DeFazio Voices Concerns Over Morgan Stanley Capacity Buy

Rep. Peter DeFazio (D-OR) wants answers from the Bonneville Power Administration (BPA) about Morgan Stanley's purchase of long-term transmission capacity owned by BPA's transmission line. Among other things, the Oregon lawmaker argues in a recent letter to BPA's acting administrator that Morgan Stanley's utilization of only a small fraction of the capacity it purchased could be a sign that the financial services company is attempting to exert market power.

In his June 8 letter to BPA Acting Administrator Steve Wright, DeFazio said that he was writing to express his concerns that BPA's transmission system could be "gamed by speculators with zero interest in maintaining reliable, affordable electricity in the Northwest." The congressman noted that he recently learned that Morgan Stanley bought all available long-term transmission capacity (1,145 MW) owned by BPA's transmission business line for one year on the AC intertie from the California border into Oregon. Also, Morgan Stanley purchased 60% of BPA's capacity (714 MW) on a long-term basis beginning in March 2002. "It is my understanding from an initial briefing by BPA Staff that the entire purchase was made for $17 million," wrote DeFazio.

But the Oregon lawmaker pointed out that Morgan Stanley is a financial services company with no recorded history of operating or maintaining an electrical utility. "The company does, however, have a record of speculating to maximize profits in other markets with little regard for consumers," DeFazio argued. "The ability of a financial services company, which has no obligation to serve electricity consumers, to lock up all available capacity for a year raises serious concerns." DeFazio asserted that BPA's first obligation should be to operate the transmission system to ensure that consumers receive low-cost, reliable service.

The lawmaker asked Wright to respond to the following series of questions related to the Morgan Stanley transaction:

  • What statutory or regulatory authority allowed Morgan Stanley to lock up all available BPA capacity for one year?
  • What, if any, conditions was BPA able to put on the sale of the capacity to Morgan Stanley?
  • What statutory or regulatory obligations, if any, does Morgan Stanley have with respect to utilizing the capacity they purchased and under what terms do they have to make the capacity available?
  • Under what conditions can Morgan Stanley withhold capacity?
  • Is it true that if Morgan Stanley is not utilizing the capacity it purchased, BPA can provide it to someone else, with the stipulation that the financial services company can reclaim its rights up to 20 minutes before the top of the hour? Is this an efficient way to optimize the transmission system in the Northwest and doesn't this last minute deal-making tend to drive up prices?

In addition, DeFazio said that it is his understanding that a new generator coming online in Klamath Falls wanted to utilize south-north transmission capacity, but Morgan Stanley refused to sign any long-term commitments to provide it. The lawmaker asked Wright whether this allegation was true and, if so, whether that means that a new Klamath Falls facility will essentially have to obtain capacity on an hourly basis.

Even if Morgan Stanley's purchase followed all applicable laws and regulations, DeFazio said that he remains "extremely concerned about the ability of the company to game the transmission system in order to drive up prices for power." He attempted to draw parallels between the Morgan Stanley transmission capacity situation and FERC's ongoing investigation into whether El Paso Corp. deliberately withheld its capacity to transmit natural gas into California in order to drive up prices. "Early indications are the FERC investigation will find wrongdoing on the part of El Paso Corp.," wrote DeFazio.

DeFazio said that based on an initial briefing he received from BPA staff, it was apparent to him that Morgan Stanley was utilizing only a small fraction of the capacity it purchased, which the lawmaker said may indicate an effort to exert market power. "Given the virtually limitless opportunities to manipulate a deregulated energy market through withholding capacity, I would urge BPA to vigorously monitor how market participants use BPA's transmission capacity in order to limit manipulation and protect consumers." To that end, DeFazio asked Wright to detail what the agency can do to set up a robust monitoring mechanism and whether BPA would consider modifying its tariff or business practices to protect against gaming.

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