Under mounting pressure from Capitol Hill, the Federal Energy Regulatory Commission last week kicked off an investigation into whether the once-powerful Enron Corp. manipulated wholesale electricity prices during the energy crisis that rocked California last year. If manipulation is found, FERC Chairman Pat Wood told a Senate committee that federal regulators or the courts could void some of the long-term forward contracts that the state signed to lock in supplies.

The Commission had been seesawing on the issue throughout most of last week, but Wood confirmed Thursday that he had directed the staff to explore allegations that Enron prolonged the energy crisis in California by fixing prices. He declined to elaborate further on the scope of the probe.

FERC decided to look into Enron’s activities after receiving a number of requests from senators representing West Coast states, including Sens. Barbara Boxer (D-CA), Dianne Feinstein (D-CA), Maria Cantwell (D-WA) and Ron Wyden (D-OR). Wood initially had promised Cantwell and Feinstein he would look into their complaints during a Senate Energy and Natural Resources Committee hearing earlier last week. California Gov. Gray Davis joined the fray as well. All favor a Commission probe of Enron’s prices in West Coast markets, but some have gone even further.

Boxer has asked FERC to supply a list of all meetings and phone calls that took place between Enron executives and FERC Commissioners during the August 2000-June 2001 period. She said her request was prompted by reports about an April 17, 2001 memo from former Enron Chairman Kenneth Lay to Vice President Dick Cheney, in which Lay allegedly urged the Bush administration not to implement price caps for California consumers.

“This connection between influence and policy relating to the California electricity crisis is quite disturbing. It also raises questions about whether Enron tried to influence the FERC directly,” Boxer said. It has been widely reported that that Lay recommended both Wood and Commissioner Nora M. Brownell for their present positions. The White House confirmed this last week.

Boxer also has called on the General Accounting Office to investigate Enron’s alleged manipulation of energy prices in California, and possible links between the embattled energy trader and FERC.

“After Enron collapsed, prices in the West’s forward energy markets plummeted [by] 20-30%. Where there’s smoke there’s often fire, and we must investigate whether we have a simple coincidence here, or something more,” said Cantwell in her formal request to FERC for a probe. This “deserves answers and, if appropriate, corrective action.”

In addition to a FERC investigation, Wyden has called on Wood to consider naming a federal advocate to look out for consumer interests in the interstate energy market.

In a letter to Wood last Thursday, Davis said he was “extremely concerned about revelations made in the past few days,” and added that California “has a special interest in getting to the bottom” of the allegations that Enron manipulated energy prices in the state. The state has signed long-term contracts for more than $40 billion of wholesale electricity supplies during the years ahead. The contracts have been widely assailed in the state for locking in above-market prices over the long term.

Commissioner Brownell pledged her support for a Commission investigation into Enron pricing activities in California’s market, saying the agency needs to “clear up [any] lingering doubt” about this before it can begin to build a “stable, predictable market” in the western state.

“If there’s market manipulation, we need to find it, and we need to deal with it,” she told a group of reporters.. “They [the public] need an honest assessment of what went on here.”

Brownell said, however, she doubted Enron alone could be blamed for all the problems in the California energy market. “The expectation…that we’re going to find something that explains the entire dysfunctionality of the California market isn’t there, because you still have this fundamental supply-demand imbalance,” she noted.”This [alleged manipulation by Enron] may have been a factor, but I don’t think it will be the magic answer to what happened in California.”

Brownell said she would withhold judgment on Enron until she knew all of the facts. “It is not sufficient to say they [Enron] had a big position” in California energy, so “they manipulated the market.” Moreover, she refused to speculate as to whether Enron energy contracts in California could be voided in the event the Commission finds evidence of market manipulation. Traditionally, she said the courts have had jurisdiction over contract disputes and issues.

Pressed by Sens. Feinstein and Cantwell during the Senate Energy Committee hearing last Tuesday, Wood said that if it could be proved the high prices “were the result of [Enron] market power rather than true scarcity,” then there could be a forced renegotiation of contracts. Wood at the time said the Commission would consider doing a Section 206 investigation of the contracts.

In other developments at the hearing, Robert McCullough of McCullough Research in Portland, OR, — emphasizing the great need for more information and transparency in the market — said that had Enron not been given SEC exemptions from the Public Utility Holding Company Act (PUHCA) of 1935 and Investment Company Act of 1940, it would have been required to report the controversial off-balance sheet partnerships that ultimately led to its collapse and bankruptcy. Startled by this disclosure, Sen. Wyden called for the Senate panel to “look very carefully” at the laws that allowed for Enron to receive the exemptions.

On the House side, Reps. Edward Markey (D-MA) and John Dingell (D-MI) fired off a letter to the Securities and Exchange Commission, asking it to reconsider its recommendation to repeal PUHCA in light of the recent disclosures.

Dr. Lawrence J. Makovich, senior director and co-head of North American Energy Group in Cambridge, MA, said the Enron debacle revealed it was a mistake to let a major “market player” like Enron be a “market maker” through its unregulated on-line trading activities, particularly in the forward energy market. At its worst, it increased Enron’s opportunity to engage in insider trading, putting its competitors at a huge disadvantage.

