1) On July 18, 2000, met with Stan Horton and others in 

the Enron Pipeline Group, and toured the Enron trading 

floor and gas control center.

(2) On December 7, 2000, was present at a lunch with Jeff 

Skilling, seven other FERC employees, and several other 

Enron employees participating in showing Enron’s trading 

room. Recall meeting Shelly Corman and Joe Hartsoe. 

From business cards collected, may have met Kevin Presto, 

Vice President—Enron North America, John Lavorato 

(COO, Enron Americas), Lloyd Will (Director, Control Area 

Operations—Enron North America Corp.), and Dave 

Delainey, President and CEO, Enron Americas.

(3) On June 28, 2001, met with Richard Shapiro, Managing 

Director, Government Affairs—Enron Corp., and three 

other Enron Representatives. From business cards collected, others may have been Linda Robertson, VP, Federal 

Government Affairs—Enron, Ray Alvarez, VP, Federal Regulatory Affairs, Enron Corp., and Alan Larsen, Senior 

Counsel—Enron North America Corp.

(4) On March 21, 2000, and on several other occasions the 

dates for which are not known, met with Joe Hartsoe from 

Enron’s D.C. office to discuss current gas industry issues. 

Mr. Hartsoe also attended several briefings given to industry participants to explain major FERC orders on the California energy crisis, after regularly scheduled Commission 

meetings.

(5) Attended during this period Outreach Program sessions 

hosted by FERC OMTR to hear various industry group concerns on specific energy issues. Enron executives among 

other industry representatives were listed as present at 

those sessions.

Madden, Kevin P. 

Former General Counsel

(1) In Winter-Spring 2001, met with Stan Horton as 

INGAA Chairman to discuss pipeline safety, rate design, 

and the affiliate conference. Jerry Halvorsen was also 

there.

(2) In Winter-Spring 2001, had dinner with Stan Horton as 

INGAA Chairman to discuss pipeline safety and affiliate 

conference. Steve Kean may have been there. Other 

INGAA representatives and pipeline representatives were 

there.

(3) On February 9, 2001, was present for part of a telephone call between former Chairman Curtis He ́bert and 

Ken Lay regarding Mr. He ́bert remaining FERC Chairman. 

This was the subject of the August 16, 2001 GAO Report, 

which found nothing illegal about the call.

22

Name of FERC

Commissioner or

Senior Staff 

Description of Meeting or Telephone Calls 

Massey, William L. 

Commissioner

(1) On October 19, 2000, met with Stan Horton, Chairman 

and CEO, as Gas Industry Standards Board (GISB) Chairman 2000, for a courtesy visit and briefing regarding the 

GISB Board. Steve Bergstrom, Jim Templeton, and Bill 

Boxwell were also in attendance.

(2) On December 18, 2000, met with Stan Horton, Shelly 

Corman, Steve Kean, Executive Vice-President and Chief of 

Staff, regarding pipeline safety matters. Jerry Halvorsen 

was also in attendance.

(3) On January 18, 2001, met with Joe Hartsoe, Vice-President Regulatory Affairs, and/or Sara Novosel, regarding a 

motion to ask the Commission to hold a technical conference on the implementation of Function 8 of Order No. 

2000. Also in attendance from the outside: Mary Doyle, 

Julie Simon, John Anderson, John Hughes, Sara Schotland, 

Mike Briggs, and Lorraine Cross. In addition, Wilbur (Bud) 

Earley was there.

(4) On May 9, 2001, met with Stan Horton and Joe Hartsoe 

for lunch. Jerry Halvorsen was also there.

(5) On May 25, 2001, met with officials of The New Power 

Company, Eugene Lockhart, President and CEO, Cynthia 

Sandherr, Vice-President, and Kathleen Magruder, VicePresident, Law and Government Affairs, to discuss generally impediments to new competitors’ entrance into existing competitive energy markets.

(6) On June 21, 2001, met with Steve Kean, to discuss generally energy issues.

(7) Perhaps during the relevant period, one or more telephone conversations with Steve Kean and Terry Thorne 

(and perhaps Jeff Skilling) about generic energy policy 

issues.

Robinson, J. Mark 

Director of Energy 

Projects

No meetings or telephone calls to report.

Smith, Douglas 

Former General Counsel

On January 9 and 13, 2001, attended two large meetings 

convened by senior Administration officials to try to arrive 

at a negotiated resolution of California’s electricity supply 

problems. Chairman Hoecker and Pat Alexander were also 

in attendance. The meetings were chaired by Secretary of 

the Treasury Lawrence Summers and National Economic 

Council Chairman Gene Sperling. Participants included 

Secretary of Energy Bill Richardson, Governor Gray Davis 

and energy officials from his administration, President Loretta Lynch of the California Public Utilities Commission, 

leaders from the California legislature, and senior executives from the California electric utilities and a number of 

energy suppliers in the California market. One or more 

Enron executives attended each meeting. Ken Lay attended 

the first meeting, and may have attended the second meeting. In all, 40 or more persons attended the meetings.

Strasser, Virginia 

Former Director of the

Office of Administrative Litigation

No meetings or telephone calls to report.

23

Name of FERC

Commissioner or

Senior Staff 

Description of Meeting or Telephone Calls 

Wagner, Jr., Curtis L. 

Chief Administrative 

Law Judge

November 2000 to July 2001, as settlement judge, held regular meetings with Enron officials and counsel during negotiations in the California Forward Contract proceedings, 

the Midwest/Alliance ISO settlement discussions, and California Refund case negotiations. No recollection of the 

names of the people who participated.

Whitmore, Charles S. 

Former Director of 

Strategy and

Performance Staff

(1) On December 7, 2000, was present at a lunch with Jeff 

Skilling, seven other FERC employees, and several other 

Enron employees participating in showing Enron’s trading 

room.

(2) During December 6–8, 2000, participated in a visit to 

Enron, Dynegy, and El Paso in Houston to talk with Information Technology staff and traders to ascertain what type 

of data sources and hardware set-up they use.

(3) In May 2001, met with James Steffes, Vice President 

for Government Affairs.

(4) Attended during this period Outreach Program sessions 

where Enron executives were probably present.

Wood, III, Patrick H. 

Chairman

No meetings or telephone calls to report.

Young, Fernanda F. 

Chief Information Officer

(1) On December 7, 2000, was present at a lunch with Jeff 

Skilling, seven other FERC employees, and several other 

Enron employees participating in showing Enron’s trading 

room.

(2) During December 6–8, 2000, participated in a visit to 

Enron, Dynegy, and El Paso in Houston to talk with Information Technology staff and traders to ascertain what type 

of data sources and hardware set-up they use. 

Senator BOXER. And FERC did not help California. Enron lobbied 

the White House in 2001 of April, Kenneth Lay had a 30-minute 

meeting with Vice President Cheney about the California electricity 

crisis and energy policy. And I’m just showing quickly here a chart. 

We see that, without reading this, Mr. Lay gave him the words 

that he should use, in terms of not taking action on a cap. And 

there you go. The very next day, he tells the Los Angeles Times

that he doesn’t see the cap as a possibility. 

So I’m going to submit for the record the eight-point memo Mr. 

Lay gave to the Vice President, if I might. 

Senator DORGAN. Without objection. 

[The information referred to follows:]

National Energy Policy: Priorities 

The 1992 Energy Policy Act (EPA) intended to introduce competition into the 

wholesale market for electric power by providing transmissions access. Events in 

California and in other parts of the country demonstrated that the benefits of competition have yet to be realized and have not yet reached consumers. To realize the 

vision set forth in the EPA, the following actions need to be taken: 

1. Fair Transmission Access 

In Order No. 888, the FERC attempted to formulate fair terms and conditions of 

access to the transmission grid for all users. However, the FERC failed to extend 

its jurisdiction to transmission services bundled together with retail sales. Consequently, distinct rules apply to different parties for use of the same transmission 

asset and such rules provide vertically integrated utilities the opportunity to use 

24

their transmission assets to disadvantage independent third party generators and 

wholesalers. 

To achieve robust competition in wholesale power markets, the FERC must actively exercise jurisdiction over all aspects of electricity transmission in interstate 

commerce and place all uses of the grid under the same rates, terms, and conditions. Moreover, FERC jurisdiction must extend to the terms of access applicable to 

transmission systems owned and operated by non-FERC jurisdictional entities including Federal Power Marketing Associations (PMAs), states and municipalities. 

To improve reliability, the FERC has encouraged utilities to combine transmission 

facilities into large Regional Transmission Organizations (RTOs) and to assign the 

responsibility for operating RTOs to an independent management team. Properly 

structured RTOs can ease the movement of power between states and between users 

within a state, and will enhance reliability, commercial activities, and competition 

in the energy industry. 

However, the FERC has refused to make RTO participation mandatory. This, coupled with the lack of non-discriminatory open access terms, has weakened the RTO 

initiative. Therefore, the Administration must encourage the FERC to approve only 

those RTOs with sufficient size and scope and with non-discriminatory terms and 

conditions for access and to require that all transmission owners participate in an 

RTO. Finally, the Administration should revise those tax provisions that prevent 

the transfer of assets to new, stand alone independent, for-profit transmission companies (Transcos). 

2. Independent Energy Reliability Organizations 

Governance of the North American Electric Reliability Council (NERC) is cumbersome and places new market entrants at a competitive disadvantage. There is 

a necessary role for FERC oversight of a new Independent Reliability Organization 

(IRO). 

Legislation to establish a new IRO is required. However, the ‘‘consensus’’ reliability language in the proposed Murkowski bill is ineffective since it establishes an 

unsatisfactory procedure to resolve conflicts between the IRO and the various RTOs 

established by the FERC. 

Legislation that permits the FERC to delegate authority to develop reliability 

standards and enforce those standards, establishes an appropriate funding mechanism, includes a limited States’ savings clause and provides the IRO participants 

with anti-trust immunity will accomplish the shared goal of establishing an effective 

IRO. 

3. Wholesale Market Price Caps or Cost-Based Wholesale Rates 

The Administration should reject any attempt to re-regulate wholesale power 

markets by adopting price caps or returning to archaic methods of determining the 

cost-base of wholesale power. Price caps, even if imposed on a temporary basis, will 

be detrimental to power markets and will discourage private investment by significantly raising political risk. Similarly, a return to cost-based wholesale rates will 

be extremely difficult to implement and will effectively negate significant investments made by new market entrants made in reliance on the presence of deregulated wholesale power markets. 

4. Interconnection Policy 

Competitive generation (including Distributed Generation ‘‘DG’’) and wholesale 

power markets have been hindered by grid interconnection policies and procedures 

that restrict new entry. The lack of a uniform and effective interconnection policy 

creates uncertainty, delay and unnecessary costs in development of new generation 

capacity and DG technologies. To correct this problem, FERC must develop and enforce standardized, non-discriminatory interconnection procedures. 

5. Federal Transmission and Generation Siting Policy 

An efficient and reliable interstate wholesale market requires construction of new 

transmission and generation facilities. Siting and permitting problems have frustrated construction of new facilities. Consistent with rules for certification of natural 

gas facilities, granting condemnation rights to private parties that have obtained 

federal authorization to construct facilities can significantly reduce these problems. 

In addition, Federal Agencies and Tribunal Governments should streamline the regulatory processes to enable expedited construction and efficient operation of energy 

infrastructure. 

6. Demand Reduction Incentives 

The Administration should mandate the creation of a regional demand exchange 

(implemented by mandatory RTOs) that would allow large consumers to post bids 

25

for the reduction of demand. If implemented expeditiously, such a mechanism can 

have an immediate impact in reducing demand this summer. 

7. California Power Crisis 

The political leadership in California has made limited progress in solving its 

power crisis. All of the above items would mitigate this crisis. 

8. Natural Gas Supply Outlook 

There are concerns that natural gas supplies may not be adequate to meet market 

demand. Yet all studies indicate that remaining economically recoverable resources 

in North America are ample for decades to come. These supplies can be further supplemented by imported liquified natural gas. This will allow natural gas to continue 

to provide an increasing share of the total energy needs to the U.S.

Senator BOXER. Enron lobbied the Energy Department. On 

March 29, Secretary Abraham held a meeting on the California crisis with 16 industry officials, including two from Enron. 

And there’s more. Between February 14 and April 26, as the electricity crisis continued in California and Enron insiders sold stock, 

Energy Secretary Abraham also met with 36 energy and business 

groups about energy policy, met with an additional 20 heads of oil 

companies and energy groups. And I ask that an article about 

these meetings be included in this record. 

Senator DORGAN. Without objection. 

[The information referred to follows:]

ENERGY CONTACTS DISCLOSED; CONSUMER GROUPS LEFT OUT, DATA SHOW

The Washington Post, March 26, 2002

Dana Milbank and Mike Allen, Washington Post Staff Writers

Energy Secretary Spencer Abraham met with 36 representatives of business interests and many campaign contributors while developing President Bush’s energy policy, and he held no meetings with conservation or consumer groups, documents released last night show. 

The information was released by the Energy Department just a few hours before 

a court-ordered deadline, and after 11 months of resistance by the administration 

to lawsuits by public interest groups seeking to determine who influenced the writing of the administration’s energy plan. 

A first review of the 11,000 pages of documents bolsters the contention of Democratic lawmakers and environmental groups that the Bush administration relied almost exclusively on the advice of executives from utilities and producers of oil, gas, 

coal and nuclear energy while a White House task force drafted recommendations 

that would vastly increase energy production. 

Of the corporations that met with Abraham, all but a few were large contributors 

of unregulated soft money to the Republican Party during the 2000 election cycle. 

A dozen of the companies that had meetings with Abraham contributed $1.2 million 

to the GOP, mainly for Bush’s election. Ten of the 12 gave more soft money to Republicans than Democrats. Large portions had been deleted from the documents released last night by the Energy Department, the Environmental Protection Agency, 

the Agriculture Department and the White House Office of Management and Budget. Most attachments were missing and in many cases documents were withheld except for the subject line. Thousands of other documents were withheld entirely, and 

the groups that won release of the documents through lawsuits said they may return to court. 

Abraham’s meetings, between Feb. 14 and April 26 of last year, included groups 

such as the National Association of Manufacturers, the Independent Petroleum Association of America and the Nuclear Energy Institute. Top executives of Westinghouse Electric Corp., Duke Power, Entergy, Exelon Corp., UtiliCorp United (now 

Aquila Inc.), American Coal Co. and others sat down with Abraham. 

Environmental groups said their efforts to meet with the energy task force were 

rebuffed. The Energy Department has said that environmental groups did not respond to its request for input, and the administration has said it held at least one 

substantive discussion with 10 environmental groups in late March, prior to the 

May release of the energy policy. 

26

Because of the deletions and omissions, there is little information about what the 

donors and business interests were seeking in their high-level meetings. The documents released include hundreds of unsolicited suggestions from citizens, companies 

and lawmakers, most of whom received form responses promising the ideas would 

receive ‘‘close and careful attention.’’ 

Among the items released is a letter from the Alliance of Automobile Manufacturers favoring tax credits for hybrid-fuel and fuel-cell vehicles and similar incentives 

for fuel efficiency that were included in the Bush energy report. 

One company, Citgo, urged the administration ‘‘to exercise federal authority to 

prevent states’’ from establishing separate fuel standards. These ‘‘boutique fuels’’ 

cause distribution problems for the industry, and Bush’s energy plan directed the 

EPA to work with states to eliminate them. 

An Energy Department e-mail indicating close coordination with industry notes 

that Texaco was seeking to help Bush’s energy policy rollout. Texaco ‘‘has offered 

to try to produce an announcement on a 1500 megawatt facility at a TVA site in 

harmony with such a rollout,’’ the May 7 e-mail said. 

‘‘Finally there is some evidence of who was actually shaping the energy policy,’’ 

said Sharon Buccino, senior attorney for the Natural Resources Defense Council, 

which won the court order on Feb. 27 requiring the Energy Department’s information release. 

Buccino said the group plans to challenge many of the omissions in court. The 

Energy Department released a chart suggesting Vice President Cheney’s task force 

had adopted nine NRDC recommendations, which Buccino called ‘‘an outright lie.’’ 

Another 15,000 pages were withheld for privacy, security and other reasons, Energy 

officials said. 

Larry Klayman, chairman of Judicial Watch, the watchdog group that won the 

court order requiring the OMB, EPA and Agriculture releases, said the White House 

appeared to be ‘‘playing games’’ with the release. He said he expects to ‘‘go back to 

court to seek testimony as to why we don’t have the substantive e-mails.’’ 

Trent Duffy, OMB’s spokesman, would not explain the deletions beyond saying, 

‘‘The items that were part of the deliberative process were redacted.’’ 

Abraham issued a statement calling the energy plan ‘‘a balanced and comprehensive energy plan for America,’’ and said that the administration ‘‘not only sought 

but included all viewpoints.’’ 

Several of the documents indicate that officials were aware of efforts to obtain information about their actions under the Freedom of Information Act, and they adjusted their correspondence to limit the release of materials. ‘‘We have an FOI request for all NEPP material,’’ said one April 25 e-mail, referring to the task force. 

‘‘Keep in mind that whatever I get I will have to include with it.’’ Another e-mail 

about the FOIA requests asked, ‘‘Did you want me to include Kyle?’’—an apparent 

reference to Abraham’s chief of staff, Kyle McSlarrow, whose e-mails were not included in the release. 

Abraham held meetings with more than 20 other heads of oil companies and energy trade groups while the report was being written, but the Energy Department 

said those meetings included other topics. 

Abraham’s staff had several meetings with Enron officials, the documents showed. 

Enron, a major Bush donor that collapsed late last year and is facing a criminal 

probe, met with other representatives of the task force six times, the administration 

has disclosed. Energy Department officials said most of their meetings with Enron 

were not related to the energy policy. Abraham met with two Enron executives on 

March 29 as part of a meeting of 16 industry officials about the California electricity 

shortage. Energy officials said Abraham declined requests for meetings with Jeffrey 

Skilling and Kenneth L. Lay of Enron Corp. 

The OMB materials that were released also indicate the energy task force’s emphasis on production over conservation. One e-mail from Feb. 22 listed seven chapters for the energy policy report: short-term supply disruptions, consumers, economic impact, alternatives, increased production, infrastructure and energy security. 

There was no mention of conservation. An e-mail from March 22 made reference to 

an ‘‘energy efficiency’’ chapter, and a March 27 e-mail indicates that an ‘‘environment chapter’’ had been included. By April 2, there were ‘‘energy conservation targets.’’ 

The Energy Department documents indicate a late surge of activity to include 

more renewable fuels in the energy report. Karen Knutson, the deputy director of 

the task force, wrote to the Energy Department on April 27 seeking information 

about solar energy. 

The OMB documents indicate Bush was involved in the shaping of the report well 

before it was released May 16. The task force briefed him on March 19, a schedule 

indicates, and a final report was circulated on April 23. 

27

The e-mails also indicate that the task force was involved in Bush’s March 13 decision to reverse a campaign pledge to characterize carbon dioxide as a pollutant 

that should be restricted, a position shared by environmental groups. A March 7 email among task force staffers refers to ‘‘CO2 as a Pollutant.’’ Ultimately, the report 

did not take a position on whether to raise fuel economy standards for vehicles, but 

the e-mails indicate there was extensive work on making recommendations about 

the corporate average fuel economy (CAFE) standards. 

The EPA and Agriculture documents were also stripped of content except for 

meeting and publication schedules and interoffice chatter and bureaucratic fencing. 

‘‘Lots of typos and the like,’’ said an EPA official, ‘‘but I assume they’ll catch those.’’ 

A long redacted section in one memo closed with a comment, ‘‘just kidding—

Mona.’’ 

Included among stacks of documents from the EPA and Agriculture Department 

were a few position papers from industry groups, including the Fertilizer Institute 

and the Clean Energy Group—a coalition of electric power companies urging a ‘‘reasonable time frame’’ for pollution control strategies. Their pitches to the administration appeared to be familiar agendas the groups have lobbied for and testified about 

many times. 

The subject lines on thousands of pages of government e-mail traffic described the 

wide horizon of energy and resource issues, from ‘‘boutique’’ gasolines blended for 

a particular region’s needs to rules on offshore drilling disputes. 

The documents released indicated some dissension about how the energy report 

was assembled. A March 28 OMB e-mail requests that ‘‘if you see any particularly 

egregious recommendations that you alert me to by tomorrow 10:30 . . . . I could 

raise it in the meeting to highlight the process problems.’’ A Feb. 26 e-mail states: 

‘‘The agency/chapter meetings got a little discombobulated.’’ 

Bush’s energy plan encourages increased production of fossil fuels, including relaxed regulations and subsidies for the coal and nuclear industries, oil and gas drilling in the Arctic National Wildlife Refuge and construction of 1,300 to 1,900 power 

plants over the next 20 years. 

Most of Bush’s energy recommendations were incorporated in a bill that passed 

the House in August after heavy lobbying from labor unions. The Senate has begun 

debating its version and is expected to take up the most controversial part, the Arctic drilling, when lawmakers return from recess in two weeks. 

Large donors meeting with Abraham included Duke Energy, which contributed $61,500 in soft money, all to the GOP, according to figures kept by the Center for 

Responsive Politics. Constellation Energy gave $38,950, all to the GOP. Northeast 

Utilities contributed $43,580, all but $2,000 to the GOP. UtiliCorp United gave 

$66,000, all to the Republicans. American Coal Co. gave $20,500, all to the GOP. 

Kerr-McGee gave $240,350, all but $20,000 to Republicans. Exelon Corp. gave 

$454,305, 74 percent to the Republicans.

Senator BOXER. Department of Energy did not act to help California. They actually started to blame California for the crisis. In 

June 2001—and I’ve got about a minute left—the Administration 

had a California message meeting. Attendees at this meeting included Secretary Abraham, Mary Matalin, Karl Rove, Lawrence 

Lindsey, Nicholas Calio, Karen Hughes, and Ari Fleischer. Mr. 

Chairman, I want to submit for the record an AP article on this 

political meeting. 

Senator DORGAN. Without objection. 

[The information referred to follows:]

POLITICS, POLICY MIX IN WHITE HOUSE RESPONSE TO ENERGY CRISIS

Associated Press, April 5, 2002

By Mark Sherman, Associated Press Writer 

Washington—As the Bush administration resisted calls from Democratic Gov. 

Gray Davis for electricity price caps during last year’s energy crisis, top officials met 

with past or future Davis foes and key White House political operatives. 

Administration documents released by a court order showed that administration 

officials kept a close eye on soaring energy prices and intermittent power blackouts 

in California. At least two of the meetings included Karl Rove and Mary Matalin, 

the top political advisers to President Bush and Vice President Dick Cheney, respectively. 

28

Records show that Energy Secretary Spencer Abraham participated in at least 19 

meetings during his first five months on the job, including at least seven during the 

first three weeks of his tenure. While Abraham didn’t meet with Davis until late 

February, he huddled with Republican Secretary of State Bill Jones and former 

Northwest Airlines executive Al Checchi before then, records show. Jones unsuccessfully sought the Republican nomination for governor in last month’s primary, while 

Davis had beaten Checchi in the 1998 Democratic primary. 

Abraham and Checchi knew each other from when Abraham represented Michigan in the Senate and Checchi was at Northwest, which has a hub in Detroit, Abraham spokeswoman Jill Schroeder said. 

Checchi had criticized Davis in newspaper opinion pieces at the time. In a brief 

interview, he said he asked to meet with Abraham to ‘‘put my two cents in’’ on the 

energy issue. 

Abraham, Cheney and other top administration officials repeatedly and publicly 

criticized Davis for his handling of the situation. Cheney called the state’s power 

purchases—begun by Davis when investor-owned utilities tottered on the edge of 

bankruptcy—a ‘‘harebrained’’ scheme. 

Republicans also began a multimillion dollar television advertising campaign—

paid for in part by power-generating companies—trying to blame the governor for 

the crisis. 

At the time, Davis was viewed as a potential rival to President Bush in the 2004 

presidential election and California had for the third consecutive presidential election gone solidly for the Democratic candidate. 

In late April, shortly before Abraham traveled to California, Joseph Kelliher, a 

senior policy adviser, asked other staff members to research Davis’ assertions that 

conservation was helping the state through the energy crisis. 

Referring to a press release on the governor’s Web site, Kelliher asked, ‘‘Can we 

assess the accuracy of his claims of conservation?’’ Kelliher asked. 

It’s not surprising the administration worried about the politics of the California 

energy crisis, said Davis spokesman Steve Maviglio. ‘‘The administration was openly 

hostile to price caps much of the winter and spring. And they were harshly critical 

of the governor’s decision to get the state in the business of buying power.’’

Leon Panetta, former California congressman and chief of staff in the Clinton 

White House, said he believes the new administration had already decided ‘‘they 

were going to hang California out there. It would be an example to the rest of the 

country what not to do. It would show the liberals that they better build new power 

plants or suffer the consequences.’’

Contrary to showing a lack of concern about California, Schroeder said, the frequent meetings demonstrated that ‘‘this was an immediate priority.’’

However, Sen. Barbara Boxer, D-Calif., said she’s ‘‘convinced that politics played 

an enormous role in this. 

‘‘This was the period we were going through our worst troubles and FERC had 

already found that prices were unjust and unreasonable,’’ said Boxer, who pushed 

for price caps and a federal investigation of electricity prices. ‘‘But the administration did not act.’’

Bush and Abraham made separate visits to the state in May, touting an executive 

order to reduce electricity use in federal facilities, but remaining firm in their opposition to capping the price of electricity—a move fiercely opposed by energy companies. 

In early June, the administration convened what it called a ‘‘California message 

meeting.’’ The participants included Abraham, Matalin, Rove, Lawrence Lindsey, 

Bush’s chief economic adviser, Nicholas Calio, the administration’s chief congressional lobbyist, presidential counselor Karen Hughes and press secretary Ari 

Fleischer. 

The following week, Cheney went to the Capitol, where he held a long-requested 

meeting with California’s congressional delegation. The message was the same: Expect no help from the administration on energy costs. 

California had been ‘‘blown off’’ by Cheney, Rep. Maxine Waters, D-Los Angeles 

said after the meeting. 

By this time, even some Republicans in California were pleading with the administration for help. 

Less than two weeks later, two Bush appointees to the Federal Energy Regulatory 

Commission voted to impose limits on what energy generators could charge for spot 

purchases of electricity in California and other Western states, although they did 

not call that decision price caps.

29

Senator BOXER. For this Administration, it appears the California crisis was not about solutions, but about spin. In fact, in 

June 2001, a series of ads, ‘‘Gray outs from Gray Davis,’’ began 

running in California. These ads blamed our Governor for this crisis. He has had to sue in an attempt to find out who paid for these 

ads. We know they were made—the ads were—by a Republican political operative. And, Mr. Chairman, I’d like to submit for the 

record copies of the text of one of those ads, as well as a newspaper 

article that talks about the political operative. 

Senator DORGAN. Without objection. 

[The information referred to follows:]

GOVERNOR SUES TO ID SPONSORS OF ATTACK ADS;

GROUP ACCUSED OF VIOLATING CAMPAIGN LAW

The San Francisco Chronicle, July 21, 2001

By Mark Martin 

Sacramento—Gov. Gray Davis struck back yesterday at an organization running 

television ads that trash his power policies, asking a state court judge to force the 

group to reveal its donors. 

Davis campaign officials say they believe big energy companies are behind the 

‘‘Gray Out’’ media blitz, financed by the American Taxpayers Alliance, in Washington. 

In a lawsuit filed in San Francisco Superior Court, lawyers representing the governor’s political committee say the alliance broke state law by not registering as a 

political organization with the secretary of state. They also say the group has until 

the end of the month to file a campaign statement listing contributors and is asking 

a judge to make sure it does. 

‘‘This committee has to tell the voters of the state of California where they’re getting their money,’’ said Joseph Remcho, a San Leandro attorney who prepared the 

lawsuit. ‘‘The American Taxpayers Alliance has totally refused to do so.’’

Beginning in June, the alliance has spent $2 million on television ads that end 

with the line, ‘‘Gray outs from Gray Davis.’’

Just what the alliance is remains something of a mystery. Headed by Scott Reed, 

a Republican campaign consultant and the former campaign manager for Bob Dole’s 

1996 presidential bid, it is registered with the Internal Revenue Service as a nonprofit corporation. The group reported to the IRS in April that it was inactive but 

shortly after began its million-dollar media buy, according to the lawsuit. 

Reed has refused to identify the group’s contributors, but Time magazine has reported that Reliant Energy Inc. is a major donor. Davis political adviser Garry 

South suggested at a press conference announcing the lawsuit yesterday that the 

White House had asked power companies to go on the offensive in California. 

Bush administration officials have previously denied that charge. Reed did not return calls for comment yesterday. 

The lawsuit comes amid a recent barrage of ads regarding the state’s energy crisis—an issue voters listed as the state’s top concern, well above any others, in a 

poll released this week by the Public Policy Institute of California. 

In response to the attack ads, Davis has dipped into his campaign war chest to 

buy $150,000-a-week radio spots defending his handling of the crisis. 

The advertising battle is among the first skirmishes of the California primary season, albeit eight months before the March contest. 

Remcho argues that the ads constitute campaign spots, and therefore the alliance 

is required to register with the state and file a campaign statement listing its contributors by July 31 under the Political Reform Act of 1974. 

‘‘Even if it doesn’t say ‘Vote against Gray Davis,’ it’s a classic candidate ad,’’ 

Remcho said. ‘‘It clearly is an anti-Gray Davis ad.’’

But Kim Alexander, president of the nonpartisan California Voter Foundation, 

said that the lawsuit delves into state political advertising laws that remain murky. 

‘‘If it’s not mentioning a bill or urging people to do something, maybe it’s just free 

speech,’’ she said. 

30

Text of Grayout Advertisement 

‘‘He’s pointing fingers and blaming others. Gray Davis says he’s not responsible 

for California’s energy problems. After all, the Public Utilities Commission blocked 

long-term cost-saving contracts for electricity. But who runs the PUC? The people 

Gray Davis appointed—Loretta Lynch and other Davis appointees who left us powerless. That’s why newspapers say Davis ignored all the warning signals and turned 

a problem into a crisis. Grayouts from Gray Davis.’’

Senator BOXER. Finally, on June 12, 2001, nearly five months 

into this Administration, the Vice President met with a California 

delegation. All he did was blame us for using too much electricity. 

And I will tell you right now, California, at that time, was the second-most energy-efficient state in the country, behind only Rhode 

Island. California was not refusing to build more power plants. It 

licensed at least 20. And, as you know from other charts I have 

shown, we actually were conserving. 

So, the story makes one thing perfectly clear, and I want to show 

one last chart here. This shows you—and it’s very small, the print 

is small—these are the meetings Secretary Abraham had, and it 

shows you how many blackouts we endured during the period of 

time of those meetings. And, the third shows the stock that was 

sold by Jeffrey Skilling and Kenneth Lay during that time. So, the 

meetings were going on with Enron and the energy people, the 

blackouts were happening, the insiders were trading. It is an ugly 

story, an ugly story for the people of California. 

So, I am very concerned about what has happened. I hope we 

can—when we do have all the facts in the record—we will all, in 

a bipartisan way, take action to make sure that this never happens 

to my state again or to any other state in the union. Colleagues, 

I wouldn’t wish this on you. I want to help you avoid it. 

Thank you very much. 

Senator DORGAN. Thank you, Senator Boxer. The ranking member of the Subcommittee, Senator Fitzgerald. 

STATEMENT OF HON. PETER G. FITZGERALD,

U.S. SENATOR FROM ILLINOIS 

Senator FITZGERALD. Senator Dorgan, thank you very much. 

And, Senator Boxer, thank you. 

I will listen with interest to the testimony of today’s hearing, but 

I have to say that I come into this skeptical with respect to whether Enron had any effect on California’s energy crisis or as to 

whether Enron’s political involvement really means very much. 

I happen to believe, based on what I’ve seen so far, that Enron 

was really just a gigantic pyramid scheme grafted onto an underlying pipeline company. I think that they were essentially borrowing money, and booking borrowed money as income. They were 

able to do that by using the accounting rules to park the borrowings on the books of partnerships that were off their books and 

not consolidated with their books. And as the debts of those partnerships became due, they borrowed more money to pay off the earlier debts and booked more fictitious income. 

I think Enron’s political involvement was really a cover for the 

confidence game that they were running. I don’t really even view 

it as—having been much of—a legitimate business. I haven’t seen 

evidence that they derived much in the way of earnings from tradiVerDate 0ct 09 2002 11:58 Sep 26, 2005 Jkt 084329 PO 00000 Frm 00034 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\84329.TXT JACK PsN: JACKF
31

tional energy-company services. I think that almost all of their reported earnings at the end were simply from their Ponzi operation 

or their pyramid scheme or their shell game. 

And I think my colleagues know me well enough to know that 

I am fiercely independent. If I thought for a minute that Enron’s 

political involvement was substantial, I would be the first to say so. 

But based on what I’ve seen so far, I don’t think it’s all that significant, but I will listen, nonetheless, with interest to the testimony 

today. 

And I have to compliment my colleague from California for her 

tenacity. She is a pit bull in fighting for her constituents, and I 

have to take my hat off to her for that. 

Thank you. 

Senator DORGAN. Thank you. Senator Wyden, you had a unanimous consent request? 

Senator WYDEN. I do. I wanted to put a document into the record 

that I think reflects the timeliness of this hearing. Right now, there 

are discussions going on involving the Bonneville Power Administration’s ability to cash out of $700 million in high-priced powerpurchase contracts that BPA has with Enron. 

The reason that these discussions are so important and the 

issues we’re examining right now are so important is that if fraudulent activity was taking place at the time that those contracts 

were entered into, that then gives the Bonneville Power Administration another opportunity to get out from under those contracts. 

I would just ask unanimous consent, Mr. Chairman, that the article describing these negotiations and why these negotiations are 

so critical for Northwest ratepayers and the issues we’re examining 

this morning are so important, be entered into the record. 

Senator DORGAN. Without objection. 

[The information referred to follows:]

NO EASY ESCAPE FROM ENRON; BPA MAY BE STUCK WITH COSTLY CONTRACT

The Seattle Times, February 8, 2002

By Hal Bernton, Seattle Times staff reporter 

The Bonneville Power Administration appears stuck with buying $700 million 

worth of electricity from Enron at a price nearly double the current market rates 

for an equivalent amount of power. 

By contrast, at least two other Western utilities have walked away from expensive, long-term contracts with Enron. 

Officials of the Snohomish County Public Utility District and the Palo Alto, Calif., 

municipal utility both cited Enron’s poor credit rating as justification to invoke escape clauses that terminated the deals. They now are preparing to defend those actions from any legal challenges that might arise during bankruptcy proceedings. But 

Bonneville Power Administration (BPA) officials say they have no easy escape 

clauses in their power-purchase contracts. Even though Enron is now fighting for 

survival in U.S. Bankruptcy Court, the Texas-based energy-trading company has 

continued to deliver power to the BPA. As long as Enron makes good on these deliveries, BPA officials say the only exit appears to be through a costly buyout. 

The 320 megawatts of Enron power, contracted for delivery through 2006, will 

cost an average of about $50 per megawatt-hour. 

Earlier this week, a buyer could have purchased power for Northwest delivery 

through 2006 for about $28.50 a megawatt-hour, said Keith Kelly, a vice president 

of energy broker TFS Energy. That would be a savings of about $300 million over 

the six-year contract negotiated with Enron. 

‘‘We continue to look at our options, but just because a company files bankruptcy 

doesn’t mean that you can walk away from your agreements,’’ said Ed Mosey, a 

spokesman for the BPA. 

32

Enron officials agree. Enron is trying to fulfill as many contracts as possible, and 

the contracts remain in force, according to Eric Thode, a company spokesman. 

The BPA markets wholesale power from 29 federal hydroelectric dams and a nuclear power plant to Northwest industries and utilities, including Seattle City Light. 

