-Caveat Lector-
http://truthout.org/docs_03/032903H.shtml
Energy Market Manipulated, Regulators Say
By Jonathan Peterson and Ricardo Alonso-Zaldivar
Los Angeles Times
Thursday 27 March 2003
FERC moves to increase California's refund to $3.3 billion, still
far less than the state seeks.
WASHINGTON -- Taking a tough new stance, federal energy regulators
said Wednesday that more than 30 private firms manipulated natural
gas and electricity prices during the California energy crisis, and
moved to increase the state's refund to about $3.3 billion.
In addition, the Federal Energy Regulatory Commission threatened to
revoke the trading authority of eight subsidiaries of troubled
Enron Corp. for allegedly gaming the natural gas market. The
commission also said it's prepared to strip the trading authority
of Reliant Energy Services Inc., now known as Reliant Resources
Inc., and BP Energy Co. for allegedly engaging in "coordinated
efforts" to manipulate electricity prices at Palo Verde, a key
Arizona trading hub. Both companies denied the charges.
California officials expressed some satisfaction with the FERC
decision, but emphasized that the remedy fell far short of the $8.9
billion in refunds sought by a coalition of state agencies and its
major utilities, including Pacific Gas & Electric and Southern
California Edison.
The commission also stopped short of approving the state's request
to renegotiate $20 billion in long-term energy contracts that were
signed during the period of feverish prices in 2001.
"Show me the money," Gov. Gray Davis declared. "Where's the $9
billion that we've been asking for, for two years? That is when
I'll finally feel vindicated, when we get the money back that these
energy companies stole from this state."
Davis said the state is prepared to keep pressing its case in court
if California's refund isn't boosted when the matter goes back to a
federal administrative law judge, the next step in the process.
FERC officials, long criticized for an easygoing approach toward
the corporations they regulate, insisted that their 13-month
investigation into the causes of California's energy crisis proves
the agency is taking its oversight role seriously.
"This is all part of our role as the cop on the beat," said FERC
Chairman Pat Wood III. "We have said from the beginning that a
belief in the free enterprise system goes hand in hand with a
responsibility to see that the playing field is level and that
everyone plays fair. If there was ever any doubt that this was part
of our core philosophy, that doubt should now be dispelled."
As part of its action Wednesday, FERC asked more than 30 companies
and utilities to justify actions that may have violated anti-gaming
provisions. These companies and utilities included some of the
out-of-state actors that were branded during the energy crisis as
preying on California, including Reliant, a Williams Cos.-AES Corp.
venture and Mirant Corp.
But FERC also singled out a number of in-state companies and
utilities for possible wrongdoing. Among them: Southern California
Edison; the Los Angeles Department of Water and Power; and Sempra
Energy, the parent of San Diego Gas & Electric and Southern
California Gas Co.
In fact, Southern California Edison is one of the major players in
the state's quest for refunds, thrusting it in the awkward position
of being both accuser and accused.
"We will certainly file a response," to the market manipulation
allegation, said John Bryson, chief executive of the utility's
parent, Rosemead-based Edison International. He added that the FERC
allegation related to no more than about $7,000 of power charges.
"The most important thing today," Bryson said, "is that the staff
report shows pervasive unlawful and unethical manipulation of the
power market, causing California consumers billions of dollars of
direct damages."
Edison officials believe their utility would qualify for up to 25%
of the refund money, which they expect would ultimately be returned
to customers through lower rates in the future.
Other companies and utilities reached for comment Wednesday roundly
denied FERC's allegations. Brad Church, a spokesman for Tulsa,
Okla.-based Williams said "a fact-based analysis" of its alleged
role in gaming the state's electricity market would find no
wrongdoing.
Steven Prince, chief executive of Sempra's wholesale-trading unit,
said he is "confident the FERC will conclude that our activities in
the California energy market were proper."
Los Angeles Mayor Jim Hahn on Wednesday ridiculed the FERC decision
to include the city's DWP among the possible price gougers.
"In its shotgun approach, FERC is seeking to hold all energy
producers liable when all evidence points to the fact that the
LADWP was a major part of the solution," Hahn said.
Energy companies named prominently in the report -- many already
battered on the stock market -- saw further declines Wednesday.
Reliant shares fell 95 cents, or nearly 24%, to close at $3.05 on
the New York Stock Exchange.
The flurry of developments came as FERC released its definitive
findings on the turbulent episode of rolling blackouts and soaring
prices that rattled the California economy in 2000 and 2001.
Some applauded the agency's announcements Wednesday. "FERC took an
important step today in recognizing that the Western energy market
was manipulated during the energy crisis," said Rep. Doug Ose
(R-Sacramento), who chairs a House subcommittee on natural
resources.
