Electricity Trading Is Target of State Probe
California officials are probing a vast private network of electricity trading floors suspected of being a central culprit in California’s spiraling energy prices.
A special state Senate panel investigating alleged manipulation of the energy market is zeroing in on hundreds of thousands of secretive transactions each year that help determine whether California will have the power it needs--and what it will have to pay to get it. Those activities also are central to a lawsuit by the San Francisco city attorney, who has accused power companies of using unfair business practices to reap huge profits from the state’s volatile and vulnerable energy market.
A single electron may be traded nearly a dozen times, often at escalating prices, before reaching California. By then, the actual cost of producing the electricity may have no relation to its price.
Unlike other commodity and stock exchanges, the frenzied daily activity on the energy trading floors escape any independent oversight, which critics contend makes the operations ripe for collusion and price-fixing.
“They’re playing the California power game,” said attorney Michael Aguirre, a former federal prosecutor now suing power companies on behalf of Lt. Gov. Cruz Bustamante. “The trading is the epicenter of the whole enchilada. They trade and inflate the value.”
Power company representatives say their trading floors operate legally and ethically. “I don’t think there has ever been the slightest shred of evidence [of] something illicit or wrongdoing,” said Gary Ackerman of the Western Power Trading Forum, an industry trade group.
Ackerman and players in the market say prices are not always ratcheted up through the trading. Often, they say, traders can match supply and demand to help stabilize prices through daily transactions and long-term contracts.
Still, Aguirre and others say, these sophisticated trading operations have outmaneuvered bureaucrats at Cal-ISO and the state Department of Water Resources, the agencies responsible for buying billions of dollars worth of power over the past several months.
The sprawling trading floors, scattered across the country, are marvels of high technology. Amid banks of computers and huge wall screens that track weather, electricity prices and demand across vast regions, mathematicians, meteorologists and rows of gung-ho traders try to optimize profits buying and selling one of the world’s most volatile commodities.
“These are trading floors that are well outside any regulatory format,” state Sen. Joseph Dunn (D-Santa Ana) said Thursday. “What impact do these trading floors have on the situation in California?”
Plant Operations Also Scrutinized
Although trading floors are an important focus of state authorities, the probes of the power companies include an array of issues. Investigators are digging into the operations of power plants to determine whether unnecessary shutdowns have been used to tighten supplies and hike prices. Dunn, a onetime consumer attorney, is heading the Senate investigation panel that is trying to unravel these issues and the role of the trading floors, operated by the nation’s largest power marketers: Enron, Mirant, Duke Energy, Dynegy Inc., Williams Cos. and Reliant.
The committee is seeking records that could determine whether the power companies have swapped information on trading tactics to maximize prices. Among dozens of categories of documents Dunn’s committee has requested--and may ultimately subpoena--are computer records from trading floors, recordings of communications between traders for different companies and training manuals for traders.
“We know one product of that trading is it drives up the price. . . . What are you trading for, other than to drive up the price?” Dunn said in a recent interview.
His committee, which has yet to uncover any wrongdoing, is battling with the power companies to obtain information the firms insist is confidential.
San Francisco City Atty. Louise H. Renne also is focusing on trading-floor activity.
“That is a central concern of ours,” said Owen Clements, Renne’s chief of special litigation. Clements suspects power traders may be “churning” megawatts through repeated sales and boosting prices.
“If everyone passes it around and makes a profit, and the ratepayer and the state of California are stuck with the bill . . . that certainly looks like an unfair business practice,” he said.
A spokesman for Houston-based Enron, which operates one of the busiest trading operations, said critics misunderstand the energy market, where profits are not necessarily tied to high prices.
“We’re agnostic about the direction of prices,” Mark Palmer said. “We make money one way or the other.” He said the trick is in having a diversified portfolio--and offering unique risk services--to absorb the changing market.
Palmer said those implying misconduct on the trading floors are “100% politically motivated. . . . These are folks who want to return California to [power] regulation.”
Still, some industry officials acknowledge that some additional oversight of trading floors may be needed. Ackerman, of the power trading association, said his members have asked federal regulators to consider an auditing program to review trading activities.
“If people don’t have confidence in trading floors,” Ackerman said, “that’s a problem.”
*
Times staff writer Miguel Bustillo contributed to this story.