It sells power in times of surplus but sometimes ends up short and has to buy 

power. 

Last year’s drought forced the BPA to make big buys, and in October the agency 

raised rates by 46 percent to help cover those costs. The BPA is considering another 

rate increase this spring. 

The BPA’s power purchases with Enron represent about 3 percent of the agency’s 

total power load. The agency purchased most of this power between fall 2000 and 

spring 2001, a period when Enron ranked as the largest private market of Northwest power. Purchase prices ranged from $30 to $85 but averaged about $50. 

The terms of all power purchases are detailed in contracts, and hundreds are 

signed each day in the West. Most of these deals are for short-term deliveries and 

detailed in relatively standard contracts developed by an industry group known as 

the Western Systems Power Pool. 

But as contracts edge up toward multiyear deals, the standard contracts in recent 

years often have been abandoned in favor of contracts with more highly refined escape clauses, according to Michael Small, general counsel for the power pool. 

When Enron put on its buyer’s hat and sought to purchase BPA power in the late 

1990s, the corporation appeared to have taken an active interest in escape clauses. 

Enron insisted that the contracts include clauses that voided the deals should either 

party become insolvent, according to BPA spokesman Mosey. The BPA last week announced it would cancel contracts to sell $285 million worth 

of power to Enron in deliveries scheduled through 2006. 

In 2000 and 2001, when the BPA sought to buy power from Enron, no similar 

escape language was included in the contract. 

Instead, the BPA used the standard contracts of the Western Systems Power Pool. 

Those contracts allow the BPA to declare Enron in default. But to get out of the 

contracts, the BPA could be required to fork up big dollars to compensate Enron for 

the loss of the contract. 

Mosey said that it was standard procedure for the BPA to use the Western Systems Power Pool contracts because the BPA was an active member of the pool. 

Small, the general counsel for the power pool, said members also are free to use 

other contracts. 

‘‘What I’ve seen is that most people who are going into a multiyear contract . . . 

don’t use the standard contract,’’ Small said. 

Snohomish County PUD officials said they did not use the pool contracts as they negotiated an eight-year, $192 million dollar deal to buy Enron power. That deal 

was negotiated in January 2001 as power prices neared record highs and the average cost per megawatt-hour topped $100. 

The Snohomish County PUD’s long-term contract has more flexibility in terminations than the standard Western pool contract, according to Neil Neroutsos, a 

PUD spokesman. 

The PUD canceled its Enron contract Nov. 27, five days before Enron filed bankruptcy. 

PUD officials say the contract was canceled because of Enron’s lack of credit, insolvency and failure to truthfully disclose its financial situation at the time the contract was signed. Palo Alto utility officials put forth some of the same justifications 

in canceling contacts with Enron. 

The utilities hope they are free of the costly contracts, which Snohomish County 

PUD officials say were ridiculously overpriced. 

But the utilities may yet face legal challenges in Bankruptcy Court proceedings 

under way in New York. Enron’s filing is the biggest bankruptcy case in history, 

and creditors are hungry for assets to help pay off debts. And they may press the 

bankruptcy judge to override the escape clauses and reinstate the long-term contracts. 

‘‘In Bankruptcy Court, a lot of the contractual language often doesn’t mean a 

thing,’’ said Jan Ostrovsky, a former Bankruptcy Court trustee in Seattle. ‘‘Those 

contracts are big enough money to trigger a fight.’’

Senator DORGAN. Let me just say, before I call the witnesses forward, Senator Burns and I believe Senator Fitzgerald, have made 

a suggestion that ought to be the guiding principle for every Committee hearing, which is that we should first receive the facts and 

the evidence, before coming to any formal conclusions. Clearly this 

33

must be the case with respect to these issues. It’s a fair point, and 

we shall abide by it. 

And let me restate again, when I began this hearing, why I think 

it’s an important hearing. That which we know to this point tells 

us that the Board of Directors of this corporation did an investigation called the Powers report. The Powers report said that the 

Enron executives effectively cheated the Board of Directors. The 

Enron executives cheated investors, their investors. And the question then is did Enron executives also cheat West Coast electric 

consumers? 

I think those are very important questions to ask, given what we 

now know about what Enron did inside its own corporation. What 

did it do outside its corporation? And I think the witnesses that we 

have today will have some interesting testimony. 

Let me call them forward: the Honorable Joseph Dunn, Senator, 

State of California; Ms. Loretta Lynch, President of the California 

Public Utilities Commission; and Mr. S. David Freeman, Chairman 

of the California Power Authority. I would ask that you all come 

forward to the witness table. Ms. Wenonah Hauter, Director, Critical Mass Energy & Environment Program, Public Citizen, and Mr. 

Robert McCullough, Manager Partner, McCullough Research, who 

is from Portland, Oregon. So, if you will all come forward, we will 

begin. Why don’t we begin with Mr. Dunn, and then I—we’ll just 

do it in the order that I called them. 

Senator Dunn, my understanding is that you were involved in 

this issue in the State of California. Why don’t you proceed, and 

we will include your entire statement as a part of the permanent 

record, and you may summarize. 

STATEMENT OF HON. JOSEPH DUNN,

CALIFORNIA STATE SENATOR 

Senator DUNN. Thank you, Mr. Chairman, and good morning to 

all the Committee members, particularly our home-state senator, 

Senator Boxer. Thank you very much for the opportunity to testify 

about Enron’s role in deregulation and, in particular, Enron’s role 

in the California electricity crisis. 

I am the Chair of the State Senate Select Committee to Investigate Market Manipulation in the Wholesale Energy Market in 

California. We began that committee over a year ago, and we’ve 

had numerous hearings, depositions. We’ve issued document subpoenas. We’ve received millions of documents that we’ve reviewed 

in Portland and Sacramento and Houston and New York, and we’re 

not through yet. 

Much of the written testimony that I’ve submitted to this Committee comes from those documents that we’ve reviewed. However, 

those documents are under confidentiality agreements, and I plead 

with this Committee to make a formal request to the California 

Senate for access to those documents so we can work out the confidentiality provisions and give this Committee access to those documents. 

And each of us before you today hold a very similar view with 

respect to Enron, and much of it is in my detailed written testimony which I’ll not read today. I’m going to focus on Enron’s conduct before our investigation committee through the past year. 

34

But before I do that, I’d like to make one statement with respect 

to Enron’s role in deregulation and the California crisis, and let me 

state a very important premise. 

We do not have a crisis in electricity in California. We have a 

crisis in economics. The longer we focus on this problem as one of 

electricity, the further from the solution we get. Everyone’s focus 

has to be on economics and the rules of market behavior—in particular, the exercise of market power and the philosophic question 

of whether electricity, because of its unique characteristics, can 

work as a commodity. There lies the cause, and there lies the solution. 

Now, I personally support deregulation of most markets. I believe 

competition does benefit the consumer. However, this deregulation, 

led by Enron, has become perhaps the greatest fraud ever perpetrated on the American consumer. It was done with the promise 

of lower prices. And our review of the internal documents of the 

market participants show they never, ever intended to deliver 

lower prices to the American consumer. 

And I know some of my colleagues here will dispel some of the 

myths that have surfaced since the crisis befell California. I won’t 

spend time with those other than to say: Do we have a shortage 

of electricity? No. Less surplus, yes. Shortage, no. Unexpected increase in demand? No. Facts don’t bear that out. Just a California 

problem? No. It just happened to first surface in California, as 

many things do, good and bad. 

But let me go directly to Enron’s behavior with our committee 

over the past year. We began in March of 2001. We were given 

promises by every market participant, including Enron, that they 

would cooperate fully with our committee. I’m sure this Committee 

has received the same promises. 

In reliance upon those promises, we served voluntary document 

requests of over a hundred categories of documents last April. After 

two months of receiving zero documents, but all kinds of excuses, 

we were forced, in June of last year, to do what the California Senate has rarely done, and that is issue document subpoenas. We 

issued them to generators, to traders, to municipal electricity systems, to financial institutions, to the Cal ISO, to the PX, and many 

other entities, requesting via subpoena over a hundred categories 

of documents, embracing millions of documents. 

We also asked, at that time, for each of the market participants 

to enter into a voluntary non-destruct agreement, because we were 

concerned about relevant documents disappearing. They refused at 

that time. And every single one today as I sit here still refuses to 

enter into a voluntary non-destruct agreement with our committee. 

Once those subpoenas were served in June, we did receive documents from all market participants but one. That one was Enron. 

Enron’s response to our document subpoena was to file civil litigation against our committee, requesting not only that the subpoena 

be quashed but questioning the very authority of the California legislature to look into the behavior of the market participants in the 

California wholesale electricity market. 

They still did not produce after the court rejected that lawsuit in 

August. And, thus, we, the California State Senate, were forced to 

commence contempt proceedings against Enron. We, in fact, found 

35

Enron in contempt. And, on the last day of our legislative session, 

September 14, before the fall recess, we had a motion on the Senate floor for sanctions for that legislative contempt. 

Those sanctions that were proposed in that Senate resolution were $1 million per day until they resolved their contempt. In addition, the resolution demanded that CALPERS, the Public Employee 

Retirement System, one of the largest retirement funds in the 

world, required them to divest themselves of all stock holdings in 

any company in contempt of the California legislature, in this case, 

Enron. 

In response to that resolution, as it was pending on that last day 

of our session, on September 14, Enron flew all kinds of corporate 

executives to Sacramento who met with us throughout the day. 

Our session went well into the night, as it usually does on the last 

session, and we reached an agreement whereby they agreed, finally, to produce documents. And, in fact, in the fall, they started 

to produce documents, about 300,000 documents, to a Sacramento 

depository. We have been through that depository. And they, except 

for a handful of documents, are all but worthless to our investigation. 

In addition, in late fall, as this Committee knows, reports of document destruction by both Arthur Andersen and Enron itself surfaced. We immediately began an inquiry into those reports, because 

we wanted to know if any of the documents under our June subpoena had been destroyed. 

Enron and Arthur Andersen have refused to cooperate with that 

part of our investigation. In fact, both of them have refused to 

honor a deposition subpoena of both an Arthur Andersen and an 

Enron—sorry, of an Enron individual about the document destruction. The Arthur Andersen subpoena has not been served yet. 

Enron refused to produce someone in response. 

As a result, this January we started contempt again. And, in 

fact, we voted for contempt and we’re moving forward with potential sanctions. We also did one other thing. We voted to refer Enron 

over to local law enforcement officials for purposes of criminal prosecution for the destruction of documents under a legislative subpoena. California, like every state in the nation, has it be a crime 

to destroy documents that are under a subpoena. 

Enron, in response to that move in January, finally agreed to 

open up their files to us. And I have to say they have opened up 

many, many files to us, in Houston and in Portland, where their 

western trading floor exists—or existed. We were pleased with 

their level of production and the level of access that we have had. 

However, one of our requests was for all e-mails from Ken Lay, Jeff 

Skilling, Steve Kean, and other corporation executives. We received 

those e-mails on nine disks about a week-and-a-half ago. 

Our IT team has now reviewed those disks, and we’ve come to 

the unfortunate conclusion that prior to the production of those 

nine disks, there was willful destruction of key e-mails on those 

disks. We’re about to go to war with Enron one more time in the 

California legislature. 

I implore this Committee in its investigation to pursue this aggressively and to use the full weight of the law that you have available to you. Otherwise, I can assure you from our experience in 

36

California, you will get many promises, but you will get nothing delivered. 

I’d like to end by dispelling one more myth about the California 

energy crisis, and that myth is, this whole mess was caused by the 

deregulation scheme that was adopted by the California legislature 

in 1996. There is no question that what the California legislature 

did in 1996 wasn’t perfect, but the legislature relied heavily on the 

industry, particularly Enron, and we trusted their representations 

at that time. 

That trust proved to be misplaced. And so the analogy I oftentimes draw is, while the California legislature may have left the 

car unlocked, the energy industry, led by Enron, stole that car. And 

that is the real crime. And, unfortunately, the cop on the beat, 

FERC, won’t do anything about it. I ask that this Committee and 

the entire U.S. Congress assist us in California to once and for all 

bring resolution to the energy crisis. 

Thank you, Mr. Chairman. 

[The prepared statement of Senator Dunn follows:]

PREPARED STATEMENT OF HON. JOSEPH DUNN, CALIFORNIA STATE SENATOR

Good morning, Chairman Hollings, Ranking Member McCain, Senator Boxer and 

members of the Committee on Commerce, Science and Transportation. Thank you 

for the opportunity to present testimony to the Committee on Enron’s role in influencing the structure and function of California’s deregulated energy market and its 

role in the energy crisis. 

Since last March I have chaired the California State Senate Select Committee to 

Investigate Price Manipulation of the Wholesale Energy Market. The Committee is 

conducting an extensive investigation into all aspects of the California energy crisis. 

We have held numerous hearings, taken countless depositions, conducted various 

interviews and meetings with experts and interested parties and reviewed millions 

of documents throughout the United States. 

Our Committee has had protracted and at times, acrimonious, dealings with 

Enron. I hope my experience in dealing with Enron and my intimacy with the California energy crisis will provide insight into decisions your Committee and Congress 

must address. 

I preface my testimony with the admonition that my Committee has documents 

to prove the claims made herein. Because of confidentiality agreements reached 

with market participants, however, I am limited in my ability to share many of 

these documents without a formal request by you or your Congressional investigators. I encourage you, Senators, to make a formal request if you wish to view these 

documents. 

My comments today speak to the pivotal role Enron played in influencing the design of California’s deregulated wholesale market, its behavior as a market participant as the market grew more and more dysfunctional in 2000 and 2001 and the 

part Enron’s conduct played in the huge price spikes California experienced. 

Let me begin by saying that there has never been a ‘‘power shortage’’ in the state 

of California. The state has always had a sufficient supply of electricity to meet its 

need. That some have said the state experienced periods where demand outstripped 

supply is one of the many myths of the energy crisis. What California experienced 

in 2000 and 2001 was not a crisis in electricity, it was a crisis in economics. Enron 

and its team of economists knew this better than most. 

Enron’s Early Foray into California 

Enron was involved in the California electricity market well before the inception 

of the deregulated market. In fact, Enron was the most pivotal (future) market participant in shaping the regulatory and political environment that gave birth to the 

commoditization of electricity. 

Enron testified before and submitted comments to the California Public Utilities 

Commission (CPUC) more than a dozen times before 1996, the year legislation was 

passed that authorized ‘‘deregulation.’’ This is a critical point—Enron’s sophisticated 

lobbying efforts helped create the very market it would later exploit. To be clear: I 

do not believe there is anything wrong with lobbying public officials on behalf of 

37

1To the extent that Enron knowingly published any false statement to affect the wholesale 

electricity market is worthy of further investigation, as it is a violation of California law (Penal 

Code § 395). 2Steven Stoft’s April 29, 1997 study, ‘‘What Should a Power Marketer Want?’’ I ask whether 

this is an unintentional concession that a deregulated model does not work. 3Stoft. 

4Despite a subpoena compelling their production and specific conversations about this data, 

our Committee has never received copies of these price curves or the staff work that gave rise 

to them. Mr. Skilling has also refused to testify before the Committee to address this and other 

issues. 

one’s business interests. Done properly, it is good business and a democratic right. 

However, Enron’s lobbying consisted of hyperbolic promises that its internal predictions do not appear to support.1

For example, former Enron CEO Jeff Skilling, then the President of Enron Capital & Trade, told the CPUC on June 14, 1994, that California would save billions 

in a few short years under a deregulated market.

In this industry in California, the potential savings are enormous. . . More specifically, in California, our view is that California is an industry run amok. If 

California consumers were paying even the same costs as surrounding states’ 

consumers are paying, the state would save about $8.9 billion per year. If you 

had $8.9 billion that you wanted to spend, let me tell you what you can buy 

every year. You can triple the number of police in Los Angeles, San Francisco, 

Oakland and San Diego, and you could double the number of teachers in Los 

Angeles, San Francisco, Oakland and San Diego. You could pay all the interest 

on the California state debt. You could pay full interest in debt service for all 

three bond issues that failed last year [1993] and you’d have enough pin-money 

left over to cover the CPUC’s budget. And you’d have another billion dollars a 

year left over.

With California facing a more-than $15 billion budget deficit this year, the hollowness of this prediction is not wasted on anyone in my state. 

Beyond what some might label insignificant grandstanding, Enron lobbied for 

very specific market rules that stood to benefit its business at the expense of consumers. Two months after giving that testimony, and again in October 1994, Mr. 

Skilling appeared before the CPUC to argue for the superiority of an ‘‘OpCo’’ electricity market versus a ‘‘PoolCo’’ market that was modeled on similar markets in 

other countries, including the United Kingdom. 

OpCo and PoolCo refer to competing approaches of market management. In each 

model, the respective guardians of each approach—a Power Exchange for the PoolCo 

method and a Power Marketer for the OpCo method—promise an optimization of 

market efficiency. Efficiency is achieved by the PoolCo method through a transparent ‘‘pool’’ system in which buyers and their ‘‘bids’’ are pooled and sellers and 

their ‘‘asks’’ are pooled. The two pools are then overlaid, and buyers and sellers are 

matched. The ultimate price is posted, and participants in the ‘‘auction’’ use this 

pricing information to make ‘‘efficiency decisions’’ on their own, such as the when 

and where of committing their generation units. 

The OpCo method championed by power marketers relies on a different underlying assumption: i.e., ‘‘competitive markets need help in performing efficiently.’’ 2

The ‘‘value-add’’ of a marketer lies primarily in its risk management, founded on 

superior understanding of market fundamentals, including price, bidding and demand history. Enron argued that the resulting efficiency wrought by power marketers, in the end, benefits consumers. 

Many economists have noted that this premise is faulty. ‘‘Generators wish for a 

high price paid to generators, and consumers want to see low prices paid by loads, 

but power marketers want the opposite of both. They want to buy low (from generators) and sell high (to consumers). Power marketers are a new breed and they have 

different objectives. . . they are mistakenly viewed as market makers. . . Currently 

power marketers often find themselves in the position of trading wholesale power 

while adding very little value. In this case their principle opportunity for profit exists at being a better speculator in the market.’’ 3 Speculating for profit is not what 

California consumers needed to ensure an efficient delivery of energy. 

In arguing for the OpCo approach, Mr. Skilling referred to Enron-generated forward price curves.4 Enron confidently predicted that the benefit of a liquid futures 

market for electricity would bring stability, efficiency and competition—but only in 

an OpCo-modeled market. A PoolCo method would lead to volatile and unpredictable 

prices, which was bad for the consumer, he told the CPUC. Ironically, Enron would 

later create volatility for profit. 

38

5 In fact, consider the decision to separate ISO and PX as an example of the concession. One 

of the most important advantages of a PoolCo system is the historic database available to the 

PoolCo of pool prices and demand, information that is not available to any single power marketer. In creating a separate ISO to manage this information, the CalPX was stripped of an inherent advantage. ‘‘If equal treatment includes taking away PoolCo’s ability to make use of its 

advantage, then the experiment has been rigged,’’ Stoft wrote. 6 Enron later explicitly acknowledged this during an investigation of misconduct by the CalPX. 

‘‘We are mystified that our competitor, the CalPX, believes that it has the authority to be judge 

and jury . . . Enron and the CalPX are direct competitors.’’ Ironically, the Committee heard testimony from a CalPX executive who denied that Enron was viewed as a competitor. 7Stoft predicted the CalPX’s demise ‘‘less than a year after the requirement is lifted on January 1, 2003 that the three major IOUs must trade through the CalPX.’’ The FERC effectively 

moved the January 2003 date forward with its December 15, 2000 order. (The order spelled out 

in detail the FERC’s elimination of the mandatory buy-sell requirement into the CalPX.) The 

CalPX ceased trading six weeks later on January 31, 2001. 8 Undated internal Enron memorandum, ‘‘Main Messages.’’

9 November 23, 1999 letter to the CalPX. 

10 Internal memo provided to the Committee. 11Dr. Anjali Sheffrin, Ph.D., ‘‘Empirical Evidence of Strategic Bidding in California Real Time 

Market,’’ March 21, 2001. 

But in the early days of deregulation, Enron’s apparent losses were always mitigated by subtle gains: California instituted a modified-PoolCo approach by creating 

the California Power Exchange (CalPX) and the California Independent System Operator (CAISO), but made key concessions to Enron in the process. For example, the 

CalPX was required to follow a strict set of protocols in its auction procedure that 

no power marketer was similarly saddled with. The result in every instance was to 

make Enron and other power marketers more nimble, more flexible to buyers and 

sellers in ways the CalPX could not be.5

Needless to say, economists characterize OpCo and PoolCo as incompatible and 

to this end, the two models are seen as competitors.6 As early as 1997, a number 

of economists, including Steven Stoft, correctly predicted that these concessions 

would give Enron and other power marketers the tools to bankrupt the CalPX.7

Given this, it is not surprising that the success of the CalPX seemed to be inversely correlated with the success of Enron, and, not coincidentally, the success of 

the CalPX was directly correlated with low wholesale electricity prices. When the 

CalPX teetered on the edge of solvency, Enron thrived and wholesale prices skyrocketed. 

On May 13, 1998, the California Senate Committee on Energy, Utilities and Communications issued a statement that demonstrated this relationship. The committee 

credited the CalPX with ‘‘buying electricity at substantially lower prices than expected.’’ Shortly before the release, Enron announced that it ‘‘suspended’’ its involvement in the California residential service market, though it did not publicly acknowledge the relationship between the success of the CalPX and its own failure. 

Enron and the Deregulated Market 

The state’s deregulated market opened on March 31, 1998. Enron’s misconduct in 

the day-ahead market was first discovered in May 1999. Through the CalPX dayahead auction, Enron successfully purchased the right to sell 2900 megawatts over 

a 16-hour time period. The company then proceeded to schedule all 2900 megawatts 

over a line with a 15-megawatt capacity. Enron unabashedly admitted that the company intentionally congested the line.8

Despite claims from Enron CEO Ken Lay that Enron ‘‘believes in conducting business affairs in accordance with the highest ethical standards,’’ 9 the company maintained internally that the intentional congesting of the power line was a ‘‘test’’ and 

was ‘‘not a big deal.’’ 10 The CalPX maintained that the ‘‘test’’ resulted in a $6 million detrimental impact on the market. Amazingly, Enron was fined just $25,000 for 

the incident. 

The CalPX was not the only regulator to cite Enron for market misconduct. In 

2001, CAISO released a study about market behavior between May and November 

2000. The report asserted that Enron Energy Services strategically bid into the market with the intent of manipulating the price of electricity. The company’s ‘‘economic 

withholding’’ of megawatts resulted in excessive profits of nearly $28 million in 

ISO’s real-time market.11 The cost of this behavior among all the companies implicated in the report was over $1 billion. 

CAISO asserted that Enron was able to charge ‘‘excessive rents’’ because it was 

able to exercise market power, an anti-competitive behavior in which a single company can determine a price the market is compelled to accept. I maintain, as I have 

since the beginning of the crisis, that market power is at the heart of California’s 

dysfunctional market. The astronomical prices of 2000 and 2001 have been blamed 

39

12 In a functional market, participants serve as ‘‘price takers,’’ indicating that the price is dictated by what the market will bear. In a dysfunctional market, participants act as ‘‘price makers,’’ indicating that they have the ability to set the market price above a competitive level. This 

is a common test for market power by economists. 13 Jeff Skilling echoed this view at various points in time. Skilling told Business Week that, 

Enron benefits from volatility, not high prices (Feb. 12, 2001). And Enron’s 2001 Q3 earnings 

release points to a direct relationship between ‘‘a low level of volatility’’ and ‘‘flat’’ profitability. 

Generators also benefit from volatility. Duke, Dynegy and Williams executives have all acknowledged the correlation between company profits and market volatility. 14Thus, the FERC and California’s combined Spring 2001 efforts to reduce Western price volatility had a significant negative impact on Enron’s 3rd quarter 2001 financial results, confirming 

the claim by Anderson’s CEO that Enron’s demise was at its heart a business failure. This paragraph (including footnote) is taken directly from a February 6, 2002 letter from California State 

Senator Steve Peace to Rep. Henry Waxman. 

on many things, and I agree that a confluence of factors contributed to the crisis. 

However, California spent billions of dollars on electricity because a cadre of companies led by Enron were, in industry parlance, ‘‘price makers.’’ 12

Market Power and the Role of Trading 

How did Enron acquire and exercise market power? As I mentioned earlier in my 

testimony, this is a question of economics and is not easily sorted out. I believe that 

Enron’s fiscal improprieties, still the subject of numerous federal probes, drove 

Enron’s strategy and behavior in the California electricity market. Thus, it is impossible to dissect Enron’s manipulation of the California market without understanding its aggressive culture and potentially fraudulent accounting practices. 

There are three important prongs to Enron’s business in California as: 1) a direct 

access provider to large commercial and industrial entities, such as the University 

of California; 2) a trader and marketer of electricity; and 3) an unregulated auctioneer in the electricity and, more importantly, the natural gas market. 

I have already discussed the relationship between Enron and the CalPX, but I 

will add another distinction between the two: the role of volatility. 

In theory, Enron would not necessarily need volatility in the market to succeed 

as a trader of electricity. Bond traders, for example, make money trading and speculating in a very stable, liquid commodity. In fact, Enron VP Steve Kean told our 

State Senate Energy Committee in January 2001 that Enron ‘‘sell[s] protection from 

price volatility to both producers and end users. Consequently our interest in California’s power market is to ensure that the market works effectively . . . Enron has 

no interest in high power prices.’’ 13

This simply is not true. Enron was like a glass-repair business that advertises on 

bricks thrown through windows: ‘‘Buy protection from the volatility we create!’’ In 

practice, Enron did require high prices, because high prices were a symptom of a 

volatile market. Not only did Enron need high prices, it worked to ensure them, in 

order to do two things: 1) SELL ‘‘protection from volatility’’ and 2) undermine the 

CalPX, in order to establish itself as the primary market maker. 

Let me state this another way. In a regulated electricity industry, protection from 

the impacts of unexpected price movement is the responsibility of regulators. Since 

Enron sold volatility management products, anything that increased volatility was 

good because it created a demand for Enron’s products. Thus, during the height of 

the energy crisis when California was requesting that the Federal Energy Regulatory Commission (FERC) impose price caps, Enron and its sister traders opposed 

them because price caps would staunch volatility and undermine the trading operation, which provided 90 percent of Enron’s revenues.14

The success and stability of the transparent CalPX market worked against Enron. 

Market participants did not need to buy or sell ‘‘protection’’ from Enron when the 

CalPX was already operating efficiently enough to mitigate volatility. Enter the 

traders. 

Enron argued to the CPUC that in an OpCo model, power marketers would make 

the market more efficient. This was supposed to be because ‘‘risk management’’ 

trading companies like Enron were better able to interpret market fundamentals 

than other market participants. Generators, for example, would pay a premium for 

Enron’s expert analysis of the market instead of relying on their own interpretation 

of the neutral information in a transparent pool. Once the CalPX was operating, 

however, the point was moot. The CalPX handled the vast majority of the trades, 

so no matter how brilliant Enron’s interpretations were, they were based on a small 

percentage of the overall transactions done in the market. 

This created a dilemma. How could Enron, as an individual company, compile a 

larger database of price, bidding and demand history than the CalPX? The simple 

answer was to book more trades. Since the price of energy in each bilateral contract 

40

15Liquidity in markets means the degree of ease and certainty of value with which a security 

can be converted into cash. Liquid markets are heavily traded, meaning it is easy to find a 

buyer or seller for your position. Imagine you have a desire to sell energy tomorrow. There 

would be many buyers willing to offer you money to buy that energy. Tomorrow is a liquid market. Now imagine you want to find a buyer for energy you want to sell in 30 years. There are 

fewer interested buyers, if any, making the market for such a transaction illiquid. 16 ICF Consulting offered this advice in July 1999. 

was a proprietary secret, the more Enron traded, the greater its market share became, and the more its traders became the resident experts about the future price 

of electricity. 

The dimension of trading is critical in understanding market manipulation because markets are manipulated by influencing traders’ expectations about the future. Those expectations establish the forward price curves, which in turn affect the 

cost of long-term electricity contracts. Since the future is uncertain, an electricity 

user trying to minimize costs must decide whether to buy a long-term contract or 

commit itself to costs that might be higher in the spot market. 

Traders themselves have a preference for long-term contracts because ‘‘mark-tomarket’’ accounting rules benefit a company in the near term, an issue I will discuss 

later. Enron attempted to transfer the long-term contract trading approach it developed in natural gas to marketing electricity. In natural gas, Enron had already developed innovative long-term contracts, modeled on financial hedge contracts, that 

allowed customers to purchase ‘‘insurance’’ against future price and quantity risks, 

a.k.a. ‘‘risk management.’’ The cost of this ‘‘insurance’’ was based upon traders’ perception of the risk that the future could be different. 

Its ability to sell the concept of risk management was limited by the success of 

the CalPX market. So Enron had to beat the CalPX price, which was published 

daily. This is the reason why contracts such as those signed with the University of 

California called for a discount to the CalPX price. In order to profit from such 

deals, Enron had to be able to purchase electricity at an even greater discount to 

the CalPX price. This meant finding suppliers willing to sell to Enron power for less 

than they could receive selling it to the CalPX. Since this was virtually impossible, 

Enron’s California operations as a direct access provider were a big money loser as 

long as the Power Exchange was in business. That was all the motivation Enron 

needed to find ways to discredit the CalPX and the market it operated. 

Enron’s desire to undermine the CalPX meshed with a well-documented pressure 

from management to show profits on its books. Enron traders found that the way 

to do both was to extend the ‘‘liquidity’’ of the futures market in California.15 It took 

to trading ‘‘bundled energy’’ as far out as 2020, a market so far in the future that 

many wondered how it was possible to predict the price of electricity that far in advance—especially because the more established natural gas market was liquid only 

to about five years. 

In order to make it work, Enron did two things. One, it leveraged its intellectual 

capital and marketing expertise to sell itself (and specifically, its traders) as the ‘‘experts’’ on the long-term future price of electricity. This was no small feat, since the 

future price was uncertain—economist Robert McCullough called such predictions 

‘‘highly subjective.’’ Two, it booked thousands of trades. The company developed a 

reputation for buying and selling everything it could, with price justifications based 

exclusively on Enron’s mysterious, omniscient price curves, each used to justify 

thousands of trades. 

We now know the folly of many of these trades, which propped up Enron’s gross 

misstatements of earnings. Enron traders would sell ‘‘bundled energy,’’ multi-year 

agreements for the future delivery of power, booking uncollected future revenues as 

collected revenues in the current quarter. This process, called ‘‘mark-to-market accounting,’’ has been labeled ‘‘an incentive to abuse’’ by recognized economist Robert 

McCullough. 

In 2000, however, Enron’s accounting practices had not yet been exposed. The 

company may have been losing money on these trades—the traders called it ‘‘selling 

negatives’’—but the market only recognized at that time that Enron was a willing 

and active trader of electricity. If you wanted to buy it or sell it, Enron was there. 

We know from the Daily Position Reports, which Enron provided our Committee, 

that as the summer of 2000 approached, Enron’s traders had taken increasingly 

‘‘long’’ positions in the market, meaning they had a growing amount of electricity 

to sell. 

Diminishing reserve margins expected for 2000 caused some consultants to encourage such long positions. One consultant was unequivocal: ‘‘Go long with every 

dollar you have in the West.’’ 16 As Enron acquired control of more and more energy 

through trades, it gained a commensurate amount of control of the market. By May 

41

2000, Enron already controlled enough of the market to withhold power until the 

‘‘last minute,’’ i.e., the spot market. 

By offering to sell its electricity only at unacceptable, high prices in the CalPX 

day-ahead market, Enron effectively forced buyers (primarily the investor-owned 

utilities) to take a pass on the CalPX market and seek a better deal at a later time. 

The better deal never came. As real-time approached, Enron’s leverage increased, 

and in real-time, it was CAISO buying power—without regard to price. 

We heard testimony from CAISO executives who acknowledged that the directive 

of the CAISO did not include a consideration of price. The CAISO Board in 2000 

disagreed. It repeatedly voted to ratchet down the price cap on electricity in order 

to mitigate the exercise of market power by Enron and other market participants. 

The board’s final vote on the subject, in October 2000, prompted Ken Lay himself 

to write to the FERC imploring a reversal of the board’s edict. The FERC ruled to 

overturn the board the following day. 

By December 2000, Enron’s goals clicked off like a falling row of dominoes. Enron 

got the tacit buy-in of complicit generators, the counter-parties involved in Enron’s 

money-losing, long-term trades. None of them blanched at the notion of a liquid electricity market because they were getting sweetheart deals; the energy bundled in 

those deals that was to be delivered in 2000 helped establish Enron’s market power, 

which in turn allowed Enron to force the market out of the now-irrelevant CalPX, 

which in turn raised the price of electricity, which in turn created volatility, which 

in turn created the very condition from which Enron said all along it was in the 

market to protect buyers and sellers. 

Enron’s culture of aggressiveness permeated the company no matter if there were 

sound business fundamentals underlying the endeavor or not. Its electricity plan 

was waiting to be replicated in other markets as well. ‘‘The Opportunity,’’ one memo 

reads, is that ‘‘there is a lack of liquidity’’ in the credit risk market. ‘‘Our response: 

We offer to transact on more companies than anyone else by a significant margin.’’

Enron took pride in the aggressiveness that helped drive it to bankruptcy. I do 

not think it is a stretch to argue that this same aggressiveness dictated its behavior 

in the California market to the detriment of California. 

Natural Gas and Enron Online 

My Committee has heard repeatedly from generators and other market participants, as well as regulators and market managers such as CAISO, that the price 

of natural gas was largely responsible for the run-up in electricity prices in Fall and 

Winter 2000. The crisis reached its nadir, they testified, in early December 2000 

when natural gas prices at the California border were running five times higher 

than prices at Henry Hub. Henry Hub usually provides the country’s most accurate 

baseline for natural gas prices in the spot market. 

During the course of our investigation, I have been appalled at the lack of skepticism employed by those regulators and market managers in simply accepting this 

relationship as gospel truth. Why was the price of natural gas so high? Could expensive natural gas justify expensive electricity so completely? Was there a certainty 

that generators ‘‘passing on’’ the cost of natural gas into the wholesale price of electricity were actually paying the spot market price? Had generators failed to hedge 

natural gas by entering into long-term contracts for gas? 

These questions were answered in December 2000 when the price of electricity 

and the price of natural gas stopped tracking each other. With price caps lifted by 

CAISO request and the FERC order, electricity prices continued to rise. Meanwhile, 

the natural gas market stabilized and ultimately prices returned to historic norms. 

I ask you to consider whether it is unrealistic to consider the possibility that gas 

prices were artificially high in order to ‘‘justify’’ a regulatory decision to remove electricity price caps. Evidence suggests this possibility. 

First you must understand the regulatory environment Enron negotiated in order 

to operate as it did in the natural gas market. Enron was the benefactor of a momentous regulatory ruling in its favor by the Commodity Futures Trading Commission (CFTC). I will not delve into the details of the political processes and money 

trail implicated in these rulings except to say that the cozy relationship between 

CFTC commissioners and Enron provides, at a minimum, the appearance of impropriety. 

