Posted on 06/25/2003 11:01:59 PM PDT by Ernest_at_the_Beach
washingtonpost.com
Suppliers Do and Don't Owe for Power Crisis
FERC Upholds West Coast Contracts but Rules 'Unjust' Profits Must Be Returned
By Peter Behr
Washington Post Staff Writer
Thursday, June 26, 2003; Page E04
Federal energy regulators, trying to resolve billions of dollars in disputed power charges from the West Coast energy crisis two years ago, yesterday favored energy suppliers in one major case but in another case said companies that manipulated power sales will be required to surrender any "unjust" profits.
A series of rulings yesterday by the Federal Energy Regulatory Commission had conflicting impacts on the politically charged aftermath of the power meltdown that spread from California to the Pacific Northwest in 2000 and 2001, spawning blackouts and record energy bills.
Democratic lawmakers, led by California Gov. Gray Davis, expressed outrage at one decision, which upheld costly long-term power-supply contracts that were signed in California, Oregon and Nevada at the peak of the crisis in early 2001.
California authorities say nearly $12 billion in long-term contracts should be canceled because contract prices had been unjustly inflated by traders and generators manipulating short-term prices. At the time they were signed in 2001, the long-term contracts provided cheaper power than utilities could get on the inflated spot market, where electricity is sold a day or less before delivery to customers. But now the long-term contracts appear expensive because spot prices have fallen, creating an economic drain on the states and an embarrassment to Davis, whose administration signed many of the deals.
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Today we return to a major priority for the Commission over the past two years – setting matters right in the aftermath of the 2000/2001 Western energy market problems. We began to resolve many of these issues back in March; they represent complex, multi-faceted and novel matters of first impression. This has required a very careful review of the facts and several voluminous records, as well as a thorough deliberation of the issues.
We need to put these issues behind us and provide the regulatory certainty our competitive energy markets so clearly require. But these are issues where views and interests differ widely and compromise is rare, so today we act to resolve these conflicts while providing the due process market participants deserve. We must decide these issues carefully and fairly, in a manner that satisfies judicial review.
The issues before us today will address the main issues pending from the March 2003 Staff Task Force Final Report on the Western Market Investigation. We have carefully examined that report as well as the evidence and arguments offered by all sides in the “100 Days Discovery” process we initiated last November. We also take up a number of requests to reform long term contracts in various parts of the country. These remarks will give you an overview of what we’re going to cover today.
First, in Item E-1 we consider an order to address the market misbehavior of Enron Corp. By revoking the company’s authority to sell electricity at market-based rates, and similarly to sell natural gas under a blanket certificate, we send a clear signal that competitive markets must work in the interest of customers and the public interest. This is the first time the Commission has imposed the so-called “death penalty.”
Second, the March 26 staff investigation report recommended certain actions in response to the Enron strategies and other questionable market behaviors. A study by the California ISO identified a number of market participants as having engaged in these strategies and entering into business relationships with Enron that raise concerns. Additionally, a number of parties in the "100 Day Discovery" process identified many of the same concerns, while raising other matters. The law allows the Commission to order disgorgement of profits in these instances, provided they represent a violation of a thenexisting tariff.
In Item E-3 we consider specific market practices that violated the Market Monitoring and Information Protocol provisions of the tariffs of the California Independent System Operator and the California Power Exchange. Based on the Staff's, the ISO's and the 100 Days Evidence parties' information, we consider formally initiating enforcement proceedings for 60 companies regarding apparent violations of the California Independent System Operator and California Power Exchange tariff provisions prohibiting “gaming” and “anomalous market behavior”. This evidence will be considered by a FERC judge in a formal hearing, with the base remedy being disgorgement of the unjust profits associated with any proven violations.
We also clarify which market schemes constitute prohibited gaming and others that represent legitimate arbitrage or will otherwise not be prosecuted. Our definition of prohibited gaming behaviors is driven largely by the use of false information and deception to make a profit; not every behavior identified in the Enron memos was wrong. For example, selling power outside California to receive an uncapped price is legitimate.
