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July - Duke Energy Employee Advocate

Deregulation - Page 15 - 2002

"About $30 billion was extorted from this state" - CA Gov. Gray Davis

Deregulation Fails in Pennsylvania

Philadelphia Inquirer – by Benjamin Y. Lowe – May 22, 2002

(5/19/02) - The lofty plans to save Pennsylvania and New Jersey consumers money on their electric bills through competition are failing.

The discounted rates, which once brought savings of up to 20 percent, have disappeared over the last 16 months as competition for consumers' business has dried up, an Inquirer analysis shows.

Rates charged by start-up companies now nearly match or exceed those offered by the region's six traditional utilities. For example, the most consumers can save now with a start-up compared with Peco Energy Co. is 2 percent, or about $1.40 on a $70 monthly bill, an amount that discourages switching to a new and unknown supplier.

Most of the start-up companies that offered big savings under the states' three-year-old electricity deregulation programs have stopped serving customers - sending thousands of households and corporate users back to the traditional utilities.

The idea of deregulation was to lower infamously high electricity rates in Pennsylvania and New Jersey by bringing competitors to the market. It had been essentially a monopoly, controlled by a small number of large utilities - the consumer had no choice of supplier.

Competition was intended to provide the choice, though traditional utilities still deliver the electricity since they own the lines into homes and businesses.

The programs worked well in both states from their implementation through December 2000. Alternative suppliers flooded the market, offering many opportunities for Pennsylvania and New Jersey consumers to save money on their electric bills.

But that ended on Jan. 1, 2001, when one of the traditional utilities, PPL Corp., of Allentown, raised certain wholesale electricity prices to six times their normal levels. That, for the first time, demonstrated the leverage big utilities have over start-up companies here.

The Pennsylvania Public Utility Commission is investigating to determine if PPL acted improperly. Its findings and recommendations, which could reinvigorate the failing program, could come this week.

The failure of electric competition is especially surprising for Pennsylvania, which was - and still is - heralded nationwide after it became one of the first states to open its market to competition in 1999.

It is clear now that Pennsylvania and New Jersey legislators designed a deregulation law that did not provide a truly competitive environment, as other states did.

As a result, 27 percent of the 96 start-up companies in Pennsylvania have dropped out of the market, and 252,235 customers, or 44 percent of those using alternative suppliers, are back with the big utilities.

"Everybody anticipated a market shake-out, but nobody expected it to this extent," said Nadia Adawi, director of operations for the Energy Cooperative Association of Pennsylvania, a Center City group that bundles customers for electricity retailers.

The shake-out in New Jersey is worse: 93 percent, or 94,167, of the customers there using alternative electric suppliers have returned to their traditional utility since January 2001. Moreover, 12 of the 26 start-up companies are not serving customers there - although some of them are in other markets.

"There isn't the competition we hoped or expected," said Jeanne M. Fox, president of New Jersey's Board of Public Utilities.

Fox's Pennsylvania counterpart, Public Utility Commission Chairman Glen R. Thomas, said the agency still is trying to bring customers the reliability and prices they want. But he conceded Pennsylvania is "working through a transition period."

Many of the start-up companies have not weathered the transition. Companies such as SmartEnergy Inc.,, and NewPower Holdings Inc. all lost millions when PPL raised prices.

For example, SmartEnergy, of Woburn, Mass., last year returned its 10,000 customers in Pennsylvania and New Jersey to their traditional utilities. The company, like other start-ups, refuses to reenter the market until the rules change.

"Our supply costs were too high to compete with the utility's price," said Patrick Jeffrey, a SmartEnergy vice president.

Like thousands in Pennsylvania and New Jersey, consumers such as Morton H. Liebman, who lives in Philadelphia's Woodside Park section, and Edward W. Leisenring, of Berwyn, every month are reminded of deregulation's failure.

Liebman and Leisenring before Jan. 1 of last year saved up to $24 off their monthly electricity bills compared with what they would have paid Peco, their traditional Philadelphia utility.

But that savings is gone. Liebman, 75, a retired history teacher, still is using his alternative electric supplier, ElectricAmerica, but the rate he pays now is nearly the same as Peco's. Leisenring gave up trying to find another electric company and returned to Peco.

"The whole opportunity for savings is gone out of this program," said Leisenring, 48, a Comcast salesman. Industrial customers also are losing out. Philadelphia Suburban Corp., the Bryn Mawr water utility, saved $3 million a year in electricity costs when deregulation began. The Thomas Jefferson University and Thomas Jefferson University Hospital System saved $5 million annually.

But the savings have vanished. For the last several months, both have looked for competitive electricity suppliers - without success.

The programs in Pennsylvania and New Jersey are collapsing for three reasons.

Most significant, the two states' deregulation laws allowed just six companies, the region's established utilities, to control too much of the electricity production.

Those six - Exelon (Peco's parent company), PPL and Allegheny Energy Inc. in Pennsylvania, Public Service Enterprise Group Inc. and Conectiv Inc. in New Jersey, and Reliant Energy Inc. in both states - produce 82 percent of the region's electricity, according to the regional power grid.