The import of the legislation and CFTC ruling must be acknowledged. The first, 

in 1992, exempted Enron’s trading of futures contracts in response to a request for 

such an action by Enron that same year. The second, an amendment to a Senate 

banking bill in December 2000, allowed Enron to operate an unregulated power aucVerDate 0ct 09 2002 11:58 Sep 26, 2005 Jkt 084329 PO 00000 Frm 00045 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\84329.TXT JACK PsN: JACKF
42

17Public Citizen, ‘‘Blind Faith: How Deregulation and Enron’s Influence Over Government 

Looted Billions from Americans,’’ December 2001. 18 Interviews conducted with an Enron competitor also revealed that Enron was on the opposite sides of many trades. 

tion—EnronOnline—that gained market share in the natural gas market almost 

overnight.17

Internal documents provided to the Committee by Enron indicate a colossal reversal of traditional market share over the span of just five quarters. In Q4 1999, 

Enron was responsible for trading roughly 23% of the natural gas and power transactions in North America. One year later, in Q4 2000, EnronOnline claimed to have 

a 74% market share, easily outpacing the ‘‘traditional’’ market. Competitors independently claim that Enron was involved in somewhere between 50–75% of the 

trades in the natural gas market.18

The reason this is so important is because of Enron’s admitted role as a speculator/trader in this market. Imagine if you will if the New York Stock Exchange 

were a for-profit company that operated the NYSE as an unregulated exchange. 

Every bid, every ask, every market trend, every individual stock trade, would be 

viewed by the omniscient company responsible for making the market. If the NYSE 

was trying to generate revenue, it would be logical to use this information to speculate on market trends. 

This is precisely what Enron was allowed to do, and what it used EnronOnline 

to accomplish. EnronOnline was the de facto exchange and Enron was the market 

maker. Enron’s traders logically used the ‘‘inside information’’ available to them 

from facilitating these trades to speculate on natural gas futures. 

Thus, when El Paso Natural Gas (El Paso) ‘‘went long’’ on gas in 2000, Enron 

spotted the movement in the market and mirrored the move. Staggering shifts—a 

veritable sea change—from short to long positions are found in Enron’s own books. 

Enron clearly had the motivation to ensure demand for natural gas, though we do 

not know the extent to which the company was able to restrict pipeline capacity or 

delivery. Was Enron merely profiting on speculation or was it aiding and abetting 

physical withholding? 

El Paso is under investigation for this very thing. When natural gas capacity is 

purchased, the process is regulated. But when unused or unneeded capacity is returned, the capacity can then be sold to unregulated subsidiaries of the same company that can use the capacity as they wish. The subsidiary distinction is a paper 

distinction only. The subsidiary is housed in the same building, on the same floor 

and the employees ‘‘play on the same softball team,’’ as one witness describes the 

relationship. The question for investigators is, given the motivation of a long position, did these unregulated subsidiaries have the ability to restrict capacity? And 

did they do that in Fall 2000? 

The natural gas market is a pivotal piece to understanding price manipulation in 

the California market, and I believe the deregulated gas market is itself in dire 

need of oversight and investigation into past abuse. Alleged misconduct has been 

the subject of investigation by the FERC, but no investigation has provided an adequate description of Enron’s ability to speculate on gas prices and to buy back unused capacity as an unregulated entity. 

Political Sophistication 

It is impossible to deny that Enron had a keen grasp of the political and regulatory environments necessary to carry out this plan. As the first state to deregulate, California was the laboratory for Enron’s plan to trade energy in a destabilized 

energy market, a model they wanted to replicate in more states across the country. 

An Enron memo from October 1996 indicates the obvious import: ‘‘The California 

market is the largest in the nation and California is the sixth largest country [sic] 

in the world. If Enron doesn’t do well in California, Enron will have a difficult time 

convincing anyone outside California that they are capable of and committed to providing power services.’’

To accomplish this, the company had a comprehensive and well-executed strategy 

to gain political influence when and where it was necessary to: a) create new markets; and b) be left alone in those new markets. A memo from Ken Lay and Jeffrey 

Skilling in October 1998 codified what was already a standing practice in the company: ‘‘Our activism in the political and regulatory process is essential to our continued success. . . .’’

Media reports and campaign finance disclosures have revealed the close relationship between President Bush, members of Congress and Enron. The company lobbied successfully at the highest levels for regulatory change that would further its 

strategy. For example, Enron was responsible more than any other company for the 

43

provisions of the 1992 Energy Policy Act that altered the historic structure of the 

nation’s electricity industry. Enron was also responsible for sweeping deregulation 

approved by the Commodity Futures Trading Commission (CTFC) that paved the 

way for Enron to trade electricity futures. 

Enron was even part of the very commissions responsible for oversight. For example, Enron was a sitting member of the CAISO board in November 1999, when the 

board decided to set CAISO’s damage control price cap at $750. When the price cap 

was lowered during a series of votes in Spring and Summer 2000, Enron lobbied 

to have the cap remain at $750. That a $750 cap provides a much larger window 

for volatile pricing than the $250 cap ultimately adopted during its board tenure 

was not wasted on Enron. 

Enron executives had unprecedented access to high-ranking public officials at 

both the federal and state levels. We know from our document review of Enron’s 

government affairs department how much the company relied on political relationships. On the one hand, California’s legislative leaders appealed directly to Enron 

for contributions and on the other received explicit instruction about specific legislation. It remains to be seen how close Enron executives were to the California Legislature, but documents seem to suggest the two were very close. 

Enron Uncooperative with State Investigation 

My Committee’s experience with Enron has been contentious, at best. Enron has 

engaged in delay tactics, arrogant displays of defiance and unabashed non-compliance. Enron has defied the state’s authority to investigate and has continued to 

stand in the way of lawful investigations of its business, including a probe by the 

California attorney general. 

When our investigation was launched last April, we asked Enron to produce voluntarily several categories of documents. It refused. We then requested that Enron 

enter into a non-destruct agreement with the Committee to ensure that documents 

critical to the investigation were preserved. Enron again refused. 

This issue has been a prominent problem for my Committee since well before 

Enron and Arthur Andersen were ever implicated in reports of document destruction. In a typical display of Enron’s hubris, the company’s counsel represented ‘‘as 

an officer of the court’’ that my Committee had entered into a non-destruct agreement with Enron. This is patently false. The claim, made before a San Diego judge 

during a civil proceeding against the company, was intended to deter a court-ordered imposition of a non-destruct agreement. 

When the Committee served Enron with a document subpoena in June 2001, 

Enron told the Committee it still would not hand over documents. Enron sued the 

Committee, arguing that my committee ‘‘had no authority to investigate’’ Enron and 

its role in the energy crisis. The company relented only when threatened with a contempt finding and a substantial financial sanction by the California State Senate. 

Enron has openly defied the Committee in numerous ways. Enron has failed to 

produce documents pursuant to our June 2001 subpoena and did not produce a company representative pursuant to a January 2002 deposition subpoena. Nor has 

Enron explained its role in the destruction of documents by Arthur Andersen or by 

its own employees as reported in the media. 

Even in bankruptcy, Enron has managed to stand in the way of our investigation. 

Multiple visits to Enron’s Houston headquarters resulted in inadequate document 

production and inappropriate assertions of privilege. 

The most troubling behavior, however, has been Enron’s deliberate destruction 

and/or concealment of documents. The Committee has not been provided documents 

it has compelled since June 2001. Coupled with reports that Enron documents have 

been destroyed, I believe Enron has committed criminal obstruction of justice. 

This belief has been affirmed by our latest review of electronic documents provided to my Committee in the last week. Our technical consultant confirmed this 

week that emails, schedules, correspondence and other electronic documents have 

been overwritten in order to destroy evidence we presume is relevant to our investigation. We can only assume the destroyed documents demonstrate at best information unhelpful to Enron’s case and at worst, criminal activity. In either case, Enron 

should be subject to criminal prosecution if this is true. 

In light of the many reports of shady accounting practices exposed in the last few 

months, Enron’s conduct over the last year should come as no surprise. From my 

perspective, however, Enron’s recently exposed shady accounting practices come as 

no surprise in light of Enron’s conduct over the last year. 

Conclusion 

Electricity deregulation has engendered heated debate since the first seeds were 

sown for an end to utility monopolies in the 1980s. I cannot recommend a complete 

44

reversal of the deregulation concept at this time. However, the current model is untenable. 

Electricity is a unique commodity. It cannot be stored, demand is inelastic and 

the barriers to entry are sizable. There has been no worthwhile oversight of the industry by the federal agency charged with policing its bad actors. ‘‘This’’ deregulation, borne of Enron, adopted by regulators and foisted on the public, has proven 

to be the greatest fraud ever perpetrated on the American consumer. The public interest is not being served. Until there are fundamental changes in the present approach, I believe we are simply biding time for the next Enron to emerge.

Senator DORGAN. Senator Dunn, thank you very much. We will 

be in touch with you with respect to the records that you have in 

your possession and appreciate that offer. 

Next, let us call on Ms. Loretta Lynch, the President of the California Public Utilities Commission. Ms. Lynch. 

STATEMENT OF LORETTA LYNCH, PRESIDENT, CALIFORNIA 

PUBLIC UTILITIES COMMISSION; ACCOMPANIED BY GARY M. 

COHEN, GENERAL COUNSEL, CALIFORNIA PUBLIC

UTILITIES COMMISSION 

Ms. LYNCH. Thank you, Senator. And I would like to thank this 

Committee for the opportunity to discuss with you how Enron’s activities in California have affected the regulatory structure of our 

markets and the pricing in our markets. I have with me the General Counsel of the Public Utilities Commission, who has been the 

lead in investigating Enron from the regulatory perspective. 

I’d like to comment on the linkage of what Enron’s been doing 

throughout the nation with the linkage of what Enron was doing 

in California. The economic and financial structures that were put 

in place in California and also nationally enabled Enron to plunder 

not only investors and consumers but also ultimately its own employees. Those structures need to be dismantled similarly to the 

way this Congress dismantled similar structures in the 1920’s and 

1930’s through the passage of the Public Utilities Act of 1935. 

Traditional regulation after the passage of the Public Utilities 

Act of 1935 has depended on three interrelated concepts. One is 

cost transparency. Two is financial transparency. And three is 

maintaining an appropriate nexus as the Federal Power Act requires, a just and reasonable linkage between cost and prices. 

Enron and its political allies, including, I’m sorry to say, both 

politicians and regulators in California and at the Federal Energy 

Regulatory Commission, have systematically dismantled those 

mechanisms for assuring the three pillars of traditional regulation 

and for assuring that they work. 

I have, as our first slide, a time line of Enron’s activities in California before the California Public Utilities Commission and before 

the legislature. Enron pushed for the creation of a wholesale electricity market in California that would have absolute government 

or regulatory oversight of its activities in the market. As early as 

1994—and I know that the slide is a long way from you—Enron 

pushed for a bifurcated market between an independent system operator and a power exchange which would enable Enron to gain the 

California market successfully. 

In 1995, Enron objected to any state government market structure—any state government establishment of a market structure, 

preferring a non-governmental entity which the state could then 

45

not control. And throughout that year of 1995 and 1996, Enron objected to the PUC’s placing of any consumer protection rules in 

that wholesale electric market. 

Enron was active in shaping the deregulation of the California 

generation industry, both at our state regulatory commission and 

at the state legislature. When they were successful, Enron then 

participated in the creation of a wholesale market with rules that 

were enabled by the FERC. And those rules enabled both the 

FERC and the California independent system operator to allow further gaming and gouging by Enron in California. 

Enron’s methods were consistent in every venue it entered. Both 

in California, it would try to make the rules and then use those 

rules to exploit the government and the system for short-term advantage. 

After Enron shaped the California market, starting in 1994 and 

extending through 2000, Enron came nationally, as we all know—

as you know well, Enron first lobbied the Congress and FERC to 

kill rules and to obtain special status for its trading activities. In 

fact, Enron was before the Commodity Futures Trading Commission and this Congress in December of 2000, at the very time the 

FERC lifted the price caps in California, at the very same time 

Enron was reaping maximum profits out of the California market, 

and at the very same time that the California market was spinning 

out of control. 

Enron continues its activities at the FERC, and it’s really quite 

troubling. As we speak, the FERC staff is attempting to create opportunities for marketers like Enron to set prices and to make markets in contravention of the FERC price mitigation order that 

makes marketers price takers and not market makers. Further 

loosening of the rules by FERC makes California’s job all the more 

difficult to contain its market. 

FERC, for decades, published a Uniform System of Accounts, 

which has provided a template for state-level accounting and disclosure proceedings of costs and profits. FERC in every state has 

required annual reports by regulated entities in which detailed financial disclosures and disclosures of operating statistics, assets, 

and liabilities and particular categories of expenditures are disclosed to the public and used by state regulators to control the 

markets. 

FERC, over the past few years, at the urging of Enron and others, have diluted those reporting requirements, loosened the accounting rules and exempted large classes of energy sellers from 

making these required disclosures. FERC does not even require 

minimal quarterly reports in the natural gas area, which makes it 

virtually impossible for the State of California to either track 

Enron’s natural gas trades or to link their natural gas trading with 

their electricity trades and actions. As we know, they are so interrelated. This makes our job much more difficult, because it eliminates cost transparency for large segments of the energy sector. 

But related to the issue of cost transparency is financial transparency. We have, on the next slide, Enron’s affiliate relationships 

and how they operated in California. Enron’s use of complex corporate structures, affiliates, partnerships, assets, and liabilities 

transfers among all of these entities have led to a further erosion 

46

of not only investor and consumer confidence, but also has given 

them the ability to manipulate financial disclosures and ultimately 

the costs and the prices in the California market. 

The temporary monopoly positions that Enron’s trading suggests 

appear to have been accomplished, at least in part, through the 

complex chain of self-dealing among these affiliates of Enron and 

a few of the other Enron compatriots. 

In 1999, Enron created the first and largest electricity energy 

trading forum called Enron Online, becoming not just a customer 

in the market, but a market maker in both electricity and natural 

gas. With Enron Online, Enron became, by far, the largest trader 

of energy. According to Gas Daily, Enron sold nearly double the 

amount of natural gas as any other competitor. And Enron Online 

itself reported over $330 billion worth of electric trades in 2000. 

Those trades total more than the cost of electricity produced in the 

United States in total. 

How did Enron do this? We have, for your consideration, just an 

example of Enron’s affiliate trading activities just in the fourth 

quarter of 2000. This quarter is key and critical because this is the 

quarter when FERC blew out the price caps in California’s wholesale markets and when the California market spun out of control. 

In the fourth quarter of 2000, five Enron affiliates—Enron Energy 

Services, Inc., Enron Power Marketing, Inc., Enron Energy Marketing Corp., The New Power Co., and Portland General Electric 

Co.—bought and sold over 11,900,000 megawatt hours of electric 

power to and from each other in the way that is demonstrated with 

those circles. 

They were purchasing among each other at prices as high as $3,322 a megawatt hour. Just the month before, in October, the 

price cap in California’s market was $250 a megawatt hour. These 

trades were not only among the affiliated companies. In fact, the 

same individuals were managing all of these companies. The next 

slide shows that all of those people who are listed below were, in 

fact, employees or directors or managers of all four of these Enronrelated companies. So the companies had the same employees. 

They were essentially trading with themselves, but those trades 

racheted up the price in the California market. 

I believe that these trades were actually sham transactions. 

Enron was selling the same megawatts back and forth to itself, 

causing the price to rise with each supposed sale, all under the 

rules they had helped create both in California and nationally. The 

selling back and forth, though, also is more pernicious. It created 

the illusion of an active, volatile market, appearing to the rest of 

the world as though massive trading was occurring on Enron’s online trading floor. In fact, Enron has reported that 30 percent of 

those trades in Q4, 2000, were among Enron’s own affiliates. Since 

Enron used accounting methods that let them book as revenue the 

value of every trade, not just the profit, they were able to create 

false value in their company with every affiliate trade. 

I believe this was truly a Ponzi scheme. The effect of these trades 

was to increase the wholesale price of electricity in the California 

market. These transactions which Enron was engaging in, and with 

itself and its affiliates, caused wholesale prices to rise both because 

they directly influenced various price indices and because the 

47

prices that were reported on Enron’s Internet-based trading site, 

Enron Online, became the benchmark in the market for wholesale 

bids into the California Power Exchange and the California ISO. 

These purchases and sales were only possible between those affiliates because there was no regulation of this market. There were 

no rules imposed by the CFTC or the FERC to prohibit this kind 

of sham transactions between affiliated entities. And, moreover, the 

California entities had little ability and no appetite to discipline 

Enron in these markets. 

This stopped only on June 19 of last year when the FERC put 

a stop to it with its historic action that brought order, albeit temporarily, to California’s market. The FERC did three things that are 

critical. It set a must-offer order that required sellers to sell into 

California to creditworthy buyers, which reduced Enron’s ability to 

game prices by withholding power and reduced other sellers’ ability 

to do that, as well. And it prevented those who were not generating 

power, like Enron, from setting the price throughout the market, 

as they had been doing so successfully in the fourth quarter of 

2000, preventing those who trade over and over internally from 

driving the price up above the price cap. 

The problem with the FERC market mitigation measures is that 

they expire. They’re temporary. And they expire September 30 of 

this year. They will expire unless there is a clear signal from this 

Congress to keep these basic minimal boundaries on California’s 

market. These boundaries should be kept until FERC can assure 

you and the people in businesses in California that the transgressions of Enron and others will not reoccur in this market. 

We know from bitter experience in California that more regulation is needed, and specifically I believe this Congress needs to tell 

FERC to ensure that market participants cannot be also market 

makers as Enron did and exploited so successfully in California 

and throughout the West. 

Exemptions for online and electronic trading under the Commodity Futures Modernization Act of 2000 must be curtailed and 

must be improved so that we can have improved reporting and 

oversight. I believe all energy traders should be regulated as a utility subject to the control of FERC. Clear, detailed transaction reporting for natural gas and electricity trades must be required and 

enforced, at least on a quarterly basis, so that we can all know 

what’s going on at the time instead of digging it out a year after 

the fact. And FERC should also be directed to strengthen its role 

in providing accountability and disclosure of costs and finances of 

energy sellers. 

Until then, until FERC can assure you that the market is fixed 

and that sons of Enron cannot perpetuate these kinds of shady and 

affiliate transactions again, the protective measures that are now 

keeping a lid on California prices and prices throughout the West 

must be continued. 

At the turn of the 21st century, the nation needs again to 

strengthen its regulation of energy companies. These companies 

have morphed into even more complex entities, as you have seen, 

and they are selling more complicated and risky products both on 

the wholesale market and to investors. We’ve seen this before in 

the 1920’s and the 1930’s. Congress must keep it simple, keep it 

48

clear, and keep regulation and enforcement of utility companies 

and energy traders strong, unlike the conditions that we still face 

today in California. 

Thank you. 

[The prepared statement of Ms. Lynch follows:]

PREPARED STATEMENT OF LORETTA LYNCH, PRESIDENT, CALIFORNIA PUBLIC

UTILITIES COMMISSION; ACCOMPANIED BY GARY M. COHEN, GENERAL

COUNSEL, CALIFORNIA PUBLIC UTILITIES COMMISSION

Thank you for the opportunity to testify about the effect Enron had on the California electricity and natural gas markets. Enron has become emblematic of a pervasive regulatory failure in the energy markets in the United States. In a sense it 

has supplanted California on the front page but, as we all understand, the failure 

that was the California energy market and the failure that is Enron are intimately 

linked. I would like to comment on the linkage from the standpoint of a state regulator and to warn the members of this panel that the forces that caused the Enron 

debacle are still at work and must be effectively curbed at the state and federal 

level if we are not to see many more failures. 

It is crucial that we not view Enron as an outlier or outlaw in an otherwise working market. The economic and financial structures that enabled Enron to plunder 

investors and consumers and ultimately its own employees need to be dismantled, 

much as similar structures were dismantled by the Public Utilities Act of 1935, 

which included both the Federal Power Act (FPA) and the Public Utilities Holding 

Company Act (PUHCA). This landmark statute preserved to the greatest extent possible local authority to regulate local service. It has served us well for over sixty 

years, until very recently. 

The utility scandals of the 1920’s and early 1930’s involving watered stock, outof-control prices, shady accounting and financial and consumer abuse are being 

reprised today. It is time to say, ‘‘Enough is enough.’’ The army of lobbyists for 

‘‘PUHCA reform,’’ laissez faire electricity pricing, grid federalization and the like are 

essentially asking you to unleash a horde of Enrons on the consumers of America. 

I respectfully suggest that we learn from history and the gaming and gouging that 

took place in the teens and twenties when I say, ‘‘Don’t go there.’’

Consumers expect that utility service and costs will be stable and reasonable. 

Federal law requires that wholesale electricity prices be just and reasonable. Enron 

and its emulators want instability and high prices. The California experience suggests that the Enron approach is bad economics and bad policy. 

Traditional regulation as practiced since the New Deal has depended on three 

interrelated concepts:

• Cost transparency

• Financial transparency, and

• Maintaining an appropriate nexus (a just and reasonable linkage) between cost 

and prices.

That system served consumers and legitimate long-term investors well. The only 

people it did not serve well were the energy speculators, like Insull and the cartels 

of the 1920s and Enron and its ilk at the turn of this century, seeking a fast buck. 

They have worked hard to undermine it. 

Enron and its political allies, including, I’m sorry to say, politicians and regulators 

in California and at the Federal Energy Regulatory Commission, systematically dismantled the mechanisms for assuring these three pillars of traditional regulation. 

Enron pushed for the creation of a wholesale electricity market in California that 

would have no government or regulatory oversight of its activities in that market. 

Enron was active in shaping the deregulation of the California electric generation 

industry, both at the state Commission and at the State Legislature. Not surprisingly, with a legion of lobbyists at the Commission and before the Legislature and 

a business plan bent on taking advantage of deregulation and a bifurcated market, 

Enron got what it asked for in California. Enron then participated in the creation 

of wholesale market rules used by FERC and the California Independent System 

Operator further enabling their trading and gaming activities. 

Enron itself has been active through a phalanx of organizations, and has facilitated activity by others. In California, Enron Corporation participated in numerous 

business ventures through its affiliates Enron Energy Services, Zond Wind Power, 

Enron Trade and Capital, Enron Oil and Gas, Portland General Electric, 

49

Transwestern Pipeline, The New Energy Company, and many more. Enron helped 

shape the policies of industry trade groups such as the Independent Energy Producers and Western Power Trading Forum and others. In addition, it spawned front 

groups such as the Alliance for Retail Markets (ARM) that purported to be coalitions of organizations but received the bulk of its funding from Enron. ARM and 

the Enron affiliates would both appear before the CPUC on electric restructuring 

matters, frequently represented by former high level PUC employees. 

Enron was represented on the original board of the California Independent System Operator (ISO) directly and indirectly where it actively opposed price caps and 

other market power mitigation initiatives and—in an infamous episode—demonstrated the efficacy of ‘‘phantom congestion’’ in raising prices and then sought to 

prevent an antidote. After Enron demonstrated the tactic, others used it to manipulate prices ‘‘according to the rules.’’

The incremental creation and exploitation of loopholes and ‘‘opportunities’’ has 

been effective at least in part because FERC has been so slow to act to counteract 

them, once discovered. For example, it has long been known that a significant weakness in the ISO tariff is the practice of paying twice for an electric generation unit—

once when it ramps up and again when it ramps down—that is inappropriately 

scheduled. The ISO has been attempting for nearly a year to change this feature 

of the tariff, only to be rebuffed by the FERC, who says simply that such a change 

is ‘‘premature.’’ Meanwhile, Enron and others are exploiting this weakness for big 

dollars. 

Enron actively sought business alliances with and takeovers of public and municipal entities. For example, it ‘‘partnered’’ with the City of Palm Springs to create 

direct access and ‘‘muni-lite’’ relationships with residential customers, only to leave 

the City program in the lurch when its attention wandered elsewhere. After Enron 

dumped its program without any appreciable downside to itself, others followed 

suit—as we learned to our dismay last Spring when the California DWR had numerous ‘‘direct access’’ customers dumped back on it when FERC-deregulated wholesale 

prices were at their highest. California went from 16% of its overall electric load 

served by non-utility providers in October 2000—the lion’s share of which was 

Enron-provided—to 2% of all customers served by non-utility sources in June of 

2001. Enron creamed off lucrative customers when prices were low then dumped 

those customers back on the utilities when natural gas and electricity prices rose 

so that it could sell its gas and electricity for the highest price—perhaps even back 

to the very same utility that was serving Enron’s dumped customers! 

Enron’s methods were consistent in every venue it entered—it would try to make 

the rules—rules that it would then exploit for short-term advantage. After Enron 

shaped the California market to take maximum advantage of nonexistent government regulation and lax ISO rules, Enron turned its sights nationally. As we now 

know, Enron lobbied Congress to kill rules proposed by the Commodities Futures 

Trading Commission which would have provided at least some federal oversight of 

Enron’s trading activities. Enron also obtained special status for its trading activities in December 2000—at the same time it was reaping maximum profits in the 

California markets. 

Enron continued its strategic manipulation of public processes to create business 

opportunities through the dismantling or modification of accepted approaches: you 

are seeing this approach in action today at the FERC, where as we speak, the FERC 

staff is attempting to create opportunities for marketers to set prices and make markets in contravention of the FERC price mitigation order that makes marketers 

price takers. The incentives and rewards for such behavior are being described by 

others. I want to make you aware of its pervasiveness. 

Every state has a regulatory body whose charter includes specifying the accounting procedures for utilities operating in its state. FERC for decades published a Uniform System of Accounts which has provided the template for state level accounting 

and disclosure procedures. FERC and every state have required annual reports by 

regulated entities in which detailed financial disclosures and disclosures of operating statistics, assets and liabilities and particularly categories of expenditures are 

disclosed to the public. FERC has over the past few years at the urging of 

Enron and others diluted the reporting requirements, loosened the accounting rules and exempted large classes of energy sellers from making 

required disclosures. FERC does not even require the same data to be filed in 

its quarterly reports, allowing companies like Enron to hide the true nature and extent of activities through skeletal public reporting and not be called to account by 

FERC. FERC does not require even these minimal quarterly reports in the natural 

gas area, making it virtually impossible either to track Enron’s natural gas trades 

and activities or to link gas trading with electricity trades and actions. This makes 

50

the state regulator’s job much more difficult, because it virtually eliminates cost 

transparency for large segments of the energy supply sector. 

In the case of Enron and many other energy supply companies the lack of cost 

transparency, prescriptive accounting rules and regular or detailed public reporting 

has undermined investor confidence in both traditional regulated utilities and in 

new cadre of speculator energy companies. Congress should require that the FERC 

ensure the primacy of promulgating and enforcing appropriate reporting and accounting procedures. 

Related to the issue of cost transparency is financial transparency. Enron’s use 

of complex corporate structures, affiliates, partnerships, asset and liabilities transfers among these entities has led to a further erosion of investor and consumer confidence and an ability to manipulate financial disclosures and, ultimately, cost and 

prices. The temporary monopoly positions that Enron’s trading statistics suggest appear to have been accomplished at least in part through complex chains of self-dealing among affiliates of Enron and a few of Enron’s compatriots. 

In 1999, Enron created the first and largest electronic energy trading forum called 

Enron On-Line, becoming not just a customer in the market but a market maker—

in both electricity and natural gas. With Enron On-Line Enron became by far the 

largest trader of energy—both electricity and natural gas. According to Gas Daily, 

Enron sold nearly double the amount of natural gas of any competitor. Enron OnLine reported over $330 billion dollars worth of trades in 2000. That is more than 

the cost of all electricity produced in the United States. 

How did Enron do this and what effect did it have on California? As an example, 

I will discuss just one period of time—the fourth quarter of 2000, as California’s 

wholesale energy market spiraled out of control with the lifting of the wholesale 

price cap by FERC, at the instigation of Ken Lay, Jeff Skilling and the former conflicted California ISO board. What we find is that Enron’s trading with its own affiliates was the major way that Enron did business and constituted a major factor 

contributing to the California energy crisis. In the fourth quarter of 2000, five Enron 

affiliates—Enron Energy Services, Inc., Enron Power Marketing, Inc., Enron Energy 

Marketing Corp., The New Power Co., and Portland General Electric Co.—bought 

and sold 10,167,782 MWh of electric power to and from each other, at prices as high 

as $1,100 MWh. These trades were not only among affiliated companies; the same 

individuals were managing all of these companies. These ‘‘trades’’ were actually 

sham transactions—Enron was selling the same MWs back and forth to itself, causing the price to rise with each ‘‘sale’’—all under the rules that it had helped to create. The selling back and forth also created the illusion of an active, volatile market, 

appearing to the rest of the world as though massive trading occurring on Enron’s 

online trading floor. By creating the excitement of a busy market place, they could 

entice other traders to come into their market (online). (What we would really like 

to know is how many of the trades Enron reported were actually real trades with 

parties other than their affiliates.) Since Enron used accounting methods that let 

them book as revenue the value of every trade (not just the ‘‘profit’’), they were able 

to create false value in their company with every affiliate trade. This was truly a 

Ponzi scheme. 

The effect of these trades was to increase the wholesale price of electricity in the 

California market. These transactions, which Enron was engaging in with itself, 

caused wholesale prices to rise both because they directly influenced various price 

indices and because the prices reported on Enron’s Internet-based trading site, 

EnronOnline, became the benchmark for wholesale bids into the PX and ISO. 

These purchases and sales between affiliates were only possible because there was 

no regulation of this market; there were no rules imposed by the CFTC or the FERC 

to prohibit sham transactions between affiliated entities. Moreover, the CA ISO and 

PX had little ability and no appetite to discipline Enron in the market. 

In addition to trading among themselves, a number of these affiliates were scheduling coordinators (SCs) with the ISO. SCs serve as the link between retail buyers, 

generators and the ISO. SCs have access to electricity market information from 

many sources not generally available to average investors and are in a position to 

manipulate the market. For example, SCs can game the market by scheduling nonfirm power to cover their needs, forcing the ISO to buy reserve power in the spot 

market to back the SC. As a market maker Enron also had the ability to influence 

the bids and costs of other Coordinators as well. 

The consequences of this and similar activities by Enron’s imitators—the sons of 

Enron—were devastating. The huge volumes of internal trades created volatility in 

the market from which Enron profited. Enron could create transmission congestion 

through meaningless trades with itself, and then get paid to eliminate that congestion or re-route electricity within California. Enron’s internal trading could affect acVerDate 0ct 09 2002 11:58 Sep 26, 2005 Jkt 084329 PO 00000 Frm 00054 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\84329.TXT JACK PsN: JACKF
51

cepted market indices, thereby increasing the prices paid to generators and suppliers that are tied to those indices. 

Enron could also use the rules and their internal trading to commit power that 

was made in California out of the state, thereby artificially creating the appearance 

of shortages of electricity generated in California that could only be remedied 

through ‘‘imports.’’ This is a practice known as ‘‘megawatt laundering,’’ and is a pervasive feature of the west-wide electricity market. It is the reason that mitigation 

measures must be West-wide. Experts have estimated that exports quadrupled from 

California from 1999 to 2000. Enron’s moving of California-generated power out of 

state—through internal and other trades—raised prices and contributed to blackouts that were in fact unnecessary. At the times of the blackouts that California 

experienced, there was never any physical, real world shortage of generation capacity in California. 

While Enron’s failed ventures and accounting practices may have brought them 

to financial ruin, its energy trading enterprise was exorbitantly profitable—accounting for over 90% of Enron’s overall revenues in 2000. The gravy train did not stop 

nor did the underlying systemic problems become apparent until the FERC put a 

stop to it on June 19, 2001, with its historic action that brought order, temporarily, 

to California’s market. FERC imposed price caps that conservatively estimated costs 

of generating electricity in California, setting the effective price first at $92/mwh 

and modified it upward slightly. It set a ‘‘must-offer’’ order that required sellers to 

sell to creditworthy California buyers, reducing the ability to game prices by withholding power, although ISO management actions have reduced the effectiveness of 

this requirement. And it prevented those who were not generating power from setting the price throughout the market, preventing those like Enron who traded the 

same power over and over internally or with others solely to drive the price up by 

the time it was sold to the utilities, to the ISO or to the state. FERC intends to 

terminate these key and critical protections on September 30 unless there is a clear 

signal from this Congress to keep these basic, minimal boundaries on California’s 

market until FERC can assure you and the people and businesses of California that 

the transgressions of Enron and others will not re-occur. 

We know from bitter experience in California that more regulation is needed. Specifically, to fix this market Congress needs to ensure that:

• Market participants should not also be market makers.

• Exemptions for online and electronic trading under the Commodity Futures 

Modernization Act of 2000 must be curtailed to improve reporting and oversight.

• All energy traders should be regulated as a utility subject to control by FERC.

• Clear, detailed transaction reporting for natural gas and electricity trades must 

be required and enforced on at least a quarterly basis.

• Statutory affiliate rules are necessary to limit the proliferation of related trading entities that skew and game the market, gouging consumers—or outlaw 

these trades and interrelationships outright.

• FERC should be directed to strengthen its role in providing accountability and 

disclosure of costs and finances of energy sellers.

• FERC must update its systems and its ability to keep up with the games. For 

example, the FERC database needs to be updated, streamlined and made truly 

accessible to regulators and the general public.

As I conclude these remarks I am mindful that my role as a regulator doesn’t end 

in the energy arena. Congress also has a real opportunity now to help insulate telecommunications consumers from these same types of accounting and reporting 

schemes executed so effectively by Enron and other energy companies. With crosscountry mergers, bankruptcies, high technology affiliates and other changes rampant in the telecommunications industry, Congress and the Federal Communications 

Commission must ensure that the FCC strengthens uniform national reporting requirements for telecommunication companies and their affiliates about costs, profits, 

revenues and service quality. Instead, the FCC is leaning away from requiring such 

national reporting just at a time when we need more information to monitor our 

information infrastructure. This data is critical to the states’ ability to meaningfully 

protect telecommunications consumers, from basic service to broadband, from the 

kinds of manipulation I’ve discussed today. 

At the turn of the twenty first century, the nation needs again to strengthen its 

regulation of energy companies—which have morphed into even more complex entities—selling more complicated and risky products than what the nation experienced 

52

in the 1920s and 30s. Congress must keep it simple, keep it clear and keep regulation and enforcement strong—unlike the conditions California and the nation face 

today.

Senator DORGAN. Ms. Lynch, thank you very much. Next, we will 

hear from——

Senator BURNS. Begging the indulgence of the Chair, Ms. Lynch, 

do you have—I didn’t notice in your testimony that you had copies 

of these slides that you presented there. We can’t see them over 

here. 

Ms. LYNCH. Oh, sure, we can get you those. 

Senator BURNS. And those slides, I think it would be very, very 

helpful to us who keep this testimony and help us understand 

what—this whole thing. So I thank the Chair. 

Senator DORGAN. That’s a good suggestion. You will make those 

available, Ms. Lynch? 

Ms. LYNCH. Sure. 

[The information referred to follows:]

53


411lyn1.eps
54


411lyn2.eps
55


411lyn3.eps
56


411lyn4.eps
57


411lyn5.eps
58

Senator DORGAN. Next we will hear from Mr. S. David Freeman, 

Chairman of the California Power Authority. Mr. Freeman, you 

may proceed. 

STATEMENT OF S. DAVID FREEMAN, CHAIRMAN,

CALIFORNIA POWER AUTHORITY 

Mr. FREEMAN. Thank you, Mr. Chairman. It’s a special pleasure 

for me to be here. I was a staffer to this Committee back in the 

1970’s when Chairman Hollings was really the junior Senator from 

South Carolina. 

[Laughter.] 

Mr. FREEMAN. I have been in this business a long time. I’ve 

worked the old Federal Power Commission and run utilities and 

I’ve been with the Governor of California for the last year through 

this crisis and was involved in the creation of the ISO and the 

Power Exchange that started us down deregulation road. 

If I could offer this observation, in terms of the California situation, I don’t believe the real story is about whether Enron broke 

the law or not. The real story is about the influence they had on 

the lack of law enforcement by FERC, the influence they had on 

the detailed rules for deregulation, both in California and in Washington, and most importantly their invisible role in the ripoff of 

California consumers. 

