Now you see it, now you don't

Pam Boschee, Managing Editor

Springtime in California promises to be stormy, but I’m not talking about weather patterns.

California Attorney General Bill Lockyer filed a $150 million lawsuit in March against four energy generators for allegedly double-dipping. He claims they sold electricity both to the state to use as emergency reserves as well as on the daily wholesale spot market.

Even though the state paid for keeping the power available in case of an emergency, Lockyer contends the firms were paid again when the generators unlawfully produced energy out of those reserves to sell on the wildly lucrative spot market.

The line-up consists of all the usual suspects when it comes to these California capers—Dynegy, Mirant, Reliant Energy and Williams Cos. Lockyer alleges that the firms orchestrated this sleight of hand beginning in 1998, continuing through the power crisis last year.

Other generators were implicated in a complaint Lockyer filed with FERC on the first day of spring. He claims dozens of generators overcharged the state to the tune of nearly $2 billion.

FERC had proposed $124 million in refunds to California for overpriced power sales in January and February 2001. A commission administrative judge is still reviewing sales going back to October 2000. Lockyer’s filing asks FERC to expand its review to include transactions between May and October 2000.

But Lockyer wasn’t quite finished—he also lobbed a lawsuit into Los Angeles Department of Water and Power’s court, claiming they overcharged the state by more than $40 million.

My initial reaction when learning of these recent allegations was “how could such chicanery go undetected for so long?

Roland Schoettle, founder and CEO of Optimal Technologies Inc., Benicia, Calif., developer of network management/optimization systems, offered his perspectives in a conversation we had shortly after these allegations flew.

I asked him about the extent of market transparency in the real world and the possibility of gaming in this situation.

He said, “As far as I’m concerned, there’s gaming on many fronts. I think the state has a significant problem because deregulation has been broken not by the concept, but by the political process, by the regulators—and it’s not really their own fault. They just simply don’t know. And the people that do know have the ability to dramatically turn the tables in real time because electricity can’t be stored. You find the system is improperly managed because the current tools can’t see the entire system at once. So because they can only get a very fuzzy view in real time, there’s a tremendous amount that you can do to take advantage of that fuzziness.

Taking advantage of fuzziness. I’m not sure that qualifies as chicanery in my book after all.

Isn’t “gaming” what energy marketing and trading is supposed to be if it’s done well? Words like “swap,””hedge,” “swing” and “option” suggest uncertainty—and fuzziness. (Besides, a sector that uses terms like “contango” and “backwardation” must be playing some kind of game.)

To prevent the kind of after-the-fact tallying that California seems to be doing, real time data is going to have to be available to make sure the system is operating fairly. Tracking a complex, “live” system, such as an electric system, demands technological assistance.

I asked Schoettle if generators would resist the move to real time data due to concerns about proprietary or commercially sensitive information. “A lot of people are not going to want this, at least not at the very beginning, because it compromises their ability to leverage the market. There will be others that will be additionally compensated because they’re having a better effect than they first thought. So, there’s going to be somewhat of a religious war over this.

That religious fervor may very well spread eastward into Texas, where a chorus of voices is similarly beseeching for explanations.

The Texas Public Utility Commission’s Market Oversight Division is preparing to seek fines against six companies it believes took advantage of market rules last August and overscheduled loads in North Texas, where lack of transmission lines and generating capacity has created bottlenecks. Prices spiked up to 100 times the normal rate many times after start-up of a pilot project to test the market. Texas consumers may have overpaid $43 million for electricity as a result of market manipulations.

In summing up the California situation, Schoettle said, “I think there’s validity on both sides of the fence here. But the fact of the matter is because they don’t physically understand the nature of the system from a holistic standpoint, they don’t know how to fix it.

Ditto for Texas.

Old-time market religion may soon have to give way to real time data.

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