That concentration limits the choices for the new companies, which do not have their own power plants and must buy from the bigger utilities. The start-ups said it is too expensive for them to import electricity from outside the region.

A related problem is that five of the six big utilities not only sell the power they produce to the start-ups in the region's wholesale market, but they also have retail arms that sell power to consumers. In short, those five - all but Reliant - compete directly with the newcomers.

The big utilities said they do not set prices artificially high for the start-up companies.

Indeed, the deregulation laws in both states made it illegal for the generating and retail arms of the large utilities to collude. But even with separate operations, profits flow to one bottom line - just as they did before deregulation.

"It's the whole idea of the 800-pound gorilla," said Peter Franolic, director of corporate energy affairs for Bethlehem Steel Corp., the state's top industrial electricity user. Deregulation will not work until "you can shop out [your electricity needs] to a bunch of chimpanzees," Franolic said.

To avoid the concentration of production and the potential conflict of interest, other states - notably New York, the six New England states and Texas - broke up their big power plant owners.

The result has been more competitive markets - with new electric companies in those states having many more choices in buying their power supply, said Phil Q. Hanser, an electricity markets consultant for the Brattle Group, in Cambridge, Mass., who has studied the Mid-Atlantic region's market for five years. Pennsylvania's and New Jersey's failures relate specifically to the way this market operates and do not involve the kind of irregularities for which Enron Corp. is being investigated in California.

In fact, the big electric companies here say the regional system has prevented electricity blackouts such as California experienced last year, though blackouts have not been a problem for New York, Texas and New England.

The third problem involves the rules of this region's wholesale electric market, where utilities buy and sell power. The market is run by PJM Interconnection, of Valley Forge, and any company serving customers in the region - from New Jersey to Virginia and west to Ohio - is subject to its rules.

A key rule requires all utilities to have an electricity reserve for emergencies, regardless of what it costs them. That was the segment of the market involved in the PPL case - and it affected primarily the new companies without power plants because they could not produce their own reserves and had to purchase them.

"[The rule] remains a ball and chain around the retail market," said John Hanger, a former Pennsylvania public utility commissioner who has opposed the requirement since the law was implemented. "It must be fixed before customers receive the full savings of a properly competitive market."

The Allentown utility does not dispute that prices in the reserve market increased to six times their normal levels. The company, which was the only one of the big utilities with extra power to sell in January 2001, said the spike was a result of increased demand, not any wrongdoing on its part.

But the U.S. Department of Justice is investigating PJM's reserve market, according to a copy of a subpoena obtained by The Inquirer. The subpoena requested information on specific electricity sales since 1999. The department would neither confirm nor deny a probe.

To be sure, electricity deregulation so far has saved Pennsylvanians $4 billion and New Jersey residents $2.4 billion, state regulators said.

But most of that - $3 billion for Pennsylvania and all of New Jersey's estimated savings - has come from temporary, state-mandated rate caps and other one-time reductions.

The caps, which expire next year in New Jersey and in 2010 in Pennsylvania - were intended merely as a bridge until market competition took hold. Permanent savings will be impossible for consumers in both states with competition failing.

The New Jersey plan's primary sponsor, State Sen. Peter Inverso (R., Mercer), did not return phone calls seeking comment on the drop in competition, but one of the Pennsylvania program's chief sponsors said he did not see any problem with the program.

"We passed the law in 1996, and nobody's rates are that high any more," said Rep. Frank J. Tulli Jr. (R., Dauphin). "I think the marketplace handles [electricity prices] and will handle it to the benefit of consumers."

Fixing the electricity deregulation programs in Pennsylvania and New Jersey would require action on two fronts: The states would have to amend their laws; and PJM, probably with a push from federal regulators, would have to change the reserve market.

Tulli and Fox, the New Jersey regulator, said legislation to break up the big utilities is unlikely.

That makes the wholesale market the more likely vehicle for change - even though PJM and the six big utilities strongly defend the status quo.

The Federal Energy Regulatory Commission is considering the PPL case as it studies new designs for power grids across the country. Its recommendations are expected to be announced in July, said Commissioner Nora Mead Brownell, who is in charge of the initiative and was a Pennsylvania Public Utility Commission member when deregulation was adopted.

But PJM moves slowly, and changes could take years to implement. That leaves consumers wondering whether they will ever see the same savings they once received.

"The whole idea of taking on another energy company was that customers were going to save money," said Dale H. Anderson, 69, a NewPower customer from Philadelphia's Mayfair section.

With his rates soaring well above Peco's, he returned to the big utility last month.

"[Deregulation] didn't turn out the way it was supposed to," he said.

Deregulation Not so Great in Virginia – by Terry Scanlon – May 21, 2002

(5/17/02) – Virginia Attorney General Jerry Kilgore says he's concerned about a lack of competition among electric utilities several months into the five-year process of deregulating the industry.

The laws passed in recent years by the General Assembly that will allow power companies to set their own prices beginning in 2007 are based on the assumption that consumers will have true choices, said Kilgore, whose office serves as a consumer representative. Without competition, the low rates Virginians enjoy now might go up.