Makovich said the fact that the forward market dropped 30% on Dec. 3, the day after Enron declared bankruptcy, is a strong indication the company was propping up the market. McCullough said the public needs to know “Enron’s position in these markets, whether Enron did have a large share of the forward contracts. There is so much information we just don’t have.”

All who testified before the Senate panel drove home the need for more market transparency and reporting requirements. “…[T]ransparency, openness is a far better tool than regulation,” McCullough said. Wood noted this was especially “critical” in the power markets, which he said were “a lot thinner” than the natural gas markets.

The cry for more transparency, however, should not be confused with “more government interference” in energy markets, cautioned Sen. Frank Murkowski (R-AK). He said any attempt by the federal government to “micro-manage” the energy markets would be disastrous.

But Committee Chairman Jeff Bingaman (D-NM) said new laws may be needed to require full disclosure of energy transactions by private energy companies. Feinstein echoed these sentiments, and questioned whether the still-remaining on-line energy platforms, operated by Dynegy Corp. and Williams Cos., should be subject to federal oversight.

“Now that Enron is out of the on-line energy trading business, companies like Dynegy and Williams have stepped in to fill the void. There’s no transparency…this could all happen again,” Feinstein said. The Intercontinental Exchange or ICE was exempted from these criticisms since it is a multi-party exchange.

She believes price manipulation by EnronOnline was responsible for the high natural gas prices that ultimately led to the spikes in electric prices in California last year. EnronOnline controlled 50% to 70% of the gas trades in the southern half of the state, she said, admitting the figure was based on anecdotal evidence. But because it engaged in unregulated bilateral trading, “nobody except Enron knew the prices that were being bid.”

McCullough pointed out that if you have an open pit outcry, “you can check how deep the market is; you can tell if there’s only one person in the pit. With EnronOnline there was no way of knowing what the prices represented.” He thanked Wood for requiring quarterly market reports, which provide some information. And the energy companies aren’t the only ones keeping secrets, he said, advising that it has been extremely hard to get any information out of the Cal-ISO. “There’s very little information on who dominates most of these hubs.”

The physical energy markets and the futures markets got a clean bill of health in the wake of the Enron collapse. Although there was “some volatility” in energy prices, FERC’s Wood said that overall there was “little perceptible impact” on the market. He noted, however, that he was concerned about Wall Street’s “overreaction to other peoples’ [financial] books,” and energy companies’ limited access to the capital markets.

James E. Newsome, chairman of the Commodity Futures Trading Commission, reported that “when Enron’s positions closed out, prices did not spike up or down, nor did liquidity suffer.”

Moreover, “at this time, we have no indication that manipulation of [the energy] futures market was attempted by Enron,” Vincent Viola, chairman of the New York Mercantile Exchange (Nymex), told the Senate committee. Nor, he added, was there any evidence that certain “rules or the absence of rules” related to the trading of energy futures contracts contributed to Enron’s demise.

Viola estimated that the notional value of trades on EnronOnline was about $2.8 billion per day in 2001, compared to $13 billion per day on Nymex. These numbers suggest that energy companies chose Nymex to conduct most of their trading activities because the exchange is overseen by federal regulators, he said.

Viola noted that Nymex “actively expressed concerns” a few years ago when Enron favored exempting all energy and metal futures contracts traded on electronic platforms from federal oversight. Congress rejected the idea, he said, adding that the “markets are better for it.” T

North American Energy’s Makovich believes a shock to futures energy prices was avoided because the Enron collapse occurred with “enough warning,” allowing customers to reduce their financial exposure. But, he added, the market for forward electricity contracts — which are non-standardized, unregulated bilateral contracts — wasn’t as fortunate.

Unlike the futures market, there is no neutral third-party entity that organizes these contracts, said Makovich, who added that EnronOnline filled this void in the power market by being a “market maker” in the forward markets. As a result, “Enron was…in the position to be consistently among the first to know about most forward market transactions.” The lesson to be learned from the Enron failure, he believes, is “it was a mistake to allow a significant market buyer or seller to be [a] market maker without any oversight.”

In addition, Makovich said the Enron collapse has led to a “crisis of confidence” in the retail energy markets that could stunt market reforms. He believes it could even cast a shadow on energy markets that have successfully been deregulated. That would be the wrong reaction, said Sen. Murkowski. “The lights stayed on and retail [energy] prices did not spike” in the wake of the Enron failure, he noted, and he credited this to deregulated markets. Wood agreed with the senator, noting that it would be wrong to think that Enron’s failure “sounds the death knell for competition.”

William Nugent, a Maine regulator and president of the National Association of Regulatory Utility Commissioners, said his state “dodged the bullet” following Enron’s failure, but it wasn’t because Maine was so market-savvy. Rather, “we were simply and profoundly lucky” that the collapse occurred in a down market.

If it had occurred during a rising market, Nugent estimated that Maine alone would have suffered a hit of $50-100 million, while New England’s losses would have been in the billions of dollars.

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