As Blackouts Hit California, Traders Manipulated Market

~~~continued~~~

A year later, an uneasy calm has settled over California's electricity grid. The last rolling blackout was in May 2001. The state survived near-record demand for power during a July heat wave.

But the calm may be sowing the seeds of new troubles. Conservation is slipping even as the state's economy remains sluggish. Aging power plants are being retired as new units begin operating. Ambitious plans for additional power plants are crumbling along with the balance sheets of energy companies; Enron went bankrupt in December 2001 and several other big suppliers are in deep financial trouble. PG&E remains mired in bankruptcy, and federal and state officials disagree about how to redesign the system.

"We may have put a Band-Aid on this problem," says Alan Vallow, utility director for the central California city of Lodi. But the state is "creating a crisis down the road."

Write to Scott Thurm at scott.thurm@wsj.com, Robert Gavin at robert.gavin@wsj.com and Mitchel Benson at mitchel.benson@wsj.com

It's "get energy traders" day at the WSJ. They are also running a hit-piece on Enron.

The last rolling blackout was in May 2001. The state survived near-record demand for power during a July heat wave.

The last publicized rolling blackout was last year. But evidently the state failed to avoid blackouts during a September 2002 heat wave, and some Californians experienced blackouts without any news to warn of an energy alert.

WECC Daily Report of System Status (Unreported 900 MW S. Cal Blackout)
WESTERN ELECTRICITY COORDINATING COUNCIL | September 4, 2002 | WECC staff
Posted on 09/05/2002 9:36 AM Pacific by Robert357

I apologize for the length of this post. Such a great article. Full of so many facts, but drawing the wrong conclusions.

With a few more phone calls, the deal was done. On paper, the power coursed through five owners and more than tripled in price. By the time it reached California, the operator of the state's power lines had to pay $12,500 for Mr. Tish's $3,500 block of electricity.

So the smoking gun for this article is a block of electricity that cost $3,500 originally. This is so little money in the world of power sales as to be the equivalent of chump change. Does the author really think that power was traded in the California energy crisis is such little tiny blocks as to have this be a typical example of what caused the California energy crisis? It couldn't have been that way or there would have had to have been ten's of thousands of energy traders to handle the required volume. No, this is not the cause of the claim for billions of money overpaid.

Thus, Dynegy and three other suppliers wound up splitting $8 million for keeping plants on call for five hours, according to state and federal records.

OK, now we are getting into some real money; $8 million in five hours! Let us examine this one more closely. There were lots of plants that were suppose to be shut down because they were at the end of their air pollution emission limits. Some of these plants had fairly steep air board penalties if they exceeded their allowances. Also some of these plants might require a full crew of plant workers and operators to report for a full shift under union rules even if they were only operated a couple hours. Some of these plants might further require a slow build up of temperature in advance of operations. Some of these plants might require special very high cost natural gas transmission if they had not been scheduled to operate. That could be a lot of cost.

However, $9,999 a MWh is probably more than the some of all that cost unless the plants in question were 10 MW units where labor costs, startup costs, etc. could dominate the economics of five hours of power delivery. Considering that $8 million is involved at a price reported to be about $10,000 per MWH, we are probably talking 800 MWh in total or 160 MW for each of the five hours. So five companies dividing 160 MW is about 30 MW per company.

Again we have very small quantities that could legitimately be priced high, maybe not a full $9,999 per Mwh but high none the less.

The congestion schemes apparently produced small gains for Enron, roughly $60 million in 2000, according to FERC. But insights drawn from those strategies may have helped Enron reap $1.8 billion in profits trading electricity during 2000 and 2001. Enron didn't own California power plants, so its profits depended on price volatility, which lets traders buy low and sell high. Congestion, or the appearance of congestion, can make prices more volatile.

To see how, consider what happened in May 1999, when Enron proposed moving 2,900 megawatts of power from Nevada to Southern California on a line that could accommodate only 15 megawatts.

OK, so the ISO is so stupid that if Enron says it wants to Move 2,900 MW over a 15 MW line, the ISO doesn't say no, you can't do that! This is not an example of Enron being brilliant. This is an example of the ISO & PX being absolutely stupid and incompetent! Nobody worth his salt should have allowed a power schedule like this to be placed! To do so would be to say that the transmission system suddenly needed to change shape in a big way and that someone should run out and build a transmission line in a hurry. That is what congestion pricing is about in theory.

