In the wake of a six-month review by the Commission of alleged manipulation in the short-term electric and natural gas markets, FERC launched formal investigations Tuesday into the potentially illegal activities of three Enron Corp. affiliates — Portland General Electric, Enron Power Marketing and Enron Capital and Trade Resources Corp. — and El Paso Electric, Avista Corp. and affiliate Avista Energy during the western energy crisis in late 2000 and early 2001.

In a much-anticipated 112-page report, staff recommended that FERC explore “possible misconduct” by the energy companies and their affiliates, including violations of their company codes of conduct and FERC standards of conduct, Commission open-access transmission requirements and minimum operating reserve requirements, as well as trading irregularities and price-manipulation practices (PA02-2). It also proposed exploring whether the energy companies failed to make appropriate filings under Sections 203 and 205 of the Federal Power Act (FPA).

The staff report further said it appeared published energy prices could be subject to manipulation, and therefore proposed an alternative method of calculating refunds due to customers during the energy crisis.

The report was submitted to five congressional committees with jurisdiction over FERC, including the primary Senate and House energy panels.

The Commission has up to 180 days in which to carry out the Section 206 investigations under the FPA, at the end of which it will decide whether to order refunds for energy sold in western markets during 2000 and 2001, and revoke the licenses of Enron’s Portland General, El Paso Electric and Avista to sell power at unregulated rates. FERC has directed Chief Administrative Law Judge Curtis Wagner to quickly designate judges to explore parallel settlement discussions in each case or go to hearings.

Accompanying the interim report were three orders identifying staff’s initial findings against each energy company. “Staff’s investigation indicates that the joint dealings between Enron and El Paso Electric may have adversely affected prices and markets in the West,” said an El Paso Electric order [EL02-113]. Staff further said it had “preliminary evidence” that Avista and Enron engaged in suspicious trading practices [EL02-115]. It noted it identified “questionable transactions” between Enron and Portland General as well [EL02-114].

On the question of energy prices, and the overall cases involving refunds for customers in California, staff said its “preliminary indications” suggest that manipulation of electric and gas spot prices in western markets occurred during the 2000-2001 period. “Market participants had the incentive to manipulate spot prices upward for natural gas at the California delivery points,” it told the Commission in the status report on its six-month probe. “EnronOnline (EOL) was a significant source of price discovery and formation, and was potentially susceptible to manipulation by market participants.”

Published spot prices for gas at the California border were not adequately verified and “are not appropriate for use in computing the mitigated market-clearing price and subsequent refunds” for electricity in California, FERC staff concluded. Instead, “we are recommending that [power] refunds be computed based on the spot prices for natural gas reported at producing-area pricing points, plus an allowance for transportation to California.”

In its notice on the price to be used for refunds, FERC asked for public comments on whether it should change the method for determining gas costs for the purpose of calculating power refunds [EL00-98-042]. Comments are due within 30 days.

The now-infamous trading strategies cited by Enron in three memos — Fat Boy, Death Star and Ricocheting — “have adversely affected the confidence of markets far beyond their dollar impact on spot price,” staff said. It noted it will continue to explore whether Enron trading practices had an “indirect effect” on other products, such as long-term physical and financial contracts.

Because the Enron trading strategies apparently were designed to manipulate energy prices and “also may have involved deceit,” staff urged the Commission to bar regulated companies, as part of their market-based rate tariffs, from deliberately submitting false information or omitting material information to the agency. Moreover, it said it strongly favored expanded civil penalties for regulated companies that violate FERC orders and regulations.

Responding to pressure from Congress, FERC opened its investigation in February into possible supplier manipulation of short-term gas and power prices in West Coast markets during the height of the California energy crisis. The scope of the probe was significantly broadened in May when Enron Corp. furnished the Commission with three memos that disclosed company strategies for gaming the California wholesale energy markets, and energy suppliers publicly revealed their participation in bogus round-trip, or “wash,” trades to artificially inflate trading volumes and revenues.

The FERC staff heading up the investigation immediately ordered more than 130 sellers in western markets to come clean about their use of the Enron gaming practices and about the extent of their involvement in sham “wash” trades for both gas and electricity.

Most suppliers denied engaging in the Enron-style strategies to manipulate energy prices to their advantage, but several conceded they carried out questionable trades. CMS Energy, for one, estimated that bogus round-trip electricity trades accounted for approximately $4.4 billion of its revenues and expenses between May 2000 and January 2002, while Reliant Resources admitted that approximately 10% of its trading revenue over the past three years came from “wash” trades.

The disclosures led to the resignations of top executives at CMS Energy, Reliant Resources and Dynegy Inc., including the chairmen of CMS and Dynegy, as well as a free-fall in companies’ stock prices and almost across-the-board downgrades in the credit ratings of corporations that had energy trading operations, bringing some companies to the brink of bankruptcy.

Moreover, the revelations prompted the Department of Justice, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) to launch parallel probes into trading activities of suppliers. A number of companies — El Paso Corp., Reliant Resources, CMS Energy, Dynegy and Duke Energy — have received subpoenas from the U.S. Attorney’s Office in Houston regarding a grand jury investigation into the questionable trading activities, while the SEC has opened a number of inquiries — both formal and informal — into sham trading transactions. The CFTC also has subpoenaed information from companies related to their trading transactions.

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