Today's Senate Hearing

The Senate Governmental Affairs Committee held an unusually long hearing
today (9:30 am to 4:30 pm) on FERC's responses to the California situation
and other related energy issues. The "star witness" was Gov. Davis. Others
were Govs. Martz of Montana and Hoeven of North Dakota against price caps,
Sens. Murkowski, Murray and Cantwell, Washington State's attorney general,
Oregon's PUC chairman, and the five FERC commissioners. Once Davis left
after several hours of testimony and two rounds of questions, most of the
press and audience left.

Enron was mentioned several times as follows:

1. Sen. Thompson, the Ranking Republican, mentioned Lockyer's "Spike"
comments in the context of asking Gov. Davis about why business would make
new investments in the state when on top of the regulatory uncertainty, there
is the broader political hostility expressed in this way by state officials.
Davis had two chances to disavow Lockyer and did not. (Thompson gave him a
second chance when he basically repeated the question and made specific
reference again to "Spike," asking Davis if FERC acted this week because of
the AG's Spike comments.) The first time Davis said that the people he
represents are mad, they want him to fight back, this is rough business, the
industry people are used to a wildcatter's environment, things occassionally
get out of hand, and we are not going to take it. On the second instance, he
said that the state was building new power plants and investment was not
being diminished.

2. Sen. Bennett (R-UT) did an excellent job questioning Gov. Davis about his
handling of the situation, using quotes from California newspapers to make
the case that Davis was slow to act. He also argued that the state had done
a bad job as a power purchaser, contrasting the state's recent 8-year
contract with Constellation for power at $150 peak and $59 off-peak with
Enron's willingness last year to sell them power for five years at $50. The
Republicans also pressed Davis on why he attacks out-of-state generators but
is not nearly as vocal about California munis who charged even more. Davis
said they should make refunds, too.

3. While not saying Enron by name, Gov. Davis did make a comment about
companies with "trading floors that compete with the New York Stock Exchange
with meteorologists and very talented people" who might have the ability to
find loopholes in the new order. He said this in answer to a question about
what FERC needed to do now that the new order was issued, and he said "watch
out for manipulation" by those subject to the order.

4. Sen. Thompson pressed Washington State AG Gregoire about why she appeared
to be investigating out-of-state suppliers even though they had a small
percentage of the market in her state, with lots of document requests and
other investigative action, while not doing the same to others. During that
exchange either Thompson or the AG (I think it was the AG) said Enron had
over $1 billion in sales to Washington State. Enron was not on the list of
companies Thompson or the AG said were subject to her information demands.
She said she would be expanding her inquiry, though.

Highlights and Analysis

1. As started at yesterday's Senate Energy hearing, the mantra from the
Western Democrats was: we want our money back. Chairman Lieberman and others
pressed FERC about how California could get refunds and the same in other
Western states, particularly Oregon and Washington. Chairman Hebert said
that the settlement conference process would allow all parties to raise all
issues, including refunds in California and outside California. He said that
the conference could include issues that the commission could not act on
itself, including refunds not otherwise allowed under the Federal Power Act.
Chairman Lieberman vowed to keep the committee active in overseeing FERC's
activities in implementing the new order, particularly as it relates to
refunds. While he acknowledged that new legislation could not apply to
pending cases, he seemed inclined to pursue legislation to repeal the 60 day
delay in the Federal Power Act relating to refunds.

2. Commissioner Wood spoke of the need to increase the penalities and
enforcement tools available to the commission, including the ability to order
short suspensions of authority for regulated entities to transact business,
treble damages, and other administrative penalties. There was also
discussion among the committee and commissioners about beefing up FERC's
market monitoring capabilities so that it acted more like the SEC, FCC and
FTC than it has in the past.

3. The Democrats on the committee and among the witnesses said that FERC's
latest order is a step in the right direction. None of them called for
legislative action on price caps as proposed by Sens. Feinstein and Smith.
Sen. Murkowski had done a good job of taking the wind out of the legislated
price cap sails by saying at the start of the hearing when he testified that
the bill's sponsors had pulled back from swift action when they spoke at
yesterday's hearing. Davis did say the still thinks that cost-based rates
are better, but he said the new order is "some price relief" and that it
corrected the mistakes in the April order.

4. There was some discussion of natural gas again. Davis said that FERC
should now turn its attention to natural gas. He said that El Paso
controlled too much of the capacity until recently. He called on FERC to
enforce laws against price manipulation. (Note: we have had several back
channel reports that the Lieberman committee intends to look into the El Paso
and Williams cases now at FERC about alleged affiliate issues.)

5. There was some discussion of the termination of the new FERC order.
Lieberman pressed several witnesses about whether Sept. 2002 is too soon.
Davis said it was and that they needed at least until the end of 2002 if not
more time and that order should apply until California has enough new
generation in place. Hebert did not back down when pressed by Lieberman
later in the hearing, saying there needs to be a deadline to get action on
new supplies, however he and the others basically said they would revisit the
issue if events warrant.

6. Several times, Sen. Lieberman and others said they generally support
deregulation, but that the effort to get more states to do so will never
happen if the price situation is not brought under control and public
confidence restored.

7. Gov. Davis did throw a few kind words toward Pres. Bush and Pat Wood,
saying that each was open to doing more about the high cost of natural gas to
California, including the possible reimposition of rate regulation of
transportation to California. He said he liked Pat Wood and he noted that
FERC did not take serious price mitigation action until the two new Bush
appointees were on the commission.

8. Lieberman asked the Washington State AG whether the Justice Dept. or the
FTC were doing anything to address high energy prices. She said not to her
knowledge even though she has asked them to do so. We can expect a
Lieberman, et al request for Justice and FTC involvement going forward, I
suspect.

9. While Chairman Lieberman's tone and closing comments were in the nature
of his normal thoughtful tone, it is clear that he and others see this as a
major issue for them to ride. He commended FERC at the end of the hearing
for doing their best, but pledged he would stay involved, closing the session
with a smile and the words "see you soon."