Attempting to place at least part of the blame for the Enron fiasco at the door of the Federal Energy Regulatory Commission, a report and hearing by Democratic Sen. Joe Lieberman’s (CT) Senate Committee on Governmental Affairs blasted the agency for “a shocking absence of regulatory vigilance.”

While acknowledging that hindsight and second-guessing provide an imperfect screen, “it seems highly likely that more vigilant, aggressive action by FERC would have limited some of the abuses that appear to have occurred, raised larger questions about Enron’s trading practices and other business activities, and unearthed at least some of the cracks in Enron’s foundation earlier.” The memorandum released Tuesday at the start of a committee hearing featuring the roasting of FERC commissioners, supposes that earlier FERC action against Enron could have spurred others to look more closely at the company and possibly alerted other government agencies, analysts and investors, who also missed the warning signs.

“FERC often seemed to view itself not as a regulator, but as a facilitator, not as a market cop, but as a market cheerleader and that left consumers with nothing to cheer about,” said Lieberman in his opening remarks at Tuesday’s hearing. “When market players are given unprecedented latitude in a previously regulated market, there must be some effective checks and balances.”

Lieberman said that the report issued on Tuesday by his staff has unearthed “an embarrassing and unacceptable failure of the federal government to protect millions of consumers, stockholders and workers. Again and again, FERC failed to ask critical questions about Enron’s business practices. In the few cases when they did ask pertinent questions, the people at FERC settled for incomplete or incorrect answers.”

The report lists four areas where FERC’s regulatory oversight failed to turn up illegal activities by Enron. One involved wind farms owned by Enron and then apparently disowned in sham transactions effected in order to maintain their qualifying facilities benefits. In this case the Commission failed to make an effective inquiry into the ownership transfer, which was submitted for its approval.

A second item has to do with a FERC investigation of EnronOnline in which it asked the right questions, but settled for “incomplete, unconvincing, or incorrect answers.” Also affiliate transactions, which now are the subject of Commission investigations, should have been initiated sooner, the memorandum said. One involved the parent company’s borrowing of funds from its pipeline subsidiaries and the other included transactions between Enron’s marketing arm and its Portland General Electric affiliate involving the export and reimportation of electricity in California.

The fourth area cited by the report involves the alleged abusive trading practices by Enron traders during the California energy crisis. “FERC waited nearly two years after the first allegations of market abuse by individual companies arose before launching a formal inquiry into the potentially abusive actions of individual companies.”

“The evidence in all four cases reveals a consistent pattern,” noted David Berick, a staff member for the Governmental Affairs Committee. “That in the face of Enron’s tireless determination to game the system, FERC displayed a striking lack of determination to scrutinize the company’s activities.” Berick said that “this was not simply FERC becoming another victim of Enron’s misrepresentations. Rather, on a number of occasions, FERC was provided with sufficient information to raise suspicions of improper activities or had itself identified potential problems, but failed to follow through.”

Berick said that “the record demonstrates a lack of vigilance on FERC’s part and a failure to structure the agency to meet the demands of the new market-based system that the agency itself has championed. While we do not know with certainty whether the disclosure of any of the individual activities I will highlight here today could have prevented Enron’s collapse, it seems highly likely that a more proactive, aggressive action by FERC would have limited some of the abuses that appear to have occurred, would have raised larger questions about Enron’s trading practices and other business activities and would have exposed at least some of the cracks in Enron’s foundation earlier.”

Going forward, the committee report raises concerns that actions taken recently by the Commission to enable it to more effectively monitor the market may not be enough to protect consumers.

Berick said that FERC has taken some “tentative steps to remedy this unacceptable state of affairs,” noting that the agency has created a new Office of Market Oversight and Investigation (OMOI). “But simply rearranging bureaucracy is not sufficient,” Berick said. “FERC must work in concert with other regulatory agencies, it must request and be given sufficient resources to monitor and police the marketplace and it must be more cognizant of what goes on under its own regulatory roof.”

