Two Sides Focus on Wider Probe of Energy Crisis
Federal regulators are likely to sweeten the pot for California under a widened investigation into the state’s energy crisis, but the expanded probe is drawing fire from energy companies that say they are being blamed for flaws in the market.
The inquiry is focusing on bids to supply short-term power between May 1 and Oct. 2, 2000. Regulators, who have excluded this time period in the past, are looking at bids to supply power at rates of $250 per megawatt-hour or more.
California officials contend there was widespread mischief during these five months, and the decision to scrutinize the period was one of several actions taken by the Federal Energy Regulatory Commission on June 25. Although FERC’s moves to uphold California energy contracts and sanction power companies garnered the most attention that day, the broadened investigation is considered important on both sides of the divide.
Of all the issues outstanding from the 2000-01 California energy crisis, “this is the hardest one left,” FERC Chairman Patrick H. Wood III said.
Companies are accusing FERC of moving toward belated and unfair sanctions, while California parties say FERC is taking an overly gentle approach toward those same firms.
What is agreed on is that the push to examine bids early in the crisis has put significant new money on the table for California, depending on how FERC ultimately judges the conduct of suppliers and chooses to treat them.
“My guess is that if you only looked at prices above $250, you could get up to a billion [dollars] for that period,” said Frank A. Wolak, an economics professor at Stanford University and chairman of the market surveillance committee of the California Independent System Operator, which runs the electricity grid.
Although Enron-style trading schemes with nicknames such as “Fat Boy” and “Get Shorty” have gained more notoriety in California’s energy woes, some economists and consultants say the deeper trouble lay elsewhere -- with companies effectively withholding electricity by offering bids to provide it at exorbitant prices, knowing there would be no takers.
To explore the allegations, FERC’s staff has begun a review of an estimated 800,000 energy bids offered in the state’s main short-term energy markets for the five-month period in 2000.
California agencies have presented evidence purporting to show that many bids in the spring and summer of 2000 sharply exceeded the costs to deliver energy, representing an illegitimate attempt to exploit the marketplace.
Companies and utilities including the Los Angeles Department of Water and Power emphatically deny the allegations, contending that they offered legitimate bids in a market under stress from its own imperfections and a shortage of energy.
The companies point out that the California energy market’s overseers did not challenge the bids as excessive at the time. They also say FERC staff is moving forward with a tardy and novel interpretation of rules that in effect victimizes the companies for seeking profits in a deregulated marketplace.
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‘Consistent With Rules’
“We marketed power in a way that ensured reliability and was consistent with market rules at the time,” said Brad Church, a spokesman for Williams Cos., in Tulsa, Okla., which is one of several suppliers whose bids are being reexamined. “It disheartens us,” he added, that FERC is scrutinizing bids above $250, when bidding caps at the time were as high as $750.
Other companies and utilities whose bids are being looked at include Reliant Resources Inc., Mirant Corp., Dynegy Inc., Enron Corp., Powerex Corp., the Los Angeles DWP, Idaho Power Co. and the Bonneville Power Administration.
California officials have long pointed to the bidding practices of energy companies as an important factor in the early months of the crisis. As long ago as November 2001, Southern California Edison asked regulators to consider the spring and summer of 2000 as within the period for which the state could collect refunds.
But it was not until earlier this year, armed with a favorable appeals court decision, that California parties were able to collect and submit to federal regulators their evidence related to past bidding behavior. In voluminous testimony, the state alleged that electricity suppliers behaved improperly by frequently offering bids to provide energy at levels that greatly exceeded their immediate costs.
For example, California parties say that costs typically faced by electricity suppliers should have dictated bids of about $50 a megawatt-hour. In reality, some bids were around $750 -- 15 times that amount. In summer 2000, as the state’s price cap was clamped tighter -- from $720 to $500 to $250 -- bids also declined. Yet even as bids declined, costs faced by suppliers were rising.
In testimony to FERC, a coalition of California state agencies and power-buying utilities such as Edison also accused companies of inexplicable “spikes” in their bids for energy from the same generator unit, with spikes often coming during statewide energy emergencies. According to the testimony, one Williams unit was bid into the real-time market at an average price of $749.09 per megawatt-hour in May 2000. By September, when the state had imposed a tighter price cap, the average bid from that unit had slipped to $139.57.