Enron was by far—and I was there and saw it—the leading advocate for the most extreme deregulation at every step of the road, 

and they were the most active participant in that volatile market 

they helped create and profited from. It’s time that we faced up to 

a harsh fact. The invisible hand of Adam Smith was Enron, and 

their fellow gougers having their hands in the hip pocket of the 

consumers of California to the tune of billions of dollars. And we’re 

now beginning to connect the dots. 

While the prices were skyrocketing in California in late 2000 and 

early 2001, as a direct result of Enron’s influence and participation, 

at the same time, Enron was here in Washington, granted special 

attention, special privileges to advise a new administration to oppose the price controls that California and the delegation was literally begging for to protect consumers from the enormous profits 

that they and others were making. And it’s not that we were asking for something special. We were simply requesting that the Federal Energy Regulatory Commission do its job. 

The Federal Power Act was not abolished. There’s a Texan 

named Sam Rayburn that got that law passed back in 1935. I 

worked to enforce the law back in the 1960’s. Just and reasonable 

rates have been the law of the land, and they didn’t just all of a 

sudden disappear, be repealed. They weren’t. It was a lobbying effort led by Enron that persuaded FERC to just take the cop off the 

beat at the time we needed them worst of all. And it wasn’t until 

the California delegation and the Governor of California and people 

from all over the West brought this to the attention of the American people, the Congress generally, and the new Administration 

that they helped us. I want to give them credit. They did name 

Chairman Pat Wood and Norma Brownell and came in and finally, 

in June, put in some measure of relief. 

59

I must say, though, that the Federal Power Act does not end on 

September 30 of this year. They put some temporary controls in 

place that expire. Very interesting that they expire just before October of an election year. I am very concerned that we go back to 

a situation where folks that have no responsibility to keep the 

lights on, no responsibility to sell electricity, are able to artificially 

create shortages and problems for us. 

And so our main plea here today, if there’s no other point that 

I make to this Committee, that this Committee unanimously inform the Federal Energy Regulatory Commission that their mandate does not end on September 30. The law is on the books. It 

says that the rates ‘‘shall’’—not ‘‘may,’’ but ‘‘shall’’—be just and reasonable. 

I say to FERC don’t become summer soldiers and quit on us just 

when we need your help the most, because we do not have a functional market in California that’s competitive. Everyone knows 

that. FERC has said so. And until they can make a finding on a 

record and show that there’s real competition that will protect the 

consumer, they have an obligation to continue what they put in 

place so well last June and continue it until they can make a finding that it’s not needed. 

I think the thrust of my written testimony is that what we have 

here before us is an example that a wealthy, famous company can 

just be dead wrong. And it’s important, those of you who have the 

responsibility and are lobbied intensively by people, that just because someone with a lot of money and a good reputation comes to 

you, you have to examine their arguments just as thoroughly as 

anyone else’s. 

And this deregulation scheme that was concocted and put into effect just has been the most terrible economic disaster, in terms of 

electric power, in the history of the industry. And it’s pretty clear, 

I think, to everyone in California at least, that electricity is different from anything else. We can’t do without it, and everyone 

knows that, for even a nanosecond.—Reliability, smooth power, in 

the computer age is more essential than ever. 

We cannot let private companies who have an interest in creating artificial or even real shortages be in control. The Congress 

needs to reexamine the Federal Power Act and look at the 21st century and set down some rules. Enron stands for secrecy and lack 

of responsibility. But in electric power, Mr. Chairman, we’ve got to 

have openness and we’ve got to have companies that are responsible for keeping the lights on. 

Thank you. 

[The prepared statement of Mr. Freeman follows:]

PREPARED STATEMENT OF S. DAVID FREEMAN, CHAIRMAN, CALIFORNIA POWER AUTHORITY

I appreciate the opportunity to appear before this Committee. I thank you for devoting your time to this issue, which, I believe, is fundamental to the future of the 

electric power industry as far as consumer protection is concerned. 

On a personal note, I am especially pleased to be here since I served as a staff 

member to this Committee in 1974–76 when Chairman Hollings was really the junior Senator from South Carolina. My testimony reflects my personal views only. It 

is based on 40 years of experience with the electric power industry as a regulator, 

an official in federal and state government, and as the manager of large public utilities. 

60

In my view the real story about Enron is not whether or not they broke the law, 

but about the influence they had on the lack of law enforcement by the FERC, on 

the rules for deregulation in California and Washington D.C. and, most importantly, 

their invisible role in the rip off of California consumers. Enron was by far the leading advocate for the most extreme deregulation of the electric power industry in 

California and they were the most active participant in the volatile market that resulted. 

The fact that Enron’s activities in California may have been legal is a most troublesome and lasting concern. It is all the more frightening because their profit-making role was largely secret. 

We must recognize that the so-called invisible hand of Adam Smith was Enron 

and their fellow gougers picking the pockets of Californians to the tune of billions 

of dollars. And now we are beginning to connect the dots. Prices were sky rocketing 

in California in late 2000 and early 2001 as a direct result of Enron’s influence and 

participation. At the same time Enron was granted special attention to advise a new 

administration in Washington to oppose the price controls sorely needed to protect 

consumers from the enormous profits they and others were making. 

All this happened despite the fact that the Federal Power Act requires that the 

FERC assure just and reasonable rates. Even the FERC admitted the market was 

not functioning properly. Enron may not have broken the law but they encouraged 

the new Administration to fail to enforce the law which in my view was just as bad. 

It was only after Governor Davis and the California delegation repeatedly called 

attention to the fact that the FERC was on a sit down strike that the President 

appointed new Commissioners who helped Governor Davis bring that market under 

a measure of control. But that happened only after Californians had been overcharged at least $9 billion. 

Some may suggest that I am singling out Enron and ‘‘piling on’’ just because they 

are in trouble for other reasons. That is not true. It is important that Congress understand that a rich and famous company can succeed in achieving terrible results 

for consumers. This Congress and the several states have before them serious questions inherent in the deregulation of electricity. Is the removal of controls on the 

price of electric power at wholesale a good idea? Does it make sense to remove the 

legal obligation of a utility to build or buy enough power to provide reliable electricity? 

The words competition and deregulation are seductive. They sound great but the 

reality we found in California was quite different. A public utility industry whose 

books are open to public inspection, who are legally responsible for providing reasonably priced electricity, and who did just that for decades, were replaced by companies that operated in secrecy, are accountable to no one (apparently not even their 

shareholders or employees), could sell or withhold power as they pleased and had 

no obligation to build new plants. 

Let us be clear about what is at stake. Having been intimately involved in what 

California experienced in recent years, I feel the need to convey to you the enormity 

of this issue. If we don’t recognize why it all happened then history will surely repeat itself. 

Electricity is unlike anything else in our economy. It is truly the lifeblood. Ordinary consumers and businesses alike cannot do without it for even an instant. It 

can’t be stored by customers. Reliable, smooth electricity at a reasonable, predictable price is an absolute necessity. 

We found out in California, the hard way, that even the tiniest of shortages literally stops the economy. And without price controls, the prices shoot up to obscene 

levels. No one has yet suggested that in a drought we allocate water to the highest 

bidder (Enron did try moving into the water business) but that is exactly the 

scheme created in California by religious believers in the market combined with 

Enron’s influence and persistence. 

Proponents continue to talk of the potential benefits of deregulation. In California 

we learned who got the benefits—it was the power marketers. As for the consumers, 

in 1996 when deregulation was launched, the consumers were promised a 20% rate 

reduction by April, 2002. Instead the consumers are paying rates that are 40% higher!

Even proponents of deregulation such as the Hoover Institution Fellow and Noble 

Laureate Gary S. Becker concede that Enron encouraged ‘‘further and faster deregulation of electricity markets at State and Federal hands especially when it would 

help its own power trading companies’’. Mr. Becker also concedes that the collapse 

of Enron and California’s bad experience ‘‘are further evidence deregulation has 

many pitfalls’’. 

It is true that Enron did not invent deregulation. Indeed because deregulation had 

been carried out with airlines and telecommunication companies it had considerable 

61

1 Robert McCullough—Testimony before the House Subcommittee on Energy and Air Quality, 

February 13th, 2002. 

momentum. But we must not forget that electricity is different from other products 

and services. We can’t do without it and it can’t be stored. 

It is important to take note that at every step of the rulemaking for deregulation 

in California from 1996 until today Enron, more than anyone else, used their enormous resources to urge the most extreme positions that resulted in maximum secrecy and lack of accountability. And Enron was a major participant taking advantage of the volatility in prices during the ‘‘Perfect Electrical Storm of 2001’’ while 

simultaneously waging an intensive, successful campaign that in six crucial months 

stopped a new Administration in Washington from doing its job of controlling prices. 

Let me be specific about Enron’s role: 

Secrecy 

California created a power exchange (PX) where power could be sold and bought 

openly with the public knowing the price. Enron stubbornly opposed the PX, claiming power contracts should all be secret. In the middle of the crisis in January of 

2001, the PX closed down and then Enron had its way. 

Transmission Rights 

Enron wanted only companies that owned physical rights on transmission lines 

to be able to reserve capacity on the lines in advance. This would allow those with 

deep pockets, such as Enron once had, to monopolize the transmission of electricity. 

They were partially successful in California. That crucial issue remains a legacy of 

Enron as the FERC and the DOE continue to encourage market participants in generation to own and possibly gain control of transmission. Remember ‘‘gridlock’’ on 

the electrical highway means it becomes a heavy toll road for those who don’t own 

it but must use it. 

Price caps 

The battle over price caps is perhaps the most glaring example of Enron’s role 

in shaping the rules of deregulation in their favor. The basic idea of deregulation 

is that if competition is working, you don’t need price caps. In California in 2000 

and beyond even the FERC has admitted that the wholesale electric power market 

was dysfunctional. Yet Enron was the poster child for opposing price caps. 

The California ISO imposed price caps in 1999 and as the head of the city of Los 

Angeles power system, I supported the price caps and indeed supported lowering the 

caps. Those caps were effectively abolished by the FERC and prices skyrocketed beginning in 2000. 

I have personal experience with the persistent nature of Enron’s lobbying efforts 

and attitudes. After a long phone argument with Ken Lay on the subject of price 

caps during which I rejected his arguments, he said to me at the end, not harshly 

but gleefully, that no matter what we ‘‘crazy people in California did that Enron 

had people working for him that could figure out a way to make money.’’ And they 

did. 

All through the fall of 2000 and the first six months of 2001 as prices at wholesale 

were at their gouging worst, Enron was the loudest and most persistent voice opposing price caps. They were vocal and persistent at the California ISO, at the FERC, 

with California public officials, the Clinton Administration, the Congress, and the 

Bush Administration. It was ‘‘all Enron all the time’’ against price caps. 

Because Enron as a trader could hide behind a curtain of secrecy no one knew 

the full extent of how much they profited, and we may never know. But it is now 

clear that as the largest trader they were profiting big time. 

It is beyond dispute that Enron lobbied hard for a system that permitted them 

to be a huge player in California with no physical assets in the state, just the equivalent of an electronic phone book. Enron then succeeded in keeping the federal cop 

(FERC) off the beat while the gougers were taking our money. Analysts 1 have estimated that Enron was a party to 40% of the transactions in the California market 

during the height of the crisis when the big money was made. No one will ever know 

for sure because they had no obligation to tell. 

It is worth pointing out that the decline in Enron’s fortunes coincides rather closely with California’s programs that Governor Davis and the Legislature put in place 

that brought prices under control. I refer to the construction of new power plants, 

massive conservation, long-term contracts and in June 2001 getting some controls 

when President Bush appointed Chairman Pat Wood and Nora Brownell to be 

FERC commissioners. Obviously Enron had many other problems, but it is beyond 

dispute that as a trader (with no power of its own to sell) Enron made money buyVerDate 0ct 09 2002 11:58 Sep 26, 2005 Jkt 084329 PO 00000 Frm 00065 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\84329.TXT JACK PsN: JACKF
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ing and selling when market prices were high, and as prices settled down so did 

their profits. 

The open question then is whether the policies that Enron successfully engineered 

will be continued. That question is very real for California. 

After belatedly recognizing last June that keeping a just and reasonable lid on 

prices was their statutory duty, those controls finally established in June 2001, are 

set to expire on September 30 of this year. The FERC has not found and cannot 

find that the wholesale market in California is competitive enough to produce just 

and reasonable rates. The reason is simple. The market is not competitive. 

Despite California’s progress, we haven’t yet achieved enough of a surplus. California is still vulnerable. The serious test is whether the new Commissioners, who 

helped California last year, will recognize that the Federal Power Act doesn’t expire 

on September 30 and they are duty-bound to keep the controls in place. The FERC 

must extend their controls until such time as they can conclude that a competitive 

market exists that produces just and reasonable rates. Otherwise the situation that 

Enron so blatantly promoted will linger on. 

In California we are continuing a strong conservation effort, we are encouraging 

private investment in new power plants which are being added, and we are promoting renewable energy projects as well. And we have created a California Power 

Authority that can step in if private companies fail to keep up with future demand. 

There are some fundamental lessons to be learned from this experience:

• Electricity really is different and the system of public utilities with a duty to 

keep the lights on at just and reasonable rates set by regulators served this 

country rather well during most of the 20th century.

• Competition thrives in a surplus. But the private generators thrive in a shortage.

• It would be a mistake to assume that Enron was unique and its demise means 

that deregulation is ‘‘cleansed’’ and there are no remaining concerns.

The Congress should recognize that consumers of all sizes cannot be well served 

by blind faith in the market. Any market for electric power generation must be combined with sufficient governmental participation to assure that the lifeblood of our 

society doesn’t operate in ups and downs. Such volatility and shortages may be acceptable for oranges or stocks but society simply can’t tolerate it for electricity. 

I thank you for this opportunity to testify before a committee that brings back 

fond memories to me. I will be glad to try to answer any questions.

Senator DORGAN. Mr. Freeman, thank you very much. Next, we 

will hear from Ms. Wenonah Hauter, the Director of Critical Mass 

Energy & Environment Program from Public Citizen. 

STATEMENT OF WENONAH HAUTER, DIRECTOR, CRITICAL 

MASS ENERGY & ENVIRONMENT PROGRAM, PUBLIC CITIZEN 

Ms. HAUTER. Thank you, Mr. Chairman and Committee members, for having me testify today. 

Public Citizen has worked on electricity issues since the mid 

1970’s, and I’ve watched Enron since the early 1990’s when I first 

read about it in the trade press when the debate up to the Energy 

Policy Act of 1992 was occurring. And Enron, of course, had been 

formed from two natural gas companies. Under Ken Lay’s leadership, it acquired too many assets and was nearing bankruptcy and 

hired Jeffrey Skilling, who came up with the great idea of a gas 

bank and energy commodity trading. 

And so I think that from observing Enron for many years, that 

we’ve been very concerned that the company didn’t use the tried 

and true business strategy of incorporating innovations and improving the delivery of a product at a competitive price. And, instead, they increased their profits over the last decade by 1,750 

percent, by basically speculating and treating the market as if they 

were a drunken gambler in a giant casino. 

63

And central to this strategy was removing the government oversight that the previous speakers have talked about, but I think 

that it’s worth going through some of the history of how they did 

that, because Enron was the most aggressive promoter of electric 

utility deregulation from the passage of the 1992 Energy Policy 

Act, when they lobbied for transmission—wheeling provisions, and 

after that time, when they were very active in all of the meetings 

and the debate that happened in electricity circles, like at the National Association of Regulatory Utility Commissioners where they 

basically advocated this really reckless scheme for deregulating 

electricity markets under the guise of competition. 

We all know competition is good, but the scheme that they were 

promoting isn’t competition. It’s basically rigging the market. And 

we were very concerned when, in 1996, A.B. 1890 passed in California. In fact, I put out a press release that day, because we had 

watched Enron’s tactics in lobbying for that legislation and were 

aware that they were basically not telling the truth about electricity markets. 

So after the 1992 Energy Policy Act was passed, they were very 

influential with the Commodity Futures Trading Commission that 

was chaired by Dr. Wendy Gramm. And just a few days before she 

left office, she pushed through the Commission an exemption for 

Enron’s trading of future contracts that really began to help revolutionize the way energy could be traded. 

Then, in 1994, Enron became the first power marketer to become 

exempted by the Securities and Exchange Commission from the 

Public Utility Holding Company Act. And they continued to push 

at the federal level for deregulation and at the state level. Many 

states where we were present—in fact, I testified in Pennsylvania—there would be an Enron lobbyist. They would send somebody from Houston, and then they’d hire a local law firm to go in 

and to advocate for the most type of radical deregulation. 

Then Enron continued to push to escape government oversight 

for its speculative activities by successfully using their relationship 

with Senator Phil Gramm to muscle a bill through Congress that 

deregulated energy derivatives. Then they were in a position aided 

both by this deregulation of electricity and derivatives, to command 

significant market share and to coordinate the purchase of large 

volumes of short-term future electricity contracts with spot control 

over key transmission capacity and natural gas supplies. 

And the way they would do this, for instance, is in California—

the company would negotiate with an owner of a power plant to 

buy electricity at a guaranteed price at a time very near to the future delivery, like the day before or a few hours before. 

And because they were entering this market and into these contracts in a recently deregulated over-the-counter market, Enron 

was in a very good position to manipulate and to control a chunk 

of the market, just as Ms. Lynch has described. This enabled them 

to predict and to set short-term and spot energy prices for the 

Western electricity market. 

And we should be clear that Enron wasn’t alone in this scheme, 

and that other companies, like Dynegy and Williams and Reliant 

were using some of the same tactics. But what’s different is that 

Enron’s exact role is just a lot more difficult to clarify because the 

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documentation just isn’t there. Enron didn’t own power plants or 

the physical infrastructure. 

And you know how a traditional utility market share is determined. It’s by how many power plants a company controls in a 

given market. But with a power marketer like Enron, there’s a big 

loophole, because there’s no way to really tell what the market 

power is because the power marketer is free to negotiate as many 

wholesale contracts as they wish. And there’s no government oversight. In a competitive market, competition doesn’t exist if you 

don’t have oversight and if the rules are rigged. 

So attempting to really look at their role in California is hard, 

because they left this web of just thousands of trades that’s already 

been referred to in earlier testimony. 

But what’s really clear is that Enron, through their lobbying, 

through their relationships with federal agencies, at the state level, 

was basically trying to escape scrutiny and to purchase enough 

electricity contracts a day ahead on the spot market to secure a 

large part of the market share so that they could set prices. 

And Ms. Lynch has already talked about the information that’s 

available. The forms that are given to the Securities and Exchange 

Commission, the Derivative Study Center has calculated that 

Enron claimed a $500 billion electricity and natural gas derivatives 

business in the months before the company declared bankruptcy. 

And, of course, we know that many of the reasons for this were the 

aggressive accounting games that were being played. 

But the disclosure forums that can be accessed on FERC’s 

website show that there is an alarming missing amount of data 

from the forms. And I think what’s really important to remember, 

and I know that this is a sensitive area, but the division—Enron’s 

Energy Services—was headed by Secretary of the Army Thomas 

White, until May of 2001. And this particular division was best 

known for its retail end of services. They were providing electricity 

to retail clients like Quaker Oats and Saks and U.S. Army installations. And this particular subsidiary was not doing well. And 

Enron Energy Services controlled about 25 percent of the wholesale 

market by trading electricity contracts. 

So in the first three months of 2001, electricity prices went way 

up, as Ms. Lynch indicated, and there were rolling blackouts. And 

that’s the time that this 11 million megawatts of electricity in the 

market alone was traded by this division, and 98 percent of these 

trades were with other Enron divisions and at astronomical prices. 

So by what we can extrapolate from this is that by selling power 

to itself at inflated prices, Enron helped both push up prices in 

California’s deregulated energy market and to accomplish two 

other goals. First——

Senator DORGAN. Let me ask that you summarize, Ms. Hauter. 

Ms. HAUTER. Yes, I am. I’m almost done. 

By trading such large volumes of electricity at high prices, they 

made the prices go up. And, second, Enron was able to move money 

from its profitable division of the Power Marketing Division to the 

unprofitable division of Enron Energy Services and make it seem 

as if the company were more stable. 

And so it’s important to note that, if there had been proper disclosure and scrutiny at FERC, this could all have been prevented. 

65

And so our recommendation is that, at the very minimum, Congress must mandate that the FERC immediately investigate regulation of power marketers and that in the short-term it would be 

very prudent for FERC to evoke market-based rates authority for 

all power marketers until there’s been a very thorough investigation of these types of practices. 

Senator DORGAN. Ms. Hauter, thank you very much. 

[The prepared statement of Ms. Hauter follows:]

PREPARED STATEMENT OF WENONAH HAUTER, DIRECTOR, CRITICAL MASS ENERGY & 

ENVIRONMENT PROGRAM, PUBLIC CITIZEN

Good morning. Mr. Chairman and Members of the Committee, my name is Wenonah Hauter. I am Director of Public Citizen’s Critical Mass Energy & Environment 

Program. Public Citizen is a national consumer rights organization founded in 1971. 

As Director of the energy program since 1997, I have spearheaded Public Citizen’s 

investigations into the problems and abuses of electricity deregulation. Due to 

Enron’s early, active and prominent role pushing for deregulation, the company became a focus of our research. 

Deregulation not only allowed Enron to become one of the most powerful corporations in the world, but it also directly led to the company’s downfall. Deregulation 

of both energy markets and commodity trading allowed Enron to escape price regulations—a key factor in the company’s meteoric, 1,750 percent increase in revenues 

over the past decade. Enron could not attribute its brief success, therefore, to such 

traditional models as incorporating innovations to improve the delivery of product 

at competitive prices. Rather, Enron’s business model was built entirely on the 

premise that it could make more money speculating on electricity contracts than it 

could by actually producing electricity at a power plant. Central to Enron’s strategy 

of turning electricity into a speculative commodity was removing government oversight of its trading practices and exploiting market deficiencies to allow it to manipulate prices and supply. So when FERC finally fully re-regulated the California 

market in June 2001, Enron’s business model was soon invalid and the company 

bankrupt. 

Enron spearheaded electricity deregulation, lobbying heavily for the transmission 

wheeling provisions of the Energy Policy Act of 1992 that allowed the company to 

gain a foothold into the wholesale market by registering as a power marketer. 

Weeks later, Enron embarked on its strategy to transform itself from an energy producer to an energy trader when it was the first company to petition Wendy Gramm’s 

Commodity Futures Trading Commission asking that agency to not regulate energy 

trading contracts (five weeks after granting Enron the exemption in January 1993, 

Wendy Gramm joined the company’s board at the request of Ken Lay). Enron was 

the first power marketer, on January 5, 1994, that the Securities and Exchange 

Commission exempted from the Public Utilities Holding Company Act. Enron successfully lobbied for the continued deregulation of over-the-counter energy derivatives trading when long-time Enron supporter Senator Phil Gramm helped muscle 

the act into law (and Gramm leads current efforts to oppose re-regulation of derivatives trading). In between, Enron spent millions of dollars influencing deregulation 

plans on the state level—most notably in California. 

But before FERC enacted the price controls which saved California but suffocated 

Enron’s revenue stream, the company had inflicted severe damage on west coast 

consumers by manipulating supplies to drive prices up. How did they do this in 

California, even though the company never owned any power plants in the state? 

Aided by deregulation of both electricity and derivatives, Enron was able to command significant market share simply by coordinating its purchases of large volumes of short-term future electricity contracts with spot control over key transmission capacity and natural gas supplies. Because Enron was entering into these 

electricity and natural gas contracts in the recently deregulated over-the-counter 

market, Enron was in a strong position to engage in trade-based manipulation by 

controlling a significant chunk of the market, thereby enabling the company to predict and set short-term and spot energy prices for the Western electricity market. 

While Enron played a significant role in helping to manipulate supplies and prices 

in California, it is important to note that the company was not alone. Indeed, the 

Federal Energy Regulatory Commission (FERC) has already levied fines and ordered refunds on several occasions totaling tens of millions of dollars to be paid by 

other energy companies, such as Dynegy, Williams, Reliant and Mirant, for their 

role in manipulating prices in California. More fines and investigations by FERC 

66

are forthcoming, as are separate state lawsuits. FERC has not yet issued a refund 

order to Enron, although one is likely imminent. But Enron’s exact role in manipulating prices in California has been harder to track due to its business structure 

that was far more opaque than other energy firms. In contrast to other energy companies, Enron did not own any power plants or other physical infrastructure, leaving only a complex web of thousands of trades with multiple partners—including 

significant trading between Enron subsidiaries—leaving practically no trail for investigators to follow. 

Enron worked this way in California: the company would negotiate with an owner 

of a power plant to purchase the electricity generated from the facility at a guaranteed price at a time very near in the future (usually the next day). Traditionally, 

a company’s electricity market share has been measured by the number of power 

plants the company owns in a given market (that’s why Southern California Edison, 

PG&E and San Diego Gas & Electric sold most of their power plants—so the utilities would not still control the wholesale market under deregulation). But power 

marketers represent a huge loophole: they have been free to negotiate as many 

wholesale energy contracts as they wish with little to no government oversight. So 

Enron was able to escape scrutiny and purchase enough electricity contracts in the 

day ahead and spot market to secure significant enough market share, where the 

company was in a strong position to set prices. Indeed, before the energy crisis hit 

the state in May 2000, Enron paid a $25,000 fine to the now-defunct California 

Power Exchange in May 1998 for the company’s early attempts at manipulating the 

day-ahead wholesale electricity market. But after that, either government regulators 

were no longer interested in holding energy firms accountable or Enron became 

more sophisticated in its ability to manipulate markets, because FERC failed to intervene until it was too late. 

From the scant information Enron makes available in its disclosure forms to the 

Securities and Exchange Commission, the Derivatives Study Center calculates that 

Enron claimed a $500 billion electricity and natural gas derivatives business in the 

months before the company declared bankruptcy. Of course, among the many reasons the company was forced into bankruptcy was that its executives played aggressive accounting games, utilizing so-called ‘‘mark-to-market’’ bookkeeping, where 

Enron booked much of the revenue for long-term contracts up front—providing the 

company with inflated revenues. 

Therefore, additional documentation is necessary to shed some light into how the 

company played a role in controlling supply and prices of energy in the California 

market. The only detailed publicly available information is contained in Power Marketer Quarterly Reports that Enron and other power marketers file four times a year 

with FERC. These disclosure forms are intended to force regulation-shy power marketers to disclose the volume and price of their trades, along with whom the trades 

are conducted. 

But in reality, FERC does a miserable job of enforcing its disclosure requirements, 

as the Power Marketer Quarterly Reports are a poor excuse for government oversight. FERC allows power marketers to exclude so many crucial details about these 

trades that the porous disclosure forms raise more questions than they answer. 

Nonetheless, these disclosure forms provide enough of a window on Enron’s operations to highlight significant problems. 

The documents indicate that Enron’s western trading operations focused entirely 

on the California market. This contradicts multiple public statements the company 

made during the California energy crisis, when company representatives argued 

that Enron’s California operations were minimal. 

Enron was making 100 percent of its west coast trades at four delivery points: 

COB (California-Oregon border); Path 15 (northern California); Palo Verde (California-Nevada border); and ZP26 (central California, near Bakersfield). According to 

many different reports, Enron was engaged in a certain amount of transmission capacity manipulation at all of these points at key times during the California energy 

crisis. The Nevada Public Utilities Commission has been investigating allegations 

that Enron was gaming the daily capacity auctions at the Palo Verde delivery point. 

And although Enron only had limited firm transmission rights over COB, Path 15 

and ZP26, trading insiders allege that Enron was able to manipulate capacity 

enough to leverage its wholesale energy trading activities. By utilizing their dominance over the Palo Verde capacity (connecting CA to Nevada) with complicated 

spot clogging of capacity at ZP26 and Path 15, Enron’s power marketing subsidiaries were better able to utilize its day ahead positions to charge inflated prices. 

Enron had four registered power marketing divisions: Enron Power Marketing, 

Enron Energy Marketing Corp, The New Power Co, and Enron Energy Services. All 

were engaged in heavy trading all across the country. Because of FERC’s poor regulatory requirements, however, Enron was able to hide significant details. For examVerDate 0ct 09 2002 11:58 Sep 26, 2005 Jkt 084329 PO 00000 Frm 00070 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\84329.TXT JACK PsN: JACKF
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ple, the Quarterly Reports for Enron Power Marketing are unintelligible; the division lumps trades conducted in every region of the country, so it is impossible to 

isolate their California trading operations from their New York trades. 

But disclosure forms submitted by Enron Energy Services provide region-specific 

data that is alarming. This division, headed by President Bush’s Secretary of the 

Army Thomas White until May 2001, was better known for its high profile retail 

contracts with such clients as Kaiser Permanente, Saks, Quaker Oats, JC Penny, 

Owens-Illinois, and U.S. Army installations. But Enron Energy Services controlled 

as much as 25 percent of the California wholesale market by trading electricity contracts. In the first three months of 2001—at the height of skyrocketing prices and 

rolling blackouts—White’s division traded more than 11 million megawatts of electricity in the California market alone, making nearly 98 percent of these trades with 

other Enron divisions at astronomical prices—up to $2,500 a megawatt hour (the 

standard price at the time was less than $340 a megawatt hour). By selling power 

to itself at inflated prices, Enron helped skyrocket prices in California’s deregulated 

market. Economists refer to this manipulation as transfer pricing.

By trading such large volumes of electricity at such high prices, White’s division 

was able to accomplish two goals. First, trading electricity at high prices with other 

Enron divisions allowed the company to charge California utilities and consumers 

astronomical prices, thereby contributing to the Western electricity crisis. Federal 

and state regulators found it very difficult to trace Enron’s trades, since the company had four separate divisions interacting in the wholesale and retail markets, 

and with each other. Second, engaging in transfer pricing allowed these various 

Enron divisions to overstate revenue and contribute to the accounting gimmickry 

that inflated the company’s share price. 

These prices were far above what other power marketers were charging at the 

time, and far above what Enron had been charging prior to May 2000 (when the 

crisis began). It is important to note that at the same time that White’s Enron Energy Services division was manipulating the California energy market by charging 

inflated prices, Enron paid the D.C. lobbying firm Quinn Gillespie more than half 

a million dollars in the first 7 months of 2001 to lobby the ‘‘Executive Office of the 

President’’ on the ‘‘California electric crisis’’ according to the lobbying disclosure report filed with Congress on April 10, 2001. Ed Gillespie, former communications director at the RNC, was a top Bush campaign advisor and ran the U.S. Department 

of Commerce for the first 30 days of the Bush presidency. Enron was lobbying 

against bi-partisan efforts to re-regulate the Western electricity market by imposing 

price controls. And just as Enron was spending this money lobbying Congress and 

the White House against price controls, the Bush Administration aggressively took 

Enron’s position. On numerous occasions, President Bush, Vice-President Cheney, 

their various spokespeople and cabinet officials took an aggressive stance against 

price controls. 

At a minimum, Congress must mandate the Federal Energy Regulatory Commission to immediately investigate regulations of power marketers. Clearly, the current 

level of transparency allows companies to manipulate wholesale markets. If it were 

not for FERC’s continued regulation of the Western electricity market, other power 

marketing firms would have incentive to pick up where Enron left off. Public Citizen 

urges Congress to make it clear to FERC that more scrutiny of power marketers 

must occur. In the meantime, it would be prudent for FERC to revoke market-based 

rate authority for all power marketers until a thorough investigation is concluded.

Senator DORGAN. Next, and finally, we will hear from Mr. Robert 

McCullough, Managing Partner, McCullough Research, in Portland, Oregon. Mr. McCullough, you may proceed. 

STATEMENT OF ROBERT MCCULLOUGH, MANAGING PARTNER, 

MCCULLOUGH RESEARCH 

Mr. MCCULLOUGH. Thank you, Mr. Chairman. Thank you, Senators of the Committee. I’ll be very brief. 

Our firm has had a leading role in looking at both the California 

crisis and the Enron collapse. We’re practitioners, not policymakers 

like many other of the witnesses on the panel. I’m going to do a 

brief overview of the chronology and a couple of the facts. 

I’m going to start a hundred years ago to note this is not the first 

time we’ve been through a critical issue in our infrastructure. It’s 

68

always amusing how many of the same parties occur again and 

again. A hundred years ago, J.P. Morgan was attempting to monopolize the nation’s railroads. That also was a critical infrastructure. 

We did not, in fact, nationalize the railroads to fix it. What we did 

was we imposed regulatory controls over market power, and it’s 

worked very well. 

FERC came out of a 1932 collapse of a company almost identical 

to Enron, the Insull Trust. Again, we did not throw the baby out 

with the bath water. We imposed controls, many of which Enron 

worked hard to eliminate over the past few years. 

In 1986, we had the merger of two not very exciting companies. 

From the beginning, Enron was cash poor. All through their history, they had a ruinous run of bad luck in investments. They 

failed in oil trading. They failed in emission control fuels. They 

failed in foreign investments. In a sense, their investment history 

was like a gambler that continued to double down. 

There were a couple of serious techniques that they used 

throughout all of this. Partial spinoffs to subsidiaries that would 

then, in fact, be used for valuation to support their financials started all the way back in 1994 with Enron Global Power and Pipelines. Now, we’ve seen that go all the way through. That was the 

model for Nighthawk, their methodology in 1997. Then for the infamous Raptors of the last year or two. We saw this same series of 

techniques support what appear to have been a failing enterprise. 

At the beginning of the decade of the 1990’s, they were averaging 

earnings and cash-flow of approximately ten percent of revenues. 

That’s not an unusual amount. That makes good sense. By the end 

of the decade, they were down to 1⁄2 of one percent. Now, that represents a company that was running twice as fast simply to stay 

where it was. 

In 1995, they invested in Dabhol, one of the largest and most 

controversial power plants in the history of the world. Oh, and by 

the way, I left an important date out—1994. We’ve seen now two 

years of explanation that California’s environment policies blocked 

energy production and caused this crisis. It’s important to remember 1994 was our last drought—71 percent of flows—a reserve margin in the WSCC of 15.4 percent. That, by the way, is at the edge 

of the practical level. David Freeman, who’s run more utilities 

than, I think, any other man in America, can talk to that number. 

At 15 percent, you begin to get worried. 

In 1998, they went to Azurix and Elektro—those were failing investments in England and Brazil—2000, Broadband—it’s, in fact, 

too polite to even call that a failing investment, because we’re not 

even certain there was any real business transacted. 

Then the critical issue for this Committee—we’re in the winter 

of 1999/2000. LJM2, one of these partnerships, a financial partnership, reaches out from Houston, comes to Portland, Oregon, and 

proposes transacting a power plant. In all of these transactions, the 

financial end of these don’t own power plants. Why would Andy 

Fastow want a power plant in Eastern Oregon? They approached 

the Oregon PUC. They asked for exemption from traditional regulation. The Oregon PUC, with all of our compliments, refuses to 

ask for a large part of this transaction if it occurs. 

69

Now, the important thing is in that winter, a power plant was 

not a good investment. Enron’s own internal documents indicate 

such an investment could not have returned more than 12 percent 

at the prices we saw before May 22, 2000. However, LJM2’s documents indicate that they were going to return 22 percent. Now, 

clearly, either LJM2, a group of financial experts in Houston, were 

much smarter than the electric industry as a whole, or, number 

two, they had some insight into May 22, 2000. Now, that, of course, 

was the first of 125 emergencies we saw over the next 14 months. 

We were astonished. Flows in the summer of 2000 were 92 percent of normal. The reserve margin was 22.9 percent. All of those, 

by the way, are official numbers coming directly from the Bonneville Power Administration or the Western Systems Coordinating 

Council. We now have these as historical numbers. There are no 

calculations. There are no debates. There are no special models. 

These are the actual historical facts. 

Over the period from May 22, 2000, to June 3, 2001, we saw a 

5,812 average megawatt reduction in thermal generation in California, below what we would have expected from traditional mathematical models. 

