Daily Breeze

Mar 13, 2002

Regulatory exemptions aided Enron

Copley News Service

WASHINGTON -- As Enron Corp. rose to become one of the nation's pre-eminent energy traders, it was helped along at key junctures by exemptions to federal regulations granted by oversight agencies and Congress.

Consumer groups and energy experts say the exemptions for the one-time political heavyweight have made it difficult to gauge Enron's influence on energy prices in California during the state's power crisis.

The exemptions also allowed Enron to obscure the financial dealings that led to its collapse, critics allege.

"They were able to create an entire trading facility and mechanism outside of any knowledge of what was going on, and they used it in a way that was highly speculative and maybe worse than speculative. They may have been
manipulating markets," said I. Michael Greenberger, former director of the division of trading and markets at the Commodity Futures Trading Commission.

Enron has repeatedly denied that it manipulated markets.

Sen. Dianne Feinstein, D-Calif., and other lawmakers are trying to tighten some regulations on energy trading. But a broader Senate energy bill would repeal a Depression-era utility law that consumer activists insist is necessary to prevent repeats of the Enron debacle.

"While the politicians are publicly flogging Enron, they're quietly
moving to further Enron's agenda," said Doug Heller of the Santa Monica-based Foundation for Taxpayer and Consumer Rights.

Supporters of the repeal say the law is outdated and would be replaced by new oversight measures contained in the bill.

In the wake of Enron's stunning collapse, Congress and federal agencies have focused most of their attention on questionable accounting and business practices that the company used to conceal huge losses.

But the Federal Energy Regulatory Commission recently launched an investigation into possible manipulation of power markets by Enron, after one energy consultant pointed out that long-term wholesale power prices on the West Coast tumbled by 30 percent the day after the company declared bankruptcy in December.

Gov. Gray Davis has asked the regulatory commission to chop $21 billion off the cost of long-term contracts the state negotiated with power sellers at the height of the electricity crisis, alleging manipulation of the market.

The state is also seeking $9 billion in other refunds for allegedly
overpriced power.

Enron controlled at least a quarter of all wholesale energy trades in the United States before its collapse, according to some estimates. But those trades were largely unregulated and the company was allowed to keep information about prices and volume secret.

That's because it successfully lobbied to keep federal regulators at bay.

In 1993, the Securities and Exchange Commission exempted Enron's wholesale  power-selling arm from the Public Utility Holding Company Act.

The law, dating to 1935, gives the agency oversight of utility company operations and is meant to prevent risky business ventures and monopolistic practices.

Enron won other key rulings in 1993 from the Commodity Futures Trading Commission. The commission exempted energy derivative contracts -- which are used to set long-term prices for electricity, natural gas and other commodities and were a core Enron business -- from federal oversight.

Joined Enron board

Then-commission Chairwoman Wendy L. Gramm launched the proceeding that led to the exemption for Enron and other energy companies. Shortly after resigning from the commission in 1993, she joined Enron's board of directors.

In late 2000, Congress quietly broadened the exemption, extending it to electronic energy-trading markets, such as EnronOnline, and made it law.

The language was included in legislation co-sponsored by Sen. Phil Gramm, R-Texas, Wendy Gramm's husband and the second-biggest congressional recipient of Enron campaign contributions.

Phil Gramm has said that he had no hand in the provision. Wendy Gramm has denied any connection between the commodity commission action and her appointment to Enron's board.

In any case, the commodity commission ruling and the subsequent legislation kept many of Enron's energy dealings from review by federal regulators and from price and volume disclosures that must be made by other commodity
exchanges, said Greenberger, the former commodity commission official. He is now a professor at the University of Maryland law school.

"They were just free to do whatever they wanted to do in the market," he contended.

California crisis

Consumer groups have been even more pointed in their criticism of the exemptions, drawing a direct line between them and California's power crisis.

"The combination of California's 1996 (electricity deregulation) law . . . and the federal law in 2000 . . . allowed the company to command significant market share in the Western market, enabling Enron to manipulate wholesale electricity prices to a far higher degree than when the company had to trade electricity in a regulated commodities exchange,"
the consumer group Public Citizen charged in a December report.

Enron spokesmen did not return phone calls requesting interviews.

Feinstein is trying to attach language that would give the commodity commission oversight of derivative transactions and on-line trading to a larger energy bill now being debated in the Senate.

"The Enron bankruptcy has uncovered many gaping holes in our regulatory structure," she said.

But commodity commission Chairman James Newsome told lawmakers last month that they should not be in a hurry to enact new regulations.

"I believe that we, as regulators, should make sure that the true
problem has been identified before remedies are pursued," he said at a House energy subcommittee hearing.

Power marketers are lobbying against Feinstein's provision.

Mixed feelings

Sen. Frank Murkowski, R-Alaska, said Feinstein's proposal "could
potentially disrupt both the electrical and natural gas markets" and should be subject to hearings. Similar concerns were raised by Treasury Secretary Paul O'Neill and Federal Reserve Charman Alan Greenspan in a letter to the Senate.

Consumer groups applaud Feinstein's move. But they criticize the overall Senate bill for proposing the outright repeal of the Public Utility Holding Company Act.

"It sort of Enronizes energy oversight at the federal level," said
Heller of the Foundation for Taxpayer and Consumer Rights.

The law has long been criticized by utilities and federal officials as being outdated. The Senate bill contains new oversight and disclosure requirements, though consumer advocates consider them weak.

"Right now, the energy trading business is pretty darn secretive. We recognize that and we have provisions that will bring about much more transparency in the energy trading business," said Bill Wicker, a spokesman for the Senate Energy and Natural Resources Committee.

Some energy experts say the exemption from the act granted to Enron was much less important than its exemption from the commodity regulations.

"The act has not had any significance for decades. Nobody takes it very seriously," said Richard J. Pierce Jr., a regulatory expert at the George Washington University law school.