"It may cause us to revisit that if we don't have real competition," said Kilgore, a Republican.

Although Kilgore says he remains supportive of deregulating the generation of electricity, his comments Thursday to reporters and editors at the Daily Press make him the highest-ranking state official to express reservations about deregulation.

He didn't call for backing away from deregulation, but said the legislature might have to consider ways to encourage competition in the state.

He also said that it made no sense to eliminate the cap on what electric companies can charge one of the aspects of deregulation if only one company is offering the service.

The leading legislative advocate for deregulation, state Sen. Thomas K. Norment Jr., agrees that companies are not yet competing for customers, but he said there are indications that might change.

Several companies that do not yet have a significant presence in Virginia are considering building electrical generation plants in the state, including three in Hampton Roads, he said.

While the two major power companies Dominion Virginia Power and American Electric Power might not go head-to-head throughout the state, he said, there might be other companies targeting specific markets.

Norment, a Republican from James City County who has headed the legislative panel that shepherded deregulation in Virginia, said part of the problem in generating competition among utilities has been resistance from the State Corporation Commission.

The SCC has oversight over electric utilities and has clashed with Norment for years over deregulation.

"The SCC is contributing to a self-fulfilling prophecy where they have said in the past that this is not the right time," Norment said.

In parts of Northern Virginia and western parts of the state, competition is now allowed. In Hampton Roads, outside companies will be able to compete with Dominion beginning next year. By 2004, every market in the state will be up for grabs.

So far, only one company has tried to make inroads into another company's coverage area. In Northern Virginia a company is offering so-called green power which is generated by wind rather than coal, natural gas, water or nuclear fuel at a higher price.

Enron's Lessons for the Energy Market

New York Times – by Gray Davis – May 18, 2002

(5/11/02) – SACRAMENTO - This week the Federal Energy Regulatory Commission released internal memos it had obtained from Enron detailing an edifice of corrupt practices Enron used to profit from artificial shortages it created in the California energy market.

More than a year ago, we in California stood virtually alone when we charged that Enron and possibly others were ripping off California consumers. The energy industry scoffed, saying the charge was paranoid. "Get used to it," they said. "That's the way the deregulated market is supposed to work."

Now, after billions of dollars of damage to California's economy, the truth is out. These memos amount to a confession by Enron of its efforts to exploit the system. Residential rate payers and small businesses were among the victims. More important, the memos are the first inkling that Enron's actions in California were possibly criminal as well. Through its greed and possibly illegal manipulation, Enron did incalculable damage to California's economy and to the national economy.

Enron's current board has done the right thing in turning these memos over to FERC. And I am joining Senators Dianne Feinstein and Barbara Boxer in asking Attorney General John Ashcroft to start a criminal investigation into Enron's actions.

I am also calling on FERC to release all other materials in its possession relating to Enron's role in manipulating the energy market in California and the West. It is important to know how deep Enron's involvement goes. Did Enron attempt to have a role in shaping California's dysfunctional 1996 deregulation law, as it attempted to influence the Bush administration on energy policy and even helped to shape the membership of FERC?

Did Enron taint trades made by other energy marketers? That possibility is raised in a tantalizing line in one of the Enron memos saying, "[A]lthough Enron may have been the first to use this strategy, others have picked up on it too." In response to this concern, FERC has appropriately demanded that other energy trading companies in the California market turn over internal documents relating to their trading strategies.

To prevent further damage, FERC also needs to continue price caps on energy throughout the West. The caps are due to expire on Sept. 30. Power producers and marketers, especially companies like Enron, make money by exploiting market imperfections. The price caps should remain until California has enough new generation capacity to prevent shortages, and until all the investor-owned utilities, including PG&E, are creditworthy again and able to purchase power on their own.

Another huge problem is the long-term power contracts that California entered into last year when it was forced to purchase power on behalf of private utilities that were driven into insolvency by high energy prices. Those contracts were infected by the high spot market prices, and now the Enron memos show that the spot market itself was tainted. These revelations add strength to California's argument that the dysfunctional market resulted in long-term contracts that the FERC must now act to reshape.

Enron's own lawyers have written memos that suggest the company's actions may have contributed to severe power shortages throughout California. In one memo from December 2000, the lawyers describe one trading strategy as appearing "not to present any problems, other than a public relations risk arising from the fact that such exports may have contributed to California's declaration of a Stage 2 emergency yesterday."

To the Enron traders who came up with schemes they named Fat Boy, Ricochet, Get Shorty and Death Star, it must have seemed merely a matter of how much they could get away with in a deregulated, chaotic market.

After Enron's manipulation and the siphoning of billions out of California during the energy crisis, it will be impossible to make the argument that the energy market can function without diligent government oversight.

Gray Davis is governor of California.

The Deregulation Con Game

The Dallas Morning News – by Charlene Oldham – May 14, 2002

(5/6/02) - With natural gas prices on the rise, both Reliant Energy Retail Services and TXU Energy Services Co. have requested increases in the benchmark electricity rates in each of their traditional service territories.

Half of the power used in Texas is produced at natural gas-fired plants.

