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FERC Missed Clues to Enron Activities, says Senate Panel by Reuters Environmental News Network, November 13, 2002

WASHINGTON -- The Federal Energy Regulatory Commission (FERC) ignored or missed early clues that Enron Corp. might be manipulating wholesale electricity prices in California and Western markets, Senate investigators said in a report issued on Tuesday.

The Democrat-controlled Senate Governmental Affairs Committee concluded that as a result of these omissions, FERC failed to protect American consumers from alleged market abuses by Enron during the California power crisis of 2000-01.

The report was released at a panel hearing, where FERC Chairman Pat Wood and commissioners Nora Brownell, Linda Breathitt, and William Massey were scheduled to testify. Wood, a Texas Republican with close ties to the Bush administration, was appointed more than a year ago.

In February 2002, FERC launched a formal probe into Enron's trading activities during the California electricity crisis. The nation's most populous state was rocked by black-outs, billions of dollars in higher wholesale power prices, and the bankruptcy of one of the state's major utilities, Pacific Gas & Electric, a unit of PG&E Corp.

But FERC "has yet to prove that it is up to the challenge of proactively overseeing changing markets," the Senate panel's report said. "On a number of occasions, FERC was provided with sufficient information to raise suspicions of improper activities — or had itself identified potential problems — in areas where it had regulatory responsibilities over Enron, but failed to understand the significance of the information of its implications," the report said.

Sen. Joseph Lieberman, a Connecticut Democrat who heads the committee, said the investigation found "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," Lieberman said.

Tennessee Sen. Fred Thompson, the panel's ranking Republican member, defended the agency and said many of the problems occurred before President George W. Bush took office. "Obviously, there are some shortcomings there that need to be addressed," Thompson said. "Some very good things have happened under the FERC watch of this administration."

WIND FARMS, ONLINE TRADING

The report criticized several specific Enron activities. In one instance, FERC had information five years ago that should have raised doubts about the validity of transactions involving wind farms owned by Enron, the report said.

Federal law requires U.S. electric utilities to buy renewable wholesale electricity at premium prices from independent power producers such as wind farms. Soon after Enron acquired the utility, Portland General, in February 1997, Enron's three wind farms told FERC that Enron would dispose of its ownership interest in them.

However, lawsuits recently filed against former Enron chief financial officer Andrew Fastow in Houston contend he tried to hide the company's stake in the three wind farms.

Last month, FERC said it would investigate the wind farms' ownership.

In another instance, investigators said FERC ignored how Enron's successful Enron OnLine trading platform dominated California power trading. FERC staff prepared an analysis of Enron OnLine in August 2001 that found the trading platform gave a competitive advantage to Enron's own traders by reducing their transaction costs and allowing them to see details about individual trades while competitors could see only bid and asked prices.

Wood told the Senate panel that FERC will end its investigation into the California power crisis by February and submit its findings to Congress. "I can assure you that our institutional commitment to remedy and prevent market abuses is now and will continue to be an ongoing one," Wood said. "We intend to work with other federal agencies to ensure that we regulate energy industries in a coordinated and effective manner so that customers and investors are fully protected."

PIPELINE LOANS

The Senate report said FERC was slow to investigate the cash management practices of Enron, which regularly borrowed cash from its subsidiaries at the end of each day.

As Enron struggled to avoid bankruptcy late last year, it borrowed a total of $1 billion in unsecured loans from two FERC-regulated interstate pipeline subsidiaries. After filing for bankruptcy protection, the two pipelines were left to pay off the entire amount to the banks, raising the potential for the pipelines to seek rate increases from shippers.

Last August, FERC said it was investigating the loans.

Enron also exploited regulatory void created by overlapping jurisdictions among FERC, Securities and Exchange Commission, and Commodity Futures Trading Commission, the report said.

FERC regulates interstate electricity markets. The SEC oversees the accounting practices of companies that trade electricity and the CFTC has jurisdiction over energy contracts traded on U.S. futures exchanges.