Energy Market Manipulated, Regulators Say

FERC moves to increase California's refund to $3.3 billion, still far less than the state seeks.

By Jonathan Peterson and Ricardo Alonso-Zaldivar
Times Staff Writers

March 27, 2003

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.


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.