FEDERAL ENERGY REGULATORY COMMISSION
` - - - - - - - - - - - - - - - - - - -x
` IN THE MATTER OF: : Docket No.
` ENRON POWER MARKETING, INC. : EL03-180-000
` AND ENRON ENERGY SERVICES, INC. :
` AQUILA, INC. : EL03-181-000
` CITY OF GLENDALE, CALIFORNIA : EL03-182-000
` CITY OF REDDING, CALIFORNIA : EL03-183-000
` COLORADO RIVER COMMISSION : EL03-184-000
` CONSTELLATION POWER SOURCE, INC. : EL03-185-000
` CORAL POWER, LLC : EL03-186-000
` EL PASO MERCHANT ENERGY, L.P. : EL03-187-000
` EUGENE WATER AND ELECTRICITY BOARD : EL03-188-000
` IDAHO POWER COMPANY : EL03-189-000
` KOCH ENERGY TRADING, INC. : EL03-190-000
` LAS VEGAS COGENERATION, L.P. : EL03-191-000
` MIECO : EL03-192-000
` MODESTO IRRIGATION DISTRICT : EL03-193-000
` MONTANA POWER COMPANY : EL03-194-000
` MORGAN STANLEY CAPITAL GROUP : EL03-195-000
` NORTHERN CALIFORNIA POWER AGENCY : EL03-196-000
` PACIFICORP : EL03-197-000
` PECO : EL03-198-000
` POWEREX CORPORATION : EL03-199-000
` (f/k/a British Columbia Power :
` Exchange Corporation) :
` PUBLIC SERVICE COMPANY OF NEW MEXICO : EL03-200-000
` SEMPRA ENERGY TRADING CORPORATION : EL03-201-000
` TRANSALTA ENERGY MARKETING(U.S.) INC.: EL03-202-000
` AND TRANSALTA ENERGY MARKETING :
` (CALIFORNIA), INC. :
` VALLEY ELECTRIC ASSOCIATION, INC. : EL03-203-000
` - - - - - - - - - - - - - - - - - - -x(Consolidated)
` Hearing Room 5
` Federal Energy Regulatory
` Commission
` 888 First Street, NE
` Washington, D.C.
` Monday, February 26, 2007
` The above-entitled matter came on for hearing, pursuant
` to notice, at 9:38 a.m.
` BEFORE:
` HONORABLE CARMEN A. CINTRON
` ADMINISTRATIVE LAW JUDGE
` APPEARANCES: (AS HERETOFORE NOTED.)
`
` P R O C E E D I N G S
` PRESIDING JUDGE: Let's proceed.
` MR. COCKRELL: I have one procedural matter,
` sort of a housekeeping question.
` PRESIDING JUDGE: Okay.
` MR. COCKRELL: We filed Mr. Barlow's testimony
` S-76 and S-77 before your ruling regarding the traders. We
` filed a corrected version this past month. He will be the
` last witness in the case. In preparing, we found five
` pages on Exhibit S-77, there is the mention of the names of
` energy traders. If I could approach, could I show you
`
`