Although both companies say the increases are necessary, the requests have provoked a tussle with consumer groups. They assert that benchmark rates were already inflated by costs that have nothing to do with fuel.

"We felt from the beginning that the price to beat was set too high," said Clarence Johnson, director of regulatory analysis for the state Office of Public Utility Counsel.

Because of objections from his office and other consumer groups, TXU's request will go to a state administrative judge on May 9. The Reliant request will likely be put through the same paces.

The PUC, after consulting with the companies, had set benchmark rates based on average prices last fall of $3.11 per million British thermal units. In separate petitions filed with the Public Utility Commission, TXU said prices had averaged $3.64 over a 10-day period in early April while Reliant arrived at $3.73 based on a 10-day average from later that month.

On the futures markets, natural gas for June delivery closed at $3.75 per million Btus, marking a 20 percent increase over the average price used to calculate current benchmark power rates.

TXU's request would add about $4.18 a month to the average customer's monthly bill in the Dallas-Fort Worth area, boosting it to $87.18. Reliant's request would raise the average Houston-area customer's bill by $5, to $91.10.

Neither request would affect the companies' rates outside their traditional territories.

The 1999 deregulation law mandates that incumbent utilities cut their base rates by 6 percent from January 1999 levels and keep them there for the first few years of competition. Power providers can request increases in their so-called fuel factor -- used to determine fuel costs -- twice a year when the price of natural gas rises by at least 4 percent.

Prices had languished after the Sept. 11 terrorist attacks and a warmer-than-average winter. Industrial output -- and consequently natural gas usage -- fell sharply as the economy slowed worldwide.

Producers curtailed their production to trim bloated inventories and bolster anemic prices. Their efforts and increasing demand are working together to raise rates.

Regardless of market prices, consumer groups maintain that the benchmark rates were set too high. In fact, the Office of Public Utility Counsel, which represents small businesses and residential consumers, has challenged the formula used to establish the rates in a lawsuit filed in Travis County court.

The suit says that costs such as power transmission congestion fees were artificially inflating the fuel factor and erasing the effects of the 6 percent decrease in base rates.

"It's kind of a shell game," Mr. Johnson said." We cut the base rate by 6 percent, but the fuel factor is high. So the end result is the customer's bill is higher than it was in 1999."

Because of adjustments made to the fuel factor, Mr. Johnson said the average TXU customer saw a 3.6 percent increase over January 1999 rates when deregulation kicked in on New Year's Day.

He also pointed out that there is nothing to force incumbent utilities to reduce rates in their traditional service territories when natural gas prices go down.

Regulators and power providers say the methodology used to set the price to beat went through months of negotiations that included consumer groups.

"That particular issue was explored thoroughly before prices were set in December," said Reliant spokeswoman Pat Hammond. "I believe that's why prices were set so late."

The PUC set the benchmark rate on Dec. 7, when natural gas was changing hands for about $2.60 per million Btus. And if fuel prices return to those rock-bottom rates, incumbent utilities argue other power companies will force them to lower their rates to compete for customers.

"When we were a monopoly, there was a need to regulation our rates," said TXU spokesman Chris Schein." Now, competition will be our motivation."

Smoking Fat Boy

New York Times – by Paul Krugman – May 12, 2002

(5/10/02) - An old joke: A farmer hears suspicious noises in his henhouse. "Who's there?" he calls out. "Nobody here but us chickens," replies the thief. Satisfied, the farmer goes back to bed.

That about sums up the behavior of federal regulators during California's electricity crisis. As I've been pointing out for more than a year, there is powerful circumstantial evidence that market manipulation played a key role in that crisis. Energy companies had the motive, the means and the opportunity to drive prices sky-high. And the crisis exhibited exactly the features you would expect if market manipulation was playing a big role: much of the state's generating capacity stood idle even as wholesale electricity prices went to 50 times normal levels.

Yet federal officials, from George W. Bush on down, offered California nothing but sermons on the virtues of the free market. The Federal Energy Regulatory Commission, which is supposed to police these things, found no evidence of foul play. Essentially, FERC asked energy companies whether they were manipulating the market. "Who, us?" they replied — and that was that. My favorite FERC study found that power companies had the ability to exercise "market power," and that it would have been profitable for them to do so, but that there was no evidence that they actually had. Those power executives must be swell guys!

The significance of the "smoking gun" Enron memos that came to light a few days ago is that they show exactly how swell those power executives really were. It turns out that Enron was indeed rigging the markets, with schemes that had smart-alecky nicknames like Fat Boy, Death Star and Get Shorty. Who said business isn't fun?

These memos came to light despite FERC's evident determination to see no evil. (We now know that the Bush administration in effect allowed Enron to choose the commission's members.) As one California official put it: "FERC is like a parent who doesn't want to believe their teenager has gone bad. The memos are significant because they are like finding a diary in the kid's backpack saying, `I robbed the liquor store.' "

The great risk now is that this will be treated purely as an Enron story. That's wrong; Enron was mainly a trader rather than a power producer, and as such could have only limited impact on electricity prices. The bigger story involves market manipulation by a number of producers. The circumstantial evidence for that manipulation is overwhelming. And if no smoking-gun memos have yet come to light, what do you expect? The Enron story shows just how easy it is for companies to cover their tracks, especially when the regulators are in their corner. If Enron hadn't lost its clout by going bankrupt, you can be sure that we would never have heard about Fat Boy and Death Star.

