Powerex accused of price rigging

Scott Simpson
Vancouver Sun
04 Mar 2003

California lawsuit demands return of $7.5 billion US

California Attorney-General Bill Lockyer claims electricity suppliers, including B.C. Hydro's Powerex, made huge profits by rigging prices.

A B.C. Hydro subsidiary manipulated power sales in California in 2000 and 2001 to reap windfall profits, the state's attorney-general charged Monday.

The actions of Powerex and other power suppliers ensured electricity prices in those years in California were double what they should have been, even in a competitive market, California claims.

"We've got a lot of stuff on Powerex," said Tom Dressler, speaking for California Attorney-General Bill Lockyer. "Powerex, our evidence shows, was engaged in a lot of the Enron-type games."

On Monday, California officially submitted evidence to the U.S. Federal Energy Regulatory Commission that state representatives say shows power suppliers, including Powerex, manipulated markets as power prices soared.

The commission, in November, gave the state 100 days to present proof of its claims that more than $7.5 billion US in profits should be refunded.

That deadline expired Monday.

Powerex denies any wrongdoing, saying it merely took advantage of weaknesses in a newly deregulated California market.

California officials have previously said they believe Powerex participated in market manipulation, but Monday's accusations are the most direct attacks levelled to date.

The state also names in the filing with FERC Williams Cos., Hydro's partner in a proposal to build a natural gas pipeline from Washington state across the Strait of Georgia to Vancouver Island.

The state says Williams deliberately shut power plants in California to create scarcity and earn higher profits.

Dressler of California said Powerex engaged in at least three schemes, or games, which gained notoriety last summer when they turned up in memos released by Enron Corp. Enron filed for bankruptcy in December, 2001. Dressler said the state found other companies engaged in Enron 'games' known as Fat Boy, Death Star and Riccochet.

In Fat Boy, suppliers intentionally submitted false electricity load schedules to the state's power grid operators to increase scarcity and prices for the next day's market, then profited by selling electricity at the artificially higher prices.

"Not only did Enron engage in that, but numerous other market participants including Powerex engaged in Fat Boy gaming," Dressler said.

In Riccochet electricity was 'laundered' by moving it out of California where internal prices were capped, then shipping it back in at higher prices unconstrained by the caps as if it were being generated outside the state.

"Under Riccochet, our evidence shows that Powerex was involved in those strategies," Dressler said.

In Death Star, the participants created false congestion on the California electricity grid, then charged the state's grid operator exorbitant prices to relieve the phoney congestion.

"Powerex, our evidence shows, participated in that game," Dressler said.

Powerex was also implicated in a scheme where it teamed up with a public utility run by the city of Los Angeles to create confusion in the market to boost prices and split the profits.

"Powerex and Los Angeles Department of Water and Power had what we consider an improper power sharing agreement," Dressler said. "Our evidence (also) shows that Powerex exported California power into Canada during times when our ISO (independent system, or electricity grid, operator) was operating under emergency conditions. We believe that export probably violated Powerex's export licence."

Dressler said California will petition FERC to lift a protective order which makes all of its evidence secret, saying the public has a right to know the details of the situation.

"We think the public has a right to know, and that there is no justification in terms of commercially sensitive type information because it's all old. It's old plant operating stuff that has no value to these guys any more."

In preparing for Monday's filing California took sworn statements from four Powerex employees, president Ken Peterson; top trader Murray Margolis; and portfolio managers Tom Bechard and Ali Yazdi.

Margolis was the third most highly paid Hydro employee in 2001, when electricity prices were skyrocketing. He earned $371,994 in salary and bonuses.

Powerex is filing to FERC what it calls "compelling evidence that it participated by the rules of the California energy markets and helped keep the lights on in California when California was in crisis."

Hydro's Doug Little said in a news release that, far from causing problems, Powerex was "instrumental in helping to keep the lights on in California during the crisis."

"Our trade activities with California were within the rules," Little said.

He said that a "Perfect Storm" of supply and demand forces in Western North American energy markets pushed prices up, with faulty market design and "poor policy response" by the state of California exacerbating the situation.

"Trading strategies being complained of by California had, at most, a marginal impact on prices -- as California's own studies have found -- compared to the impact of market fundamentals," Little said.

"We are confident that we participated by the market rules and expect the evidence we, and likely others, provide will bear out our contention that the Perfect Storm of basic market forces, California market design flaws and poor policy decisions were the cause of California's energy problems."

The companies have until March 20 to reply to the charges.