Similarly, one Dynegy unit in June was bid at prices of $100 to more than $700, a noteworthy variation in price levels, according to the state’s filing.
Sellers who submitted bid price spikes during energy emergencies declared between May 22 and Aug. 4, 2000, included Williams, Dynegy, Mirant, Reliant, Powerex, the DWP, Idaho Power and the Bonneville Power Administration, according to the testimony of Carolyn A. Berry, a private economic consultant and former FERC staff economist.
The California coalition argues that such bidding put tremendous pressure on the real-time market for energy, run by California’s Independent System Operator, or ISO.
“If you look at the bids, some of them were astronomical -- and they were clearly astronomical at a time when the ISO had no choice,” said Severin Borenstein, a professor at UC Berkeley’s Haas School of Business and director of the University of California Energy Institute.
The California coalition filing may have had some influence within FERC. In March, the agency’s staff released its long-awaited analysis of California’s market debacle, backing many of the assertions made by California. Among the bidding practices at issue was something known as “Hockey Stick,” in which the last power from a unit is bid at a much higher rate than other power from the same unit -- creating a price spike that resembles a hockey stick when it is drawn on a chart. Also under scrutiny are bids that vary over time in a way that appears disconnected from the unit’s performance or the availability of energy in the marketplace.
“Staff concludes that input costs and market fundamentals do not explain the excessive rise in [market] prices during the summer of 2000,” said the FERC report that was supervised by Donald J. Gelinas, associate director in FERC’s office of markets, tariffs and rates.
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Firms’ Response
The companies have been quick to respond to the questions of California parties and FERC’s staff.
They have chided the agency for misreading the market rules, for reaching wrong conclusions from the data and for seeking to punish firms that were operating in an environment of growing scarcity and serious flaws in California’s own market design.
The Los Angeles Department of Water and Power, for example, is being ordered to explain spiked bids that removed supply from the marketplace in May and June 2000. But its executives maintain that critics are demonstrating an ignorance of how the company operates.
“Anything we had less to offer, it’s because we had our own needs we had to fill first,” said David Wiggs, general manager of the utility. “That’s what drives us. It’s got nothing to do with the wholesale market. The allegation that we would manipulate the amount we have available to affect the price, it’s just not true. It’s not how we run the system. And we can prove it.”
Companies also say that the California parties have wrongly diagnosed the problem, blaming the conduct of suppliers for high prices when basic market forces were determining rates.
“There was no need to manipulate that market,” said Ken Peterson, president and chief executive of Powerex, a Vancouver, Canada-based marketer of wholesale energy. “The fundamentals created opportunity for people to make money if they could get their energy in there.”
Others have taken issue with FERC for seeking to interpret rules in a way that could lead to sanctions for behavior that companies were not warned about at the time.
“It is one thing for the new cop on the beat to decide to install a new stop sign at a particular intersection,” said Dynegy, Mirant and Williams in an April filing to the regulators. “It is quite another for that cop to begin issuing tickets to drivers who were following the rules of the road for the past three years and did not stop at that intersection precisely because there was no stop sign. Such an approach is not only unfair but unlawful, contradicting the very fiber of the American legal system.”
Nonetheless, California parties are far from jubilant about the way FERC is proceeding on the bidding investigation.
They and their allies argue that regulators have set a generously high bar for the firms, given the claim by Californians that high bids began at levels much lower than $250. Moreover, if FERC is selective in imposing sanctions, as it has suggested it may be, the final number would be much lower than if it forced all companies in the marketplace to return profits.
Borenstein, of the UC Energy Institute, said: “My guess is that in practice, FERC will narrow it down to a level that will be disappointing to California.”
Wolak, of Stanford and the California ISO, agrees: “Why only above $250? That’s preposterous.” He suggested that FERC’s staff was trying to keep refund numbers “in the realm of money that we can make the generators pay. That’s FERC playing politics.”
Under separate rulings, FERC had indicated that the state could be in store for a refund of $3.3 billion. The new focus on May-October 2000, while raising the distinct possibility of adding more dollars, still would not approach the total of $8.9 billion that California parties have been demanding as redress for the crisis of 2000 and 2001.
