Union Tribune

April 18, 2003

Power companies admit to misdeeds during state crisis

By TOBY ECKERT
COPLEY NEWS SERVICE

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.

California officials scoffed at the companies' statements.

"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.

But BP said the transactions "did not manipulate the market."

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.

BP made a similar argument.

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."