Copyright 2002 Federal News Service, Inc.  
Federal News Service
February 13, 2002, Wednesday
LENGTH: 34795 words

HEADLINE: HEARING OF THE ENERGY AND AIR QUALITY SUBCOMMITTEE OF THE HOUSE ENERGY AND COMMERCE COMMITTEE
 
SUBJECT: THE EFFECT OF THE BANKRUPTCY OF ENRON ON THE FUNCTIONING OF ENERGY MARKETS
 
CHAIRED BY: REPRESENTATIVE JOE BARTON (R-TX)
 
LOCATION: 2322 RAYBURN HOUSE OFFICE BUILDING, WASHINGTON, D.C.

WITNESSES:
 
PATRICK H. WOOD, III, CHAIRMAN, FEDERAL ENERGY REGULATORY COMMISSION;
 
JAMES E. NEWSOME, CHAIRMAN, COMMODITY FUTURES TRADING COMMISSION;
 
ISAAC HUNT, COMMISSIONER, SECURITIES AND EXCHANGE COMMISSION;
 
MARY HUTZLER, ACTING DIRECTOR, OFFICE OF INTEGRATED ANALYSIS AND FORECASTING ENERGY INFORMATION ADMINISTRATION, ENERGY DEPARTMENT;
 
THOMAS L. WELCH, CHAIRMAN, MAINE PUBLIC UTILITIES COMMISSION;
 
RICHARD C. GREEN, CHAIRMAN, UTILICORP UNITED INC., ON BEHALF OF ELECTRIC POWER SUPPLY ASSOCIATION;
 
DAVID OWENS, EXECUTIVE VICE PRESIDENT, EDISON ELECTRIC INSTITUTE;
 
RAYMOND PLANK, CHAIRMAN, CEO, APACHE CORPORATION, HOUSTON, TX;
 
GERALD NORLANDER, EXECUTIVE DIRECTOR, PUBLIC UTILITY LAW PROJECT, ALBANY, NY;
 
ROBERT MCCULLOUGH, MANAGING PARTNER, MUCCULLOUGH RESEARCH, PORTLAND, OR
 


BODY:
REP. JOE BARTON (R-TX): We will begin. Today the Energy and Air Quality Subcommittee is going to hold a hearing on the effect of the bankruptcy of Enron on the function of energy markets. The full Energy and Commerce Committee has already held a number of hearings on the broader issues associated with Enron the Oversight and Investigation Subcommittee has an ongoing series of hearings to put the facts on the table as to criminal or unethical conduct by those associated within the company or monitoring the company or consulting with the company.

Today's hearing is a little bit different, this subcommittee has got jurisdiction over the energy industry in the United States. So what we want to determine, if it is possible in one hearing to determine, is how did the energy markets function in general and specifically the Enron online trading system as it reduced its share of the trading in energy commodities how did that effect the broader energy market? There have been a lot of surprises related to Enron, ah so far most of them have been very unpleasant surprises. We have had employees testify how they lost their jobs, they lost their savings, they lost their retirement accounts. We've had stockholders testify how they lost the value they had thought was in the stock that they purchased. We've got creditors that have testified, things like this. So now we're going to see how the energy markets work, and if they work.

There's some testimony on the second panel that perhaps the energy market didn't work as well as it was expected. We want to see if there are lesson that can be learned, if there are issues that need to be addressed in our ongoing pending mark-up of the Electricity Restructuring Bill which, quite frankly, I'd hoped to be marking up beginning last week and continuing today. I would lots rather be doing something substantive that could help the country; the present and the future, than holding a hearing on something that perhaps went wrong. But if we can discover what went wrong, perhaps we can put some amendments in on a bi-partisan basis in our electricity bill that could prevent something, like what's happened, from happening in the future.

I have a full statement, but in the interest of time, I am going to put that into the record. We just hope that our panelists testify truthfully, its already been asked, but your gonna be asked to testify under oath. This is not an oversight hearing so, we do expect you to tell the truth, but your not gonna have to swear to tell the whole truth and nothing but the truth so help you God. I can see looking out most of you testified before us before and you've always been very trustworthy so I don't see a reason that you wouldn't be today.

I would now like to recognize the ranking member of the subcommittee, Mr. Boucher from Virginia.

REP. RICK BOUCHER (D-VA): Thank you, Mr. Chairman. The scheduling of today's hearing is timely, the examination of the effect of the Enron collapse on the wholesale electricity market is highly appropriate.

I believe that we have sufficient information to draw some conclusions. First, in the wake of the Enron bankruptcy filing the wholesale electricity market functioned smoothly and effectively, it didn't miss a beat. There was no interruption in power delivery, the lights stayed on, electricity flowed. Even with the removal from the market of a major trading firm, the market recovered immediately. Other firms quickly filled the void. The wholesale electricity market experienced the largest corporate bankruptcy in American history, and the fact that it didn't miss a beat is truly a testament to its strength.

Secondly, I believe that the flexibility adherent in the largely deregulated wholesale market was the key to its rapid recovery. If the market had been inflexible, if it had been tightly regulated, the ability of other trading firms to fill the void would have been substantially reduced. Now is not the time to consider measures that would limit market flexibility.

As a third matter, the stock value of companies involved in energy trading and in the construction of independent powers plants have fallen significantly in the wake of the Enron bankruptcy. Their ability to acquire capital for new power plant construction has been diminished. As a result many power plant construction projects that had been announced have been delayed and in some cases cancelled all together. The nation may in fact find itself without sufficient electricity as a consequence and as the economy recovers we may experience that reality.

The major concern, Mr. Chairman, that I have, and the subject that I suggest be the primary focus of this subcommittees inquiry, is what steps need to be taken to restore investor confidence in the wholesale market and in the basic business model of the merchants energy companies that supply electricity to it.. I have some suggestions: First, the point should be stressed that the wholesale market was largely unaffected by Enron's misdeeds. The drop in wholesale prices in one region of the nation can be explained by the thin and illiquid nature of the market in that region and by the long- term downward trend in wholesale prices in that particular region of the wholesale market. In fact a view of the Long Term Price Chart places the market decline well within the range of normal fluctuation.

Secondly, we should encourage the taking of steps by the FERC which will increase transparency, predictability and reliability in the wholesale market.

I congratulate the FERC for the steps it is now taking to stimulate the formation of large regional transmission organizations, and to require membership in the RTO's by entities that own transmission assets. I hope that the FERC will continue along this positive path, which will make the market more reliable and more predictable. The same can be said for the FERC's proposed actions to establish uniform standards for interconnection. These are positive and helpful steps, and I hope that the FERC will move forward aggressively in both of these areas.

I look forward to additional suggestions that today's witnesses may make for steps that can be taken at the FERC, or perhaps by this subcommittee, that will lead to greater wholesale market transparency and to strengthened investor confidence in the companies that supply electricity to it. This is our most important mission, and I am pleased that we have today knowledgeable witnesses who can comment on this subject.

Thank you very much, Mr. Chairman

REP. BARTON: Thank you, Congressman Boucher. I would associate my opinion with your remarks. I would agree almost in totality with what you said.

The gentleman from Tennessee, Mr. Bryant, is recognized for an opening statement.

REP. ED BRYANT (R-TN): Thank you, Mr. Chairman. I would also like to thank you for holding today's hearing. I look forward to hearing from the distinguished panel of witnesses on what effect if any Enron --

REP. BARTON: If the gentleman wishes to be recorded for television and posterity, he ought to come to this microphone right here.

REP. BRYANT: That's okay.

REP. BARTON: All right.

(Laughter.)

REP BRYANT: I do look forward to this panel's testimony and what effect, if any, Enron's collapse has had or will have on competitive energy markets. According to Robert J. Michaels, December 10, 2001, essay in USA Today, and I quote, "The most important fact about the fall of Enron s hardly has been noted in the media. The disintegration of such a large company that so dominated this market should bring bedlam to it suppliers and customers, yet power and gas prices remain low and stable. They continue to be driven by supply and demand both where Enron traded and where it did not," unquote.

To my knowledge Enron's collapse has had little effect on the consumer cost of electricity and natural gas. Judging from the lack of correspondence my office has received, the Enron political scandal is not resonating outside of the Beltway. The politics seem to be over-hyped and media driven as reporters continue to try to connect the dots between Enron's campaign contributions to this White House and the immediate past White House as well as Congress. The media and some others appear to be obsessed with turning a despicable business scandal into a political scandal.

This subcommittee should certainly fully understand the consequences of Enron's collapse before moving forward with electricity restructuring legislation, however, if this subcommittee does indeed consider electricity restructuring legislation it will be because the majority believe it's in the best interest on consumers and the American economy and not due to any outside influences.

There are certainly a lot of questions yet to be answered about the collapse of Enron, questions about the role and responsibility of third party auditors, the effects of Enron's collapse on pension (coughing) and employ 401(k) investments, and current corporate financial disclosure practices. However, despite all of these questions that need to be asked about that, the lights are still on even without Enron.

Again, Mr. Chairman, thank you for calling this day's hearing and I look forward to these witnesses.

Thank you.

REP. JOE BARTON (R-TX): We thank the gentleman. The full committee ranking member Mr. Dingell is recognized for an opening statement.

REP. JOHN D. DINGELL (D-MI): Mr. Chairman, I thank you for your courtesy and I commend you for holding this hearing. It will help us to begin to understand the impact of Enron's bankruptcy on energy matters and most importantly upon consumers. Today's hearing is a good start at giving back the layers of what looks to be a rather large and quite frankly, smelly onion.

I welcome the participation of federal agencies, today and I note that they are responsible for protecting investors and consumers. I am pleased that both the Securities Exchange Commission the SEC, and the Federal Energy Regulatory Commission FERC, are investigating Enron's activities. There is plenty to investigate there and I trust that these inquiries will be conducted in a careful and thorough, as well as fair manner. It is necessary to provide the agencies and Congress with the best information possible, though we can take whatever actions our respective responsibilities require to ensure that working people and investors are not victimized by this kind of a smelly mess again.

With this in mind I must express reservations about the apparent tendency of both the SEC and FERC to reach premature conclusions about important public policy questions posed by the hearing, today. On the one hand each agency has begun investigations into Enron in keeping with their statutory responsibilities. On the other hand, and this is most troubling to me and I suspect also to the committee, both agencies already seem to have concluded that Enron's collapse raises no substantial question about regulation of the nation's electricity suppliers. I differ very strongly with that view.

Mr. Chairman, I would like to introduce into the record a response from SEC Chairman, Harvey Pitt, to a letter in which my colleague, Mr. Markey and I asked whether in light of the Enron debacle the commission was reconsidering its position with respect to the repeal of the Public Utility Holding Company Act --

REP. BARTON: Does the gentleman have a document that he wishes to put into the record?

REP. DINGELL: This is such a good one, I'd like to read it, Mr. Chairman, I'd --

REP. BARTON: Oh, I thought you wanted to put it in the record.

REP. DINGELL: -- Since I have five minutes I'll just say this is an admirable statement, Mr. Chairman. I hope that my colleagues will read it an enjoy it as much as I would.

REP. BARTON: The chair will accept it being put in the record if the gentleman would formally ask that it be put in the record. We're not trying to be obstreperous, we're trying to follow the rules that you so ably enforce when you were chairman.

(Laughter)

MR. DINGELL: Mr. Chairman, I ask unanimous consent that my statement be put in the record in full, and also that the Securities Exchange Commission response to my communication, and another communication which I'm going to send them and which I know they're going to answer quickly, although --

REP. BARTON: We will accept the one that's already been sent and answered to. We can't accept one that hasn't been sent or answered to yet.

MR. DINGELL: I want the record kept open, Mr. Chairman, I know that's within your power.

REP. BARTON: We will do so. Without objection, so ordered.

MR. DINGELL: Thank you, Mr. Chairman.

REP. BARTON: The Chair would recognize the full committee chairman, the gentleman from Louisiana, Mr. Tauzin, for an opening statement.

REP. W.J. (BILLY) TAUZIN (R-LA): Thank you Chairman Barton.

And I want to thank you for literally working to coordinate this hearing with the other subcommittee hearings on the state of the Enron collapse and its effect on this market as well as others.

And obviously you have all heard that tomorrow the subcommittee oversight and investigations committee will be continuing its work, and will have Tim Watkins, the Enron employee who tried to warn the president of Enron, Ken Lay, that there were questionable accounting practices going on behind the transactions.

And I have a subcommittee hearing on commerce trading and consumer protection that will look into the other current financial accounting standards, and whether they're sufficiently informative to consumers and to other investors and corporations.

So this subcommittee hearing is part of that B part process whereby we're looking at the O&I committee at -- wrongdoing and violation of standards, and nevertheless that these two committees to make sure that we understand the effect on the market and the effect on our need to improve the laws and rules by which people invest in markets like this one.

The hearing also, I think, will highlight a good story in the face of all the bad stories we've been hearing in this investigation. And that is that despite Enron being the largest energy trader in North America, that its sudden and dramatic departure from the energy markets took place with little, if any, impact on energy prices and supply. That's a remarkable story. That somehow the markets worked around the financial collapse, and still delivered energy to consumers at rational rates, and still delivered ample supplies of gas and electricity in those markets, and at a time when energy prices still remain significantly low. No disruptions in supplies, no disruptions in deliveries that we know of. And I think that's a testament to the maturity and success of these competitive energy markets today, and the stability and benefits that I think they will continue to deliver to folks in this country.

We saw that in gas. We also saw it in electricity. And hopefully, as a result of this hearing, we can get a better picture of literally how that happened, how these markets are working in spite of this type of collapse, so that we might follow a very important rule when we go about trying to fix some of these problems, and that's do no harm. That we not harm the good features of the marketplace that does, in fact, work.

I want to make it clear that our committee intends to follow this investigation wherever it leads. And so we endorse the FERC's examination of issues raised in the Senate. At the same time, we also believe that in this market, as in other markets, that more disclosure, more transparencies, is probably a very good idea. And to the extent that you can shed some light on how this energy trading system can be, perhaps, more transparent and more informative to both consumers and investors in that market we'll be interested in hearing.

I want to welcome again Chairman Pat Wood to the committee. Mr. Chairman, you know that you and I don't agree on all issues, and we're debating a few right now. But I want to commend your hard work and your tenacity. And I also want to welcome the CFTC Chairman Newsome. We appreciate your willingness to help us understand the role your agency plays in these markets. And we certainly welcome Commissioner Hunt back, of course. And we look forward to the testimony which we feel strongly that the House needs to follow the Senate's lead and repeal the Public Utility Holding Company Act, although my friend, Mr. Dingell, has a different view on that.

But we want to hear more about it. We also want to welcome the acting Director of the Energy Information Agency, Ms. Mary Hutzler, back to the subcommittee for the first time with a new title. And we welcome you. And we certainly want to welcome the Maine Public Utilities Commissioner, Chairman Welch.

This, again, is going to shed light on what we hope will be an understanding of how energy markets function in today's competitive marketplace. And particularly, as much as we ought to do to make them better, but what we might be careful not to do to harm what apparently is some good news here.

And I thank the chairman for the hearing.

REP. BARTON: Thank you.

We now want to recognize Mr. Waxman of California, who is the first member present at the hearing today. We welcome your opening statement.

REP. HENRY A. WAXMAN (D-CA): Thank you very much, Mr. Chairman.

Thank you for holding this hearing. It's very timely. Yesterday Ken Lay refused to testify about the Enron scandal. But it wasn't too long ago that Ken Lay testified before this subcommittee and freely made a number of promises about deregulation. And I'd like to spend a few moments reviewing these promises.

Let's look at the first chart. Ken Lay told us, "We formed the electric power system to give American consumers the equivalent of one of the largest tax cuts in American history". Well, many states took Mr. Lay's advice and restructured their electric utilities. So how accurate were Mr. Lay's predictions? According to a recent report by the Consumer Federation of America, quote "Despite predictions of huge rate reductions in states that restructured electricity service, consumers there are paying higher prices and receiving less reliable service than in those which have not restructured".

Now let's look at another prediction. Mr. Lay told us that deregulation would dramatically cut rates for consumers. He said, "it's time to bring competition to the electric business, and in the process cut electricity rates by 30 to 40 percent". Well, that sounds pretty good. Unfortunately, this prediction hasn't held up too well, either. According to the Consumer Federation of America, quote "In retrospect, claims of efficiency gains of price reductions of 40 percent or more for electricity restructuring seems silly. In fact, careful analysis showed that under the best of circumstances efficiency gains in generation could only be a fraction of that, while efficiency losses and new costs are far larger. It may well be that inefficiencies introduced into what has been a reasonably well managed network have increased overall costs by over 10 percent" end quote.

Mr. Lay promised that competition would bring rates down by 30 to 40 percent. In effect it appears to have raised rates by over 10 percent. And things are worse in California. The Los Angeles Times reported that the typical home owner in southern California, Edison territory, now pays 18 percent more each month than in 1995. At no point during the deregulation process did residential consumers enjoy the sharply lower electricity rates prices that advocates of the policy had forecast.

Now another prediction. Mr. Lay told us customer choice will allow the introduction of green energy options. Well, the American people want the environment protected, and this promise has appealed to it. Unfortunately, the reality is that air pollution has gone up as a result of wholesale electricity competition. The North American Commission for Environment Cooperation recently conducted a study on this issue and, as the chart shows, found, quote, "U.S. energy regulators underestimated the amount of increased pollution that arose after wholesale electricity competition rules were adopted in 1996. Recent experience indicates that electricity competition is likely to increase air emissions from power plants. FERC underestimated by nearly 8 percent the amount of carbon dioxide and other pollutants U.S. utilities emit under the worse case scenario", end quote.

Well, despite Mr. Lay's prediction that consumers and the environment would win under competition, these promises haven't been realized. Well, what about business? Let's look at the next chart. Mr. Lay told us that quote, "American industry will become more profitable and become stronger competitors in an international marketplace" end quote. Well, this one just might be the biggest whopper of them all. According to the L.A. Times, quote, "The collapse of the Enron Corporation, so far a political, legal and investor crisis is now imposing widespread costs on the U.S. economy according to a range of companies, energy experts and bankers. The very decline of Enron stock from more than $90 a share to 50 cents a share in a single year has taken a massive $67 billion of shareholder wealth out of the economy. Also other energy companies have suffered losses in the hundreds of millions of dollars because of their relationship to Enron".

And I'd like to also introduce into the record an article just from today's Washington Post, entitled "Enron related fears take toll on other firm stocks".

REP. BARTON: Do you have the article?

REP. WAXMAN: Yes.

REP. BARTON: Have we seen it?

REP. WAXMAN: Well, it's in the Washington Post, and I hope you've seen it. We will provide it to you, and you can take it under submission as to whether you put it in the record.

REP. BARTON: I would -- let us take -- but I'm sure that we'll put it in the record.

REP. RALPH M. HALL (D-TX): What if we don't read the Washington Post?

(Laughter.)

REP. WAXMAN: Well, if you read the record, you'll read this story, if it's permitted to go in the record.

REP. BARTON: We could get somebody to read it to you.

(Laughter.)

REP. WAXMAN: For years we have heard the promises about deregulation, but the reality of deregulation has meant more pollution and more cost to consumers. Mr. Chairman, we have a duty to protect consumers from gouging, to protect the environment from pollution, and to protect investors from sham accounting that hides huge losses in energy markets. It's time to take a deep breath and rethink this pending legislation.

REP. BARTON: I thank the gentleman for his statement. I would simply say it's heartfelt but some of those promises may yet come true once we actually do it. We have to do it first.

REP. WAXMAN: That's a matter of faith and belief but not reality.

REP. BARTON: I'm a very faithful person.

(Laughter.)

REP. BARTON: Gentleman from Oregon, Mr. Walden, is recognized for an opening statement.

REP. GREG WALDEN (R-OR): Mr. Chairman, I'm going to keep my remarks brief. However, I just think we're darn lucky the Enron collapse occurred, if it was going to occur, in the time it occurred. Because I think our economy is so far back on its rear end that demand is so low for energy products across the country, markets weren't under the same pressure they were prior to that, when we were having hearings a year ago.

