Armed with “preliminary evidence” of manipulation of prices for short-term electric and natural gas markets in western markets, FERC launched formal investigations last week into the potentially illegal pricing 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 marketing affiliate Avista Energy to determine the extent of any wrongdoing and the type of disciplinary actions warranted.

In a much-anticipated 107-page interim report culminating a six-month fact-finding effort, FERC staff recommended that the agency further explore “possible misconduct” involving company trading and price-manipulation practices, as well as violations of company codes of conduct and FERC standards of conduct, Commission open-access transmission requirements and minimum operating reserve requirements [PA02-2]. It also proposed the agency examine whether certain companies illegally ceded control of their assets to Enron without notifying FERC under the Federal Power Act (FPA).

Significantly, the staff said it appeared published natural gas prices could be subject to manipulation, and therefore it proposed an alternative method for calculating the gas cost component of refunds due to customers during the California 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 in the range of up to 180 days in which to carry out three separate Section 206 investigations under the FPA, at the end of which it will decide whether to order the companies to pay refunds for energy sold in western markets during critical 2000-2001 period, and revoke the licenses of the Enron’s affiliates, El Paso Electric and Avista to sell power at unregulated rates. As part of the probes, FERC has directed Chief Administrative Law Judge Curtis Wagner to quickly designate judges to explore settlement discussions in each case or go to hearings.

Accompanying the interim report were three orders identifying staff’s initial findings and the specific FERC-ordered actions 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 the 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 proceeding 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. “EnronOnline (EOL) was a significant source of price discovery and formation, and was potentially susceptible to manipulation by market participants.”

Moreover, published spot prices for gas at the California border were not adequately verified during the state’s energy shortage nearly two years ago, and “are not appropriate for use in computing the mitigated market-clearing price and subsequent refunds” for electricity in California, FERC staff concluded. As a result, “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 [regulated rates for] transportation to California,” rather than on the high costs for delivery of gas to the state that existed during the energy crisis in 2000-2001.

In an accompanying notice, FERC asked for public comments on whether it should change the method for determining gas costs for the purpose of calculating power refunds for California during the 2000-2001 period [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 expressly 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 fact-finding review in February of possible supplier manipulation of energy 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 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 sellers denied any knowledge of the Enron-style strategies or close ties with Enron. But FERC staff’s report said Enron’s relationships with El Paso Electric, Avista and affiliate Portland General Electric were so cozy that it was impossible at times to distinguish who was calling the shots at the companies’ energy trading desks.

Staff also said the evidence it had against the companies and their utility affiliates was far more extensive than it revealed in the interim report forwarded to Congress. “To ensure fairness to the companies, as well as to avoid compromising the cases against them, staff believes that specific details of evidence…should be discussed only in orders voted out by the Commission, rather than in a report to Congress.”

Preliminary evidence indicates “El Paso Electric’s management may have… allowed [the company’s] assets to be used improperly” by Enron, staff said. “Market participants complained that, when they called El Paso Electric’s trading desk, they were uncertain whether they were actually dealing with El Paso Electric or with Enron.”

In response to a show-cause order issued by FERC in early June, El Paso Electric admitted that Enron personnel manned its trading desk 75% of the time during the critical 2000-2001 period, when California faced a power supply shortage and prices soared. This information was at odds with the company’s claim in May that it knew nothing of Enron’s dealings on its behalf.

FERC staff cited a letter from Enron to El Paso Electric executives in which “Enron discusses how the two companies had taken advantage of the unseasonably hot weather and unit outages that occurred in the West during a single month in the summer of 2000.” El Paso Electric reported revenues of more than $7 million for that month as a result of its partnership with Enron, it noted. El Paso executives wrote back two days later, saying this was a “great illustration of what is possible when teamwork, knowledge, initiative and accountability all come together.”

The high level of revenue for a single month “is, in and of itself, not evidence of improper conduct, but does indicate that further investigation is needed,” staff told the full Commission. It also asked FERC to explore whether El Paso Electric may have violated the agency’s open-access transmission requirements.

With respect to Portland, OR-based Portland General, staff said it had “preliminary evidence, taken from transcripts of recorded telephone conversations, indicating that Portland and Enron knowingly engaged in transactions that may constitute violations of the [FERC] standards of conduct and/or the companies’ codes of conduct.”

Based on transcripts of telephone conversations for a single month during the two-year period, staff indicated Enron employees used non-affiliated utilities as middlemen to buy and sell power with Portland General in effort to circumvent FERC rules limiting such sales between affiliates. “It is highly doubtful that this kind of conduct occurred only in that single month. A separate investigation would allow discovery of instances of questionable transactions not only during, but also before and after the two-year review period,” it noted.

“Enron and Portland often required the cooperation — either knowing or unwitting — of third parties for their inter-affiliate transactions. At this point in time, staff is making no recommendations with respect to those third parties, pending the completion of our analysis of the roles such third parties played,” the report said.

Spokane, WA-based Avista has admitted that it routinely acted as a middleman in the Enron-Portland General transactions, and that its traders “did have questions about the transactions,” staff noted. It disputed Avista’s claim that it was “used” unwittingly by Enron, saying this was “not reconcilable” with the company’s own admission that it acted as a go-between as a routine matter.

Staff also took issue with Avista’s claim that it was unable to conduct a meaningful analysis of its past trading transactions because its telephone tapes could not be reviewed by electronic search methods. “This response is in sharp contrast to many other [companies] that made a considerable effort to provide full and complete responses to the [FERC] data requests…Staff finds that Avista’s response is less than forthcoming.”

FERC staff said it would continue its investigation of trading operations in western markets, and issue a final report at a later date. The final report, it said, would review round-trip, “wash,” trades of electricity and natural gas in the West; give the findings of its investigation into allegations that Williams Cos. Inc. attempted to manipulate gas markets in the West; analyze the relationship between physical and financial natural gas and electric products; analyze selected sales data from short-term, seasonal and long-term forward contracts; and spell out the role that EnronOnline played in the energy markets, along with interviews of former Enron employees.

©Copyright 2002 Intelligence Press Inc. Allrights reserved. The preceding news report may not be republishedor redistributed, in whole or in part, in any form, without priorwritten consent of Intelligence Press, Inc.