`

` that?
` PRESIDING JUDGE: Yes.
` MR. COCKRELL: It's pages 12, 17, 19, 22,
` and 23. If you would, before he testifies, give us your
` advice on how we should handle it. We can put it in
` without the names on it, we can cross them out, or we can
` just do it as is. No personal information about the
` traders appears to be in there.
` PRESIDING JUDGE: It does have a number of -- a
` significant number of names. Can you just white out those
` names?
` MR. COCKRELL: I think we can do that. I'll
` have them do that.
` PRESIDING JUDGE: All right. Very good.
`
` Whereupon,
` ROBERT MC CULLOUGH
` resumed the stand and, having been previously duly sworn,
` was examined and testified further as follows:
` THE WITNESS: Your Honor, could I make a very
` short request? In reviewing my testimony in response to
` your question on Friday, I wanted to make a very short
` amplification.
` PRESIDING JUDGE: Okay. Hang on. We'll get
` started on that.
` Any other housekeeping matters? No? Okay.
` Mr. Moore, you were on.
` Can you do that, Mr. Cockrell?
` MR. COCKRELL: Yes. We'll do it before
` Mr. Barlow testifies.
` PRESIDING JUDGE: Proceed.
` THE WITNESS: It's very short, your Honor.
` Thank you very much.
` In reviewing the record on Friday, I noticed I
` used the word "penalty" in a colloquial way, and it
` occurred to me "penalty" is a term of art in the bankruptcy
` case. What I meant to say, when I used "penalty," was
` simply that the Federal Energy Regulatory Commission should
` remove the market-based rate privilege and return them to
` the previous state, that there was no fine involved.
`
` Thank you very much, your Honor.
` PRESIDING JUDGE: And the 1.6 billion, where did
` you get that figure from, sir?
` THE WITNESS: That's simply the total of profits
` from various sources from the daily position reports.
` PRESIDING JUDGE: You have the floor, Mr. Moore.
` MR. MOORE: We'll get to both, Judge. We'll get
` to where the 1.6 billion came from, and we'll get back to
` penalty, too, before we done here.
` PRESIDING JUDGE: All right.
` CROSS-EXAMINATION (Continued)
` BY MR. MOORE:
` Q Let's start out and see if we can be more
` agreeable this morning on Monday than we were on Friday
` afternoon and start with an easy one, I hope. And that is,
` that as a fundamental -- as one of the fundamental
` regulatory principles at this agency, you will agree with
`
`

`

` me that the starting point for determination of
` just-and-reasonable rates is, in fact, cost; correct?
` A Well, we couldn't quite agree on that on Friday,
` and it still has a problem here. Obviously, that's a
` component, that's a perfectly reasonable component, but
` equally obviously, I sat through EL00-95 where the
` Commission has adopted a marginal cost approach, which is
` different than the traditional embedded cost approach. So
`
` I aim to keep that in mind in my answer.
` Q And there's different ways and different
` methodologies to determine just-and-reasonable rates using
` cost as a starting point, but cost is always a starting
` point; right?
` A Let me agree halfway. Cost is always a
` component. The reason I'm pausing is because it's my
` understanding that the EL00-95 solution was an analog to
` what a market price would have been, and it was their way
` of getting it.
` Q Even in the MMCP, you start with some costs of
` representative generators that participated in that
` particular market; right?
` A You start with a natural gas price series
` derived from the basins, and then you make adjustments for
` specific resources selected by the ISO.
` Q Right. But you start with costs?
` A Accepted.
` Q Okay. And then maybe you'll go even a little
` bit further with me, then, that one of the standard
` regulatory tools used at this agency in determining the
` just-and-reasonable rates, using costs as a starting point,
` is a cost and revenue study; correct?
` A That's a more difficult path to follow you on.
` If, by cost and revenue study, a phrase you've used for
`
` many years in this case and which I interpret each time as
` a cost-of-service analysis and the traditional regulatory
` format, that really was not the direction we received from
` the Commission in either the first order or the follow-up
` orders. They did not say -- and they could have -- please
` analyze Enron as if it were a traditional utility. They
` said "return the profits", and that gives a slightly
` different answer.
` So I can't agree with you that we've been in any
` sense directed in this proceeding to conduct a
` cost-of-service analysis, nor, frankly, do we have the
` data. I can remember on at least one occasion, we asked
` you -- pardon me. Normally identifying the lawyer with
` their client is not an issue; in this case it is an issue.
` We asked your client for cost-of-service information, and
` they responded that they only had what they provided to
` FERC, which, of course, meant that it was not available.
` PRESIDING JUDGE: In which case was that? In
` this one or in the preceding one?
` THE WITNESS: That data request was in this
` case.
` PRESIDING JUDGE: In this case? I'm sorry,
` Mr. McCullough, I have to disagree with you. What the
`
`

