Statement by Senator Dianne Feinstein on FERC's Findings of Widespread Fraud and Manipulation in California's Energy Crisis

Statement by Senator Dianne Feinstein on FERC's Findings of Widespread Fraud and Manipulation in California's Energy Crisis

March 26, 2003

"The Federal Energy Regulatory Commission (FERC) today announced that its investigation of the 2000-2001 Western Energy Crisis found that energy companies had deliberately manipulated electricity and natural gas markets.

FERC also announced that California would likely receive more than $3.3 billion in refunds, although according to FERC California still owes $3 billion for unpaid electricity, so the net result might not be so great.

FERC ordered more than 30 energy companies and municipal utilities to turn over unjust profits unless they counter the evidence uncovered in the investigation and prove that they did not engage in market manipulation. This could dramatically boost the refund to California.

Most significantly, FERC charged four energy companies - Enron Power Marketing, Enron Energy Services, Reliant Energy Services and BP Energy Company - of engaging in market manipulation that could now result in loss of their authority to charge free-market rates.

FERC is also considering banning eight Enron connected gas companies from selling natural gas in California: Bridgeline Gas Marketing, Citrus Trading Corp., ENA Upstream Co., Enron and Enron Canada Corp., Enron Compression Services Co., Enron Energy Services Inc., Enron MW, LLC, and Enron North America Corp.

The regulatory hammer has finally begun to drop. The question now is how hard. FERC needs to do much more to ensure that the people and businesses of California are adequately compensated for their financial losses and hardships during the energy crisis.

California has requested a total of nearly $9 billion in refunds and provided significant documentation of the widespread fraud and manipulation to back up its claim. In view of the inflated profits that energy companies realized at the expense of California homeowners and businesses - FERC should right this wrong and honor California's claim.

FERC is still reviewing California's request to open up to renegotiation $43 billion in long-term contracts signed at the height of the crisis. But I have been told that the Commission may be reluctant to take this step because they fear setting a precedent. I do not believe this would be a precedent, because the contracts were entered into under extraordinary circumstances with rates inflated by market manipulation, and I believe failure to open up the contracts would be a big mistake.

Based on the evidence that I have reviewed, which documents a coordinated attempt by energy companies to manipulate the Western energy market, I am also urging U.S. Attorney General John Ashcroft to investigate fraud and anti-trust violations during the energy crisis. The documents submitted to FERC by the State of California, the California Attorney General and the State's largest utilities, provide significant evidence that there was a concerted effort to boost company profits at the expense of consumers. Let me describe some of the highlights:

First, the documents detail new incidents when energy companies intentionally held their plants offline to drive prices up.

For instance, these documents show that Reliant failed to return its plant near Santa Barbara to service for two days after repairs were completed on January 26, 2001 -- even though the State was experiencing Stage 3 emergencies.

Additionally, on August 15, 2000, Williams reported that its Alamitos 7 plant in Long Beach was unavailable due to pollution limitations -- but another company's logs from that day show the plant was shut down because Williams directed it to be.

Second, we found pages and pages of transcripts that show energy traders were deliberately attempting to manipulate the Western market - frequently through strategies earlier Enron memos termed "Death Star," "Get Shorty," "Fat Boy," and "Ricochet," among others.

The transcripts show these strategies were implemented not just by Enron, but by energy companies across the board. Here are just a few examples:

A conversation between a Mirant trader and a trader from Public Service of Colorado reveals a joint effort to engage in overscheduling energy, the "Fat Boy" strategy.

The trader from Public Service of Colorado states, "Why don't we just do something where we overschedule, overschedule load and share an upside, dude." The Mirant trader responds, "That's fine."

Additionally, Reliant had "camouflage transactions" where the company sold power out of California day-ahead to Arizona and New Mexico utilities, and bought it back for sale (at a much higher price) in California. This was known in the Enron memos as the "Ricochet" strategy.

These were not isolated incidents. They were widely implemented practices designed to fleece consumers in the West.

Third, the documents lay out new evidence of possible anti-trust violations by energy companies. The filing shows the largest energy suppliers in California shared non-public information through a third-party company called Industrial Information Resources. Traders called this company "The Mole."

Industrial Information Resources provided sellers detailed, non-public information on daily plant outages - essentially giving energy companies insider information on when an unplanned outage could transform an energy shortage into a Stage 3 energy emergency or blackout.

Fourth, the documents provide new evidence of document destruction by energy companies to cover up details of their actions.

In the documents, an ex-Mirant employee disclosed that:

He was instructed to delete certain files relating to the California markets from hard drives; and
Key Mirant executives were instructed to turn in their laptops so that Mirant could clear their hard drives.

According to this employee, he was ordered to flagrantly destroy documents, which may have detailed market fraud. This means that we will never know the true scope of the gaming and manipulation.

I strongly believe this type of fraud and manipulation occurred, in part, because strong federal oversight of the energy trading system was non-existent.

To help remedy that, Senators Fitzgerald, Harkin, Lugar, Cantwell, Wyden, Leahy, Boxer, Durbin, and I have introduced the Energy Market Oversight Act -- to help ensure that the energy crisis in the West will never be repeated.

The legislation would provide the Commodity Futures Trading Commission (CFTC) full anti-fraud and anti-manipulation authority over all online and bilateral energy trades. These trades currently take place with no transparency, no record keeping, no audit trail, and no federal oversight to guard against fraud and manipulation. It would also give FERC greater authority to investigate and prevent fraud and price manipulation.

Despite the clear evidence of fraud and manipulation, FERC and CFTC have done little to punish the energy companies -- frequently letting the companies off with just a slap on the wrist. This sends the wrong message to the industry and increases the likelihood of additional manipulation in the future.

But by passing this legislation, Congress would send a strong message to the energy industry that fraud and manipulation will not be tolerated. It has been more than two years since the energy crisis began in California. It is time to bring the necessary oversight to the energy market."

###