There is, however, one specific Enron angle here. I may have done Thomas White, secretary of the Army, an injustice. He ran Enron Energy Services, a division that — or so I thought — was mainly used as a way to generate phony profits, inflating Enron's stock price. But the division turns out to have had another role: to create phony energy transactions, inflating Enron's actual profits at the expense of the state of California. Why, exactly, is Mr. White still in office?

What really annoys me in this story, however, isn't the behavior of the energy companies. It isn't even the behavior of the Bush administration — though the administration not only stood idly by while California was robbed of around $30 billion, it also shamelessly exploited the state's misery to promote its own, utterly irrelevant energy plan. (Now, of course, that same energy plan is essential to the war on terrorism.) No, what bothers me is the position taken by so many business and political commentators: that the California catastrophe says nothing about the risks of deregulation and the dangers of loving free markets too much. It was California's own fault, they say, for creating a "flawed" system — a wonderfully vague term that evades the necessity of explaining what really happened. In fact, the main flaw was that the system contained no safeguards against market-rigging.

And I'm sure that there will be a determined effort to ignore even these latest revelations. After all, why let facts get in the way of a beautiful, and politically convenient, theory?

Other Energy Companies Under Investigation

L. A. Times – by R. Zaldivar, R. Simon – May 10, 2002

Regulators seek to determine if sellers tried to manipulate the California market.

(5/9/02) - WASHINGTON -- Widening their probe of energy price manipulation, federal regulators Wednesday ordered scores of electricity and natural gas sellers across the nation to turn over documents related to trading strategies.

The Federal Energy Regulatory Commission order broadens the scrutiny over fallen energy giant Enron Corp. to a large portion of the industry, including private energy marketing firms, electric utilities and generators owned by municipalities.

In addition to demanding documents, the order asks energy sellers to state whether they engaged in any of the market-manipulation strategies outlined in Enron memos released Monday and to provide supporting documentation.

"It is hardball," said Roger Berliner, an energy lawyer representing Los Angeles County before FERC. "It is unusual, but the circumstances are unusual. Given the vociferous denials from producers that they were engaged in any of these activities ... I believe that FERC is properly concerned whether people have been saying things that aren't true."

As a large consumer of power, the county is supporting efforts by Gov. Gray Davis to obtain billions of dollars in refunds.

The FERC regulators demanded "copies of all communications or correspondence, including e-mail messages, instant messages or telephone logs, between your company and any other company ... with respect to all of the trading strategies discussed in the Enron memoranda."

Officials also asked companies to state under oath whether they attempted to manipulate California's energy market.

"Your company's response is to be signed under oath, in the form of an affidavit ... after the company ... has diligently conducted a thorough investigation into the trading activities of the company's employees and agents," said the FERC order, which was posted late Wednesday on the agency's Web site.

The order covers transactions from 2000 and 2001. The firms were given until May 22 to respond.

"Quite frankly, the commission is tired of this lingering issue and wants to get beyond it," said one FERC official, who asked not to be identified. "It's like a piece of bubble gum that sticks to the bottom of your shoe."

Power marketers offered guarded responses. "We just got the e-mail, and we're trying to figure out what it says," said John Stout, a vice president of Houston-based Reliant Energy Inc.

Mirant Corp. spokesman Pat Dorant said his company "will continue to cooperate with all inquiries so that we can try and resolve these issues and move forward to the real question that we still haven't answered in California: How are we going to have energy for our future?"

Though Enron is bankrupt, many other energy companies are quite profitable.

"If you can show similar behavior from other companies that aren't bankrupt, that's money on the table," said Mark Cooper, an energy policy analyst for the Consumer Federation of America.

The FERC order applies equally to sellers of electricity and natural gas, the main fuel used to generate power. Electricity sellers have long contended that the high cost of natural gas was one of the main reasons they charged such high prices. But state officials have maintained that gas marketers created artificial shortages to drive up the fuel price.

"When FERC goes looking for [electricity overcharges] the money disappears into the gas price," Cooper said. "The gas price may have been set on the basis of fictitious transactions."

The FERC order describes each of the market manipulation strategies outlined in the Enron memos. The complex schemes--given such nicknames as Fat Boy, Death Star, Shorty and Ricochet by Enron traders--generally involved taking advantage of loopholes in market rules and oversight to increase profit and raise energy prices. The Enron memos say other companies were doing similar things.

Next to the description of each market maneuver, FERC officials wrote a simple instruction for the energy firms: "Admit or deny."

Enron, which is under new leadership and struggling to survive, released the documents to the FERC on Monday but said it cannot say whether they are accurate. During the energy crisis, its executives denied manipulating energy prices in the wake of California's deregulation.

The memos include two virtually identical documents prepared by attorneys and dated Dec. 6 and 8 that were prepared in anticipation of litigation or investigations involving Enron's trading practices.