The more I hear about what Enron's been up to and was up to, the more it appears to me that perhaps their goal was to create chaos in the market so that they could then capitalize on it and trade in before regulatory oversight would come to bear. And so I'm not sure how eager I am to necessarily applaud the fact that markets have gone along fine, with or without Enron because I'm not sure I'm ready to admit that without the downturn in the economy, what we wouldn't be in a lot worse shape right now. And I think the market does have vitality to it. I do think that there's others that could fill the gap. But if it were going to happen I think we're probably not suffering as mightily as we might have, had it occurred when the markets were tighter. Don't know, we'll see how that bears out.

And as we look at this whole issue of regulation, coming from Oregon, which of course is the one utility, Portland General Electric in Oregon, that Enron owned, we were fortunate that frankly, our Public Utility Commission was pretty strong, in terms of putting some boundaries around what Enron could or could not take out of Portland General Electric. One of the things that's been reported they did, however, was take multi millions of dollars in supposed federal tax payments into the rate structure in Portland and then basically bonus that up to the main company, that apparently never did pay that in federal tax. And so the ratepayers paid what they thought, what the utility commission thought, was going to be tax payments to federal government that may never have been paid. So I think there are some issues here that we need to cautiously approach.

Thank you, Mr. Chairman, for this hearing.

REP. BARTON: Mr. Luther was next on the Democrat side. Is he in the annex? If not Mr. Luther, we'll go to Mr. Sawyer. We recognize Mr. Sawyer for an opening statement.

REP. THOMAS C. SAWYER (D-OH): Well thank you, Mr. Chairman, and thank you for holding this hearing. It's an important step in our exploration of the Enron debacle.

Mr. Chairman, I know, and I share your dedication to removing, as appropriate, barriers that exist to healthy electricity markets that benefit customers. But I'm sure you would agree that it's best that we evaluate the causes and consequences of Enron's astonishing fall, before we move forward on an electricity bill. Today's hearing will help advance that understanding, but I imagine it will take more than what we can accomplish here today for us to unravel Enron's business practices and their effects on energy markets.

I would also add that I don't think we ought to allow Enron to derail our longer standing efforts to overcome the significant impediments to workable energy markets that still exist. We can look to California to see a cautionary tale about taking the time to get the market rules right before putting them into effect. And I would just simply add that I think we're heeding that lesson today.

But another lesson from California is that government has a responsibility to craft clear rules to undergird a market and then enforce those rules on all parties. Right now the electricity industry and their consumers are stick in the middle of a transition to competitive markets and there's very little certainty about where those markets are heading.

So I hope that today begins a renewed effort to ensure that the rules we use to create viable, regional electricity markets are both effective and enforceable. Just as an aside, I would add, Mr. Chairman, and repeat the interest that I have in which consumer protections and other elements in PUHCA we must ensure survive a possible repeal of that act.

With that, Mr. Chairman, I yield back the balance of my time and put the rest --

REP. BARTON: We thank the gentleman from Ohio for that statement. See no one on the Republican side. Next is Mr. Wynn, did he just leave? Is he out there, because he was here? If it's not Mr. Wynn, it's Mr. Hall.

Okay, we'll start with Mr. Hall, opening statement.

REP. HALL: Chairman, thank you and members of the committee. I of course thank you, Joe Barton, for holding this hearing today on market issues. And some questions have been raised in the wake of the collapse of Enron.

I think I'd like to begin by saying that it's my most sincere wish that we take from this unfortunate event, a list of improvements that we can make in our energy markets so that we might not see a catastrophe like this -- of this proportion again, but that remains to be seen. And while it's important that we understand fully what happened at Enron so that we might carry out our obligation to make whatever changes are needed in law and policy, we need to recognize that ultimately, the courts and the regulatory agencies are going to deal with what happened there. I guess it's our duty to point out the facts and I think that there are those in each party that are doing their very best to do that.

Evidence has come to light that the energy markets may have been manipulated, especially during the Western energy crisis of 2000. I remember we were well on track to give aid to their most popular state, they was having a lot problems then. A mild summer kind of came to their aid. September 11th changed a lot of it because it diverted money to a war that we're going to have to support and fight.

We need desperately to help some of the states that are having difficulty to work on prescription drugs, to correct a lot of the Medicare and Medicaid, so that's a reality. We've got a young commander-in-chief that's doing a good job and is working day and night and I think it's our duty to support him.

Consequently, FERC investigations may nullify some of the long term contracts that states thought they were stuck with and if this is the case it will provide some relief for countless utility customers. It will also provide further testament to the instability, to the volatility and the malleable nature of energy markets, which all of you are, of course, very aware of. And I see Pat Wood out there who's of my own state and a young man for whom I've had the highest respect and regard, and I was very pleased when he was appointed, and when he accepted and when you read the papers it sounds like Ken Lay is the only guy in the world that recommended him, but that's not true. I know I wrote letters and made calls and I think many of the Texas delegation did and others from other state delegations that knew of Pat Wood and knew of his dedication and his knowledge. So I think as these facts are all uncovered obviously there's going to be a need for more hearings of this type, by this committee. The distinguished witnesses we have before us today have a great deal to teach us based on what they've observed thus far and I trust we're going to benefit greatly from their observations and their experience.

Mr. Chairman, perhaps we ought to have them back in six months, or four months from now and ask them how their views may have changed as the Enron story continues to unfold and the markets react accordingly. It may in fact, be much longer than that before we see the true effects of such a radical change in the market. Restating earnings has a very negative effect on the credit worthiness of a company and we have to be realistic when assessing the future of the energy markets, if the major players don't have the access to the capital enabling them to proceed with generation project. We're not here to ensure the future corporations but it is our duty, I think, to ensure the future of our citizens.

And in closing, Mr. Chairman, as a member from the oil patch, let me urge my colleagues, as did Mr. Sawyer who is exactly right in his assessment, not to tar all other energy companies with an Enron brush. There are many, many well run energy companies that have conservatively managed and treat their creditors, their employees, their shareholders, those expect to retire with a pension, treat them fairly.

Oil, natural gas, and yes, electricity markets are evolving, but let's be careful that we don't act hastily and undo the progress that these markets have made. As problems are uncovered, let's correct them, but don't throw the premise that, throw out the premise that competitive markets are innately bad. At the very least we owe it to ourselves to tread cautiously but not falter in our commitment to utility restructuring.

I yield back my time.

REP. BARTON: We thank the gentleman from Texas.

The gentleman from Illinois, Mr. Rush, is recognized for an opening statement.

REP. BOBBY L. RUSH (D-IL): I want to thank you, Mr. Chairman, for holding today's hearing on the affects of the Enron bankruptcy on energy markets. In the wake of the Enron collapse, several House and Senate committees have been left to take inventory of the laws and regulatory schemes that were open to abuse by Enron, and indeed remain open to abuse by all of corporate America.

At the center of that discussion lies the Public Utility Act of 1935, enacted at a time when big business proved itself to be completely untrustworthy and dangerous to investors and consumers alike. PUHCA assumed that the nature of big business is to grow and prosper, even when their growth and prosperity comes at the expense of the consuming public. Thankfully that wisdom lives on through the words of officials like former Governor Bush of Texas, who stated in 1999, and I quote, "The invisible hand works many miracles but it cannot touch the human heart."

Indeed, opponents of PUHCA repeal, argued that without firmer consumer protection to take its place, repeal may replace the miracle of the free market with the nightmare of market manipulation and monopoly. Still many, including Enron, were unconvinced, playing a tune of free and efficient markets, Enron, Enron were the pied piper of stand-alone PUHCA repeal. And while many in government were not swayed by its song, there were many more in positions of power and influence who listened and marched blindly forward following the songs of Enron.

Mr. Chairman, if there's a silver lining to the tragedy of Enron, it lies in the fact that it has forced Congress to rethink it's stance on the role of the Federal Government and regulation of corporate activity in the public's interests.

Supporters of PUHCA repeal argue that serious reconsideration of how Congress would support electricity restructuring is unnecessary, even in light of the Enron collapse. Time and time again they point out that despite the political and regulatory shock waves sent out by the collapse of Enron, energy markets barely flinched in response. This observation is well noted, however we need only to look to the West Coast brown-outs for 2001 for possible evidence of a connection between Enron's financial misdeeds and the wallet of unsuspecting consumers.

That said, I am convinced and encouraged by folks willingness to lodge an investigation into whether Enron used it's long term energy contracts to manipulate energy markets in the West, and as that investigation continues I will be eager to learn whether Enron had to struggle for it's own survival, attempting to save itself by going under, save itself from going under, by pushing firmly down on the shoulders of California's consumers. If that turns out to be the case, the fact that states like New York, Pennsylvania and Florida, and indeed my own state, Illinois, were not used as lifesavers for Enron, will ultimately serve as testament to the effectiveness of PUHCA.

Thank you, Mr. Chairman, I yield back the balance of my time.

REP. BARTON: Thank the gentleman from Illinois.

Go to another distinguished gentleman from Illinois, Mr. Shimkus, for an opening statement.

REP. JOHN SHIMKUS (R-IL): Thank you, Mr. Chairman, I'll be brief. I know we're here today to talk about what happened to the markets after the Enron collapse and I think that's an important thing to discuss. A company that controlled 20 percent of the energy contract disappeared overnight, and what happened?

Illinois, and last two winters ago, we experienced a shock of what happens when natural gas prices go, skyrocketing. We heard it from our constituents. That did not happen here, and I think it's worth investigating why, and in the whole guise of the energy debate issue I look forward, I think it's timely, Mr. Chairman, and I'll just yield back by time.

Thank you.

REP. BARTON: Good.

We now hear from the gentleman from Pennsylvania, who normally gives, amongst many stellar exemplary opening statements, his is usually one of the most stellar and exemplary. So let's see if he can match his normal standard of excellence.

REP. MIKE DOYLE (D-PA): Talk about the burden of high expectation. Flattery will get you everywhere, Mr. Chairman.

Mr. Chairman, thank you for convening this hearing to examine the effect of the Enron bankruptcy on the functioning of energy markets. Like all members of this committee, I'm seriously concerned about the actions of Enron and its management. We must continue to thoroughly investigate the facts of the matter and institute appropriate remedies.

The hearings in the House and Senate, in conjunction with the insight and clarity provided by the Powers Report, have demonstrated that various types of reform appear to be warranted to prevent others in the market place from causing the level of undue harm that Enron has inflicted upon its shareholders, employees, and our financial system.

What is significantly less clear at this point is the effect that Enron's practices and subsequent bankruptcy had on the functioning of energy markets. I recognize that many of the witnesses that we will hear from today assert that there has been no noticeable disruption to the functioning of energy markets in terms of price fluctuation generation for trading.

If further investigations by FERC and others confirm this initial impression, what does this tell us about the state and structure of our energy markets, given the collapse of Enron, a major energy trader whose transactions comprised an estimated 15 to 25 percent of wholesale energy trades seemingly has had such a negligible effect.

Furthermore, I'm particularly interested in looking at how these initial impressions might be skewed within the context of a falling energy price market. Obviously we need to examine this dynamic further before reaching conclusions about the entire wholesale electricity market.

Competition, if structured and implemented appropriately, has brought benefits to electricity consumers. This is a new marketplace and deserves our scrutiny but it is my hope that we will continue to move forward with our efforts to preserve and improve competition.

And finally, Mr. Chairman, as a member of the committee who did not have the opportunity to weigh in on the Commodity Futures Modernization Act, I'm eager to hear more about how the major changes regarding the regulation of exchange traded futures contracts over the Connor derivatives and securities futures have fared.

I look forward to today's discussion, Mr. Chairman, I yield back my time, and thank you.

REP. BARTON: As I said, it was a good statement and your staffer who helped prepare it is smiling, so it --

REP. DOYLE: Pay raise.

REP. BARTON: She thinks it's acceptable.

We now want to hear from the vice-chairman of the subcommittee, Mr. Largent. This will be his last official act as a member of this subcommittee. He's resigning from Congress tomorrow to go the great state of Oklahoma and put his name up for election to be the governor of Oklahoma. We're going to miss you, you've been a good member, you have worked extremely hard on the issue of electricity restructuring, I'd hoped to move the bill out of subcommittee before you left so that you could participate in that markup, that's not going to happen, but as you're running for governor watch the press because we still hope to move that bill, and we will have some amendments in it that will be entitled, The Largent Amendments, I'm sure, so we would welcome you for an opening statement on this issue and any valedictory statements that you wish to make as a soon to be retired member of the subcommittee.

REP. STEVE LARGENT (R-OK): Thank you, Mr. Chairman. It's been an honor to serve on your subcommittee, you've done an outstanding job. You know, I was thinking about my congressional career, seven years here in Washington DC. I came in and the first vote I cast was on GAT. The last vote of the 103rd Congress was my first vote, and now my last vote in Congress is going to be on Campaign Finance Reform and it reminded me of Samuel Clements, alias Mark Twain, who it is said was born when Haley's Comet passed the Earth, that was visible from the Earth, and then died on Haley's Comet. And sort of my career began with GAT, end with Campaign Finance Reform.

Mr. Chairman, my only statement is that, you know, one of the real highlights for me in my time in Congress is having gotten the opportunity to serve on the Commerce committee. It's a great committee, we deal with a number of really significant issues for a country, and I really believe that in the near future dealing with the Electricity restructuring that we need so desperately in this country as a very important issue in terms of establishing a really sound national energy policy.

You know, frankly, I think everything evil has now been attached to the word 'Enron'. But the fact is that the markets worked. The markets worked when it punished a bad actor in the form of Enron and the markets have continued to work when you take a major player like Enron out of the market and you save your electricity. Markets have consistently and seamlessly moved forward and I think that that's something that we should all be very proud of. Free markets really do work. And I look forward to hearing the testimony of our distinguished panel and thank you for calling this hearing.

REP. TAUZIN: Would the gentleman yield for a second?

REP. BARTON: The gentleman -- the committee chairman -- we still have Mr. Markey to give an opening statement.

REP. TAUZIN: I'll just take a second because we will not have a full committee process before we see the departure of our friend Steve Largent.

I wanted to say, Steve, how much we have all appreciated your service to the committee. Mr. Dingell, who was formerly chair of this committee and I both share a fierce love and devotion to the work of this committee and one thing we always tell people on and off this hill is that only the best and the brightest make it here and you were one of the very best and brightest. And I want to thank you for your service not only to this committee but to the country and wish you well in your new ventures.

(Applause.)

REP. BARTON: Mr. Doyle, who has been on the receiving end of your fast ball in the congressional baseball games, said he's not terribly disappointed that you're going to Oklahoma. Mr. Markey is welcome for an -- recognized for an opening statement -- welcome and recognized for an opening statement.

REP. EDWARD J. MARKEY (D-MA): I thank the chairman very much and I will miss the gentleman from Oklahoma. Many of the amendments which he was going to make in the subcommittee mark-up were Largent-Markey amendments and I'm not sure that I will be able to score as frequently without Steve Largent carrying the ball, particularly when it comes to the Tennessee Valley Authority, which was a particularly interesting subject for the both of us in terms of their structure inside the electricity marketplace --

REP. BARTON: Let's not get personal now --

REP. MARKEY: No, no, no, no. This was meant to be facetious. I was going to the jocular vein, not the jugular vein. So, yes, he is a great member. And I'm sure that the people of Oklahoma are very happy that he is coming home to serve them in that larger capacity. I thank you for holding this hearing. Some have rushed to say, Mr. Chairman, after the Enron scandal broke, that this has nothing to do with electricity or natural gas markets. They say this is merely a matter of accounting and securities fraud and that Enron could have just as easily been trading widgets as natural gas or electricity.

Clearly, there has been securities fraud. Clearly, there has been massive accounting fraud. Clearly, there has been shredding of documents and possible obstruction of justice. But I simply do not know how anyone can say right now that Enron's demise has absolutely no implications for the energy markets. Last week, I asked Jeff McMahon, Enron's new president and chief operating officer, how many special purpose entities Enron created, what they were used for, whether any of them involved any other Enron insiders and what types of financial arrangement Enron had with them. He did not know the answer to any of those questions.

The Powers Committee of Enron's board, which reported to us in its internal investigation, told us that it only looked at the LJM, Raptor, JEDI and Chewco transactions. So right now, all we know about is the tip of the iceberg. Sherron Watkins' memo mentioned mark-to- market valuation problems with Enron energy services and other investments. What were they? When I asked Enron officials last week, no one had looked into the concerns she raised in these areas.

How many secret deals and long-term contracts are still out there like ticking time-bombs waiting to explode? How big is the iceberg of fraud and deceit? We simply do not know.

The fact is that federal regulators appearing before us today either waived oversight over Enron's activities or had it taken away from them. The CFTC's authority to regulate Enron's energy trading was gutted by the Futures Trading Practices Act of 1992. The exemptive rules adopted by former CFTC chair and current Enron board member, Wendy Gramm and the additional loopholes adopted by the Commodities Futures Trading Act of 1999. The SEC's ability to restrict Enron's diversification and limit its self-dealing practices has been constrained by the fact that it has decided to administratively repeal the Public Utilities Holding Company Act of 1935 through a policy of non-enforcement and neglect, including application of this act to Enron.

Press reports have also revealed that the SEC waived application of the Investment Company Act of 1940 on Enron. Of course, the SEC did have authority to review Enron's annual and quarterly filings under the Securities Act of 1933 and Exchange Act of 1934, but apparently, did not fully do so from 1997 until it actually began its enforcement spree last fall. And finally, the FERC had the authority to regulate many of Enron's trading activities, including setting accounting standards and regulating its electricity rates but chose not to use these authorities until the California melt-down began to force action. Enron clearly had great success in largely avoiding any meaningful federal oversight of its core businesses for many years.

But just what was it doing in the natural gas and electricity markets? Some of the prepared testimonies we have received today suggest that Enron's trading activities may have contributed to increased volatility in the natural gas and electricity markets and that Enron may even have manipulated prices in these markets. I have received written testimony from a witness that the majority staff declined to accept. This testimony suggests that Enron online trading activities had a negative impact on electricity markets and significantly increased volatility in those markets. I would like to ask unanimous consent that this testimony be included in the record of this hearing.

I have long been supportive of moving towards competitive energy markets but I have repeatedly emphasized that I favor de- monopolization not deregulation. The tragedy of what has happened in our energy markets is that the old regulatory structure of regulated monopolies has been torn down. Unfortunately, it has not yet been replaced with a new regulatory structure that serves the public interest by protecting consumers from abuse of sales and trading practices, ensuring fair and orderly transparent markets and eliminating excessive and artificial levels of volatility. Replacing regulated monopolies with unregulated oligopolies is not competition. It is a formula for allowing a few big players like Enron to gain the markets to the detriment of both producers and consumers. I look forward to the hearing today and again, I renew my unanimous consent request.

REP. BARTON: We will -- we took one of the witnesses the gentleman from Massachusetts recommended. That witness is here in that testimony. The other witness the gentleman recommended, we did not accept. We looked at the testimony, had some problems with it. We'll take another at the testimony during the hearing and if we can accept it, we will. But we took one of your witnesses as you well know. And it's going to add to the hearing, so --

REP. MARKEY: I will do this, Mr. Chairman. I will withdraw right now and I will renew the unanimous consent request later in the hearing.

REP. BARTON: We are going to go vote but we want to hear from Congresswoman McCarthy and her opening statement.

REP. KAREN McCARTHY (D-MO): I will be very brief in deference to the committee and the vote. I want to thank you, Mr. Chairman, for this hearing and also extend a special greeting to my constituent, Richard Green, who is the chairman of UtiliCorp and I would encourage you to consider, after his testimony, that we take a trip and visit its subsidiary, Aquila, which is one of the power marketing firms that I went on the trading floor to better understand the task before us, as we take a look at electric utilities and restructuring and the future of power in this country. So I'm glad that he is here today. He is a success story I'm proud to represent and I thank you for this hearing and I'll put the extent of my remarks in the record.

REP. BARTON: Since there are no other members present, we will accept all other members not present's opening statements in the record. We are going to recess to go vote. We shall reconvene in 15 minutes, say at 2.45 and we will recognize Mr. Wood and the rest of the panel to begin to give us their testimony.

(Vote recess.)

