California: Power companies admit to misdeeds during state crisis

WASHINGTON – Two energy companies facing the loss of their ability to sell electricity on the open market have acknowledged improper behavior by some of their traders during California's power crisis and say they have fired them.

However, in filings with federal regulators this week, Reliant Energy and BP Energy asserted that the traders' activities had no impact on the Western power market and did no harm to consumers. The companies said revoking their authority to sell wholesale power at market rates would be an overly harsh punishment that would send shock waves through an already-fragile industry.

"They don't consider it all that bad, but it was bad enough for them to fire a couple guys over it," said Richard Katz, a senior adviser to Gov. Gray Davis.

Two Enron Corp. divisions and several Enron natural gas affiliates are facing similar sanctions. But their responses to the Federal Energy Regulatory Commission, which were due Wednesday, were not immediately available.

The threat by the commission, commonly known as FERC, to revoke the companies' trading authority stems from a yearlong investigation of alleged price manipulation by dozens of energy companies during the power crisis that shook California and other Western states in 2000 and 2001. Wholesale electricity and natural gas prices soared, leading to shortages and scattered blackouts.

The investigators said they uncovered evidence that a pair of traders for Reliant and BP struck deals in April 2000 that were apparently meant to inflate prices at a key electricity trading hub in Arizona.

The BP trader would offer to sell electricity on an electronic trading platform and the Reliant trader would buy the power at the posted price. The BP trader would then buy back the power off the exchange at the same price to negate the deal.

In recorded telephone conversations and transcripts turned over to FERC by Reliant, the BP trader explained that he was trying to increase the price of power and needed the Reliant trader to "lift his offer" to a certain level.

"This market was clearly being manipulated," the investigators said in their final report, released in March.

The trades were conducted to create an audit trail for market prices to satisfy industry accounting standards and "did not result in financial benefit or loss to BP Energy or the trader involved and did not harm consumers," BP said in a summary of its filing.

Nonetheless, the conversations were "inappropriate," BP said, and the company "regrets and apologizes for the behavior of its trader," who was fired.

Similarly, Reliant said its trader's conduct "was plainly wrong" but "does not appear to have affected the market or benefited" the company. The trader was fired, senior trading managers were replaced and the company made changes in procedure to prevent similar episodes, the company said.

"Imposition of the ultimate sanction of denying market-based rate authority . . . for the transgressions of an individual trader, after the company itself has taken extensive corrective measures, would reverberate throughout the industry, calling into question whether the risks of trading can be justified for anyone in such a regulatory environment," Reliant argued.

Katz, Davis' adviser, said the punishment "would be appropriate," though he declined to say how long the trading authority should be suspended.

"Our view is that California ratepayers got ripped off, and unless FERC steps up and acts as the market cop they claim to be, you'll never have a functioning market because companies will violate the rules with impunity," he said.

The state has demanded $8.9 billion in refunds from power sellers, a figure far higher than FERC has indicated it will grant.

The FERC investigators recommended that the commission order more than 30 other companies, including Sempra Energy and its subsidiary San Diego Gas & Electric, to prove that their trading behavior during the power crisis was proper or be forced to surrender ill-gotten profits.

In a flurry of recent filings with FERC, many of the companies argued strenuously against such a move. Sempra joined several in contending that California's market rules were "simply too vague and amorphous for participants to know in advance what particular conduct was prohibited."

Found this:

STATEMENT OF JEFF MORGHEIM
CLIMATE CHANGE MANAGER, BP
TO SENATE COMMITTEE ON COMMERCE, SCIENCE AND
TRANSPORTATION
FULL COMMITTEE HEARING ON SOLUTIONS
TO REDUCE GREENHOUSE GAS EMISSIONS

SEPTEMBER 21, 2000

Mr. Chairman and Members of the Committee, my name is Jeff Morgheim and I am the
Climate Change Manager for BP. I’m based in Houston, Texas, where I manage BP’s
Emissions Trading System. I’m excited to present our system to you.

The BP system is
the world’s first global trading system for greenhouse gases and is the only trading
system that has voluntarily participation across a company’s entire operations.
The BP trading system is the product of a commitment to explore the use of trading
systems to control emissions. The trading system is a powerful tool that is helping BP
meet its reduction target cost effectively. I would like to recount how we developed the
system.

In May 1997, Sir John Browne, chief executive officer of BP, announced that BP would
reduce its emissions of greenhouse gases and launch a pilot internal emissions trading
system. In July of that same year, BP teamed with Environmental Defense to develop the
pilot system. Environmental Defense has been an important partner and we want to again
express our thanks to Fred Krupp and Dan Dudek (insert titles) of Environmental
Defense for their contribution and continued support.

In September 1998, the pilot system was launched. The pilot involved twelve business
units from across the globe, representing approximately 25% of the company’s
emissions. In that same month, Sir John Browne announced that BP would reduce its
greenhouse gas emissions by 10% from 1990 levels by the year 2010. He also announced
that we would launch a company wide trading system by 2000. In November 1998, I had
the privilege to sell the first emissions permit in the pilot system while working for the
Forties Pipeline System in the United Kingdom.

I would like to briefly describe how our system functions. On January 1 of this year, BP
launched its company-wide emissions trading system. More than 150 business units in
over 100 countries participate. These business units range from oil exploration to power
generation. On January 14, the first trade was made with a sale to our refinery in Toledo,
Ohio. I am pleased to announce that BP traded its millionth ton of greenhouse gas just
over two weeks ago, with the sale of permits from our gas operations in the Western
United States to our refinery in Salt Lake City, Utah.

I would like to outline the mechanics of our global trading system. Every year, BP sets a
target for greenhouse gas emissions stated in carbon dioxide equivalent terms. BP then
allocates its target to every business unit in the form of permits. One permit is equal to
one ton of carbon dioxide equivalent emissions. Each business unit is required to have
enough permits to cover their annual emissions.

