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July - Duke Energy Employee Advocate

Deregulation - Page 29 - 2002

More Energy Evidence Allowed

Reuters - December 23, 2002

WASHINGTON, Dec 17 (Reuters) - California, which claims electricity suppliers overcharged it by nearly $9 billion in the state's power crisis of 2000-01, is allowed to submit pricing data from all 14 Western states to support its case, an administrative law judge said on Tuesday.

Peter Young, a judge with the Federal Energy Regulatory Commission, rejected arguments by power sellers who wanted to limit the scope of California's search for evidence.

The complex two-year-old case involves California's demand for wholesale electricity refunds. Energy firms have denied any wrongdoing, saying power prices jumped tenfold during the energy crisis, which led to blackouts and bankruptcy of the state's biggest utility.

Firms in the case include Williams Cos., Duke Energy Corp., Enron Corp., Mirant Corp., and Dynegy Inc. The judge also ruled that California markets for natural gas and emissions credits -- key inputs to determining electricity prices -- are subject to scrutiny.

Young conceded he took an "expansive view" of an August ruling by the U.S. Ninth Circuit Court of Appeals, which ordered FERC to allow new evidence of market manipulation to be introduced into the case to determine possible refunds.

The FERC responded in November by giving parties in the case until Feb. 28 to submit more evidence and conduct fact-finding on whether California's energy market was manipulated. Young was appointed by FERC to determine how much new evidence California can collect and submit in the case.


Since the California power crisis began in late 2000, state officials have accused Enron and others of inflating prices to pad profits while the state reeled from rolling blackouts.

Another FERC judge, Bruce Birchman, ruled last week that energy companies owe California an estimated $1.8 billion in refunds, evoking howls of protest from California lawmakers.

With about $3 billion in unpaid bills to its electricity suppliers, California would still owe them $1.2 billion if Birchman's decision is upheld.

Because of the way the commission defined his case early on, Birchman did not look at allegations of market manipulation to determine his refund estimate.

After the final round of evidence-gathering ends, FERC commissioners must decide whether to uphold or change Birchman's ruling. New evidence of possible manipulation allowed by Judge Young could give California the tools it needs to overturn the ruling.

"It is my ruling that the geographic scope of discovery is not confined to the state of California, but shall extend no further than the Western System Coordinating Council," Young said. He referred to a 14-state trading region that includes Western states and parts of Canadian and Mexico.

Transactions outside that region could also be considered if the state can prove their relevance, Young said. Power generators' attorneys argued that the scope should be limited to the state's wholesale power market -- specifically transactions in the California Independent System Operator and now-defunct Power Exchange. "This is not a West-wide investigation," said Mark Haskell, an attorney for BP Plc BP.L , speaking for a consortium of generators.

New evidence of improper trading schemes and phony reporting of natural gas prices justify a new look at California's refund request, said Richard Roberts, an attorney for California parties.

"The revelations continue to mount," Roberts said in a presentation which pointed to new evidence, such as a guilty plea in October by a former top Enron electricity trader that he schemed to defraud California during its crisis.

California intends to have such evidence submitted for the FERC's consideration in the refund case, Roberts told Reuters in an interview after the hearing.

Judge Young also ruled new evidence is admissible on markets that indirectly affected prices -- specifically natural gas prices and California's market for plant emission credits.

Ruling Against Duke CA Plant

The Tribune (San Luis Obispo, CA) – December 19, 2002

by Neil Farrell, and Kathe Tanner

December 13, 2002, A-Section, Page: A1

SAN FRANCISCO -- The state Coastal Commission recommended unanimously Thursday against Duke Energy using ocean water to cool the revamped Morro Bay Power Plant -- a move that could kill the $800 million project.

Commissioners ruled that using sea water for cooling the plant -- which Duke wants to do -- would cause too much harm to marine life in the Morro Bay estuary.

Duke objects to the use of so-called dry cooling, which the Coastal Commission favored. That process uses air pushed by dozens of 30-foot-wide fans in 100-foot-high towers to cool plant boiler water.

The Coastal Commission's opinion is expected to be considered by the state Energy Commission in deciding what type of cooling the modernized power plant will use.

