San Diego Union Tribune

September 27, 2005

Market manipulation ruled out in cost surge

By Toby Eckert

WASHINGTON – Market manipulation did not play a role in a spike in costs associated with electricity imported into California, federal regulators concluded in a report released yesterday.

The price increases reported earlier this year by the California Independent System Operator, which manages the state's power grid, were caused by ISO "rules then in effect that have now been adjusted," investigators for the Federal Energy Regulatory Commission said.

ISO spokeswoman Stephanie McCorkle said the agency accepts that conclusion.

The ISO asked the federal commission to investigate in March after noticing a surge in payments under a program designed to encourage electricity imports.

Market rules allowed the ISO to order power from import sellers 45 minutes before prices are set in the market. If the market price ended up lower than what the sellers originally bid, the ISO made up the difference, dubbed an "uplift cost."

A flaw in the procedure accepted matching bids to buy and sell power that would otherwise have been rejected if they were submitted separately. Over five months beginning in October 2004, energy traders earned about $18.5 million from overlapping bids to sell and buy wholesale power in California.

Some energy experts said the trades resembled a price manipulation tactic that was used during the state's 2000-01 power crisis, when electricity prices soared, causing shortages and rolling blackouts.

Nearly all of the fees questioned by the ISO were paid to Powerex, a Canadian energy company.

The payments "were the result of (an ISO-) requested and Commission-approved rule" and "Powerex reasonably could not have foreseen that its increased bidding activity would result in the uplift costs complained of" by the ISO, the federal commission's Office of Market Oversight and Investigations found.

After asking the federal commission to look into the matter, the ISO changed its trading rules and "that has headed off the problem," McCorkle said. "FERC is the final authority on the issue," she added.

»Next Story»