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FERC takes Action Against California Power Suppliers by Tom Doggett and Chris Baltimore Reuters - March 27, 2003

WASHINGTON -- U.S. energy regulators on Wednesday moved to wrap up a long-running investigation of the California energy crisis by awarding refunds of $3.3 billion to the state, proposing to order bankrupt Enron Corp. to repay $500 million in unfair profits, and accusing three suppliers of manipulation.

In a flurry of rulings and reports, the Federal Energy Regulatory Commission (FERC) also said it is mulling action against several major U.S. wholesale electricity and natural gas suppliers of wrongdoing as well as some municipal utilities that sold power to California.

The FERC said it was taking a closer look at three dozen energy firms and municipal utilities that allegedly collaborated with Enron in questionable trading strategies.

Central to all the cases was California's complaint of price-gouging by energy suppliers in 2000-01. During that time the state was forced to its knees by a tenfold spike in wholesale electricity prices and rolling blackouts.

REFUND SHORT OF CALIFORNIA'S DEMAND

FERC commissioners ruled the state was owed about $3.3 billion in refunds — more than the $1.8 billion initially awarded by an agency judge in December. But the state still owes suppliers $3 billion, so it would receive only $300 million, a FERC spokesman said.

California Gov. Gray Davis, a Democrat, demanded that FERC "show me the money. Give me back $9 billion," referring to the state's original demand. He also reiterated his state's stance that it will appeal the finding to the Ninth Circuit Court in San Francisco if the agency does not comply.

The refunds would fall short of California's demand, but additional undetermined fines for as yet unnamed companies that withheld supplies "has the potential for a lot of dollars," FERC Commissioner William Massey said.

FERC released reams of protected material — millions of documents and e-mails — gathered in its probe of Enron and Western markets, including Enron's entire computer database.

Bankrupt Enron, which once dominated the U.S. power market, came under special scrutiny. Investigators recommended that FERC order Enron to repay $500 million for unfair profits the firm gained mostly from its Enron Online trading platform.

California's flawed deregulation scheme, a booming Western economy, and a chronic shortage of generating capacity all contributed to the rise in prices, FERC said.

"There's plenty of blame to go around for this crisis," said Massey. "This agency must never again approve a market design that is so utterly flawed."

RELIANT, BP ACCUSED

In a related action, FERC said it may strip the wholesale trading privileges of Enron, Reliant Resources, and BP Plc due to their trading activities during the crisis.

Shares of companies named in the investigators' report plummeted. Reliant Resources' stock was hardest hit, plunging 24 percent to $3.05. Dynegy's stock slipped more than 7 percent to $2.33, while Williams Cos. shares tumbled 7.4 percent to $4.39. Mirant slid nearly 14 percent to $1.56.

FERC investigators said Enron tried to manipulate natural gas prices at Louisiana's Henry Hub, the largest U.S. natural gas trading hub. BP and Reliant tried to manipulate prices at the Palo Verde electricity hub in Arizona, a FERC report said.

FERC gave the companies 21 days to submit evidence on why they should not lose the right to trade wholesale electricity.

BP had no immediate comment. Reliant said FERC's "show cause" orders mean that the agency is continuing to investigate and has not yet reached a final decision.

"The FERC clearly is trying to show that it takes the potential for market manipulation very seriously," said Glenrock Associates analyst Paul Patterson.

FERC investigators also recommended that 37 energy companies and municipal utilities that engaged in questionable trading with Enron should turn over any unjust profits.

Consumer advocacy group Public Citizen dismissed the findings as "too little too late."

"Trading licenses should be immediately revoked," said the group's Tyson Slocum. "I don't see why FERC continues to defer these actions."

Last year, FERC released now-infamous internal Enron memos that documented trading strategies with names like "Fat Boy" and "Death Star" designed to circumvent California's poorly designed market rules. Since then, two former Enron traders have pleaded guilty to conspiracy linked to those schemes.

On California's request to cancel some $20 billion in long-term contracts signed at the height of the crisis, FERC commissioners did not issue a ruling. But two commissioners said they opposed the request. On Tuesday, state officials said they renegotiated another $23 billion in long-term contracts, shaving about $5 billion off its power costs.