REP. BARTON: If the subcommittee would come to order we're going to reconvene the hearing. We're ready to hear from our expert witness of panelists but we have one more member who wishes to make an opening statement and normally I'd say 'no' but since he was so nice to me at the Mardi Gras party that the State of Louisiana put on two weeks ago and made a point to throw me some special beads, I'm going to say 'yes' so if Mr. John wishes to make a very brief opening statement then we'll begin our panel.

REP. CHRIS JOHN (D-LA): Thank you, Mr. Chairman, I must come clean --

REP. BARTON: If we could have the attention of the audience so we could hear the statement.

REP. JOHN: I must come real clean as the chairman of subcommittee I appreciate the latitude to give an opening statement. It was me that threw the moon pie that hit you in the head at the Mardi Gras party, I'm sorry.

(Laughter.)

REP. JOHN: Thank you very much for allowing me --

(Cross talk.)

REP. JOHN: -- to give a brief opening statement and I appreciate the leadership that you've shown on this issue which is very, very important.

First, I believe that there are many lessons that we can learn from the Enron's collapse that took down the seventh largest corporation in America. However, while the solutions maybe broadly applied, I don't believe that it's very reasonable to conclude -- to come to a conclusion -- that it's not reasonable to come to a conclusion to suggest that the problems with Enron are universally applied to other energy industries around the country.

I think it's appropriate for this committee, regulators, and also investors to take a closer look at the companies that engage in similar business practices. But I think we should be very, very careful and not rush to judgment or rush to indict all of the wholesale energy companies as being possibly the next Enron.

You know, it hasn't been very long ago, it was right out a year, that we had a lengthy debate in this committee, and on full committee, about the electricity crisis in the West, and the challenges that we must have tried to overcome to ensure reliable, affordable supplies of electricity. A lot has changed over the past year, but I think the fundamental issue remains. Should the economy begin to recover, many of the problems that we faced last year will emerge again unless we continue to expand the wholesale energy markets.

I also believe that if we do not overcome some of these crises in confidence, and that's an important point, that currently exist with regards to companies engaged in wholesale power -- in the power markets, that consumers will be faced, once again, with high prices, brown-outs, in the next couple of years.

This hearing today, I believe, is a very positive step in setting the record straight about what we should learn from Enron and California, so that we could provide which I think is so precious to the American people, and that is public confidence.

Mr. Chairman, my second observation is that I support the recommendations of my colleague from Check Bay (ph), Louisiana, when he recently said of this subcommittee that we should be very careful in proceeding with a mark-up of electricity until we really have a very good handle on the conclusion of the investigations, and rendering a judgment about what we can learn from what has passed -- what has happened over the past few months.

The policy issues surrounding electricity restructuring are very complicated, and if complicated enough that I don't that it will be constructive to allow a legitimate debate on legislation to become very confusing, or collectively, very convoluted. And I think that's very important as we proceed to this.

So, chairman, thank you very much for allowing me to say an opening statement. I look forward to the testimony before us.

REP. BARTON: Thank you. The chair would ask unanimous consent that all members not present have the requisite number of days to submit their written statement for the record as an opening statement. Is there an objection? Hearing none, so ordered.

The chair would also announce that he has reviewed the testimony that Congressman Markey from Massachusetts had proffered to put in the record by a witness that was not going to be on the panel of testifiers, the second panel. The staff has reviewed that testimony and it appears to be sufficient and adequate in nature to be put in the record. So the chair would ask for unanimous consent that that testimony be put into the record at the appropriate point. Without objection, so ordered.

The chair would now recognize the Honorable Pat Wood, the Chairman of the Federal Energy Regulatory Commission, and the immediate past President of the Public Utilities Commission of Texas, and a proud Texas aggie soon to be father of another child within the next five weeks, to the committee.

Your statement is in the record in its entirety. We would recognize you to elaborate on it. We're going to set the clock at seven minutes, but that is purely for informational purposes only. If it takes a little bit longer, that would be fine.

MR. PATRICK H. WOOD III: Shorter fine?

REP. BURTON: Shorter would be even more fine.

MR. WOOD III: To cut to the chase, Mr. Chairman, and members, Mr. John, but for the Beam (ph) River flowing a little bit more to the west, you would be my congressman from back home. So, it's a pleasure being with you as well.

The bankruptcy of Enron was a significant event in 2001, and the energy industry. It's also had a tremendous impact on the investor community, on its own employees and retirees. But the focus of your hearing is what is the effect of that event on the nation's energy markets.

And so looking specifically at the removal of Enron from the nation's energy markets, it is pretty safe to conclude that there has not been any significant damage from the exit of the largest power and gas marketer in the country. The prices in the energy markets remain stable. Importantly, there have been very few disruptions in the deliveries of the actual electricity or gas to customers. There have been a few, however. And it's important to know that it's not an absolute perfect picture. It has been helpful that it was in a down economy, as prices were turning downward, that this happened so that customers that had locked in hard prices with Enron were actually able to exit those contracts and go get cheaper power off the market, or cheaper gas. That's certainly fortunate.

The resilience of these markets following the collapse of these is true testimony to the robustness and efficiency of these markets, ruthless efficiency as it may be. But the kind of counter question is, then, did the energy markets and growing trend toward competition in those markets cause or contribute to Enron's collapse, which is a separate question. No. I think because of Enron's business strategies have been explored by your sister committee, but I think certainly from all that we have available to us at the commission and that we have reviewed, the energy market strategy that Enron had was successful in a rising price market. But it wasn't really attuned toward a cyclical market such as we have with these sort of commodities. And it's unfortunate for them that that strategy did not work. But it has not, in my mind, certainly caused a questioning of whether energy markets themselves caused their collapse.

However, based on recent allegations that Enron in its better days may have manipulated electric and gas markets, the FER Commission staff has begun a fact finding investigation. The staff team has been given by the full commission access to whatever resources, including subpoena power that are necessary to investigate whether there was, in fact, manipulation in the electric and gas markets over the past 25 months. And we expect that, hopefully, that this complete picture of what has happened, in the -- particularly the west, but in energy markets in the recent past will inform broadly, and specifically, both, the debates that this committee is having, and that energy customers are asking questions about across the country.

And I think we owe it to them to do that in the most professional and thorough manner possible. We will be working with our sister agencies that have expertise in areas that we don't, such as Chairman Newsome's agency and Mr. Hunt's agency, as well as the Federal Trade Commission to develop, get the expertise we need to really provide a full picture of how energy markets have worked, and may have been manipulated, or could have been manipulated, and in fact try to draw some conclusions as to whether they were, or were not, actually manipulated so that people, if there's a problem we can fix it. If there's a bad Act we can punish it, and if things are doing just fine we can report that affirmatively to the customers of America.

To prevent or mitigate Enron-like problems in the future I recommend that Congress continue to support and enhance fair and balanced competition in the electric and gas markets. I think as Mr. Markey points out that's a different concept than going straight to deregulation. You've got to have competition first. And that is certainly our goal, and will be more crisply our goal on a going forward basis.

I think the separate but equally important decision about whether to open retail markets to competition is one that I think is appropriately to the state level because it is really separate from whether wholesale power markets work to deliver efficiencies and innovation at the generation of power level.

Finally, I think, certainly support of the committee for the commission's efforts to encourage reasonable transmission organizations would be very helpful in making sure that that effort goes forward. I was pleased in today's commission meeting, which we held earlier this morning, that reports from PJM, excuse me, the Pennsylvania Jersey Maryland interconnect, and the mid-west RTO, to create a single energy market over some 26 states, as well as a separate but also uplifting report from participants in the southeast United States RTO, which would be primarily the footprint covered by Entergy (ph), Cleco (ph) and the Southern Company as well as a number of other public power entities, gives me a lot of hope that the commission's approach for voluntary compliance with regional transmission organization order of the commission two years ago will move forward and result in a good wholesale workable market for benefits to be flowed through to customers.

A final thought about what can Congress do, because Chairman Barton asked that in the invitational letter, is on transparency. We've heard a lot about this phrase, transparency. It is kind of motherhood, apple pie. But what transparency means is, is the information that is back and forth given to the public marketplace about a sale or a purchase of gas or power, is that information out there? And, quite frankly, I would say the answer to that is a muddled no. The commission in July, I am pleased to report, did put forward a change in its data requirements that are proposed to the public, and that has created a significant amount of comment from the industry and from people on both sides who want to make this information public, or who don't want to make this information public.

But when we talk about transparency it is a pretty granular issue about can we really get the information out there that a buyer and a seller knows that the deal he just did is actually in the market. That's an important fact and it helps a lot to discipline the market as we've seen in other entities. The close, and I've heard it from a number of members, the -- this is an industry.

The energy industry requires a tremendous amount of capital on a daily basis to build power plants, to build power lines, to put up distribution lines, to hang meters on customers' houses, sort of do an accurate bill to a customer every 30 days. And I think I would just ask on behalf of those customers of those industries and those people who are trying to decide where to invest capital, because we need it in those industries. The lull in the economy has just given us time to catch up, but we need to get back on track to continue the pace in investment on both supply and demand side auctions.

We're moving along pretty well in the year 2000, it's that we keep these issues focused on what is wrong and not try to paint with a broad brush, the industry that has served to keep the lights on very adequately over the years. And I would just say that the energy markets, in fact, I think are what saved this country from the collapse of the large company. They digested Enron officially, ruthlessly so, and I think it's a testimony to the efficiency of the market that Enron and so many, many others advocated over the years that it worked as it did.

REP. BARTON: Thank you. And let the record show that the chairman took a minute over seven minutes in spite of the promise to speak less than seven minutes.

We will now here from the honorable chairman of the Commodity Futures Trading Commission, Mr. James E. Newsome, and he's already asked if he may be given a little additional time, which certainly we will agree to. Mr. Chairman, your testimony's in the record in its entirety and you're recognized to elaborate on it.

MR. JAMES E. NEWSOME: Thank you very much, Mr. Chairman. I appreciate the opportunity to appear before you and the subcommittee to testify on behalf of the Commodity Futures Trading Commission, and I do appreciate those couple of extra minutes since this is not a committee that we normally testify in front of, and I think there are some relevant comments in terms of how we do things that are important to the committee.

I would like to say first that both as a financial regulator and as a citizen, that I have great sympathy for those who have been harmed and who are harmed by incomplete and inaccurate financial information. I share the concern of many that appropriate inquiries be made to ensure that investors, creditors and others who rely on the accuracy and completeness of financial disclosures by publicly held companies can continue to do so with full confidence.

Today I would like to share with you the important role the futures markets play in our economy and the CFTC's role in overseeing these markets, particularly with respect to energy-based contracts, and then how our role changed under the Commodity Futures Modernization Act. I will also describe how we responded to the Enron situation last fall and then finish with some thoughts about how the commission might contribute as we move forward.

The CFTC perceives its mission as two-fold: to foster transparent, competitive and financially sound markets, and to protect market users and the public against fraud, manipulation and abuse of sales practices. While the stock market provides a means of capital formation, a way for new and existing business to raise capital, the futures markets perform a different role, that of providing producers, distributors and users of commodities with a means to manage or hedge their exposure to price risk.

Futures contracts based on non-agricultural fiscal commodities like metals or energy products and on financial commodities such as interest rates, foreign currencies and stock market indexes now serve the risk management needs of business in virtually every sector of our economy. Although the primary purpose of the futures markets is to facilitate the risk management efforts of hedgers, futures markets also play an important price discovery role in which business and investors that are not direct participants in the futures, nonetheless refer to the quoted prices of futures market transactions as a reference point or a benchmark for other types of transactions and/or decisions.

To fulfill its mission the commission focuses on issues of market integrity and pursues a multi-pronged approach to market oversight. We seek to protect the economic, the financial, and the operational integrity of markets in several specific ways. I explain our approach in greater detail in the written comments, but for the sake of brevity will not go into detail in these oral comments.

We oversee on-exchange trading, a futures and options contracts based on such things as crude oil, natural gas, heating oil, propane, gasoline, and coal. The overwhelming majority of over these on- exchange contracts are executed on the New York Mercantile Exchange or NYMEX. The CFTC does not regulate trading of energy products on either the spot -- on any spot the cash markets, or the forward markets, which are excluded form our jurisdiction by the Commodity Exchange Act. Because Enron was a large trader on the NYMEX, its on- exchange activities have been regularly monitored by our staff. At this time we have no indication that manipulation of any futures market was attempted by Enron.

However, the rapid financial deterioration of Enron presented a separate concern for the commission about the economic integrity of the markets. Could Enron's positions be closed out without unduly increasing volatility or reducing liquidity? In fact, Enron was but one of many significant participants in these increasingly liquid markets, and the markets proved resilient. And as Enron's positions were closed out prices did not spike nor did liquidity suffer. Because we are also concerned with the financial integrity of the markets, we closely monitored with the NYMEX Clearing House and the Futures Commission Merchants, or the FCMs, that were carrying most of Enron's positions to monitor and manage the closeout of those positions.

Through margin increases and other appropriate measures the NYMEX clearing house was able to accomplish a very smooth landing while protecting the FCMs and their other customers. By the time Enron filed for bankruptcy the risk of its positions, as measured by standard margin requirements, had been cut by 80 percent from just a week earlier. By mid-December all of its positions on the regulated futures exchanges had been closed out. I believe that this episode was an example of success for the system of financial controls in the on-exchange futures markets.

The Commodity Futures Modernization Act was signed into law by President Clinton on December 21st, 2000. It amended the Commodity Exchange Act to, among other things, provide legal certainty for over- the-counter derivatives markets. With respect to contracts based on energy products and certain other non-agricultural and non-financial commodities, the CFMA amended the Act to exempt two types of markets from much of the CFTC's oversight. The first type is bilateral, principal-to-principal trading between two eligible contract participants. A category that includes sophisticated entities such as regulated banks, well-capitalized companies or individuals, for example, those with over $10 million in assets.

The second type is electronic multilateral trading among eligible commercial entities such as the eligible contract participants that I just described that also have an ability to either make or take delivery of the underlying commodity or dealers that regularly provide hedging services to those entities. Other types of bilateral energy trades are beyond the scope of our authority under the Commodity Exchange Act by virtue of the statutory exclusions of forward contracts and swap transactions. As an oversight regulator, we have and will continue to look at how and why the markets within our jurisdiction respond the way they do, whether well or poorly, to situations such as the failure of a significant market participant.

Separately, as a member of the President's Working Group on Financial Markets, the CFTC is working with the SEC, the Treasury and the Federal Reserve Board to review, for the president, possible improvements in accounting, auditing and disclosure practices with respect to publicly held companies. The Enron situation has let some to call for further responses from Congress and regulators, even for re-regulation of markets that were provided legal certainty under the Commodity Futures Modernization Act. While I agree that it is prudent for a regulator to constantly review its policies and procedures to ensure that an appropriate level of oversight is exercised, I also believe that a situation of this magnitude deserves careful consideration before a regulator seeks to take action.

Mr. Chairman, I agree with Chairman Wood in his written comments and that I believe that we as regulators, should make sure that the true problem has been identified before remedies are pursued.

I supported passage of the CFMA because I sincerely believe that a "once size fits all" approach to regulation was outdated, particularly in light of global competition and important advances in technology within the financial services industry. Rules tailored to the participant, the product and the trading facility seem to me to be a more appropriate approach than prescriptive regulations of the past. To date I have seen no evidence to the contrary in the CFTCs initial analysis of the Enron situation.

In closing, the CFMA was enacted after numerous hearings were conducted by our house and senate oversight committees in the context of reauthorizing the commission. Many issues relating to evolving markets received a full airing and important that changes to the law were agreed upon as a result. I believe that any departure from the path of progress represented by this important piece of legislation, should be approached with extreme caution. We will continue to monitor the markets within our jurisdiction and to utilize our authorities given to us by Congress to aggressively pursue violations of the Commodity Exchange Act. We stand ready to (coughing) with this subcommittee, the Congress, other regulators and market participants.

Mr. Chairman, I thank you for the invitation to appear before this subcommittee.

REP. BARTON: We thank you, chairman, and appreciate your testimony. We now want to hear from the Commissioner of the Securities & Exchange Commission, the Honorable Isaac Hunt who has appeared before our subcommittee before.

MR. ISAAC HUNT: Yes sir.

REP. BARTON: Glad to have you back.

MR. HUNT: Thank you.

REP. BARTON: Your statement is in the record. You're recognized for seven minutes to elaborate on this statement.

MR. HUNT: Chairman Barton, ranking member Boucher and members of the subcommittee I am Commissioner Hunt with the U.S. Securities & Exchange Commission. I am pleased to have this opportunity to testify before you on behalf of the SEC.

As you know, for almost 20 years the SEC has consistently reported -- supported repeal of those provisions of PUHCA that either duplicate laws administered by other regulators or that are no longer necessary. Since I last testified on PUHCA repeal before this committee in December, the magnitude of the Enron debacle and the harm that Enron's collapse has tragically inflicted on the company's investors and employees, has become clearer. Congress and various regulatory agencies including the SEC are appropriately investigating what happened at Enron, why it happened and what should be done to prevent Enron like debacles in the future.

As we continue to investigate and learn from the events surrounding Enron's collapse we remain open minded and of course would reconsider our views on conditional PUHCA repeal if warranted. Currently, however, we are not aware of anything that would cause us to conclude that there is reasons to abandon our longstanding support for conditional PUHCA repeal.

The commission continues to support repeal of PUHCA as long as repeal is accomplished in a way that gives the FERC and state regulators sufficient authority to protect utility consumers. Specifically FERC and state regulators should be given additional authority to monitor, police and regulate affiliate transactions. As long as electric and gas utilities continue to function as monopolies there will be a need to protect against cross subsidization. The best means of guarding against this is likely to be audits of books and records and federal oversight of affiliate transactions. Any move to repeal PUHCA should include provisions providing FERC and state regulators the necessary tools to engage in this type of oversight.

In addition, Congress should consider providing FERC the authority to issue rules prohibiting or limiting those types of affiliate transactions that FERC concludes are inherently abusive. The harm the Enron's collapse has tragically inflicted on the company's investors and employees is now clear. What may not be as clear to this committee is why Enron's power marketing activities did not subject it to PUHCA and why Enron is an exempt public utility holding company.

In 1994 Enron Power Marketing Inc., a subsidiary of Enron, received a No Action letter from staff in the SEC's division of investment management in which the staff agreed not to recommend enforcement action against that subsidiary if it engaged in power marketing activities without it or Enron itself, registering under the act. In its request for No Action relief the subsidiary argued that the contracts, books and records and other materials underlying its power marketing activities were not, "facilities used for the generation, transmission or distribution of electric energy or sale." Accordingly, EPMI argued that the power market subsidiary was therefore not, "electric utility company" for purposes of PUHCA and therefore Enron was not a utility holding company for purposes of PUHCA.

The staff gave the subsidiary the requested No Action relief and since that time the staff has given analogous No Action relief to approximately 20 other companies. Moreover, in 1997 the commission, after public notice and comment, adopted Rule 58 that permits registered holding companies to engage in the brokering and marketing of energy commodities as permitted non utility activities.

In July 1997, Enron acquired Portland General Electric and claimed an exemption to PUHCA registration under Rule 2 as an intra- state public utility holding company. Enron was able to claim this exemption because both Enron and Portland General were incorporated in Oregon and all of Portland General's operations were in Oregon. Enron recently agreed to sell Portland General to North West Natural Gas, a transaction that is subject to commission approval under PUHCA.

Enron's claim to an entrusted exemption was and is consistent with the commission's historical interpretation of the intra-state exemption. For example, as early as 1937 the commission granted an exemption to the South Eastern Indiana Corporation. That company which was incorporated in Indiana owned a single public utility subsidiary which was also incorporated in and operated exclusively in Indiana. The company, however, also owned a number of non utility subsidiaries incorporated in Indiana and Ohio that provided a bus and telephone service in Indiana, Ohio and Kentucky and granting the company's request for an exemption, the commission stated that, "such non public utility activities of the applicant do not deprive it of its intra-state character so as far as the public utility aspect of its business is concerned and that so long as all of its public utility subsidiaries are organized under the laws of Indiana, and confine their public utility business to that state, it will be entitled to the exemption provided by section 3A(1), the intra-state exemption.

