After Wood’s Dismissive Reaction to Enron Tapes Exposing Energy Market Manipulation

June 16, 2004

Pat Wood, III
Chairman
Federal Energy Regulatory Commission
888 First Street, N.E.
Washington, DC 20426

Dear Chairman Wood:

We have received a copy your June 7, 2004 letter to Senator Barbara Boxer and are appalled at your indifference to both already established facts surrounding Enron‘s gaming of California ratepayers and to the suffering of Californians due to market manipulation perpetrated by companies that you regulate.

Most disturbing is the misstatement of conclusions already reached by your agency and that you show far more empathy for the discredited positions of Ken Lay, who first recommended you as a utility commissioner to then-Governor Bush, than for Californians. Despite the revelation by CBS News of taped conversations among Enron employees revealing overtly criminal behavior by Lay’s employees (and explicit acknowledgement that Mr. Lay himself was in on the schemes), you have once again dismissed evidence of one of the largest crimes against consumers in our nation’s history.

‘ You state: “the Commission found no evidence that there was market manipulation specific to the long-term contract negotiations and no evidence of unfairness, bad faith or duress in the negotiations of the long-term contracts.”

In fact, that conclusion contradicts the findings of your own agency. According to FERC’s “Final Report on Price Manipulation in Western Markets” of March 26, 2003 the manipulated spot market prices “significantly influenced” the energy prices agreed to in longer term contracts. Your agency found that “forward power prices were distorted” and FERC even developed “a detailed statistical analysis providing estimates of the extent of the distortion based on a certain level of distortion in spot power prices.” Your claim that the awful behavior of Enron and its energy generation and trading counterparts did not improperly alter the environment in which California’s long-term contracts were negotiated cannot be reconciled with the findings of your agency or the plain history of California’s energy crisis.

‘ You also wrote: “The Commission has worked persistently to resolve the issues in the refund proceeding so that refunds may be distributed.” You point to an impending $3 billion refund assessment.

But the truth is that your agency has set up roadblocks every step of the way. When the Ninth Circuit ordered FERC to accept evidence of market manipulation in the refund proceedings, you allowed only a 100-day period to produce the documents. And when state agencies supplied you with caseloads of information, you kept the evidence out of the refund proceeding, instead placing it in a series of secret investigative proceedings from which California was excluded. What’s most obscene is that the more-than-$3 billion in prospective refunds to which you refer is set to be mitigated by a $3 billion dollar debt you would have California ratepayers refund to the energy companies.

‘ You state: “To date, the Commission has approved, or had a role in other agencies’ approval of, numerous settlements that grew out of dysfunctions in California energy markets. These settlements amount to over $3.1 billion.”

The clear implication that FERC has played a proactive and significant role in efforts to provide Californians with refunds from the energy crisis, is a rewriting of history. The only money that has actually been secured as compensation for California has come from settlement negotiations between California officials and the offending companies. Californians have been forced to negotiate with these bandits, exactly because FERC has failed to use its extensive powers in the refund process. There is no doubt that the amount recovered so far — which we believe to be significantly less than the $3.1 billion you allege — would have been far greater had FERC ever used its wide ranging authority to order refunds or meaningfully suggest that it would severely punish companies that illegally gamed the market or even simply ensured that the entire amount stolen from California was on the table.

California ratepayers remain at least $7 billion short of what they are due in refunds in large measure because the FERC, under your leadership, has failed to protect consumers from the illegal profiteering of energy companies and has refused to enforce the law so Californians can recover billions of dollars stolen from the state.

It is, of course, not just the outstanding refunds that you have withheld, but your unwillingness to bring energy companies to the table for contract renegotiation that is so offensive. The market manipulation began at least as early as June 2000, according to a Department of Justice indictment of Reliant. It continued – as evidenced by Enron‘s “Fat Boy/Death Star” memo, the conversations about manipulation involving AES and Williams traders as well as the new Enron tapes and a host of other indisputable proof — through the 2001 blackouts and price spikes. This should provide you with incontrovertible evidence that the contracts must be abrogated or renegotiated.

Although you do not attempt to defend these indefensible tapes, your effort to deflect their relevance in this manner demonstrates your continued allegiance to your long-time promoter Ken Lay. But more importantly, your letter shows that you do not grasp the heinousness of this massive larceny. These tapes are the most startling evidence to date that the environment in which California negotiated over $40 billion worth of long-term energy contracts was illegally skewed to force California to accept unjust and unreasonable terms and prices. It is because California was victimized by crooks who manufactured shortages to drive prices up and threatened blackouts that the state signed the outrageous contracts. Even after three years of bearing the excessive prices of these contracts, these insidious deals still leave the state’s consumers with at least $7.38 billion in excessive rates to be paid over the next decade. In other words, you are willing to allow another $7 billion above reasonable market prices to be charged to Californians under these contracts despite the plethora of evidence that the prices were obtained as a result of manipulation. And, of course, this does not include the billions of dollars above market prices that we have already paid on these contracts since 2001.

There is no excuse for your unwillingness to confront the abhorrent economic crimes that gave way to the deregulation disaster of 2000 and 2001. It is time that you stand up for consumers.

Sincerely,

Douglas Heller
Executive Director, Foundation for Taxpayer and Consumer Rights