How Enron Manipulated State’s Power Market

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One of Enron Corp.’s favorite trading strategies during the California electricity crisis was like booking an airline ticket for a flight you don’t intend to board.

It’s a waste of time and money unless you’re sure the flight will be overbooked and the airline will have to dish out rewards to passengers who agree to stay home.

Enron--and, possibly, other energy traders--worked variations on this theme to collect special fees from the California Independent System Operator, the embattled traffic cop for the state’s power grid following deregulation.


Sometimes Cal-ISO would pay Enron premiums not to use power that the firm didn’t really need in the first place. Sometimes Enron would exploit California’s emergency price caps, buying power at the capped price and then selling it at huge profit out of state, where there were no price caps.

Enron’s trading strategies were described in memos released Monday by the Federal Energy Regulatory Commission. The memos, written by lawyers for Enron, detailed an array of trading methods that went by such swashbuckling nicknames as Death Star, Wheel Out, Fat Boy and Get Shorty.

California officials have pounced on the Enron memos as proof that energy traders and freelance power generators--mainly from out of state--were manipulating California’s energy markets, raising prices and even triggering blackouts.

But the senior member of Cal-ISO’s market surveillance committee, Stanford University economist Frank A. Wolak, said Wednesday that most of the schemes described in the memos were garden-variety trading strategies common to any market--whether for stocks, natural gas or used cars.

Power trading came into being in California with the advent of energy deregulation in 1998. Before that, regulated utilities with state-granted monopoly territories generated the power and distributed it directly to consumers.

Under deregulation, utilities sold many of their generating plants and became giant consumers, bidding for electricity from power producers, some from out of state, some running the same California plants that used to belong to the utilities.


In the new market, traders--often pure middlemen who did not own power plants--began to ply their trade. One of their functions, which Wall Streeters call arbitrage, was to try to buy power at a low price in one place and sell it at a higher price somewhere else.

The biggest and arguably the savviest of the traders was Enron. Here, according to the memos released Monday and interviews with trading experts, are some of the methods it used to try to profit from the unique characteristics of the California market:

* In one specialized part of the market, Cal-ISO required participants to submit daily schedules stating how much power they intended to supply the next day and how much they intended to use. The two components were supposed to be in balance.

Realizing that California’s utilities, for reasons of their own, were habitually understating their “load,” or the amount of electricity they needed to use, Enron saw a profit opportunity in overstating its load. Traders called the technique “inc-ing the load,” meaning increasing the load. When supplies were tight, Cal-ISO paid participants a premium when they provided more power than they required.

Since the utilities often needed more power than they had scheduled, Cal-ISO often found itself having to offer premiums, and Enron, which did not need all the power it had scheduled, was ready to scoop up the premiums.

* When prices started to soar in 2000, officials responded by capping electricity prices in the California market. In December 2000, as the crisis intensified, the capped price was $250 a megawatt-hour. However, the crisis had spilled over to other states, where there was no state-mandated price ceiling. Enron realized that it could reap easy profit by buying power at the capped price in California and selling it out of state.


A Dec. 6, 2000, Enron memo provides a powerful example: “Yesterday

Of course, the memo acknowledged, exporting power at a time when Californians were screaming for it posed “a public relations risk arising from the fact that such exports may have contributed to California’s declaration of a Stage 2 Emergency yesterday.”

* Sometimes, the amount of power scheduled for delivery into California exceeded the capacity of some of the system’s transmission lines. At such times, Cal-ISO would make “congestion payments” to market participants that would either schedule transmission in the opposite direction of the clog or would reduce their generation-load schedule.

Enron would sometimes file schedules for power for which it had no need, simply to collect congestion fees when Cal-ISO asked it to decrease its power use. This technique was analogous to booking an airplane ticket when you have no intention of flying.

A parallel technique, nicknamed Death Star, involved arranging to route power around Cal-ISO’s system, sometimes via out-of-state lines, just to get in position to send power in the opposite direction of a traffic jam--and, once again, to collect congestion fees.