Now the other little piece of information here is that Enron made $60 million in 2000 but $1,8 billion in 2000 and 2001 in trading electricity. I would wager that the $1.8 billion didn't all occur in 2001 in a way that you and I would understand. I would wager that the $1.8 billion is a national figure based on taking profits from many multiple year sales made at the height of the energy crisis. So this number is probably ten or more years worth of profits across the entire country and maybe even the world. This is therefore not the cause of the $8 billion over charge claims by California.

State officials blame El Paso Corp., Houston, owner of one of two big pipelines that bring gas to Southern California. California officials say El Paso's pipeline unit and its energy-trading affiliate manipulated gas supplies to increase prices. (El Paso Corp. isn't related to El Paso Electric.)

In February 2000, El Paso sold one-third of the capacity on its pipeline for 15 months to the affiliate, El Paso Merchant Energy. Merchant won the right through an auction, but state officials say the deal was rigged, with a secret discount that wasn't advertised to other bidders. Then, officials say, the two units limited the amount of gas coming into California, with the goal of raising prices.

OK, I believe that there was a combination of shortage in natural gas pipe line capacity and some manipulation by the pipeline and gas companies that was part of the price roll up. However, does anybody remember the natural gas pipeline explosion near El Paso (actually in New Mexico near a bridge where a family was camping and killed)? I remember it and remember how freaked communities were that had major pipelines running through them. I also remember that not only did it take a long time to get the pipeline fixed, but that there were proposed laws in the US Congress to dramatically alter pipeline regulations and communities demanded that pipelines be taken out of operation to be tested to insure their integrity. I suspect that the accident has never been fully examined as a root cause of some of the price spike in California.

Such stunts didn't matter much until the warm spring of 2000, which reduced the water available for hydroelectric dams in the Pacific Northwest, source of up to 20% of California's summer power. Meanwhile, electricity use across the West grew much faster than projected. The era of energy surpluses had ended

A couple of points. California's statement that it will get 20% of its electric power needs from renewable resources by new legislative mandate. I guess they want year around NW hydro or something else. Historically they got PNW hydro for around $20 to $30 per MWH. During the drought there was little PNW hydro and a lot of PNW utilities hooked up diesel generators to make electricity at about $100 to $200 per MWH and sold that to themselves and any extra to California. That five fold price increase and the sky high prices of natural gas (normally $2 to $3 per MSCF but sometimes going for $25 to $150 per MSCF) is what drove the price of California electricity through the roof! The cause of the California energy crisis was a lack of price response on the part of the consumer combined with panic buying on the part of the DWR, all worked into a dysfunctional regulatory system that was pointed out early in the process as having problems.

The cause of the California energy crisis was a lack of price response on the part of the consumer combined with panic buying on the part of the DWR, all worked into a dysfunctional regulatory system that was pointed out early in the process as having problems.

An excellent summation.

Excellent post, to which I would add the following comments:

• Energy companies seized on loopholes and local shortages to charge prices hundreds of times higher than normal.

Loopholes. That makes me laugh. The morons in the Davis (mal-)administration demanded "price caps", and imposed "must sell" and "maintenance" regulations on in-state generators, and now act surprised when the victims found ways around their stupid rules. These companies are in business for one reason: To make money. They would be foolish not to take advantage of "local shortages", brought about by the NIMBYs and BANANAs in Kali.

• Suppliers withheld power from the state's primary market, and sometimes idled power plants to induce shortages and boost prices.

As you said, the main reason these plants shut down at the peak of the crisis was that they had reached their emission limits. Reliant Energy and the $1900 per MW. NOx credits went from less than 10 cents per pound, to over $3! And the PUC would not let the generators recoup that cost, so they just shut down. In another thread, the manager of the AES Alimitos plant near Seal beach said, "the company was not able to successfully juggle competing pressures from the AQMD and the state's power-grid operator." The plant had just been fined a record $17 million by the AQMD for continuing to operate beyond their emission limits, AT THE REQUEST OF THE CAL-ISO!

In other cases, the Cal-ISO ordered them to shut down out of pure incompetence. Where is the thread on the plant that the union guys charged that the management "ordered them to shut down to create a shortage". San Diego, wasn't it? It turned out that the Cal-ISO told them to shut down.

And having worked in plant maintenance, I can tell you that there is always a huge stack of maintenance items which are put into work when there is an unplanned outage, like a steam tube rupture.

And speaking of that, it can take weeks to repair one of those things. First, you have to cool the plant down, then purge the boiler, then open it up and build scaffolding from the bottom up to the pendants - possible 100' high or more. You have to install ventillation and lighting, and only then can you actually repair the tube leak. Then the whole process is reversed.