Although some California politicians said the Enron maneuvers amount to fraud, it's unclear whether any of the actions described in the memos were illegal. Some FERC staffers said it appears the company merely took advantage of a poorly designed market structure in California. However, one agency official said the California market rules included ethics provisions approved by the FERC. Violations of these provisions could be punishable by the federal agency, this official said.

California's Democrats in Congress applauded the agency's action. In the past, lawmakers bitterly criticized the FERC for failing to use its legal authority to ensure "just and reasonable" wholesale energy prices. The FERC changed direction last summer, setting price limits in the West. Chairman Patrick H. Wood III, an advocate of deregulation, nonetheless promised to make the agency a tough cop on the regulatory beat.

"For the first time, FERC is fully carrying out its charge under the law," said Sen. Dianne Feinstein (D-Calif.). "FERC's investigation is critical for determining just what went wrong in these energy markets and who was responsible for an energy crisis that likely resulted in significant overcharges to consumers."

"It's exactly what FERC should be doing," said Rep. Anna G. Eshoo (D-Atherton). "If we had been trying to pursue the truth and get to the bottom of things a year and a half ago, California wouldn't be holding the bag for billions of dollars."

In a separate request, the FERC asked the agency that runs California's electric transmission grid for reams of data on power transactions, which could give federal investigators another avenue to identify companies that engaged in market abuses. The California Independent System Operator said it would comply.

"It's a pretty extensive data request," said Stephanie McCorkle, spokeswoman for the California ISO. "Obviously, [federal regulators] are trying to track any manipulation of the market."

The FERC request covers hour-by-hour transaction data from 2000 and 2001. The ISO plays a critical role in assuring there is enough power available to meet consumer demand.

Investigators will use the Enron memos as a road map for analyzing the ISO information, another FERC official said. The goal is to see whether the transactions reflect the market strategies outlined in the memos.

"What the memos say is 'these are the strategies,'" said the official, who asked not to be identified. "They may help people who have the data to analyze it. It may help to focus things."

Texas Deregulated Utility Protest

Star-Telegram – by R. A. Dyer – May 10, 2002

(5/9/02) - AUSTIN - As many as 150,000 TXU customers have gone without bills - some for as long as four months - because of continuing problems with electric deregulation in Texas, a top company official said Wednesday.

Another 90,000 Reliant Energy customers have not been billed since January, an official with the Houston company said.

Some Texas customers received huge four-month bills, while others still haven't been billed.

Those delays and errors were outlined Wednesday during a tense meeting of lawmakers overseeing the state's new deregulation law. State Rep. Kim Brimer joined others in hinting that new leadership may soon be needed at the state's electric grid.

"Who here can fire you?" Brimer, R-Fort Worth, asked power grid director Tom Noel.

Noel said, "You probably could." But it wouldn't be quite that simple, because the power grid's board has the authority to fire and hire a chief executive officer.

Known as the Electric Reliability Council of Texas, or ERCOT, the grid coordinates transactions between electric providers and other entities in Texas. ERCOT engineers also manage a multimillion-dollar computer system created specifically for deregulation.

Noel blamed computer glitches, data input errors and miscommunication with power companies for the ongoing problems. But even so, the error rate in switching customers between electric companies has declined over the last four months, even as the organization processes more of those transactions, he said. He also told lawmakers that ERCOT has an 81 percent success rate in switching customers between companies in a timely manner. "I am doing everything I know to do and my staff is doing everything they know to do to get that accelerated," he said.

But state Rep. Steve Wolens, the Dallas Democrat who heads the oversight committee, said he wanted problems fixed before the end of the year. 'You have to work better, faster," he said.

State Rep. Syvlester Turner, D-Houston, also called for a quick fix to the billing problems. "Excuses don't work anymore: If this is not worked out, someone has to be held accountable," he said.

The deregulation law also drove new political allegations leveled Wednesday by Democratic gubernatorial candidate Tony Sanchez. During a news conference just a few blocks away from the oversight committee hearing, Sanchez laid the blame for higher electric bills this summer at the feet of Gov. Rick Perry.

Sanchez noted that a Perry appointee to the Texas Public Utility Commission was a former Enron executive, and that the PUC recently voted to inflate electric rates in a way that indirectly benefits an Enron offshoot company.

Sanchez cited lawsuits by a coalition of Texas cities that said the Perry appointee - former PUC Chairman Max Yzaguirre - should have recused himself from various rate cases that indirectly benefited that offshoot company.

Yzaguirre resigned about a month after the rate decision amid a flurry of conflict-of-interest allegations. He could not be reached to comment Wednesday.

"This summer, Texans will face higher electric bills because Rick Perry thought he could get away with allowing an Enron executive to control the PUC," Sanchez said. "It should have never happened and Texas consumers should not have to pay millions because Rick Perry wants to pay off debts to special-interest contributors."

A spokesman for Perry, who announced earlier this week that the campaign had returned about $85,000 in Enron-related campaign contributions to an Enron employee relief fund, called the charges "misguided and misinformed."