Again, with respect to PUHCA, as we continue to investigate and learn from events surrounding Enron's collapse, we remain open minded and would reconsider our views on appeal -- on repeal if warranted. Currently, however, it appears that the tragic collapse of Enron is not a result of its classification, or lack of classification, as a public utility holding company. Rather, a number of recent events including Enron's collapse suggests that for several years our system of disclosure regulation has needed repair.

What happened to investors of Enron should be prevented from happening to investors in any other company. All investors including investors in public utility holding companies are entitled to a regulatory system that produces disclosure that is meaningful and intelligible. Today, this morning, the SEC announced its intention to propose its first set of rule changes designed to enhance and improve our current disclosure system.

These proposals would; (1) Require companies to timely disclose transactions by their executive officers and directors in company securities including transactions with the company; (2) Require enhanced disclosure about a company's critical accounting policies; (3) Accelerate the timetables for companies to file their quarterly and annual reports with us; (4) Expand a list of significant events required to be disclosed on Form AK and accelerate the filing deadlines for that form and (5) Require that public companies include their exchange act reports on their Internet web sites at the same time those reports are filed with the SEC.

These proposals will be the first of a series of commission initiatives to enhance our disclosure and financial reporting system.

Other commission initiatives to follow will include better disclosure of trend and evaluative data, clear and informative financial statements and enhanced related party disclosure that would provide needed sunshine to affiliate transactions. Likewise, in order to prevent our system of accounting from being abused, whether by public utility holding companies or other types of companies, we are working to establish a better system for private regulation of the accounting profession and to make that the FASB responds expeditiously and clearly to establish needed accounting standards.

The lessons earned from the Enron tragedy cannot be limited merely to public utility holding companies. In my opinion, these teachings must be used to protect all investors not just those who have invested in public utility holding companies. After all, investors who have lost their life savings will find little comfort in the fact that their losses came from investment in a computer company as opposed to a public utility holding company.

Thank you for your time, I will be happy to answer any questions that you may have.

REP. BARTON: Thank you Commissioner Hunt.

We'd now like to hear from Mary Hutzler. Is that correct?

MS. MARY HUTZLER: Yes.

REP. BARTON: You've testified before?

MS. HUTZLER: Yes.

REP. BARTON: And who is the now acting Director of the Energy Information Agency, to give us your view on the facts and the figures about what happened as Enron's bankruptcy became more prevalent, and I would point out, for the record, that each testifier has gotten a little bit longer than the previous one (laughter), so hopefully you can disassociate yourself from that trend.

MS. HUTZLER: Okay. Mr. Chairman and members of the subcommittee, I appreciate the opportunity to appear before you today to discuss current and future energy prices and supplies in the United States in light of the recent Enron situation.

The Energy Information administration is an autonomous, statistical and analytical agency within the Department of Energy. We are charged with providing objective and timely data analysis and projections for the use of the administration, the Congress and the public.

Energy markets with particular emphasis on electricity and natural gas have experienced considerable turmoil over the past two years. These markets, however, have emerged into a period of relative calm. Most of the volatility in electricity markets occurred on the West Coast, particularly in California and in the Pacific Northwest. Many of the conditions that contributed to the electricity market squeeze in California are no longer present. Unfortunately one of the contributors to lower electricity market volatility is the significant slowdown in the U.S. economy in 2001, particularly due to the dramatic decline in industrial output, which is still pervading the economy.

Despite the volatility in some spot electricity markets, most retail electricity customers have seen only slight increases in delivered electricity costs because, at the retail level, electricity prices are still regulated in many states. Some states, particularly California, have seen large changes in delivered electricity prices, but for most areas retail price changes have been relatively small over the last two years.

Some of the pressure on electricity prices in 2000 and early 2001 were related to fuel costs and the availability of adequate generating capacity. Throughout 2000 natural gas spot prices were rising steadily because of strong demand and stagnant or declining productive capacity. The economy was expanding rapidly and incremental natural gas demand requirements were outstripping the capacity to produce new supplies.

Natural gas inventories fell steadily to very low levels at the beginning of the 2000-2001 heating seasons, setting the stage for significant increases in natural gas costs to end use customers.

Oil prices were also well above typical levels because of the tight condition of world oil markets.

The reduction in hydroelectric resources in 2000 due to weather factors served to tighten electricity markets by removing an important component of electricity supply adding to the increased demand for natural gas generation.

In late 2000 very cold temperatures moved heating energy use to well above normal levels. This squeeze of the natural gas markets resulted in a dramatic run up in natural gas prices, which set fuel costs soaring. Since last winter the onset of the economic slow down and relatively mild weather has reduced demand and changed the cost price environment for electricity and other energy sources. Average U.S. natural gas spot prices are currently between 1/4th and 1/5th the level seen at the height of the run up last winter, and oil prices are noticeably lower.

Electricity spot prices are generally between $18 and $30 per megawatt hour, compared to mid January 2001 prices of $40 to $50 in the South and East, and $400 to $500 on the West Coast.

We have examined electricity and natural gas price data since the fourth quarter of last year and compared them to Enron's stock prices. As this chart shows, we see no correlation between spot market prices for electricity and the path of Enron stock price. Between October 2001 and February 2002 wholesale electricity prices from the mid- Atlantic, New York, New England, California displayed relative stability at the same time that Enron's stock value was plummeting from nearly $30 a share in October to less than $1 a share six weeks later.

In terms of electricity, Enron was a small contributor in 2000, accounting for less than one percent each of total retail electricity sales, total generating capacity and total electricity generation. Similarly, the Enron spot natural gas price, while a little more volatile than electricity prices, showed no sign of being affected by the Enron problems during the same period. While Enron had as much as a 10 percent interest in interstate pipeline capacity, this capacity, of which the largest pipeline has been sold, is operating and is expecting to operate regardless of future ownership. Both electricity and natural gas markets appear to have shrugged off the Enron situation with little or no discernible market impacts.

In the short term, little change is expected for electricity prices. For 2002 an average decline in residential electricity prices of 1.6 percent is expected. A modest increase of about half a percent is anticipated for 2003 as fuel costs increase moderately and as aggregate electricity demand increases.

In the longer term electricity prices are expected to decline about .2 percent annually from 2000 to 2020 as more competition and lower coal prices to electric generators offset somewhat higher natural gas prices. Spot well head prices are currently averaging around $2 to $2.20 per million BTU, or about one-quarter of what they were in January of last year when prices at the well head reached record levels.

Very mild weather during the fourth quarter of last year through January of this year has reduced heating demand considerably. The low heating demand, a weak economy and high storage levels for natural gas should result in natural gas flow head prices of about $1.85 per thousand cubic feet for 2002, increasing to nearly $2.40 per thousand cubic feet in 2003 as the economy grows and world oil prices increase. Natural gas prices at the well head are expected to rise from their current levels, reaching $3.26 per thousand cubic feet by 2020 in real 2000 dollars.

In summary, it appears that the factors responsible for the very volatile and high electricity prices on the West Coast and the spike and subsequent collapse in natural gas prices nationwide stem from numerous economic and non-economic developments that are not obviously related to Enron's market activity. Enron, while a large and well- known player among energy trading entities in the United States was one, among many, existing and potential new players in electricity and natural gas markets.

The existing array of market participants should be able to interact effectively to ensure a normal competitive market balance.

There is nothing more has occurred in energy markets since the failure of Enron that would suggest otherwise as far as the aggregate energy market data is concerned.

Thank you, Mr. Chairman, and members of the subcommittee. I will be happy to answer any questions you may have.

REP. BARTON: Thank you. And you're the first one to be under time, which we appreciate.

I might say, before we go to Mr. Welch, that some of this very dry recitation of facts and figures does tend to be a little drowse inducing to the chairman, but it's very important. I mean, it's important to put that into the record, that that is, that's the facts, you know, that's not the rhetoric that's what really happened in the energy market and I appreciate you being here to put that into the record.

We'd now like to hear from the Chairman of the Public Utility Commission in the great state of Maine, which is a state I've not had the honor to visit but it's a state that I hear great things about. I've got several friends from Maine who just brag, brag, brag about what a great place it is, so I hope someday to get up there. So your statement's in the record and we welcome you to elaborate on it, in such time as you may consume.

MR. THOMAS L. WELCH: Thank you very much, Mr. Chairman, and members of the subcommittee. If you do plan to visit August is a better time than February.

REP. BARTON: Ah.

(Laughter.)

MR. WELCH: I speak only for the Maine Commission --

REP. BARTON: In both states, by the way.

(Laughter.)

MR. WELCH: I speak here today only for the Maine Commission, but I think since our market is as open to competition as any market in the country, our experience may nevertheless provide a useful view. And I also want to say right away that it's a pleasure to be able to confirm from our state's perspective many of the observations of my friend and colleague, Pat Wood. Frankly many of us in the states think he is exactly the right person to be in the job at the moment.

No state has a greater interest in the success of competitive electricity markets than Maine. In the two years since we opened our retail markets to competition Maine's consumers have been directly and often immediately affected by changes in the wholesale prices in New England. This dependence has its roots in two critical principles of Maine's law. First Maine cut the regulatory link between electricity supply and delivery by requiring our utilities to divest themselves completely of generation. We did so because we believe the competition in electricity markets is likely to be fairest and most robust when the transmission and distribution utility has no reason to favor any one competitor over any other.

Second, Maine decided to forego artificial price controlling devices, such as price caps or long term fixed supply contracts that insulate consumers from the prices revealed in the wholesale markets. Even Maine's standard offer, the product for people who do not contract directly with energy suppliers is priced by competitive bid rather than regulatory or legislative directive.

The effect of Maine's approach to restructuring has been dramatic. Forty four percent of the total electric load in Maine is served through bilateral contracts between retail customers and suppliers. Incidentally, Enron, by our own, by our best estimates, served about one-quarter of Maine's total load, serving both part of the standard offer and many retail customers as well.

Maine's aggressive adoption of the competitive model however, has vastly increased the vulnerability of Maine's consumers to distortions in the wholesale market. Accordingly, we have worked hard to ensure that wholesale market reflects the economics of supply and demand and does not provide inadequate incentives for efficient investment or opportunities for gaming and the exercises of market power.

Thus, it is with considerable personal and professional relief that I can report that both Maine and New England have apparently avoided significant injury from Enron's recent collapse. The greatest dangers we saw, as the collapse became evident, were threats to the reliability of supply and to the prices paid by Enron's customers. Neither of these threats materialized to any substantial degree. Supply continued without discernible disruption and because of very careful management, particularly by the New England independent system operator and participants in the New England power pool, we saw little instability in the trading market.

Enron's collapse did not cause a reliability problem because Enron does not own generation in New England. The generation owner's interest remain unchanged to run their generators and sell the output. Customers can continue to buy that output. Loads did not change and the generating plants did not go anywhere. Moreover, there was enough trading capacity available to ensure that purchasing and selling could proceed on a scale sufficient to absorb the volume abandoned by Enron.

Indeed the stress, and ultimately bankrupt Enron continued, and continues to this day, to meet its contractual supply obligations. These contracts remain valuable assets of the bankrupt entity, because most, if not all, of these contracts are profitable for Enron in today's electricity market. Virtually all the contracts were signed at a time of higher electricity prices in the region and require customers to pay a higher price than the current market price.

I am sorry to report, however, that the ability of Maine and New England to escape largely unscathed, has little to do with our own foresight or cleverness. We escaped for the simple reason that, when Enron fell, energy supplies were high and energy prices low. Had Enron collapsed in a period of rising energy prices, customers would have been exposed to enormous market risk. For example, had Enron's implosion occurred in a higher priced market like the one we had just a year ago and Enron had defaulted on it's obligations, Maine's customers would have had to pay at least $100 million more to secure the same supply. The losses for all of New England could have been ten times that amount.

Our fundamental concern is that the risks in the energy market are asymmetrical. If a customer signs a contract with an energy supplier and market prices fall, the customer is stuck with paying the now higher than market price for its energy. This remains true even if the supplier goes bankrupt. The contract is a valuable asset of the bankrupt company and one that the bankruptcy court will likely seek to enforce.

On the other hand, if a customer has a contract with an energy supplier, and market prices rise and the supplier, for whatever reason defaults on the contract, the customer must buy new supply in a high price energy market and take their place in line with all other creditors with frankly little hope that the protections the customer negotiated in the supply contract will supply sufficient relief.

Maine tries to minimize such risks to the state's standard offer electricity customers by requiring licensed suppliers to provide evidence of their financial soundness, either by posting a substantial bond or providing us a corporate guarantee that the supplier will meet its obligations. The Enron experience suggests, however, that Maine's own efforts along these lines are likely to be insufficient. A corporate guarantee from Enron frankly, which we would have accepted last year, would obviously not have saved our consumers. Surety bonds, as we have discovered in our own experience in another matter, are difficult to enforce and in any case likely to become significantly more expensive, due in no small part to the Enron related losses themselves.

I remain convinced that a well structured and genuinely competitive electricity market can bring substantial benefits to consumers and investors alike. That market will be destroyed in its infancy however, unless market rules require all players to compete fairly based on the underlying economics of what they bring to the market. Just as important is public confidence in the solvency and integrity of the players. Absent the latter, customers will be justifiably reluctant to enter the market.

Competition and larger regional electricity markets are increasingly recognized as superior to traditional regulation as a way of creating incentives for investment, disciplining prices and ensuring a robust and secure infrastructure. But the political and regulatory consensus needed to achieve those broad competitive markets may wither away if consumers are perceived to be vulnerable to unethical or irresponsible behavior by market participants.

Energy providers, consumers and investors very much need national reforms that will restore confidence in markets. By themselves, states cannot protect against incompetence or purposeful cheating by a major national player. Apart from the cost and limited effectiveness of requiring corporate guarantees or surety bonds, unscrupulous players can avoid state design and state enforced consumer protections by doing business only in states with fewer or less effective protections. The reforms enacted to restore such confidence must thus be national in scope.

I do not have specific legislative proposals to recommend this afternoon. I urge however, that you give favorable consideration to national standards, whether done through accounting and reporting rules or greater oversight authority over marked participants that will minimize the possibilities that consumers in Maine and elsewhere will be exposed to the financial consequences of events like the sudden collapse of a major market player that customers had no reason to expect, based on the information available to them.

Customers in electricity markets should of course, be subject to the normal competitive risks of price fluctuations due to changes in supply and demand. They should not also be subjected to risks created by deceptive financial reporting or inadequate regulatory tools.

Thank you for your time.

REP. BARTON: Thank you for that excellent testimony.

The chair will now recognize himself for the first series of questions and will set the clock at five minutes.

There has been quite a bit of discussion about need. Either need for more transparency or additional transparency in some of these markets. It's my understanding that the Enron trading system, Enron Online, was not a market like is created in the New York Stock Exchange, where the New York Stock Exchange creates a trading entity, a trading area, in an independent broker actually create markets in the specific stocks and bonds that are traded on the New York Stock Exchange. It's my understanding that Enron was actually a participant in each trade. That they could either purchase the commodity or sell the commodity but they were actually on one side of each trade.

So my first question, and I'm going to ask it to Mr. Wood and Mr. Newsome but if Mr. Hunt wants to answer, he's certainly welcome to. The Enron Online trading system, is it in and of itself something that we should have separate regulations for at the federal level?

MR. WOOD: We are -- we have -- actually in September, before Enron ever came up, this issue was raised at the commission and we put out, in the context of a broader rulemaking that we have now pending, whether the codes of conduct that applied to corporate affiliates such as between Enron Pipeline and Enron, the gas trading company, whether that same type of reporting requirement and those prohibitions that we have should apply also to Enron Online, which is in effect an extension, a marketing extension so to speak, of Enron's competitive sales activity. But yet, it is an issue we're looking at, we've asked for comment on. I expect the comments may look a little different in the light of Enron's departure. But I think it's within the current statutory authority to go ahead and do that if it's needed to be done. Certainly any guidance from Congress would be welcome but we are looking that also in our investigation as to the role of Enron Online and look deeper into what it could have done, or not have done.

REP. BARTON: Mr. Newsome.

MR. NEWSOME: Thank you, Mr. Chairman.

As I said in my testimony I think it's extremely important to define the problem before we look toward the solution. And at this point, at least in our opinion, as tragic as the Enron situation has been, we have yet to find any problems with the Enron Online trading system, at least as it relates to our markets. So it appears that there was no apparent breakdown in the trading system itself.

I think when we look at Enron Online as a trading system, we would look at it in terms of the bilateral trading exemption that I discussed earlier. And when we look at those bilateral systems, and I think as Congress looked at it and made the determination to exempt from the Commodity Exchange Act or at least from the CFTC, I think it looked at a system in which you had two very large sophisticated players doing business with each other in which the price was negotiated at that level, between those two sophisticated parties, and recognize that that bidding was not openly competitive, it was only between those two parties. And I think the reason that Congress did not require transparency at that point, is that because you were dealing between two large, sophisticated parties, who may be dealing in a very large amount of a product that it could actually distort a competitive market price if that was in fact transparent.

REP. BARTON: Mr. Hunt.

MR. HUNT: I don't have anything to add, Mr. Chairman. The stock market is different from the energy market and as you characterized, the trades on the exchange are between individual members of that exchange typically, and the exchange itself is not a party to those trades. It's just a trading area.

REP. BARTON: Would it be good for the public to know that in an Enron trading system, where Enron itself is making the market in several -- it's buying on one side and selling on another side. It's buying from one person and selling to another person. If you're going to make that market, should you have to, at the end of the day, at the end of the week, at the end of the month, do a net balance sheet analysis to FERC or CFTC, so that we know whether you're long or short in aggregate, in your aggregate trading positions? Is that something we should look at or not look at?

MR. HUNT: I think Congress made the determination at the time of the CFMA that it was something that did not need to be looked at. We are continuously --

REP. BARTON: Congress changes its mind on occasions --

MR. HUNT: We are -- that's an area that we are continuing to look at, Mr. Chairman. We are cooperating with other agencies as well and looking at the transparency issues and I think, as we come up with determinations, surely we'll share that information and our thoughts with this subcommittee.

REP. BARTON: My last question: did Enron actually default on any of its energy contractual obligations that it entered into under its trades on Enron Online?

MR. (?): We can check into that. I know it's defaulted on some trades. I'm not sure if those were ones that were entered into on Enron Online or not.

REP. BARTON: We tried. Specifically energy related contracts, did they actually default or were they able -- one of the testifiers was that because of the great work of various other markets, they were able to offset, download, hedge so that there really was none of that. I'd be -- the committee would be very interested if there was examples of actual defaulted obligations. My time has expired. I would recognize the gentleman from Virginia for five minutes.

REP. BOUCHER: Thank you, Mr. Chairman.

Ms. Hutzler, let me inquire of you concerning a number of matters. In the wake of the Enron bankruptcy, there was a marked diminished ability on the part of companies that built merchant energy plants to attract capital and I wonder, as a first matter, whether your agency has done an inventory of the projects for construction of new power plants that were either delayed or cancelled in the wake of the Enron bankruptcy. Do you have any information about that?

MS. HUTZLER: We actually have not done an inventory on that, but it is noted in my testimony that over the past two years, we have built 74 gigawatts of capacity and brought them all on line which in 2001 was probably close to a record at 49 gigawatts of capacity.

In a time when demand is high and the economy is thriving, obviously there are a lot of announced capacity additions. But the amount of announced capacity additions would probably be far more than the demand that's needed. In our forecast of the next 20 years, we show at 1.8 percent growth in electricity demand, the need for about 375 gigawatts of capacity. So that would be about 20 on average a year. Now obviously, the economy is different each year. Weather is different each year. So the amount that you need does fluctuate by year. But we've certainly seen a record amount coming on recently.

REP. BOUCHER: Well, let me focus your attention just on the most recent event, which was the Enron bankruptcy. I'd like to have your opinion -- and if you aren't prepared to give it today, then, we would be happy to receive it in written form on a subsequent day -- about the effect of the Enron bankruptcy and the subsequent lack of ability on the part of many of the merchant energy companies to attract the capital to build the new plants that they had announced they were going to build and the effect that that's going to have on the energy supply for the nation. As the economy recovers, I've heard many people express a concern that these plant cancellations and delays may result in there being an insufficient amount of electricity available. Let me just ask you if you share that concern and if you'd like to provide an answer that's more extensive in a supplement, that would be fine as well.