Furthermore, we recognize that transactions may have the appearance of gaming but may have occurred for solid, non-manipulative purposes, so we offer some direction to the parties and the Judge for how to winnow thoroughly but expeditiously through the transactions.
The first show cause order, discussed above, addresses gaming behavior practiced by individual companies. But the Staff Task Force Final Report also explained that Enron and two other companies apparently practiced gaming and market manipulation by working in concert with other utilities in the West. In the second show cause order, Item E-4, we will consider formal enforcement hearings in which Enron and the other two alleged partnership organizers and their business partners, will be asked to submit evidence and proceed to hearings on the issue of jointly engaging in these gaming practices that violated Commission regulations and relevant tariffs to the disadvantage of customers and the marketplace. As with the individual gaming practices, the base penalty for these issues will be disgorgement of the unjust profits from the tariff violations.
The Staff Task Force Final Report also addressed the issue of economic withholding. In Item E-5, we will consider an order accepting the Staff’s recommended level of $250/MW as the threshold of review for anomalous bidding as defined in the MMIP in the tariffs. It publicly directs the Office of Market Oversight and Investigations to continue its investigation of bidding patterns in the ISO and PX markets to determine whether they represent economic withholding in violation of the tariffs’ anti-gaming provisions. OMOI will report back to us before year-end regarding those responsible for economic withholding, and the amount of their profits potentially subject to disgorgement. This is perhaps our most difficult issue, but we must and will conclude our review of economic withholding soon.
This will affect sales from May through October 2, 2000, which marked the beginning of the applicable refund period in our California refund proceeding. That refund proceeding is on a different track here and will proceed as we have directed in our March order. We have essentially bifurcated the process. For the October 2, 2000, through June 21, 2001, refund period, the soon-to-be-fully-determined market mitigated clearing price will determine refunds. For the prior period, beginning in May 2000, companies will be subject to disgorgement of unjust profits associated with tariff violations.
The Staff Task Force Final Report and the “100 Days Evidence” also alleged that some generators may have engaged in physical withholding. Today, we will receive a brief public update on staff's ongoing investigation of these matters.
What I have just described are backward-looking, remedial issues concerning past market behavior. In Items E-54 and G-24, we consider responses to the Staff Task Force Report's recommendations to add clearer market rules and some bite to electric our market-based rate authorizations and our gas marketing certificates. In those items today we have proposed rules which will add new behavioral constraints and reporting requirements to electric market-based rate authorizations and natural gas blanket certificates. We also touch upon solutions to some of the index and reporting issues we heard about yesterday at the well-focused Price Reporting Issues conference with the CFTC. We look forward to comments on these proposals.
Also looking forward, we consider, in M-1 and M-2, a Final Rule on Cash Management practices (the subject of a staff audit last summer), and a new NOPR on Regulated Company reporting requirements. These actions, our first following the Sarbanes-Oxley Act of last year, are intended to enhance transparency and public disclosure to our regulated entities. This serves not only the interests of the Commission in our duties, but also the interests of customers, state regulators, investors and counterparties.
Finally, today we consider orders in a number of different cases regarding some aspect of power contract reformation. Acting on the evidence and analysis compiled by our Administrative Law Judges in four Western cases, we find that the records do not support requests to modify or abrogate contracts entered into during the Western energy crisis. We also act today on a contract dispute arising in Connecticut.
I acknowledge that we do not rule with unanimity among the Commissioners on these contracts. One of the challenges of these orders has been that we each have strongly held and different approaches to the standard of review and the weighing of the evidence in these various cases. These are difficult, complex issues as we will discuss later on today. But while we may not agree on every conclusion, we do continue to work on these hard issues collegially with a mindful eye toward the inevitable court reviews of these decisions.
So today, on our second anniversary at FERC, Nora, and your tenth, Bill, we should be able to move significantly down the road on the numerous Western Dockets issues. After today’s meeting we will have the bulk of the decision making on the California clean-up behind us. Going forward, it is absolutely imperative that we have clear market rules in place to assure that this sort of severe dysfunction can never again victimize electricity customers. I look forward to our continued dialogue on the road around the country with market participants, RTO and ISO staff and state officials to accelerate the development of fair and robust power markets that bring benefits to customers, not pain.