`

` Commission said was "disgorge."
` THE WITNESS: Yes, ma'am.
`
` BY MR. MOORE:
` Q You would also agree with me, Mr. McCullough,
` that you have not done a cost and revenue study, as you have
`
` just described it, for Enron's West Coast operations;
` correct?
` A I have not done a cost-of-service analysis, but
` I have, in fact, reviewed the net profits that are
`identified
` by Enron.
` Q We're going to get to the net profits, and I
` want to examine you carefully about that.
` A Yes, sir.
` Q I'm not leaving that out, and I'm not intending
` by my questions to suggest that you didn't calculate
` profits. But I just want to state for the record, you did
` no cost and revenue study on Enron's West Coast operation;
` correct?
` A Correct. And as I've responded, there simply is
` not the data to do a traditional regulatory analysis. I
` believe your experts have said something similar, and
` certainly, we received that information directly from
` Enron.
` Q Okay. And other than what's in your testimony
` in the three pieces you filed, SNO-58, SNO-710, SNO-822,
` other than what's in there, you've done no study or
` analysis of what the just-and-reasonable level of rates in
`
` California or the Pacific Northwest would be or should have
` been; correct?
` A No. As you know, I have done such studies. I
` would simply state that they were not presented in this
` proceeding because they were not an issue in this
` proceeding.
` Q Okay. I want to be precise with you. You have
` not, in your testimony in this proceeding, in SNO-58,
` SNO-710, or SNO-822, presented any study or analysis of
` what the just-and-reasonable rate levels in California or
` the Pacific Northwest should have been during the relevant
` time period; correct?
` A No, I have not, and I don't believe that is a
` part of this proceeding.
` Q Okay. Now, you also agree with me, don't you,
` that in order for you to find an Enron violation of the ISO
` or PX MMIPs requires a detriment to ISO or PX customers,
` including a negative economic impact?
` A Anomalous behavior, obviously, has a negative
` impact on the entire market. We've been directed by the
` Commission not only to review the original show cause, but
` a much wider set of standards, including the conditions of
` the market-based rate privilege and the MMIPs. When the
` MMIP includes 2.1.1.5, obviously, we have a situation where
` we are looking at anomalous behavior in neighboring
`
`

`

` markets.
` So in that sense, it's a much broader standard.
` Now, I could argue certainly that violating Bonneville's
` rules at COB has a negative impact on anyone connected to
` COB, certainly the ISO and PX. But I would actually go
` further and say that the broad set of rules would have us
` approach impact throughout the West Coast.
` PRESIDING JUDGE: Would have what?
` THE WITNESS: Would have us address issues
` throughout West Coast.
` PRESIDING JUDGE: I didn't understand one word
` you said. Speak up.
` BY MR. MOORE:
` Q Let me speak up and be sure you understand my
` question. My question relates to violations of the MMIP,
` either the ISO or PX MMIPs. They're pretty much identical,
` you agree with that, don't you?
` A Yes, sir.
` Q And my question is focused on that. Do you
` agree with me that a violation of the MMIP requires a
` detriment to ISO or PX customers, including a negative
` economic impact?
` A I think you've asked me for a legal conclusion,
` but I'm not sure I would agree. I believe that the MMIPs
` are a guide to the rules, as published by those agencies
`
` and accepted by FERC in the tariff and that it's the
` violation of the rules, not the subsequent proof of damage
` that counts.
` Q Do you still have your deposition from
` April 14th, 2004, in front of you?
` A I do.
` Q Turn to page 96, please. Are you on page 96?
` A I am, sir.
` Q I want to you focus on the question I ask you
` there on line 13 and your answer on line 16. If you want
` to get the context of it, you may go back up and see where
` the preceding page on page 95, we're talking about MMIPs.
` And I have asked you, earlier on page 96 -- I left out the
` PX, and you told me to put it back in, not just the ISO but
` the PX as well. And I said, "I'm sorry, I didn't mean to
` leave them out. Other than that modification, it requires
` a detriment, does it not?" Your answer, "a detriment to
` customers in the ISO and PX markets, yes."
` Then down there on line 13, my question to
` you, "we'll start with this one, then. Do you agree that a
` showing of a detriment requires a negative economic impact
` or not?"
` And your answer on line 16 was what?
` A "I agree."
` Q Is that your testimony today?
`
` A Yes.
` Q Okay.
` A Pardon me. You're such a skilled counsel, that
` each time you add a condition, I have to puzzle through a
`
`