MS. HUTZLER: I would prefer to provide it for the record. As I did mention though, with the lower economy and lower demand, you'd expect cancellations of some of these plants. But --

REP. BOUCHER: The cancellations -- the economy had been diminishing for the better part of a year and these announcements of delays and cancellations came very rapidly after the Enron bankruptcy. So most people, I think, see some correlation. This isn't simply a question of the economy having declined. So take a look at it, if you would and advise us.

Mr. Wood, let me ask you a couple of questions. What actions, in your opinion, can be taken at your agency and what actions would it be necessary for us to take legislatively in the effort to restore investor confidence and the condition of the wholesale market and in the companies that supply electricity into that market? And feel free to comment in providing this answer, if you like, about the progress that you're making in adopting rules with regard to regional transmission organizations and also at uniform inter-connection standards and other matters.

MR. WOOD: Thank you, Mr. Boucher. I wrote those down as you mention them in your opening statement and I would add -- I would say those three would add certainty -- I would add two more that the commission has also done in the past six months. The transparency initiative, which I discuss to get more standardized disclosure of data, make it web friendly, make it more contemporaneous. That's a work in progress, the RTO-ness to which the commission began with the rule making in 1999. At this stage we're implementing that rule. I don't envision that that substantive approach needs to change. We will be fleshing out the details of what RTOs should do so there's some certainty about -- you know, even though this RTO may be five years behind that RTO, ultimately this is where it's all going so there can be some uniformity in the market and the reduction in transaction calls, which in -- depending on the market, the suppliers tend to eat those transaction calls. That's not always so but that's certainly a thing we can do to add certainty.

Uniform generation inter-connection make it easy to build a power plant that basically could take the haggling with the local utility out of the picture. It's hard enough to get the financing lined up and the water right and the pollution issues dealt with by the local regulators to have to then run the gauntlet past the utility for six or ten months to negotiate a contract is to me time not well spent. We have also set up offices of market oversight investigation at the commission. I think having an active referee in the market, not a coach, not a regulator, but a referee watching the market to make sure that some of the things we worry about or have talked about in this hearing so far don't kind of replicate themselves through energy markets is important.

And the last thing I would add would be an integration of standards of conduct that we have with gas and utility companies and electric utilities. There are standards out there that are separate. Putting those under one umbrella seems to make a lot of sense and is something that would give some certainty to how the world going forward will like.

REP. BOUCHER: Can you take all of this steps with current authority or do you need additional authority from this Congress?

MR. WOOD: I mention in my statement, sir, as I have before this committee before, that although in line with what I heard today, maybe RTOs won't be challenged in court either. But RTOs and transparency are initiatives that I think certainly within the broad reading of the federal Power Act, there's authority but I also know that things go to court at a pretty glacial pace and certainty from the Congress on RTOs and on transparency of information are certainly -- would be helpful in shaving probably three to five years off that court run.

REP. BOUCHER: Mr. Wood, thank you. Ms. Hutzler, thank you. Thank you, Mr. Chairman.

REP. BARTON: We have a vote on the floor on the Shays substitute to the Campaign Finance Reform. We will take a short recess, reconvene at approximately 4 p.m. Normally I would let this panel go but I know Mr. Sawyer wants to ask questions. Mr. Largent and Mr. Shimkus and I want to ask one more round myself. So I hate to inconvenience you but if you all wait another 10 minutes, we should be back and reconvene the hearing. We're in recess until approximately 4 (Vote recess.)

REP. BARTON: The subcommittee will come to order. We've got a number of members who wish to question this first panel. They're not back yet. In the interests of time, I'm going to ask a few questions and then hopefully by then Mr. Sawyer, Mr. Largent and Mr. Shimkus, Mr. Pickering and Mr. Wynn will be back in attendance and they will be recognized.

In my first round of questions, I asked the question about transparency and whether we needed additional legislation to set some additional standards for transparency. This second round, I'm going to ask the question a little bit differently. If you were me, the chairman of this subcommittee with jurisdiction over energy markets, what would you change or reform in current statutory authority? I'll ask that one question and then I'll recognize Mr. Sawyer, since he's now back in attendance.

So what would you change, Mr. Wood, or reform if you were the chairman with legislative authority and had a pending electricity and energy bill before your subcommittee?

MR. WOOD: Congressman, I'd like to give you an actual language but I think conceptually -- I think the main thing that we would -- that is close to the line now is the extent to which we can require a certain type of information being disclosed.

REP. BARTON: A little additional authority for information?

MR. WOOD: Because there are lot of cries for confidentiality. This is sensitive business information, et cetera, and while that may be true, you know, on an open exchange such as Jim and them oversee, that information is available. On an aggregate basis it's available. On trade basis you get a lot of information in an open exchange market that informs markets, that you don't necessarily get on bilateral markets where a lot of the energy trades actually happen. So, if you want transparency, I think it's really just kind of focused on that issue and we'd be glad to work on anything with you on.

REP. BARTON: Good.

Mr. Newsome.

MR. NEWSOME: Mr. Chairman, I wouldn't have anything specific to add at this point. We may later, as we continue reviewing what happened and how it happened. But I think, I guess as it relates to transparency, I would try to get down to the bottom end question of what's in the public good. And certainly, if a market provides a price discovery function, then it is in the public good for that market to be transparent and trying to learn more, I guess, and make the determination about what's in the public good and what's not in the public good would be a great place to start.

REP. BARTON: Okay.

Mr. Hunt.

MR. HUNT: Sir, you know what I would do. I would repeal PUHCA.

(Laughter.)

REP. BARTON: I love that answer but there's nobody here. We need Mr. Dingell and Mr. Markey and Mr. Waxman here to hear it.

(Laughter.)

MR. HUNT: I made sure they were out of the room when I said that. They've been detained. And give the additional protections of books and records to FERC and transfer authority over that amended PUHCA to FERC because they're the energy experts, we're not. And they could be consistent in administering all the federal energy acts together. You know, we try to avoid conflicts with them but -- in administering PUHCA, but sometimes it's inevitable. But we'd like to see whatever comes out of this committee and the Congress as a whole, in the public utility area, transfer it to FERC.

REP. BARTON: Okay.

Ms. Hutzler, is there any additional authority your agency would like to have?

MS. HUTZLER: Well, generally the more markets can have information, they better they function. So that would be my only recommendation.

REP. BARTON: And Mr. Welch, who's implementing some of these -- or overseeing some of these at the state level.

MR. WELCH: I think with respect to FERC authority, I think what Chairman Wood indicated is probably the best thing. One of the -- getting enough information to enough people in time for them to act upon it in their own interest is really critical to these markets, and right now that flow is not what it needs to be. REP. BARTON: Okay.

The Chair would recognize Mr. Sawyer for questions, for five minutes.

REP. SAWYER: Thank you, Mr. Chairman.

Let me get to a question that I raised in my opening statement. Mr. Hunt, you -- is there any evidence, or reason to suspect that Enron avoided acquiring multiple utilities in order to avoid coming under PUHCA?

MR. HUNT: I don't know that we have any hard evidence. They certainly knew, Mr. Congressman, that if they acquired another utility they would be under PUHCA, if it wasn't a foreign utility or an EWP but a utility from another state, they would have been under PUHCA and that might have restricted that other area of operation because if it's a registered as opposed to exempt holding company, PUHCA has a lot to say about what other non utility activities a registered holding company can engage in.

REP. SAWYER: So if they had come under PUHCA, there would have been tools that would have been useful in -- ?

MR. HUNT: If they were under PUHCA we certainly could have examined their books and records. We are now on -- I think, trying to get to a five year cycle of closely examining the books and records of the 27 registered holding utility systems. So there is a possibility that we would have given a look at them under the public utility act. But we also have the authority, Mr. Sawyer, to look at their books and records and their annual reports under the 33 Act, but you know, we don't have enough people to look at every large company, every year. So we put them on a four or five year cycle.

REP. SAWYER: Sure. Are there tools within PUHCA that if, or when, PUHCA is repealed, we ought to take special care to assure it remain in the law, in the interest of the kinds of things you're talking about?

MR. HUNT: I -- from our perspective, we think the most important thing is the power to inspect the books and records and to look at affiliate transactions primarily, because there is no cross subsidization. And to give FERC the power to, by lieu or order, prohibit some affiliate transactions that are inherently unfair.

REP. SAWYER: Chairman Newsome, are there similar oversight tools that are found in PUHCA that would be available to regulators if energy derivatives were to return to the Commodity Exchange Act?

MR. NEWSOME: Congressman, I'm just not that familiar with PUHCA. I mean we have absolutely no responsibility or jurisdiction in that area, so it would be very difficult for me to respond from that standpoint. I'm just -- I'm not familiar with it.

REP. SAWYER: Okay. Chairman Wood, are there tools which would be important to FERC as responsibilities under PUHCA went away?

MR. WOOD: Yes, sir. I mean certainly the discussions -- and I think Commissioner Hunt represents those pretty well in his written and oral testimony so far, that giving access to books and records of all members of a holding company system, to FERC and to state regulatory commissions is important to make sure that electric and gas customers don't subsidize, through regulated rates, the other activities of a corporate empire. And that role actually is to me -- and in a lot of the discussions over the last several years, it appears it has been an important kind of trade off on any sort of reform to PUHCA. It really is built around that issue.

There are other aspects but that's kind of the core -- the ability to get to the books and records. Now that's no easy task, as one who's lived through the rate settings side on the state level, it's a jungle. I mean to go through all the costs and make sure that they're not being unfairly allocated on top of the ratepayer in your own state. That's certainly a difficult -- and I think --

REP. SAWYER: Commissioner Welch, would you agree that where you work is a jungle?

(Laughter.)

(Inaudible.)

MR. WOOD: I lived in one too. So I think the increased access plus the -- I think there is also, as mentioned in Mr. Hunt's testimony about certain market power reviews in PUHCA that would go to FERC, certainly would be I think, offset the absence of PUHCA being there.

REP. SAWYER: Let me just say, by way of observation, Mr. Chairman, that the whole question of capital formation seems to me as critical in the industry right now. And if it is fragile in generation then it is even more fragile in transmission, which has never been seen as a traditional earning center. Putting transmission in a position to do precisely that, I think, is one of the great challenges in forming effective regional markets and I would look forward to discussing that with you in the future.

Thank you, Mr. Chairman.

REP. BARTON: Thank you. The chair would recognize the distinguished gentleman from California, Mr. Waxman, for five minutes for questions.

REP. WAXMAN: Thank you very much, Mr. Chairman.

Mr. Wood, you testified that energy markets and the growing trend toward competition did not cause or contribute to Enron's collapse. That might be a true statement, it might not be. I think I'll associate myself with the remarks of Mr. Dingell, who accurately states that we really don't fully understand Enron's collapse yet. But Mr. Wood, let's for a moment assume that you are right and energy markets and competition did not cause, or contribute to, Enron's collapse. In your view, Mr. Wood, do we fully understand the impacts of Enron's collapse?

MR. WOOD: For the limited purpose of the physical markets that we regulate, I think we do know certainly what has happened in the recent past was not a significant disruption to those markets. So to that extent, yes, sir, Mr. Waxman.

REP. WAXMAN: I want to introduce into the record, a letter from the Northern California Power Agency. Several of the agency's members entered into long term agreements with an Enron subsidiary for electricity and the letter explains the serious situation these California municipalities are now in. Upon announcing Enron's bankruptcy, the Enron subsidiary stopped delivering electricity for almost three weeks. Now the Enron subsidiary delivers electricity on a day-to-day basis, providing no long term assurances. So in Northern California, power association agency members are in a quandary. If they terminate their contracts they owe Enron a huge amount of money. If they don't terminate their contract, they have uncertain service for potentially years to come.

Mr. Wood, are you aware of this situation?

MR. WOOD: I am not specifically aware of that one, Mr. Waxman.

REP. WAXMAN: Does FERC know how --

(Break in audio.)

REP. WAXMAN: -- many Enron contracts who are also in a situation like this?

MR. WOOD: We do not specifically know. We've only heard from those that actually want to evoke some authority from the FERC.

REP. BARTON: Would the gentleman yield?

REP. WAXMAN: Yes.

REP. BARTON: We asked before the gentleman came, a similar -- the chair asked a similar question, if there was information about contractual obligations that Enron had devolved at all. So we're with you in trying to get that information.

REP. WAXMAN: I guess the other question -- I'll ask it and maybe we'll get an answer for the records. How many Enron contracts has FERC evaluated to determine the effect of the Enron collapse? Do you know Mr. Wood?

MR. WOOD: To date, not many that I'm aware of. That's why we've opened our investigation to look into potential manipulation in the gas and power markets by Enron, its affiliates and any other entity.

REP. BARTON: I have one last question for all of the witnesses. The letter from the NCPA concludes by stating, "It is now incumbent upon policymakers to provide careful non-partisan analysis of the root and causes of the Enron crisis with a focus on resolving the underlying flaws in our assumptions regarding deregulated electricity markets and regulatory deficiencies in the oversight process."

I want to ask everyone at the table if they, if each one agrees or disagrees with this recommendation or whether they think Congress should immediately press forward to pass legislation to deregulate the electricity industry?

Mr. Wood, why don't we start with you?

MR. WOOD: First of all, I have not viewed the efforts of this committee or any others to deregulate the industry. I think adding more competition to the wholesale power market is a quite different thing from deregulating. But with that caveat, I think certainly understanding what happened to Enron is important and if, in fact, that causes us to change our assumptions about a lot of things, I'm willing to do that. But I also want to be informed, as I think Mr. Newsome mentioned in this statement, of what really -- about what we learn, about what your committee learns and what your sister committee learns, by what we find out through courts happened in this Enron deal. But I do think it's the best part of good policy to learn first and then react to that, after we learn.

REP. BARTON: Mr. Newsome.

MR. NEWSOME: Yes, sir.

REP. BARTON: Shall we learn first or should we legislate first?

MR. NEWSOME: Well, I think, when you talk about energy deregulation, it refers more to the cash markets and the forward markets of which we have absolutely no jurisdiction over. So I wouldn't even begin to try and comment from that standpoint. I would say that in the markets that we do have regulatory sight over that we are continuing to do our due diligence. We are looking under every rock and looking at all areas. We're cooperating with other financial regulators to provide whatever expertise we might have to look at our area of jurisdiction. But under the cash markets we would have none.

(Off mike)

REP. BARTON: Use one of the microphones.

MR. (?): I'm sorry. We have, I think, seen some areas in the laws we administered primarily and in accounting regulations that did not work in the Enron case clearly. My preliminary view is a part of that was lack of oversight by the board of the company, certainly a lack of oversight by the audit committee of the board and certainly a fairly poor job done by the outside auditors. And in terms of the disclosure statutes that we administer, certainly the word 'impenetrable' has used to describe Enron's financial statements and textual statement in terms of describing the many off the books that were affiliated with Enron. So we think we already know nothing and we have a lot of work to do to make our disclosure laws and our regulation of the accounting profession both stronger and clearer.

REP. (?): Just to put a question on the table for the last two people, the recommendations from this organization in Northern California was that we don't -- we resolve the underlying flaws in our assumptions regarding deregulated electricity markets and regulatory deficiencies in the oversight process before we legislate. Do you have any views on that?

MS. HUTZLER: It's always generally good to understand what's happened in the past and how that's going to affect future issues. The real question is how much do you need to study it and in how much detail do you need to study it. One can continually study issues and not move forward on anything else. So you have to realize what the data will allow you to study and how far you can get answers to those questions.

REP. (?): Thank you. Mr. Welch?

MR. WELCH: Thank you. We actually deregulated our market several years before Enron. So I'm not sure we can go back. Nothing about what has happened in Enron in particular has thus far caused me to lose confidence in the basic structure of moving from a sort of commanding control integrated resource planning model which we had for many years to a model which relies much more on markets to allocate resources. Having said that, we continuously review whether or not what we're doing is exactly the right thing and obviously Enron has some lessons - I'm not sure exactly what they are, but I don't think, at least for us, they have thus far caused us to doubt that the particular direction in which we're moving is the right one.

REP. (?): Thank you.

REP. BARTON: The gentleman's time has expired.

The gentleman from Massachusetts is recognized for five minutes.

REP. MARKEY: Thank you, Mr. Chairman, very much.

Chairman Wood.

MR. WOOD: Yes, sir?

REP. MARKEY: Good job, huh? It's interesting, yeah? I would like to turn to Enron's status under the Federal Power Act. Under sections 203 and 204 of the Federal Power Act, FERC has claimed legal authority to regulate Enron's energy marketing affiliates, such as Enron Power Marketing as a public utility.

Now, under section 204 of the Federal Power Act it requires prior FERC approval of issuances of securities and assumptions of viability by any public utility like Enron Power Marketing, isn't that right.

MR. WOOD: Yes, sir.

REP. MARKEY: Did the FERC ever require Enron Power Marketing to obtain prior FERC approval before it issued securities or assumed liabilities.

MR. WOOD: The FERC has had a practice since, I believe, the mid-'90s, early '90s, Mr. Markey, of granting blanket pre-approval authority to power marketer applicants unless there's a protest.

REP. MARKEY: So in issuing blanket prior authorization for such security issuances and liability assumptions, Enron did not have to seek FERC approval for its specific debt obligations or security issuances. Is that correct?

MR. WOOD: That's correct.

REP. MARKEY: Now section 204 says that FERC shall approve issuances of securities are assumptions of liabilities by public utilities, "if it finds that such issue or assumption (a) is for some lawful object within the corporate purposes of the applicant and compatible with the public interests which is necessary and are appropriate for or consistent with the proper performance by the applicant of service as a public utility and which will not impair its ability to perform that service, and (b) is reasonably necessary or appropriate for such purposes."

Had the FERC been reviewing and approving Enron's issuances of securities or transfers of liabilities to the LJM, Chewco, JEDI and Raptor partnerships, do you think you would have approved them under that standard?

MR. WOOD: I think it's fair to say that it would be, well, assuming we could understand the nature of LJM, Chewco, JEDI and the others, and it's difficult even with the Wall Street Journal damning it down for us what it is. I think it's a fair question that those would have had trouble getting past, or to the standard.

REP. MARKEY: So they probably would not have passed muster, given the tests that they would have had to pass, if they had not already received prior blanket approval?

MR. WOOD: Again, I'm not, I'm not prejudging that if we had to deal with it, but I have to say, if we had reviewed those under the lawful necessary, the (a) and (b) standard of 204 (a) and (b), in advance, we might have had a different outcome.

REP. MARKEY: So, even if you started regulating power marketers as public utilities under section 204, you still wouldn't have authority over their holding companies, would you?

MR. WOOD: No. Probably again, that is a PUHCA issue.

REP. MARKEY: Right. So you couldn't stop an operating utility from simply dividing up their profits, you know, sending it up to the parents and the parents issuing whatever securities, notes, papers, et cetera?

MR. WOOD: Correct. It's just the marketer that is the "public utility" under the Act. That's right.

REP. MARKEY: So you, you wouldn't have any control over that?

MR. WOOD: No, that's --

REP. MARKEY: So, let me go to you then, Commissioner Hunt.

MR. HUNT: Yes, sir.

REP. MARKEY: Over at the SEC, now you've got the ball in your court. Notwithstanding the fact that the FERC has long said that a contract for the delivery of electricity constituted a public utility facility under the Federal Power Act, the SEC in 1994 issued a 'no action' letter deciding to tell Enron Power Marketing that it would not consider such contracts public utility facilities under PUHCA, reversing a long standing 1974 SEC staff interpretation to the contrary.

Isn't it true that the SEC's decision in this matter was contrary to what the law requires, contrary to established precedent, and contrary to what the SEC staff had previously said on the matter?

MR. HUNT: We did give an Enron subsidiary -- in 1994 the staff agreed not to recommend enforcement action against that subsidiary if it engaged in power marketing activities. Without that subsidiary or Enron self-registering under the public -- under the 35 Act. We did not think and do not think that power marketing and what tools for power marketing are, quote, "facilities used for the generation, transmission or distribution of electric energy for sale," close quote.