Thirdly, the geniuses at the Cal-ISO issued impossible regulations. From Calif ISO: Noticeable Rise In Generators' Non-Compliance

Generators Wary About New Market Requirements
Days after the Aug. 2 [2001] incident, the ISO sent a notice to market participants setting forth new operational guidelines. One of the guidelines is simply unworkable for operators of a certain kind of large power plant, said Reliant's Wheatley.
The requirement is to power, or "ramp up", a plant 10 minutes before it is scheduled to provide electricity, then "ramp down" 10 minutes after it is scheduled to stop. That isn't possible for combined-cycle plants, which use waste heat from natural gas turbines to produce steam for conventional steam turbines, Wheatley said.
"You can't just flip the switch on a combined cycle plant, the way you can with a peaker. It takes a half-hour to bring one of these plants up," said Wheatley.

• Gas companies manipulated supplies and prices, driving up the cost of a main ingredient of electricity.

FERC has already looked into this and found nothing to that story. But that doesn't seem to bother the WSJ.

• Enron played a much bigger role than previously believed in California's energy market. Its trading strategies overwhelmed regulators and drove up prices.

At the peak of the crisis, Enron supplied a maximum of 4% of Kali's electricity needs. Tell me how such a small-time player could be responsible for what happened. And if they were making so much money, how could they have gone bankrupt, eh?

From The Enron Blame Game

Since corporate ruthlessness usually reflects the vigor with which a company pursues profits, it would appear that Enron was actually not ruthless enough. For instance, records pried from the governor's office by legal action reveal that during last year's crisis Enron was charging less for electricity than the market average and significantly less than Davis's own L.A. Department of Water & Power, under the direction of the governor's "electricity czar," David Freeman.
Even were Enron overcharging, it was scarcely a major player in California's market. According to the governor's office, Enron only supplied about 4 percent of the state's electricity needs. Davis's relentless campaign to lay all or even some of California's electricity troubles at Enron's doorstep is ludicrous on its face.

I'm thinking of cancelling my WSJ subscription over this article, and the other hit piece on Enron. Clearly Al Hunt as taken over their shop.

Nice additions and documentation of the air pollution regulation aspects to the high energy prices.

However, the item you posted that I liked the best was toward the end about Ernon being such a small player and yet being the focus of all the blame.

Davis's relentless campaign to lay all or even some of California's electricity troubles at Enron's doorstep is ludicrous on its face.

If one takes a look at all the examples and disects them, yes there are elements of price gouging. Sometimes they are gouging because of government regulation imposing huge fines. Sometimes by are because government actions regarding pipeline regulation. Sometimes they are because of government caused panic buying. But usually, the examples don't add up to the huge $8 billion dollar claim that keeps coming out of Gov Davis office.

In my opinion, if California paid an $8 billion penalty in the California energy crisis; probably $1 or 2 billion was due to California air regulations,$2 or 4 billion was due to very high natural gas prices, maybe $200 to $400 million was due to price gouging, and the rest was due to ISO/DWR/PX incompetence & panic buying. In summary, if Davis is right about the $8 billion, most of it was under the control of the folks he appointed or who were controlled by those he appointed.

Thank you. There are lots and lots of third and fourth order causes of the California energy crisis and some of them are due to price gouging, but the big reasons have nothing to do with Enron, Calpine, Duke, Reliant, etc. One would have expected the price of power in California to be high based on the PNW dought and the high Canadian price of natural gas. However, the big reasons that really drove up the price of power in California are too close to home for incumbent elected officials to complain about.

I would like to add an additional comment.

Sometimes I read something that just makes me mad. Today I got my latest issue of Clearing Up, an electric energy trade journal. Well it turns out that the Bonneville Power Administration had to spend about $1.5 billion (yes with a B) last year on power purchases because of Fishery requirements imposed on the operation of the Columbia River System.

Click here for article for one week only

BPA made it official last week: the agency spent close to $1.5 billion on power purchases last year. Bonneville hydraulic engineer Roger Schiewe told the Power Planning Council Wednesday that the agency had to buy power at market in order to maintain reservoir levels mandated by the current biological opinion. Without those constraints, Schiewe said the system could have generated about 1000 aMW more a month over the winter. With power prices averaging nearly $300/MWh through the spring, the agency spent big-time. The same amount of power would only have cost $106 million the year before.