A final decision by the Energy Commission is expected by February or March.

Morro Bay City Attorney Rob Schultz told the Coastal Commission that the City Council was against dry cooling mainly because of the noise that would result from the process, as well as the towers' visual effect.

The commission agreed with a state Regional Water Quality Control Board study that concluded the modernized plant would kill between 17 percent and 33 percent of the larvae produced by small fish, clams, mussels, crabs and other sea creatures living in the estuary.

Duke estimates the kill rate is between 8 percent and 10 percent.

Kevin Johnson, Duke's project manager, said the revamped plant will use less fuel, have fewer effects on marine life and would be smaller and less intrusive to the community while producing more energy for California.

The roughly 50-year-old plant currently uses sea water for cooling.

Several Morro Bay residents testified that the project would be too damaging to sea life, and told commissioners that they had a duty to protect the estuary.

Babak Naficy, attorney for the Coastal Alliance on Plant Expansion, said the commission staff's conclusions on sea-water cooling were the same that have been reached by other agencies.

Energy Commission staff members, as well as the state Fish and Game Department and the National Marine Fisheries Service, oppose sea-water cooling.

The city of Morro Bay and the regional water board are the only public agencies favoring Duke's plan.

Naficy blasted the city's stance to block the plant revamping if it's to include dry cooling.

He said it was wrong for the city to limit choices.

Just like the regional board staff, the city believes Duke's proposed habitat-enhancement program is acceptable, Schultz said.

He also criticized Coastal Commission staff for stating in its report that the city's laws could simply be changed to make the project conform.

Duke spokesman Pat Mullen said the company was disappointed with the commission's vote, but pleased it will now go back to the Energy Commission, "where these differences can be resolved.

"What the vote means

The state Energy Commission must consider the Coastal Commission's recommendation against sea-water cooling when it issues a license for Duke Energy's revamped Morro Bay Power Plant. Duke won't revamp the plant if it cannot use ocean water for cooling.

The Energy Commission is expected to take a preliminary vote by February or March.

Previous Morro Bay article:

Commission Votes Against Duke Plant

Commission Votes Against Duke Plant – Press Release - December 19, 2002

(Dec. 13, 2002) - The Coastal Alliance on Plant Expansion scored a major victory on Thursday, Dec. 12, when the California Coastal Commission voted to oppose licensing Duke Energy's proposed new Morro Bay Power Plant because of the damage it would cause to marine life in the Morro Bay National Estuary.

Almost two years ago to the day, CAPE launched an effort against the plant--as proposed by Duke--on grounds it would pose risks to public health from air emissions and would kill fish larvae in estuary water pumped into the facility for cooling.

CAPE's stand has been vindicated by the California Energy Commission (CEC) staff, the National Marine Fisheries Service, the California Department of Fish and Game and now the Coastal Commission. They all oppose diversion of water from the estuary because a year-long study by independent marine scientists showed the plant would kill up to 33% of the fish larvae, which are proxies for hundreds of other aquatic species that would be destroyed and the birds and other wildlife that depend on fish for food.

CAPE wrote letters, talked to Commissioners and made a presentation to the Commission on Dec. 12, supporting recommendations by the four regulatory agencies that if the plant is licensed, it should be required to use an alternative cooling technology, called "dry cooling" instead of water from the estuary to cool its generators.

In urging denial of a license for the plant, the Commission approved a 60-page staff report that found the plant would violate policies of the Coastal Act, which protect marine life in the Estuary, an environmentally sensitive habitat area. It recommended dry cooling, which uses large fans to cool generators, thus diverting no water and having no harmful effect on the Estuary. Duke has vowed not to build the plant if dry cooling is required.

Commissioners also rejected pleas by Duke and the city of Morro Bay that the plant should be allowed to divert water from the Estuary and that the purchase and improvement of habitat in and around the Estuary be accepted as compensation for the killing of fish. This so-called "habitat enhancement plan" "is highly speculative and largely conceptual," the report said, and would "not provide adequate assurance that the adverse impacts (on the Estuary's marine life) will be sufficiently mitigated."

