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. Last Updated: 07/27/2016

Inquiry: Regulators Missed Enron Clues

WASHINGTON -- Senate investigators have concluded that the U.S. Federal Energy Regulatory Commission repeatedly missed clues about improper dealings at Enron that could have led to earlier scrutiny of the company.

In one case, investigators say, the agency had information five years ago that should have raised doubts about the validity of transactions involving wind farms owned by Enron that were later cited in criminal charges against Enron executives.

The Senate Governmental Affairs Committee, in a report to be released Tuesday, has also found that the agency, which is charged with overseeing the energy markets, remains woefully shorthanded for the job of monitoring the trading and transmission of electricity and natural gas.

At some other federal regulatory agencies, a much higher proportion of employees are involved in enforcement, the investigators found.

Many of the findings by the Senate panel detail episodes that have been previously disclosed, like the agency's initially lax response to the California energy crisis; the agency's failure to quickly assess whether Enron's online trading platform could be used to manipulate markets; and whether Enron improperly transferred cash from its regulated natural gas pipelines.

"It seems highly likely that more vigilant, aggressive action by FERC would have limited some of the abuses that appear to have occurred, raised larger questions about Enron's trading practices and other business activities and unearthed at least some of the cracks in Enron's foundation earlier," the report says. The agency "has yet to prove that it is up to the challenge of proactively overseeing changing markets," the report added.

"On a number of occasions, FERC was provided with sufficient information to raise suspicions of improper activities -- or had itself identified potential problems -- in areas where it had regulatory responsibilities over Enron, but failed to understand the significance of the information or its implications."

Commission officials disputed parts of the report, especially the criticism of enforcement efforts. They said the commission has moved aggressively to hire more highly skilled employees and investigate market manipulation.

But the Senate committee, noting that Enron spent more than $100 million from 1999 to 2001 on governmental affairs activities like lobbying, found that the agency "was no match for a determined Enron."

One episode highlighted by investigators was Enron's May 1997 sale of a 50 percent stake in three California wind-farm projects to a special-purpose entity named RADR, which, federal prosecutors said, was set up by Enron's former chief financial officer, Andrew Fastow.

The transaction occurred as Enron was acquiring a utility in Oregon in a deal that, under federal rules, would jeopardize the preferential rate treatment for the wind farms. In charges against Fastow, Justice Department officials said that he secretly owned a stake in RADR that was supposed to be held by investors independent of Enron. As a result, the charges say, Enron kept control of the farms while retaining the special rate status.