FERC Moves to Settle, Dismiss Gaming Cases

With a deadline looming, federal regulators moved to dismiss or settle charges against at least 26 energy companies and utilities accused of gaming the market during the California energy crisis.

In the largest settlement, announced Tuesday, Morgan Stanley Capital Group agreed to pay the Federal Energy Regulatory Commission $857,089.

“We expressly deny the allegations,” said Mark Lake, a Morgan Stanley spokesman. He said the company agreed to settle in part because of the costs of a protracted legal wrangling with regulators.

Morgan Stanley was among more than 60 power suppliers facing a deadline Tuesday to explain to FERC why they shouldn’t be forced to give up profits they made by allegedly manipulating the market.

Companies and utilities that failed to resolve their cases faced the prospect of costly trial-like proceedings, although settlements still are possible.

In a flurry of actions, many over the last week, FERC attorneys filed motions to dismiss charges against 16 utilities and companies -- including five municipal utilities in California -- and filed settlement agreements with 10 others.

FERC hasn’t determined how the settlement payments will be distributed.

California officials complained that the agency had failed to protect consumers by relying on narrow definitions of misconduct and slap-on-the-wrist sanctions.

“FERC has all the rhetoric, but when it comes to actually holding the generators accountable, they roll over, they cave in, and they give the generators a pass,” said Richard Katz, Gov. Gray Davis’ energy advisor.

In particular, critics contend that FERC’s approach of penalizing companies individually fails to address the collective effect of dozens of firms gaming the market, with each one building on previous players’ abuses.

“It is disheartening that they are missing the point in doing these piecemeal settlements for mainly paltry sums,” said Vickie Whitney, a deputy state attorney general. “They should be doing a market-wide remedy for refunds since every game impacted the market and every participant in the market benefited.”

FERC spokesman Bryan Lee defended the agency, saying settlements were generally “a much more cost-effective means of resolving disputes than litigating them before the commission.”

On June 25, FERC issued so-called show-cause orders to more than 60 energy firms and public utilities, demanding that they demonstrate why they shouldn’t be punished for abusing the California energy market through trading schemes to increase prices by giving the power grid operator a false picture of electricity flows.

All settlements must be approved by FERC’s three commissioners, who typically sign off on such arrangements.

After Morgan Stanley, the largest settlement agreement was with Reliant Resources Inc., which agreed last week to pay $836,000.

“We see this stipulation and agreement as a significant step toward resolving the outstanding legal and regulatory issues Reliant faces,” the Houston company said.

Federal regulators moved to dismiss charges against municipal utilities in Anaheim, Azusa, Pasadena, Riverside and Los Angeles.

Whitney of the state attorney general’s office said that in the case of the Los Angeles Department of Water and Power, FERC had a “too-narrow definition of gaming that excludes a substantial amount of bad conduct.”

The DWP was accused by the state of making about $2 million in profit by exporting power out of California and then selling it back to state markets at or just below the $250 price cap, a tactic known as “ricochet.” The utility also was accused of creating false congestion on power transmission lines and promising, for a fee, to provide backup power on short notice to the state grid operator without lining up the electricity necessary to satisfy the commitment.

FERC’s trial staff said a review of actual transaction data as well as evidence submitted by California officials turned up no proof that the DWP falsely imported electricity during certain targeted hours or received congestion payments. In addition, the DWP always had enough electricity in reserve to fulfill its promises to provide backup power, the lawyers said.

As part of its investigation, California officials claimed, FERC narrowed for the first time the definition of “ricochet” transactions to those that exceeded the price cap -- thereby eliminating the DWP trades. California officials previously complained that the DWP delayed submitting documents as part of a court-ordered discovery period, which resulted in a relatively slim collection of evidence.

DWP officials said FERC rightly exonerated the agency based on a review of the facts.

Times staff writer Nancy Rivera Brooks in Los Angeles contributed to this report.