By the way, after the last emergency, those models returned to 

having almost a 100 percent correlation with client dispatch. Once 

FERC had eliminated the abilities to gain this market with their 

must-offer rule and their price caps, the markets returned to normal dispatch. And, of course, in August, Skilling resigns. 

The bottom line of this short story is very simple. This was a 

company with a tremendous need to succeed. They had gone to 

more than doubling down. They had financial schemes that were 

going to explode in their faces in 2003. The entire Whitewing structure was going to cash out at this point, leaving them with billions 

of dollars of exposure. The Raptors also had an explicit time limit. 

There had to be a success. 

Looking through their risk-management assets, we notice that 

they were very prepared for the May 22 crisis. In fact, they were 

the only entity that I know of that was prepared and made money 

in those risk-management assets over that period. 

And the interesting side is that with the shift in FERC policy, 

they took a loss in risk-management assets almost as great as the 

profits they had made before. Interestingly, they were more able to 

predict the unpredictable than the simple political response. 

Thank you very much, Mr. Chairman.

PREPARED STATEMENT OF ROBERT MCCULLOUGH, MANAGING PARTNER, 

MCCULLOUGH RESEARCH

Thank you for your invitation to testify today. 

The year 2001 witnessed two surprising events. First, California, the leading example of electricity deregulation, experienced rolling blackouts during the winter 

(2000–2001)—a season when electric loads are normally at their lowest. Second, 

Enron, the leading proponent of electricity deregulation, in a matter of months shifted from exponential growth to massive collapse. We now know that California’s electricity market was deeply flawed. A complex and secretive structure provided the 

ideal framework for the exercise of market power. Contrary to the extensive public 

affairs campaign waged by the beneficiaries of the California energy crisis, actual 

data shows neither a resource shortage nor the presence of underlying cost changes. 

We now understand that Enron itself was a paper tiger. Its impressive show of tradVerDate 0ct 09 2002 11:58 Sep 26, 2005 Jkt 084329 PO 00000 Frm 00073 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\84329.TXT JACK PsN: JACKF
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1 In addition to California, a number of utilities in the Western U.S. have asked FERC to review one sided contracts forced upon them during the crisis. FERC has not yet responded to 

these requests. 2Moves are still underway at FERC, the Energy Information Administration, and the North 

American Electric Reliability Council to restrict market information from the press, public, and 

policy makers. Ironically, the participants, themselves, now have access to almost all ‘‘market’’ 

data through FERC cases and ongoing litigation. 3The California ISO operates a number of centralized markets for capacity and energy. This 

same basic model has been adopted in the regional transmission organizations mandated by 

FERC across the continent. The contradiction in terms—open competition only within highly 

centralized and opaque administered markets—has seemingly been lost on FERC and the advocates of these schemes, despite problems in California, New England, Pennsylvania and Alberta. 4Theodore Roosevelt at Ossawatomie, Kansas, August 31, 1910.

ing strength masked more than a decade of bad business decisions and accounting 

legerdemain. 

It is natural to sense a connection between these two events and to conclude that 

Enron used its considerable clout to manipulate Western electricity prices. As Hal 

Bernton of the Seattle Times has asked, ‘‘How far down in Enron do you have to 

go to find ethical behavior?’’

However, the institutional structure and opacity that made the California market 

easy to manipulate also makes tracing Enron’s activities difficult. Certainly, Enron 

had the means, motive, and opportunity. Twenty-three months after the onset of the 

California crisis and ten months after it suddenly ended, we still have little access 

to the relevant data. Two of the California investigations have only recently received 

access to basic discovery. FERC finally began its investigation into the broader implications just two months ago. 

Our public policy response to these two events has been slow and faltering. FERC 

still finds it difficult to apply its rate-making powers. Recent requests for Federal 

Power Act 206 review of long term contracts forced upon purchasers during the crisis have not been granted.1 The onslaught by marketers who continue to argue for 

the withdrawal of data from the public eye continues.2 And despite substantial 

questions about the theories that underlie centralized markets administered by the 

California ISO, FERC continues to support the development of similar institutions 

throughout the U.S. and Canada.3 At the current rate, the commodity market in 

electricity will continue to be both the most troubled and the most secretive for 

years to come. 

Moreover, the analysis of the issues posed by the California crisis and Enron’s collapse has been drawn into a deeper debate about the appropriateness of consumer 

choice in electricity. This debate is often confused with how to maintain the currently uneasy balance between business and consumer interests. 

While the costs borne by California’s residential ratepayers were high, even higher costs to the economy have been shouldered by major industrial customers 

throughout the western U.S. and Canada. Outside of California many, if not most, 

large industrial customers have enjoyed open market access to electricity, based 

upon the natural gas model of simple bilateral trading arrangements. When prices 

suddenly increased without notice in California, it directly raised prices throughout 

the region, shutting down major industries from Washington to Utah. Even ten 

months after the California crisis, many of these industrial facilities remain 

padlocked. Some of these industries will never reopen. 

The debate about the lessons of California and Enron is really about protecting 

our economy against the exercise of market power. As Theodore Roosevelt said:

‘‘Combinations in industry are the result of an imperative economic law which 

cannot be repealed by political legislation. The effort at prohibiting all combination has substantially failed. The way out lies, not in attempting to prevent such 

combinations, but in completely controlling them in the interest of the public welfare.’’ 4

We should not abandon our efforts to create a wholesale electricity market. Nor 

should we ignore our responsibility to both consumers and business. However, if the 

goal of equitable restructuring is to be realized, FERC must vastly improve its 

record of monitoring, preventing, remedying, and punishing market power abuse. 

The facts are this simple. At the onset of the crisis in California, if FERC had 

implemented its order of May 16, and its June follow up a year sooner, industries 

throughout the Western U.S. would not be closed today. If FERC had exercised its 

review powers on long term contracts that are priced at two and three times the 

cost of the new resources required to serve them, the lingering effects of California 

would soon fade away. 

71

5The phrase, ‘‘Ten years of rapid load growth without new resources,’’ was a hallmark of an 

excellent public affairs campaign waged by marketers and generators in the California crisis. 

Interestingly, both parts of the phrase were strikingly untrue. The West Coast had a better load 

resource balance in 2000 than in previous years and peak loads actually were lower in the ISO’s 

control area than they had been since 1997. 6Section 220(a) of AB 1890.

7The ISO issues emergency notices when its forecasted hourly reserves fall below set levels—

7% for Stage 1, 5% for Stage 2, and 1.5% for Stage 3. In practice, this mechanism has never 

worked. Emergency declarations have tended to reflect the need for additional operational rights 

for the ISO rather than hard and fast standards. 

This isn’t a partisan issue. When the events of 2000 destroyed paper mills in 

Washington, as well as other paper, chemical, and metals industries throughout the 

West, our country took its first steps into the current recession. Like regulation of 

the market power of railroad trusts at the turn of the century, the question is efficient pricing, not the elimination of a customer’s right to choose. 

The California Crisis 

Twenty-three months ago the California market erupted in a fourteen-month long 

series of emergencies, price spikes, and financial crises. For a short while, a wellfueled public relations campaign had much of the world convinced that the state 

had run out of electric generating capacity as a result of its own unrealistic 

environmentalism.5 Now that the storm has seemingly passed, the more dispassionate view that this was market failure rather than resource shortage is 

gradually gaining the upper hand. 

From the beginning, the electric industry was poorly prepared to handle a major 

market failure. The Western Systems Coordinating Council (WSCC), the body 

tasked with the electric reliability of the West Coast of Canada, the U.S., and 

Northern Mexico, never did take an effective role in the crisis. Indeed, most of the 

debaters never even noticed that the West Coast had a reliability council that had 

been studying electric reliability issues since 1967. 

The crisis in California ended with a whimper, not a bang. Although predictions 

for the summer of 2001 were catastrophic, the last California emergency took place 

soon after the implementation of a regional price cap. Simply stated, the crisis 

turned out to be a problem in institutions and not resources. 

California’s restructuring was characterized by six words—‘‘bad design, bad incentives, bad results.’’

AB–1890, the law that launched California on this path, was complex and difficult 

to understand. Its unanimous passage was evidence that every interest group had 

gotten its every desire. When every party to a negotiation leaves the table happy, 

there is a strong implication that they have been promised far more than can be 

delivered. It is useful to remember the optimistic language of the law:

It is the intent of the Legislature that a cumulative rate reduction of at least 20 

percent be achieved not later than April 1, 2002, for residential and small commercial customers, from the rates in effect on June 10, 1996. In determining that 

the April 1, 2002, rate reduction has been met, the commission shall exclude the 

costs of the competitively procured electricity and the costs associated with the 

rate reduction bonds, as defined in Section 840.6

Reality proved far more complex. 

The basic design involved turning all power decisions over to an hourly market. 

This decision was so audacious and so mis-informed, that regional utilities and industries are still having to explain to FERC that the hourly market has little to do 

with the industry years after the design failed. Further, reliability, the historical 

strength of the North American supply system, was only considered as an afterthought. 

The crisis started with the announcement of a Stage 1 and Stage 2 emergency 

on May 22, 2000.7 The crisis ended on July 3, 2001 with the final emergency declarations. The catastrophic summer of 2001 actually saw declining prices and increased thermal generation. Every warning that price controls would reduce generation and contribute to the crisis turned out to be wrong. 

Politically, the response to the onset of the crisis was like a scene from a frontier 

bar in an old western. Once the first punch was thrown, every interest group leaped 

into the fray with its own two fisted agenda. Generators launched preemptive attacks on air pollution agencies, the California governor accused marketers and generators of price fixing, Secretary Richardson moved to seize scarce Pacific Northwest 

reservoirs, and municipals like L.A. and federal agencies like the Bonneville Power 

Administration were accused of profiteering. Within minutes, the bar was a roiling 

mass of punching, kicking, and screaming special interests. Policy responses were 

72

8 Assessment of the Summer 2000 Operating Period, Western Systems Coordinating Council, 

Spring 2000, page 3. 9Since the 2002 report isn’t available, we have used the forecasted levels from last year’s report for 2001.

especially hopeless. The ISO spent months tinkering with price controls that always 

contained fatal loopholes. FERC dithered in appalled indecision for seven months, 

only to gun down one of the victims of the crisis—the California Power Exchange—

on December 15. Governor Davis’ contribution was to negotiate deals with the marketers and generators that effectively fixed the unfair prices for years to come while 

simultaneously assailing them for price fixing. Only after the composition of FERC 

was changed, were substantive steps taken—the adoption of a must offer rule and 

WSCC-wide price caps. 

While pundits from San Diego to Maine opined daily during the crisis, the truth 

is that under the California ISO’s rules, no one was certain exactly where the region 

stood. The WSCC had published, as they had done for the preceding thirty-three 

years, a summer load/resource appreciation that indicated that while California supplies for the summer might be tight, that there was no immediate cause for alarm 

if 1,642 megawatts were available for import during June.8 In May, for example, 

they projected a reserve margin of 29.2% for California. 

When the California ISO announced its first emergency on May 22, the industry 

was completely taken off guard. Under the complex structure of the California system, an emergency did not require a true shortage. The definition of an emergency 

is when the capacity offered the previous day in the computerized markets of the 

Power Exchange and Independent System Operator was less than 107% of forecasted demand. At the time, the ISO had no mechanism in place to determine if 

they were actually facing an emergency, or whether the phone had just stopped 

ringing. 

For some time the WSCC had been constructing a real time generator data base. 

The data from the WSCC (supplied to them from the ISO) did not support the hypothesis that California plants were out of service. Instead, the data showed that 

the plants tended to be operating during the ISO system emergencies, but were not 

being fully dispatched—even during the hours when actual emergency operating 

conditions were in place. 

We were very surprised to learn that overall thermal operations in the California 

ISO’s control area were running at levels far below the levels of comparable plants 

elsewhere in the WSCC. Comparing the dispatch rates with price data, our preliminary conclusion was that the California PX and ISO had suffered a one time supply 

curve shift of 8,000 megawatts leftwards towards the origin. In simpler words, the 

crisis looked like 8,000 megawatts had simply been removed from service. Eighteen 

months later, this is still our conclusion. 

Enough time has passed that we now know that the WSCC was not facing a capacity shortage at the time. On an annual basis the WSCC publishes a ten year 

forecast of resource sufficiency. This forecast is usually named the ‘‘10-Year Coordinated Plan Summary.’’ One important part of the report describes the ratio between 

resources and loads for the previous year. 

The following chart shows this data from the WSCC reports from 1980 to 2001.9

73

10 Criteria for Uniform Reporting Of Generator Ratings, Western Systems Coordinating Council, June 20, 1974. 

In describing this chart to the House Energy and Commerce Committee, I used 

the metaphor of assuring a happy household by ensuring that the ratio of snacks 

to teenagers always stayed high. In the utility industry, this ratio is called the reserve margin. A reserve margin of 15% means that the area has 15% more resources 

than requirements. This level—15%—is generally regarded as an acceptable margin, 

since one power plant in six would have to fail for an interruption in service to take 

place. 

As the chart shows, the WSCC has fallen near to this level frequently in the past 

decade. From 1991 through 1998 reserve margins routinely fell below 20% during 

the summer. In each case actual interruptions of service were unnecessary, since we 

always had enough resources to meet load. 

The situation in 2000 was far better than the situation that the WSCC faced from 

1991 through 1998. In 2000 it was able to get through the summer with a reserve 

margin above 20%. 

Pundits have identified the real problem in 2000 and 2001 as the serious drought 

that afflicted the Pacific Northwest during this period. As it turns out, this argument is wrong theoretically (reserve margins are always calculated assuming 

drought conditions) and factually (the serious drought started in 2001, not 2000.) 

It would not be prudent to announce an ability to meet load that could not be 

delivered during a drought year. In 1974, the WSCC recognized this fact by issuing 

instructions that the capacity of hydro-electric projects should always be calculated 

assuming drought conditions.10

Thus, the reserve numbers reported above have always assumed drought conditions. Even if the flows on the Columbia River were only at 92% of normal, this 

would not have affected its ability to meet peak loads. 

As it happens, Columbia River flows during 2000 did not represent a drought. 

Flows in 2001, did. The emergencies within 2000 took place during a period of 

roughly average water. Put succinctly, there was a drought, but it started after the 

first summer of the California crisis. When the California crisis ended, the WSCC 

was in the grip of a major drought. 

The following chart shows the January through July flows on the Columbia since 

1980.


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11 California ISO Information Availability Policy, originally dated October 22, 1998, modified 

November 1, 2001. 

The very straightforward conclusion that comes from the reserve margin chart 

when combined with the Columbia River flows is that 2000 was both a better year 

in terms of resources—22.9% reserve margin compared with 15.4% in June 1994—

and Columbia River inflows—92% of normal compared to 71% in 1994. If these facts 

explained the emergencies in 2000, how did the lights stay on in 1994? The answer 

is that the organization of the industry rewarded meeting load in 1994. In California’s complex structures, this incentive had been changed in 2000 and 2001. 

The major difference between the relatively stable conditions we experienced in 

1994 and the emergencies in 2000 was in large part the difference in the operations 

of traditional utilities and the structure of the California market. In 1994, the generating plants belonged to the utilities. In 2000, the generating plants were dispatched according to the complex incentives hidden in the rules of AB–1890. 

Starting in 2000, the WSCC had established a database showing the hourly plant 

operations of many of the plants on the West Coast. The California ISO provided 

plant data to the WSCC which, in turn, provided it to any interested WSCC member. While secrecy of operating data is a cornerstone of the California market design, the practice of secrecy at the ISO was unusual. The ISO provided this secret 

data in contravention of its FERC-filed tariff throughout the summer and fall of 

2000.11 Any market participant equipped with this data would be able to easily adjust its operations to accentuate the California ISO’s problems during an hour when 

demand was high. Curiously, Portland General Electric, Enron’s subsidiary, did not 

contribute data to the database. Enron had access to the data of others, but did not 

welcome access to its own plant operations. 

The California ISO has provided numerous charts that show that as its system 

approached peak, supplies offered to the California PX would begin to drop off. The 

resulting deficit would become an operating problem at the ISO. Once emergency 

conditions were declared, prices would skyrocket and supplies would reappear. 

Ironically, the hourly data is public outside of California—even today—as part of 

the EPA’s emissions database. Unfortunately for consumers and policymakers in 

California, access to this data is usually delayed from three to five months. 

The following chart shows the monthly operations of the units owned by Duke, 

Dynegy, Mirant, Reliant, and AES over this period. While plant operations in the 

rest of WSCC reached 100%, plant operations for the groups who have primarily 

profited from the crisis averaged 50.3% from May 2000–June 2001. Interestingly, 


411mcc2.eps
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12This chart was based on data provided by the EIA. The EIA has faced substantial pressure 

to reduce the amount of such data available to public, as has FERC, the WSCC, and the North 

American Electric Reliability Council.

plant operations were actually slightly higher for the three months that followed 

price controls, even though market prices were significantly lower.12

We have been unable to explain the hourly operations of these five generators 

even after enormous effort. Frequently, plants went undispatched during system 

peaks and even during ISO declared emergencies. Whistleblowers from the plant operations staff have indicated that their directions from management were inexplicable. Operations at plants outside of California have shown none of these problems. In fact, outside of the plants in the chart above, operations have been as close 

to 100% of capacity as the owners could reach. 

Many analysts break the California crisis into two periods. The first, economic 

withholding, represents the period when generators either did not bid resources into 

the PX and ISO or made bids at unrealistic prices. A second period—physical withholding—took place from November through June. While it is possible that the decision to take 50% of California’s thermal units down simultaneously for planned outages was simply coincidental, an alternative explanation is also possible. After the 

ISO stopped providing operating data to the WSCC, generators may have simply 

switched to communicating their operating levels through planned and forced outage announcements. Regardless of the explanation, operations in the second part of 

the crisis roughly mirrored operations during the first portion.


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13 NERC’s Generation Availability Data System (GADS) can be used to review the history for 

any type of plant. It is available on NERC’s web site. 14The Economic Impacts on Western Utilities and Ratepayers of Price Caps on Spot Market 

Sales, January 31, 2002, page 4.

From November until the onset of price controls, the five generators reported massive plant outages. The ISO did not reliably solicit or record plant outage data until 

2001, so it is difficult to compare the outages in November 2000–May 2001 with previous years for the same plants. Detailed historical data on the performance of similar plants—by age, size, technology, and fuel—are accumulated by the North American Electric Reliability Council. Its data shows vastly lower outage rates on similar 

equipment.13

While predictions of widespread blackouts were common through the spring of 

2001, FERC’s decision to implement a WSCC-wide price cap appears to have had 

a significant impact on plant outages, short-term prices, and long-term prices in the 

late spring. 

As always, shifts in long-term prices are the most interesting, since they are not 

affected by weather or other operating problems. 

The onset of price caps in June led to the larger of the West Coast’s two longterm price reductions in 2001. The second major price reduction—in percentage 

terms—took place over the weekend Enron declared bankruptcy. 

The success of the price caps can be seen immediately. The presence of a counterweight to California’s fragile power markets almost immediately returned long-term 

prices to the levels we have seen for the past twenty years. As FERC’s recent report 

notes, ‘‘the average price (both simple and weighted) at which the Western utilities 

sold power in the daily spot market was significantly below the price cap of $92/

Mwh.’’ 14 This is quite an understatement—by the end of June, prices had fallen to 

$43/MWh at Palo Verde. 


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15The model uses heat rates derived from EPA hourly generation and fuel use data, MWh/

Nox data from the same source, and market natural gas and electric prices. RECLAIM prices 

are the monthly average for coastal and inland markets.

While price caps are unlikely to work in a competitive market, the California market was hardly competitive. The incentives under AB–1890 rewarded shortages. 

Once the ISO entered an emergency, it offered prices five to thirty times higher 

than normal levels for emergency supplies. Once FERC eliminated the ISO’s ability 

to pay such distorted prices, generators in California were rewarded by producing 

more rather than less electricity. All of the data indicates that once the incentives 

were repaired, plant operations improved and prices fell. 

The shift in generator behavior is even more significant when each plant’s operations are modeled on an hour-by-hour basis from January 1, 1997 through December 31, 2001. The following table shows the forecasted operations of the plants based 

on market prices for energy, natural gas, and NOx RECLAIM credits.15

Northern

California 

Southern

California

(Outside of 

SCAQMD) 

SCAQMD Total 

Forecasted

Jan–97 to Mar–98 125.63 467.31 486.69 1,079.63

Apr–98 to Apr–00 2,097.07 2,145.22 2152.96 6,395.24

May–00 to Jul–01 4,055.36 4,623.28 4812.76 13,491.40

Aug–01 to Dec–01 2,504.16 2,524.25 1202.37 6,230.78

Actual

Jan–97 to Mar–98 973.99 1,157.25 1060.72 3,191.96

Apr–98 to Apr–00 1,250.30 1,349.55 952.43 3,552.28

May–00 to Jul–01 2,603.83 2,665.89 2408.84 7,678.57

Aug–01 to Dec–01 2,351.52 2,031.62 2163.14 6,546.27

Difference

Jan–97 to Mar–98 848.37 689.93 574.03 2,112.33

Apr–98 to Apr–00 (846.77) (795.67) (1,200.52) (2,842.97) 

May–00 to Jul–01 (1,451.53) (1,957.38) (2,403.92) (5,812.83) 

Aug–01 to Dec–01 (152.64) (492.63) 960.77 315.50


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Actuals are significantly lower than forecasted levels from May 2000 through July 

2001—the duration of the California crisis. After FERC’s intervention in the market 

the deviation between actual operations and forecasted operations changed from an 

under-generation of 5,813 megawatts to a slightly higher than predicted production 

of 315 megawatts. 

Overall, the standard model of economic dispatch of these plants fits very well before the crisis and after the crisis. During the crisis, the plants generated 5,813 

megawatts less than a market model would have predicted.

Motive, Means, and Opportunity: Enron’s Role in the Market

From its inception, Enron, the combination of the Houston Natural Gas and the 

InterNorth pipeline companies, was a turbulent and troubled entity. While the public relations skill of Ken Lay and the financial skills of Jeff Skilling portrayed the 

company as a surging force in energy markets, the revelations of the past year indicate that it had lurched from failure to failure. The cycle of Enron triumphs—optimistic announcements followed by accounting adjustments, temporary boosts by artificial valuations, and finally closure or sale—was repeated time and time again. 

After each cycle, the deadweight loss of previous disasters placed a heavier burden 

on the next announced triumph to overcome.

Year Enterprise Outcome 

1988 Oil trading Large scale embezzlement caused the abandonment 

of the business.

1990 Long Term 

Natural Gas 

Contracts 

Shifts in natural gas pricing made many early 

transactions uneconomic.

1994 Brazil A variety of Brazilian projects including the pipeline 

from Bolivia to Brazil and associated power plants 

were delayed, cancelled, or eventually devalued by 

Brazil’s economic problems and a persistent 

drought.

1995 Dabhol Enron’s one sided contracts faced every possible obstacle from the state of Maharashtra.

1997 PGE While PGE has retained its value, Enron’s high purchase price depended upon proposals to free valuable assets from Oregon regulation. None of these 

were approved by the Oregon PUC.

1998 California Retail 

Markets 

Enron withdrew from the retail market after a 

month at a cost of hundreds of millions of dollars in 

startup costs.

Azurix Enron’s troubled investment in England is followed 

by failed water investments throughout the world.

Elektro Enron purchases a Brazilian distribution utility now 

troubled by drought, devaluation of the Brazilian 

currency, accounting investigations, and devaluation.

2000 Broadband Enron’s broadband revenues prove largely illusionary.

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16 Understanding Whitewing, McCullough Research, January 20, 2002, and Understanding 

LJM, McCullough Research, February 2, 2002. 

Year Enterprise Outcome 

2001 EnronOnline Enron’s business to business web site achieves $195 

million dollars in notional transactions in its final 

quarter—roughly four times Enron’s total revenues. 

No impact on actual revenues, earnings, or 

cashflows is apparent.

TNPC Enron spins out a troubled retail operation and profits through the complex mechanics of Raptor 3. Actual revenues are low and earnings are non-existent. 

The central theme in Enron’s growth was its desperate search for purchasers in 

its schemes. Each cycle promised enormous growth. Each cycle faltered on the absence of realistic markets. Each cycle fell to creating buyers where none really existed. We now know that many of Enron’s past failures involved—in one way or another—the creation of artificial demand for their commodities and assets. 

From the beginning of the decade when Enron began to treat asset sales as ‘‘merchant investments’’ to the mid-1990s when an increasing proportion of Enron’s earnings began to be based on questionable ‘‘mark to market’’ estimates, the actual quality of Enron’s earnings have faltered badly. 

Since 1994, Enron has always obscured its frequent market setbacks with affiliated entity transactions. From 1994 through 1997 the major buyer for many of these 

troubled assets was Enron Global Power and Pipelines. In 1997, the buyer was 

Nighthawk. Nighthawk evolved into Whitewing in December 1997. As Enron’s problems expanded, the affiliated entities also expanded in number. By 1999, Whitewing 

was joined by a variety of structures including Sundance, Hawaii, LJM1 and LJM2, 

not to mention the infamous Raptors.16

The chart below summarizes fifteen years of Enron’s announced earnings and 

operational cashflows as a proportion of announced earnings.

Even these figures are amenable to manipulation. The relatively strong figures for 

the early 1990s depended upon the sale of future receivables—another example of 

borrowing from Peter to pay Paul. 


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Ironically, some of the most important evidence we have on Enron’s deteriorating 

financial position over time comes from materials only made available to the partners of LJM2. The following chart represents data on off-balance sheet assets provided to select limited partners:

By any standards, Enron entered into 2000 in desperate conditions. We now know 

that earnings in 2000 and 2001 were primarily taken from financial maneuvers like 

LJM2’s Raptor subsidiaries and comparable affiliated party transactions like Osprey 

and Sundance. 

Clearly, enormous concentration in California markets was required for Enron to 

affect prices. FERC does not accumulate the data necessary to show the degree of 

concentration on a systematic basis. FERC does require energy marketers to file 

quarterly reports. Enforcement of this provision is weak. Some marketers fail to file 

their reports. Others file their reports in illegible or illogical formats. Still others, 

like Enron, do not specify any detail on the hubs where they bought and sold electricity. 

The following chart shows Enron’s share of the major California hubs over time. 

The data used to generate this chart was taken from sales and purchases of major 

Enron trading partners who do show where Enron’s transactions take place.


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17Deconstructing Enron’s Collapse, McCullough Research, January 10, 2002. 

This chart matches our detailed research on Enron’s trading activities.17 Enron’s 

market share—for both sales and purchases—increased dramatically in 2000. By the 

fourth quarter of 2000, the evidence from FERC’s quarterly marketing reports indicated that its sales were nearly 30% of the market. As Enron entered 2001, the 

growth of its wholesale operations appears to have stalled. Overall statistics indicate 

that Enron’s physical sales declined after 4th quarter 2000. 

In almost any other commodity market a 30% market share is clearly sufficient 

to exercise price leadership. Pacific Gas and Electric’s share of California wholesale 

markets before April 1, 1998 was similar and its ability to use its scale to affect 

prices had long been observed. 

Enron’s sales directly to the California ISO were not large. Enron’s sales at the 

hubs were vastly greater than its sales to the ISO. This may simply reflect the fact 

the market leader need not show up in every transaction. Price leadership sets the 

prices for all participants. Each transaction would reflect the price leader’s price 

even though the price leader only had 30% of the market. 

Enron’s transactions with Pacific Northwest generators may have tended to obscure its sales to the ISO. During the California crisis, Enron approached a number 

of Pacific Northwest utilities offering to purchase ancillary services for sale to the 

ISO. Disentangling these transactions may be difficult. 

Do we know whether Enron exercised its market power in an attempt to increase 

prices during the market crisis that occurred between May 2000 and July 2001? No. 

Publicly available data simply isn’t that detailed. And while the California ISO 

continues to restrict availability of such data through its aggressive use of confidentiality agreements, the public debate will not become much clearer. The irony of the 

situation is that the ISO, the victim, has restricted market information to the market participants since they must have access to participate in the FERC refund 

cases and ongoing litigation, but has taken the same data out of the hands of the 

public, the press, and policy makers. 

If arrogance was a clue to the exercise of market power, Enron’s behavior during 

this period was legendary. During one transaction we were involved in, a junior 

Enron trader simply hung up on a senior executive of a Fortune 500 company because he could not move fast enough. This is market power with a vengeance. 

What little evidence we can access concerns Enron’s ‘‘price risk management activities.’’ This typically elliptical phrase was used by Enron to describe its hedging 

activities. Enron’s 2000 Annual Report describes this area of its business as:


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18 2000 Enron Annual Report, page 36. 19Powers Report, page 147. 20 June 14, 2000 letter from Kathy M. Lynn to LJM2’s limited partners, page 4. 21 Understanding Recent Power Prices, August 14, 2000, page 15. 

Enron engages in price risk management activities for both trading and non-trading purposes. Instruments utilized in connection with trading activities are accounted for using the mark-to-market method. Under the mark-to-market method 

of accounting, forwards, swaps, options, energy transportation contracts utilized 

for trading activities and other instruments with third parties are reflected at fair 

value and are shown as ‘‘Assets and Liabilities from Price Risk Management Activities’’ in the Consolidated Balance Sheet.18

If Enron had knowledge of market power in advance, we would have expected its 

hedging operations to be quite profitable. If not, the surprising and unanticipated 

events of May and June 2000—2nd Quarter 2000—should have posed a substantial 

economic risk. 

Enron’s financials show a dramatic shift in the net value of price management 

assets in the 2nd Quarter of 2000. This would be consistent with foreknowledge of 

the onset of the California crisis:

This chart also provides ample reason for Enron’s energetic attempts to postpone 

the advent of price controls in the 2nd Quarter of 2001. As prices fell, Enron faced 

enormous losses in the net value of their hedging assets. 

On a smaller scale, at least one of the investments of LJM2 shows the same canny 

prescience on future events. In the winter of 1999, six months before the onset of 

the California crisis, Enron approached the Oregon Public Utilities Commission 

with the proposal to sell a minor PGE asset in the market while reserving much 

of the profit for Enron. PUC staff reviewed the proposal carefully and successfully 

preserved the majority of the profits from the transaction for Oregon ratepayers. 

A number of aspects of the transaction were not known to Oregon regulatory staff 

at the time. Significantly, LJM2 took a major role in this transaction, receiving a 

difficult to understand $3.5 million profit in the transaction.19 Even more surprisingly, LJM2 planned to take a 50% ownership in asset.20

Enron’s testimony before the Oregon Public Utilities Commission on August 14, 

2000 showed that its market perceptions before the crisis was that such investments 

would have been unable to earn even a 15% return on the investment.21 LJM2’s internal documents indicated a 22% return on this investment. LJM2 apparently was 


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22 ‘‘Tim Belden of Enron, a major energy marketer, predicted that prices would remain high 

for another two to four years as demand approaches the region’s capacity to produce electricity.’’ 

Experts Try To Explain Run-Up In Energy Costs, Associated Press, July 19, 2000. 

able to either operate in the same markets with vastly more expertise than Enron, 

or LJM2’s estimate showed foreknowledge of the events to come. 

Both sets of evidence—the larger picture of Enron’s hedging position and the 

smaller example of a single plant transaction—seemingly indicate that Enron was 

prepared for the explosion on May 22, 2000. If so, it was among a very select group. 

As mentioned above, May was not considered a month in which an emergency was 

even remotely possible. 

The California Crisis and Enron’s Collapse 

Were these two events related? Enron had means, motive, and opportunity. Substantial evidence now exists that Enron was able to exercise market power in forward markets. The firm had the means. We now understand the motive very well. 

Enron stood on the brink of bankruptcy. Jeff Skilling’s unanticipated exit from 

Enron soon after the end of the California crisis is powerful evidence on how dangerous FERC’s imposition of price controls were to Enron. Finally, they had opportunity. If the firm’s market share was as high as FERC’s quarterly market reports 

indicate, it was in an excellent position to affect hourly markets. 

Data also suggests that Enron’s management were able to plan ahead for the 

onset of the crisis. The event they could not predict was a shift in the regulatory 

climate that brought the crisis to a close years ahead of the schedule the firm had 

predicted.22 The FERC orders that ended the California crisis may well have spelled 

the end to the last gamble to preserve Enron from bankruptcy. 

While we know that the California crisis did not reflect market fundamentals, the 

final word on Enron’s role in the crisis will depend on investigations now underway. 

We can draw lessons from the crisis even before the final word on Enron arrives.

First, secrecy and opacity are simply too expensive. Open markets require 

open information.

Second, market power is always a problem in commodity markets. Steps are 

underway to reverse many of the exemptions that Enron received from regulatory controls.

Third, FERC’s role is more important in a deregulated market than it ever 

was before. Arguments that FERC should surrender its power to review long 

term contracts and avoid an active regulatory role are as wrong today as they 

were at the turn of the century when the U.S. faced the same arguments concerning the railroads.

Thank you for this opportunity to appear before you.

Senator DORGAN. Mr. McCullough, thank you very much. Ms. 

Lynch, I understand that you have to depart at 11:30. Is that correct? 

Ms. LYNCH. Yes, Senator. 

Senator DORGAN. Why don’t we begin a series of questions. I also 

have to go to an Appropriations Committee at the request of Senator Byrd at 11:15. I’m going to ask Senator Boxer to chair at that 

point. 

Let me begin. Let me try to ask about the 11 million megawatts. 

I think two or three of you have discussed this issue, 11 million 

megawatts being traded. Ms. Lynch, could you amplify on that 

again so that we can ask some questions about that? 

Ms. LYNCH. Certainly. We studied one quarter’s worth of trades 

by Enron and its trading affiliates, and that is the fourth quarter 

of 2000. And what we found was of the trades that Enron and its 

affiliates, over 11 million megawatt hours, almost 12 million 

megawatts, were actually trades among its own entities. And, in 

fact, certainly 30 percent of the trades that Enron accomplished in 

that fourth quarter were with itself or its related entities so that 

it inflated the market, essentially. 

84

Senator DORGAN. Now, those are not arms-length transactions, 

as you suggest. That’s why you call them ‘‘sham transactions,’’ 

right? 

Ms. LYNCH. Exactly. 

Senator DORGAN. Well, let me try to understand. I understand 

that more will be traded than will be used in order to provide liquidity in the marketplace. But if you have a marketplace that is 

obscure, you can’t see who the participants are or what the participants are doing, and a company like Enron has partnerships that 

are trading with each other and creating an artificial price, was 

there not a mechanism in California that could determine this and 

take action to prevent it? 

Ms. LYNCH. Not that I know of. California had essentially handed off its price controls, because these were trades in the wholesale 

electric market, and those would have been covered by FERC. 

Senator DORGAN. Now, all of you have made the point that 

Enron was hip deep in the proposition of how California would restructure. And they had a powerful influence on how the restructuring occurred. Every company, every citizen has a right to be involved in the political process by which they nudge or urge or try 

to force decisions in a certain direction. But creating the groundwork on which one may be able to cheat is actually different than 

actually cheating and I want to get to the question not of whether 

Enron was a big political player in California and in Washington 

in helping restructure, for example, California in an image that it 

wanted, but did it then use that in a manner that bilked or cheated 

or rigged the game against California consumers? And if so, why 

were there no mechanisms? Is FERC the only mechanism available 

to deal with that? I mean, I understand that—I said it at a couple 

of Energy Committee hearings that FERC was doing its best imitation of a potted plant. And it finally seemed to come alive from the 

neck up and took some action, but it just essentially sat on its 

hands and did nothing for a long period. 

The question is, if one believed that a company came into the 

marketplace and began rigging the marketplace, were there no 

mechanisms and no handles at all, save for FERC making an ultimate decision at some point to resolve this on behalf of the consumer? 

Senator Dunn. 

