- The Washington Times - Thursday, May 16, 2002

Federal regulators yesterday promised to crack down on the illegal manipulation of energy markets after finding a "smoking-gun" that Enron Corp. drove up prices during California's power crisis last year.
"When they don't play by the rules, market participants ought to get their fair punishment," said Pat Wood, chairman of the Federal Energy Regulatory Commission as he asked Congress for increased enforcement powers and staff to go after abusive companies.
Mr. Wood, lawmakers and attorneys working for Enron who appeared at two Senate committee hearings yesterday said trading strategies with such nicknames as "Get Shorty" and "Death Star" in internal Enron memos prove that traders were guilty of deliberate "deceit," as well as other violations of state and federal law.
The vow to go after the perpetrators is a radical change for the energy agency, which in past years largely dismissed accusations by California officials that the power companies were price-gouging and "gaming" the market during the 2000-2001 electricity crisis.
The change of heart comes not only in response to Enron memos detailing the deceptions, which the agency uncovered and released earlier this month, but also from escalating pressure from Congress to act or be forced into action.
Sen. Byron L. Dorgan and other committee Democrats scolded the agency for ignoring the problem for so long and threatened to greatly step up regulation.
"FERC was a potted plant, just sitting there, doing nothing," the North Dakota Democrat said.
"I've had a belly full of being restructured and deregulated. We want more effective, aggressive regulators," he said. The agency's "shameful absence made me feel like we ought to abolish the agency and start over again."
Mr. Wood conceded the agency "has got some changing to do that requires bringing in some new blood."
He said he wants to "go out and hire some hot dogs to oversee these markets."
California officials and lawmakers at the hearings called for criminal investigations, with some suggesting that collusion by power companies in California violated anti-racketeering laws.
Mr. Dorgan, an assistant Democratic leader, called for an investigation by a special counsel of the Justice Department. He called for a hearing with the highest-ranking former Enron official in the Bush administration, Army Secretary Thomas White, to determine whether he was involved.
"We've got a lot of work to do to drain this swamp," said Sen. Ron Wyden, Oregon Democrat.
But Mr. Wood cautioned against jumping to conclusions based solely on the Enron memos, which were written by attorneys for Enron in December 2000 as they prepared to defend the company against lawsuits by California power users.
"Although the Enron memos clearly are very serious, we cannot and should not indict either a single company or an entire industry based on" them, he said.
While some of Enron's trading strategies involved "deliberate misrepresentation" to elicit higher prices from California's grid operators, many of them "exploited flaws in California's market design," Mr. Wood said.
Design defects must be corrected through regulatory action, he said. The agency, for example, on Dec. 15, 2000, ended some of Enron's actions by overruling a flawed state requirement that companies sell power only on the high-priced spot market rather than through lower-priced long-term contracts.
Future price spikes remain possible, he said, because the state has built few new generation facilities in the year since the crisis faded. In fact, 17 planned power plant projects have been canceled.
Frank Wolak, a Stanford University economics professor, said the Enron techniques were "standard arbitrage strategies" used by energy traders everywhere.
They were "at best, a small part of the cause of the California electricity crisis," he said, estimating that they accounted for $500 million of $10 billion in power overcharges the state wants refunded.
David Freeman, chairman of the California Power Authority, said Enron mostly took advantage of loopholes in California's power structure that the company helped create through lobbying in Sacramento.
"They can do these sham transactions because no one's ever seen a kilowatt hour," he said. Several of Enron's strategies involved trading kilowatts that the company never actually had or delivered, a practice regulators say is difficult to detect.
"This company had no moral compass," Mr. Freeman said.


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