Global Policy Forum

By Richard A. Oppel Jr.

California electricity and natural gas prices were driven higher because of widespread manipulation and misconduct by Enron and more than 30 other energy companies during the 2000-2001 energy crisis that threatened the state's solvency, federal energy regulators said today.

Despite those findings, the Federal Energy Regulatory Commission strongly signaled that it was likely to refuse to overturn any of the more than $40 billion in long-term power contracts that California and others on the West Coast signed at the height of the crisis. The state had agreed to the high-cost contracts as a means of bringing raging power prices under control, but state officials now say that pervasive evidence of price manipulation means the deals should be abrogated.

At the same time, the commission today increased to $3.3 billion the refund it contends is owed to California to compensate for electricity overcharging. An administrative law judge had previously recommended $1.8 billion in refunds, but commission officials said manipulation of the prices paid for natural gas used to fuel many power plants in the state meant that the refund should be larger.

Because the state still owes the power suppliers $3 billion, it is unlikely to gain much money from this ruling. California signaled today that it was likely to go to court to try to increase its refunds.

In a series of reports and orders released today, the commission demanded that Enron, Reliant Energy Services and BP Energy show why their ability to trade electricity at market rates should not be revoked, citing "numerous" manipulations by Enron and "apparent manipulation" of electricity prices at the Palo Verde hub in Arizona by Reliant and BP.

Reliant noted that the commission had not taken formal action yet and said the episode was "an isolated incident" and that the employee responsible for those trades had been fired. Nevertheless, shares of Reliant Resources dropped 24 percent, to $3.05, in trading after the ruling today. Shares of other larger energy traders named by the commission also fell sharply.

In addition, the commission staff proposed requiring more than 30 other large companies, including Dynegy, Idaho Power, the Los Angeles Department of Water and Power, Mirant and the Williams Companies, to return "any unjust enrichment related to their misconduct" that stemmed from inflated bidding, withholding of power or other violations of market rules. The commission will decide whether to take action against these companies later.

In an exhaustive report today, Donald Gelinas, who led the commission's investigation of market abuses, said investigators had found "significant market manipulation" but that the root causes of the state's meltdown were a shortage of electricity and a "fatally flawed market design."

All the same, Mr. Gelinas said investigators had found an "epidemic" number of efforts to manipulate gas prices. In one of the more blatant examples, Reliant was able to inflate the average price paid for gas in California during December 2000 by $8.54 per million British thermal units — what investigators described as a very significant amount — by "churning" gas trades.

In addition, the Gelinas report found that Enron's online trading platform was "a key enabler" of gas-price manipulation. The platform, Enron Online, generated more than $500 million in speculative profits for Enron in 2000 and 2001 by manipulating actual physical prices for gas and electricity that greatly boosted Enron's profits on derivative financial contracts tied to those physical prices, the report stated.

These high prices for electricity, Mr. Gelinas found, "significantly influenced" longer-term electricity sales agreements signed during 2000 and 2001. Mr. Gelinas also recommended a number of changes to ensure better reporting and monitoring of energy trading and price reporting. His report also found that accusations that Williams had "cornered" the market for gas in California in January 2001 were "unsubstantiated." A former Williams executive stated in a news article in June 2002 that the company had managed to drive up gas prices in California.

All of the rulings by the commission today are likely to be reviewed eventually by a federal appeals court.

For California officials, the decisions are a bittersweet result to more than two years of efforts to obtain refunds and penalties for what they have long maintained was widespread price gouging.

On one hand, the findings by the commission, which is made up of two members appointed by President Bush and one selected by President Bill Clinton, are likely to put to rest any serious arguments that manipulation and misconduct played little or no role in the California energy crisis. Initially, state officials were widely mocked for accusing the energy companies of profiteering, but an increasing body of evidence has emerged that illegal behavior contributed to price spikes.

On the other hand, the commission still made it clear today that the state's own deregulated electricity marketplace was naí¯vely constructed and severely flawed, and made possible the abuses since documented. Moreover, the commission has agreed to return only a small portion of what the state claims as overcharges. In addition to wanting to tear up the high-priced power contracts, state officials also want $9 billion in refunds.

"It took two years for FERC to confirm what we knew all along: there was widespread market manipulation and a massive rip-off of California ratepayers," Gov. Gray Davis of California said today. Mr. Davis, a Democrat, added: "Talk is cheap. Until California gets its money back, the FERC hasn't done its job. They still have an opportunity to do. If not, we'll see them in court."

The energy companies, by and large, blame the crisis on a shortage of electricity and California's poorly designed electricity marketplace, and they say that accusations of manipulation are vastly overstated.

Steve Malcolm, the chairman and chief executive of Williams, one of the largest energy traders, said in a statement this afternoon that he was "confident that further, detailed review of the outstanding issues will confirm that Williams operated in accordance with market rules and ethical business practices."

The three commissioners were deeply divided today over whether contracts for long-term electricity sales signed during the height of the crisis should be torn up.

William Massey, who was appointed by President Clinton, said the findings of widespread manipulation could not be squared with comments today by the other two commissioners, Pat Wood III and Nora Brownell, in which they indicated an extreme reluctance to overturn contracts.

"I do think that these two notions are kind of at war with each other," Mr. Massey said.

However, Ms. Brownell said, "I don't think it's fair to say there's an absolute correlation between the evidence of manipulation and the long-term contracts."

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