Senator DUNN. Mr. Chairman, thank you. I’ll take the first crack 

at that one. I want to underscore, however, that I agree with you 

that certainly it’s everyone’s right to lobby for a particular new set 

of laws, or statutory layout. Remember, however, that the promise 

of deregulation, as it was pushed at both here and Washington, 

D.C., and at every state level, was to bring in a deregulated format 

and the consumers will receive lower prices. 

The fact of the matter is the internal documents for most of these 

companies show that was never the intent, although that was the 

promise that was made in virtually every legislative and regulatory 

body, including by, in California, Mr. Lay and Mr. Skilling directly, 

starting in testimony before the CPUC in 1994. 

But getting specifically to the question of whether, in fact, they 

manipulated the market, the first evidence of that, although the 

question is whether they did it before it, that’s still outstanding, 

85

but the first evidence surfaced in May 1999 when Enron artificially 

congested one of the transmission lines in California. That resulted 

in about a $6 million hit on the California consumers at the time. 

And the California ISO attempted to take action. They found 

that there were many obstacles in their way, including the enormous political legal power of Enron in preventing its taking aggressive response to this and ultimately it resulted in a settlement 

agreement of which I believe fined Enron $25,000. 

Unfortunately, every time any, in my view at least, any time any 

California regulatory body, be it ISO, the PX, the CPUC, has attempted to take aggressive action in that wholesale market, they’ve 

been stopped by FERC as a result of the industry’s request of 

FERC to prevent further regulatory activity at the state level. 

Senator DORGAN. Mr. Freeman. 

Mr. FREEMAN. Mr. Chairman, I just want to make clear that 

California did not sit idle and do nothing. We were a hundred percent in the spot market in January of 2001, and FERC has exclusive jurisdiction over that spot market, but we moved to enter into 

long-term contracts, even though they had us over a barrel at the 

time, but we got a lot of the power out of the spot market with 

long-term contracts. We initiated the most effective conservation 

program in the history of this country. And it was the combined actions of our long-term contracts, our conservation program, and, finally, in June, FERC beginning to do its job that brought this tiger 

under control, so to speak. So we did everything we could do, including building new power plants and completing them as fast as 

we can. We completed almost 3,000 megawatts of new plants over 

the last year. 

But the part of the job that the state has no authority to deal 

with is the sale of electricity at wholesale in interstate commerce, 

and that’s been FERC’s responsibility for decades, and they’ve exercised it for decades. And this business of all of a sudden deciding 

unilaterally, without any findings, that they can kind of go home 

and not do their job—to my mind, lobbying for new laws is one 

thing, but lobbying agencies not to enforce the law that’s on the 

books is something else. 

Senator DORGAN. You’re correct about it, that’s quite different. 

Mr. COHEN. Mr. Chairman? 

Senator DORGAN. Yes? 

Mr. COHEN. Just in response to your question about whether 

FERC was the only agency that could have done anything. Actually, the Commodity Futures Trading Commission also has——

Senator BURNS. Excuse me. Who are you? 

Mr. COHEN. I’m sorry. Gary Cohen. I’m General Counsel for the 

CPUC. 

Senator BURNS. Thank you very much. 

Mr. COHEN. And the Commodities Future Trading Commission 

issued proposed rules in June of 2000, and then final rules in December 2000, which were to become effective in February in 2001 

that would have regulated the online trading that Enron was conducting. But when Congress passed the Commodities Futures Modernization Act amending the Commodity Exchange Act, those rules 

were withdrawn. So during this time period that we’ve been talking 

86

about, there were no rules in effect whatsoever that governed the 

online trading that Enron was engaged in. 

Senator DORGAN. Thank you very much. 

Let me make a point, ask one additional question, and then I’ll 

call on Senator Burns. 

Senator Dunn, you talked about the lack of cooperation that your 

committee has received from Enron. Let me tell you that we have 

experienced the same with respect to Enron. 

Senator DUNN. I’m sorry to hear that, Mr. Chairman. 

Senator DORGAN. This Subcommittee has been involved in an investigation. We have, for example, repeatedly asked for records 

dealing with partners, the investors, and all of the partnerships. 

We hear from the corporation that they want to cooperate. Their 

attorneys say they want to cooperate. But the fact is, they never 

do cooperate. And I have spoke to the Chairman and the Ranking 

Member of the full Committee about issuing additional subpoenas, 

but we have experienced exactly the same thing. A little cooperation would go a long way here. 

Senator DUNN. Agreed. 

Senator DORGAN. But we’ve received precious little. 

Now, let me ask a final question. There is a criminal investigation ongoing. We know that. There are congressional investigations 

ongoing with respect to Enron. I said when I started, the reason 

that we are focusing on Enron today with respect to this hearing 

and we’re not tackling the larger question of restructuring and, you 

know, California’s mistakes in restructuring, et cetera, et cetera, is 

we’re trying to understand, did people who ran the Enron corporation and cheated their Board of Directors and cheated investors—

that comes from the Board of Directors’ own report—did they also 

cheat consumers in California and consumers in the West Coast by 

manipulating prices and creating sham trades and so on and so 

forth? Because that is a very serious question and is not petty 

crime. We’re talking about billions of dollars. These are big issues. 

I’m wondering, are any of you aware of, for example, FERC investigators investigating out in California the questions that we’re 

tackling today, are you aware of investigators from the Justice Department who are engaged in a criminal investigation of Enron in 

California, looking at these questions with respect to Enron? 

Ms. Lynch. 

Ms. LYNCH. I know that FERC has an open investigation proceeding regarding the generation market in general, and I have 

had several conversations with Chairman Wood about how we 

could assist in a joint state/federal effort. Those have not borne 

fruit. 

Senator DORGAN. In your judgment, is the FERC investigation 

an active, aggressive investigation? 

Ms. LYNCH. I just don’t know. I haven’t seen them where we’ve 

gone. I haven’t seen them where Senator Dunn has gone. I haven’t 

seen them where the Attorney General has gone, because we are 

coordinating with the California Attorney General. That doesn’t 

mean they’re not there. I would hope that we could coordinate more 

effectively with the federal investigators. 

Senator DORGAN. Is there any evidence that FERC is involved in 

an active, aggressive, robust investigation? Ms. Lynch. 

87

Ms. LYNCH. I haven’t seen it. 

Senator DORGAN. Senator Dunn. 

Senator DUNN. If I may, Mr. Chairman, just add on to Ms. 

Lynch’s testimony, we actually called before our committee one of 

the FERC commissioners early last summer. They resisted and instead sent one of their litigation counsel to testify before our committee, an individual by the name of Robert Pease. He was very cooperative, very open. I was very impressed with his testimony. 

We asked him that very question. But now we’re dealing with 

mid-summer of last year. The best that Mr. Pease and—outside of 

the—at direct testimony that we’ve been able to gain is when there 

was suspicions about planned—or, excuse me, outages that were 

done deliberately to create a shortage, FERC indicated that it 

would investigate. And it did, by making several phone calls to a 

few of the plant operators asking them if they turned down their 

plant in an effort to manipulate the market. The answer was no. 

FERC concluded there was no manipulation of the market. 

Since that time, at least as far as our committee is concerned, 

we have seen, to be perfectly frank, Mr. Chairman, zero from 

FERC in its investigation in California. 

Senator DORGAN. Senator Dunn, I am disgusted by those who 

would take advantage of consumers. And we’re talking now about 

the Enron Corporation in this investigation. But I’m also disgusted 

about that group I call the ‘‘grateful dead’’ that assumed public office in a regulatory role and failed to regulate. They do no service 

to this country. Best, in my judgment, they not accept a role in 

public service if they’re not interested in using the opportunities 

they have on behalf of the American people to make sure the marketplace is a fair marketplace and people are not cheated. 

So I shouldn’t even disrespect the name of a band in this country 

by calling them the ‘‘grateful dead,’’ but I was so angry with FERC 

during this period when they were running up prices and everyone 

understood something was amiss, and FERC nonetheless sat and 

sat and sat and did nothing. And finally they took action, and I 

suppose we should not fail to be grateful for small favors. But having taken action billions of dollars late, I think many people in 

California and on the West Coast wonder if they need to say 

thanks to someone who took action that late. 

But, at any rate, let me call on my colleague, Senator Burns, for 

questions. 

Mr. FREEMAN. Chairman Dorgan, could I just thank you for your 

anger and hope that you will persist in the question that you 

asked, because having worked at the predecessor to FERC, these 

agencies do respond to the Congress, and I believe that you and 

your colleagues, if you persist, can have an influence that’s in the 

public interest, and I thank you for this hearing and for that interest. 

Senator DORGAN. Well, rest assured that we’re going to try to 

build a fire, and I’m going to be one carrying wood. 

Senator Burns. 

Senator BURNS. Thank you very much. That’s a bad illustration 

of the Grateful Dead. I can remember in 1994, they came to Montana to play a big fund raiser for my opponent. 

[Laughter.] 

88

Senator BURNS. They had come up there and done a big concert 

for my opponent. 

Mr. FREEMAN. And he was grateful, even though he wound up 

being dead, in terms of——

[Laughter.] 

Senator BURNS. He knocked him out. 

Mr. FREEMAN. Apparently, Mr. Burns, it wasn’t good enough. 

Senator BURNS. He didn’t make it. 

Enlighten me a little bit on the California law whenever you deregulated the power industry. You deregulated transmission. Is 

that correct? 

Mr. FREEMAN. Not exactly, Senator. The transmission was restructured—but it’s still a cost-plus regulatory——

Senator BURNS. OK. How about generation? 

Mr. FREEMAN. It was. Yes, sir. It was—that was the part of the 

industry that was clearly deregulated. 

Senator BURNS. How about the prices that could be passed on to 

the consumer? 

Mr. FREEMAN. Well, the retail rates are still under the jurisdiction of President Lynch and her colleagues, so they’re still regulated. 

Senator BURNS. I would—I’m just looking over things. You had 

other companies there that showed great profits, too, and I’m not—

this whole thing with Enron is fascinating to me as to how they 

put that all together. And there’s no doubt about it that there’s 

going to be some people go to jail and ought to go to jail. There is 

no question about that. 

But there’s also some flags along the way those who are serving 

in our legislature—now, I didn’t vote for deregulation here, and I’ve 

always been sort of leery of it, because you cannot dereg an industry when you have not—when you do not have a national grid to 

where you can move power to anywhere you wanted to go. In other 

words, we, in Montana—now, we’ve heard a lot of bad things said 

about cooperatives and REA and, you know, and they wanted to 

take those in, but I’m one of the guys that believe it had not—

’cause I’m come out of agriculture—had it not been for the REA, 

we’d be watching television by candlelight out there on the ranch. 

And when you talk about being hammered by big companies, I’m 

telling you what. You want to come and try to sell grain or fat cattle? Now, that’s a perishable product, just like electricity is. I 

mean, it’s those things—and we fight those battles every day, and 

we’ve fought it under every administration, every Justice Department, and whatever we could look at it. 

But here it looks like that you piecemealed deregulation and it 

caused this mischief to happen. Because those costs, in a purely deregulated market, could not be passed on to the user who usually 

is the people that demand regulatory or legislative people to take 

action. The consumer of California. 

As long as they had the protection of their PUC, and that could 

not be passed on to them, everything was going on back here behind them, they didn’t worry about it. The public really didn’t 

worry about it. The only thing they worried about was reliability. 

But it wasn’t coming out of their billfolds until it was done 

blanketly among everyone through taxes—increased taxes. 

89

Now, tell me if I’m wrong there, Mr. Freeman, and put me on 

the right track. But this just seems like I’m——

Mr. FREEMAN. Well, the one thing that you’re certainly right on 

is the REA, because I grew up in the Tennessee Valley. We had 

the first co-op in the country there. And, if it weren’t for the coops, there wouldn’t be electricity in rural America. 

Senator BURNS. That’s right. 

Mr. FREEMAN. So that’s a fundamental point. Frankly, the people 

of California and the California legislature did not and could not 

repeal the Federal Power Act. And we had every right, every reason, to believe that the wholesale price would not have gone 

through the ceiling. President Lynch, in her commission, would 

pass on reasonable wholesale rates. They do. That was not the 

problem. The problem is the Federal cop just went off the beat and 

let those wholesale prices go up to the sky and turned their back 

on it. That was the nub of the problem. 

And, frankly, I don’t think anybody thinks that deregulation was 

a great and wonderful thing. Matter of fact, if it weren’t for the 

honor of it all, we’d just as soon skip the whole last four years, 

but——

[Laughter.] 

Senator BURNS. Well, I’d go for that. I’d go for that. But it just 

looks like, to me, that you had all this area of mischief, and it could 

not—and you just hit a wall as far as passing some of those costs 

along of that mischief. Now, that mischief would have gone away 

as soon as the public—whenever they start writing those high 

power checks, there would have been something happen, I think. 

Maybe I’m wrong here. 

Mr. FREEMAN. Senator Burns, President Lynch is perfectly capable of defending her commission, but I want to say that they did 

raise the rates. They raised the rates a healthy three cents a kilowatt hour. And Californians are paying rates that are among the 

highest in the nation. So——

Senator BURNS. Well, you affected my state, too, you know. 

I’m——

Senator DUNN. This myth that somehow California consumers 

have not felt the impact of these rate increases—they’re the ones 

that are paying these outrageous rates. They’re the ones that got 

ripped off. And they know it. 

Mr. FREEMAN. If I may, Senator Burns. 

Senator BURNS. You bet. 

Mr. FREEMAN. Let’s drive the point home with three quick figures. And those three quick figures are the last year in which we 

experienced regulated wholesale rates, or at least the tail of it, was 

1999. The entire cost of wholesale electricity in the state of California in 1999 was $7 billion. The first real year of wholesale deregulation, 2000, or at least when its impact was first—most experienced, that year, when demand from 1999 to 2000 only went up 

four percent. Calendar year 2000, the cost of wholesale electricity 

in the State of California was $27 billion. 

Now let’s go to calendar year 2001, when demand has actually 

gone down from 2000 to 2001. Now, while the figures are still being 

calculated, it’s roughly in the neighborhood of $50 billion. All of 

that, not due to increased demand. One thing—increased wholesale 

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cost. And the call early on was simply to pass on those high wholesale costs to the retail customer. When you go from $7 billion to 

approximately $50 billion, you can imagine the impact on the average retail payer, whether it’s residential or small, medium, or large 

businesses. That would have been fatal, not only to the California 

economy, but elsewhere, as well, Senator Burns. 

Ms. LYNCH. Senator, nonetheless, we did pass on some of those 

costs. In May of 2000, the costs started to rise in San Diego. And 

San Diegans, throughout 2000, experienced those higher prices, 

until the state legislature stepped in and stopped the hemorrhaging. And then last March, a year ago March, my commission 

raised retail rates to a historic level in California. So we have been 

passing those costs on. But I agree with Senator Dunn, a sevenfold 

increase in electric costs month over month or year over year would 

not have been able to be sustained by the California economy. 

Ms. HAUTER. Senator Burns, I’d like to address your issue 

around deregulation, because we’re skeptical as to whether even 

good regulation by FERC could really prevent higher prices for residential consumers. One of the reasons that we’ve been skeptical 

about the state deregulation bills is that the way the bills have 

been crafted, it puts large industrial customers who can buy a lot 

of energy in the driver’s seat and in a position to buy energy cheaper. And when you take those large industrial customers away from 

the other sellers of energy, then costs go up. And small consumers, 

small businesses, don’t have the market power to go out in the 

market and compete. And, in fact, Enron, in California, promised 

a vigorous retail market, that they would sell to small consumers. 

And they almost immediately pulled out, because they recognized 

that they weren’t going to make enough money. So that cherry 

picking is one of our concerns. 

Senator BURNS. I would agree. I would agree with your premise 

on some of those. And I thank the chairman for holding this hearing. I’ve got to go to the same place he’s got to go. But I’m going 

to go through this testimony, and I’ll probably write you some 

questions or something, you know, if you would, but—and I noticed 

there were some other folks that made terrific profits this year also 

that we should look at. You know, you had Dynegy in there, Duke 

was in there, Reliance, Williams, AES, West Coast Power, all those 

people were profiting from this same situation, and I’d—you know 

don’t whether it might be a situation of Lucy playing—pulling 

away the football or something, but I thank you for coming today, 

and I thank you for your testimony. 

Thank you. 

Senator DORGAN. Senator Burns, thank you. Senator Wyden. 

Senator WYDEN. Thank you, Mr. Chairman. 

Just one current matter for you, Mr. Dunn. You described evidence of willful destruction of documents. I’d like to know if you 

can tell us anything about what documents you believe were destroyed, and particularly whether you believe any of those documents involved matters affecting Oregon, whether they come from 

the Portland trading floor, that kind of thing. What can you tell us, 

based on what you now know, with respect to the destruction of the 

documents? 

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Mr. DUNN. Senator, I will zero in specifically on the disks of emails that I referenced as opposed to the Arthur Andersen——

Senator WYDEN. Right. 

Senator DUNN.—and the reports of late last fall of Enron’s own 

destruction. We had requested, after January, when we moved for 

contempt again and voted for the criminal referral of Enron for its 

destruction of documents, Enron came to us and said, ‘‘Look, Senator, we want to get out from under this contempt and this criminal referral. We’ll open our doors to you, save attorney-client privilege documents. But other than that, we’re in bankruptcy, we’re 

exiting the market, we don’t care about trade secrets anymore, and 

all the other traditional privileges which could be used to be prevent the production of documents.’’

We were really after two broad categories from Enron and other 

companies, as well. First, what we call their policy documents or 

their strategy documents in setting up—my editorial now—their attack on California and elsewhere, as well as the micromanipulation, the trading manipulation. That would have primarily occurred 

in their facility in Portland, Oregon. 

When we went after the larger, more macrostrategic documents, 

we wanted all of Mr. Lay’s, Mr. Skilling’s, Mr. Kean—and for those 

unfamiliar with Mr. Kean, Steve Kean is the head of their governmental affairs department on a national basis based in Houston, an 

individual by the name of Jeff Dasovitch, who’s based in San Francisco, takes care of all the Western U.S. government relations for 

Enron, or did—he has since departed—as well as some key other 

governmental affairs individuals. 

We asked for all e-mails associated with those individuals that 

relate to anything relevant to the Western United States energy 

markets, particularly their lobbying efforts, their business designs 

for that area of the country, et cetera. It was those requests that 

led to the production of approximately nine disks of information in 

which they assured us that all the documents, save attorney-client 

privilege, were contained on those documents. 

We then—first, you’re dealing with an individual who’s not the 

most computer-literate person in the world. We retained an IT 

team to go in who has tremendous expertise, as I know much of 

the committee’s expertise in that area as well. 

They spent, as oftentimes experts in IT do, about four straight 

days, 24 hours a day, analyzing those nine disks, breaking through 

all kinds of codes and other—what they believe were deliberate obstacles for us gaining access to the actual documents on those 

disks. 

Once we got through all of those obstacles, we began to review 

the various e-mails from Mr. Lay and Mr. Skilling and Mr. Kean, 

et cetera. And it was through that review that the IT team discovered what they referenced as certain mechanisms that were utilized to blank out key e-mails from each of those individuals that 

they said could not have been done in any way but a deliberate 

manner to block out those e-mails. 

Now, the first blush would be, well, maybe that was attorney-client privilege. No. We were referenced that all documents on those 

disks were non-attorney-client privilege, so that we should have 

had access to all of them. 

92

We’ll be frank with you, Senator. Our IT team is trying to break 

through those deliberate efforts to eliminate the documents. We’re 

having some success. 

We are not demanding of Enron—as a result of this conduct—absolute, complete, unfettered access to the main hard drives and the 

other information that we need to go through at our discretion to 

really get to the core of this, because this is just one other example, 

in my view and the committee’s view, of Enron’s deliberate attempt 

to preclude us from gaining access to the information we consider 

critical. 

Back to your very basic question: Does it also involve the State 

of Oregon? Yes, unfortunately, Senator, it does. 

Senator WYDEN. Well, I thank you for that information, for your 

thoroughness. I would also ask that you make that information 

available to Oregon’s Attorney General and Oregon’s U.S. Attorney, 

certainly in a fashion that doesn’t compromise your inquiry. And 

my assumption is, already, the Attorney General and the U.S. Attorney of your state are looking at is, and I think that we ought 

to maximize our efforts with our two states. That’s what Senator 

Boxer and I have sought to do on this Committee. And we appreciate your thoroughness. 

A question for your, Mr. McCullough, with respect to LJM2 and 

their efforts to get into the State of Oregon. LJM2, as you know, 

is one of the most questionable of the whole operation surrounding 

Enron that led to the restatement of Enron’s earnings and basically 

the house of cards started falling. And my sense is, and I’d like to 

get your sense of this as well, that when you look at the LJM2 effort to get into Oregon, it indicates that Enron knew prices were 

going to go up or that they were working actively to try to raise 

the prices. And this goes, of course, right to the heart of what we 

need to know in this investigation. 

And let me begin by saying you point to Enron’s efforts to sell 

off one of the plants as evidence that Enron had reason to expect 

that prices would be going up. Can you tell us which one of PGE’s 

plants Enron approached the Oregon Public Utility Commission 

about selling? 

Mr. MCCULLOUGH. Yes, Senator Wyden. In the early 1990’s, a 

power plant was built in the eastern part of the state called Coyote 

Springs I. The practice in the industry is to build the infrastructure, water and fuel delivery, for two plants so you get a synergy. 

You would halve the cost of that infrastructure. Coyote Springs II 

was on the boards since that date. Because power prices were lower 

than the trigger required to start Coyote Springs II, the plant had 

simply sat on the drawing boards from the early 1990’s to the winter of 1999. At that point, Enron approached the PUC and said, 

‘‘We can sell this. So pull the plant out from the utility, turn it over 

to us, and we’ll be able to make a profit from it, and we’ll provide 

a small margin back to the ratepayers.’’

Senator WYDEN. Well, we now understand that LJM2 was going 

to be a partner to the transaction with a 50 percent stake of the 

equity. We know that they were expecting a return of substantially 

more than one would expect in this area. 

And I just want you to know very much first that we appreciate 

your expertise. The questions that I asked you at the earlier hearVerDate 0ct 09 2002 11:58 Sep 26, 2005 Jkt 084329 PO 00000 Frm 00096 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\84329.TXT JACK PsN: JACKF
93

ing with respect to the precipitous market drop did more than anything in my view to finally get FERC off the sidelines to look at 

this. We’re going to ask you some more questions, perhaps in writing, with respect to LJM2, but I thank you particularly for your 

analysis on that point. 

One other question for you, Mr. McCullough. Before the onset of 

the huge price spike, Enron was also seeking to sell off PGE to Sierra Pacific Resources, having filed applications with the SEC and 

FERC in February and March of 2000. Are there any documents 

associated with that proposed sale of PGE to Sierra Pacific that, 

again, indicate Enron had some advanced knowledge that these 

West Coast electricity markets were going into the stratosphere? 

Mr. MCCULLOUGH. I had my staff review that, and we’ve not 

found anything clear in that, though the complexity of those calculations are so great that I wouldn’t call the book closed. 

Senator WYDEN. Alright. Ms. Hauter, you state in your written 

testimony that Enron divisions paid up to $2,500 per megawatt 

hour for electricity markets when market prices were less than 

$340. Why in the world, short of the kinds of more ominous analyses that suggest circumstantial evidence of manipulation—why in 

the world would Enron’s traders, these very sophisticated people, 

have paid such high prices to buy from their own company when 

they could buy the same power at cheaper prices on the market? 

Ms. HAUTER. Well, I think that the circumstantial evidence is 

very good that their motives were to really cause a price increase, 

because then they would make more of a profit in their other trading divisions, and because with their energy services division doing 

so poorly, that they could hide its financial difficulty in more of 

their accounting tricks. I mean, that’s the only—obviously, this is 

circumstantial evidence, but this is the only rationale that we can 

come up with. 

Senator WYDEN. Now, Ms. Hauter, in the spring of 2000, Enron 

filed an application with the SEC to enable it to compete in what’s 

called the Qualifying Facility Market and an application that 

would allow them to compete even before the sale of PGE was completed. If the proposed sale of PGE was approved, Enron would no 

longer be a holding company under the Public Utility Holding Company Act and obviously out from under a number of regulations. 

But even before the sale was approved and Enron was no longer 

under the Public Utility Holding Company Act, Enron was seeking 

to get out from under the holding company restrictions in order to 

compete in this particularly lucrative market, the qualifying facility 

market. 

At the time Enron was saying it expected the PGE sale to be 

completed in the second quarter of 2000, but it appears Enron 

wanted a bigger than 50-percent share of the ownership and profits 

from qualifying facilities investments, and it wanted it now. It 

didn’t want to go through the regular process. 

Do you see any connection between Enron’s urgent interest in 

this precipitous effort to get into qualifying facility investments in 

the spring of 2000 and this overall West Coast energy crisis? 

Ms. HAUTER. Well, again, an educated guess based on circumstantial evidence is that they wanted to make use of that baseline power, that power that would be there all the time and availVerDate 0ct 09 2002 11:58 Sep 26, 2005 Jkt 084329 PO 00000 Frm 00097 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\84329.TXT JACK PsN: JACKF
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1 A QF cannot be owned by a person primarily engaged in the generation or sale of electric 

power. 16 U.S.C. § 796(18)(B) (1996). The PURPA regulations provide that a facility ‘‘shall be 

considered to be owned by a person primarily engaged in the generation or sale of electric 

power, if more than 50 percent of the equity interest is held by an electric utility, or utilities, 

or by an electric utility holding company or companies, or any combination thereof.’’ 18 C.F.R. 

§ 292.206(b) (1999). 2 18 C.F.R. §§ 292.206(c)(1) and (c)(2) (1999). 

3The FERC explained: ‘‘Although section 292.202(n) specifically utilizes the phrase ‘‘rule or 

order,’’ reliance on the statutory PUHCA section 3(c) ‘‘safe harbor’’ is not inconsistent with our 

regulations. In our view, treating a pending good faith SEC application differently than the SEC 

‘‘rule or order’’ language in the regulations concerning granting an exemption would be inconable to them, so that when they were doing trading on the spot 

market, that they would have it as a backup, as a protection, so 

to speak. 

Senator WYDEN. Madam Chair, I know my time is up. I would 

like to just make two points. First, I’d like to submit for the record 

a letter dated April 13th, 2000, from Enron’s attorney to the SEC 

about Enron’s interest in getting expedited approval of its application for exemption from the qualifying facility restrictions so it 

could compete in the Qualifying Facility Market before the second 

quarter of 2000 when the sale of PGE was expected to occur. 

Senator Boxer [presiding]: Included in the record. 

[The information referred to follows:]

LEBOEUF, LAMB, GREENE & MACRAE L.L.P. 

Washington, DC, April 13, 2000

CATHERINE A. FISHER, Assistant Director, 

Office of Public Utility Regulation, 

Division of Investment Management, 

Securities and Exchange Commission, 

Washington, DC. 

RE: Enron Corp. Application under Sections 3(a)(3)/3(a)(5)

Dear Cathie:

I am writing to provide some background information with respect to an application (‘‘Application’’) that Enron Corp. (‘‘Enron’’) is filing under Section 3(a)(3) or, in 

the alternative, Section 3(a)(5) of the Public Utility Holding Company Act of 1935 

(the ‘‘1935 Act’’ or ‘‘Act’’). Briefly stated, Enron is seeking relief, similar to that 

granted AES Corporation, to enable it to compete effectively in the developing QF 

market, pending completion of the sale of Portland General Electric Company 

(‘‘Portland General’’) to Sierra Pacific Resources, Inc. (‘‘Sierra Pacific’’). 

Enron is currently a holding company that claims exemption pursuant to Rule 2 

under Section 3(a)(1) of the Act, by reason of its ownership of all of the outstanding 

voting securities of Portland General. As you know, Enron has entered into a definitive agreement to sell Portland General to Sierra Pacific Resources, Inc., and applications for approval of that transaction were filed with this Commission on February 3, 2000 (SEC File No. 70–9619) and with the FERC on March 3, 2000. The 

Sierra Pacific/Portland General transaction, which is subject to customary regulatory approvals, is expected to close in the second half of 2000. Upon completion 

of the sale, Enron will cease to be a holding company within the meaning of the 

Act. 

Pending Commission action on the Sierra/Portland General transaction or 

issuance of a final order on the instant Application, Enron will rely on the goodfaith exemption granted by Section 3(c) of the 1935 Act as a means of obtaining relief from the QF ownership restrictions under the Public Utility Regulatory Policies 

Act of 1978 (‘‘PURPA’’). Briefly stated, the regulations under PURPA generally limit 

an electric-utility holding company to no more than 50% equity interest in a QF.1

There is, however, an exception (relied upon by AES) for holding companies that are 

exempt ‘‘by rule or order’’ under Section 3(a)(3) or 3(a)(5) of the 1935 Act.2 The Federal Energy Regulatory Commission (‘‘FERC’’) has interpreted this language to 

apply as well to entities that have filed a good-faith application for exemption under 

Section 3(a)(5) and, by extension, Section 3(a)(3) of the 1935 Act. Doswell Limited 

Partnership and Diamond Energy, Inc., 56 F.E.R.C. ¶ 61,170 (July 31, 1991) (a copy 

of the order is [not] attached).3

95

sistent with the intent of section 292.202(n).’’ The FERC noted that it had made a similar finding with respect to a company’s filing of an application under Section 2(a)(3) of the 1935 Act, 

and the pendency of the exemption from the definition of ‘‘electric utility company’’ during the 

pendency of a good faith application. See Long Lake Energy Corporation, 51 F.E.R.C. ¶ 61,262 

(1990). 

As explained more fully in the Application, Enron believes that it is entitled to 

an exemption under either Section 3(a)(3) or 3(a)(5), based on the precedent, the nature of its primary nonutility business and the relative and absolute size of its utility operations. Indeed, if the Sierra Pacific/Portland General transaction were to fall 

through, Enron would ask the Commission to rule on the merits of the Application. 

We do not anticipate any problems, however, with the Sierra Pacific/Portland General transaction and so, would simply rely on the good-faith exemption provided by 

the instant filing (as it affects Enron’s QF ownership rights), pending the outcome 

of the Commission’s review in File No. 70–9619. 

To address any concerns during the pendency of this Application, we would offer 

the following additional safeguards for the public interest and the interest of investors and consumers so long as Enron continues to own Portland General:

• Enron, which is currently exempt pursuant to Rule 2 under Section 3(a)(2) of 

the Act, will undertake to continue to file Form U–3A–2 during the pendency 

of the exemptive Application or until Portland General is divested.

• Enron will not rely on the temporary good faith exemption to facilitate the 

growth and extension of a holding company system. Once the sale of Portland 

General is complete, Enron will cease to be a 1935 Act-jurisdictional entity and 

so, will withdraw the instant Application.

• Finally, in the event that the sale of Portland General is not completed in a 

timely manner and if it appeared that it would ultimately be determined that 

Enron was not entitled to an order of exemption under either Section 3(a)(3) 

or 3(a)(5), Enron would undertake to restructure its QF interests within a reasonable time and thereafter withdraw the request for exemption.

We would be happy to meet with you and to provide any additional information. 

If you have any questions, please call me at (202) 986–8281. 

Sincerely, 

JOANNE C. RUTKOWSKI.

Senator WYDEN. And, I will also say, Madam Chair, and I think 

it’s going to be interesting to talk to some of the Californians, as 

well, about Enron’s interest in getting into the qualifying facility 

business, because clearly this is another area where certainly there 

is substantial circumstantial evidence indicating that this is another effort to hot-wire the market and get in and make cash profits quick without having to go through the regulations. And hopefully we can get into that on another round. 

The only other point that I wanted to mention—Ms. Hauter, I 

want to thank you for the support that you’ve given me in this effort to get a strong ratepayer advocate in the Justice Department 

to deal with these issues. As you know, given the fact that FERC 

has been on the sidelines for so long, the biggest and most constructive force for consumer and ratepayer advocacy comes from 

the states. 

The states have no authority, folks, over virtually everything you 

all have been talking about this morning. And one of the things 

that we can do in the energy bill, because our proposal was accepted, is set in place a ratepayer advocate within the Justice Department with subpoena power, with full power to get at these interstate transactions. And I thank you for the support you’ve given us 

and look forward to examining particularly the qualifying facility 

issues in the future. 

And I thank you, Madam Chair. 

96

Senator BOXER. Thank you so much, Senator. It is just most unfortunate that we have to go in that direction. I’m supporting you, 

because FERC is supposed to do all this. And so it’s a little 

unnerving that they’re not. 

I’m really sorry that Senator Fitzgerald had to leave, because he 

said that he didn’t think Enron had anything to do with the California crisis, and I want to make sure that I heard you all loud and 

clearly. I believe all of you said they did play a role, a pretty large 

role. And if I could summarize it—tell me if I did not summarize 

it correctly. 

For the record, what you basically told our Subcommittee—and, 

by the way, I want to welcome Senator McCain, because he has 

been so strong in his efforts to protect consumers, and we really 

were at a crunch time whether this Committee was going to move 

forward with these kind of hearings, he was the voice to say yes. 

I want to thank him publicly for that. 

The message that you gave us was that, in fact, you felt that 

Enron did play a large role in our crisis in this way. First, in working aggressively to change the regulatory environment at the state 

level and at the federal level. And then when there was only one 

regulatory agency left, FERC, they worked very hard to stop them 

from doing anything for quite a long time and, third, by manipulating the market. Does that sum up what I heard? Does anyone 

disagree with that summary? 

OK, because what I want to hone in on is this. I have a total grip 

on what they did to get themselves out of regulation. I understand 

what they did with FERC, and I’ve put a lot of documentation in 

the record, Senators, on how they actually staved off any move by 

FERC for almost a year. And, as Mr. Freeman told us, that was 

the only thing that could have been done to save us. And, finally, 

when they acted, they did save us. And we have a good market, 

a good functioning situation right now in California. 

And I’m going to ask about what should happen if they don’t 

renew the order, the must-offer order and the cost-based pricing in 

a moment. But I want to make sure senators understand and I understand the way they manipulated the market. And all of you 

spoke to that. But I’ve picked up a few ways, but then I want you 

to tell me if I’m missing some of the ways. 

One, they kept selling the same electricity over and over again 

driving up the price along the way until it finally got to the consumer. I suppose you call that ‘‘derivatives.’’ Senator Feinstein 

tried to get a handle on that. We were unsuccessful in our reform 

measure on the floor of the Senate, but we’ll fight another day on 

it. But that’s one way. They kept selling the same electricity and 

upping the price along the way. The reasons for it, Ms. Hauter and 

I think Mr. McCullough also said they wanted to get—make that 

look like a profit-making operation to hide other problems. But, be 

that as it may, the California consumer was hit, and hit hard. One 

way. 

The second way, and we didn’t talk about it, but, Senator Dunn, 

you do have it in your testimony is that they jammed, they had a 

way of jamming transmission lines. So when they jammed the 

transmission lines, it set off a crisis. And I want you to explain, 

97

any one of you who understands it, how that would push up the 

costs when they did that. 

And the third thing I didn’t hear anyone say, and I—my understanding is this happened. I don’t know if Enron was involved in 

it or not, but more and more plants were taken offline for quote/

unquote ‘‘maintenance’’ then we ever saw before. I have the charts, 

and I wonder whether that was—if any of you know that that was 

used. 

So I’ve come up with three ways the market was manipulated by 

Enron and others. I wonder if any of you have any thoughts about 

whether I’m wrong on any of those three, and what other ways was 

the market manipulated. Ms. Lynch, I’ll start with you. 

Ms. LYNCH. Certainly. I completely agree with you, Senator 

Boxer, that Enron would trade among itself so that it could drive 

the price up. And not only would it drive the actual price of the 

electricity it was trading among itself on, but its internal trades 

could also affect the market indices on which other people traded. 