So we don't think that that subsidiary was an electric utility company for purposes of PUHCA and therefore that Enron itself was a utility holding company for the purposes of PUHCA. We think that FERC reached a different conclusion under the Federal Power Act because the Federal Power Act serves very different purposes.

REP. MARKEY: Yeah. Now, in 1974, I'll just bring to your attention, commissioner, the SEC said just the opposite. So obviously a big decision was made in 1994 by the SEC and we can see this regulatory black hole opening between the FERC and the SEC into which Enron and its, you know, shenanigans would be able to move.

Can I ask unanimous consent to continue for two additional minutes, Mr. Chairman?

REP. BARTON: Well, you're one minute over. Could you have one more really penetrating question they can answer very quickly?

REP. MARKEY: I will try hard.

Commissioner Hunt, you have previously testified that Enron got an exemption from PUHCA for owning Portland Gas and Electric because Enron reincorporated in Oregon, where PG&E was operating. The reason, of course, was that Enron didn't want to be a registered holding company, so it reincorporated in Oregon because of PUHCA. Isn't that right?

MR. HUNT: I don't know the reasons of their reincorporation. It's certainly plausible, congressman, that their reincorporation in Oregon was to avoid the strictures of PUHCA, but I haven't talked to Mr. Lay lately so I don't know if --

(Laughter.)

REP. MARKEY: Well, isn't it true -- well, let's talk about the effect of it then. Isn't it true that that allowed the Oregon --

MR. HUNT: That's certainly true.

REP. MARKEY: The Oregon PUC to play certain protections on the holding company of its Oregon operating utility, as PUHCA was designed to do.

MR. HUNT: Well, I testified with the chairman of the Oregon Public Utility Commission before the other body last week and he thought that Enron's activities had nothing to do with the good functioning of the utility in Oregon.

REP. MARKEY: All right. Now, if PUHCA is repealed except for books and records, isn't it true that there will be no reason at all for holding companies to be incorporated in the same state where they own utilities?

MR. HUNT: There would certainly be no PUHCA reason --

REP MARKEY: Okay, thank you. I understand that the SEC staff --

REP. BARTON: That's three questions after the one question.

So what's the -- you got a bottom line question there?

REP. MARKEY: Yeah, I can just get to --

REP. BARTON: Well, why don't you go to the bottom line question?

REP. MARKEY: Let me get one more yes --

(Laughter)

REP. MARKEY: -- one more yes, then I get the big conclusion. I understand that the SEC staff didn't fully review Enron's filings from 1997 until it initiated it's enforcement inquiry late last year, is that true?

MR. HUNT: Because of lack of resources, as you probably know, we only review a limited number of publicly held companies every year and we have on schedule to review Enron in 2001 but some new derivatives came on line and so we put it off for one more year. If you give us more staff and more money we'll review every publicly held company every year.

(Laughter.)

REP. MARKEY: Well, this is the seventh largest company in the United States. If you weren't reviewing Enron's book and records and Enron apparently couldn't understand it's own books and records, Wall Street analysts couldn't understand them, and their accountants couldn't understand them, how do you expect a state PUC with limited jurisdiction to be able to figure out what they're up to? The PUHCA --

REP BARTON: This honestly is going to be your last question because we've got three other members --

REP. MARKEY: I think that -- and I will just finish up in a second.

REP. BARTON: -- and you've doubled the time.

REP. MARKEY: Hasn't PUHCA kept the registered holding companies out of the junk bonds, scandals, and indeed, on what we can tell, out of the Enron mess, except where they confined these regulatory black holes?

MR. HUNT: Well, we hope we have done a decent job administering the Act, Mr. Congressman, and that you have kept the registered holding companies out of the morass that Enron now finds itself in.

REP MARKEY: Thank you, Mr. Chairman. I appreciate --

REP BARTON: Thank you. Those are all good questions, by the way. I'm not opposed to the content of the questions, just the time it takes to answer them.

Mr. Shimkus, for five minutes.

REP. SHIMKUS: Thank you, Mr. Chairman. Mr. Welsh, because of the Enron crisis, have you all made any changes to help the individual citizens of the state of Maine so that they can uphold to the old clich of let the buyer beware? Have you done any -- what changes are going on in the state to help?

MR. WELCH: We haven't done anything specific, except we are currently in reviewing what kind of security we're going to require from market participants who are selling, particularly residential consumers -- residential small business. We view the larger consumers as having sufficient wherewithal to make their own judgments about with whom they're dealing but the smaller consumers we do think some form of security is important, as my written remarks indicated. We're trying to beef that up in a way that we won't be surprised in the future.

REP. SHIMKUS: The -- and correct me if I'm wrong. In your opening statement and your written testimony you maintain that because the -- in essence we're in a slow economy and we're not seeing the natural graphs of price spikes that we had two winters ago and the demand wasn't as great. That limited the effect of the Enron trading, the 20 percent leaving the market and deluded that.

What I want to do is -- and that's correct, that's what you made in your opening statement, is that correct?

MR. WELCH: Yes, it is.

REP. SHIMKUS: Now, I'll ask the other panelists. Do you all agree with that? And if the chairman would start, Mr. Wood, and then we'll just go down to the other --

MR. WOOD: Let me just clarify, Tom, what you said yes to was the --

MR. WELCH: I'm sorry, the particular point I was making was because typically Enron was in the market with contracts for supply customers with prices that were above the now current market price, we were not too worried if Enron defaulted on those contracts because -- and in fact they have not defaulted on those contracts. If they did default people would be able to replace the power less expensively.

REP. SHIMKUS: But there would have been another crisis, had we been in a more restricted high-demand market.

MR. WELCH: If we had -- yes. Had the market price been above the Enron contract price then it would have been a serious problem for our consumers.

REP. SHIMKUS: Does anyone disagree with that? So we're lucky that Enron collapsed now versus when we had the natural gas price spikes of a year and a half ago or whenever that was? Probably a year ago. Last winter. I mean, is everybody shaking their head yes? Is that what --

MR. WELCH: I think one of --

REP. SHIMKUS: I guess it's hard --

MR. WELCH: On that narrow fact, yes, sir. But I would wonder that Enron may not have collapsed had their been an up market.

REP. SHIMKUS: Okay.

MR. WELCH: I mean, I mentioned in my testimony that they kind of had a one-way strategy that seemed to work.

REP. SHIMKUS: We had the accounting hearing last week and there was a lot -- you know, they had a lot of shady financial dealing. All right. Chairman Wood, let me ask has the commission significantly altered -- it's kind of somewhere to the question I asked the public utility of Maine. Have you significantly altered any of your positions with respect to the development of competitive energy markets as a result of Enron?

MR. WOOD: I think the -- specifically as a result of Enron we have published one further question, but quite frankly, the signal event for us, in our agency's development, was what happened in Mr. Waxman's home state, and the changes that we have made to respond to what happened in California were really the signal events for our agency in adding a market oversight division, in enhancing our ability to get transparent data, as I've discussed earlier, in changing the codes of conduct for affiliate review, and looking at how market power's analyzed.

So a lot of the things that Enron could represent in part were represented in totality about what happened in California. So I would say yes, but recognize that a big part of the yes was already underway.

REP. SHIMKUS: Does anyone else wan to have any changes or plans? Make changes based upon what we've perceived? Obviously members of the legislative branch are looking at ways to address legislation that might affect it.

Mr. Newsome or Mr. Hunt, do you have -- are you planning on any changes?

MR. (?): Yes, sir. I said in my oral testimony that today the SEC had announced five additional things we're -- to enhance disclosure of publicly held companies. This will be the first of a series of commission initiatives to enhance our federal disclosure and financial reporting system. Clearly, the Enron case has shown, and it's not clear whether this was all legal or not, but -- that in some instances of disclosure and financial reporting systems simply did not work in that instance.

And we need to make some changes in it.

REP. SHIMKUS: In the auditing hearing that we had last week, I asked a question on performance statements. And that's kind of what I'm addressing. Are they helpful, or are they harmful? Are they a corporate stand, or --

MR. (?): They can be either.

REP. SHIMKUS: I asked that last week. But --

MR. (?): Some people have misused them. They can sometimes help explain fairly complicated financial structures. But we issued a recent public statement that they can be misused, and warned companies to not misuse them to make their result better than what they were.

REP. SHIMKUS: Great. Thank you. And, Mr. Chairman, I yield back my time.

REP. BARTON: I thank the gentleman. I know my fellow Missourian, Ms. McCarthy, has already welcomed our friends from Kansas city, Rick Green from UtiliCorp, and his associates from UtiliCorp, and Equilus (ph), so I'm not going to do that. I'll file a statement to the record, and recognize Ms. McCarthy for five minutes. If you want to go in and do your five minutes of questioning now? We've just had a vote call, but I would think we could do your questions if you'd like.

MS. KAREN McCARTHY (D-MO): I just have a brief question, actually, for Mr. Wood, and anybody else who wants to discuss it with us briefly. But that's about, you know, getting greater price transparency. It was mentioned in your testimony that that would really help improve the efficiency of the markets and I know that transparency is something that we've been talking about here in the Congress.

So, could you elaborate? Or if anyone else in the panel wants to talk about it. How is that best approached? Is that through your -- through the regulatory agencies calling for it? Is it something that might require legislation? Or is it something that within the industry they can bring that forward? I'd just like you to expand on that, that notion.

MR. WOOD: Let me put two things out there, and then I'll answer your question after that. We have proposed for more price transparency in kind of a modest way, quite frankly, last July that required standard disclosure, internet based, et cetera, to the big areas of push back, or one that I mentioned a moment ago on confidentiality business information, which is traditional, the tussle that there is between opacity and transparency.

But the second on which, of course, took a lot more relief after 9/11 is an argument that this much information in the market is actually a security issue now. And so we're kind of -- you know, you don't want to be wrong on that count. But on the other hand, you don't want that to be kind of a generic excuse not to have transparent data.

So, certainly, yes ma'am, our job would be to make the best cut we can at the regulatory agency and make that the rule. And it is the kind of detail probably that in general you all do want to delegate to an agency to figure out. But if there is any guidance that Congress has, or in particular that -- how that ought to be balanced on security, it would be welcome. And certainly the corporate, you know, private business information, we can do that. But any guidance on that certainly is welcome as well.

But those are the two kind of flash points that -- it would give us some guidance and perhaps save us from litigating reporting form for the next several years.

REP. McCARTHY: Would anyone else like to comment before we go vote on this transparency issue, and guidance from Congress? Or other thoughts?

Then, thank you, Mr. Chairman. And I appreciate your comments.

REP. (?): Would you yield please?

REP. McCARTHY: Of course.

REP. (?): If you have completed your questions.

REP. McCARTHY: Yes.

REP. (?): Because I wondered that -- maybe use your time just to ask a question and to get a response in the record.

Mr. Wood, the Wall Street Journal reported that Ken Lay played an influential role in the appointment of FERC commissioners, and that you were supported by Ken Lay. But there have also been reports that Mr. Lay supported your appointment to the Texas Public Utilities Commission. I have asked other officials for a listing of their contacts with Enron. I would like to have you provide for the committee a list of your contacts with Mr. Lay and other Enron officials during your services as FERC commissioner, and while you served on the Texas PUC. And I'd request that the list of contacts provide the date of the contact as well as the subject matter of the contact.

MR. WOOD: I'd be happy to provide that, sir.

REP. (?): Thank you. Thank you, Mr. Chairman.

REP. BARTON: If you would provide that for the record, every member of the committee has a requisite number of days to submit questions, and may want to do that.

If we're done with this panel, we'll recess for 15 minutes and start the second panel at 5:00.

(Vote recess.)

(Break in audio.)

REP. BARTON: -- then Mr. Gerald Norlander (sp) who is the Executive Director for Public Utility Law Project in Albany, New York, and Mr. Robert McCullough (sp) who is the Managing Partner for McCullough Research in Portland, Oregon.

We'll start with you, Mr. Green. Your testimony is in the record. We'll recognize you for seven minutes to elaborate on it.

MR. RICHARD C. GREEN: Good. Thank you, Chairman Barton and other members of the subcommittee. As Chairman of UtiliCorp I appreciate this opportunity to testify on behalf of the Electric Power Supply Association. EPSA is a national trade association that represents the competitive power suppliers, producers and marketers and UtiliCorp is an international energy and services company based in Kansas City. Our Aquila subsidiary is one of the largest wholesalers of electricity and natural gas. We also are one of the leading providers of risk management services in North America, United Kingdom and Continental Europe.

Mr. Chairman, we are here today because of the Enron bankruptcy. It has made governments suspicious, investors leery and employees nervous. The tragedy visited on Enron's employees and its shareholders and the communities they served, should never happen again. Recent events have raised questions about the trading of energy, the security of pensions, corporate ethics and financial disclosure. These issues are separate and must be addressed individually.

I am here today to talk about the questions that are unique to the energy industry. Based on my understanding of the reports, today, it appears that Enron failed due to questionable non-core business investments and inadequate financial reporting practices. Enron did not fail because it was in the energy business. It failed because of the way it did business. Despite the shock of the Enron bankruptcy and the loss of the largest industry player the energy markets did not panic, this market continued to deliver power and gas to our customers. There were no significant swings in prices. There were no interruptions. In fact, because of the transparency in the marketplace of credit, trading and operations, the market knew way in advance that Enron was in trouble and market participants were prepared and found it easy to replace Enron.

Mr. Chairman, these markets did work but there is still work to be done. The further refinement of the market can do nothing but continue to deliver benefit to customers.

While I understand the need to study the reasons for the Enron collapse and how the market responded these legitimate inquiries should not slow down the continued development of more efficient energy markets or cause a retreat to historical forms of regulation. Questions have been raised about the use of derivatives and accounting disclosures of derivatives. In simplest terms a derivative is a contract where one party pays another when a certain event occurs. Many businesses have used derivatives over the years to manage risk.

A good example of the benefits of a customized derivative is our contract with the Sacramento Municipal Utility which provides them power or cash to purchase power when there is insufficient rainfall for their hydroelectric generation to operate. This allows the Sacramento Utility to protect its customers from rate increases to cover the cost of purchasing last minute power at high prices on the open market. Congress and FERC must continue their effort to restructure the energy industry. The progress to date has allowed this market to work so that the benefit to customers can continue. Do not stop now. This will send a strong signal to the capital markets to invest in the critical infrastructure for our future energy supply and delivery.

It is important to move forward to make this market more efficient. I urge you to move forward on broad regional transmission organizations, to provide more transparency, adopt standardized interconnection rules to allow clear and timely access to the power grid for new generation supply, and repeal PURPA, respectively, and remove outdated restrictions on the ownership of QFs which will encourage capital investment.

In closing, Mr. Chairman, I want to again emphasize the energy markets work. There was no panic. Energy customers were served. The modern energy market did not cause the Enron bankruptcy. I trust that as this Congress seeks to respond to the tragic suffering experienced by Enron employees and shareholders, it will not take action that will disrupt our nation's vital energy market.

Thank you.

REP BARTON: Thank you, Mr. Green.

We now want to hear from Mr. David Owens. Your statement is in the record. We would ask you to speak to it from five to seven minutes.

MR. DAVID OWENS: Thank you, Mr. Chairman. Good afternoon Mr. Chairman and members of the subcommittee. My name is David K. Owens and I'm executive vice president of the Edison Electric Institute.

We certainly are pleased to testify on the effect of the Enron bankruptcy on energy markets. Enron's employees and its investors have borne the front of Enron's bankruptcy. Congressional committees and government agencies are appropriately investigating the causes of this debacle. Fortunately, Enron's bankruptcy did not have an immediate harmful impact on electricity consumers. As other witnesses have stated today, there was not disruption of service to retail customers, the lights stayed on and prices remained stable.

In addition, the chairman of the Oregon PUC testified recently at a Senate hearing that Enron's bankruptcy does not appear to have harmed the retail consumers of Portland General Electric company, an Enron division.

Now as you know, allegations have been made that Enron manipulated forward prices in western electricity markets. As we heard today from FERC chair, Pat Wood, FERC plans to conduct an investigation of these allegations, and I think that's totally appropriate.

In other respects, Enron's bankruptcy is having important impacts on energy markets. Many energy companies have reported losses resulting from Enron's bankruptcy. Wall Street is asking more questions about financial practices and tightening credit standards, particularly for energy companies. The stock prices of many energy companies have declined significantly. And many companies have delayed investments in generating capacity, raising the possibility of tied power supply markets when economic growth picks up.

In addition, there is increased scrutiny about the effect of accounting for forward trade and electricity, known as mark to market accounting. Selling electricity for future delivery is essential for efficient operation of electric markets. However, when forward markets are not very liquid, there are greater uncertainties as to the proper market valuation for such transactions.

Now's Enron's collapse suggests a need for many reforms that effect all publicly owned companies, not just energy companies. With respect to energy, it appears that the area of greatest concern is the transparency of financial reporting and disclosure as thinly traded electricity markets, much of what we heard from the first panel.

The ultimate cure for this is to advance measures to promote liquid trading markets. In electricity that would involve enhancing our transmission infrastructure. It would involve moving towards standardized power markets with efficient transmission pricing. And it would also include facilitating independent regional transmission organizations. In other words, establishing more liquid hubs for the delivery and trading of power.

FERC has taken a lead in addressing many of these issues. However, legislation is 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 reforms to achieve the goal of a more robust competitive wholesale market. We look forward to continuing to work with the subcommittee on these important legislative initiatives and I would be happy, Mr. Chair, to respond to any of your questions and other members of the subcommittee.

Thank you.

REP. BARTON: Thank you, Mr. Owens.

We now want to hear from Mr. Raymond Plank of the Apache Corporation in Houston Texas. Your statement is in the record. We'd ask that you elaborate on it in five to seven minutes.

MR. RAYMOND PLANK: Thank you, very much, Mr. Chairman, members and interested persons in the audience. My name is Raymond Plank and I have correctly been introduced as an effective founder and CEO of Apache Corporation which has had an opportunity to observe energy markets for the 49 years of business in which we have gone from the smallest of 16,000 oil and gas producers to among the 20 largest in the world.

REP. (?): Do you know my good friend Michael T. Houbuotie (ph), by any chance?

MR. PLANK: Yes, I do.

REP. (?): He still goes to the office every day and I think he's 95, but I don't mean to ask -- interrupt your testimony

MR. PLANK: I haven't seen him for a couple of years, but he's quite a guy.

REP. (?): He's ornery as ever.

MR. PLANK: Today, what we have, as I see it, in the energy chain natural gas is a very critical link. The reasons is that it is the fuel of preference, both from an environmental standpoint and in terms of its robust usage in commanding that portion of the natural gas and the electricity market which are totally interdependent.

Now today the greatest threat faced by the natural gas supply side is rather than minimized price volatility, its exacerbated price volatility contrary to the promises when Enron and other were capturing the last phase of deregulation and assured such party purchasers as the state of California that prices would be lower and that supplies would be adequately abundant for their purchases to take place on a day to day basis on a spot market.

I would suggest that the committee follow the self interests of those who make these claims, for if it in the physical market the ratio of physical trading is one point for every 15 points of a virtual market, and you can command the same margin of profit on one trade t 15 trades, then in your virtual market you have an opportunity for a multiplying factor of 15.

That then drives the psychology under which during the last phase of deregulation, which was preceded by some very constructive phases of deregulation which they didn't really have (inaudible) because it was such a terrible mess at the time that deregulations began some 15 years ago.

At that time, the process was hijacked by the marketers. The hijackers immediately moved in between the pipeline companies and the consumers and filled that gap. They were the deregulated portion selling their commodities and their protection against volatility to whoever would buy it in the middle.

Unfortunately, from a standpoint of natural gas, paper contracts, paper agreements, future sales don't burn. They don't generate energy. So commitments were being made to potential consumers that spot market prices would be very adequate for them to buy all of the supply behind which they were a pack a liars.

Those lies are coming out today as truth. Enron carried it as far as they could and it collapsed. Now credit has been taken here today and appropriately should be for the fact that the process moved smoothly during the Enron collapse. I want to suggest that in addition to the two reasons suggested thus far, there is a third one.

The first one of course being a period of recession in which gas demand particularly from industrial users is significantly down. The second one is that an unseasonably warm winter to date. And the third one is the fact that they weren't contributing a damn thing in the first place. They were not a value added service provider. They were an opportunist who saw an opportunity to create a market through current technology and go out and sell it.