In closing, I want to sincerely thank all the staff whose hard work, long hours and dedication made today’s actions possible, a full month earlier than I had promised.
I.Introduction
1. As discussed below, the entities listed in the caption (Identified Entities) appear to have participated in activities (Gaming Practices), that constitute gaming and/or anomalous market behavior in violation of the California Independent System Operator Corporation's (ISO) and California Power Exchange's (PX) tariffs during the period January 1, 2000 to June 20, 2001, that warrant a monetary remedy of disgorgement of unjust profits and that may warrant other additional, appropriate non-monetary remedies. These determinations are based on certain of the tariffs' provisions, an ISO study, a report by Commission Staff, and evidence and comments submitted by market participants.
American Electric Power Service Corporation Docket No. EL03-137-000 Aquila, Inc. Docket No. EL03-138-000 Arizona Public Service Company Docket No. EL03-139-000 Automated Power Exchange, Inc. Docket No. EL03-140-000 Bonneville Power Administration Docket No. EL03-141-000 California Department of Water Resources Docket No. EL03-142-000 California Power Exchange Docket No. EL03-143-000 Cargill-Alliant, LLC Docket No. EL03-144-000 City of Anaheim, California Docket No. EL03-145-000 City of Azusa, California Docket No. EL03-146-000 City of Glendale, California Docket No. EL03-147-000 City of Pasadena, California Docket No. EL03-148-000 City of Redding, California Docket No. EL03-149-000 City of Riverside, California Docket No. EL03-150-000 Coral Power, LLC Docket No. EL03-151-000 Duke Energy Trading and Marketing Company Docket No. EL03-152-000 Dynegy Power Marketing Inc., Docket No. EL03-153-000 Dynegy Power Corp., El Segundo Power LLC, Long Beach Generation LLC, Cabrillo Power I LLC, and Cabrillo Power II LLC Enron Power Marketing, Inc. Docket No. EL03-154-000 and Enron Energy Services Inc. F P & L Energy Docket No. EL03-155-000 Idaho Power Company Docket No. EL03-156-000 Los Angeles Department of Water and Power Docket No. EL03-157-000 Mirant Americas Energy Marketing, LP, Docket No. EL03-158-000 Mirant California, LLC, Mirant Delta, LLC, and Mirant Potrero, LLC Modesto Irrigation District Docket No. EL03-159-000 Morgan Stanley Capital Group Docket No. EL03-160-000 Northern California Power Agency Docket No. EL03-161-000 Pacific Gas and Electric Company Docket No. EL03-162-000 PacifiCorp Docket No. EL03-163-000 Docket No. EL03-137-000, et al. - 2 - PGE Energy Services Docket No. EL03-164000 Portland General Electric Company Docket No. EL03-165-000 Powerex Corporation Docket No. EL03-166-000 (f/k/a British Columbia Power Exchange Corp.) Public Service Company of Colorado Docket No. EL03-167-000 Public Service Company of New Mexico Docket No. EL03-168-000 Puget Sound Energy, Inc. Docket No. EL03-169-000 Reliant Resources, Inc., Docket No. EL03-170-000 Reliant Energy Power Generation, and Reliant Energy Services, Inc. Salt River Project Agricultural Docket No. EL03-171-000 Improvement and Power District San Diego Gas & Electric Company Docket No. EL03-172-000 Sempra Energy Trading Corporation Docket No. EL03-173-000 Sierra Pacific Power Company Docket No. EL03-174-000 Southern California Edison Company Docket No. EL03-175-000 TransAlta Energy Marketing (U.S.) Inc. Docket No. EL03-176-000 and TransAlta Energy Marketing (California), Inc. Tucson Electric Power Company Docket No. EL03-177-000 Western Area Power Administration Docket No. EL03-178-000 Williams Energy Services Corporation Docket No. EL03-179-000
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