Last week was an active one for the Federal Energy Regulatory Commission. The staff heading up the agency’s three-month probe into price-manipulation activities widened its inquiry to include questionable “wash” trading transactions, targeting natural gas and power suppliers in Texas and western energy markets. At the same time, it was inundated with energy suppliers’ almost-blanket denials that they used apparently deceptive Enron-style trading practices in California and other western markets during the critical 2000-2001 period.

The exceptions were two Portland, OR-based utilities, PacifiCorp and Portland General Electric (PGE). They admitted that they may have unknowingly participated in schemes that gamed the energy markets during the height of the energy crisis, according to The Wall Street Journal. Specifically, the companies said they may have been involved in a practice known as megawatt laundering, ricocheting, to take advantage of the spread between the capped and uncapped prices for energy. PacifiCorp identified Sempra Energy, Aquila and Williams Cos. as participants in the schemes, a charge which all three suppliers denied.

“We believe the transaction PacifiCorp describes in its FERC filing [appears] to be what we referred to in our FERC filing as informal ‘parking’ agreements,” said William Hobbs, CEO of Williams Energy Marketing and Trading. “These transactions involved power Williams purchased from out-of-state sources — not from the California Power Exchange — and sold into California to increase the state’s supply at a time it was needed. Our records show that during the time of price caps, we did not sell to the California Independent System Operator at levels above the caps.”

Both Williams and Aquila confirmed they did deals with the two Oregon utilities, but they said they were within the rules involving the practice of “parking,” or the buying of power from out-of-state sources for resale in California. Sempra Energy also claimed that it had done nothing wrong.

Interestingly, a few major energy suppliers — such as Reliant and Mirant affiliates — acknowledged that they overscheduled power on occasions in California, but they said their practices, unlike those of Enron’s, were known to and welcomed by the California Independent System Operator (Cal-ISO) because of the chronic underscheduling of demand by the state’s utilities. Moreover, some of the activities identified in the now-famous internal Enron memos, such as supplier overscheduling to offset utility underscheduling and phantom congestion, were already well known to FERC, before it launched its widespread investigation, Reliant said.

The Commission’s investigation has centered mostly on the activities of power suppliers in the West, but last Wednesday it ordered all sellers of natural gas to western and Texas markets during 2000-2001 to come clean about any questionable “round-trip” or “wash” trades that they engaged in over the past two years [PA02-2]. The agency gave gas suppliers until June 5 to file affidavits admitting or denying their culpability in the bogus trades, which are designed mostly to inflate revenues and trading volumes. It threatened possible enforcement action against gas sellers who do not respond in a “timely and complete fashion” by the deadline.

FERC’s action came one day after it directed western power suppliers to fess up to their participation in “wash” trading transactions. Several major energy companies — Reliant Resources, CMS Energy, Williams and Dynegy Inc. — already have disclosed that they were involved in these phony transactions, and some have been forced to restate their revenue and trading volumes for the past couple of years. The Securities and Exchange Commission (SEC) has opened investigations into the fake trades as well.

Both gas and power sellers who admit to the phony “wash” trades must report “transaction-by-transaction details,” including: 1) the methods and rationale used to arrive at the value or compensation of the transactions; 2) whether the transaction was reported to a price index newsletter or any other organization that monitors, publishes or reports trading data; 3) the name and company position of each trader who participated in the trades; 4) how the transactions were executed; and 5) all the policies and procedures that have been implemented to prevent future transactions of this type. Gas and electric suppliers also have been told to turn over “all communications or correspondence” or other materials that “refer or relate” to the phony trading activities.

“With subpoenas flying, we believe the political pressures against Washington/FERC have grown to the point to where some sort of concession on refunds and/or contracts is likely [for the West],” said the UBS Warburg Natural Gas & Power Group in a report last week. “This is particularly true, given what appear to be seemingly endless requests from the FERC for information on various types of market activities and the alleged accusations that Enron proactively manipulated the market during a time when billions of dollars of sales or contracts were facilitated.”

In the final analysis, “we believe it would be an overall positive development for companies (and the sector as a whole) if parties were to work with the state [California] to seriously put this issue to rest once and for all,” wrote UBS analyst Ron Barone and others. “Though this could result in some short-term pain at a time when much pain has already been felt, we believe the overall return to shareholders from such a move could outweigh the impact of this issue potentially dragging on for several additional years.”

Responding to the first phase of FERC’s investigation, nearly 150 western energy suppliers filed affidavits last Wednesday on whether they engaged in 10 Enron-style practices in western energy markets in 2000-2001. With the exception of PacifiCorp and Portland General, none the suppliers who publicly disclosed their affidavits or reports admitted to type of possible misconduct in California or other western markets over the two-year period. A few sellers said they used variations of the strategies, but they said they were legal and were done with the full knowledge of the Cal-ISO.

El Paso, Reliant, Exelon, Duke Energy, TECO Energy, Dynegy, AEP, NRG, Avista, Calpine, Southern California Edison (SoCal Edison) and Bonneville Power Administration (BPA) were among the major western energy suppliers that denied mimicking the deceptive Enron strategies. The Enron practices came to light in three memos that were turned over to the Commission and the Department of Justice earlier this month (see NGI, May 13). The internal memos identified a number of colorfully named strategies — Fat Boy, Death Star and Ricochet — that Enron used to apparently manipulate energy prices in California and elsewhere.

