Man Without Qualities

Wednesday, August 14, 2002

Isn't What the FERC Says Interesting?

The Federal Energy Regulatory Commission has issued its preliminary report on the notorious Enron trading practices. If the preliminary findings contained in the report hold up, the new California grand jury empaneled by the Justice Department to investigate those practices won't have much to do. Here are some excerts:


While the exact economic impact of the trading strategies is difficult to determine precisely, Staff concludes that these now infamous trading strategies have adversely affected the confidence of markets far beyond their dollar impact on spot prices. is highly unlikely that the impact of the Enron trading strategies on spot prices alone accounted for a substantial portion of Enron's total revenues from long-and short-term trades.

On "Load Shift"

By Enron's own admission, its use of this trading strategy was not very successful in that Enron was not able to move the price paid for congestion management because the bidding strategy of other entities had a counter-balancing effort. In any event, Enron may have received approximately more [sic] congestion revenues due to this trading strategy. Nevertheless, whether successful or not, "load shift" involves deliberately creating congestion on a transmission line to increase the value of Enron's transmission rights, and is clearly an attempt to manipulate prices.

On Exporting Power out of California

While it may be true that any individual company may have acted in an economically rational manner by exporting its power to a market with higher prices, collectively the large amount of exports contributed to the scarcity in California during 2000-2001.

On "Ricochet"

Entities routinely engage in trying to capture profits from price differences that exist between different time periods, e.g., purchasing power day-ahead and selling it in real time. The actual price in the real-time market can be higher or lower than the original price paid in the day-ahead market. Entities assume this arbitrage risk where others are unwilling to do so.

On "Fat Boy"

Enron's use of the "fat boy" trading strategy did not set the market-clearing price in the Cal ISO's real-time market.

On "Get Shorty"

In this trading strategy, Enron would commit to provide the ancillary services in the Cal PX's day-ahead market and then cover its position by purchasing those services in the Cal ISO's hour-ahead market. There is a legitimate profit motive here: to sell high in the day-ahead market and buy back at a lower price in the real-time market.

Staff notes that Cal ISO Tariff Amendment No. 4, which the Commission accepted for filing,103 permits the "buy back" of ancillary services as a legitimate form of arbitrage.

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