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FERC says power firms maybe gamed markets

By HIL ANDERSON

LOS ANGELES, Aug. 13 (UPI) -- Federal energy regulators said Tuesday there was evidence that energy companies may have manipulated the western electricity markets as California officials have long alleged, but added that the state's own market rules made it vulnerable to being ripped off.

As it released a long-awaited report on its investigation into the power price crunch of 2000-2001, the Federal Energy Regulatory Commission announced it was launching a formal investigation into the activities of six companies, including three Enron affiliates, to see if they took part in the manipulation of the western markets in order to boost prices for wholesale electricity and natural gas.

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"Electric prices in the California markets skyrocketed in the summer of 2000, exacerbated by an inadequate infrastructure and insufficient energy supplies," FERC said in a statement issued with the report. "In addition, poor market rules within California provided fertile ground for potential manipulation."

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FERC Tuesday ordered its staff to continue its probe of six companies: El Paso Electric, Avista Corp., Avista Energy and three Enron firms: Enron Power Marketing, Enron Capital Trade Resources and Portland General Electric Co.

While there were no definite conclusions in the report of wrongdoing by the companies, FERC warned that they could be banned from energy trading and face repayment of ill-gotten gains if they are found to have violated the Federal Power Act.

"If the Enron companies, El Paso Electric, or Avista are found to have violated federal law, the commission could revoke their market-based rate authority," FERC said. "If any of the companies are found to have violated a FERC rule, regulation, tariff or order, they may be ordered to disgorge any profits obtained while engaging in the prohibited activities."

There was no immediate comment from El Paso or from Enron, but Spokane-based Avista issued a statement pledging to cooperate with the probe.

"Avista has asked on several occasions to meet with FERC staff in order to provide additional information or clarification about our filing, but they have declined our requests for a meeting," said Chairman Gary G. Ely. "We now look forward to the opportunity to tell our story to FERC, clear Avista's name, and move forward."

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The FERC investigations come as the once high-flying energy business has struggled to recover from last year's California fiasco and the hidden losses of Enron and other trading companies that have cast a dubious shadow on the entire power market still today.

Enron's bankruptcy led to revelations earlier this year that its success was not due so much to market fundamentals as it was to sophisticated strategies with colorful nicknames like "Get Shorty" and "Riccochete" that were allegedly used to artificially pump up prices for electricity it sold to California utilities on the volatile spot market.

A survey of U.S. electricity trading in the past year by the respected industry publication Platts was released Tuesday and found that the volume of daily trading in electricity was down some 70 percent from a year ago as the scandalous collapse of Enron, as well as Wall Street's soured view of power trading took most of the wind out of the industry's sails.

"The collapse of credit ratings is the biggest liquidity killer, particularly the downgrading to junk status of big trading players who used to do high-volume trading and provide a lot of the liquidity at major hubs, both in the daily and forward markets," said Brian Jordan, director of North American electricity markets at Platts.

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California has requested that FERC order power trading companies to refund nearly $9 billion in alleged unfair overcharges. The request is still pending and Gov. Gray Davis Tuesday expressed impatience with FERC's seemingly slow investigation.

"The only one in charge of punishing energy companies is the federal government and they are just now getting into the starting blocks," Davis complained to reporters in Sacramento.

"If you can loot California for $22 billion without any sanctions, then FERC is spineless," he added.

But the regulators found that California might have set the stage for its own self- victimization by designing power and natural gas markets that were too heavily based on the commodity prices compiled daily by specialized publishing companies that act basically as referees for the market prices of gas, electricity and oil.

Most of California's power plants run on gas, much of which is produced in the Permian Basin of Texas and New Mexico and shipped by pipeline to Southern California. Third-party price publishers such as Bloomberg and Platts study daily trades made on the nation's pipelines and come up with a benchmark price for various locations, including the California state line. Those prices are then used as the sale price for a transaction or contract.

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FERC was concerned that the publishers could not independently confirm the prices to them by the traders and could be wind up basing their prices on numbers that were falsified by the traders in order to sway the published price one way or the other. The report said it was inclined not to use published natural gas prices when and if it calculates refunds for California.

"Without knowing the source of the raw data, there cannot be any independent verification of the price data published by any reporting firm," FERC concluded. "The trade publications reporting spot and forward prices for both electric and natural gas products at California delivery points do not employ statistically valid sampling procedures or a systematic, formal verification procedure."

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