FERC delivered a powerful one-two punch in energy, financial and political circles last week. First, it released explosive documents that appeared to all but substantiate charges that the once-mighty Enron Corp. manipulated trading in the California power market. And before the shock waves had subsided, it launched an industry-wide dragnet targeting 150 electric suppliers to find out just how widespread the use of questionable trading practices has been in the western wholesale energy markets. The gas industry could be the next target, some believe.

The disclosure of the “smoking gun” evidence, which strongly inferred that Enron gamed the California markets, prompted the state’s senators on Capitol Hill, as well as Gov. Gray Davis, to call on the Department of Justice to open a wide-ranging criminal investigation into the trading practices of Enron and other suppliers in California. The White House refused to say if it supported a criminal probe. However, it expressed confidence that FERC would “vigorously” pursue the case.

The news also rekindled congressional interest in Enron and the energy industry in general, with many lawmakers last week calling for hearings on trading practices in western markets. Some commended the Federal Energy Regulatory Commission’s action a a good first step, while others blasted the agency for not uncovering the manipulation years before.

Repercussions were felt immediately on Wall Street last Tuesday, with the stocks of key California energy suppliers taking a major hit. Dynegy shares fell to their lowest level in two years in reaction to the Enron documents and the news that the Securities and Exchange Commission had launched a formal investigation into the company’s Project Alpha and possibly some of its power transactions (see related story). El Paso shares plummeted to a low of $32.30 last Tuesday from more than $35.90/share on Monday, but rebounded back into the mid $30s by the end of the week. Williams shares fell to a low of $16.60 last Tuesday from more than $19/share the prior day. Calpine dropped to $8.70 from highs of more than $10 on Monday before rebounding back above $9/share later in the week. And Mirant tumbled to $9.75 Tuesday from more than $11 on Monday and continued falling to near $8 per share on Friday morning. Other merchant energy shares, such as those of Reliant Resources, AES Corp. and NRG, suffered from the news as well.

In a blistering eight-page letter last Wednesday, FERC ordered marketers, utilities, traders, power producers, munis and federal power administrators to furnish information on whether they used Enron-like strategies to manipulate energy trading during the height of the California energy crisis in 2000-2001. Western sellers were instructed to “admit or deny” under sworn oath that they unfairly gamed the market.

Separately, Enron was told to submit the names of all traders who were aware of the questionable power trading strategies, and all correspondence addressing the power strategies, as well as correspondence related to Enron’s gas trading practices. The information was due at the Commission on Friday.

Donald J. Gelinas of FERC’s Office of Markets, Tariffs and Rates, who is heading up the agency’s probe into the trading activities of natural gas and power sellers in western markets, told power suppliers that failure to respond to the FERC questions in a “timely and complete fashion” would result in enforcement action, including the revocation of their authority to sell wholesale electricity and/or ancillary services at market-based rates.

Given that FERC is exploring both the power and gas markets, “I imagine that there will be” similar questions asked of gas suppliers in California and western markets, “but I can’t say anything about the timing” of that, said a Commission spokeswoman.

FERC blanketed the industry with the questionnaires within days after an Enron attorney furnished it with three memos that outlined strategies used by the once-powerful energy company to apparently game the California energy markets for its financial gain. Some of the strategies were colorfully named Fat Boy, Death Star, Ricocheting and Inc-loading.

Under these strategies, Enron subsidiary, Enron Power Marketing Inc., is believed to have submitted unrealistic schedules into the California Independent System Operator’s real-time energy imbalance market to snare higher charges; created and then relieved phantom congestion on the Cal ISO’s transmission grid; and engaged in megawatt laundering, or buying energy in California at low, capped prices, selling it outside the state only to re-purchase it and sell it at a much higher prices in California, according to the Commission.

The trio of memos identifying these practices, which were written by Enron outside attorneys and sent to company General Counsel Richard Sanders, were turned over to FERC by Enron at a meeting last Monday. Two of the memos were dated December 2000, when California was plagued by energy blackouts and the state’s utilities financial ruin. Enron lawyer Robert Bennett said the company’s board became aware of the documents about 10 days prior to handing them over to the Commission.

The documents suggested the gaming strategies were not unique to Enron, but that other energy suppliers engaged in them as well. However, it did not identify any companies. FERC’s Gelinas ordered the targeted energy suppliers to “admit or deny” their culpability in these questionable practices.

Supplier responses to FERC’s questions are to be “signed under oath” by the president, CEO, general counsel or a corporate officer of “comparable authority,” attesting to the fact that they had “diligently conducted a thorough investigation into the trading activities of the company’s employees and agents, including those of its affiliates and subsidiaries, in the U.S. portion of the Western Systems Coordinating Council (WSCC).” The WSCC includes about 11 western states. The replies are due at FERC before May 22.

The Commission ordered suppliers to turn over “all communications or correspondence, including e-mail messages, instant messages, or telephones logs between your company and any other company (including your affiliates or subsidiaries) with respect to all of the trading strategies” that mirror those used by Enron. In addition, it directed sellers to provide “all material[s]…that address or discuss your company’s knowledge of, awareness of, understanding of, or employment or use of any of the trading strategies discussed in the Enron memoranda, or similar trading strategies” in the U.S. portion of the WSCC during the 2000-2001 period.

