Enron Memos Fuel Inquiry of Power Pricing
Enron Corp. memos released last week are providing new fuel for a state investigation into whether traders illegally pumped up electricity prices and manipulated California’s power grid chief into lifting price caps at a crucial juncture in the energy crisis.
The memos, which detail a variety of trading ploys to create artificial shortages, also are lending credence to allegations that the crisis was manufactured at least in part.
The Enron documents lifted the veil on what was going on behind the scenes as California sweated through a series of critical energy shortages on the way to the first deliberate statewide blackouts since World War II.
One memo, dated Dec. 6, 2000, made the startling assertion that one trading strategy “may have contributed” to California’s declaration a day earlier of a Stage 2 emergency, which is prompted when electricity reserves fall below 5%.
Two days after the memo was written, the head of the California Independent System Operator unilaterally sought and won federal permission to remove price caps designed to safeguard electricity customers from runaway costs.
His action, taken without consulting his board or the governor, helped restore electricity supplies and stave off blackouts for more than a month but caused prices to temporarily spike as the state’s largest utilities careened toward insolvency.
State officials say the action by Terry Winter, chief executive of Cal-ISO, to blow away California’s hard-won and hotly debated price caps had serious consequences. Within six weeks, already ailing Pacific Gas & Electric Co. and Southern California Edison were out of money, traders refused to sell them electricity and the state stepped in as the primary power buyer for nearly 30 million Californians.
At the time, Cal-ISO suspected that Enron and other marketers were working the system to their own advantage. But officials say they did not know the extent of the manipulation, did not have adequate staff or authority to police it and were scrambling to address a power shortage that the marketers exacerbated.
Now a state Senate panel headed by Joseph Dunn (D-Garden Grove) is examining whether Winter was duped or coaxed into removing the price limits by Enron and other power marketers who allegedly were “gaming” the system for their own profit.
“What communications did Winter have with the industry about those caps?” asked Dunn, who launched his wider investigation months ago. “Did he know the market was being manipulated?”
Winter denied any improper contacts with market participants and said his action got profit-minded marketers to resume selling in the state.
“It allowed me to keep the lights on ... and it had the impact of reducing prices when the market was competitive again,” he said.
Enron released three memos Monday to the Federal Energy Regulatory Commission and to Dunn’s committee, which is seeking more documents.
Although Enron and other power sellers have repeatedly denied manipulating California’s electricity markets, Enron acknowledged in the memos that its strategies resulted in supplies being withheld from the state and prices being jacked ever higher. It also said other energy companies had adopted similar tactics.
Calling Winter’s action a palace coup, critics allege that it touched off a chain reaction that cost the state economy billions of dollars.
The Stage 2 alert that Enron says it may have helped cause “was the cover that Terry Winter used to blow the price caps out in California,” state Public Utilities Commission President Loretta M. Lynch said. “It was a situation that let FERC move to destroy our market.”
FERC officials declined to comment, citing their ongoing investigation into price manipulation.
Energy companies, economists and some politicians have said that California’s energy crisis resulted from a confluence of problems, including insufficient power generation in the state, an increase in demand and a rise in the price of natural gas.
But in the memos, Enron acknowledged that its trading strategies may have contributed to shortages.
Enron’s “Death Star” strategy, for example, involved creating fake congestion on transmission lines so that the company could collect a payment from Cal-ISO for relieving it. At the time, the agency cited congestion as contributing to the state’s power woes.
Enron also said it bought power in California, where there was a price cap of $250 per megawatt-hour, then resold it elsewhere at several times that amount.
“There is no question that in December of 2000 we were dealing with a very artificial power crisis,” said Robert McCullough, a Portland, Ore., energy consultant, saying newly disclosed strategies such as Death Star made the situation appear far worse than it may have been.
State Sen. Steve Peace (D-El Cajon), who helped shape the state’s deregulation proposal in 1996, said there was a legitimate power shortage, which allowed traders to take advantage of an already shaky system.
“If we weren’t tight, they never would have hit us as hard as they did,” he said.
Southern California Edison President Robert G. Foster said the documents show that market manipulation drove the price of electricity higher. A spokesman for Pacific Gas & Electric Co. declined to comment.
Cal-ISO was created by the landmark 1996 deregulation law as a sort of traffic cop that would balance electricity supply with demand across a power grid serving about 75% of the state.
