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April
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April 8,
2003
FERC and Wall Street
Conversations May Have Violated Federal
Law
By JASON LEOPOLD
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
can be reached at: jasonleopold@hotmail.com
Yesterday's
Features
Anthony
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