The CEC, which will make the final decision on the Duke project, probably early next spring, must incorporate the Coastal Commission's findings and recommendations into its decision, unless they are found to be infeasible or more harmful to the environment. The Energy Commission staff has concluded that dry cooling is feasible and would be a vast improvement for the environment compared to use of Estuary water. The Morro Bay National Estuary Program has also stated it supports dry cooling for the new plant, if the CEC deems it to be feasible. "This is a question of marine resources," commissioner Shirley Dettloff told the meeting in San Francisco, directing her remarks at Duke officials. "I urge you to be an example on the west and east coasts and use new technology. More and more communities will be looking at the best technology to protect coastlines.

"I hope Duke and the city would take the information about dry cooling and put it to good use. You would have a grateful state. You know now what needs to be done and should take the steps to do it."

Peter Douglas, executive director of the Commission, scoffed at claims in a letter from Morro Bay mayor William Yates that the Estuary "is not ill, not even a little." The Estuary, Douglas pointed out, has been listed as an "impaired" water body by the Regional Water Quality Control Board and its water has violated the board's safe body-contact standards. The regulatory agencies have concluded that destruction of marine life by a new plant would add significantly to the cumulative adverse effects that have degraded the estuary, including urban and agricultural runoff. The staff report said the additional air-cooled condensers that would be added to the plant to provide dry cooling would increase blockage of views and therefore would not conform to the Coastal Act. However, the concern for the killing of fish by once-through cooling is overriding. "On balance (dry cooling is) most protective of coastal resources" due to the fact that "Morro Bay is a state and national estuary primarily for its habitat values and is designated as Environmentally Sensitive Habitat Area." Therefore, "its marine biological resources are the predominant coastal resource of concern," overriding the issue of protection of views.

In conclusion, Commissioners voted to agree with CEC staff "that the project as proposed by the applicant be denied by the CEC." CAPE's presentation was made by Henriette Groot, CAPE president; Babak Naficy, one of CAPE's attorneys; Bill Powers of Powers Engineering, a power plant dry cooling expert, and Jack McCurdy, CAPE vice president. Also speaking for CAPE were David Nelson, CAPE vice president, and Colleen Johnson, a Morro Bay resident and CAPE supporter. Powers assured the Commission that an appropriately-designed dry cooling system would be feasible at the proposed plant site, echoing findings the CEC staff. Duke and the city of Morro Bay had argued it would not be feasible.

Letters supporting the staff report's recommendations and CAPE were presented to the Commission from Shirley Bianchi, a member of the San Luis Obispo County Board of Supervisors, whose second district covers Morro Bay, and the SLO Coast Alliance, a consortium of 30 county environmental organizations dedicated to the protection and preservation of the coast. The Alliance includes more than 12,000 supporters. Speaking on behalf of CAPE were Mark Massara, coastal program director of the Sierra Club, who was representing the local Santa Lucia chapter of the Club, which approved recommendations for dry cooling for the Morro Bay plant, if it is approved, and Kaitlin Gaffney, coastal program manager for The Ocean Conservancy.

Previous Morro Bay article:

Morro Bay Power Plant Hearing

Enron’s Wild Speculating

New York Times – by David Barboza – December 12, 2002

Despite Denial, Enron Papers Show Big Profit on Price Bets

Even as Enron's top executives were insisting that the company did not engage in speculative trading, Enron was reaping the bulk of its profits during the California energy crisis by betting on the direction of gas and electricity prices, according to company records and interviews with former Enron traders and executives.

Enron made the hugely profitable bets — including one that resulted in a $485 million gain on a single day in December 2000 — at a time when federal and state investigators say the company was conspiring with other energy trading companies to manipulate power and natural gas prices in the West.

Indeed, Enron's standing as the nation's biggest energy trader may have bolstered its ability to profit on bets on the direction of prices. While it is unclear whether Enron could singlehandedly move markets with its trades, several Enron trading officials said that to justify their risk-taking, they told the company's executives and directors that, like a casino, Enron had a "house advantage" in the energy markets.

