Senate

Statement of Senator Dianne Feinstein
Energy Manipulation

Mrs. Feinstein. Mr. President, I come to the floor today in another capacity, and that is as a member of the Energy and Natural Resources Committee. I quickly bring to the Senate recent disclosures about how a number of energy firms have engaged in deceptive trading practices to drive up prices for consumers in the western energy market. I believe strongly this recent evidence requires the Federal Energy Regulatory Commission to take additional strong and aggressive steps to keep energy markets from continually being abused. I will update the Senate on these revelations that have been uncovered in the past year.

Earlier this month, Jeffrey Richter, the former head of Enron's Short-Term California energy trading desk, pled guilty to conspiracy to commit fraud as part of Enron's well known schemes to manipulate western energy markets. Richter's plea

follows that of head Enron trader Tim Belden in the fall of 2002. Belden admitted that he schemed to defraud California during the Western energy crisis and also plead guilty to conspiracy to commit wire fraud.

The Enron plea came on the heels of FERC's release of transcripts from Reliant Energy that reveal how their traders intentionally withheld power from the California market in an attempt to increase prices. This is one of the most egregious examples of fraud and manipulation that affected the western energy market in 2000 and 2001 and it is clear and convincing evidence of coordinate schemes to defraud consumers.

Let me read just one part of the transcript to demonstrate the greed behind the market abuse by Reliant and its traders.

On June 20, 2000 two Reliant employees had the following conversation that reveals the company

withheld power from the California market to drive prices up. Let me read to you this phone call transcript.

Reliant Operations Manager 1: ``I don't necessarily foresee those units being run the remainder of this week. In fact you will probably see, in fact I know, tomorrow we have all the units at Coolwater off.''

Reliant Plant Operator 2: ``Really?''

Reliant Operations Manager 1: ``Potentially. Even number four. More due to some market manipulation attempts on our part. And so, on number four it probably wouldn't last long. I would probably be back on the next day, if not the day after that. Trying to uh . . .'' Reliant Plant Operator 2: ``Trying to shorten supply, uh? That way the price on demand goes up.''

Reliant Operations Manager 1: ``Well, we'll see.''

Reliant Plant Operator 2: ``I can understand. That's cool.''

Reliant Operations Manager 1: ``We've got some term positions that, you know, that would benefit.''

Six months after this incident, as the Senate Energy Committee was attempting to get to the bottom of why energy prices were soaring in the west, the President and CEO of Reliant testified before Congress that the State of California ``has focused on an inaccurate perception of market manipulation.''

Reliant's President and CEO went on to say:

We are proud of our contributions to keep generation running to try to meet the demand for power in California. Reliant Energy's plant and technical staffs have worked hard to maximize the performance of our generation.

These transcripts prove otherwise and reveal the truth about market manipulation in the energy sector.

If you think that is a lot of money, remember that the cost of energy for California went from $8 billion 1 year to $28 billion the next year. So the fraud and the manipulation was huge during that period of time.

Despite this clear and convincing evidence of fraud, on January 31 of this year, the Federal Energy Regulatory Commission chose to give Reliant a slap on the wrist for this behavior. The company paid only $13.8 million to sweep this criminal behavior under the rug and settle with FERC.

Let me turn to some other recent examples that demonstrate how other energy companies manipulated the western energy market as Reliant did. On December 11 FERC finally released audio tapes that show how traders at Williams conspired with AES Energy plant operators to keep power offline and drive prices up.

The tapes depict how on April 27, 2000, Williams outage coordinator Rhonda Morgan encouraged an AES operator at the company's Alamitos plant to extend a plant outage because the California grid operator was paying ``a premium'' for power at the time. The Williams employee stated:

That's one reason it wouldn't hurt Williams' feelings if the outage ran long.

Later that day, Eric Pendergraft, a high-ranking AES employee called to confirm with Ms. Morgan that Williams wanted the plant to stay offline by saying:

You guys were saying that it might not be such a bad thing if it took us a little while longer to do our work? I don't want to do something underhanded, Ms. Morgan responded, but if there is work you can continue to do .....''

At this point Mr. Pendergraft interrupted to cut off their suspicious conversation, saying:

"I understand. You don't have to talk anymore."

Clearly, this is evidence of a calculated intent to withhold power to raise prices. I find it unconscionable.

Let's turn to some other examples.

On January 27, 2003, Michelle Marie Valencia, a 32-year-old former senior energy trader for Dynegy was arrested on charges that she reported fictitious natural gas transactions to an industry publication.

