What's Happening At FERC
[April 2003]

FERC Staff issued its final report on Price Manipulation in Western Markets. After compiling and analyzing data during a 13-month investigation, Staff construes certain activities as evidence of "manipulation" of both electric and natural gas markets in the West in 2000-01. Staff proposes a series of generic and company-specific remedies designed to address the market flaws and abuses its investigation identifies. FERC has acted on some of the report's recommendations and indicated that it will take future action on other Staff proposals. The report emphasizes that its conclusions do not change the Commission's determination in its December 15, 2000 order that the "root causes" of the energy crisis were "significant supply shortfalls and a fatally flawed market design."

On the gas side, Staff discovered that:

• Spot gas prices at the California border reflected "extraordinary basis differentials that far exceeded the cost of transportation;"
  
• Dysfunctions in the natural gas market fed off misconduct, including gas transaction misreporting and wash trading;
  
• Market participants attempted to "manipulate" published indices through "epidemic false reporting;" and
  
• Spot gas prices were not the product of a well-functioning competitive market.

In the electric industry, Staff found that:

• Utilities engaged in the "Enron" trading strategies, economic withholding and inflated bidding;
  
• These practices violated the CAISO and Cal PX tariffs' anti-gaming provisions; and
  
• Market dysfunction in the California short-term markets "affected" long-term contracts.

Based on these findings, Staff recommends that the Commission direct more than 30 companies to show cause why their behavior did not constitute gaming or other anomalous market behavior and why they should not be required to disgorge any associated unjust enrichment. Staff also recommends that the Commission direct nine companies to show cause why their bidding behavior did not constitute economic withholding. Staff suggests using the analysis in its report to "inform" ongoing long-term contract proceedings and other complaints that long-term contracts are not just and reasonable (see What's Happening in the Northwest, April 2003).

The Staff report recommends, and the Commission approved, the issuance of an order instituting a show cause proceeding directing Enron Power Marketing, Inc. and Enron Energy Services, Inc. to demonstrate why their electric market-based rate authority should not be revoked in light of their use of "Enron" trading strategies to "manipulate energy prices." The order also directs eight additional Enron affiliates to show cause why their natural gas blanket marketing certificates should not be revoked in light of their "manipulation of gas prices at Henry Hub."

The Staff report recommends, and the Commission approved, the issuance of an order instituting a show cause proceeding directing Reliant Energy Services, Inc. and BP Energy Company to demonstrate why their respective electric market-based rate authority should not be revoked in light of their apparent manipulation of the electricity prices at the Palo Verde trading hub.

To provide the factual background for the Commission's actions, the Commission made public the information that was submitted by market participants to FERC in the investigation that resulted in the Staff report.

In a long-awaited decision, the Commission issued an order in the California refund proceeding. The Commission largely affirmed an administrative law judge's decision that power sellers are obligated to make refunds to California but not at the level that the State had claimed. As proposed in the Commission Staff report on Price Manipulation in Western Markets, FERC adopted a revised method to determine the mitigated market clearing price (MMCP) in the West. The new calculation of the MMCP will be used to approximate just and reasonable prices in California's single clearing price auction during the refund period from October 2, 2000 through June 20, 2001. However, the Commission indicated that it will defer until after the 30-day rehearing period the requirement for the California Independent System Operator and the California Power Exchange to calculate revised MMCPs and refunds. Thus, the total size of the refund is not known at this time, but it is expected to be larger than the refund the ALJ calculated.

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