Still, despite a FERC staff conclusion that prices for long-term
power were influenced by market manipulation, two of three board
members said they would be reluctant to approve Gov. Davis' demand
to renegotiate the long-term power contracts.
The contracts were based, in part, on short-term prices that FERC
now concedes were the result of broken markets and abusive
practices by sellers. In a report to the commissioners, Donald
Gelinas, a senior FERC staffer, found that "market dysfunction" in
California affected the long-term contracts.
But Commissioner Nora Mead Brownell said FERC should be extremely
reluctant to void contracts that were willingly entered into by
competent parties. "Investors will not participate in a market in
which disgruntled buyers are allowed to break contracts," she said.
FERC commissioners did accept a staff recommendation that could
lead to more money for California through another avenue. The staff
called for scrutinizing the actions of dozens of companies to see
if the firms had violated fair-market principles they had agreed to
abide by as a condition of doing business in California's
deregulated market.
If abusive behavior is shown to have taken place, FERC can order
the firms to return ill-gotten profits for the period of Jan. 1,
2000, to June 21, 2001. Otherwise, the companies are now only
liable for refunds for the period of Oct. 2, 2000, to June 21, 2001
-- a timetable set by a quirk in federal law.
In any case, a gulf would still remain between the $9 billion
demanded by California officials and the amount being considered by
FERC.
On Wednesday, FERC said it would change the method of calculating
natural gas overcharges that led to higher electricity prices.
Staffers said that would add an estimated $1.5 billion to the $1.8
billion previously set by an administrative law judge, for a new
total of about $3.3 billion. But because of debts that the
utilities owe their power suppliers, even the higher figure of $3.3
billion would leave a net refund of only $300 million.
"If we don't get $9 billion out of refunds, we will go to federal
court," said Richard Katz, a senior advisor to Davis, deriding FERC
decisions Wednesday as "better wrapping on the same old package."
During the crisis and its aftermath, FERC officials often focused
on the imperfections in California's energy deregulation plan and
other problems, while state officials focused on alleged wrongdoing
by energy firms. That tension continued on Wednesday, even as
federal regulators moved further than ever toward blaming companies
for misconduct.
An "underlying supply-demand imbalance and flawed market design
combined to make a fertile environment for market manipulation,"
FERC said in a statement.
For example, FERC said Wednesday that phone conversations and
transcripts suggest Reliant and BP Energy Co. worked together to
manipulate energy prices at Palo Verde, which sets prices for
electricity trading throughout the Southwest.
Both Houston-based firms denied the charges and said they would
cooperate with the continuing investigation. In response to
accusations that Reliant and BP Energy worked together to boost
energy prices, Reliant spokesman Richard Wheatley said a "small
number" of suspect transactions with BP were made three years ago.
The company discovered the transactions through its internal review
and bought them to the attention of FERC, Wheatley said.
"The transactions were not authorized by Reliant, and they violated
the company's own trading practices and procedures," Wheatley said.
"However, there is no evidence that the trades impacted the
market."
FERC also said that two Enron subsidiaries, Enron Power Marketing
Inc. and Enron Energy Services Inc., could lose their authority to
set market-based rates. In addition, FERC said it would explore
whether Enron and a handful of firms and municipalities with which
it traded -- including the cities of Glendale, Redding and the
Modesto Irrigation District of Northern California -- engaged in
gaming of energy markets and might be ordered to give up profits or
face other sanctions.
A spokeswoman for Enron Corp., whose subsidiaries were accused of
manipulating natural gas and electricity prices in California, said
the company was reviewing the FERC orders.
According to FERC, the Los Angeles Department of Water and Power
may have engaged in a market gaming strategy known as "ricochet" or
"megawatt laundering," which involved buying energy from the
now-defunct California Power Exchange, shipping it to another
entity and then selling it back into California as imported power
not subject to the state's price caps.
To carry out the strategy "Enron needed others to move power into
and out of the [California] system," the report said. The DWP was
among those that allegedly collaborated, according to the report.
The FERC staff called the ricochet strategy an "exercise of market
power" and a violation of California market rules.
It recommended that the DWP and eight other companies or
partnerships be required to return any ill-gotten profits. In one
week during December 2000, the nine may have made as much as $10
million from megawatt laundering. The DWP was fourth from the top
in a list ranking the Enron trading partners in order of potential
profits.
A DWP spokesman said it filed evidence last week with FERC
disproving the allegations. The FERC report "indicates to me they
didn't read our response," spokesman Randy Howard said.
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