Each business unit then decides if it more economical for them to live within their permit
level, to invest in reductions below their permit level and sell the additional reductions to
other business units, or to exceed their permit level, provided they have bought permits
resulting from reductions at another business unit. In this way, BP achieves the company
emissions target at the lowest possible cost.

Trading alone does not deliver emissions reductions. The trading system, however,
provides our managers with the incentive to attack emissions with innovation. For
example, in the Western United States, we are changing 4,000 valves on our gas well
sites to reduce emissions of methane equivalent to more than a million tons of carbon
dioxide per year while also saving the company money.

As stated earlier, this year we not only launched the full trading system across our
company, but traded our one millionth ton of greenhouse gases. This milestone was
reached only two years from the launch of our pilot system and our commitment to a
company-wide system.

We have learned many lessons along the way. The most important lessons are: to keep
things simple, to get started, to capture the learning and to continuously improve the
system. Practical experience is the key to developing a robust system.

Mr. Chairman, I would like to conclude by saying that BP’s experience is that trading is a
powerful tool in the management of emissions in a cost-effective way. We haven’t
stopped learning and BP seeks to continuously improve its trading system. We stand
ready to share our experience with all interested parties.

Thank you for the opportunity to share our system and our lessons.

While searching I came across this from Forbes:

Top Of The News
In California Energy Crisis, Some Dogs Still Bark
, 03.27.03, 9:28 AM ET

NEW YORK - California Governor Gray Davis has oft-vowed to fight the energy companies that plundered his state "until the last dog dies." Yesterday a dog died, but it was hardly the last dog as the Federal Energy Regulatory Commission issued its latest ruling that dozens of companies will likely owe $3.3 billion in refunds due to massive "gaming" of the state's energy markets.

For Gov. Davis and the state, blaming the companies--Enron (otc: ENRNQ - news - people ) prominent among them--was worthy of praise. But FERC also soiled the proverbial carpet by blaming the state in part for the crisis that led to economic calamity and rolling blackouts in areas served by its main power supplier. The FERC staff "concluded that an underlying supply-demand imbalance and flawed market design combined to make a fertile environment for market manipulation," according to a statement summarizing the report.

The report itself is massive, as FERC reports often are, and is based on a 13-month investigation in which the staff collected "more than two terabytes of material, the equivalent of 1.5 million floppy diskettes or 3,341 compact diskettes." Those materials are on the FERC Web site, though this reporter has not quite finished reading them.

Advocates for the state have already digested and have vowed to unleash dogs of litigation. "It took two years for FERC to confirm what we knew all along: there was widespread market manipulation and a massive rip-off of California ratepayers," Davis said. "Talk is cheap. Until California gets its money back, the FERC hasn't done its job. They still have an opportunity to do. If not, we'll see them in court."

California has said it believes it is owed $9 billion, and many companies still defend their actions, so a court fight is all but certain. Still the FERC ruling yesterday was an improvement on a ruling by an individual FERC administrative law judge that put the rebate figure at $1.8 billion.

The $3.3 billion number is enough to offset the full $3 billion that the FERC judge said the California Independent System Operator and the California Power Exchange still owed their suppliers, but not nearly enough to satisfy Davis, who has said he wants roughly three times as much.

California also has lost for the time being another key issue as FERC signaled it was unlikely to overturn any of the more than $40 billion in long-term power contracts that California and other Western states signed at the height of the 2000-2001 crisis. Those high-cost contracts were seen as a way of assuring the state's power supply at reasonable rates, but after the crisis, when prices fell, they appeared much too costly. The state has argued that the rampant price manipulation colored the negotiations so those deals should be canceled.

The FERC yesterday concluded that the administrative law judge should have used lower "[natural] gas price proxy values" in calculating the refund. Using revises figures, led to a higher refund. The precise refund figure is yet to be calculated.

While FERC said it was planning new enforcement actions against units of Reliant Resources (nyse: RRI - news - people ), BP (nyse: BP - news - people ) and Enron, these companies have been ordered to show why their ability to trade electricity at market rates should not be revoked. FERC cited "numerous" manipulations by Enron and "apparent manipulation" of electricity prices at the Palo Verde hub in Arizona by Reliant and BP.

Companies the FERC accuses of gaming include Sempra Energy (nyse: SRE - news - people ), Canadian provincial utility BC Hydro, Avista (nyse: AVA - news - people ), American Electric Power (nyse: AEP - news - people ), Duke Energy (nyse: DUK - news - people ), Mirant (nyse: MIR - news - people ), Dynegy (nyse: DYN - news - people ), Calpine (nyse: CPN - news - people ), Reliant, Williams Cos. (nyse: WMB - news - people ) and Constellation Energy Group (nyse: CEG - news - people ). Those companies should have to prove disgorge profits from withholding power between May 2000 and October 2000, unless they can show they did nothing wrong, FERC staff recommended.

It is not clear what, if anything, each of these companies might be ordered to contribute to a final reckoning. But California at least has put more meat on the bones of its charges, once widely derided, that illegal profiteering contributed to energy price spikes in the state.

But the commission also emphasized that the state's own method of energy deregulation set the stage for the traders' abuse. That system allowed wholesalers to charge whatever the market would bear but capped the amount retail consumers could be billed. The deregulation plan also forced utilities to sell their power plants to out-of-state companies. This plan left the utilities vulnerable to extremely high prices in times of relative scarcity.

FERC Chairman Pat Wood III said yesterday in a statement, "It is time to bring this crisis to a close." But with Davis vowing court action and with dozens of proceedings against companies now on the table, that seems unlikely to happen any time soon. Somewhere in the Golden State, another dog barks.

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