SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 1924 words

COMMITTEE: HOUSE ENERGY AND COMMERCE

SUBCOMMITTEE: ENERGY AND AIR QUALITY

HEADLINE: IMPACT ON EURON BANKRUPTCY ON ENERGY MARKETS

BILL-NO:

 

H.R. 3406             Retrieve Bill Tracking Report


                      Retrieve Full Text of Bill


 

H.R. 4             Retrieve Bill Tracking Report


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TESTIMONY-BY: MR. DAVID OWENS, EXECUTIVE VICE- PRESIDENT

AFFILIATION: EDISON ELECTRIC INSTITUTE

BODY:
Statement by Mr. David Owens Executive Vice- President Edison Electric Institute

The Committee on Energy and Commerce

February 13, 2002

Mr. Chairman and Members of the Subcommittee:

My name is David K. Owens, Executive Vice President of the Edison Electric Institute (EEI). EEI is the association of U.S. shareholder-owned electric utilities and industry affiliates and associates worldwide. We are pleased to have the opportunity to testify before the Subcommittee on the effects of the Enron bankruptcy on the functioning of energy markets.

Enron was reported to be the 7th largest company in the nation and often had been cited among the "most admired and innovative companies." Its sudden bankruptcy has shaken the confidence of the nation's investors and devastated Enron's own employees, many of whom have lost their jobs and their retirement savings. This bankruptcy has raised substantial questions that the Energy and Commerce Committee, other congressional committees and government agencies are properly investigating. Investors must have confidence in the corporations whose stock they own. This requires the fair, accurate and transparent presentation and disclosure of financial information. Enron obviously did not meet this fundamental standard. The circumstances of Enron's demise, while not yet fully known, certainly require a reevaluation of our approaches to auditing standards, financial reporting and disclosure for all companies, no matter what industry they operate in.

DID ENRON'S BANKRUPTCY HAVE ANY IMPACT ON ENERGY MARKETS?

Fortunately, Enron's bankruptcy did not have any immediate harmful impact on electricity consumers. Nevertheless, it is affecting energy companies and future developments in the energy industry in many ways.

First, the good news. As FERC Chairman Wood testified on January 29 before the Senate Committee on Energy and Natural Resources, despite the fact that Enron was the nation's largest marketer of gas and electricity, Enron's collapse has had little or no impact on the supply or price of electricity. There was no disruption of service to electric customers. The lights stayed on. Prices remained steady.

It appears that electricity traders, including those at Enron, worked hard to unwind various deals involving Enron and to find other parties to complete such transactions. Enron and many other market participants often used a standardized electricity trading contract, voluntarily developed by traders, buyers and sellers under the auspices of EEI, which simplified the process of responding to Enron's financial collapse. The contract provided uniformity in the terms and conditions of electric trading transactions, and contained detailed default and credit provisions which enabled parties to protect themselves if the party they were trading with (the counterparty) suddenly lacked creditworthiness. See "Using the EEI-NEM Master Power Contract to Manage Power Marketing Risks," 21 Energy Law Journal, 269 (2000).

Chairman Wood's testimony to the Senate Energy Committee contains data showing that daily power prices for electricity, which are often extremely volatile, had no unusual peaks during the fall of 2001. Electricity trading markets have proven to be robust and efficient, allowing others to step in to fill the void left by Enron.

In addition, Enron's bankruptcy does not appear to have harmed the retail customers of Portland General Electric Company, an Enron division which provides electricity to retail consumers in Oregon. Roy Hemmingway, Chairman of the Oregon Public Utility Commission, confirmed this in his testimony to the Senate Energy Committee on February 6.

I understand that Mr. McCollough, who appears with me today, has testified recently that Enron's bankruptcy was followed by a 30% decline in West Coast forward prices and suggested that Enron used its "market dominance" to "set" forward prices. I do not know whether declines were as significant as Mr. McCollough indicates or if they were the result of manipulation by Enron.

It is plausible that prices declined with Enron's bankruptcy because other sellers tried to dispose of power at one time that they had originally sold to Enron. Other factors that might have contributed to the decline in electricity prices include the sluggish economy, warmer than normal weather and falling natural gas prices. Whatever really happened, the Federal Energy Regulatory Commission will investigate these allegations, as it should.

In other respects, Enron's demise does appear to be having important impacts on energy markets.

Many energy companies reported losses resulting from Enron's bankruptcy.

Wall Street is asking more questions about financial practices and tightening credit standards, particularly for energy companies.

Accounting and reporting practices are being scrutinized and reevaluated.

Corporate Board members and officers are reviewing their roles and responsibilities.

The stock prices of many energy companies have declined significantly. Credit rating agencies have downgraded some energy companies and are re-evaluating others. All of which makes it more difficult and costly to raise capital to make needed investments in our nation's energy supply infrastucture.

