FERC last Wednesday “split the baby” in a series of long-awaited rulings on the western energy crisis, giving both sides reason to cheer and scowl. The agency, on one hand, revoked the marketing authorizations for Enron Corp. subsidiaries and launched show-cause enforcement actions against nearly 60 energy companies for potential gaming of the California market, while at the same time it rejected efforts by California and other western utilities to overturn contracts worth an estimated $12 billion that were negotiated at the height of the market turmoil two years ago.

In a major victory for energy suppliers, the Commission upheld the sanctity of long-term power contracts that were negotiated with California during the state’s energy market meltdown in 2000 and 2001, along with contracts held by Nevada Power, Sierra Pacific and PacifiCorp. The challengers had sought to re-negotiate the contracts, arguing that they were “unjust and unreasonable” because of the crisis-driven high prices. But FERC last week ruled they had failed to meet the higher Mobile-Sierra doctrine that required them to show that the contracts were contrary to the public interest.

Despite the “very voluminous” evidence in the cases, it “did not get me over the [public-interest] hurdle” to warrant overturning the contracts, said FERC Chairman Pat Wood. Nor was there any evidence that the contracts jeopardized the companies that held them, according to the orders. The Supreme Court in the Mobile and Sierra cases ruled that to meet the public interest standard, the challenger must prove a contract would impair the financial ability of a public utility to continue service, impose an excessive burden on customers, or be unduly discriminatory.

“I would leave them where they lie and move forward,” Wood said. Noting these were the “most difficult series of decisions” facing the agency, Commissioner Nora M. Brownell said she agreed with the administrative law judge (ALJ) decisions in the contract dispute, which held the challengers must meet the higher Mobile-Sierra burden.

She noted that she also was concerned that a decision undoing the contracts would have caused investment in the western energy infrastructure to dry up.

Commissioner William Massey was the lone dissenter, saying that “we have the obligation to make it right” for western customers harmed by the high-priced contracts. It “seems unconscionable now” not to re-negotiate the contracts. The prices in the California contracts were “extraordinarily high” and “unprecedented,” he noted. FERC staff in its March report on western energy manipulation found that the markets “were clearly dysfunctional, out of control” and had an effect on contract prices.

The Commission also denied refunds for high-priced spot power sold in the Pacific Northwest during the 2000-2001 market breakdown as well. Again, Massey disagreed with Wood and Brownell, favoring refunds for the region. Denying the relief was at odds with the other related rulings that FERC issued last Wednesday, calling for enforcement actions against energy companies for alleged manipulation and anomalous behavior, he said.

The agency said it was formally initiating show-cause enforcement proceedings against an estimated 60 energy marketers, as well as municipal and investor-owned utilities, for allegedly gaming the California Independent System Operator (CAISO) and Power Exchange (PX) markets from January 2000 through June 2001. The companies could be required to return any profits stemming from the questionable activities [EL03-137 et al].

Among the 60 parties were Aquila Inc., Duke Energy Trading and Marketing, Dynegy Power Marketing Inc., Los Angeles Department of Water and Power, PacifiCorp, Portland General Electric, Reliant Resources, Sempra Energy Trading, Williams Energy Services Corp., American Electric Power Services, Enron Power Marketing Inc., Mirant Americas Energy Marketing LP, Pacific Gas and Electric, Powerex, San Diego Gas & Electric, Sierra Pacific Power, Southern California Edison, Florida Power & Light, and Coral Power LLC.

The companies are alleged to have participated in the Enron-pioneered market strategies, which had the colorful names of Ricochet, Death Star, Get Shorty and some congestion-related practices, according to Commission staff. But the order found that “certain activities…allegedly engaged in by the identified entities do not constitute tariff violations; instead, many were legitimate transactions, which, while they have the superficial appearance of gaming, were not manipulative.” The companies will have the opportunity to make their cases before an ALJ, FERC said.