A result of the speculation, the records show, was one of the most stunning runs ever for a corporate trading operation — some $7 billion in net trading profits for Enron during a power crisis that wreaked havoc on consumers in 2000 and 2001 and forced rolling blackouts in some parts of California. That tally included days with immense trading losses, including a $550 million reversal just a week after the $485 million gain. Former Enron executives said the company hid its speculative activities to shield it from criticism that it was profiting from California's energy woes.

More than a year after Enron's collapse, the company's full role in the energy crisis is only now coming to light. The disclosure of its speculative trading practices, which are being reviewed by federal and state investigators, comes as California officials await a decision by a Federal Energy Regulatory Commission judge on the state's demand for billions in refunds from power merchants. That ruling is expected soon.

At the time, Kenneth L. Lay, Enron's chairman and longtime chief executive, and other Enron officials said that the company was simply a middleman in the fast-growing market for buying and selling natural gas and electricity. Most of the company's profits, they said, were made on the markup taken as Enron's traders bought and then resold soaring volumes of electricity and natural gas, as well as on selling to other companies hedges against big moves in energy prices.

But in recent interviews, several former traders said that a huge share of Enron's profit came from big bets on whether natural gas and power prices would rise or fall.

"Yes, we were speculating," said John Arnold, who was Enron's most successful trader last year, alone making a $750 million profit for the company by trading natural gas in 2001. "There was a big move in 2001. I identified it early and played it with lots of leverage."

In dozens of pages of profit-and- loss tables obtained by The New York Times, Enron's records show a winning streak that several trading experts called astounding.

For instance, at a time when Wall Street executives say a $100 million daily trading profit was considered sizable for a major trading operation, Enron recorded a $485 million profit on Dec. 4, 2000. For the full month — a period when, California regulators, say the company was trading with its own affiliates in an effort to raise energy prices — the records show that Enron's net trading profit was $440 million.

Federal regulators have also accused Enron of trying to raise prices by engaging in sham trades with an unnamed company on Jan. 31, 2001. On that day, according to Enron's internal records, the company recorded a $114 million trading profit.

Over the course of 2000 and 2001, the records show single-day trading profit of $100 million or more on at least 17 days.

Wall Street analysts, who bullishly endorsed Enron's shares for much of the period, said that they might have shown more restraint had they known the extent of the company's speculative trading. Enron disclosed some risk measures about its trading activities, and careful analysts could have noted how those numbers rose in 2000 and 2001. But analysts paid more heed to guidance from the company's executives.

"They specifically told us they were not speculating," said an analyst at one of the nation's biggest brokerage houses, who insisted on anonymity. "At the time, Enron was valued at close to 40 times earnings. And Enron naysayers were saying, `How is this different from Goldman Sachs, which on a good day is valued at 12 times earnings?' "

In a March 27, 2001, interview, Mr. Lay said: "We're basically making markets, buying and selling, arranging supplies, deliveries. We do not, in fact, speculate on where markets are headed." The company also denied, in meetings with Wall Street analysts, that California accounted for a large share of its profit in 2000, at the height of the state's energy crisis.

But the trading records show that about $1.3 billion, or over half of Enron's trading profit that year, was tied to soaring gas and power prices on the West Coast.

"We had meetings every morning," one former trader said. "And there was a lot of pressure to use more and more leverage and to put on bigger and bigger trades."

A spokesman for Enron, which is struggling to emerge from Chapter 11 bankruptcy protection, said the company was cooperating with investigators.

Mr. Lay's spokeswoman declined to comment. Jeffrey K. Skilling, who built Enron's trading operation and served as the company's chief executive for half of last year, was unavailable for comment.

Three weeks ago, a report issued by the Federal Energy Regulatory Commission said that Enron conspired with Portland General Electric, an Oregon utility it owns, to manipulate the price of power in the spring of 2000. In October, Timothy N. Belden, a former Enron senior trader, pleaded guilty in federal court to helping manipulate power prices in the West during the California energy crisis. Mr. Belden is cooperating with the government in continuing investigations.

According to the records, Enron's trading profit soared during the most volatile trading periods in 2000 and 2001, when consumers and politicians in the West started complaining about unusually high gas and power prices.