Enron relinquished the memos as part of FERC’s two-month investigation into allegations that Enron and other suppliers have manipulated short-term prices for electricity and natural gas in the West Coast markets since Jan. 1, 2000. Chairman Pat Wood has said he wants to submit a report on the results of the agency’s probe to Congress by this summer.

Within hours after the Enron documents were released to the public last week, Sen. Dianne Feinstein (D-CA) fired off a letter to U.S. Attorney General John Ashcroft asking for a criminal probe into Enron and other energy suppliers. The documents prove that Enron engaged in “outright fraud,” wrote Feinstein, a long-time critic of Enron’s practices in California.

“Because UBS Warburg has purchased Enron’s trading entity [formerly EnronOnline], I am particularly concerned that the same manipulative strategies may continue to be in place today,” and “may well involve other energy companies” that supplied gas and power to the West in 2000 and 2001 and continue to do so now, she told Ashcroft.

Gov. Davis, who echoed Feinstein’s request for a criminal probe, also asked FERC’s Wood for his “serious and expeditious attention” to issues related to the release of the Enron internal memos from late 2000. Besides pursuing Enron, Davis suggested five other areas for the Commission to consider:

“Enron’s activity may rise to criminal activity,” Davis said, but “criminality need not be found for the FERC to order refunds to California consumers. [FERC is] the only government agency with the authority to grant relief.

“It doesn’t matter to me whether or not Enron’s market manipulation rises to the criminality level. There is abundant evidence for FERC to provide relief that California has long been due. We haven’t gotten one penny of relief for the high prices we endured for about a year and a half. And we haven’t gotten any help from FERC in reforming our long-term contracts that were entered into when the market was wildly manipulated by Enron and perhaps others.”

Davis called FERC’s decision to require affidavits of power suppliers “a good first step.” He noted it was “time for FERC to act like a referee, they are the only referee in this game. They need to stand up and cry foul because the evidence is pretty clear that the system is not working.”

The California governor, who is up for re-election this fall, cited another “clear” violation in which the state has received no help from FERC: El Paso Natural Gas Co. and its affiliates’ alleged manipulation of the wholesale natural gas market at the California-Arizona border.

The Bush administration expressed its support last week for the FERC investigation, saying that federal regulators should “vigorously” explore any evidence that points to manipulation of California energy markets. “He [Bush] expects that the investigation will be vigorously pursued wherever it may go,” said White House spokesman Ari Fleischer.

The Bush administration “supports very tough enforcement of the laws that protect consumers, [and] that applies to the energy markets as well,” he said. Specifically, it favors stiffer penalties and prison terms for market abusers. These “are all items that we have proposed and will fight for in the conference” on the Senate and House omnibus energy bills, Fleischer noted.

The Senate Energy and Natural Resources Committee and the Senate Commerce consumers affairs subcommittee announced they will hold separate hearings on May 15 to explore the magnitude of supplier manipulation of the gas and electricity markets. At the Senate Energy panel hearing, which “won’t zero in exclusively on Enron.” FERC’s Wood is scheduled to testify, while Senate Commerce is expected to hear from the Enron lawyers that drafted the memos.

Congress “will not interfere with FERC’s ongoing investigation” of Enron and other energy suppliers in the western markets, “but we will ensure that, as we move forward into conference on the broader energy bill, we will remain alert to problems that need to be addressed so that consumers are served by well-functioning energy markets,” Senate Energy Chairman Jeff Bingaman (D-NM) said

Senate Energy spokesman Bill Wicker believes the issue of stiffer penalties for companies that game energy markets will receive greater attention when Senate and House conferees meet later to reconcile their energy bills. Neither measure currently addresses tougher penalties for market abusers, he said, but this is something that both Bingaman and the Bush administration favor. The White House supports raising the current penalty of $500/day to $25,000/day.

The “biggest advocate” for increased fines within the Bush administration has been Joseph T. Kelliher, Wicker noted. Kelliher, a senior policy advisor at the Department of Energy (DOE), was nominated recently by President Bush for a five-year term on the Federal Energy Regulatory Commission.

On the House side, 36 western Democrats last Thursday urged House Energy and Commerce Committee Chairman W. J. “Billy” Tauzin (R-LA) to investigate the charges of price-fixing by Enron and other suppliers. The Democratic lawmakers were joined by Gov. Davis in a partisan attack on Enron and the energy industry, calling for regulatory, criminal and congressional investigations.

Strong reaction also came from the power and gas sectors. The power industry “has always opposed the gaming of energy markets. Practices designed to manipulate customer prices, create unfair advantages for specific market participants or threaten the reliability of the electricity grid cannot be condoned. If anyone ultimately is found to have engaged in these practices, we will join with FERC and all California customers in condemning this behavior and seeking appropriate remedies,” said Lynne H. Church, president of the Electric Power Supply Association, which represents independent power producers and marketers.

“In the meantime, these memos demonstrate the importance of FERC’s existing initiatives, supported from the start by competitive power suppliers, to create independent and multi-state regional transmission organizations, a standard market design with appropriate monitoring and good congestion management rules,” she noted.

Anadarko Corp. President Richard Sharples, who was in Washington last Thursday, expressed support for the Commission’s probe. “It’s probably the right thing to do…If some people did some things wrong, fine, they should be punished,” he said, adding that he would prefer to “have it evaluated by a responsible partly, like FERC, rather than in the day-to-day headlines.

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