On December 5, 2002, Todd Geiger, a former vice president on the Canadian natural gas trading desk for El Paso Merchant Energy, was charged with wire fraud and filing a false report after allegedly telling a trade publication about the prices for 48 natural gas trades that he never made in an effort to boost prices and company profit.

These indictments are just the latest examples of how energy firms reported inaccurate prices to trade publications to drive energy prices higher.

Industry publications claimed they could not be fooled by false prices because deviant prices are rejected, but this claim was predicated on the fact that everyone was reporting honestly--which we now know they weren't doing.

CMS Energy, Williams, American Electric Power Company, and Dynegy have each acknowledged that its employees gave inaccurate price data to industry participants. On December 19 Dynegy agreed to pay a $5 million fine for its actions.

In September an Administrative Law Judge at FERC issued a landmark ruling concluding that El Paso Corporation withheld natural gas from California and recommended penalty proceedings against the company. Since the El Paso Pipeline carries most of the natural gas to Southern California, this ruling has tremendous implications. The FERC Commissioners are expected to take up this case for a final judgment soon.

This is one of the things I tried to see the President about, but he wouldn't see me, because it became very clear during this period of time that natural gas going into San Juan, NM, was trading at about $5 to $6 a decatherm, whereas natural gas going just a short distance away into southern California was trading at $60 a decatherm, and natural gas forms the basis for the price of electricity. I had hoped if I could give this information to the President of the United States at that time that he might look into it and we might have prevented some of what happened in the western energy markets. Unfortunately--and I wrote four letters--he refused to see me on this subject.

This past summer, California State Senate investigators uncovered how Perot Systems--a company which set up the computer system for California's electricity market--provided its energy clients with a detailed blueprint of how to exploit holes in the state's bidding system to drive prices up.

These have been the latest revelations in a series of energy disclosure bombshells that began on Monday, May 6, when the Federal Energy Regulatory Commission posted a series of documents on their website that revealed Enron manipulated the western energy market by engaging in a number of suspect trading strategies.

These memos revealed for the first time how Enron used schemes called ``Death Star,'' ``Get Shorty,'' ``Fat Boy,'' and ``Ricochet'' to fleece families and businesses in the West.

By using Death Star, for example, Enron would ``get paid for moving energy to relieve congestion without actually moving energy or relieving any congestion.'' That is according to their own internal memo.

Just on its face, that is fraud. We are going to move energy without moving energy--fraud.

In another strategy detailed in these memos, Enron would ``create the appearance of congestion through the deliberate overstatement of loads'' to drive prices up.

Create ``the appearance of congestion through the deliberate overstatement of loads''--fraud.

The above-mentioned strategy reveals an intentional and coordinated attempt to manipulate the western energy market for profit.

This is an important piece of the puzzle, and some former Enron traders helped fill in the blanks.

CBS news reported in May that former Enron traders admitted that the energy company was directly responsible for rolling blackouts in California. Yet, interestingly enough, no one has followed up on this report.

Anybody who has ever been through a rolling blackout knows what it is like. Everything goes off and you cannot predict where it goes off next. Street lights, hospitals--literally everything goes off.

According to CBS news, the traders said Enron's former President, Jeff Skilling, pushed them to trade aggressively in California and told them: If you can't do that, then you need to find a job at another company or go trade pork bellies.

The CBS article mentions that Enron traders played a disturbing role in blackouts that hit California. The report mentioned specific manipulative behavior by Enron on June 14 and 15 in the summer of 2000 when traders said they intentionally clogged Path 26. That is a key transmission path connecting northern and southern California. Here is what one trader said about that event:

What we did was overbook the line we had the rights on during the shortage or in a heat wave. We did this in June of 2000 when the Bay Area was going through a heat wave and the ISO couldn't send power to the north. The ISO has to pay Enron to free up the line in order to send power to San Francisco to keep the lights on. But by the time they agreed to pay us rolling blackouts had already hit California and the price for electricity went through the roof.

California lost billions. Yet, according to the traders, Enron made millions of dollars by employing this strategy alone.

On top of all of this, traders disclosed that Enron's manipulative trading strategy helped force California to sign expensive long-term contracts. It is no surprise that Enron and others were able to profit so handsomely during the crisis.

Financial statements show that revenue and income surged for energy trading companies in 2000 and 2001. Many firms such as Duke, Dynegy, Enron, Mirant, Reliant, and Williams greatly increased their revenues by taking advantage--taking advantage--of the California market.

And the evidence suggests that other companies were--and may continue to be--engaging in these manipulative strategies and that the Enron memos may well be the tip of the iceberg. One of the Enron memos said: Enron may have been the first to use this strategy, others have picked up on it, too.

