What happened

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What happened?
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What happened? The perfect storm

• insufficient generation capacity?
• insufficient generation available?
• Hydro Outages
• Gen Cost factors gas/emissions rights
• transmission constraints?
• market manipulation?
• market design?

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Issues affecting generation -- initially

• Capacity decreased 2 percent from 1990-1999,
  while retail sales increased by 11 percent
• 10,000 megawatts of total capacity out of
  operation due to forced and/or planned outages
• Unusually low water level, losing about 3,000
  megawatts of capacity from the Northwest

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Pacific Region Precipitation and Hydroelectric
Generation, 1996 - 2000
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Cost factors for generators

• Transmission Scarcity
• Transmission constraints limit the amount of
  electricity that can be moved between Northern
  and Southern California
• Natural gas
• Excess electric generation in summer caused some
  to use all available emission allowances for year
• Natural gas price increases and El Paso natural
  gas pipeline explosion
• Supply interruption west to east

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Natural Gas Prices in 2000

• Prices peak at an unheard level of 60/MMBtu
• Gas prices for the second half of 2000 were more
  than four times higher than 1998 and 1999 prices

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Caps and the Squeeze late 2000 PGE and SoCalEd
customers faced retail rate caps imposed by the
original restructuring plan. SDEG customers
cap had expired, so their retail prices went up.
CA legislature stopped this by imposing a cap
for residential SDEG customers. Wholesale prices
gt Retail prices, despite maximum buy side bid
price of 250/MW imposed by CA PUC. ESPs began
to default on payments late in 2000. What would
these events do to prices?
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California's Declared Staged Power Emergencies,
1998--May 22, 2001
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• Winter 2000-01
• Shortages/rolling blackouts Why?
• Generators ordered to sell into CA market. Fair?
• Feb. 2001 State takes over wholesale purchase
  obligation for PGE and SoCalEd. Why?
• April 2001
• PGE filed for Chp. 11 bankruptcy.
• FERC price mitigation plan reinforces mandatory
  supply order imposes system of caps during low
  reserve periods based upon prices during high
  reserve periods.
• Sept. 2001 end of retail choice in CA

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• By mid to late 2001
• State had purchased many transmission facilities
• Capacity crunch had diminished, due to increasing
  supply and decreasing demand
• Spot market accounted for much smaller portion of
  sales state made long term bulk power purchase
  sales on behalf of ESPs Wise?
• Unpaid debts on wholesale sales were piling up
  ESPs and CA charged manipulation of wholesale
  market by Enron and other sellers. FERC
  investigated.

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How/Why was the CA market susceptible to price
increases caused by strategic bidding?

• Individual sellers bidding high
• Individual sellers withholding generation
• to sell elsewhere
• maintenance
• Phony/fraudulent bids

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Average Daily Generating Capacity Offline
xi
Source California Energy Commission
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Market Manipulation in CA Trading
Techniques Withholding Generation
Email exchange between Reliant traders We
decided prices were too low so we shut
down. Excellent. Excellent. We pulled about
2000 megs off the market. Thats sweet.
Everybody thought it was really exciting that
we were gonna play some market power. That was
fun!
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Market Manipulation in CA Trading
Techniques Export strategies ricochet
Sales into CA from out of state were, at certain
times of inadequate supply, not subject to the
same caps as intrastate sales. E.g., Co.
A Co. B CA AZ Second sale is at
unconstrained higher price companies split gains
from arbitrage.
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• Market Manipulation in CA ISO v. PX
• PX conducts day ahead bid auctions, publishes
  market clearing prices
• PX submits load and generation data to ISO
• ISO balances load and generation identifies
  congestion problems. Remember how electricity
  travels on grid.
• 4a. If no congestion, initial schedule of
  generation and load is used.
• 4b. If congestion is found, schedule is modified
  using adjustment bid process to charge users for,
  and compensate those who act to relieve,
  congestion.
• 5. ISO real time market used to balance actual
  load in real time real time market prices often
  differed from day ahead prices.

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Market Manipulation in CA Trading
Techniques Incing (a/k/a fat boy)

• CA ISO scheduled generation to meet anticipated
  load (based on day ahead markets), paying all
  scheduled generators even if their generation
  wasnt ultimately needed in the real time market.
• Participants qualified to bid as both buyers and
  sellers overstate their anticipated load (demand
  needs) in the day ahead market.
• In the real time market, they took less than they
  had said they would, but got paid for making the
  generation available to meet the need the load
  the ISO had anticipated or if buyers
  underscheduled, for actually supplying the
  power.

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Market Manipulation in CA Trading
Techniques Congestion load shift and death star
Seller 1 Seller 2 Seller 3 Enron Seller 4
Seller 5 Buyers Buyers Enron Buyers Buyers
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Market Manipulation in CA Trading
Techniques Load Shift

• ISO paid a congestion relief subsidy to firms
  who reduced demand (took less power than they
  indicated theyd need in day ahead markets) to
  relieve congestion.
• Enron overstated day ahead loads in potentially
  congested areas in order to trigger the need to
  relieve congestion on lines.
• Then Enron took less than its forecast load in
  the real time market, receiving payments for
  helping to relieve congestion.

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Market Manipulation in CA Trading
Techniques Death Star

• ISO paid a congestion relief subsidy to firms
  who scheduled transactions requiring transmission
  in the opposite direction of the congestion,
  thereby requiring fewer electrons than usual to
  move in the direction of the congestion. came
  from congestion charge assessed to all who were
  using the congested route.
• Enron and others scheduled phony counterflow
  transactions in order to receive the congestion
  relief payments (sometimes in conjunction with
  load shift transactions).

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Market Manipulation in CA Trading
Techniques Gas Markets

• El Paso self dealing in gas markets
• Withholding gas to benefit own position in
  electricity markets
• Gas price indices Fraud

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Market Manipulation in CA Trading Techniques
FERC Staff One expects that traders will
utilize various strategies in an effort to
maximize profits. But a fundamental aspect of
some of the Enron trading strategies is the
deliberate use of false information. A market
cannot operate properly without accurate
information. What is the difference between
exacting scarcity rents and exercising
impermissible market power?
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Market Manipulation in CA Trading Techniques
FERC Staff Enrons corporate culture
fostered a callous disregard for the American
energy consumer and demonstrates the need for
aggressive market monitoring and enforcement.
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• Postscript
• 2003 PGE, SCE, SDEG now buying power again,
  at rates agreed to by DWR contracts.
• CA refund proceeding FPA power issue
• CA claim 8.9 bln overcharges
• FERC 12/02 1.8 bln
• FERC 2003 approx. 3 bln
• Unpaid bills from CA buyers approx 3 bln
• State and federal fraud and antitrust litigation
  (including criminal charges) pending

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• Postscript
• 3. CA long term power purchase contracts
• Can CA get FERC to rescind the 60-250/MW long
  term power purchase contracts it entered into
  with sellers in 2001?.

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• FPA says prices must be just and reasonable.
  What makes prices unjust or unreasonable
  under the FPA?
• Price fixing (collusion)
• Scarcity rents with artificial scarcity
• what is artificial scarcity?
• Scarcity rents without artificial scarcity
• what if those rents are gt 100 of costs?
• Prices that include large risk premiums

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Is the following wholesale price just and
reasonable? (Historical rates 50/mwh)
300/mwh 100 risk premium to cover risk of
nonpayment (under must sell order?)(absent
must-sell order?)
200/mwh 50 cost of purchasing NOx emissions
rights at 500 of historical highs
150/mwh 50 scarcity rent, i.e. profit charged
because buyers will pay that price
100/mwh Fuel costs 200 of historical highs