"Max Yzaguirre opposed Enron's wishes while he served as chairman of the Public Utility Commission - and the decision [in the rate case] was contrary to what most big power companies wanted," spokesman Ray Sullivan said.

The hearing came a day after the Star-Telegram reported allegations in lawsuits brought by Fort Worth, Arlington and scores of other Texas cities that electric rates were inflated to the benefit of an Enron offshoot, and suggesting that Yzaguirre and fellow commissioner Brett Perlman should have recused themselves because of their past association with Enron.

On Wednesday, Perlman called those allegations "spurious." Perlman did consulting work for Enron before taking his position at the PUC.

Sanchez called for an independent investigation by the Office of Public Utility Counsel and the attorney general's office into the lawsuits' allegations. He also renewed his call for merging the PUC and the Railroad Commission into one publicly elected body.

Enron’s Smoking Gun Found

Associated Press – by Mark Sherman - May 9, 2002

A confidential Enron document released by federal energy regulators Monday showed how traders for the now-bankrupt energy company drove up power prices during last year's California power crisis.

Written by Enron lawyers, the December 2000 memorandum lists practices described by California officials who say the energy trading company created phantom congestion on energy transmission lines and engaged in sham power sales between its affiliates to increase electricity prices.

Referring to a strategy called "Death Star" by Enron traders, the lawyers wrote, "The net effect of these transactions is that Enron gets paid for moving energy to relieve congestion without actually moving any energy or relieving any congestion."

Another practice, called "ricochet," allowed Enron to send power out of California and then resell it back into the state to avoid price caps that applied only to transactions within California.

"To us, this is really the smoking-gun memo," said Sean Gallagher, a staff attorney with the California Public Utilities Commission. "It's Enron's own attorneys admitting that Enron is manipulating the California market."

Enron's document confirmed long-held suspicions, said Sen. Joe Dunn, D-Santa Ana, chairman of a state Senate committee investigating the power crisis.

"We have known for a long time that there was gamesmanship in the market by a variety of market participants," said Dunn, who testified last month at a U.S. Senate hearing on Enron's role in California's power crisis. "These documents finally prove internal knowledge ... that they were intentionally engaging in that behavior."

Steve Maviglio, a spokesman for California Gov. Gray Davis, said the memos are more evidence that federal energy regulators should order power companies to refund billions of dollars in exorbitant electricity sales.

The Federal Energy Regulatory Commission has been investigating whether Enron either took advantage of or helped spark the crisis in California's newly deregulated power markets, in which wholesale power rates jumped tenfold, three investor-owned utilities faced financial ruin and Californians experienced rolling power blackouts. Enron has denied any role in the crisis.

The company provided the memo to the FERC Monday along with a later, undated report from another set of Enron lawyers that took issue with the first memo. FERC posted the memos on its Web site, along with a letter to Enron seeking more information about the company's electricity and natural gas trades in California and other western states.

Robert Bennett, a Washington attorney who represents Enron, said the memos became known 10 days ago and could easily have been kept confidential. The reports were addressed to Enron Vice President and Assistant General Counsel Richard Sanders to prepare for investigations and lawsuits resulting from the California situation.

"Current management decided the responsible thing to do was to release the documents," Bennett said.

Questionable accounting practices helped drive the company into bankruptcy last year and resulted in the sale of the energy trading unit at the center of the California allegations. "It's virtually impossible for us to determine the accuracy or inaccuracy of these memoranda," Bennett said.

The memos and Enron critics said the company was one of several energy marketing companies that sought to take advantage of California's power crunch. The second report "tries to downplay megawatt laundering by saying that other market participants did it more than we did," Gallagher said.

California officials have credited FERC's caps on wholesale power prices, imposed last summer, with helping restore calm to the state's power markets. The caps are set to expire Sept. 30, leading some officials to worry about the return of soaring power prices.

"These memos are another reason FERC should keep them in place," Gallagher said.

The California Independent System Operator, which manages most of the state's electricity grid, was already aware of most of the strategies described in the reports, said spokeswoman Stephanie McCorkle.

The grid manager, created by the state to maintain reliable electricity supplies after deregulation, has assessed power companies more than $120 million in penalties for violating its rules, McCorkle said. She said she could not provide a company-by-company breakdown of the penalties.

Associated Press Writer Alexa Haussler contributed to this story.

Proof Enron Forced Up Energy Prices

New York Times – by R. Oppel, J. Gerth – May 8, 2002

WASHINGTON, May 6 — Electricity traders at Enron drove up prices during the California power crisis through questionable techniques that company lawyers said "may have contributed" to severe power shortages, according to internal Enron documents released today by federal regulators.

Within Enron, the documents show, traders used strategies code-named Fat Boy, Ricochet, Get Shorty, Load Shift and Death Star to increase Enron's profits from trading power in the state — techniques that added to electricity costs and congestion on transmission lines.

The documents — memorandums written in December 2000 by lawyers at Enron to another lawyer at the company — also describe "dummied-up" power-delivery schedules, the submission of "false information" to the state, and the effective increasing of costs to all market participants by "knowingly increasing the congestion costs."

