May 21, 2002
The Honorable Pat Wood, III Dear Chairman Wood: I am writing to continue to urge the Federal Energy Regulatory Commission (FERC) to protect the Nation’s consumers from unjust and unreasonable electricity prices resulting from manipulative trading practices in wholesale power markets. While the Commission is to be commended for initiating an investigation of the extent and impact of such practices, I am concerned that FERC may not have the wherewithal to protect consumers from similar occurrences in the future. Since the beginning of California’s restructuring effort, the Commission’s interest in the theoretical benefits of competition has at times undermined its focus on protecting actual consumers. The Commission’s response to the California meltdown was at best reactive, and at worst characterized by foot-dragging. In April 2001, Subcommittee on Energy and Air Quality Ranking Member Rick Boucher and I wrote then Chairman Curt Hebert and the other commissioners expressing concern about the disarray in western electricity markets and FERC’s failure to redress the situation. In May 2001, things grew so desperate that I and other House Democrats wrote Secretary of Energy Spencer Abraham asking him to initiate proceedings under the Department of Energy Organization Act to require FERC to reimpose cost-of-service prices for wholesale sales, not only in California but throughout the West, and to provide for refunds to consumers who paid prices that were found to have been unjust and unreasonable. The actions FERC ultimately took to protect consumers in California and other western states would have been far more effective had they been undertaken earlier. In light of its finding in November 2000 that California’s restructuring plan was "seriously flawed," FERC cost consumers hundreds of millions of dollars by waiting until June 2001 to impose price controls on western power sales. I suspect the Commission’s slow response belied a reluctance to acknowledge that, under the wrong circumstances, competition could be problematic. Mr. Chairman, I recognize that during your tenure at the Commission, a number of steps have been taken to improve FERC’s ability to monitor markets, for which I commend you. I hope the Administration and the appropriations committees will support these efforts by ensuring you have the necessary resources, and I have attached some questions to better understand the Commission’s needs. I remain concerned, however, that FERC’s response to evidence of problems in the Nation’s power markets continues to be a day late and far too many consumers’ dollars short. As recently as February 13, 2002, you testified before the Subcommittee that the Enron collapse "has not had any substantial spillover effects" on energy markets. Perhaps the effect on markets, as opposed to consumers, is debatable. As I observed at the time, however, "such distinctions will mean little to the average consumer in the West or any other region where Enron is found to have used its market power to manipulate prices." Knowing what we now know about Enron’s attempts to manipulate the market with trading strategies with names like "Death Star," "Richochet," and "Get Shorty," it is hard to argue that the behavior that resulted in its downfall did not harm consumers. I note that in testimony last week before the Senate Committee on Energy and Natural Resources, while you acknowledged that the Commission may have been too "deferential" in approving California’s market design, you stated, "The Commission believes firmly that sound, competitive wholesale electric markets serve America’s energy users better than the cost-of-service, vertically integrated alternative." Given what we have learned about shortcomings in FERC’s ability to monitor wholesale markets, this tends to reinforce my concern that the Commission persists in elevating market theory above the practical effect of its policy on real consumers. While it may be that wholesale competition can produce just and reasonable prices, in light of recent sobering events, it seems clear that this is not necessarily so. Under the Federal Power Act, Congress directed the Commission to ensure that prices are just and reasonable. If any practice or contract affecting rates is unduly discriminatory or preferential, FERC must provide a remedy. In light of new evidence of unscrupulous trading practices and market manipulation, I would like to highlight several matters in which FERC may be required to take additional action or rethink its approach to wholesale competition. First, the Commission will soon be required to act on a matter requiring a thorough understanding of the impact of questionable trading practices, when it considers whether to continue the cap on western wholesale electricity prices beyond September 30. At present, FERC is in the early stages of its investigation into Enron’s trading practices, and recently asked other wholesale sellers to inform the Commission whether they have employed similar strategies. It is imperative that before it decides whether to take off the western price cap, the Commission understands the nature and effect of these practices. Otherwise, it risks exposing consumers anew to these deplorable practices or variants which the Commission has not yet comprehended. Moreover, until it completes its trading investigation, FERC should defer action on any request to charge market-based prices in other parts of the country. Second, I urge the Commission to avoid elevating theory over fairness to consumers in its consideration of requests to reform long-term power contracts that were entered into at the height of the disarray of western markets last year. Certainly I agree with FERC’s observation in its April 25, 2002, procedural order that contract reform is an