Massey disagreed that penalties against wrongdoers should be limited to disgorgement of profits. “Simply requiring bad actors to disgorge their profits does not make the market whole” again, and may not deter similar behavior in the future, he said. Moreover, he said he would prefer that the Commission first determine the extent of the violations before assessing remedies.

But Wood said profit disgorgement was the agency’s best option until Congress gives it “more robust” enforcement authority. FERC does not intend to take action against those companies whose profits from gaming were less than $10,000.

In other action, FERC issued an order instructing its Office of Market Oversight and Investigations (OMOI) to investigate all companies who bid above $250/MWh during the period of May through October 2000, to determine if the bidding rules of the CAISO and PX were violated. The OMOI already has received the bid data for the period from the CAISO, and will rely on it during its investigation, staff said.

Staff noted the OMOI plans to review a total of 800,000 bids from the CAISO and PX, which it estimated involved less than 100 companies. “Entities who submitted bids in excess of $250/MW in the CAISO and Cal-PX markets…will be required to demonstrate why such bids did not violate” the state’s Market Monitoring and Information Protocols, or “to what extent their bidding behavior and practices constituted legitimate business behavior,” according to the order [IN03-10].

The OMOI reported Wednesday it was looking into the potential physical withholding of energy in California, and has served data requests on 80 parties. It said it plans to notify those companies who are “exonerated” by July 31, and complete the entire probe by Jan. 31, 2004.

Noting it was the “first time the Commission imposed the so-called death penalty” on a company, FERC stripped several Enron affiliates of their market-based rate authority and their blanket gas marketing certificates for engaging in “inappropriate gaming” activities in California [EL03-77, RP03-311]. This case “perhaps more than any other” shows that when an energy company engages in “systemic manipulation” to succeed, it has “not earned the privilege” to sell power and gas at market rates, Brownell said.

Referring to Enron, she noted, “The business was all about manipulation.”

The order specifically strips Enron Power Marketing and Enron Energy Services Inc. of their licenses to sell electricity at unregulated rates. Eight other companies with ties to Enron lost their blanket gas marketing certificates, which had allowed them to resell gas at negotiated rates in interstate commerce. They include Bridgeline Gas Marketing LLC, Citrus Trading Corp., ENA Upstream Co. LLC, Enron Canada Corp., Enron Compression Services Co., Enron Energy Services, Enron MW LLC and Enron North America Corp. The companies manipulated gas prices by engaging in wash trades on EnronOnline, according to FERC.

Citing Enron’s ongoing bankruptcy proceedings, the order will allow the affiliated companies to unwind their natural gas positions before formally revoking the certificates. Noting that Enron is a shell of its former self, some observers saw the ruling as a hollow one.

In response to recommendations in FERC staff’s western market report, the Commission also ordered nearly two dozen companies to show cause why their alliances with Enron in California should not be considered market manipulation. They, too, could be required to return any profits that were tied to gaming during the period of Jan. 1, 2000 through June 20, 2001, the agency said [EL03-180].

“We find that Enron and other entities with whom it had [a] partnership, alliance or other arrangements…appear to have jointly engaged in market manipulation schemes that had profound adverse impacts on market outcomes, and violated the ISO and PX tariffs,” the order said.

Directed to show cause were some of the leading energy suppliers in the West, including Coral Power, Sempra Energy, Public Service Co. of New Mexico, Aquila, Constellation Power Source Inc., El Paso Merchant Energy LP, Koch-Entergy Trading Inc., Morgan Stanley Capital Group, PECO, PacifiCorp, Powerex, and TransAlta Energy Marketing (US) Inc.

In an attempt to deter manipulative behavior in the future, FERC proposed amending its certificates granting companies the authority to sell electricity and natural gas at market or negotiated rates — to include prohibitions against manipulative market behavior, and a requirement for companies who report prices to published indexes to do so “accurately and completely.” (see related story)

In addition to including a generic ban on manipulation, the proposal calls for both electric and gas companies to keep records of their sales and reported prices to index publishers for three years, according to staff.

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