Now in doing that, that process -- and you know it as well as I, but it rests with you and other legislative committees, to pursue it to a point where justice has been served. They did capture a good bit of that market. But again, the value added service has not been provided. As proof, go back to early 1970s before Ken Lay came over to the predecessor to Enron before they then acquired Northern Natural Gas which more recently they flipped off a billion and a half dollars, as though it were a rotten apple hanging on a tree in order that they could concentrate 100 percent of their activities on the highly profitable energy side which is a misnomer because they were no longer in the energy business. They were a trade marketer of commodities and of derivative products. That became the definition of their business.

At that point in time, then, one of the reasons why the industry could state by, the final reason that they could state by the collapse of Enron was very simply that they were contributing so little in the first place.

Now deregulation has contributed quite a bit in its earlier phases. I've indicated that it was a mess and if I had more time I would be pleased, or if you asked me a question on it, I'd be pleased to comment on, thereupon. Today our greatest problem that we confront within the industry, both as consumers and as suppliers is price volatility. The promise was that with broader trading markets there would be less price volatility. Gentlemen, the price of natural gas in 18 months has gone from under $2 to over $10, back to under $2. That would represent the New York Stock Exchange or the Dow Jones average going from 10,000 points to 50,000 points and back to 5,000 points, or back to the, yeah back to, whatever you want to put it - the ratio is still kind of 10:1. (Laughter.) The arithmetic, I'm going to leave to you - I'm certain that you'll get that right.

That would not be a salutary condition and the impact upon the supply side of the market is very simple. We spend our cash flow to replace the diverted a depleting reserve base. It takes about 1,000 rigs drilling at a time in the United States and Canada to maintain our reserve base at a level where it can meet the present known demand of approximately 60 dcup (ph) 2.20 or million BTUs of gas per day. That's about our daily demand.

REP. BARTON: Mr. Plank, you're a little over one minute over the seven minutes, if you could try to -I've read your testimony, if you could try to summarize it in the next minute.

MR. PLANK: All right. We'll put it this way - we've got a bit of ticking time bomb here, gentlemen, and your job isn't finished. The energy markets are not fractured, they're broken. We could come a long way but before you rebuild an improved regulatory structure or before you turn it loose for the cars to go down the streets of Washington DC at 100 miles an hour instead of 20.

We'd better do the counterpart of what was done in New York City. The cleaned up ground zero before they're going to start building on it again. There's an age-old principle to this old bomber pilot in the South Pacific and to a father who said to me, "Son, when you grow up I hope you'll remember this word of advice. There are a lot of very smart crooks around, the interesting thing is that they would have done a lot better for themselves and for the country if they'd been honest in the first place."

There is an ethical problem here, there's a moral problem here, the citizens of the United States understand it all the more clearly as a result, Mr. Chairman, of 9/11. I hope the committee will take that into consideration as they deal with these problems.

Thank you very much.

REP. BARTON: Thank you, and I will provide a Washington translation of the straight Texas talk that he just gave us, since I'm also a Texan, you know. I'll translate that into Washington legalize so that the audience will understand some of those words that you put before us.

We now want to hear from Mr. Gerald Norlander who's executive director of the Public Utility Law Project. You're statement's in the record, we'd ask that you elaborate on it in seven minutes.

MR. GERALD A. NORLANDER: Thank you, Chairman Barton. In addition to being executive director of the Public Utility Law Project, I'm also the chairman of the Electricity Committee of the National Association of State Utility Consumer Advocates, also known as NASUCA, and we didn't have enough time to put together a NASUCA position on this today so I'm speaking for PULP, Public Utility Law Project.

We represent low-income consumers, primarily up in New York State, on issues affecting universal service, consumer protection and affordability. Although most eyes were turned toward California last year, we had a near California experience in New York City with respect to the deregulation plan that was put in effect and implemented there.

That was a plan that was very much like the model that Enron had proposed and the effect of that in the summer of 2000 was a one-month jump of 43 percent in consumer bills. There were hearings - consumers living day to day with just a few dollars of discretionary income for themselves, just can't make ends meet with bills like that. Nor could businesses, and the hearings were crowded by business people whose business plan was spoiled. People who ran grocery stores and ran coolers and things like that had no remedy whatever from the price spikes.

And subsequently the utility which was buying the energy for the consumers in, primarily in the spot market, didn't know what had been going on, subsequently said that they had been buying from only two or three sellers at times in locations in the city, and they went to FERC under prior administration, I might add, and couldn't get relief. I would like to point out that under current leadership at the FERC we are quite pleased that, what one utility in New York called a runaway train heading for disaster, has at least been slowed down and I think they're beginning to ask the correct questions about market manipulation, in the spot markets about the standards for granting market based rates.

I think, you know, I would urge the committee that in looking this we apply a different test which not, will we do harm to the markets, but will we do harm to the people? And people who demand and expect and who, at reasonable rates, under the old WAR (ph) which is still WAR and we're quite sensitive to that in New York because New York never changed its law or commission went out and asked the utilities to divest their plants and then buy back the energy for consumers in the spot markets.

The theory urged by Enron and that is why I bring this back to Enron is that it is the, it was their model that, certainly others bought into it, that we would have a spot market and it would be volatile but it would be efficient, it would be competitive, and the marketers would come to the rescue when the volatility got to be too much. And I think they're wrong on just about every count, at least so far in our ISL (ph) markets, and we have markets that are riddled with market power. We don't have enough sellers.

It seems to us, from our look at the problem, that we don't have enough, simply don't have enough sellers in these markets and that the traditional NI (ph) trust screens are not sufficient in the electricity markets so that an entity that passes the traditional tests will still be able, with their friends, to bid up the markets in these spot markets without conspiracy, without over manipulation. So if we're out looking for smoking guns and really bad conduct and price rigging we may not see it. What we may see is a system that's not generating an efficient price.

Now, the markets were relied upon too soon, I think, though without looking at things like reliability, the costs of going forward in the market design, and whether we had remedies, and I think that today you've asked what remedies might we look at. We think that one of the, a good remedy would be, would help us get to that test, are consumers going to be better off? We should have the regular reporting of costs by generators. What does it cost to run the machine? They don't have to bid that, perhaps, but when something goes wrong or when there needs to be an investigation into the market, not only is the information readily available, but there's a reset, a fall back price that can be utilized to correct a market power problem.

I think that in the states that haven't done this yet, they're going to be looking very carefully at the, whether these new measures of FERC will indeed control market power at times of shortage. We're also seeing a situation where the reliance on the new market to bring new plants is a major question. We had a situation where 19 plants were on the list to be built in New York, and last week in an article reminiscent of Willie Nelson, it says, "Turn out the lights the party's over," they say that about half those plants will, look like they're going to be built now.

New York does need new energy supply. It didn't come and we had to build -- we had the power authority from the state come in to build the emergency plants in the last couple of years.

We are concerned that, with Enron, that some of the marketers like Enron will go bankrupt. We had that happen with the gas marketer in Buffalo. Nineteen thousand people lost their contract. Many of them had paid in advance and their money is in the bankruptcy court and the bank has priority, has a secured interest and so they lose, they had to pay twice. On a larger scale, Enron seems to have defaulted on some of its retail contracts in the Chicago area, leaving consumers holding the bag and fortunately, being able to go out in a low market and replace what had been breached.

NASUCA, in its resolution last summer, recommended that the FERC adapt measures to provide a cost based fallback when market power is found and we do believe that that is a corrective measure that is very important for FERC to pursue. We think that, from a legislative perspective, we need to look at the problem of market power in the unique electricity auctions as a particular problem and I think that the problem of mergers is, I think, one of the major problems that if we go to the effort to get more sellers in through the larger markets, we're going to spend a lot to get larger markets and more people selling. At the end of the day, if sellers can merge, we're back where we are today.

REP. BARTON: Good. Thank you, Mr. Norlander.

We now want to hear from Mr. McCullough, who is from Portland, Oregon. He is the Managing Partner of McCullough Research. And we'll put your statement in the record, we give you seven minutes to elaborate. We have a vote, a 15-minute vote and if you actually give us about four minutes, we might actually be able to let each member take one or two questions and then adjourn the hearing. If that didn't work, we'll come back about 6 o'clock. So I'll put you on your behavior here.

MR. ROBERT McCULLOUGH: Mr. Chairman, I can't talk as directly as a Texan but I'll move fast. Thank you, Mr. Chairman. Thank you, members of the committee.

I am addressing directly Enron in California. California was badly designed and sent us bad results. Enron was a major player in the creation of the system with a large market share --

REP. BARTON: Put the microphone over more towards you.

MR. McCULLOUGH: My apologies.

REP. BARTON: I can hear, but it helps the recorder to --

MR. McCULLOUGH: Yes, sir. They had a large market share. We have some evidence that their ethics may have been in question. We don't yet know how far that goes and obviously, we're going to have to wait till the investigation at FERC and the SEC runs its course. We've had 20 years of a good power market on the West Coast. It wasn't created by Enron. It was created by the availability of real power, Mr. Plank, in excess because of the Colombia River. It's lasted through droughts, it's lasted through earthquakes, it's lasted through resource shortages, it's lasted through high fossil fuel prices. It was very stable with one exception.

Last year, we had a series of price spikes and emergencies. If we now look at the WSCC, Western Systems Coordinating Council, reports, we now discover that our load resource situation was better last year than it had been for the previous five years. Moreover, the Colombia River was at 92 percent of average flows, not good but not, in fact, a crisis during the initial summer of the Californian problems. Nineteen ninety four, we had last resources, more load and a lower river and we didn't have blackouts. Bottom line -- and it's real simple -- we had a situation where it was easy for the incentives to go the wrong way, that led us to generators not bidding in into the California PX, led us into emergencies on an ongoing basis.

Chairman (?), FERC, implemented price controls. Suddenly plant operations improved. Prices fell. Now, I am a price theory economist. I'm not someone who likes price controls. They don't work in a competitive market, but we didn't have a competitive market in California. Do we know that Enron was responsible? No, we won't know more until we get those investigations. Do we know that they seem to have had enough market share to have price leadership? The answer is yes. We know that we have long term pricing problems throughout the industry on the West Coast. Prices that had left the just and reasonable standard in what they were a multiple of what it would have cost to build a new power plant. That's worrisome and we need to get to the bottom of it.

Bottom line: we need to know more. Transparency is not simply a goal. Practical issues need to be addressed. We need to know market shares. We know those in regular markets. We don't know them on the West Coast. We need to know whether or not one party is driving the prices or whether it's an open and competitive market. Those are issues in front of Chairman Wood and I trust he'll do a good job. Thank you, Mr. Chairman.

REP. BARTON: The chair will recognize Mr. Sawyer for five minutes for questions.

REP. SAWYER: I'm not going to use my entire five minutes. I have to tell you, Mr. Plank, I was tempted to say deregulation is a mess, would you care to comment? But I'm not going to do that, because we're running short on time. I throw this to everyone, but Mr. McCullough seems to have the most direct experience with it. The Price Exchange in California was supposed to provide the kind of transparency that you were talking about. The PX apparently failed. Can you tell us why and what lessons we should learn?

MR. McCULLOUGH: Two reasons. One, the rules were simply too complex. They allowed end-runs that enabled smart players to get special results. Two, the flow of information in California is constipated. Literally, I have more information on the Californian situation in this short piece of testimony than we have yet available in California through their process. That was a policy. It needs to be corrected.

REP. SAWYER: Any other comments on that?

MR. (?): I'm not going to comment on the transparency but I think there were other things that were taking place in California which we are all aware of. There was a high dependency on the spot market. There were bilateral contracts and so forth --

REP. SAWYER: I understand that. I was talking specifically about the failure of the PX to perform adequately.

MR. (?): The failure of the PX to perform, many would suggest it's because the rules were not clear that the PX operated under.

REP. SAWYER: Thank you, Mr. Chairman. I yield back.

REP. BARTON: I'm not going to give you, the panelists, an option. I can ask one or two questions and adjourn the hearing and you can go and have supper. I can go vote and come back and spent 30 minutes asking questions. So you folks want to get out of here quick or you folks want me to go vote and come back and maybe a few more members come back?

MR. OWENS: We want to be helpful to the committee. If there are questions that you need in the record, we'll be pleased to do it. If not, I'd like to go home.

MR. (?): I agree with Mr. Owens.

REP. BARTON: Let me ask just a few quick questions then we'll have written questions for the record that you can elaborate on. Mr. Plank says in his written testimony that we should just eliminate the concept of mark-to-market accounting, require traders to book revenues and profits as they're actually realized. And that has a lot of appeal to me. I can't book votes in advance no matter how good my phone number looks. I have to wait till they're voted that day of the election and I get to count them. So, Mr. Green, should we end market-to-market accounting as Mr. Plank recommends.

MR. GREEN: Right now, mark-to-market accounting is a requirement, as you know. And I think it's one of the most rigorous accounting processes here. People can abuse almost any process and I think we have seen some abuses of that. But mark-to-market accounting exactly does that. You have to put the fair value of your contracts and we do it on a daily basis. I think there can be some more disclosure of that and how you value those contracts, either the current as well as the extended. But used correctly, it is the most rigorous accounting process we have for the trading environment we're in.

REP. BARTON: Mr. Owens, would you have a comment on that?

MR. OWENS: I would agree with it. I would say that there are two things you can do. One would be uniformity in the price curves. Mark-to-market accounting is not just used by the energy industry. It's used by a broad range of industries and it is very complicated but I think it also has tremendous value. The second thing would be to link it for transparency.

REP. BARTON: Mr. Markey, we're about to end the hearing. I've asked two questions. Mr. Sawyer has asked a question. Would you like to ask one or two questions and let this panel go?

REP. MARKEY: Mr. Chairman, we are fortuitously scheduled to be here until 3:30 a.m. --

(Laughter.)

REP. MARKEY: -- and we are not leaving --

REP. BARTON: Your definition of fortuitous and my definition of fortuitous are --

(Laughter.)

REP. MARKEY: Well -- but these are really important people in terms of discussing this energy market place and I don't have anything to do. I mean if they don't have anything to do, I don't have anything to do. I can stay here, if you don't mind, I mean really --

REP. BARTON: No, I'm asking the question. I don't need a three minute dissertation. If you want to --

REP. MARKEY: Okay, if it would be possible --

REP. BARTON: We are going to recess the hearing. We'll reconvene at 6:00 p.m.

(Recess.)

REP. BARTON: The subcommittee will reconvene. Congressman Markey is -- should be on his way back. He promised me that he would and he keeps his promises, so I'll ask some questions until he gets back and then we'll recognize him for questions.

I would like to ask -- Mr. McCullough is not here. Did he have a plane to catch?

(Cross talk.)

He's on a cell phone. Well I saw Mr. Markey has just come in, so I'll wait till he gets here and then we'll recognize him.

The chair would recognize Mr. Markey for five minutes for questions. Let me put it this way. How much time do you think you're really going to use and I'll recognize you for that amount of time?

REP. MARKEY: If I had 10 minutes I think that would do it.

REP. BARTON: All right. The chair would recognize Mr. Markey for 15 minutes for questioning.

(Laughter.)

REP. MARKEY: It won't take that long.

Mr. Green, did you ever see those Ed McMahon ads that say, "Congratulations, you may have already won millions of dollars in the Publishers Clearing House sweepstakes?". Well, congratulations, Mr. Green, you may already soon be an unregistered mutual fund. Are you aware that Enron sought and obtained an exemption from the Investment Company Act of 1940, the law that protects mutual fund investors?

MR. GREEN: I am not.

REP. MARKEY: You are not. Well, Enron apparently obtained an exemption from that act, from the Securities Exchange Commission staff back in 1997. Were you aware of that?

MR. GREEN: I was not.

REP. MARKEY: Now, were you also aware that there is a provision in Mr. Barton's electricity restructuring bill, section 125, that would allow every exempt and registered holding company to transform itself into an unregulated mutual fund without any of the protections that the investment company act provides with respect to self healing, leveraging, independent board and excessive fees?

MR. GREEN: I am not aware of that.

REP. MARKEY: Did you know that the SEC has warned Mr. Dingell and me, in a letter we just received today, that if this particular provision was passed, "hundreds of unregulated investment companies would result" and that "it would be virtually impossible to determine an exact number of potential unregulated investment companies created by section 125?"

MR. GREEN: No, these are areas I really don't have an interest in.

REP. MARKEY: Are you aware that the investment company institute which represents mutual fund industry is strongly opposed to this revision and in a letter they sent me today, they have requested that section 125 should be deleted from H.R. 3406 in its entirety? Your company, Mr. Green, could already be an unregistered mutual fund, in other words.

A benefit that perhaps you're not aware of, but something that with just the right MBA that gets hired this summer, could put you into a position of diversification.

MR. GREEN: Well, that's not our business. We stick to our core businesses and don't diversify in that sense.

REP. MARKEY: Right. And that's good.

REP. BARTON: Would the gentleman yield on this line?

REP. MARKEY: Why, sir?

REP. BARTON: That particular provision in the bill was put in for a company that's -- or companies in the mid West. It has nothing to do with Mr. Green's company and we've already told at the staff level that due to the concerns of Mr. Dingell and yourself, that we'll be very willing to clarify the specific language in that if it's controversial take it out in its entirety. So I don't see a reason to berate Mr. Green on this.

REP. MARKEY: I'm not berating Mr. Green.

REP. BARTON: Because he's got no -- nothing to do with that particular paragraph.

REP. MARKEY: Well, let me ask Mr. Owens. What is the EEI position on that provision?

MR. OWENS: We have no position.

REP. MARKEY: No position?

MR. OWENS: No. We're not concerned about that.

REP. MARKEY: Okay. I guess the point I'm trying to make here is that Mr. Green and his company may not be interested in taking advantage of that, but we know that Mr. Lay and Mr. Skilling would have taken advantage of it. Did take advantage of it. So if it's a broad exemption that is universal, then while Mr. Green may decide not to do it, it would not be because he was restricted from doing it. It would just be a choice to stay home and to do the things that he does well. But it wouldn't mean that others wouldn't be able to get out into the field without the safeguards and protections that are in the 1940 act.

Mr. Plank, in your opinion -- let's do this. Tell me, Mr. Plank, what is the one thing you want us to remember out of this hearing? Give me the one big truth you want us to have.

MR. PLANK: That --

REP. MARKEY: Can you pull up there a little bit, please?

MR. PLANK: Yes, sir. Commodity price volatility in natural gas is excessive to the point where our responsibility as producers, to Americans, to consumers, to our shareholders and to our own integrity is threatened by our inability to determine with any degree of accuracy whatsoever what our cash flow may be, and thereby what funds we may have available to reinvest in a business which depletes its wells on a day-to-day basis.

REP. MARKEY: Okay.

MR. PLANK: That's my primary message and primary hope.

REP. MARKEY: And your recommend -- and your solution is?

MR. PLANK: I think before you reconstruct, Congressman Markey, on the site of Ground Zero, regulation, the sifting through what the failures have been in this particular phase can be very rewarding as you adopt new regulation, which, on the one hand, still does your very best to maintain human and individual freedom and dignity, and on the other hand, reinforces the American ethic of morality, and protects against the invasions of all kinds of financial side institutions.

Such as Forbes has an article out this week and it's another one out by -- and another one -- another major publication that puts the contingent unbooked liabilities of major banks at the present time at somewhere around $5 trillion. A lot of that money, as predicated, is at risk due to their guarantee to pick up commercial paper in the event of credit unworthiness. But be that as it may, the credit unworthiness that stands behind these tread -- these trades and these virtual activities, which are supposed to be marked to market every day, I think it's enough to market once less frequently, predicated upon sure that you don't recognize dollar income before you've got a cash receipt to go against that marking to market.

REP. MARKEY: So it really isn't marked to market, is it? It's marked to marketing?

MR. PLANK: That's correct.

REP. MARKEY: You know, they actually don't have the receivable here. What they're saying is, "We got a good idea that somewhere down the line, two years, three years from now, because our marketing is so good that we'll have, you know, that thing that we're promising is going to serve as the collateral." So it's -- we don't really have -- we don't in the theory have, huh?