`

` slightly different question than the one you've asked.
` Q Just to be clear, on this record today, in this
` proceeding in front of Judge Cintron today, you agree with
` me that an Enron violation of the ISO or PX MMIP requires a
` detriment to ISO and PX customers, including a negative
` economic impact? Yes or no?
` A And like I said, since we had this deposition
` three years ago, we have a far more extensive set of
` orders, and we have been directed to look at the MBR
` conditions, the MMI conditions, and the show cause orders.
` So I would believe that today, it would be sufficient that
` simply, for example, a violation of the rules of the road
` and not a specific proof of injury is required. But as I
` said, we're verging on a legal discussion, and that's
` simply my layman's opinion from reading the orders.
` Q Setting aside whatever other theory of liability
` you may want to introduce for a moment --
` A Yes, sir.
` Q -- and focusing only on the theory of liability
` associated with an Enron violation of an ISO or PX MMIP as
` used in the show cause orders, you agree with me that
`
` insofar as that violation is concerned, it requires a
` showing of detriment to ISO and PX customers, including a
` negative economic impact? Yes or no?
` A I'm not sure I can. I am not making a statement
` of the law, but I'm just sitting here trying to puzzle
` through how I would interpret 2.1.1.5. The anomalous has
` been extended to neighboring markets, but I don't see in
` that particular section a statement that an anomalous
` definition has to be immediately tracked back to the ISO.
` I presume that the framers of 2.1.1.5 knew that
` the anomalous behavior at the California/Oregon border did
` affect the ISO, and certainly, I think any operator would
` agree that it did. But I don't see the precondition in
` that section. I'm not trying to be difficult. You
` actually are dragging an economist through a legal
` definition, and I'm trying to give the most honest answer I
` can.
` Q Certainly, in April of 2004, you agreed with me
` that the violation of an MMIP required a negative economic
` impact to customers; correct?
` A The question you had me read was a definition of
` negative impact, which I agree, but you're pulling that out
` of context for a very complicated conversation. So I'm not
` sure even then I agreed, but those were in different
` contexts that the orders we're operating under.
`
` Q You agree with me, don't you, that that sort of
` detriment, that sort of negative economic impact can be
` quantitatively measured, can it not?
` A Now I know where you're going. We had an
` extensive discussion of this in our most recent deposition.
` Yes, in principle, it can.
` Q Okay. In fact, you can -- as an economist, you
` can measure the detrimental impact of Enron's conduct in
` several different ways; correct?
` A I would say a wide variety ways if I had the
`
`

`

` time, the resources to do so.
` Q And in fact, quoting from you, the first is
` gaming and anomalous behavior, can it be measured? The
` answer is yes.
` Do you agree with that?
` A Yes.
` Q Second, reliability impacts, such as the ones
` we're discussing, can be evaluated across the entire West
` Coast? Yes, they can.
` Do you agree with that?
` A Yes.
` Q Third, increases in price volatility can be
` evaluated across the entire West Coast. Yes?
` A Yes.
` Q And then you ask you your own question, "is it
`
` efficient for us to undertake that calculation? As I said
` in this testimony, I think it's very expensive and may be
` beyond our capabilities."
` Is that that your testimony?
` A Yes.
` Q But you agree with me that it's not an
` impossible calculation to do, is it?
` A I think I would characterize it as unbelievably
` difficult.
` Q You testified in your deposition, you
` said, "we've done that for Fat Boy, and it's not an
` impossible calculation to do"; correct?
` A Fat Boy, for one of the years of the crisis, is
` one of the more doable analytics.
` Q In that case, you could do a quantitative
` measurement of the negative economic impact; correct?
` A And we have done so. Let me qualify.
` Q I don't have a pending question yet.
` A I was going to finish the last one.
` Q In you want to reanswer the last one, go ahead.
` A We took a look within the California market. We
` didn't take a look at the Fat Boy implications and any
` detail in our most recent testimony in another case that
` would have impacted neighboring markets.
` Q You agree with me also, Mr. McCullough, that if
`
` Judge Cintron thought it was appropriate for this record,
` you now have the data to use it, and you have the expert
` opinions from no one less than Dr. Pindyck about how it
` should be used and what its impacts are in order to
` quantitatively measure that negative economic impact;
` correct?
` A If you're talking about the connection between
` short-term and long-term prices, yes, we do have
` Dr. Pindyck's methodology, and in fact, we now even have
` Tim Belden's methodology. They also did similar
` calculations at Enron.
` Q And, quote, "there's no question as an economist
` that we now have the data we did not have in hand in 2002,
` there's no question to me that some of the confusion in
` that case would now no longer be present."
` You could, in fact, now today quantitatively
`
`