So if they kept trading essentially in sham transactions, the indices 

would reflect that, thereby allowing other people to start trading at 

that level, as well. 

Senator BOXER. They pushed the price up. 

Ms. LYNCH. Exactly. Because the prices that are paid to generators and suppliers in some transactions are tied to those indices, 

so when they went up, everybody else’s prices went up and it was 

just a race to the top. 

Certainly, in terms of transmission congestion, the internal trading could affect that. Enron company one could trade power to company two, supposedly transferring where that power was going to 

go. So from North to the South or they could trade the power so 

that a southern entity would have to send it north creating congestion. 

The interesting thing would be, then they would be paid to eliminate the congestion, but the congestion was always phantom congestion to start with. It never was going to go from the North to 

the South, because they were trading among themselves. 

Senator BOXER. Who paid them to eliminate the congestion? 

Ms. LYNCH. The ISO would then pay——

Senator BOXER. Oh. 

Ms. LYNCH.—an additional price to eliminate the congestion, 

which was called phantom——

Senator BOXER. So that upped the price more and more. 

Ms. LYNCH. It would up the price more and more. And, in fact, 

I believe that Enron was one of the earliest, if not the earliest, creators of phantom congestion in California’s lines. 

Senator BOXER. Phantom congestion. 

Ms. LYNCH. Yes. 

Senator BOXER. Wonderful way to explain it. 

Ms. LYNCH. And as to the power outages, we certainly have been 

tracking the physical withholding of power in California, as you 

know, although in 2000 we had 45,000 megawatts of power that 

could be produced by California power plants. In the winter of 

2000, up to 16,000 of those megawatts were off line. So a third of 

the power in California that could have been produced, wasn’t proVerDate 0ct 09 2002 11:58 Sep 26, 2005 Jkt 084329 PO 00000 Frm 00101 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\84329.TXT JACK PsN: JACKF
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duced. We haven’t yet come to the bottom of how Enron was involved in that. 

Senator BOXER. OK. Anybody else? Yes, Senator? 

Senator DUNN. Senator, I’d like to add a fourth area. 

Senator BOXER. Please. 

Senator DUNN. And that’s what has come to be known as ‘‘megawatt laundering.’’ What occurred under those circumstances is that 

when the Cal ISO imposed price caps in the year 2000, one of the 

exemptions from those price caps was power coming from out of 

state. And so many of the market participants, including Enron, 

who had legal control over many of the megawatts would, in a theoretical sense, transfer them out of state, or legal ownership out of 

state, then resell them back into California unrestricted by the 

price caps that the ISO had put in place in the year 2000. 

Senator BOXER. You call that ‘‘megawatt laundering.’’

Senator DUNN. Correct. 

Senator BOXER. This is good. We’re having a whole new lexicon 

here. Before we get to you, Mr. Freeman, do you have anything 

else. Those were four ways that——

Mr. FREEMAN. Yes, ma’am. 

Senator BOXER. Yes? 

Mr. FREEMAN. Enron—I negotiated longer-term contracts with 

many of these generators to try to get out of the spot market. 

Enron was the company I could not come to an agreement with. 

And they—among all of the folks that were taking advantage of us, 

they just would not agree to a long-term contract. And the irony 

of it all was, they questioned our credit. Their argument was——

Senator BOXER. Oh. 

Mr. FREEMAN.—that our credit was not good enough. That was 

their excuse. They made out in the secrecy of the short-term market where there was no evidence of what went on. And, of course, 

many of the transactions did not even have their name on it, because they simply brought together someone in the marketplace 

that had power to sell and someone who bought it. They made their 

profits off of the volatility. And it’s very interesting, and I think 

Mr. McCullough and others have pointed out, that as we brought 

things under control in California, Enron’s profits came under control——

Senator BOXER. Oh, yeah. 

Mr. FREEMAN.—and their demise. The other point I want to 

make is, this issue of transmission is a huge issue. Just think of 

the highways. If you have gridlock on a highway, then people 

would obviously pay to get by. And if you have gridlock, on the 

transmission system, it creates higher costs. 

Now, you have going on at the FERC today what I would say 

the, kind of the remains of the Enron syndrome where there is a 

concerted effort to turn transmission over to merchants, to the 

same people that were marketing generation. And if they are able 

to buy up pieces of the transmission system, you’ve got a new set 

of problems on our hands throughout the country. That needs to be 

nipped in the bud before it really gets rolling. But that is the big 

issue that Ken Lay was pushing. It was the subject of his conversations about the new FERC employees, and it’s one that deserves 

the attention of this Committee. 

99

Senator BOXER. Ms. Hauter? 

Ms. HAUTER. Yes, I wanted to address that issue of phantom congestion, because we’ve been looking at the FERC rims site and 

these disclosure forms that are really a disgrace. And there were 

basically four paths where Enron was making a hundred percent 

of its West Coast trades. And one of those paths was between Nevada and California. And the Nevada Public Utilities Commission 

is investigating the allegations around Enron’s daily capacity auctions at this Palo Verde place where there would be congestion. 

And I think that FERC—these forms—we’d be happy to make them 

available to you——

Senator BOXER. Please. 

Ms. HAUTER.—really demonstrate how outrageous the lack of information is. 

Senator BOXER. Thank you. Mr. McCullough, did you have something to add? And then I’m going to call on Senator Nelson and 

then Senator McCain. 

Mr. MCCULLOUGH. I’d like to comment on two of the issues that 

you’ve raised and then add a fifth. 

The first is on the spot pricing and potential sham transactions. 

We don’t have much transparency in this market. In fact, what little transparency we have now comes from third-party indices. And 

President Lynch made this point, but it needs to be made more 

clearly. 

The principal one is the Dow Jones indices. If one can add transactions to the Dow Jones indices in the proper way, one raises the 

price by contract from one end of the West Coast to the other—literally from Alberta to Mexico. This goes far beyond California. 

Most of the industries outside of California actually had their rates 

tied to this. So every one of those transactions had an impact, and 

those transactions directly were the cause for paper mills closing 

in Washington, metals firms throughout the Northwest, chemicals. 

So there was a tremendous opportunity in that one area. And there 

has been no oversight in that. 

On outages, John Robinson, at FERC, as you noted, did his study 

early in the process. We’ve really not had a return to that study. 

The plants in California, the ones that were averaging a 50 percent 

outage rate, as you noted, they’re not unusual in the U.S. In fact, 

we have a data base run by the North American Electric Reliability 

Council that follows that type of plant by age, by fuel, by size. They 

average an 80-plus availability rate everywhere, outside of these 

few short months in California when they averaged a 50 percent 

availability rate. And that was something FERC never addressed 

and probably should revisit. 

But last and most importantly is long-term contracts. California 

focused on hourly markets. That surprised most of us who had 

spent our lives in the industry, because most end-user supplies are 

monthly or yearly contracts. With the California crisis, the number 

of players fell dramatically. The market power of those players increased dramatically, and that left a trail of high-power, long-term 

contracts that are of vastly more value than the day-to-day hourly 

transactions. In fact, those are the ones that are going to last for 

the next ten years. Moreover, those contracts are currently being 

100

sold quietly by Enron today. The auction starts next week. And 

that’s one of the primary sources of value left in the shell of Enron. 

Those are incredibly valuable long-term assets that came out of 

this, and that’s what, of course, has been the fight. Your constituents and constituents elsewhere throughout the West Coast have 

been fighting to get FERC to review. 

Senator BOXER. Of course, we are deep in that fight. I have to 

move on to Senator Nelson and then to Senator McCain, and then 

I will come back for another round. 

STATEMENT OF HON. BILL NELSON,

U.S. SENATOR FROM FLORIDA 

Senator NELSON. Thank you, Madam Chairman. Madam Chairman, I remember the crisis in California. It affected virtually every 

one of your constituents. Everyone was outraged. The state government had to step in and start doing all kinds of things—and I assume the state legislature, as well—and ultimately your state got 

the price caps. 

Now, what I’d like to ask is, under that kind of crisis atmosphere, how could this kind of manipulation have been disguised so 

that it was not discovered back in the middle of the crisis? 

Ms. LYNCH. Senator, I’d like to note that there was no regulation 

at the federal level of either the online trading, although the—certain commissions were trying to regulate it, but Enron was really 

fighting that. There was no regulation at the SEC. And, frankly, 

although there should have been, there was no regulation at the 

Federal Energy Regulatory Commission. 

So because it was happening in the wholesale market, which is 

the responsibility of the federal government, the states could not 

even get access to information. For instance, one of the tariffs that 

our independent systems operator has filed at the FERC is a confidentiality tariff which requires the ISO to fight document requests by state government. So when we, the PUC, and the Attorney General and I believe the Senate, tried to get documents, we 

had to formally subpoena them. We fought with this non-governmental entity that was answering to FERC, not the state. 

So for the first year, the state was severely handicapped by both 

the lack of regulation, the lack of documentation, and affirmative 

confidentiality tariffs which required that non-governmental entity 

to operate in the best interests of the market participants and not 

state governments. 

Senator DUNN. Senator, if I could add real quickly——

Senator NELSON. Please. 

Senator DUNN.—as well. I want to give credit to a certain number of individuals. Mr. McCullough is one of them. The other one 

is state Senator Steve Peace in California. There are a number of 

individuals who, from the very beginning of this alleged competitive market, as dysfuctional as it is, that raised red flags from the 

very beginning. 

But in the political process—I wasn’t there in 1996, but I certainly understand, as an elected official representing almost a million constituents, that there really was an earnest desire on every 

elected official across the political spectrum to deliver to their constituents lower rates for electricity. And that was the promise. And 

101

it was only the industry and, save a handful of individuals, like Mr. 

McCullough, that really had the sophistication to understand that 

what was being set up was, in fact, not to the benefit of consumers 

but to the detriment of consumers. 

Mr. FREEMAN. Senator Nelson, if I could just add, I was there 

with the Governor during this crisis. And as an elected public official, I’m sure you understand when the house is on fire, your job 

is to put the fire out. The legislature was up until 3 o’clock in the 

morning passing bills to put the state in the business of buying 

electricity, because the utilities were out of money, and we were 

facing massive blackouts. The last thing in the world was that we 

had any time to be investigating what FERC ought to be doing, except we just kept blasting away that they needed to get back on 

the job. And it was—I would imagine that the Governor, the state, 

and the members of the legislature spent on the average of 18 

hours a day working on this subject all through those months. And, 

frankly, we just didn’t have the resources or the data to figure this 

out at that time. 

Senator NELSON. So the solution to this problem is more disclosure at the federal level so that this kind of non-disclosure shenanigans can’t go on in the future. Is that the solution? 

Ms. LYNCH. But also limiting or eliminating trades between affiliates for no other purpose than to raise the price. 

Senator NELSON. Were the other utilities in California doing the 

same thing as Enron? Was there any complicity there, or was this 

just Enron? 

Ms. LYNCH. It’s certainly not just Enron. Enron was kind of the 

best at it and the earliest. But there were other market participants and other merchant generators and sellers who were doing 

the same thing. And the unregulated affiliates of PG&E were also 

doing the same thing. 

Senator NELSON. Which affiliates? 

Ms. LYNCH. Unregulated affiliates. So the trading arm of PG&E, 

the unregulated utility, its sister subsidiary, was engaging in the 

same kinds of behavior. 

Senator NELSON. Have you, as the Public Service Commission, 

called to answer PG&E? 

Ms. LYNCH. Well, actually, the unregulated—well, the non-stateregulated trading arm is, in fact, regulated by FERC, because it 

trades in the wholesale market and is not the regulated utility. So 

they answer to FERC, not the PUC. 

Senator NELSON. But they’re owned by PG&E. 

Ms. LYNCH. They’re owned by PG&E, the holding company, not 

PG&E, the utility. 

Senator NELSON. Boy, I’d see if you couldn’t get the long arm of 

control some way through the Public Service Commission there. 

Senator. 

Senator DUNN. I just want to add one thing, Senator, to be fair. 

If you called before this Committee representatives of the major 

traders and generators and asked them the question about whether 

the primarily three California utilities—PG&E, Edison, and 

SDG&E—contributed to the dysfunction that beset the California 

wholesale market, they would, of course, answer that question yes. 

And what they will say is, as they have said to our committee, is 

102

that early on in the newly deregulated market, each of those three 

utilities had an incentive to see higher costs for purposes of recovering what’s called their stranded costs, and that, as a result, they 

accuse those three investor-owned utilities in California of attempting to manipulate the market early on in the formation of that new 

market. 

Senator NELSON. When you look at all of this unconscionable activity that affected every Californian, do you find in the management—let’s take in the case of Enron—do you find a particular person who holds the smoking gun of this manipulation? 

Mr. FREEMAN. Well, I’m just an old-fashioned guy that believes 

the top dog needs to take responsibility. 

Senator NELSON. Well, that would be Ken Lay. He was the Board 

Chairman and the CEO, and it seems to me that he’s the responsible person. I don’t know whether he broke any laws or not, but 

he was certainly the leader or the poster child, in terms of deregulation, and he and his people were there every step of the way urging us to give them maximum freedom from any oversight and 

maximum secrecy and no responsibility and, at the same time, 

making the pitch here in Washington to persuade the law enforcement agency, FERC, not to enforce the law. That’s what so galling 

about it. 

Senator BOXER. Senator McCain. 

STATEMENT OF HON. JOHN MCCAIN,

U.S. SENATOR FROM ARIZONA 

Senator MCCAIN. I want to thank the witnesses for being here 

today, and I want to thank you for this hearing, Senator Boxer. 

There are many aspects of this issue that average citizens and 

average senators don’t understand. So maybe I could just ask some 

simple questions. Ms. Lynch, what do you mean by saying that 

Enron was trading amongst themselves? 

Ms. LYNCH. We had a packet of slides where we used, as an example, in the fourth quarter of 2000 all the Enron related affiliates 

which had substantially the same personnel, so their directors were 

the same, the chairman was the same, their officers were the 

same——

Senator MCCAIN. I understand the chart. 

Ms. LYNCH. Right, all those——

Senator MCCAIN. But I’d like it in English. 

Ms. LYNCH. That all the related Enron affiliates were trading energy with each other, and so they traded over 11 million megawatt 

hours of electricity in the California market. 

Senator MCCAIN. How much money did it come to? 

Ms. LYNCH. You know, we don’t know, because we only know the 

ranges at which it was traded. It traded at prices up to $3,300 a 

megawatt hour. But since they don’t have to report that data to the 

FERC, we don’t know how much money they made among themselves, just driving the price up and affecting the market indices 

that then drove the price up throughout the West. 

Senator MCCAIN. Senator Dunn, was the original legislation, that 

was passed by the California legislature and signed by the Governor, a bad piece of legislation? 

Senator DUNN. Senator McCain, in retrospect, it was. 

103

Senator MCCAIN. Why? 

Senator DUNN. I don’t imply an ill will on behalf of any legislature at that time. As I had stated before, the California legislature 

trusted the industry in how to craft those rules to really achieve 

a free and competitive market. Fortunately, there were many tricks 

of the trade buried in that language that was proposed directly by 

the industry. 

Senator MCCAIN. Senator Dunn, suppose that they can’t renegotiate those contracts, that are so expensive. Let’s just assume worst 

case. How much does that cost the State of California? 

Senator DUNN. I’ll probably leave it to Mr. Freeman, who actually negotiates those. 

Senator MCCAIN. Either Mr. Freeman or Ms. Hauter could answer that question. 

Mr. FREEMAN. Well, the total dollar of revenue from all these 

contracts is about $43 billion. Those contracts are all in a state of 

intensive renegotiation. They also are before the FERC on a just 

and reasonable basis. In other words, those contracts were entered 

into at the height of the crisis because we were paying 35 cents a 

kilowatt hour, and we got long-term power for about seven. We certainly had to get that much of a reduction. The seven, though, was 

not based on costs, and it reflected the market power they had at 

the time. 

We’re in the process of both renegotiating and suing, going to 

FERC because we have a right to. And the excess profits in those 

contracts, you know, I wouldn’t want to just throw a number 

around, but it’s obviously some percentage of a $43 billion number. 

I think, as Senator Dirksen used to say, ‘‘a billion here, a billion 

there, pretty soon it’s real money.’’

Senator MCCAIN. Well, a rough number would be $15 billion or 

$20 billion? 

Mr. FREEMAN. That would be a rough number. Yes, sir. 

Ms. LYNCH. Senator, we have actually put a number down on the 

table at FERC. 

Senator MCCAIN. What is it? 

Ms. LYNCH. The PUC sued on those contracts and alleged 17 to 

20 billion dollars of excess profits that are unjust and unreasonable. 

Mr. FREEMAN. The Senator’s math is really quite good, then, isn’t 

it? 

[Laughter.] 

Senator MCCAIN. Mr. Freeman, suppose it’s a matter of record 

that Enron was lobbying FERC not to intervene. 

Mr. FREEMAN. Oh, yes, sir. That’s off the record, on the record, 

and in the record. 

Senator MCCAIN. Is it a matter of record that FERC eventually 

reversed its previous positions? 

Mr. FREEMAN. Yes, and I want to give credit to President Bush, 

who put two new people on the FERC, Pat Wood and Nora 

Brownell, who came in with Mr. Massey and, finally, in June, provided some orders that they must sell and some cap—they didn’t 

call it a cap, and that’s fine—but a mitigation. And it is to those 

two people and—those three people that I’m appealing to their integrity that they continue to help us. 

104

Senator MCCAIN. What was the time delay? 

Mr. FREEMAN. Well, it was the six-month period where we got 

taken to the cleaners, sir. 

Senator MCCAIN. So, that period of six months was really a critical time when the Governor felt that he had to sign long-term contracts because of FERC’s unwillingness or inability to act. Is that 

your view? 

Mr. FREEMAN. Well, certainly. Getting the prices down from 30 

to 35 cents down to 7 was an improvement even though the 7 was 

higher than what it ought to be. We had the equivalent of a gun 

to our head, and we were also faced with rolling blackouts, and the 

cop just wasn’t on the beat. 

We mounted a massive conservation program in addition to the 

long-term contracts. We started building power plants. We’ve actually completed a number of them, 3,000 megawatts this year. We’re 

doing everything we can. But the Federal Energy Regulatory Commission, which had a crucial role to play, just copped out, if you’ll 

pardon the expression. 

Senator MCCAIN. It’s hard to understand, isn’t it? 

Mr. FREEMAN. Hard to understand, from a public-interest point 

of view, but recognizing the seductive nature of the word ‘‘competition’’ and ‘‘deregulation.’’ Remember, we deregulated the airline industry. We deregulated the telephone industry. And everybody——

Senator MCCAIN. Sort of. 

Mr. FREEMAN. Sort of, yeah. But the word, in 1996 to 1997, is, 

‘‘This is going to reduce the price.’’ They promised a 20 percent rate 

reduction in 1996 when they lobbied this bill through. And, Senator, you know that when a bill is passed unanimously by any legislative body, there’s something wrong. 

[Laughter.] 

Mr. FREEMAN. And the 1890——

Senator MCCAIN. I think there were only three votes against the 

Telecommunications Reform Act, But that’s a different issue. Do 

you really believe that activity was carried out solely by Enron, or 

did they have——

Mr. FREEMAN. Oh, no, they——

Senator MCCAIN.—co-conspirators? 

Mr. FREEMAN. Oh, they had fellow travelers, I guess is the way 

to put it. They were the leader. They were the poster child. But everyone in the generating business was kind of with them, in the 

sense that they all wanted to make a bunch of money. I mean, 

there’s—we’re not testifying that they were alone. We’re testifying 

that they were the most persistent, the most active, the most contributory, if I might put it that way. 

Senator MCCAIN. My time has expired. 

Senator DUNN. Thank you, Senator McCain. I just want to—if I 

may add to Mr. Freeman’s comments, the California ISO has both 

what’s called the Department of Market Analysis and a Market 

Surveillance Committee. Both of these entities are primarily driven 

by economists whose sole role is to watch the behavior of market 

participants in the markets—in this case, the California Wholesale 

Electricity Market. Both of those entities, the Market Surveillance 

Committee and the Department of Market Analysis within ISO, 

have concluded from the very—almost the very beginning of this 

105

market in 1998 that there were numerous players, including the 

large generators and traders—in particular, them—that had been 

exercising market power since almost the very beginning of the 

market. There is little dispute, at least in my humble opinion, as 

to that fact. The real question is, from the generators and traders, 

when you ask them, ‘‘Were you exercising market power in the 

California Wholesale Electricity Market,’’ their response is simply, 

‘‘Well, how do you define market power?’’ That’s their defense. 

Senator MCCAIN. Thank you very much, Madam Chair. 

Senator BOXER. Thank you so much. 

Senator NELSON. Madam Chairman? 

Senator BOXER. Yes. 

Senator NELSON. I’d just be curious in the mathematical computation of what the average California electricity consumer lost by 

having to pay that 17 to 20 billion dollars extra that was as a result of running up the price. 

Senator BOXER. Well, the bottom line of the way it worked was, 

we did have some increases in our prices, which we’ll put in the 

record for you. But the state went into the power-buying business 

and it’s the taxpayers of California that got stuck because their 

utilities went under. That’s why we’re fighting for Mr. Wood and 

friends to keep that price cap on. That’s why we’re fighting to make 

sure that there’s a must-offer on the table, and that’s why we’re 

fighting for renegotiation of the contracts. But we’ll give you the 

details. This is a multibillion dollar scam that hit the people in my 

state. 

I want to just show—I’m sorry Senator McCain had to leave, but 

I was glad he was here—but I just wanted to say, what Mr. Freeman explained on the prices and maybe the media could take a 

look at this, because here’s the wholesale price of electricity—Bill, 

can you see this?—in 2000 October. Here it is. And look at how it 

shoots up all the way there, and as soon as the rate caps went in, 

it came back down to normal. And it’s eight months—eight months 

of sheer hell for the people of my state. And I want to make it 

clear, the Governor that signed that legislation was not Governor 

Davis. Am I correct? 

Senator DUNN. That’s correct. 

Senator BOXER. It was Governor Wilson. 

Senator DUNN. Right. 

Senator BOXER. So I just want to make sure that people get it 

straight. I’m sorry. OK, you have to leave, Loretta, don’t you? I 

know you have to catch a plane. 

Ms. LYNCH. I apologize. 

Senator BOXER. Senator Dunn, you have to leave? No, yes, you 

do? Let me just ask one question then, and then we’ll excuse the 

Californian folks. This idea of making sure that we renew the costbased pricing, I mean this is something we have to hone in on, because September 30, you know how life goes very fast when you’re 

having fun, and it’s going to go fast, and it’s going to be September 

30. If they don’t renew this, we could be back in deep trouble. So 

I just want to say to Mr. Freeman, who was very complimentary 

of Mr. Wood, as well he should be, eight months late this FERC 

finally did something when Mr. Wood came on. OK? So they did 

nothing, which was disastrous. They finally did something. 

106

This is a from a San Diego Union-Tribune article, February 23, 

‘‘Federal price caps on electricity, which many believe played a role 

in taming California’s power crisis, will expire as planned on September 30 if Pat Wood, head of FERC has his way. Speaking to a 

congressional subcommittee in Sacramento, Wood said the price 

controls need to expire to encourage market reforms in the state. 

‘The incentive is to get the market structure back in place,’ Wood 

said. He could not be reached for followup comments.’’

Mr. Freeman, if this kind of attitude prevails, will you speak, because I know you’re a straight shooter. Tell us what you see happening in our state or what could happen. 

Mr. FREEMAN. Well, it is impossible for California alone to control how power plants throughout the West operate. And the fallacy 

in assuming that California can develop mitigation or rules to govern these out-of-state generators is, indeed, a fallacy. 

Now, the Federal Power Act does not have a California exemption in it. We’re still part of the United States. And it’s been in effect, and there is nothing in the act that says that FERC can stop 

on September 30. And having put in place some controls over the 

market that have worked reasonably well, in the situation where 

everyone knows that the market is not inherently competitive all 

by itself, that those controls are needed, at the very least, there has 

to be a hearing on the record and some findings by this agency that 

the marketplace is competitively functional. They can’t make those 

findings, because it’s not true. And for them to have decided last 

summer that they’re going to put the cop on the beat for a year 

is arbitrary, capricious, and, in my view, contrary to their duties 

under the Federal Power Act. 

And, you know, for a while it looked like when we were yelling 

for price caps, we were whistling in the dark. But after a while, the 

folks, even in the White House, heard us. California is a big state. 

And it seems to me that Chairman Wood, Ms. Brownell, Mr. 

Massey are intelligent people, and they realize that their job is to 

keep the prices under reasonable control until there is real competition. They have done some good. They have no basis for stopping on September 30. And, quite frankly, I believe that their 

minds have to still be open. You know, I’m kind of an optimistic 

fellow. We kept plugging away last year and finally won, and I 

think if we’re persistent in making the point that there’s still a 

hope over there. You know, I remember in the Cold War when 

President Kennedy ignored the first letter from Khrushchev and 

just accepted the second letter, and it ended the Cuban Missile Crisis. So I’m willing to just ignore what Chairman Wood may have 

said in February and hope that he’ll give us a better answer if we 

are persistent. 

Senator BOXER. Senator. 

Senator DUNN. Thank you, Senator Boxer. I want to just add the 

catch–22 we are now in in California. When the prices spike so 

high, as referenced on your chart, the private sector was very interested in building lots of new generation plants in California to 

maximize profits from those high prices. And, in fact, there was a 

hew and cry about us, at the state legislative level to reduce the 

environmental regulations, make it easy to permit these new generation units that were being planned because of the high prices. 

107

As a result of the move by FERC last June, the long-term contracts, we now have a stable market. Many plants, the permits 

were granted. They started planning for construction. 

Once the markets stabilized, they’ve walked away from all of—

well, not all, but many of those planned plants for which they obtained permits because they can’t get the high prices. Yet it’s those 

new plants that will provide excess capacity that has the possibility 

of introducing true competition to that market. 

Senator BOXER. Well—Ms. Lynch. 

Ms. LYNCH. If the price caps come off on October 1 without further reform of the markets, it will endanger the health of the utilities. The utilities will not be able to get back into the power procurement business, and someone will need to continue to be the 

provider of last resort. The problem, of course, is too many of the 

generators and sellers have learned Enron’s lessons very well. And 

Enron and its followers will roar back with a vengeance on October 

1 and destabilize both the reliability of the market, meaning blackouts, and the prices, meaning price increases. 

Senator BOXER. Well, let me thank our California witnesses, and 

I’m going to let you go in two minutes. I think you were absolutely 

terrific, all of you, this whole panel. You have shone a light on 

what happened on the ground in California while a lot of us were 

begging FERC for help, for that eight-month period when nothing 

was done, the billions of dollars that were transferred from ordinary folk, the taxpayers of our state, to these generators. 

Mr. Skilling said, you know, ‘‘We were kind of like the Titanic, 

but when the Titanic went down, it had its lights on and we 

weren’t going to have our lights on.’’ Well, we have our lights on, 

and they went down. Let there be a lesson in that. 

And you folks under the gun there day after day, just—you get 

my thanks. I know how hard it was for the whole legislature, 

Democrats and Republicans back there working 18 hours a day. I 

was on the phone to a few of them myself. 

We will continue to put tremendous pressure on FERC. We are 

going to send them the transcript of today’s hearing, because I 

think there are a lot of lessons learned. My colleagues leaned over 

to me during your testimony and said, ‘‘They’re ready to keep the 

pressure on.’’

And so I want to thank all of you. The picture is really clear now 

of what went on there. Enron led the pack, got out of regulation, 

manipulated the market, and wined and dined FERC so they did 

nothing for too long a period of time. If there’s anything I know it’s 

that I’m going to try to make sure something like that never happens again. 

I want to thank you for adding so many intelligent ideas and 

concepts and facts to the picture, to the story. Thank you very 

much, and we stand adjourned. 

[Whereupon, at 12:09 p.m., the hearing was adjourned.] 

(109)

A P P E N D I X

PREPARED STATEMENT OF HON. BOB FILNER

CONGRESSMAN FROM CALIFORNIA

Good morning. Thank you Senator Dorgan for welcoming my testimony. I also 

want to thank my California colleague, Senator Boxer, for pushing for this hearing 

to get to the bottom on Enron’s manipulation of our California energy market. 

When the whole Enron mess hit, my constituents and I were not surprised. We 

knew our energy markets had been criminally manipulated during the summer of 

2000 and through the winter of 2001. Paying up to 10 times what they had for electricity in the months before was ludicrous and criminal. What would you think if 

you suddenly had to pay $20 for a loaf of bread? 

The agency that was supposed to protect our consumers, the Federal Energy Regulatory Commission, FERC, did nothing. They found that the prices were ‘‘unjust 

and unreasonable’’ and continued to let the energy companies charge them. Why? 

Could the $2 million in contributions that Enron contributed to Republican candidates from 1999 through 2002 have anything to do with FERC’s inaction? It certainly seems suspect. It guaranteed Enron a place at Vice President Cheney’s energy task force—not for one, but seven visits! And the result of this access and 

Enron’s investment? Not only White House energy plans wholeheartedly supporting 

deregulation, under which Enron was reaping such huge windfall profits in California, but I suspect FERC’s inaction. 

You see, during the energy crisis, FERC investigated—or so they say—the situation, and they found no wrongdoing! Now that the spotlight is burning brightly on 

Enron, FERC has suddenly announced that they are going to look into this matter 

again. Why, if the first investigation was not just smoke and mirrors, do they say, 

‘‘Let us look again’’? 

That is why I have introduced legislation calling for a special prosecutor to be 

named to look into the whole Enron mess. My legislation asks for a special prosecutor to look into the relationship between Enron and the manipulation of the 

stock market and its value per share; to look into the relationship between contributions by Enron to the President, the Vice President, Cabinet officers, other administration officials, and Members of Congress. 

I am asking the prosecutor to look into the influence of Enron on Federal and 

State legislation, including, in particular, the effort to deregulate energy markets, 

both in States and in the Nation as a whole. 

The legislation also asks for the prosecutor to look into the relationship between 

Enron and our whole Federal and State regulatory system. 

This special, hopefully impartial, investigation is necessary to restore confidence 

in our political process and to clearly discern where Enron’s tentacles were in the 

energy crisis that hit California in the summer of 2000. I hope that you will get 

closer to the truth in today’s hearing. But we must involve a prosecutor who has 

the latitude to bring criminal charges. 

The special prosecutor will look beyond the business scandal that screams for reforms of our auditing practices and the strengthening of the safety of pension plans. 

She or he must conduct a criminal investigation into the pervasive corruption of 

American politics. 

I believe the prosecutor will find, and you may discover a hint of it today, that 

California’s so-called electricity crisis, was not a problem of supply and demand, but 

in fact, a crisis resulting from the manipulation of our market. That criminal manipulation of our market resulted in the theft of anywhere between $20 billion and $40 

billion from California ratepayers. Enron was not only making energy policy, it was 

carrying it out in California. The CEO of Enron, Ken Lay, personally submitted 

names and interviewed candidates to be members of our Federal Energy Regulatory 

Commission. Thus FERC became, in my words, the ‘‘Federal Enron Rubber-stamping Commission.’’ 

We know the connections, close connections, between this Administration and 

Enron and the people who came directly from Enron to work in this Administration. 

110

It was those connections that caused this scandal, and it was the connections between Enron and State legislatures and State legislators and State regulatory commissions and Federal regulatory commissions that caused their success. 

That is what I am asking you to investigate today and to join me in calling for 

a special prosecutor who can go even deeper into the sordid dealings of Enron. We 

must discover why Enron flew so high for so long and stole so many billions from 

so many people. 

The American people do not want this investigation to stop with only a few business reforms instituted and maybe one or two folks thrown into jail. They are demanding the investigation of the whole corruption of our political system so we can 

discover who beyond Enron and a small group of energy insiders perpetrated the 

crime!

111

LEGISLATION SUBMITTED FOR THE RECORD BY HON. BARBARA BOXER, U.S. SENATOR

FROM CALIFORNIA

II

107TH CONGRESS

1ST SESSION S. 26

To amend the Department of Energy Authorization Act to authorize the

Secretary of Energy to impose interim limitations on the cost of electric

energy to protect consumers from unjust and unreasonable prices in

the electric energy market.

IN THE SENATE OF THE UNITED STATES

JANUARY 22, 2001

Mrs. FEINSTEIN (for herself and Mrs. BOXER) introduced the following bill;

which was read twice and referred to the Committee on Energy and Natural Resources

A BILL

To amend the Department of Energy Authorization Act to

authorize the Secretary of Energy to impose interim

limitations on the cost of electric energy to protect consumers from unjust and unreasonable prices in the electric energy market.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. INTERIM REGIONAL LIMITATIONS.

4 Title IV of the Department of Energy Organization

5 Act (42 U.S.C. 7171 et seq.) is amended by adding at

6 the end the following:


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2

•S 26 IS

1 ‘‘SEC. 408. INTERIM REGIONAL LIMITATIONS.

2 ‘‘(a) DEFINITIONS.—In this section:

3 ‘‘(1) COMMISSION.—The term ‘Commission’

4 means the Federal Energy Regulatory Commission.

5 ‘‘(2) COST-OF-SERVICE BASED RATE.—The

6 term ‘cost-of-service based rate’ means a rate,

7 charge, or classification for the sale of electric en8 ergy that is equal to—

9 ‘‘(A) all the variable and fixed costs for

10 producing the electric energy; and

11 ‘‘(B) a return on and of any invested cap12 ital.

13 ‘‘(3) INTERIM REGIONAL PRICE LIMITATION.—

14 The term ‘interim regional price limitation’ means a

15 price limitation on the rates charged for the provi16 sion of electric energy that—

17 ‘‘(A) includes a region-wide wholesale elec18 tric energy price limitation for a region com19 prising the Western Systems Coordinating

20 Council; and

21 ‘‘(B) reflects load differentiated demand.

22 ‘‘(4) LOAD DIFFERENTIATED.—The term ‘load

23 differentiated’ means the difference between price

24 limitations by season, time of day, and other rel25 evant usage patterns.


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3

•S 26 IS

1 ‘‘(5) SECRETARY.—The term ‘Secretary’ means

2 the Secretary of Energy.

3 ‘‘(b) AUTHORITY TO IMPOSE LIMITATIONS.—The

4 Secretary shall impose, in any region of the United States,

5 an interim regional price limitation, or cost-of-service

6 based rate, on any sale of electric energy at wholesale rate

7 in interstate commerce subject to the jurisdiction of the

8 Commission under part II of the Federal Power Act

9 whenever—

10 ‘‘(1) the Commission has determined that the

11 rate, charge, or classification otherwise applicable to

12 such sale is unjust, unreasonable, or unduly pref13 erential or the Secretary determines that the rate,

14 charge, or classification otherwise applicable to such

15 sale exceeds the marginal cost of producing the elec16 tric energy by a significant amount or for a signifi17 cant length of time; and

18 ‘‘(2) the Secretary determines that—

19 ‘‘(A) the continued existence of such rate,

20 charge, or classification threatens public health

21 and safety or the economy of any State or re22 gion; and

23 ‘‘(B) the Commission has otherwise failed

24 to act to improve the situation.


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4

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1 For purposes of carrying out this section, the Secretary

2 may exercise any authority vested in the Commission

3 under the Federal Power Act for the fixing and enforcing

4 of rates, charges, and classifications that are just and rea5 sonable under Part II of that Act.

6 ‘‘(c) DURATION.—A regional price limitation or cost7 of-service based rate imposed under subsection (b) shall

8 remain in effect until such time as the market reflects just

9 and reasonable rates, as determined by the Secretary.

10 ‘‘(d) AUTHORITY TO OPT OUT.—

11 ‘‘(1) IN GENERAL.—The Governor of any State

12 within a region in which a regional price limitation

13 or cost-of-service based rate is imposed under sub14 section (b) may waive the application of such limita15 tion or rate to sales of electric energy to purchasers

16 in that State by notifying the Secretary in writing

17 at any time after imposition of the price limitation

18 or cost-of-service based rate.