MR. PLANK: Mr. Markey, could I add?

REP. MARKEY: Sure.

MR. PLANK: It's a very difficult situation at the present time because this trading speculation has extended to the securities market itself to such a degree that those who are running the hedge funds have no interest in the company or the performance of the company, they're interested only in the momentum of that particular trade. We see that day after day. We have 40,000 shareholders, 137 million shares or stock out there. And our stock, in a given day, based upon information which is, we believe, generated internally to serve those who can profit by creating the volatility, we've seen gas markets on a daily basis change by as much as 15 percent --

REP. MARKEY: I'm going to run out of time, Mr. Plank, and I --

MR. PLANK: That's just what I wanted to say.

REP. MARKEY: What you did say. You just finished it, huh?

MR. PLANK: I just finished it.

REP. MARKEY: You just finished. Let me then ask you, do you think that Enron was able to manipulate the gas marketplace because of Enron Online?

MR. PLANK: In my opinion, absolutely. And I am absolutely satisfied that they did.

REP. MARKEY: How did they do it?

REP. BARTON: Would you -- would the chair -- I mean, would the gentleman yield?

REP. MARKEY: Sure, be glad to.

REP. BARTON: We'd like to see some documentary evidence of that, and you're entitled to your opinion.

MR. PLANK: So would I, and I don't have the power of subpoena and you do, so I suggest you're closer to it than I am.

REP. BARTON: Well, we just had all the people who would have this evidence and they said just the opposite, that there's absolutely no evidence --

MR. PLANK: Well, then I'd look to their self-interest.

REP. BARTON: No, these were the government witnesses. They would have no self interest. The EEI is purely a gather of information -- EIA, I'm sorry.

So I'm -- I know you feel that very sincerely --

MR. PLANK: Let me give you -- may I give an example?

REP. BARTON: Yes, sir.

MR. PLANK: You recognize that storage figures, of course, of natural gas were published this past year, and have been for quite some time, on a Wednesday at 1:30 p.m. Washington DC or New York time. And these storage figures are basically -- and what they gambled on was either storage fill or storage tape draw-down. That also led Enron to being in the weather trading business. So it would be very much to Enron's interests to know whether a gambling point at 1:30 on a Wednesday point, the information which was going to b e released then to the general market would show either a larger than anticipated storage fill or decline in that particular point in time.

Mr. Farius (ph) our president, who happens to be here, and I happened to meet with a gentleman for lunch in his office --

REP. BARTON: We will give the gentleman from Massachusetts additional time, so you're not going --

REP. MARKEY: No, no, no problem. Go ahead, no problem.

MR. PLANK: We met in his office -- or he met in our office, and we asked him, "What's your guess as to the storage fill for the week?" And he said, "I think I know." And he said, "The storage fill will be 74 billion cubic feet this week. And we said, "Where'd the you get the information?" A senior Enron official. And within 10 minutes a man walked into our office and our staff who got the information and made -- released through the public and the storage fill for the week was 74 bcf. The market response is instantaneous. He who can -- either can control that information or gain access to it in advance of the other in a speculative market can move that market, and does, to the major personal benefit thereof. And I chart that's probably a reality.

REP. BARTON: Well, it's -- let's assume that everything you said is absolutely totally factually true. Let's say that.

MR. PLANK: Okay.

REP. BARTON: The fact that you know something is going to be released and you can take a position. Now, you've got prior knowledge, you've got insider knowledge, you may be guilty of a securities violation for trading on it. But how does that manipulate the market? How would that manipulate -- Mr. Markey's question to you is that it manipulates the market.

MR. PLANK: Well, it means that the benefits of insider information are captured.

REP. BARTON: Beg your pardon?

MR. PLANK: It means that the benefits of the insider market are able to be --

REP. BARTON: But that's different.

MR. PLANK: -- insider information are able to be captures.

REP. BARTON: That's different.

MR. PLANK: Well, it isn't --

REP. BARTON: Being able to benefit from insider information may, in fact, be a criminal violation. But I thought Mr. Markey asked you if you thought Enron was manipulating the market --

MR. PLANK: I think they were.

REP. BARTON: -- actually taking the market to a different location than it would be otherwise. That particular story, even if totally true, does not indicate market manipulation.

MR. PLANK: My belief is that those who are supplying storage fill information were in a position to and did act in confidence.

REP. BARTON: I'm also told that AGA no longer does that, that EIA does it, so that information would be instantaneously available to the public, not procured, and perhaps given to certain insiders like it may have been in that instance.

MR. PLANK: I think they're in the field --

REP. BARTON: I don't know when your story occurred.

MR. PLANK: If I may sir, that they're in the field as a regulation. It would be very important that there be teeth behind the information which the storage people provided.

REP. BARTON: I agree with that.

MR. PLANK: At the present time there is not.

REP. BARTON: I don't disagree.

MR. PLANK: So if they have a predisposition either not to answer the storage fill question or to tilt it in terms of where they feel their self interest may lie, I think you have been looking at that in the normal 1:30 Wednesday afternoon reporting.

REP. BARTON: I don't disagree with that.

MR. PLANK: And that doesn't do the consumers any good. I can tell you it doesn't do the producers any good at all in terms of predicting or having a less volatile market out of which to predict our capital flows and therefore to make larger commitments in the United States. We are reducing our capital commitment by 70 percent in North America during the year which means a reduction in just this company of $700 million.

We're not doing it deliberately to bring down the sword of Damocles' around the consumers' head, we're doing it because there is too great a risk in the market at the present time of continued price volatility. Multiply that by the other producers in this industry and we've got a ticking bomb in terms of a re-spike of natural gas prices which you can't deal with quickly enough to bring enough LNG in here to make a difference or which coal can't gear up rapidly enough, which totally leaves, at the mercy of volatility, the amount of capacity that needs to be erected or constructed in terms of cogent facilities or the amount of replacement capital that needs to go under our infrastructure.

And I haven't touched yet, on what's being done to human capital. Slumbershay (ph?) last year hired 80 percent of the graduating engineers in the United States. The average age of an engineer operating in this industry at the present time is 48. That is higher than in any other country in the world. Not only are we about to lose the energy security, to the extent that we have it, but we're also likely to lose some of our technological lead capability because the real abilities now have to be recruited out of the colleges of other parts of the world. We're losing that lead too.

Take it all back to price volatility and then see if we have the opportunity, which I insist that it is, to improve upon the regulatory processes that are available to you in your wisdom and through sifting to the bottom of this and then coming up, not without all regulation but with the next generation of it able, more effectively to address the requirements of an American people with the type of pride they demonstrated in response to 9-11. I'm all through lecturing.

REP. BARTON: Thank you.

MR. PLANK: Unless you give me another 10.

(Laughter.)

REP. BARTON: No, thank you. It's Congressman Markey's time.

REP. MARKEY: No. You are obviously a brilliant man, Mr. Plank and what you just said is very frightening. You're basically saying this volatility that's now being built into the marketplace discourages long-term investment, discourages the kind of drilling that could give us the extra margin of energy security which our country needs.

And that's a frightening, a warning that you've just given to our committee and you're pointing the finger of responsibility back at this now out of control marketplace that is based upon speculation and short term trading.

MR. PLANK: I knew there was a reason I liked you.

(Laughter.)

REP. MARKEY: I'm trying to re-shade it in a way that I could explain it to my mother, you know. I don't think I could repeat what you just said, it was too well thought out and intricate in it's detail.

Well, let me ask you this, Mr. Plank and Mr. McCullough. If you were Enron online and you were trading as principal with hundreds of companies and as a result got non-public information about who was long and who was short in the market, couldn't you use that data to front-run those other companies in the NYMEX and how would the CFTC ever even know that you had done it?

MR. PLANK: Well, if we couldn't, I want to tell you --

REP. MARKEY: Could you pull again the microphone?

MR. PLANK: If we couldn't use that information to our great benefit, again absent in integrity and morality, then you'd have to write another book about when stupidity failed. The current hot book, so far as I'm concerned, or excellent book to be considered in this context is the misnomer itself of the company called Long Term Capital. In that particular instance the title of the book was When Genius Failed, so for someone not to know how to utilize insider information outside the bonds of morality and of legality and of criminality, you'd have to be very stupid indeed.

REP. MARKEY: Let me, again I need you to, because I am really operating here at the indulgence of the chairman right now - what you're saying is that Enron online was in a position to take -

MR. PLANK: Absolutely.

REP. MARKEY: The proprietary information of hundreds of companies and to then use that information because they were essentially creating the marketplace to their own advantage as a player in that marketplace simultaneously, to the disadvantage of hundreds of other companies, and right now you're saying this committee and the American public isn't as, isn't aware of the full extent to which that may have occurred?

REP. BARTON: Will the gentleman yield?

REP. MARKEY: Sure, be glad to.

REP. BARTON: The gist of the gentleman's question -- I share the same concern -- I don't think that we've shown, I don't think the record will show that Enron manipulated the market that it was making. I think the fact that they could take some of this information that they received as a result of creating this market and use it in other markets may in fact be something we need to look at. In fact, if I know who's long and short in the electricity market, that I'm a player in, and I can take that to the NYMEX with advantage, because I have information that nobody else has, then that is an issue that we need to look at.

So I'm with you, on going into other markets, I don't see that the record is showing that they took their position in the online trading market to their own advantage, but I'm still, I'm going to ask some questions after you do, and I'm going to ask Mr. Green and Mr. Owens to comment.

REP. MARKEY: Well, I think what Mr. Plank is saying to us is if he had the subpoena power, which this committee has, there'd be a whole bunch of people he would ask to sit at this table to answer questions and that we would play the role that a whole bunch of companies like his, and whole bunch of investors and consumers out there really aren't in a position to ask and might be afraid to ask because they're not in as protected a position as we are. But I think that we could perhaps get some suggestions from some people as to who we might want to have sit here and answer the questions as to what they were doing with the marketplace.

And in not trying to over extend your courtesy to me, Mr. McCullough I would like you to answer the same question I asked Mr. Plank.

MR. McCULLOUGH: I don't know the answer. I'm going to yield to Mr. Plank because it's a natural gas question.

REP. MARKEY: No, it's the online -- if they were trading electricity, for example, would they have the capacity to use that information to position themselves against the other electricity companies trading online, Mr. McCullough?

MR. McCULLOUGH: I'm sorry I interrupted you. We don't have an active NYMEX electricity market, so moving back and forth for electricity would be different than moving back and forth for gas.

REP. MARKEY: Do you mind if I ask one final question, Mr. Chairman? Thank you.

REP. BARTON: Two minutes.

REP. MARKEY: I've also been told that it was a practice at Enron to quote a price for electricity or gas OTC contract and then come to the customer in a day, or a week, and say, the bid ask has now changed and since some customers did their mark to market based on Enron's quotes, the customer would be taken to its position limit and would have to cash out their position at a loss. Have you ever heard of that practice taking place, either at Enron or elsewhere, Mr. Plank or anyone else?

MR. PLANK: I've heard it referred to, but I have no basis to verify or to comment further. I don't know whether that's accurate or not.

REP. MARKEY: Do you think it's a worthy subject of inquiry? Would that be an important subject of inquiry for the committee -

MR. PLANK: I think it is important subject of inquiry. I think a particularly important subject of inquiry is the fact that when you have a 120 points at which natural gas either be received or sold then you've got 120 equivalents, equivalencies of gambling casinos, all of them unregulated, all of them unreported. The net result is that we, in so far as price volatility, have a 150 pound tail wagging a 10 pound puppy, and this ten pound puppy ain't a going to be able to deliver the gas if the demand increases. That's the essence of my concerns throughout, as an American.

REP. MARKEY: Right.

MR. PLANK: And I want to add just one little thought, if I might, sir, to that

REP. BARTON: Let's do it, because I'm going to ask you - (cross talk)-- two or three minutes now. And I do have some questions. So, --

REP. MARKEY: You know what, Mr. Plank, I'm going to have to let you stop right there. If any of that was happening in the stock market it would be a violation of the Securities Exchange Act, and of --

MR. PLANK: And it should be here.

REP. MARKEY: And it would be.

MR. PLANK: It ought to be a violation of the Corrupt Practices Act in some way.

REP. MARKEY: It would be. And, Mr. Green, I just want to say I apologize for my line of questioning in the beginning. It was only meant to point out that you would be turned into a mutual fund as an opportunity for your company to pursue and not meant in any other way to make any other reference to the good company that you've obviously --

MR. PLANK: Understood.

REP. BARTON: The chairman would recognize himself for some brief questions because we do have one more vote, and we're not going to ask you folks to sit through another vote.

Mr. Plank had a question -- had a recommendation that deals with some of the questions that Mr. Markey was asking. Since Enron could actually take a position in trades, in its on line trading system, in fact did take a position, Mr. Plank's recommendation is that -- I'll just read it. It says, "These on line platforms are exchanges. They should be subject to similar regulations to ensure fair treatment of all parties. The equities market has a basic rule that agents cannot put their trades ahead of their clients' transactions. Similar rules should guide the conduct of the energy markets".

Now, the Enron on line trading system, everybody knew that Enron was half of every trade. They were in a sell position or a buy position. So my first question to you, Mr. Green, and to Mr. Owens: Should we just prohibit that in its entirety and say you couldn't have that kind of a market, that in fact you ought to have a market similar to the New York Stock Exchange or the NYMEX where the market maker is simply a broker, but not a participant.

MR. GREEN: I think the key ingredient there, and obviously I think it's going to be looked into, is there other types of exchanges besides the Enron on line which we would say is a N exchange meeting. It is many trading with one. Some of the more successful electronic exchanges that have developed, like ISB intercontinental exchange, is many on many. So you have full disclosure or transparency. And it's one of the key developments in the industry to bring real transparency. Obviously people that are playing in the market can see what is going on. But even customers, many utilities will --

REP. BARTON: But as a general rule, should we prohibit a market maker like Enron from participating in trading. If they want to have an on line trading system, fine. But you can't buy or sell, you just create the forum for the market. It's intrinsically letting Enron be a buyer or a seller and then doing what Mr. Markey and Mr. Plank said they may have done, which is take that information from the fact that they were buying and selling and take it into other markets. Should we just eliminate that potential conflict of interest by saying, "You cannot take a position in a market if you're going to be the market maker". That's my question.

MR. GREEN: Yes. That certainly could be an outcome because I believe in transparency in the market. And nobody should have a right to more information than others.

REP. BARTON: Mr. Owens, do you have a --

MR. OWENS: Yes. I would respond the same way. I think those were thinly traded markets. It seems to me that the result should be that we should have a deep market and a transparent market. And we would avoid an entity being able to manipulate the market as has been alleged by Mr. Plank.

If in the transition it's important to make sure that an entity that also is trading in the market also can't set the market rules, and tell the markets are deep and more liquid, that may be a compromise.

REP. BARTON: Okay. Good. Now, Mr. Plank, you've been in the energy business for -- at least Apache as a company, for 49 years. So I would assume that you've been with Apache for 49 years. Is that correct?

MR. PLANK: I started it, so I'd better be.

REP. BARTON: Okay. Now, I've never had to put money into an oil well or a gas well. I've just been an observer. So I've never had to put my money where my mouth is, so to speak. But is the gas market -- once upon a time, Texas gas prices intrastate were unregulated. Gas prices interstate were regulated by the gas policy, the Natural Gas Act, I think, of 1935. And pipelines bought the gas from the producer on long term contracts. And some pipelines made bad deals. And they agreed in the '30s and the '40s to supply gas to the north-east for five cents of NCF for 10 cents or one cent.

And Texaco had a famous contract. It was like 3 cents in NCF for, I guess, forever. It had a very structured market. Everybody knew what the price was. But the producers kind of chafed under that, and they came to guys like me when we were getting ready to run for Congress, and said "You ought to decontrol natural gas prices".

Now, my guess is you probably wrote me a check or two way back then, saying, "If you get elected, I want you to help decontrol natural gas prices in the interstate market". Maybe you didn't. But if we wanted to totally take the traders out of the market, like you recommended in your testimony you almost, de facto, go back to a regulated situation where you have these long term contracts, and you've got stability but you don't allow for changes in economic conditions.

Are you advocating that we go back to the system we had where we all had prices that were regulated, and pipelines brought the gas, and they sold it to distributors who then sold it to retailers? Are you advocating that? Are you simply saying, as these markets emerge we need to get more transparency, we need more reporting, we need to make sure that people cannot (a) create inside information, and then take advantage of it.

Exactly what are you trying to tell this committee?

I know you feel very strongly that the fluctuation, if it's not supply and demand, if it's artificially created because of some trader position, that that's not right, and I agree with that. But what are you really trying to tell us in the broad?

MR. PLANK: Mr. Chairman, I would like to think that if some of the potential securities violations here, and other violations were acted to be eliminated, and with other accounting considerations having been effectively dealt with, that it might be adequate to clean up the fringes.

Also I, of course, am thrilled that Enron is out of the ball game. I'm one of those people who saw it coming. And like some people who testified here today, it took longer than I thought it would. It could be, particularly if -- not necessarily you, but the appropriate courts find that criminal acts have been performed and that the bad apples go to the hoosegow --

REP. BARTON: We've got an oversight subcommittee that's doing the most aggressive investigation of any of the congressional committees just down that line. And I'm strongly supportive of that.

MR. PLANK: Then I would be delighted to see one hang on to as much freedom as possible, but still balanced with appropriate regulation based on what we found didn't work so that we could try to improve it a little more this time around.

REP. BARTON: But you're not advocating reregulation of well head natural gas prices?

MR. PLANK: I'd just as soon not have reregulated natural gas prices. Although, on the other hand, if it were -- if you can't get stability back into the price market, I would hope that later on down the road you'd give some consideration to price band opportunities in which you traded a minimum price for a maximum price, and allowed the volatility to take place between two base points.

REP. BARTON: Well, my position is that I believe a market, if properly structured, with transparency and ease of entry and -- egress and ingress, is a better system than a regulated system. But you've got to have a fair system. And if the old system that Enron was -- I think they had, like, 90 percent of the trades, or some huge number. If that gave them an insider position that could be used for manipulative purposes, that's wrong.

And we need -- if we need to change the legislative statute to deal with that, we're going to do it. And we've got a bill that's coming, hopefully, in the next month or so that we can do it. If, on the other hand, we just need to fine tune the system and then throw the book at people that abused it in the past, that's a whole different thing.

So, I don't think we can go back to a regulated electricity market like we had prior to 1992. I don't think we can go back to a regulated energy market like we had in the Natural Gas Policy Act of 1978. I don't think we can go back to regulated oil prices like we had in the windfall profits tax that came in in the mid-70s. I think we almost have to stay with the market system, but perfect it, reform it -- whatever the verb you want to use -- so that stockholders, the stake holders, the investors, the consumers know that it is a fair system and nobody has insider ability to affect it in an unfair way. That is just my position but that's the position of the majority of the Congress may hold, once we get through all these hearings. Mr. Norlander, do you want to say something? I'm going to go vote and adjourn this hearing.

MR. NORLANDER: I think that there is an alignment that enters that the consumer and the producer for some system that puts some stability out there for the good of the country and for -- we have to have a playing field and decide what we want here. Do we want to -- do we really want to have power plants allocated, based on the market? New York City, they're not doing it now. So to get the next power plant, do we have to bid for it with the highest rates in the world? And I think the answer is yes, unless we have a system in place that looks at it.

The other piece is that this committee is a wholesale power committee mainly and we are now seeing that directly impact consumers. And originally, when this was started, the idea was everyone will be at least as well off, or will be better off and if we hold in place the network of programs for the poor and everything else and let the states work out these things. Prices are coming down. We'll all be better off. That is not the message that people are receiving in the real world today in New York City. And it's not what they received in Buffalo with natural gas. That the price volatility is in power for ordinary consumers living on fixed incomes.

REP. BARTON: Well, thank you. I'm going to release you folks. I want to thank you for being patient and being here all day basically. Thank you for your testimony. We'll file a report on this and digest this and if you have potential amendments to the pending Electricity Restructuring Bill, we'd ask you to get them to us because some of these issues, we can put in the bill when we mark it up, which I hope will still be in the very near future. We thank you for your testimony and this hearing is adjourned.

END

LOAD-DATE: February 16, 2002