The nonprofit agency would buy power to make up the difference in what the utilities had and what they needed. That difference, ultimately paid for by the utilities, commonly was 6% to 8% during the first two years, officials said.
But with electricity prices rising in mid-2000 and customer utility rates frozen, PG&E; and Edison were reluctant to pay what the sellers were demanding, so they left more and more of their load for Cal-ISO to acquire--sometimes as much as 25%.
In its memos, Enron noted that it counted on this pattern of under-scheduling by utilities to make some of its trading tricks work.
Winter said Cal-ISO’s marketing staff of four could not make phone calls fast enough to line up the power, so they established a computerized bidding system that listed marketers, bids and quantities available.
But in the winter of 2000, after the Cal-ISO board passed a price cap of $250 per megawatt-hour, natural gas prices soared and generators were saying it was costing them more to produce electricity than they could get in California.
Soon, Cal-ISO’s roster of power offerings shrank from 3,000 to 4,000 megawatts to a couple of hundred. To meet demand, Cal-ISO’s power hunters had to call outside their service territories to obtain electricity--and that power was not subject to price caps.
Meanwhile, the cost of power was rising rapidly. On Dec. 5--the day of the Stage 2 emergency that Enron said it may have helped cause--Cal-ISO paid $5 million for energy. Within two days, the price leaped to $86 million.
On Dec. 7, Winter was in Arizona talking about blackout scenarios with other Western grid operators, when California’s first Stage 3 emergency was called as the state came perilously close to running out of power. Moving to avoid the next stage--blackouts--Winter flew home and authorized attorneys to prepare an emergency filing at FERC.
Winter said speed was required.
“I really did not want to debate something for four or five days while the system went black,” he said. “If the board did not like [my action], on the next Monday they could have turned it around or fired me.”
Gov. Gray Davis and others later publicly blasted Winter for acting unilaterally. The Cal-ISO board discussed Winter’s decision in closed session, but took no action.
Jan Smutny-Jones, then chairman of the Cal-ISO board, is the executive director of the California Independent Energy Producers Assn. He said Winter had the authority to go to FERC on his own when necessary.
“There’s no question these were extraordinary circumstances,” Smutny-Jones said.
The filing lifted the price cap, but it also provided that companies selling at prices above the $250 cap had to justify the price by disclosing their actual costs.
After the cap was lifted, prices spiked, then declined but remained far above historical levels. They went down after natural gas prices fell, the state signed long-term contracts and federal regulators established Western regional caps in June 2001.
Cal-ISO spokeswoman Stephanie McCorkle said FERC moved as quickly as it did because the filing mirrored a proposed order already at FERC. It also provided penalties for utilities that dump demand on Cal-ISO and forced generators to sell available power.
Lynch, the PUC president, said it galled her that federal regulators moved within a few hours on Winter’s request to lift the price caps but did not act promptly on a PUC filing raising allegations against Enron for one of the tactics described in the memo.
“If you bring evidence of market manipulation, it takes a long time,” she said. “When you ask for elimination of a price cap, [FERC] can move real quick.”
Dunn has been boring in on what Winter knew and when he knew it, reviewing calendars and other internal documents. The senator has deposed Cal-ISO officials, and is suspicious that there were improper communications from market participants before Dec. 8, “laying the groundwork for elimination of the price caps.”
Winter, a free market advocate and former San Diego Gas & Electric executive, acknowledged that marketers for years had pushed to have price caps lifted, but he said that in early December 2000 “we never talked about price caps or removal of caps.”
However, he said he did ask the marketers to increase the amount of power they were offering in California and to get all available generators running. “The answer was, ‘We can’t run it because we can’t operate at a loss.’”
Officials said they were aware before the memos that they had experienced the sorts of strategies described in the Enron memos.
“We had identified these strategies as vulnerabilities or weaknesses but did not know the extent they were being used,” Winter said, adding that Enron’s competitors probably used similar tactics.
Winter said some market manipulation issues were taken to the board and others were addressed through software changes, notices to generators or filings with federal regulators. Also, the agency has levied $251 million in fines since it began operating in early 1998.
In hindsight, Winter said that Cal-ISO might have needed more analysts to spot market manipulation. He said that, during the crisis, his marketers were so busy they probably could not pass on all suspicions about possible gaming.