extraordinary remedy that must be based on compelling evidence. I am troubled, however, by language to the effect that the preservation of contracts has become "more critical" because of a need for "regulatory certainty." This seems to miss the point. Without prejudging the merits of the case, if FERC finds that contracts and resulting consumer prices are unjust and unreasonable due to the exercise of market power at their inception, the Federal Power Act requires it to order changes. In this case, FERC would have to take corrective action and regulatory certainty would become a distinctly secondary consideration. I urge you not to make decisions in a vacuum with respect to extending western price caps, acting on requests for market-based pricing, or requests to reform long-term western power contracts. The proper consideration of each of these and possibly other matters is likely to be affected by what the Commission learns in its ongoing trading investigation. You have a difficult job before you, and it is essential to avoid acting in a manner that compounds the errors you have acknowledged with respect to the Commission’s role in the California debacle. On another matter, I draw the Commission’s attention to trading practices known as "round-tripping" or "wash sales," a practice reportedly admitted by several companies. "Round-trip" trades involve two companies agreeing to buy and sell equal amounts of power at the same price, resulting in a wash. While it appears that participants in these trades may have had motivations unrelated to affecting electricity prices, the Commission should determine whether such practices resulted in consumer prices that were artificially inflated, and not just and reasonable, and whether the practice should be permitted in the future. I appreciate your consideration of my suggestions, and have attached a list of specific questions to which I would appreciate a response by Monday, June 3, 2002. Please fax the responses to Sharon Davis, Chief Minority Clerk, at (202) 225-2525 or hand deliver to Ms. Davis c/o the Committee on Energy and Commerce Democratic Staff, 2322 Rayburn House Office Building, Washington, D.C. 20515. Due to significant delays in postal deliveries on Capitol Hill, we ask that your response not be sent through the postal service. Sincerely, JOHN D. DINGELL cc: The Honorable W. J. "Billy" Tauzin, Chairman The Honorable Joe Barton, Chairman The Honorable Rick Boucher, Ranking Member Questions for FERC Chairman Pat Wood, III 1. (a) What is the status of the Commission’s new Office of Market Oversight and Investigations? (b) How many staff currently are on board, and how more do you need to hire? (c) Did the Office of Management and Budget (OMB) provide the Commission with its full request? If not, what was the request to OMB? (d) What is the status of the Commission’s budget request and anticipated appropriations for this office for the balance of FY 2002 and FY 2003? 2. In your testimony of May 15, 2002, before the Senate Committee on Energy and Natural Resources, you stated that FERC "has contracted with leading experts in business and academia" to assist in the investigation of Enron and other companies that may have manipulated prices for electric energy or natural gas markets in the West since January 1, 2000. Please provide the names of each consultant and describe the terms of his or her employment by the Commission. (a) Why was it necessary to engage outside consultants? (b) What precedent is there for this practice in prior Commission proceedings? (c) What steps have been taken to avoid conflicts of interests between such consultant’s work for the Commission and any other activities in which they are engaged? 3. Please describe the nature of the Commission’s coordination with the Securities and Exchange Commission and the Commodities Futures Trading Commission with respect to FERC’s investigation of trading practices affecting wholesale power markets. 4. In your May 15 Senate testimony, you state that you believe that "rules now in effect across the organized markets in the eastern markets prevent major manipulations of the type outlined in the Enron memos." (a) What is the basis for this conclusion? (b) Please describe the area comprising "eastern markets"? (c) What about other areas of the country? 5. Press reports of your May 15 Senate testimony indicate that you stated that, if the trading practices described in the Enron memoranda were not illegal, they should be. (a) If this accurately reflects your testimony, do you think these practices can be prevented by FERC henceforth under its current statutory authority? (b) By any other federal agency pursuant to its existing authority? If not, please describe the new authority you believe the Commission or other federal agencies may require to prevent such practices from recurring. 6. (a) Please describe all "round-trip" sales of electricity known to the Commission. For each such transaction, please list:
(b) Is the Commission confident that all such transactions have been reported to the Commission? If not, what steps are necessary to collect the information? (c) Does the Commission have data on round-trip sales only on western markets, or does it have data on all markets? (d) A Wall Street Journal article of May 16, 2000, states that "round-trip trades could also have been used to move prices in the wholesale market." Does the Commission have any evidence that the reported "round-trip" sales have resulted in higher consumer prices in any markets? If the answer is yes, please be specific. (e) Does the Commission believe the use of "round-trip" sales is prevalent in the industry, and does the Commission have any information concerning the motivation behind "round-trip" sales?
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