In their affidavit, Reliant Energy Power Generation and Reliant Energy Services acknowledged that they overscheduled small amounts of energy to delivery points in California “on some occasions” during the critical 2000-2001 period, but they said this practice was both needed and sanctioned by the Cal-ISO.

“A potentially confusing element of the Enron memoranda…is the suggestion that the power supplied in association with overscheduled load points was ‘excess,’ in the sense that it was unnecessary, or that it was not needed or wanted by the California ISO and load-serving entities [utilities] in the operation of the California electrical system. Experts understand that this is a substantive misconception,” the Reliant companies said in a seven-page response to FERC (See Related Story).

Because this affidavit will be reviewed by a “broad lay audience,” the Reliant affiliates said, “we wish to make it clear that neither Reliant nor any other participant in the unscheduled energy market in California was ever paid for ‘excess generation.'” Suppliers “were paid only for generation actually delivered to and used by consumers in California,” they noted, adding that to be paid any more “would be impossible” under the Cal-ISO tariff.

Likewise, Mirant said it overscheduled load in California because the “local utilities routinely under-forecasted demand.” It noted that the Cal-ISO “was aware of, and approved, this action.” In addition, Mirant said it identified 19 days during which “it exported power at the same time it was purchasing power from the California Power Exchange,” but it noted it found no evidence to suggest that Mirant routinely bought power from the Cal-PX for the purpose of selling it outside of the state.

Referring to Enron’s practice known as “Ricochet” or megawatt laundering, Mirant said it uncovered one instance in which it sold a small amount of price-capped power purchased from the Cal-PX out of state, then purchased from the buyer a “similar amount” and sold it — presumably at a higher price — to the California Department of Water Resources.

Williams “emphatically denied” any misconduct, even after PacifiCorp’s accusations. However, the company’s report filed at FERC did identify Williams-specific transactions that “have some of the characteristics described in the Enron memo but which were engaged in for entirely different reasons” other than to game western energy markets, said President and CEO Steve Malcolm. These transactions accounted for a “fraction of a percent of its overall trading volumes” during that period, he noted (See Related Story).

El Paso Merchant Energy LP (EPME) and San Joaquin Cogen LLC, two El Paso Corp. affiliates that supply power to western markets, told the Commission they did not use any trading strategies that mirrored those employed by Enron to apparently manipulate wholesale power prices in California and several other western states. They further denied using any “variants” of the Enron practices to take unfair advantage of the markets.

Both EPME and San Joaquin Cogen said they have “substantially completed” their investigation, but noted that their efforts are still ongoing. They said they would file “supplemental responsive affidavit[s]” if additional information is uncovered.

Duke Energy told FERC that its activities in the California energy market were appropriate. “Following a thorough investigation in response to a FERC inquiry, we have not found any activities that Enron allegedly engaged in,” said Jim Donnell, CEO of Duke Energy North America. “Our operations have followed the market rules in place in California. Our FERC filing supports what we have always said, that we have acted in good faith in supplying the California market’s energy needs.”

In addition to the information required by the inquiry, Duke Energy said it provided FERC with details of other activities that had some of the characteristics described in the Enron memoranda, but were within market rules. “While Duke Energy will continue to cooperate with FERC on this matter, the need for all stakeholders to work together and continue the job of making competitive power markets work in California is far from over,” Donnell said.

The Duke executive cited the need to add additional transmission capacity in California and to create a wider western transmission grid to assure efficient flow of power within California and between neighboring states. In addition, he added the state needs to encourage construction of new power plants and long-term contracts to assure consumers a reliable supply of power at stable prices.

Already embroiled in a scandal in which the company admitted to taking part in “round-trip” trades, Dynegy denied participating in any of the activities described in the Enron memos. “We took a comprehensive look at our activities during the 2000-2001 timeframe, and we reaffirmed that Dynegy has operated within the rules and protocols established by the California Independent System Operator and the California Power Exchange,” said Dynegy CEO Chuck Watson.

San Jose, CA-based Calpine also claimed no wrongdoing. “Calpine’s response to the FERC inquiry affirms the integrity of our trading practices,” said CEO Peter Cartwright. “I am proud of the role Calpine played in building new sources of generation to benefit California customers during the energy crisis. We did more than any other party to help stabilize the market and bring down power prices in the state. Our plants produced all they could, operating at more than 96% capacity throughout the crisis. And we worked closely with all state agencies, including coordinating our scheduling and operations with the California ISO during every stage alert. More important, the company was the first to bring on-line major base load power plants in more than 10 years — adding nearly 1,700 MW of clean, low-cost supply to serve California’s 2001 peak summer demand.”

BPA, a Portland, OR-based federal power agency, said it engaged in “none of these practices.” and added “we are deeply disturbed about the pattern of deception now coming to light with regard to Enron’s trading activities in California and the West.”

SoCal Edison, still trying to dig out from its near-bankruptcy last year, denied any involvement in any of the Enron-like practices referenced by the FERC data request, including allegations that it and other California-based private-sector utilities consistently understated the demand for power in the day-ahead market of the now-defunct Cal-PX, increasing the need for more costly real-time supplies in the state grid operator’s (Cal-ISO’s) imbalance market.

Exelon said that its power team did not engage in “Death Star,” “Get Shorty,” “Fat Boy” or any of the other strategies outlined in the Enron memos referred to in FERC’s data request. Moreover, it reported that the power team, Exelon’s wholesale energy marketing and trading group, has not participated in any bogus trading transactions, such as the so-called “wash” trades. The company noted the incentive plans for power team traders are profit-oriented, not volume-oriented. The incentives also are based on overall team performance.

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