The memos, which provide the first inside look at the complex trading strategies Enron used in California, give strong ammunition to state officials who have long argued that Enron and other power marketers manipulated the state's market and played a crucial role in the crisis that cost California consumers and utilities tens of billions of dollars in 2000 and 2001. The documents state that other power companies used similar techniques.

Tonight, Senator Dianne Feinstein, Democrat of California, said she would ask Attorney General John Ashcroft "to pursue a criminal investigation to determine whether in fact federal fraud statutes or any other laws were violated" by Enron's energy-trading activities. Federal prosecutors are already conducting an inquiry into Enron's accounting, which falsely increased reported profits but ultimately led to the company's filing for bankruptcy protection in December.

Enron agreed to sell its energy-trading unit earlier this year to UBS Warburg, a division of UBS, Switzerland's largest bank. Nearly all of Enron's senior executives, and most of its board members, have departed in the last nine months.

Enron's senior management learned of the documents in late April, and the company's board decided during a meeting on Sunday to waive attorney-client privilege and turn the memos over to investigators at the Federal Energy Regulatory Commission, a person close to the company said. The company has also informed the Justice Department, the Securities and Exchange Commission and the attorney general of California about the documents.

At a noon meeting today, lawyers for Enron gave the memos to investigators from the regulatory commission, which is examining whether Enron manipulated energy markets in the West. The agency released the documents a few hours later. Officials at the commission declined to comment, but they are continuing their investigation into Enron's effect on power prices and asked the company today to provide additional documents on its electricity and natural-gas trading activities.

In a letter sent by officials at the commission today to Enron, investigators at the agency said the documents described how Enron traders were "creating, and then `relieving,' phantom congestion" on California's electricity grid. The documents also detail what investigators described as "megawatt laundering," in which Enron bought power in California, resold the power out of the state and then bought the power back and resold it back into California — allowing Enron to circumvent price caps meant to clamp down on costs.

"These documents prove that these companies can manipulate the market," said Loretta Lynch, the president of the California Public Utilities Commission. "Enron prevented California from seeing these documents for years, and now we know why."

Ms. Lynch said the documents supported her argument that FERC should leave in place temporary electricity price restraints, introduced last June, which state officials say have played a large role in reining in prices. "I don't see how FERC can remove the boundaries they put in place on our market last June."

An outside lawyer for Enron, Robert S. Bennett, said he could not comment on the trading strategies described in the documents. "Because we have sold the trading unit and the people with the knowledge of trading practices are no longer with the company, we do not know what the true facts are, and we do not know which parts of the memoranda are correct and which parts are incorrect," Mr. Bennett said tonight.

But he emphasized that the company had agreed to waive that attorney-client privilege because it was trying to cooperate with the various investigations into Enron's business practices. "These memoranda came to the attention of the board and current management in late April, and the board instructed its counsel to not assert the attorney-client privilege and produce these documents to the appropriate government entities," Mr. Bennett said.

Another memo written by a separate group of lawyers for Enron in 2001 — apparently in January or February, after soaring wholesale power prices in California pushed the state's largest utilities to the brink of insolvency — tried to play down the strategies described in the December 2000 memos.

In this later memo, which was written to prepare Enron for the "various investigations and litigation" it faced because of the California power crisis, the lawyers repeatedly tried to play down or cast doubt on the conclusions drawn by Enron's own lawyers in the earlier memos.

"Some of the information" in the earlier memos "which resulted in some erroneous assumptions and conclusions, cannot be supported by the facts and evidence which are now known," the later memo stated.

In one strategy described in the December 2000 memos, Enron would buy power from a state-run exchange for $250 a megawatt-hour — the maximum under the price caps — and resell it outside California for almost five times as much.

"Thus, traders could buy power at $250 and sell it for $1,200," according to one memo. In that document, the Enron lawyers acknowledged that such activity could be playing a big role in causing electricity shortages in the state, but they suggested that was not a significant concern.

"This strategy appears not to present any problems," the memo stated, "other than a public relations risk arising from the fact that such exports may have contributed to California's declaration of a Stage 2 Emergency yesterday."

The Death Star strategy, as described in the memos, allowed Enron to be paid "for moving energy to relieve congestion without actually moving any energy or relieving any congestion."

And the Load Shift strategy allowed Enron to generate about $30 million in profits in 2000 using techniques that, according to the documents, included creating "the appearance of congestion through the deliberate overstatement" of power to be delivered.

In the past, Enron officials said the California power crisis was caused by the state's deeply flawed electricity deregulation plan, the lack of new power-generation capacity and by temporary factors, like a drought that drastically reduced available hydropower. Even some economists who think price manipulation was widespread say these other factors contributed to soaring prices.

But Enron executives always insisted that absolutely nothing their traders had done contributed to the crisis. In an interview last year, Enron's former chairman, Kenneth L. Lay, dismissed accusations that manipulation was even partly to blame for California's troubles.

"Every time there's a shortage or a little bit of a price spike, it's always collusion or conspiracy or something," Mr. Lay said in the interview, which was also taped for "Frontline" on PBS. "I mean, it always makes people feel better that way."

Deregulation - Page 14 - 2002