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FERC Vows Broad Crackdown Against Market Manipulators

by Rebecca Smith, Staff Reporter
Wall Street Journal - March 27, 2003

Federal energy regulators said they found "epidemic" efforts to manipulate electricity and natural-gas markets during California's 18-month-long energy crisis and vowed to crack down on abusers, perhaps including taking the unprecedented step of stripping some companies of the right to sell electricity and gas in the open market.

In its toughest enforcement action to date concerning the 2000-2001 California debacle, the Federal Energy Regulatory Commission demanded that dozens of big companies show why they shouldn't be punished for manipulating the market. The suppliers, ranging from government-owned utilities such as the Los Angeles Department of Water and Power to big energy traders such as Reliant Resources Inc., were accused of using illegal trading strategies to reap "unjust enrichment."

Unless they can prove their innocence, the companies may eventually be forced to disgorge these profits and pay penalties -- both likely measured in millions, not billions, of dollars. The strategies condemned by the FERC are largely a dead issue today. Wholesale energy markets imploded in the wake of Enron Corp.'s December 2001 bankruptcy filing, causing many firms to abandon energy trading.

Three companies were accused of such serious market abuse -- Reliant, Enron and BP Energy Co. -- that the FERC proposed stripping them of the authority to sell energy at competitive prices. Enron was accused of manipulating prices at Louisiana's Henry Hub, where benchmark pricing is set for much of the nation's natural-gas market. That market had been considered too large for a single company to manipulate, until now. Reliant and BP were accused of conspiring in a scheme to rig electricity prices at the Palo Verde pricing point in Arizona in order to illicitly inflate the value of their trading portfolios. In both cases, the FERC's accusation raises the specter of further enforcement action by the Securities and Exchange Commission or the Justice Department.

Enron spokeswoman Karen Denne said the company is reviewing the findings and will respond. Reliant spokesman Richard Wheatley said Reliant brought the matter to the FERC's attention, admitting it "violated the company's own trading practices and procedures." He said disciplinary action had been taken against some employees and that Reliant would work with the FERC to reach an appropriate outcome. BP spokesman Ian Stewart said the firm, a unit of London-based BP PLC, vigorously denies the allegations and "will make a robust response on a timely basis."

The stock of energy companies mentioned by the FERC got hit across the board, with Reliant being the worst case, down 24%. Shares of Reliant closed at $3.05, down 95 cents, on the New York Stock Exchange. Enron, which entered into bankruptcy-court proceedings in December 2001, has been delisted from the Big Board. The BP unit doesn't trade separately from its parent.

In its actions Wednesday, the FERC approved a refund order that will result in at least $3 billion being repaid to California by energy suppliers, based on a finding that prices charged in the state's deregulated wholesale energy markets were neither just nor reasonable. The order went beyond a prior decision by an agency hearing judge, who had recommended a $1.8 billion refund. Some additional refunds will go to other sellers in the West, but the amounts weren't known Wednesday.

It is unclear how much the refunds will mean to consumers, though, since suppliers argue they are owed about $3 billion in unpaid bills. A final tally is expected in four to six months. The FERC is also expected to take several months to consider fixes to the wholesale markets recommended by its staff to prevent future wrongdoing.

FERC Chairman Pat Wood said that although he looks forward "to hearing what the excuses are" from the companies, he was surprised at the staff's findings. Mr. Wood said the commission's staff was continuing to "sift through" thousands of pages of additional evidence submitted this month by California officials, who have been arguing for an eventual refund of $8.9 billion.

California Gov. Gray Davis said he was happy for "the comforting words. Now show me the money." He said he is waiting to see whether the FERC has "the guts to make California whole." If the FERC doesn't come up with the amount the state is demanding, Mr. Davis said, the state will go to court.

Meanwhile, the commission was split over the question of whether to uphold $40 billion in long-term contracts entered into by California and other energy buyers at the height of the crisis. Bill Massey, a Democratic commissioner from Arkansas, said it was incomprehensible that the contracts would be upheld, given that prices were inflated. But Nora Brownell and Mr. Wood, Republicans from Pennsylvania and Texas, said they were reluctant to abrogate contracts. In some cases, Ms. Brownell said, complainants who had made unseemly profits selling energy were asking the FERC to strike down high-priced purchase contracts.

Rebecca Smith, Staff Reporter
FERC Vows Broad Crackdown Against Market Manipulators
Wall Street Journal, March 27, 2003

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