But Sen. Fred Thompson (R-TN), the ranking Republican member on the committee, questioned whether Berick was “really giving appropriate credit to Mr. Wood and FERC” with regard to the federal agency’s overall performance and, specifically, the OMOI and the Commission’s ongoing standard market design proposal for U.S. wholesale power markets.

“Obviously it’s too early to tell how well the Office of Market Oversight is going to perform since it’s just now being established,” Berick responded. He noted that with the help of the Congressional Research Service, committee staff examined the resources and staffing that was being given to OMOI “and it raised some fundamental concerns with us.”

Specifically, Berick said that less than 10% of FERC’s full-time equivalent (FTE) staffers are going to be assigned to the OMOI. “That’s essentially one individual working,” he noted. “Even if we give FERC the benefit of the doubt and concede that all 250 FTEs that are identified in its budget request as having something to do with enforcement and market oversight are included — so we’re essentially giving FERC credit for more than double the number of people actually in that office — that number is still significantly less, it’s less than 20%.”

Berick said that when compared to other federal agencies that engage in similar types of activities, such as the Commodities Futures Trading Commission, “We find that those agencies have significantly larger resource commitments both in terms of FTEs and in terms of dollars.”

The committee staff member also said that there are “a range of activities” identified in the report “that are not going to be fixed by the new office,” referring to the OMOI. “So our point is twofold. The steps that they appear to be taking seem to be too small and that the steps that they are taking are not broad enough to encompass the range of regulatory shortcomings that we identified in the investigation.”

The idea that FERC’s creation of the OMOI is merely “bureaucratic reshuffling” clearly struck the wrong chord with Commission Chairman Pat Wood. “I do take some umbrage” with the OMOI being characterized in such a fashion, he said in response to a question from Lieberman.

“We’ve had, in fact, some extensive hiring from the outside. Significant people with other federal experience and a tremendous amount of private sector experience for the 90 employees that we have hired to date,” Wood said. “It is, in fact, the farthest thing that this agency has had from a bureaucratic reshuffle.”

For his part, FERC Commissioner William Massey said that he thinks the OMOI is a “strong step” in the right direction. “Of course, the proof will be in the pudding. If we’re back here two years from now because of a failure of oversight, then I will be wrong about that,” Massey said. “But I don’t think we will be. I think the agency is moving in the right direction.”

Meanwhile, Thompson, who is retiring from the Senate, raised hay over apparently dozen of contacts that were previously made by Enron with FERC Commissioner Linda Breathitt, one of two Democrats on the Commission.

Thompson grilled Berick over the report’s failure to mention any of these contacts. “It appears that there were 46 contacts, most of them telephone conferences, between lobbyists for Enron and Commissioner Breathitt.” According to Thompson, the contacts in question occurred from August 2000 through December 2001.

“I must ask whether or not you’ve been fair in your assessment here,” the Tennessee lawmaker said to Berick. “When we got to looking through the documents here that were subpoenaed or gathered by the majority, it appears that there were several contacts between Enron lobbyists and Commissioner Breathitt that were not referred to in anyway,” Thompson said.

At a later point in the hearing, Thompson gave Breathitt the opportunity to elaborate on her apparent contacts with Enron. “I don’t have the same information that you have. I don’t know what the 46 [contacts] are,” Breathitt told the lawmaker.

“The Enron contacts that I have disclosed were ones that I had records of. We don’t keep telephone logs in my office and to the best of my recollection, I disclosed to the committee everything that we had records of and that I could remember,” Breathitt said.

She also pointed out that during the times in which she spoke to Enron’s lobbyists, they were “very disappointed” that Breathitt had not been a proponent of mandatory regional transmission organizations (RTOs).

“They were very interested in having mandatory RTOs, having unfettered open access through the transmission lines. They were very interested in having a single transmission tariff. They were a big proponent of bundled retail sales and I have probably been the most reticent member of the Commission on those issues.”

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