Statement by Senator Feinstein
- On FERC's Probe of Market Manipulation -
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August 13, 2002

"Since the California energy crisis began in 2000, I have been urging the Federal Energy Regulatory Commission (FERC) to investigate market manipulation by energy companies. In January, I personally asked Patrick Wood, Chairman of the Federal Energy Regulatory Commission, to investigate whether Enron manipulated prices in the Western Energy Market.

Today, FERC has finally released an initial report identifying specific incidences of likely misconduct by three Enron affiliates and two investor-owned utilities that did business with Enron. As a result, FERC has launched formal investigations of violations of the Federal Power Act by these companies.

I am once again encouraged that FERC finally is taking seriously its responsibility to protect consumers.

Significantly, the investigation also found 'preliminary indications' that market manipulation may have occurred in the published spot prices for natural gas, which was one of the major factors in the escalation of electricity costs during the energy crisis.

I have long suspected manipulation in the natural gas market and asked FERC on several occasions to examine this issue, because it was always hard to understand the enormous price differential between Southern California and elsewhere.

As an example, during the height of the energy crisis, the average spot price for natural gas in Southern California was $60 a decatherm, while it was only $12 a decatherm in San Juan, New Mexico, and the cost of transportation was less than a $1.

Something drove that price up, and based on the FERC report, it appears that market participants 'had an incentive to manipulate the prices.' The FERC report indicates that possible significant refunds may be due California because of this market manipulation. This would be good news for our State.

While this report may not contain any major new smoking gun, it does point out that there are many things wrong in the energy marketplace.

It also reinforces the need to improve the operation of the regulatory bodies of federal government, whether this is giving FERC more power, or seeing that the Commodity Futures Trading Commission carries out its full regulatory obligation.

Frankly, as one who has watched this scene for three years, I do not believe that we have yet struck a proper balance of regulatory oversight.

Therefore, I believe passage of the energy derivatives bill is even more important, because one of the areas that this report pinpoints as possibly responsible for manipulation was the online trading that would be regulated by this legislation. We need to see that the marketplace has full transparency as well as the anti-fraud and anti-manipulation oversight that this bill would provide.

The FERC report also documents the importance of providing FERC with new authority to police competitive energy markets, including the ability to impose meaningful fines and criminal penalties when companies violate the law and cheat consumers."

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