19 ‘‘(2) EFFECTIVE DATE.—Not later than 30

20 days after receiving a letter from a Governor of any

21 State under paragraph (1), the Secretary shall waive

22 the application of the price limitation or cost-of-serv23 ice based rate to sales of electric energy to pur24 chasers in that State.


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5

•S 26 IS

1 ‘‘(e) PURPA FACILITIES NOT COVERED.—The au2 thority of subsection (b) shall not apply to any sale of elec3 tric energy generated by a qualifying small power produc4 tion facility or qualifying cogeneration facility (as defined

5 in section 3 of the Federal Power Act) that is exempt in

6 whole or in part from the Federal Power Act as provided

7 in section 210(e) of the Public Utility Regulatory Policies

8 Act of 1978.

9 ‘‘(f) EFFECT ON OTHER LAW.—Nothing in this sec10 tion affects any authority of the Commission under the

11 Federal Power Act (16 U.S.C. 791a et seq.) with respect

12 to sales of electric energy forwhich no determination has

13 been made under subsection (b).

14 ‘‘(g) EFFECTIVE DATE.—This section shall apply to

15 contracts for the sale of electric energy entered into or

16 renewed after the enactment of this section.’’.

Æ


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1

II

107TH CONGRESS

1ST SESSION S. 80

To require the Federal Energy Regulatory Commission to order refunds

of unjust, unreasonable, unduly discriminatory or preferential rates and

charges for electricity, to establish cost-based rates for electricity sold

at wholesale in the Western Systems Coordinating Council, and for

other purposes.

IN THE SENATE OF THE UNITED STATES

JANUARY 22, 2001

Mrs. BOXER (for herself and Mrs. FEINSTEIN) introduced the following bill;

which was read twice and referred to the Committee on Energy and Natural Resources

A BILL

To require the Federal Energy Regulatory Commission to

order refunds of unjust, unreasonable, unduly discriminatory or preferential rates and charges for electricity, to

establish cost-based rates for electricity sold at wholesale

in the Western Systems Coordinating Council, and for

other purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘California Electricity

5 Consumers Relief Act of 2001’’.


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•S 80 IS

1 SEC. 2. ADDITIONAL REFUND AUTHORITY UNDER FEDERAL

2 POWER ACT.

3 Section 206 of the Federal Power Act (16 U.S.C.

4 824e) is amended by adding the following at the end there5 of:

6 ‘‘(e)(1) The provisions of this subsection shall apply

7 only to refunds of rates and charges in effect pursuant

8 to a rule or order of the Commission providing for market9 based rates and charges for a transmission or sale of elec10 tric energy subject to the jurisdiction of the Commission.

11 The provisions of subsection (b) concerning refunds shall

12 not apply to such rates and charges.

13 ‘‘(2) When the Commission has found, after notice

14 and opportunity for a hearing, on its own motion or upon

15 complaint, that any rate or charge referred to in para16 graph (1) is unjust, unreasonable, unduly discriminatory

17 or preferential, the Commission shall order a refund of

18 the portion of such rate or charge that exceeds the rate

19 or charge that the Commission finds to be just, reasonable

20 and not unduly discriminatory or preferential. Such re21 fund shall include interest from the date on which the rate

22 or charge was paid.

23 ‘‘(3) No order providing for a refund under this sub24 section may be issued with respect to amounts paid prior

25 to the date 2 years before the date on which the notice


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3

•S 80 IS

1 referred to in paragraph (2) is published in the Federal

2 Register.’’

3 (b) EFFECTIVE DATE.—The amendment made by

4 subsection (a) shall not apply to any complaint filed before

5 August 1, 2000.

6 (c) SAVINGS PROVISIONS.—Nothing in the amend7 ment made by subsection (a) shall affect any authority

8 of the Commission (or of any court) existing before the

9 enactment of this section, including any such authority to

10 issue any rule or order relating to market-based rates, to

11 approve or fix rates and charges, or to order refunds of

12 any rate or charge.

13 SEC. 3. ESTABLISHMENT OF COST-BASED RATES FOR

14 WHOLESALE SALES OF ELECTRICITY IN THE

15 WESTERN UNITED STATES.

16 (a) EXERCISE OF AUTHORITY TO ESTABLISH MAX17 IMUM PRICES.—

18 (1) DETERMINATION ON ITS OWN MO19 TION.—The Federal Energy Regulatory Com20 mission shall issue an order establishing the

21 maximum price for electricity sold at wholesale

22 subject to the jurisdiction of the Commission

23 under the Federal Power Act in the Western

24 Systems Coordinating Council for any period

25 after June 1, 2000, if the Commission deterVerDate 0ct 09 2002 11:58 Sep 26, 2005 Jkt 084329 PO 00000 Frm 00122 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\84329.TXT JACK PsN: JACKF

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4

•S 80 IS

1 mines that any rates charged for such wholesale

2 sales of electricity are unjust, unreasonable, un3 duly discriminatory or preferential under sec4 tion 206 of the Federal Power Act. The Com5 mission may make such determination on its

6 own motion at any time. If the Governor of any

7 State within the Western Systems Coordinating

8 Council submits a petition to the Commission to

9 make such determination with respect to any

10 such rates, within 30 days after receipt of the

11 petition, the Commission shall determine if such

12 rates are unjust, unreasonable, unduly discrimi13 natory or preferential under section 206 of the

14 Federal Power Act.

15 (b) MAXIMUM PRICE.—The maximum price estab16 lished by the Federal Energy Regulatory Commission pur17 suant to subsection (a) shall be a price based on the sell18 er’s costs, including a return of and on invested capital,

19 established in accordance with part II of the Federal

20 Power Act.

21 (c) REFUNDS OF PRICES PAID IN EXCESS OF MAX22 IMUM PRICE.—Any prices paid in excess of the maximum

23 price established pursuant to this section shall be refunded

24 pursuant to section 206 of the Federal Power Act, as

25 amended by section 2 of this Act.


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5

•S 80 IS

1 (d) PENALTIES.—Any person who violates any re2 quirement of this section shall be subject to civil penalties

3 equal to 3 times the value of the amount involved in such

4 violation. The Federal Energy Regulatory Commission

5 shall assess such penalties, after notice and opportunity

6 for public hearing, in accordance with the same provisions

7 as are applicable under section 31(d) of the Federal Power

8 Act in the case of civil penalties assessed under such sec9 tion 31.

10 (e) SAVINGS PROVISIONS.—Nothing in this section

11 shall affect any authority of the Commission existing be12 fore the enactment of this section to approve or fix rates

13 and charges, or to order refunds of any rate or charge.

14 SEC. 4. SEVERABILITY.

15 If any provision of this Act is found to be unenforce16 able or invalid, no other provision of this Act shall be in17 validated thereby.

Æ


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1

I

107TH CONGRESS

1ST SESSION H. R. 238

To amend the Department of Energy Authorization Act to authorize the

Secretary of Energy to impose interim limitations on the cost of electric

energy to protect consumers from unjust and unreasonable prices in

the electric energy market.

IN THE HOUSE OF REPRESENTATIVES

JANUARY 20, 2001

Mr. HUNTER (for himself, Ms. ESHOO, Mr. CUNNINGHAM, Mr. ISSA, Mrs.

CAPPS, and Ms. LEE) introduced the following bill; which was referred

to the Committee on Energy and Commerce

A BILL

To amend the Department of Energy Authorization Act to

authorize the Secretary of Energy to impose interim

limitations on the cost of electric energy to protect consumers from unjust and unreasonable prices in the electric energy market.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. INTERIM REGIONAL LIMITATIONS.

4 Title IV of the Department of Energy Organization

5 Act (42 U.S.C. 7171 et seq.) is amended by adding at

6 the end the following:


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1 ‘‘SEC. 408. INTERIM REGIONAL LIMITATIONS.

2 ‘‘(a) DEFINITIONS.—In this section:

3 ‘‘(1) COMMISSION.—The term ‘Commission’

4 means the Federal Energy Regulatory Commission.

5 ‘‘(2) COST-OF-SERVICE BASED RATE.—The

6 term ‘cost-of-service based rate’ means a rate,

7 charge, or classification for the sale of electric en8 ergy that is equal to—

9 ‘‘(A) all the variable and fixed costs for

10 producing the electric energy; and

11 ‘‘(B) a return on and of any invested cap12 ital.

13 ‘‘(3) INTERIM REGIONAL PRICE LIMITATION.—

14 The term ‘interim regional price limitation’ means a

15 price limitation on the rates charged for the provi16 sion of electric energy that—

17 ‘‘(A) includes a region-wide wholesale elec18 tric energy price limitation for a region com19 prising the Western Systems Coordinating

20 Council; and

21 ‘‘(B) reflects load differentiated demand.

22 ‘‘(4) LOAD DIFFERENTIATED.—The term ‘load

23 differentiated’ means the difference between price

24 limitations by season, time of day, and other rel25 evant usage patterns.


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1 ‘‘(5) SECRETARY.—The term ‘Secretary’ means

2 the Secretary of Energy.

3 ‘‘(b) AUTHORITY TO IMPOSE LIMITATIONS.—The

4 Secretary shall impose, in any region of the United States,

5 an interim regional price limitation, or cost-of-service

6 based rate, on any sale of electric energy at wholesale in

7 interstate commerce subject to the jurisdiction of the

8 Commission under part II of the Federal Power Act

9 whenever—

10 ‘‘(1) the Commission has determined that the

11 rate, charge, or classification otherwise applicable to

12 such sale is unjust, unreasonable, or unduly pref13 erential or the Secretary determines that the rate,

14 charge, or classification otherwise applicable to such

15 sale exceeds the marginal cost of producing the elec16 tric energy by a significant amount or for a signifi17 cant length of time; and

18 ‘‘(2) the Secretary determines that—

19 ‘‘(A) the continued existence of such rate,

20 charge, or classification threatens public health

21 and safety or the economy of any State or re22 gion; and

23 ‘‘(B) the Commission has otherwise failed

24 to act to improve the situation.


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1 For purposes of carrying out this section, the Secretary

2 may exercise any authority vested in the Commission

3 under the Federal Power Act for the fixing and enforcing

4 of rates, charges, and classifications that are just and rea5 sonable under Part II of that Act.

6 ‘‘(c) DURATION.—A regional price limitation or cost7 of-service based rate imposed under subsection (b) shall

8 remain in effect until such time as the market reflects just

9 and reasonable rates, as determined by the Secretary.

10 ‘‘(d) AUTHORITY TO OPT OUT.—

11 ‘‘(1) IN GENERAL.—The Governor of any State

12 within a region in which a regional price limitation

13 or cost-of-service based rate is imposed under sub14 section (b) may waive the application of such limita15 tion or rate to sales of electric energy to purchasers

16 in that State by notifying the Secretary in writing

17 at any time after imposition of the price limitation

18 or cost-of-service based rate.

19 ‘‘(2) EFFECTIVE DATE.—Not later than 30

20 days after receiving a letter from a Governor of any

21 State under paragraph (1), the Secretary shall waive

22 the application of the price limitation or cost-of-serv23 ice based rate to sales of electric energy to pur24 chasers in that State.


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1 ‘‘(e) PURPA FACILITIES NOT COVERED.—The au2 thority of subsection (b) shall not apply to any sale of elec3 tric energy generated by a qualifying small power produc4 tion facility or qualifying cogeneration facility (as defined

5 in section 3 of the Federal Power Act) that is exempt in

6 whole or in part from the Federal Power Act as provided

7 in section 210(e) of the Public Utility Regulatory Policies

8 Act of 1978.

9 ‘‘(f) EFFECT ON OTHER LAW.—Nothing in this sec10 tion affects any authority of the Commission under the

11 Federal Power Act (16 U.S.C. 791a et seq.) with respect

12 to sales of electric energy for which no determination has

13 been made under subsection (b).

14 ‘‘(g) EFFECTIVE DATE.—This section shall apply to

15 contracts for the sale of electric energy entered into or

16 renewed after the enactment of this section.’’.

Æ


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I

107TH CONGRESS

1ST SESSION H. R. 268

To require the Federal Energy Regulatory Commission to order refunds

of unjust, unreasonable, unduly discriminatory or preferential rates and

charges for electricity, to establish cost-based rates for electricity sold

at wholesale in the Western Systems Coordinating Council, and for

other purposes.

IN THE HOUSE OF REPRESENTATIVES

JANUARY 30, 2001

Mr. FILNER (for himself, Mrs. DAVIS of California, Mrs. NAPOLITANO, Mr.

HONDA, Mr. STARK, Mr. MATSUI, and Ms. MILLENDER-MCDONALD) introduced the following bill; which was referred to the Committee on Energy and Commerce

A BILL

To require the Federal Energy Regulatory Commission to

order refunds of unjust, unreasonable, unduly discriminatory or preferential rates and charges for electricity, to

establish cost-based rates for electricity sold at wholesale

in the Western Systems Coordinating Council, and for

other purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘California Electricity

5 Consumers Relief Act of 2001’’.


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1 SEC. 2. ADDITIONAL REFUND AUTHORITY UNDER FEDERAL

2 POWER ACT.

3 Section 206 of the Federal Power Act (16 U.S.C.

4 824e) is amended by adding the following at the end there5 of:

6 ‘‘(e)(1) The provisions of this subsection shall apply

7 only to refunds of rates and charges in effect pursuant

8 to a rule or order of the Commission providing for market9 based rates and charges for a transmission or sale of elec10 tric energy subject to the jurisdiction of the Commission.

11 The provisions of subsection (b) concerning refunds shall

12 not apply to such rates and charges.

13 ‘‘(2) When the Commission has found, after notice

14 and opportunity for a hearing, on its own motion or upon

15 complaint, that any rate or charge referred to in para16 graph (1) is unjust, unreasonable, unduly discriminatory

17 or preferential, the Commission shall order a refund of

18 the portion of such rate or charge that exceeds the rate

19 or charge that the Commission finds to be just, reasonable

20 and not unduly discriminatory or preferential. Such re21 fund shall include interest from the date on which the rate

22 or charge was paid.

23 ‘‘(3) No order providing for a refund under this sub24 section may be issued with respect to amounts paid prior

25 to the date 2 years before the date on which the notice


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1 referred to in paragraph (2) is published in the Federal

2 Register.’’

3 (b) EFFECTIVE DATE.—The amendment made by

4 subsection (a) shall not apply to any complaint filed before

5 August 1, 2000.

6 (c) SAVINGS PROVISIONS.—Nothing in the amend7 ment made by subsection (a) shall affect any authority

8 of the Commission (or of any court) existing before the

9 enactment of this section, including any such authority to

10 issue any rule or order relating to market-based rates, to

11 approve or fix rates and charges, or to order refunds of

12 any rate or charge.

13 SEC. 3. ESTABLISHMENT OF COST-BASED RATES FOR

14 WHOLESALE SALES OF ELECTRICITY IN THE

15 WESTERN UNITED STATES.

16 (a) EXERCISE OF AUTHORITY TO ESTABLISH MAX17 IMUM PRICES.—

18 (1) DETERMINATION ON ITS OWN MO19 TION.—The Federal Energy Regulatory Com20 mission shall issue an order establishing the

21 maximum price for electricity sold at wholesale

22 subject to the jurisdiction of the Commission

23 under the Federal Power Act in the Western

24 Systems Coordinating Council for any period

25 after June 1, 2000, if the Commission deterVerDate 0ct 09 2002 11:58 Sep 26, 2005 Jkt 084329 PO 00000 Frm 00132 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\84329.TXT JACK PsN: JACKF

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1 mines that any rates charged for such wholesale

2 sales of electricity are unjust, unreasonable, un3 duly discriminatory or preferential under sec4 tion 206 of the Federal Power Act. The Com5 mission may make such determination on its

6 own motion at any time. If the Governor of any

7 State within the Western Systems Coordinating

8 Council submits a petition to the Commission to

9 make such determination with respect to any

10 such rates, within 30 days after receipt of the

11 petition, the Commission shall determine if such

12 rates are unjust, unreasonable, unduly discrimi13 natory or preferential under section 206 of the

14 Federal Power Act.

15 (b) MAXIMUM PRICE.—The maximum price estab16 lished by the Federal Energy Regulatory Commission pur17 suant to subsection (a) shall be a price based on the sell18 er’s costs, including a return of and on invested capital,

19 established in accordance with part II of the Federal

20 Power Act.

21 (c) REFUNDS OF PRICES PAID IN EXCESS OF MAX22 IMUM PRICE.—Any prices paid in excess of the maximum

23 price established pursuant to this section shall be refunded

24 pursuant to section 206 of the Federal Power Act, as

25 amended by section 2 of this Act.


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1 (d) PENALTIES.—Any person who violates any re2 quirement of this section shall be subject to civil penalties

3 equal to 3 times the value of the amount involved in such

4 violation. The Federal Energy Regulatory Commission

5 shall assess such penalties, after notice and opportunity

6 for public hearing, in accordance with the same provisions

7 as are applicable under section 31(d) of the Federal Power

8 Act in the case of civil penalties assessed under such sec9 tion 31.

10 (e) SAVINGS PROVISIONS.—Nothing in this section

11 shall affect any authority of the Commission existing be12 fore the enactment of this section to approve or fix rates

13 and charges, or to order refunds of any rate or charge.

14 SEC. 4. SEVERABILITY.

15 If any provision of this Act is found to be unenforce16 able or invalid, no other provision of this Act shall be in17 validated thereby.

Æ


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II

106TH CONGRESS

2D SESSION S. 3093

To require the Federal Energy Regulatory Commission to roll back the

wholesale price of electric energy sold in the Western System Coordinating Council, and for other purposes.

IN THE SENATE OF THE UNITED STATES

SEPTEMBER 21, 2000

Mrs. BOXER introduced the following bill; which was read twice and referred

to the Committee on Energy and Natural Resources

A BILL

To require the Federal Energy Regulatory Commission to

roll back the wholesale price of electric energy sold in

the Western System Coordinating Council, and for other

purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Halt Electricity Price5 gouging in San Diego Act’’ or ‘‘HELP San Diego Act’’.


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1 SEC. 2. ROLL BACK OF WHOLESALE PRICE FOR ELEC2 TRICITY IN WESTERN MARKET.

3 (a) CEILING.—The Federal Energy Regulatory Com4 mission shall, by not later than November 30, 2000, issue

5 an order establishing the maximum price for electricity

6 sold at wholesale subject to the jurisdiction of the Commis7 sion under the Federal Power Act in the Western System

8 Coordinating Council after June 1, 2000.

9 (b) MAXIMUM PRICE.—For purposes of this Act, the

10 maximum price established by the Federal Energy Regu11 latory Commission shall be the lesser of—

12 (1) an average of the wholesale price for electric

13 energy sold in the Western System Coordinating

14 Council in the three-year period immediately before

15 June 1, 2000, or

16 (2) a price based on a cost-based formula for

17 wholesale rates established in accordance with Part

18 II of the Federal Power Act.

19 (c) REFUND.—Any person selling electric energy at

20 wholesale subject to the jurisdiction of the Commission

21 under the Federal Power Act in the Western System Co22 ordinating Council after June 1, 2000, who has received

23 in excess of the maximum price for such energy shall

24 promptly refund to the purchaser the full amount of such

25 excess. Such purchaser shall promptly transfer such re26 fund to the ultimate consumers of such electric energy,


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1 except that if such purchaser resold the electric energy at

2 wholesale to any other wholesale purchaser, each such

3 wholesale purchaser shall refund such amount to the per4 son or persons who purchased such electric energy from

5 such wholesale purchaser.

6 (d) PENALTIES.—Any person who violates any re7 quirement of this Act shall be subject to civil penalties

8 equal to three times the value of the amount involved in

9 such violation. The Federal Energy Regulatory Commis10 sion shall assess such penalties, after notice and oppor11 tunity for public hearing, in accordance with the same pro12 visions as are applicable under section 31(d) of the Fed13 eral Power Act in the case of civil penalties assessed under

14 such section 31.

15 (e) SEPARABILITY.—If any provision of this Act is

16 found to be unenforceable or invalid, no other provision

17 of this Act shall be affected thereby.

Æ


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I

106TH CONGRESS

2D SESSION H. R. 5131

To require the Federal Energy Regulatory Commission to roll back the

wholesale price of electric energy sold in the Western System Coordinating Council, and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

SEPTEMBER 7, 2000

Mr. FILNER introduced the following bill; which was referred to the

Committee on Commerce

A BILL

To require the Federal Energy Regulatory Commission to

roll back the wholesale price of electric energy sold in

the Western System Coordinating Council, and for other

purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Halt Electricity Price5 gouging in San Diego Act’’ or ‘‘HELP San Diego Act’’.


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•HR 5131 IH

1 SEC. 2. ROLL BACK OF WHOLESALE PRICE FOR ELEC2 TRICITY IN WESTERN MARKET.

3 (a) CEILING.—The Federal Energy Regulatory Com4 mission shall, by not later than November 30, 2000, issue

5 an order establishing the maximum price for electricity

6 sold at wholesale subject to the jurisdiction of the Commis7 sion under the Federal Power Act in the Western System

8 Coordinating Council after June 1, 2000.

9 (b) MAXIMUM PRICE.—For purposes of this Act, the

10 maximum price established by the Federal Energy Regu11 latory Commission shall be the lesser of—

12 (1) an average of the wholesale price for

13 electric energy sold in the Western System Co14 ordinating Council in the three-year period im15 mediately before June 1, 2000, or

16 (2) a price based on a cost-based formula

17 for wholesale rates established in accordance

18 with Part II of the Federal Power Act.

19 (c) REFUND.—Any person selling electric energy at

20 wholesale subject to the jurisdiction of the Commission

21 under the Federal Power Act in the Western System Co22 ordinating Council after June 1, 2000, who has received

23 in excess of the maximum price for such energy shall

24 promptly refund to the purchaser the full amount of such

25 excess. Such purchaser shall promptly transfer such re26 fund to the ultimate consumers of such electric energy,


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•HR 5131 IH

1 except that if such purchaser resold the electric energy at

2 wholesale to any other wholesale purchaser, each such

3 wholesale purchaser shall refund such amount to the per4 son or persons who purchased such electric energy from

5 such wholesale purchaser.

6 (d) PENALTIES.—Any person who violates any re7 quirement of this Act shall be subject to civil penalties

8 equal to three times the value of the amount involved in

9 such violation. The Federal Energy Regulatory Commis10 sion shall assess such penalties, after notice and oppor11 tunity for public hearing, in accordance with the same pro12 visions as are applicable under section 31(d) of the Fed13 eral Power Act in the case of civil penalties assessed under

14 such section 31.

15 (e) SEPARABILITY.—If any provision of this Act is

16 found to be unenforceable or invalid, no other provision

17 of this Act shall be affected thereby.

Æ


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II

107TH CONGRESS

1ST SESSION S. 287

To direct the Federal Energy Regulatory Commission to impose cost-ofservice based rates on sales by public utilities of electric energy at

wholesale in the western energy market.

IN THE SENATE OF THE UNITED STATES

FEBRUARY 8, 2001

Mrs. FEINSTEIN (for herself and Mrs. BOXER) introduced the following bill;

which was read twice and referred to the Committee on Energy and Natural Resources

A BILL

To direct the Federal Energy Regulatory Commission to

impose cost-of-service based rates on sales by public utilities of electric energy at wholesale in the western energy

market.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. COST-OF-SERVICE BASED ELECTRIC ENERGY

4 RATES.

5 (a) FINDINGS.—Congress finds that—

6 (1) prices in the spot market for electric energy

7 have consistently stayed at rates that are multiples


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1 of the prices that prevailed last year and the year

2 before;

3 (2) the price increases began in California and

4 spread throughout the western energy market;

5 (3) the Federal Energy Regulatory Commission,

6 in an order issued November 1, 2000, found that

7 prices in California and the western energy market

8 are unjust and unreasonable; and

9 (4) the high and volatile prices for natural gas

10 are reflected in the costs of producing electricity.

11 (b) DEFINITIONS.—In this section:

12 (1) COMMISSION.—The term ‘‘Commission’’

13 means the Federal Energy Regulatory Commission.

14 (2) COST-OF-SERVICE BASED RATE.—The term

15 ‘‘cost-of-service based rate’’ means a rate, charge, or

16 classification for the sale of electric energy that is

17 equal to—

18 (A) all the variable and fixed costs for pro19 ducing the electric energy; and

20 (B) a reasonable return on invested cap21 ital.

22 (3) PUBLIC UTILITY.—The term ‘‘public util23 ity’’ means a person that owns or operates a facility

24 that is subject to the jurisdiction of the Commission


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1 under the Federal Power Act (16 U.S.C. 791a et

2 seq.).

3 (4) WESTERN ENERGY MARKET.—The term

4 ‘‘western energy market’’ means the States of Ari5 zona, California, Colorado, Idaho, Montana, Nevada,

6 New Mexico, Oregon, Utah, Washington, and Wyo7 ming.

8 (c) COST-OF-SERVICE BASED ELECTRIC ENERGY

9 RATES.—Not later than 60 days after the date of enact10 ment of this Act, the Commission shall impose cost-of11 service based rates on sales by public utilities of electric

12 energy at wholesale in the western energy market.

13 (d) DURATION.—A cost-of-service based electric en14 ergy rate imposed under this Act shall remain in effect

15 until such time as the market for electric energy in the

16 western energy market reflects just and reasonable rates,

17 as determined by the Commission.

Æ


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II

107TH CONGRESS

1ST SESSION S. 764

To direct the Federal Energy Regulatory Commission to impose just and

reasonable load-differentiated demand rates or cost-of-service based rates

on sales by public utilities of electric energy at wholesale in the western

energy market, and for other purposes.

IN THE SENATE OF THE UNITED STATES

APRIL 24, 2001

Mrs. FEINSTEIN (for herself, Mr. SMITH of Oregon, Mr. BINGAMAN, Mrs.

MURRAY, Ms. CANTWELL, and Mr. LIEBERMAN) introduced the following

bill; which was read twice and referred to the Committee on Energy and

Natural Resources

A BILL

To direct the Federal Energy Regulatory Commission to

impose just and reasonable load-differentiated demand

rates or cost-of-service based rates on sales by public

utilities of electric energy at wholesale in the western

energy market, and for other purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. FINDINGS.

4 Congress finds that—

5 (1) prices in the spot market for electric energy

6 in the western energy market have consistently reVerDate 0ct 09 2002 11:58 Sep 26, 2005 Jkt 084329 PO 00000 Frm 00144 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\84329.TXT JACK PsN: JACKF

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1 mained at levels that are multiples of energy prices

2 prevailing before 2000;

3 (2) the price increases began in California and

4 spread throughout the western energy market;

5 (3) the Federal Energy Regulatory Commission,

6 in an order issued November 1, 2000, found that

7 prices in California and the western energy market

8 are unjust and unreasonable; and

9 (4) the high and volatile prices for natural gas

10 are reflected in the costs of producing electricity.

11 SEC. 2. DEFINITIONS.

12 In this Act:

13 (1) COMMISSION.—The term ‘‘Commission’’

14 means the Federal Energy Regulatory Commission.

15 (2) COST-OF-SERVICE BASED RATE.—The term

16 ‘‘cost-of-service based rate’’ means a rate, charge, or

17 classification for the sale of electric energy that is

18 equal to—

19 (A) all the reasonable variable costs for

20 producing the electric energy;

21 (B) all the reasonable fixed costs for pro22 ducing the electric energy;

23 (C) a reasonable risk premium or return

24 on invested capital; and


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1 (D) all other reasonable costs associated

2 with the production, acquisition, conservation,

3 and transmission of electric power.

4 (3) LOAD-DIFFERENTIATED DEMAND RATE.—

5 The term ‘‘load-differentiated demand rate’’ means

6 a rate, charge, or classification for the sale of elec7 tric energy that reflects differences in the demand

8 for electric energy during various times of day,

9 months, seasons, or other time periods.

10 (4) PUBLIC UTILITY.—The term ‘‘public util11 ity’’ has the meaning given the term in section 201

12 of the Federal Power Act (16 U.S.C. 824).

13 (5) WESTERN ENERGY MARKET.—The term

14 ‘‘western energy market’’ means the area within the

15 United States that is covered by the Western Sys16 tems Coordinating Council.

17 SEC. 3. WHOLESALE ELECTRIC ENERGY RATES OF REGU18 LATED ENTITIES IN THE WESTERN ENERGY

19 MARKET.

20 (a) IMPOSITION OF WHOLESALE ELECTRIC ENERGY

21 RATES.—Not later than 60 days after the date of enact22 ment of this Act, the Commission shall impose just and

23 reasonable load-differentiated demand rates or cost-of24 service based rates on sales by public utilities of electric

25 energy at wholesale in the western energy market.


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1 (b) LIMITATIONS.—

2 (1) IN GENERAL.—A load-differentiated de3 mand rate or cost-of-service based rate shall not

4 apply to a sale of electric energy at wholesale for

5 delivery in a State that, after the date of enactment

6 of this Act—

7 (A) prohibits the State public utility com8 mission from approving the passing through to

9 retail consumers of cost-of-service based rates

10 or load-differentiated demand rates approved by

11 the Commission; or

12 (B) imposes a price limit on the sale of

13 electric energy at retail that precludes a public

14 utility (or any entity that is authorized to pur15 chase electricity on behalf of a public utility or

16 a State) from making a payment when due to

17 any entity within the western energy market

18 from which the public utility purchases electric

19 energy for resale at retail within the western

20 energy market.

21 (2) NO ORDERS TO SELL WITHOUT A REASON22 ABLE ASSURANCE OF PAYMENT.—Notwithstanding

23 section 302 of the Natural Gas Policy Act of 1978

24 (15 U.S.C. 3362), section 202(c) of the Federal

25 Power Act (16 U.S.C. 824a(c)), or section 101 of


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•S 764 IS

1 the Defense Production Act of 1950 (50 U.S.C.

2 App. 2071), neither the Secretary of Energy nor the

3 Commission may issue an order that requires a sell4 er of electric energy or natural gas to sell, on or

5 after the date of enactment of this Act, electric en6 ergy or natural gas to a buyer in a State described

7 in paragraph (1) unless there is a reasonable assur8 ance that the Commission determines is sufficient to

9 ensure that the seller will be paid—

10 (A) the full purchase price when due, as

11 agreed to by the buyer and seller; or

12 (B) if the buyer and seller are unable to

13 agree on a price—

14 (i) a fair and equitable price for nat15 ural gas, as determined by the President

16 under section 302 of the Natural Gas Pol17 icy Act of 1978 (15 U.S.C. 3362); or

18 (ii) a just and reasonable price for

19 electric energy, as determined by the Sec20 retary of Energy or the Commission, as

21 appropriate, under section 202(c) of the

22 Federal Power Act (16 U.S.C. 824a(c)).

23 (3) REQUIREMENT TO MEET IN-STATE DE24 MAND.—Notwithstanding any other provision of law,

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1 ergy market may prohibit any utility subject to the

2 jurisdiction of the State public utility commission

3 from making any sale of electric energy to a pur4 chaser outside the service area of the utility at any

5 time at which the State public utility commission

6 has reason to believe that delivery of the electric en7 ergy would impair the ability of the utility to meet,

8 at or after the time of the delivery, the demand for

9 electric energy in the service area of the utility.

10 (c) AUTHORITY OF STATE REGULATORY AUTHORI11 TIES.—This section does not diminish or have any other

12 effect on the authority of a State regulatory authority (as

13 defined in section 3 of the Federal Power Act (16 U.S.C.

14 796)) to regulate rates and charges for the sale of electric

15 energy to consumers, including the authority to determine

16 the manner in which wholesale rates shall be passed

17 through to consumers (including the setting of tiered pric18 ing, real-time pricing, and baseline rates).

19 (d) REPEAL.—Effective March 1, 2003, this section

20 is repealed, and any load-differentiated demand rate or

21 cost-of-service based rate imposed under this section that

22 is then in effect shall no longer be effective.

23 SEC. 4. NATURAL GAS RATES.

24 (a) INAPPLICABILITY OF WAIVER OF MAXIMUM RATE

25 CEILING PROVISION TO TRANSPORTATION OF NATURAL


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•S 764 IS

1 GAS INTO THE STATE OF CALIFORNIA.—Effective begin2 ning on the date of enactment of this Act, paragraph (i)

3 of section 284.8 of title 18, Code of Federal Regulations,

4 shall not apply to the transportation of natural gas into

5 the State of California from outside the State.

6 (b) DISCLOSURE OF COMMODITY PORTION AND

7 TRANSPORTATION PORTION OF SALE PRICE IN BUNDLED

8 NATURAL GAS TRANSACTIONS.—

9 (1) DEFINITION OF BUNDLED TRANSACTION.—

10 In this subsection, the term ‘‘bundled transaction’’

11 means a transaction for the sale of natural gas in

12 which the sale price includes both the cost of the

13 natural gas and the cost of transporting the natural

14 gas.

15 (2) DISCLOSURE.—Exercising authority under

16 section 4 of the Natural Gas Act (15 U.S.C. 717c),

17 not later than 60 days after the date of enactment

18 of this Act, the Commission shall promulgate a regu19 lation that requires any person that sells natural gas

20 in a bundled transaction under which the natural

21 gas is to be transported into the State of California

22 from outside the State to file with the Commission,

23 not later than a date specified by the Commission,

24 a statement that discloses—


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•S 764 IS

1 (A) the portion of the sale price that is at2 tributable to the price paid by the seller for the

3 natural gas; and

4 (B) the portion of the sale price that is at5 tributable to the price paid for transportation of

6 the natural gas.

7 SEC. 5. SENSE OF THE SENATE REGARDING THE BONNE8 VILLE POWER ADMINISTRATION.

9 It is the sense of the Senate that the Bonneville

10 Power Administration should—

11 (1) take steps to reduce its wholesale electric

12 power purchase needs in the rate period beginning

13 October 1, 2001; and

14 (2) undertake other actions to minimize its po15 tential wholesale electric rate increase due to take

16 effect October 1, 2001.

17 SEC. 6. EFFECT OF ACT.

18 Nothing in this Act—

19 (1) affects any energy production that, as of

20 the date of enactment of this Act, is not online and

21 for which an application for a permit to produce

22 electricity has not been filed;

23 (2) affects any contract for the purchase of

24 electric energy except a contract for a spot market

25 purchase; or


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1 (3) prohibits a State or other entity from ap2 pearing in a Federal court in any instance in which

3 it is alleged that the Commission is not enforcing

4 the Federal Power Act (16 U.S.C. 791a et seq.).

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II

107TH CONGRESS

1ST SESSION S. 1068

To provide refunds for unjust and unreasonable charges on electric energy.

IN THE SENATE OF THE UNITED STATES

JUNE 20, 2001

Mrs. BOXER introduced the following bill; which was read twice and referred

to the Committee on Energy and Natural Resources

A BILL

To provide refunds for unjust and unreasonable charges on

electric energy.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Electricity Gouging

5 Relief Act of 2001’’.

6 SECTION 2. REFUNDS FOR EXCESSIVE CHARGES.

7 Section 206 of the Federal Power Act (16 U.S.C

8 824e) is amended by adding at the end the following:

9 ‘‘(e) REFUNDS FOR EXCESSIVE CHARGES.—

10 ‘‘(1) Notwithstanding any other provision of

11 this section, the Commission shall, within 60 days


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S 1068 IS

1 after enactment of this subsection, order a refund

2 for the portion of charges on the transmission or

3 sale of electric energy that are or have been deemed

4 by the Commission to be unjust or unreasonable.

5 Such refunds shall include interest from the date on

6 which the charges were paid.

7 ‘‘(2) The refunds ordered under paragraph (1)

8 shall apply to charges paid between June 1, 2000

9 and June 19, 2001.’’.

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