The Federal Energy Regulatory Commission turned its back on California during its energy crisis two years ago, ignoring warning signs that Enron Corp. and other energy companies might be manipulating power and natural gas prices along the West Coast, a Senate committee report concludes.
The report, prepared for a hearing today by the Senate Committee on Governmental Affairs, said the five-member regulatory commission lacked the will and resources to oversee Enron and other politically-powerful energy companies as U.S. electricity markets deregulated in the mid-1990s.
FERC Chairman Pat H. Wood III, who will appear at the hearing, agreed in an interview yesterday that FERC had not done enough to investigate the causes of California's crisis and the conduct of the nation's power companies.
"That's part of why I took the job -- because I didn't think we were doing that," said Wood, the former chief energy regulator in Texas. President Bush picked Wood to join FERC in June 2001, and he became chairman three months later.
"This agency has a crucial role to play to make sure these markets deliver benefits to consumers and that this is an industry the people can trust. There is a big problem there," Wood said.
The Senate report credited Wood with stepping up FERC's enforcement capabilities with the creation of a new office of market oversight, in August 2002. But it questioned whether FERC was strong enough to police complex energy markets. "FERC's experience with Enron demonstrates that the agency is no match for the sophisticated, competitive, profit-driven companies it regulates," the Senate report concluded.
Meanwhile, a federal grand jury in San Francisco investigating price manipulation during the state's power crisis has issued subpoenas to Duke Energy Corp., Williams Cos., Reliant Resources Inc. and Mirant Cos. The companies said they are cooperating with the inquiry. And yesterday, Tulsa-based Williams agreed to pay a $150 million fine and turn six generating turbines over to the state to settle state charges of market manipulation.
Senate investigators noted in their report that while FERC launched a series of California investigations, the inquiries are not adequately tied together to produce the full picture of what happened. FERC "must recognize the need for a total cultural reorientation of its regulatory approach," the report said.
Wood agreed that FERC has tended to compartmentalize inquiries, focusing on specific complaints. Now it is trying to find broader answers, he said. Wood said he was the first FERC chairman in 10 years to request more staff from the White House and Congress. "If I need more, I'll be back."
California's electricity prices exploded in the summer of 2000, followed by natural gas prices in November, and the state suffered seven days of power blackouts affecting millions of customers.
FERC stood by through the worst of the crisis, ignoring pleas by state officials for federal price controls, the Senate report noted. Instead, commissioners concluded in November 2000 that the primary cause of California's crisis was its own flawed power deregulation plan, not wrongdoing by power companies.
That judgment ignored warnings by FERC staff investigators that power companies may have been able to manipulate power prices that summer of 2000. FERC commissioners did not order an investigation into possible price gouging by energy providers for another 15 months.
It was not until last May that the FERC inquiry turned up a confidential report by Enron attorneys describing an arsenal of trading scams and market gaming strategies with such code names as "Death Star" and "Fat Boy."
Warning signs of possible misconduct by Enron showed up years ago at FERC but were not heeded, the report said.
In 1997, Enron notified FERC of its sale of interests in three wind-farm projects to a supposedly independent investment group. Federal prosecutors now allege that the sale was a ploy designed by Enron's chief financial officer at the time, Andrew S. Fastow, to enable Enron to maintain control of the wind farms and continue to reap preferential prices from the projects.
While Enron's reports to FERC did not disclose that Enron executives secretly controlled -- and profited from -- the deal, they did show that Enron was funding the transactions, was entitled to repurchase the wind-farm assets, and strongly suggested that the deal was not a true sale, the committee report said.
Instead of examining the deal in detail, FERC's review confined itself to "largely parroting back Enron's representations without further scrutiny," the report said.
In some cases where FERC's staff found problems -- as in the market dominance of Enron's power trading unit, EnronOnline -- the concerns were not heeded by the commission, the report said. The lax oversight "left a regulatory 'black hole' that Enron has been able to exploit," the report said.
Wood responded that the commission now meets privately with its investigators, "so that these issues don't just sit in a file."