Dynegy, Duke Energy, El Paso, Reliant Resources, CMS Energy, and Williams all admitted engaging in false

``round-trip'' or ``wash'' trades.

What is a ``round-trip'' or ``wash'' trade, one might ask? ``Round-trip'' trades occur when one firm sells energy to another and then the second firm simultaneously sells the same amount of energy back to the first company at exactly the same price. No commodity ever changes hands. But when done on an exchange, these transactions send a price signal to the market and they artificially boost revenue for the company. Fraud again.

How widespread are ``round-trip'' trades? The Congressional Research Service looked at trading patterns in the energy sector over the last few years. This is what they reported:

This pattern of trading suggests a market environment in which a significant volume of fictitious trading could have taken place. Yet since most of the trading is unregulated by the Government, we have only a slim idea of the illusion being perpetrated in the energy sector.

Consider the following recent confessions from energy firms about ``round-trip'' trades:

Reliant admitted 10 percent of its trading revenues came from ``round-trip'' trades. The announcement forced the company's president and head of wholesale trading to both step down.

DMS Energy announced 80 percent of its trade in 2001 were ``round-trip'' trades.

That means 80 percent of all of their trades that year were bogus trades where no commodity changed hands, and yet the balance sheets reflect added revenue. If that isn't fraudulent, I do not know what is.

Remember, these trades are sham deals where nothing was exchanged.

Duke Energy disclosed that $1.1 billion worth of trades were ``round-trip'' since 1999. Roughly two-thirds of these were done on the InterContinental Exchange; that is, the online, nonregulated, nonaudited, nonoversight for manipulation and fraud entity run by banks in this country. That means thousands of subscribers would see false pricing.

A lawyer for J.P. Morgan Chase admitted the bank engineered a series of ``round-trip'' trades with Enron.

Dynegy and Williams have also admitted to ``round-trip'' trades.

Although these trades mostly occurred with electricity, there is evidence that suggests that ``round-trip'' trades were made in natural gas and even broad band.

By exchanging the same amount of commodity at the same price, I believe these companies have not engaged in meaningful transactions but deceptive practices to fool investors and drive up energy prices for consumers. It is, therefore, imperative that the Department of Justice, the Federal Energy Regulatory Commission, the Securities and Exchange Commission, the Commodities Futures Trading Commission, and every other oversight agency within this Federal Government conduct an aggressive and vigorous investigation into all of the energy companies that participated in these markets.

Beyond that, I believe Congress must reexamine what tools the Government needs to better keep watch over these volatile markets that are, frankly, little understood.

In the absence of vigilant Government oversight of the energy sector, firms have the incentive to create the appearance of a mature, liquid, and well-functioning market. But it is unclear, and I think improbable, that such a market actually exists.

The ``round-trip'' trades and the Enron memos raise questions about illusions in the energy market. To this end, I believe it is critical for the Senate to act soon on the legislation I offered last April to regulate online energy trading.

This week, I plan to reintroduce this legislation with Senators Fitzgerald, Lugar, Harkin, Cantwell, Wyden, and Leahy, to subject electronic exchanges like Enron On-Line to the same oversight, reporting, and capital requirements as other commodity exchanges such as the Chicago Mercantile Exchange, the New York Mercantile Exchange, and the Chicago Board of Trade.

This legislation will be called the Energy Market Oversight Act. Without this type of legislation, there is insufficient authority to investigate and prevent fraud and price manipulation and, also, the parties making the trade are not required to keep any records, nor are the trades transparent. In other words, they are secret trades with no audit trails, no oversight for fraud and manipulation. They cannot exist over a regular exchange like that, but the Internet, the online trading community is exempt from this oversight. It is a huge loophole, and it has cost my State billions.

I strongly believe that in order to restore confidence in the economy, we must bolster the authority of the Securities and Exchange Commission, the Federal Energy Regulatory Commission, and the Commodity Futures Trading Commission, and other regulatory agencies.

The marketplace must be fair and transparent, and regulatory bodies such as FERC must show they will act in the public interest and release to the public all information on fraud and manipulation. This includes removing the ``protective order'' FERC has placed on evidence uncovered by the State of California and other interested parties, information the Commission has on wrongdoing in the energy sector but hasn't disclosed. With something as broadly based as energy, as important to people as energy, it is unconscionable to have all this information protected in a lockbox. It must change.

I strongly believe families and businesses that suffered during the western energy crisis have a right to know the extent of the fraud and manipulation that was wrought upon them. So I intend to help ensure that FERC fulfills its public duty so this abuse cannot happen again. Unfortunately, at this time, none of us can give this guarantee to the people of America. And that must change.

Mr. President, I yield the floor.