`

` measure that negative economic impact, could you not?
` A Let's clarify which scheme you're referring to.
` Are you still on Fat Boys?
` Q Well, I'll ask you it this way. I'll give you
` as much room as you want to run. Any MMIP violation in the
` ISO or PX, take it away.
` A That's a nice offer. Thank you, sir.
` Your Honor, we have the following problem with
` these, and I think that's why FERC provided rules of the
`
` road for us. Some of these are incredibly complicated.
` The simplest one, almost certainly, is Fat Boy.
` In Fat Boy, every day, almost every hour, Enron
` would purchase power from the PX, and then they, in effect,
` would keep it in their hands, because it would be used as
` uninstructed energy that would appear at the last moment at
` the ISO. And clearly, they understood, and we understand
` that put a stress on the system, and the ISO so testified.
` In a recent case, we actually went through that
` calculation and figured out exactly the cost impact of that
` scheme, and it's sizable. In that case, we could use the
` statistical results of Dr. Pindyck and walk all the way
` through the region -- I'm sorry. We could use the
` statistical results from Enron's own studies, which I have
` cited in my testimony, and then walk through the region and
` show how that impact affected COB, affected Palo Verde, and
` we could use Dr. Pindyck's statistics to take that into
` transactions of other tenors. And that's the best and most
` easily defined.
` But let's then talk about one of the more
` complicated-to-comprehend ones. In Get Shorty, we know
` that Enron was, in fact, offering capacity to the ISO, and
` we know throughout this whole period, the ISO was desperate
` for capacity. They were issuing capacity emergencies every
` three days. There was no question in the press that that
`
` was a problem.
` There was no question in any conversation where
` the ISO brought that up. On the Get Shorties, Enron would
` go ahead, claim to have capacity ready to sell, and then on
` the hourly moment pull it back. They would just zero out
` their form. We know from their own testimony that this was
` a fraudulent issue, and of course, the practitioners have
` pled guilty and are -- two of the three have been
` sentenced, I believe.
` However, this is not an easy one to evaluate
` without a much better model, because zeroing out the
` capacity tended to put stress on the ISO and made an
` emergency declaration all that easier. When they put in
` hundreds of megawatts of fraudulent capacity, when they
` pulled them back out, the ISO was short and quite often at
` that point would have to declare an emergency, get out, and
` start buying out of market.
` That's a very hard modeling problem, because
` we're talking about the impact of a capacity shortage on an
` energy market. So we go from one degradation, one that we
` could model very well, to one that would be incredibly
` difficult. And I believe if we had 10 years and a really
`
`

`

` big budget, perhaps if I had not been working for dock
` workers in Everett, but for aristocrats in Manhattan, it
` might be different. But I don't think we can get there,
`
` and I don't think we were directed to get there. I think
` we were directed to determine whether the profits should be
` disgorged.
` Pardon me, your Honor, for misspeaking earlier.
` And that really is a simpler issue. I think at one point
` that I said when you rob a bank, they make you give back
` the money. They don't do a cost-of-service study on the
` proceeds. And I think in this case, that's the right
` metaphor to describe this.
` And I apologize for the long speech, but I think
` you gave me the permission.
` PRESIDING JUDGE: In which proceeding was it
` that you were able to estimate the Fat Boy consequences, so
` to speak?
` THE WITNESS: We filed testimony in Newby, and
` that is the case where Enron and others are suing the
` bankers and advisors. And I think we did a very solid job
` on that. We went all the way through. We reran the Power
` Exchange market on an hourly basis for the entire year and
` actually went through those calculations in a way that we
` had not had an opportunity to do before.
` PRESIDING JUDGE: So you only did it for Fat
` Boy?
` THE WITNESS: As I say, your Honor, some of
` these things, as we know, are even hard to understand,