FERC Told by Edison of Market Rigging by Enron

Southern California Edison warned federal regulators in August 2000 about some of the trading ploys that Enron Corp. used to wring profit from California, but regulators took little action for months.

During the power-starved summer of 2000, the names Fat Boy, Ricochet and Load Shift were known only on the trading floor of Enron and possibly its power-trading rivals. But evidence of these electricity-trading strategies was spotted by Edison’s unusual market-monitoring operation, which the Rosemead utility created to protect itself when competitive electricity markets opened in California in 1998.

The written warning was delivered to investigators with the Federal Energy Regulatory Commission as they began to probe problems in California’s electricity markets, where prices had first skyrocketed the previous May.

“The purpose was to help FERC know what to look for, where to look and how to look for information,” said Gary Stern, director of market monitoring and head of Edison’s three-person market analysis group. “We knew we had serious problems in the market, and we wanted to take this opportunity to get this investigation started out right.”

“We never tried to come up with clever names for the games we were looking for,” Stern said. “We were looking for relief.”

The previously secret memo was released Wednesday by Sen. Dianne Feinstein (D-Calif.) during a Senate committee hearing on Enron and its potential manipulation on Western energy markets. But Edison, a unit of Edison International, had withheld comment on its analysis until Monday.

The memo discusses several ways energy traders or generators intentionally created phantom congestion and then were paid to relieve the congestion, sometimes by creating fictitious flows of energy in the other direction. It also described other ways traders and generators forced the California Independent System Operator to pay as much as possible for electricity or related services in the markets the Folsom nonprofit operates.

For example, the memo describes how Enron once scheduled 2,800 megawatts of power on a transmission path despite knowing the line could accommodate only 15 megawatts.

“This likely results in increased day-ahead energy prices, and increased congestion costs on the path where the game was played,” the Edison memo said. “Day-ahead peak energy prices increased from about $30 to about $45” per megawatt-hour.

Stern presented the memo on Aug. 17, 2000, to FERC investigators during a meeting in San Francisco that also was attended by representatives of PG&E; Corp.’s Pacific Gas & Electric and Sempra Energy’s San Diego Gas & Electric, the state’s two other investor-owned utilities.

SDG&E; earlier that month had filed a complaint with FERC because its customers were being subjected to record bills and had been since May of that year, when power prices first surged. Edison’s and PG&E;’s customers were then shielded from wholesale electricity costs by a rate cap, and the two utilities were accumulating huge power debts they were unable to pass along to customers.

FERC, a sort of national utility regulator and the final arbiter of the fairness of electricity trading markets, has much greater authority to investigate than a market participant such as Edison does.

But when FERC released its staff investigation Nov. 1, it said there was the potential for market manipulation but cited neither specific examples nor perpetrators. It followed with a series of attempts to fix California’s market problems but did not achieve significant success until June 2001, when it instituted price caps on most Western states and required generators to offer their wares to the market.

“We read the November report, and as we had feared they didn’t deal with a lot of the issues that we raised,” Stern said. “They didn’t have a lot of time, and you could argue that some of these things were very difficult to find.”

Feinstein last week condemned FERC, saying the memo was “further corroboration through Southern California Edison that the Western marketplace was being manipulated and gamed while it appeared the federal agency responsible for overseeing the marketplace and ensuring just and reasonable prices failed to respond.”

FERC Chairman Patrick H. Wood III responded that the agency was continuing its investigations of Enron and others but that some of the blame for its energy woes lies with California, which failed for several years to build major power plants. A FERC spokeswoman on Monday declined to comment further.