Many companies have delayed investments in generation capacity and some are selling assets, raising the possibility of tight supply markets when economic growth picks up.

Many of these actions are understandable responses to the concerns of investors, customers and the public.

In addition, the circumstances of Enron's bankruptcy have raised specific questions about the effect of accounting for forward trades in electricity. A forward trade is a transaction for delivery of electricity at some future time. Selling electricity for future delivery is essential for efficient operation of electric markets. The California experience demonstrated the problems of relying too much upon the spot market for electricity and confirmed the importance, for stable electricity prices, of having a portfolio of long and short-term electricity contracts.

Where there is a transparent liquid market for longer-term commodity contracts, mark-to-market accounting is used to recognize and disclose the financial impact of such transactions. However, where forward markets are not as liquid and prices are not as transparent, there are greater uncertainties as to the proper market valuation and accounting for such transactions. Thus, the absence of transparent market prices could raise concerns about improper manipulation of anticipated prices that could distort financial reporting and disclosure. Questions have been raised regarding Enron's accounting for the income from such transactions and its treatment of the risks and valuation of the underlying trades.

In a related vein, questions have been raised whether the exemption of forward energy trades from CFTC regulation contributed to Enron's problems by giving it a greater opportunity to take advantage of illiquid markets.

Information from investigations of Enron will be helpful in addressing these questions.

ARE THERE ANY LEGISLATIVE ENERGY-RELATED RECOMMENDATIONS THAT RESULT FROM ENRON'S COLLAPSE?

Enron's collapse suggests the need for many reforms and changes that affect all publicly-owned companies. Such changes must be much broader in application than just the energy industry. We are pleased that Congress is looking into these issues, although many reforms can and should be accomplished without legislation.

Depending upon what else we learn about the circumstances at Enron, right now it appears that the "energy" area of greatest concern is the transparency of financial reporting and disclosure in thinly traded electricity markets. The ultimate cure for this is to initiate measures to promote more liquid trading markets. In the electricity context, this would involve enhancing our transmission infrastructure, moving toward standardized power markets with efficient transmission pricing, facilitating independent regional transmission organizations and establishing more liquid "hubs" for the delivery and trading of power.

FERC is taking the lead in addressing many of these issues. However, legislation is also needed in areas where FERC cannot act.

H.R. 3406, together with the tax provisions of H.R.4 already passed by the House, contain many needed electricity provisions to achieve the goal of a more robust, competitive wholesale market and to promote market liquidity. The tax provisions of H.R. 4 remove disincentives to transferring transmission assets to RTOs for both privately-owned companies and public power entities. This will facilitate the voluntary formation of large regional RTOs without federal mandates. (While many electric companies disagree with aspects of FERC's current RTO policy and the RTO mandate language in H.R. 3406, there is broad support for development of robust, large regional RTOs.)

The transmission siting and incentive rate provisions of H.R. 3406 would facilitate investment in and construction of needed new transmission facilities. The standard market design initiative being conducted by FERC would achieve greater liquidity in electric markets. And the reliability provisions of H.R. 3406 would help assure the continued reliability of the grid.

In addition, FERC must have the same level of authority over all transmission owners, no matter what type of entity owns transmission facilities, if we are to attain the consistency needed for transparent liquid markets. While H.R. 3406 moves in the direction of granting FERC some increased authority over the 25% of the transmission network that governmental and cooperative utilities own, it is too timid. FERC should have the same level of regulatory authority over all transmission providers no matter what their ownership form.

The provisions of the Public Utility Holding Company Act (PUHCA) and the Public Utility Regulatory Policies Act (PURPA) are incompatible with the current move to competitive wholesale markets. PURPA assumes we are still operating under the old vertically integrated monopoly paradigm, not with open access transmission and a competitive wholesale market comprised of hundreds of active participants. Prospective repeal of PURPA's mandatory purchase obligation is needed to eliminate future distortions in energy markets.

PUHCA's commitment to vertically integrated utilities is directly contrary to FERC's goals of a decentralized, competitive wholesale generation market and large regional transmission organizations that are completely independent of power generators and retail electric sellers. PUHCA precludes investment from non- electric companies, interferes with establishment of large regional transmission companies and promotes concentration of generation, not dispersion. A better approach, contained in H.R. 3406, is to assure strong access to books and records for all state commissions and FERC, recognizing that our responses to Enron's situation will lead to improved financial reporting and disclosure approaches for all public companies.

Finally, Congress needs more information on the role of commodities-type regulation for energy forward markets and perhaps should hold hearings on this topic.

CONCLUSION

In conclusion, I appreciate the opportunity to appear before this Subcommittee to address the energy market ramifications of Enron's bankruptcy and would be pleased to respond to your questions.



LOAD-DATE: February 19, 2002