In November and December 2000, for instance, Enron made nearly $1 billion in trading profit just in North America, according to a presentation the company made to Moody's Investors Service, the credit rating agency. Those results are evidence that the company was engaged in speculative trading, financial experts said.

"Given their profit-and-loss swings, they were taking on huge positions," said Robert Litzenberger, the former head of risk management at Goldman Sachs. "You might have swings, but not like that in a hedged market. That's quite extreme."

Occasionally, Enron got on the wrong side of the market, as it did in mid-December 2000, when the trading operation lost nearly $1 billion over three days.

The worst day was Dec. 12, when gas prices unexpectedly plummeted. Enron's traders lost $550 million — a figure that sent shock waves through the company. The loss equaled what Long Term Capital Management, the hedge fund, lost on one of its worst trading days in 1998, when its near-collapse shook global markets.

The $550 million reversal exceeded the company's risk control levels, meaning that they had to be reported to the board. A week earlier, after the traders recorded their $485 million gain, they had persuaded the board to loosen Enron's risk limits. Trading executives argued that Enron had superb risk management controls and that the traders could reap even bigger profits in a volatile market, executives and trading officials said.

During the last three months of 2000, according to internal company records, Enron's so-called value-at-risk limits — what Enron was willing to lose on a single day — were raised three times, from $80 million in October to $140 million on Dec. 7.

J. C. Nickens, a lawyer for Richard B. Buy, who at the time was Enron's chief risk officer, said that it was obvious that Enron was speculating.

"Of course they were speculating; they were traders," Mr. Nickens said this week. "But they thought they were better traders and less risky. They thought they had the system beat."

Another limit set by Enron's board — the "risk appetite," or the overall amount of the company's capital that the company was willing to risk losing in the course of a year — was set at $2 billion in early 2001, records show.

"That figure is huge, shocking," said Mark Williams, a former energy trading executive who now teaches at Boston University. "This gets back to, was Enron really a hedge fund disguised as an energy company?"

Early in 2001, Herbert S. Winokur Jr., who was then the chairman of the finance committee of Enron's board, began asking the company's risk managers to re-evaluate the trading policies and tighten risk controls, according to W. Neil Eggleston, a lawyer for Mr. Winokur.

After learning about the Dec. 12 loss, Moody's also grew concerned about Enron's risk profile. Mr. Buy traveled to New York in late 2000 or early 2001 to soothe Moody's concerns, according to several former Enron executives. Moody's said it decided not to take any action against the company after Enron assured it that there were good controls in place and that this was an opportunity to make even bigger profits.

In retrospect, officials at Moody's feel duped.

"We did express concern about the level of trading activity that they showed us," said John Diaz, a managing director of Moody's energy group. "But what we have come to believe is that the information Enron provided to us was misleading, incomplete and designed to deceive. If we had known that they were really speculating in a big way, that probably would have led to a lower rating."

Instead, the trading profits during the California energy crisis only heightened Enron's hunger for more, according to a former executive in the company's risk-management unit.

"Enron's appetite for risk was huge," he said. "We could set some limits, but we couldn't stop the train."

El Paso Ex-VP Indicted

Houston Chronicle – by L. Goldberg, T. Fowler, D. Ivanovich - December 6, 2002

Charges of bogus trade deals area seen as notice to others

(12/5/02) - A former El Paso Corp. vice president has been indicted on charges of reporting bogus energy trades in an attempt to manipulate a benchmark used to set natural gas prices.

The charges against Todd Geiger, unsealed Wednesday, are the first from energy industry investigations under way at the U.S. attorney's office in Houston.

They are also a signal that similar behavior by current and former traders at other companies is fair game for criminal charges.

At issue: Giving bad information to trade publications that compile price indexes widely used to set prices for the buying and selling of natural gas.

"We are going to prosecute people who knowingly disseminate false information into the public marketplace," said U.S. Attorney Michael Shelby. "You cannot have a free market based upon false information."

Companies such as Houston-based Dynegy, Ohio-based American Electric Power and Tulsa-based Williams Cos. have disclosed that current or former employees gave out bad data for indexes.

Federal energy and commodities regulators have also been looking into index reporting. The Federal Energy Regulatory Commission first began examining the way publications compiled indexes as part of its probe into Enron Corp.'s role in the California electricity crisis.