OK, so California is screaming about its $8 billion in refunds, because power costs were unjustly high. Well, the $1.5 billion is a lot of money for BPA's customers. I don't think people either understand or want to believe the high cost that various air pollution, save the fish, and other kinds of environmental regulation are in terms of higher electric power bills! Again, I would wager that a big chuck of the California complaints about high power cost can be traced to various kinds of enivornmental regulations.

Speaking of Cal-ISO/DWR incompetence and Bonneville:

Hard-Boiled Bidding for Kilowatts Water agency said to be in over its head as a trader

By nearly all accounts, the luckless bureaucrats at the DWR are being torn to shreds by professional energy traders, who see in California's power- purchasing plan a golden opportunity to make off with billions in extra profits.
"It's like being in a lion cage or a snake pit, however you want to define it," Hannigan said. "We've definitely gotten burned. That goes without saying."
In fact, state officials estimated last week that the DWR is shelling out roughly $350 million a week on the volatile electricity "spot" market and will have spent almost $4 billion by the end of the month.
[snip]
Several industry sources said they had been advised not to discuss the DWR's performance since a trading manager at Bonneville Power Administration in Portland, Ore., was quoted as saying that California's new electricity buyers "agree to prices that make you wonder."
The manager, David Mills, told the Wall Street Journal that the DWR is so out of its depth that he has instructed Bonneville's traders "to cut California some slack" by occasionally offering cut-rate prices.
A Bonneville spokesman said last week that Mills had been misquoted, but the damage already was done: The DWR is now widely perceived in energy circles as a pushover.
At this rate, the state will use up by the end of July the entire $10 billion authorized by the Legislature for power purchases.

And speaking of "overscheduling" (transmission line congestion), from California Struggles in Role Of a Large Buyer of Power

Many of the contracts contain "take or pay" provisions that commit the state to pay for power for five to 20 years, whether or not it is needed. That may help to explain why in June a new problem has cropped up -- "overscheduling" -- where the state, at times, has ordered too much power to be delivered. To keep from overloading electric lines, the ISO has had to order some generating units to produce less juice.

And speaking of emission regulations: From Air Emission Credits Called High Priced

In effect, companies are investing in air-emission credits in much the same way they invest in stocks.
Coy said one company, Pinnacle West, registered a $412,500 air-emissions credit purchase on March 12, then sold the same credits March 29 for more than $1 million.
The increase in the costs of credits roughly paralleled the state's surge in wholesale electricity prices.
Three years ago, one type of credit sold for $451; this year it went for more than $45,000.

OK, since we are bringing up Golden Oldies, I thought I would bring this one out of retirement as well! Just so folks don't think that this is just the opinion or crazy FREPers.....

Go to the following Website for a course outline from a University of Chicago Graduate Bus School Course and look at class 16.

Link to U of Chicago Course Outline >

There are two things to look at the first is the Power Point slides (see the last slide).

The course instructor argues that the true causes were:
(1)Short Term Contracts and The Requirement to Sell Through the PX
(2)Underscheduling of Load and Resources
(3)Governance of PX and ISO
(4)Auction Design
(5)Demand Response

Second there is FERC's analysis of the problem back when everyone was in the thick of things. That is found in the report, which is linkable at that site.

FERC basically says that the State of California messed things up pretty badly and provided some solutions that the State refused to implement.

Hopefully this provides a little more documentation that the problem resides with the State of California government (legislature, PX, ISO, DWR, Gov's Office) and that they were not the innocent victim they are trying to portray

Interesting link. I don't do Powerpoint, but I downloaded the .pdf file.

The Commission finds in this order that the electric market structure and market rules for wholesale sales of electric energy in California are seriously flawed and that these structures and rules, in conjunction with an imbalance of supply and demand in California, have caused, and continue to have the potential to cause, unjust and unreasonable rates for short-term energy (Day-Ahead, Day-of, Ancillary Services and real-time energy sales) under certain conditions.

One of the FERC recommendations from Nov. 2000 was the underscheduling penalties which have now gone by the wayside. I suspect that was because the penalties against Cal-ISO quickly ran up into the Billions of dollars, and politically, FERC had no way to enforce them. Cal-ISO is obviously still engaged in underscheduling.

Let's hope FERC stands fast on the independence issue.

Of course, a major West Coast grid crash would give FERC the political cover to step in and fix both the underscheduling and independence problems. Maybe FERC has decided to just step aside until the inevitable happens?

?? the addition of a penalty charge for deviations in scheduling in excess of five percent of an entity’s hourly load requirements and the disbursement of penalty revenues to the loads that scheduled accurately;
?? the establishment of independent, non-stakeholder Governing Boards for the PX and the ISO; and