Responding to FERC’s threat to revoke the energy marketing privileges of wrongdoers, Reliant Energy Services acknowledged the actions of its power trader were “plainly wrong,” but it asked the agency for leniency in light of the trading reforms enacted at the company. BP Energy Co. apologized for the misconduct of one of its traders and asked for mercy as well. A group of Enron Corp. power and gas marketers, however, challenged the Commission’s action, claiming it was based on faulty and “ambiguous” charges.

While not denying any of the charges leveled in the show-cause order issued in March, Houston-based Reliant Energy urged FERC to keep in mind that it has taken a “number of organizational corrective measures to identify and discipline improper trading activity and to prevent repetition of such misconduct,” fired the trader and replaced senior management overseeing trading, and has withdrawn from the “speculative trading aspect of its business.”

Given these reforms, the company said revoking its license to sell electricity at unregulated rates would be “unnecessarily punitive” to its business and the entire industry. Imposing the “ultimate sanction of denying market-based rate authority to the company for the transgressions of an individual trader, after the company itself has taken extensive corrective measures, would reverberate throughout the industry, calling into question whether the risks of trading can be justified for anyone in such a regulatory environment.”

Reliant Energy asked the agency for the opportunity to demonstrate at a hearing the “efficacy of [its] reforms and improved controls,” which would give staff and others a chance to recommend more improvements if needed. If the agency denies its request for a hearing and rejects the reforms, the company said it should be given a “meaningful opportunity” to respond to the allegations contained in the FERC show-cause order.

In the show-cause action, the Commission said it had evidence — transcripts of phone conversations — to show the Reliant Energy trader and a BP Energy Co. trader manipulated the price of electricity delivered to Palo Verde, a key Arizona trading hub [EL03-59, EL03-60]. The manipulation allegedly occurred three years ago and involved delivery of 25 MW of power.

BP Energy told FERC it fired the energy trader, calling his actions “inappropriate, disappointing and embarrassing for the company.” It asked the agency to weigh several “critically important facts” when deciding whether to revoke its market-based rate license: the trades at issue did not manipulate the market, nor were they intended to do so; BP Energy was a small participant in the western power markets at the time of the trades; it lacked the market power to move prices in the western markets; and it did not profit from the trader’s transactions.

“Considering the totality of the circumstances, revocation of BP Energy’s market-based rate authority is a punishment disproportionate to the conduct underlying the small trades cited in the show-cause order and could remove a beneficial market program…The revocation of BP Energy’s market-based rate authority would only further limit a market that is already suffering from illiquidity and the departures of market participants.”

The Enron gas and power marketers attacked the show-cause order against them for being short on facts. “A show-cause order…is effective only when it identifies specific facts to support specific legal theories of culpability. In this case, the show-cause order does not specify the facts on which its allegations are based, nor does it explain how those facts, if true, would violate the law.”

The Commission’s show-cause order threatened two Enron power marketers with the loss of their market-based rate authority, and eight other companies with ties to Enron with the loss of their blanket gas marketing certificates [EL03-77, RP03-311]. All responded with the exception of Enron-affiliated Citrus Trading Corp. and Bridgeline Gas Marketing LLC, which are expected to file separately.

The show-cause directive against the Enron power companies involved high-profile gaming strategies that Enron pioneered to influence electricity prices and trades in California. On the gas side, the eight Enron-connected companies reportedly profited to the tune of $3.2 million after running up gas prices at the Henry Hub in Louisiana, and then driving them down again through the use of Enron’s electronic platform, EnronOnline.

Citing the vagueness of the show-cause order, the Enron companies said the Commission “alleges that ‘certain’ of the Enron gas marketers made sales at unjust and unreasonable prices during [the] summer 2000 and winter 2000-2001. Which of the gas marketers are actually accused of charging unjust and reasonable prices is not disclosed by the Commission. Even the identity and names of the traders are withheld. Nor has the Commission bothered to specify the transactions in which the prices are allegedly unjust and unreasonable or what those prices are.”

The Enron companies further challenged the legal and regulatory basis for FERC’s move to strip gas marketers of their blanket gas marketing certificates, which allow them to resell gas at negotiated rates in interstate markets. “The only condition attached to the blanket certificates at the time of their issuance was that affiliated transportation-only pipelines must have been restructured pursuant to Order 636,” which the Enron pipelines did. There were no conditions related to price manipulation, they noted.

Furthermore, the law requires that before FERC can revoke a license, such as a Natural Gas Act certificate, it must give the certificate-holder a “second chance” to comply with the requirements of the certificate, according to the Enron marketers.

“In short, any attempt [by FERC] to revoke the blanket certificates of the Enron gas marketers would violate the terms of the Natural Gas Act, Supreme Court precedent, the Commission’s precedent, the Constitution’s due process clause and the Administrative Procedure Act.”

Likewise, the Commission has failed to make a case against Enron marketers on the electricity side. “The Commission has stated that it may revoke market-based authority if a seller acquires an undue market share, measured by generation and/or transmission capacity, or undue control of inputs [natural gas] to electric production or other barriers to entry,” but the agency “has not demonstrated that these circumstances are present here,” the Enron marketers claim.

The “gaming” charges against Enron power markets do not hold water either, they argue. FERC itself “recognized nearly six years ago that the term ‘gaming'” as defined in the California Independent System Operator’s Marketing Monitoring and Information plan “was vague and did not provide adequate notice of the conduct prohibited.”

Given the “inadequacies” in the show-cause order, the Enron marketers called on the Commission to, at a minimum, allow them to conduct discovery and confront witnesses. “The current process underway as established by the Commission’s show-cause order is fatally defective.”

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