On Nov. 13, El Paso said it turned up one case where inaccurate information might have been given to a trade publication but didn't give details.

The company said Wednesday it was referring to the circumstances that led to the indictment of Geiger, who resigned Nov. 12 from his job as a natural gas trader and vice president at El Paso Merchant Energy in Houston.

Geiger was charged with one count of false reporting of commodities information and one count of wire fraud. If convicted of both, he will face up to 10 years in prison and fines of $750,000.

The Monday indictment was unsealed Wednesday after Geiger's Tuesday night arrest at George Bush Intercontinental Airport, where he landed on a flight from Detroit. He spent the night in jail.

Geiger, 38, was arraigned Wednesday afternoon, and his attorney said he plans to plead not guilty to the charges at a hearing scheduled for Monday.

Shelby said investigations of Geiger, El Paso and other companies are ongoing.

El Paso, which is getting out of energy trading, said it's cooperating with investigators and declined to comment on the specifics of the Geiger charges.

El Paso investors weren't too spooked Wednesday, as the company's stock dropped 29 cents, closing at $7.05.

The indictment alleges that Geiger fabricated 48 natural gas trades and provided prices and volumes for the trades on Nov. 30, 2001, to a newsletter called Inside FERC's Gas Market Report.

Inside FERC's is one of several publications that compile so-called indexes, which are used as benchmarks to price certain natural gas deals.

For example, a utility may sign a long-term deal to buy natural gas based on an index price that changes monthly.

The publications survey a variety of traders to create indexes, which typically include average prices for activities at variety of "hubs."

Geiger traded in Houston through El Paso's Canada desk. The 48 trades were said to represent deals at the so-called Sumas trading hub on the border of British Columbia and Washington state, said Assistant U.S. Attorney John Lewis.

Sumas is a gas pipeline hub and cross-border trading point where three pipelines carrying Canadian gas converge, noted one industry source. Those pipelines transport gas produced in regions such as Alberta to customers in cities such as Portland, Ore., Spokane, Wash., and Boise, Idaho.

Up or down movement in index prices can boost the profits traders make for their companies. And, depending on the compensation plan, such movement can also raise someone's salary or bonus.

This indictment didn't include allegations detailing Geiger's motivation or charge that he benefited in any specific way.

Manipulating indexes could also skew the prices consumers ultimately pay for their natural gas or electricity. Because of the energy market's complexity, it's difficult -- if not impossible -- to quantify potential consumer harm.

In this case, it appears the trades that were allegedly made up weren't used in index calculations.

"An initial review of our records indicates that the data was received, considered and rejected because it was outside of the market price and could not be verified," said Jim Nicholson, editorial vice president for Platts, which publishes Inside FERC's, in a prepared statement.

Just because bad data isn't used doesn't mean the behavior was legal.

In August, FERC went public with its concerns about the price data being published by the trade publications, calling it "susceptible to manipulation."

The following month, Dynegy revealed it had discovered employees in its marketing and trading business who had provided "inaccurate information" on gas trades to such publications. Soon American Energy Power also fessed up.

Dynegy later canned six employees and said it would discipline another seven in connection to those revelations. Then, FERC ordered other energy traders to reveal if they, too, had employees who gave out fake numbers.

Regulators didn't make the results of that probe public but instead turned their findings over to prosecutors. Shelby's office noted Wednesday morning that the irregularity at El Paso was discovered during a FERC-required review.

Geiger entered a federal courtroom that afternoon at the end of a line of about a dozen other prisoners in a dark green prison uniform, his hands cuffed to a steel chain that wrapped around his waist.

He appeared somber as U.S. Magistrate Judge Frances H. Stacy read the charges out loud. They allege that Geiger both e-mailed information about the trades from his office in Houston in November 2001 to Inside FERC's and spoke to an editor at the publication in Washington, D.C., about them.

Geiger and his wife posted a $250,000 unsecured bond for his release, but not before promising to turn over his passport and remove all firearms from their home, which Geiger said included six or seven pistols, four or five shotguns, and three or four hunting rifles.

Deregulation - Page 28 - 2002