March 27, 2003
California Energy Market
Manipulated, Regulators Say
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 states refund to about
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 its 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
The commission also stopped short of approving the states 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.
Wheres the $9 billion that weve been asking for, for two years?
That is when Ill 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
Californias refund isnt 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 Californias 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
states 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 utilitys parent, Rosemead-based Edison International. He added that the FERC allegation related to no more than about $7,000 of
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
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 FERCs allegations. Brad Church, a spokesman for Tulsa,
Okla.-based Williams said a fact-based analysis of its alleged role in
gaming the states electricity market would find no wrongdoing.
Steven Prince, chief executive of Sempras 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 citys DWP among the possible
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,
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 agencys 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
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 Californias 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
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 dont 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 Californias 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 companys own trading practices and procedures,
Wheatley said. However, there is no evidence that the trades impacted
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 states 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 didnt read our response, spokesman
Randy Howard said.
Times staff writers Nancy Vogel, Nancy Rivera Brooks, James F.
Peltz, Jerry Hirsch, Hanah Cho, Debora Vrana, Scott Reckard and Doug Smith
contributed to this report.
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