Several energy sellers recently offered firm denials to Texas regulators that they attempted to manipulate energy markets in the Electric Reliability Council of Texas (ERCOT) by utilizing tactics adopted by former energy trading giant Enron Corp. in California or by executing trades designed to artificially boost trading volumes and revenues. In a few cases, generators acknowledged to the Texas Public Utility Commission (PUC) that they completed a few isolated contemporaneous or prearranged trades, but that such activity was on the up-and-up and for valid business reasons only.

The assurances offered by the generators came in response to a June 12 memorandum from Parviz Adib, director of the Commission’s market oversight division. The memorandum included a request for admissions from power companies requiring responses related to activities conducted in ERCOT on or after July 31, 2001.

Specifically, companies were asked to admit or deny engaging in trading activities utilized by Enron in California and detailed in a set of memos recently issued by FERC. The Enron memos describe strategies used by Enron traders in California including: 1) “inc-loading” (i.e., submitting unrealistic schedules) into the California ISO’s real-time energy imbalance market; 2) creating and then “relieving” phantom congestion on the Cal ISO’s transmission grid; and 3) megawatt laundering (called “ricocheting”). The PUC also directed power companies to admit or deny executing so-called “wash” or “round trip” trades, which are designed mostly to pump up trading volumes and revenues. FERC has launched its own parallel investigation looking at whether energy sellers adopted Enron-type strategies in Western power markets or utilized wash or round trip trades.

A review of several filings made in response to the PUC directive found companies denying the use of trading strategies similar to those used by Enron or round trip/wash-type trades. Companies responding to the June 12 memo included: Sempra Energy Solutions, Coral Power LLC, Exelon Generation Co. LLC, NRG Power Marketing, NRG Energy, PacifiCorp Power Marketing, Dynegy, Mirant and Reliant Resources, among others.

A few generators conditioned their responses by saying that while they may have executed trades similar to those under the PUC microscope, such activity was only for “legitimate business purposes.”

In an affidavit submitted to the PUC, Aquila CEO Robert Green said that the company entered into a limited number of transactions in ERCOT on or after July 31, 2001 that involved “the sale of an electricity product to another entity together with a contemporaneous purchase of the same product at the same price.” But Aquila said that all of these transactions were above board and were not done in order to increase reported trading volumes.

For its part, Dynegy specifically denied engaging in one of the strategies detailed in the Enron memos dubbed “Fat Boy.” At the same time, Dynegy said that it did make adjustments in load forecasts provided to it in order to account for the fact that the forecasts “were historically low and therefore to better balance actual supply and load.”

The company highlighted the fact that PUC staff’s own analysis has determined that while the “Fat Boy” strategy is possible in ERCOT, the rules do not make it profitable. “Thus, Dynegy had no incentive to and did not artificially increase load in the balanced schedules it submitted to ERCOT.”

In addition, Dynegy said that its review to date has turned up no trades that meet the PUC’s criteria for wash or round trip trading in ERCOT for any time beginning on or after July 31 of last year. However, the company did say that its review revealed two trades that were executed on a prearranged basis.

But Dynegy underscored the point that those trades do not meet PUC staff’s definition for wash or round trip trades since the transactions were not executed to artificially inflate the company’s trading volumes or ERCOT market prices “and had an otherwise valid business purpose.” Dynegy said that its review also unearthed two trades that were contemporaneous, but were not prearranged, since they were “out-trades” intended to cancel mistakes.

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