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FERC
and Wall Street
Conversations
May Have Violated Federal Law
by
Jason Leopold
April
9, 2003
Two
weeks ago, after the Federal Energy Regulatory Commission issued a staff report
to Congress that said California's electricity and natural gas markets were the
victim of widespread manipulation by more than a dozen energy companies, the
chairman of FERC and one of the agency's commissioners took the unusual step of
holding a private conference call with Wall Street analysts to calm jittery
investors who feared the report would send energy company stocks plummeting.
One
of the items that came up for discussion during the conference call was whether
FERC would decide if California's $20 billion in long-term electricity
contracts should be abrogated because, according to California state officials,
the deals were signed during the height of the energy crisis when manipulation
in the state was rampant.
FERC
Commissioner Nora Brownell indicated during the public meeting hours earlier
that she would likely not support California's argument that the contracts be
voided because it would scare away investors or discourage companies from
signing similar deals in the future.
"Investors
simply will not participate in a market in which disgruntled buyers are allowed
to break their contracts, at least not without charging a significant risk
premium ... a cost that is ultimately borne by customers," Brownell said
during the public meeting last week.
Still,
Brownell and FERC Chairman Pat Wood said the thorny issue of what to do about
the long-term contracts was still being discussed by the commission privately
and that the commission would make a final decision over the next few weeks.
But,
in what appears to be a violation of FERC's own federal rules, Brownell told
the Wall Street analysts on the conference call after the meeting exactly how
she and Wood would vote on the issue when it comes up for a vote at a FERC
meeting in mid-April.
On
Monday, Southern California Water Company and Public Utility District No. 1 of
Snohomish County, Washington, filed complaints with FERC seeking to have the
conversation Brownell and Wood had with analysts placed on the public record.
California's
electricity crisis wreaked havoc on consumers in the state between 2000 and
2001, resulted in four days of rolling blackouts, and forced the state's
largest utility, Pacific Gas & Electric, into bankruptcy. California was
the first state in the nation to deregulate its power market in an effort to
provide consumers with cheaper electricity and the opportunity to choose their
own power provider. The results have since proved disastrous. The experiment
has cost the state more than $30 billion.
Furthermore,
for nearly two years, the fate of the long-term electricity contracts-signed by
the state to prevent future blackouts-hung in limbo while California officials
argued before the commission that the deals were too expensive once it became
clear that energy companies were manipulating the marketplace. Energy companies
who signed contracts with the state stand to lose billions of dollars and may
skid closer toward insolvency if the deals are canceled, analysts said.
According
to analysts from Schwab Capital Markets, Lehman Bros., Prudential and Morgan
Stanley, Brownell said she and Wood would vote to uphold the contracts while
the three-member commission's only Democrat would vote to abrogate the deals.
One
analyst, who requested anonymity for fear of being subpoenaed in the event that
Brownell did violate FERC's ex-parte communication rules, said Brownell said
"point-blank" that she wanted the analysts to convey the message to
investors that the long-term electricity contracts would not be abrogated.
"She
told us how she and Wood were going to vote on the contracts and that Wall
Street should know," the New York-based analyst said. "There's been a
lot of uncertainty surrounding these contracts and the stocks of these
companies have been performing poorly because of it. But now that we know for
sure how the commission is going to vote on the contracts the stocks are
performing a little better."
Dow
Jones Newswires columnist Mark Golden quoted one unnamed analyst last week as
saying that during the conference call, Brownell and Wood put on two faces, one
for the public and one for Wall Street. Because FERC has come under fire for
failing to take action sooner in California, the agency wants to present a
tough public image so that states and the U.S. Congress will support its push
for advancing electricity deregulation. On the other hand, FERC doesn't want to
scare away more investment from the electricity industry, which is still in
desperate need of new electric transmission lines and will need more power
plants soon in some regions of the country.
"It
was the typical thing they've been doing - trying to please Wall Street at the
same time they are trying to please California, and they end up not pleasing
anybody," that unnamed analyst quoted by Dow Jones Newswires said.
According
to FERC's federal rules, "no member of the body comprising the agency,
administrative law judge, or other employee who is or may reasonably be
expected to be involved in the decisional process of the proceeding, shall make
or knowingly cause to be made to any interested person outside the agency an
ex-parte communication relevant to the merits of the proceeding. A member of
the body comprising the agency, administrative law judge, or other employee who
is or may reasonably be expected to be involved in the decisional process of
such proceeding who receives, or who makes or knowingly causes to be made, a
communication prohibited by this subsection shall place on the public record of
the proceeding."
A
transcript of the conference call was unavailable because the call was never
recorded, according to Bryan Lee, a FERC spokesman. That too may be a violation
of the agency's federal rules, if in fact Brownell discussed pending items
before the commission. FERC's rules say that such conversations must be placed
in the public record after it takes place.
Lee
said despite what Wood and Brownell said during the conference call, which he
would not disclose, the commissioners did not violate FERC's ex-parte
communication rules last week.
"The
conversation that commissioners had last Wednesday with Wall Street analysts
was a proper conversation and no ex-parte rules were violated whatsoever,"
Lee said, refusing to answer further questions. "That's all I am at
liberty to say for the record."
California
officials were never asked to participate in the conference call nor were they
informed that it was taking place, said Steve Maviglio, press secretary for
Gov. Gray Davis.
Maviglio
said he the phone call with analysts proves what Davis has been saying all
along: that FERC is pandering to the interests of Wall Street and failing to
uphold its duty to protect consumers.
"This
is dismaying," Maviglio said of Brownell and Wood's off-the-record
conversation with Wall Street. "FERC apparently makes public
pronouncements that it claims are major and then privately tells the industry
to expect less aggressiveness."
Doug
Heller, co-director of the consumer advocacy group Foundation for Taxpayer and
Consumer Rights, said the conference call between FERC and Wall Street
analyst's amounts to insider trading.
"I
would have expected FERC to screw us anyway," Heller said. "But it is
absolutely beyond my expectation that they would be out there advancing
analysts to comfort the market. This is the equivalent of insider trading where
those who are going to make decisions are funneling information to people with
financial interest."
Spokespeople
for Congressman Henry Waxman, D-California, and Sen. Barbara Boxer,
D-California, two outspoken lawmakers on California's energy crisis said they
would look into the issue.
This
is not the first time FERC has gone out of its way to protect the interests of
the energy industry.
In
March 2001, while Vice President Dick Cheney and members of his energy task
force were drafting President Bush's energy policy and while Gov. Davis was
accusing energy companies of withholding electricity supplies from the state,
Tulsa, Okla., based-Williams Companies entered into a confidential settlement
with FERC agreeing to refund California $8 million in profits it reaped by deliberately
shutting down one of its power plants in the state in the spring of 2000 to
drive up the wholesale price of electricity in California.
The
evidence, a transcript of a tape-recorded telephone conversation between an
employee at Williams and an employee at a Southern California power plant
operated by Williams, shows how the two conspired to jack up power prices and
create an artificial electricity shortage by keeping the power plant out of
service for two weeks.
Details
of the settlement had been under seal by FERC for more than a year and were
released in November after the Wall Street Journal sued the commission to
obtain the full copy of its report.
Jason Leopold is a freelance
journalist based in California, he is currently finishing a book on the
California energy crisis. He can be contacted at jasonleopold@hotmail.com.