GAO Investigation

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"Daniel Douglass" <Douglass@ArterHadden.com<
03/07/2001 11:27 AM

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Subject: GAO Investigation

On Monday, 2 March 200, U.S. Representatives Jay Inslee and Peter Defazio
(OR-04) requested that the investigative arm of Congress research whether
energy producers have been "gaming the market" and unfairly jacking up energy
prices in the Western United States. "My constituents have seen huge
increases in their energy prices, and I have seen some reports suggesting
that energy producers have deliberately withheld energy from the market in
order to drive prices even higher. I am requesting that the GAO investigate
this possible market manipulation, and determine whether these reports are
accurate," said Inslee.

Following is text of the Congressmen's letter to the General Accounting
Office:

March 5, 2001

David Walker
Comptroller General of the United States
General Accounting Office
441 G Street NW
Washington, DC 20548

Dear Mr. Walker:

We are writing to request that the General Accounting Office (GAO)
investigate whether power shortages and the subsequent skyrocketing energy
prices in California, which has had serious ripple effects throughout the
Western United States, was due to market manipulation by energy producers.
We are concerned about allegations that energy producers have been
manipulating the market by pulling generators offline for no justifiable
reason, thus creating an artificial scarcity of energy in order to drive up
prices.

The apparent energy shortages in the Western United States will undoubtedly
raise issues as to whether we as a nation change our policies toward
developing our energy resources and whether we change the manner in which we
currently operate Federal hydroelectric facilities. For example, many
elected officials have used the energy crisis as an argument to drill for oil
in the Arctic National Wildlife Refuge, and to open for oil and gas
exploration millions of recently protected National Forest lands. To answer
these important policy questions which will be considered in the House
Committee on Resource, a committee on which we both sit, we believe that we
must have an accurate understanding of the causes of the current energy
crisis.

We recognize there are many contributing factors to the current energy
crisis, including high natural gas prices, a lack of generation and
transmission capacity, and California's failed effort to deregulate its
energy market.

While the economics of supply and demand lead to the conclusion that the
scarcity of generation in California has contributed to the high energy
prices, it is not clear why there is such a scarcity. Many analysts point to
such variables as inadequate water supplies and the need for increased
maintenance as the cause for so much generation unexpectedly being taken
offline in California. According to information we have seen, however, these
factors do not come close to fully explaining the scarcity of energy supplies
in California.

For example, it is our understanding that in an absolute low water year,
California has more than 45,000 mW of generating capacity available.
According to the Western Systems Coordinating Council (WSCC), the entity to
which all power generators in the West are required to report their power
availability, California has been importing more than 2,000 mW of power,
while recent peak demand in California on those same days has hovered around
only 30,000 mW. While almost 10,000 mW of this 17,000 mW difference is duly
accounted for as being offline either through planned or unplanned
maintenance, there is apparently about 4,000 to 8,000 mW of potential
generation in California which is not online for reasons that remain
unexplained.

Meanwhile, prices for wholesale electricity have been going through the roof,
with some generators and marketers of energy in California earning record
high profits. These energy companies have insisted they are operating their
generators at maximum capacity and are not manipulating the market by pulling
generation offline. We have read evidence to the contrary. For your
reference, we have enclosed a report by the private consulting company
McCullough Research Group, and a research paper by Massachusetts Institute of
Technology economics professor, Mr. Paul Joskow.

The Federal Energy Regulatory Commission (FERC), the federal agency
responsible for ensuring that energy costs are "just and reasonable," has
studied the energy crisis in the West. As you may know, while FERC concluded
that energy prices in California are not "just and reasonable," based on a
preliminary inquiry, they determined there is insufficient evidence of market
manipulation as a contributing factor to the high prices.

Given independent reports that are at odds with FERC's conclusions, we are
concerned FERC has not done an adequate job in its investigation of possible
market manipulation. Therefore, we request that you:

Compare the methodology used by FERC with that of Professor Joskow.

Determine whether or not the FERC methodology and investigation were thorough
enough to determine whether generating capacity has been withheld without
legitimate reason.

Analyze whether California's deregulation of its electric utility market
created a regulatory environment in which a small number of energy generators
or marketers are more easily able to manipulate power prices by withholding
generation.

Thank you for investigating this matter. Due to the time critical nature of
this issue, it is our hope that your office can make this investigation a
high priority.

Sincerely,

JAY INSLEE
Member of Congress

PETER DEFAZIO
Member of Congress