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 firstname.lastname@example.org.