Today: Finish discussion of trading techniques used in CA Reaction of FERC to these issues Discussion of how FPA limits market Use of antitrust law to regulate electric and gas markets POLR issues Environmental issues Thursday: Is restructuring a good thing? Will it work? If you could determine how and whether energy markets will be regulated, what would you do, and how would you do it?

Trading techniques identified by FERC Bidding up marginal price when excess capacity is scarce. Holding back capacity to facilitate #1 Ricochet  phony sales across state lines to circumvent cap Incing/Fat boy  overstate loads in day ahead market (at both ends) to get $ for making generation available

= consumer = generator

Trading techniques identified by FERC Bidding up marginal price when excess capacity is scarce. Holding back capacity to facilitate #1 Ricochet  phony sales across state lines to circumvent cap Incing/Fat boy  overstate loads in day ahead market (at both ends) to get $ for making generation available Death star/load shift  schedule and abandon unneeded load to get $ for congestion relief Wash trades  paper trades to increase trade volume Gas market counterparts: El Paso proceeding

Which of these ought to be illegal? Why or why not? Bidding up marginal price when excess capacity is scarce. Holding back capacity to facilitate #1 Ricochet  phony sales across state lines to circumvent cap Incing/Fat boy  overstate loads in day ahead market (at both ends) to get $ for making generation available Death star/load shift  schedule and abandon unneeded load to get $ for congestion relief Wash trades  paper trades to increase trade volume Gas market counterparts: El Paso proceeding

Issues: What did Congress mean by “just and reasonable”? Are market-based rates (absent collusion or fraud) inherently “just and reasonable”?

Market Manipulation in CA: Trading Techniques Challenging the FERC’s initial explanation By late 2001 reliance on the spot markets had decreased. FERC’s initial investigations credited the “perfect storm” explanation: supply shortages, high demand, fuel and emissions costs. By mid 2002, evidence of “gaming” techniques used by traders emerged. Several studies published in 2002 suggested that adequate capacity did exist to serve CA demand in 2000 and 2001.

FERC Staff: “[O]ne expects that traders … will utilize various strategies in an effort to maximize profits. But a fundamental aspect of some of the Enron trading strategies is the deliberate use of false information. A market cannot operate properly without accurate information.” Market Manipulation in CA: Trading Techniques

FERC Staff: “Enron’s corporate culture … fostered a callous disregard for the American energy consumer and demonstrates the need for … aggressive market monitoring and enforcement.”

Is the following wholesale price “just and reasonable”? $200/MWH: cost = $20/mwh under normal conditions cost = $30/mwh now because fuel and emissions credits are expensive + $70/mwh scarcity rent + 100% ($100/mwh) “risk premium” because buyer is near bankruptcy and is not paying bills

Postscript: 1.CA refund proceeding: FPA power issue CA claim $8.9 bln overcharges FERC 12/02: $1.8 bln FERC 2003: approx. $3 bln Unpaid bills from CA buyers: approx $3 bln Settlements with FERC 2.CA long term power purchase contracts

Antitrust prohibitions: Bid rigging Price fixing Misuse of monopoly power How are these laws enforced? Who enforces them? How, if at all, do they apply to electricity markets?

POLR Customers … with bad credit With a bad location Who have lost their provider What kind of customers are these? What were their rates like under traditional regulation? What will their rates be like when they get service from a POLR? Is this fair? Unfair?

Oppenheimer: 3 classes of service, with 3 rates Transition to market Short term service Long term service How much should each of these cost? How should this service be priced? How does its provision affect the electricity market?

Environmental Issues: Mandatory utility-funded conservation Social cost dispatch Integrated resource planning What happens to these kinds of programs after restructuring? How does restructuring affect dispatch and investment decisions? How can restructuring states retain incentives for cleaner sources of power?

Implications for Restructuring 1.How can the FERC and/or states prevent a recurrence of the CA problem? 2.Can electricity markets ever work satisfactorily? Can consumers live with price volatility – the kind that sends signals that create long term efficiency? Is market manipulation inevitable? What can/should governments do to safeguard consumers AND let the market work?

= consumer = generator