----- Forwarded by Richard B Sanders/HOU/ECT on 05/21/2001 08:06 AM -----

	Michael Tribolet/ENRON@enronXgate
	05/21/2001 07:55 AM
		 
		 To: Richard Shapiro/NA/Enron@Enron, James D Steffes/NA/Enron@Enron, Harry 
Kingerski/NA/Enron@Enron, Robert 
Neustaedter/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, Chip 
Schneider/ENRON@enronXgate, Lisa Mellencamp/HOU/ECT@ECT, Richard B 
Sanders/HOU/ECT@ECT
		 cc: 
		 Subject: SF Chronicle article


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Power juggling ramped up price 
Insiders say manipulation also strained equipment

Christian Berthelsen, Scott Winokur, Chronicle Staff Writers    Sunday, May 
20, 2001 
  

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Large power companies have driven up electricity prices in California by 
throttling their generators up and down to create artificial shortages, 
according to dozens of interviews with regulators, lawyers and energy 
industry workers. 

Those sources say the unusual maneuvers not only jacked up prices but also 
wore down equipment and contributed to the record levels of plant shutdowns 
that are depriving the state of much-needed electricity. The accounts are 
supported by an independent review of shutdown data by The Chronicle. 

The California Energy Commission calculates that an average of 14,990 
megawatts of generating capacity, nearly a third of the state's total, was 
unavailable each day in April because of plant shutdowns, more than four 
times as much as a year ago. 

Such shutdowns are the subject of increasing scrutiny as California enters 
another period of high demand, the warm spring and summer months of May to 
September, when electricity usage normally grows by a third. 

Loretta Lynch, president of the California Public Utilities Commission, said 
last week the agency has found considerable evidence of suspicious plant 
shutdowns. And the California Independent System Operator, which manages the 
state's power grid, says plant shutdowns have now become the primary means of 
constricting supply. 

But an extensive investigation by The Chronicle has found that not only were 
generators shut down to boost prices but these "gaming" tactics contributed 
to the plants' deteriorating condition. 

"We suspected it," said Jim MacIntosh, the manager of grid operations for the 
ISO. "It was a sure factor in driving up prices." Such swings in unit output, 
he said, "would only make sense in a scenario when they're trying to game 
something. Otherwise, why would they do that? They're tearing their units 
up." 

Unusual phone calls 

Operators at a San Bernardino County power plant owned by Reliant Energy Inc. 
say a complex plan to manipulate the California energy market began early 
last year with a series of unusual telephone calls from the company's 
headquarters in Houston. 

According to the accounts of three plant operators, Reliant's operations 
schedulers on the energy trading floor ordered them to repeatedly decrease, 
then increase output at the 1,046-megawatt Etiwanda plant. This happened as 
many as four or five times an hour. Each time the units were ramped down and 
electricity production fell, plant employees watched on a control room 
computer screen as spot market energy prices rose. Then came the phone call 
to ramp the units back up. 

"They would tell us what to do, and we would do it," said one of the men, who 
only agreed to speak on condition they not be identified because they fear 
being fired. "Afterward, we would just sit there and watch the market 
change." 

The workers said frequent and large swings in electricity output began at a 
number of California power plants just as the state's power crisis began in 
earnest. The workers and state power authorities assert the swings were one 
of the primary means of gaming the wholesale energy market. 

"It appears the control rooms are responsive to direction from the trading 
floors in Houston, rather than the reliability needs of the ISO," said Carl 
Wood, a commissioner with the utilities commission who is overseeing that 
agency's investigation into plant outages. "Instead of being responsive to 
demands for reliability, they're responsive to demands for profitability." 

Corporate denial 

Reliant officials adamantly deny using this tactic or any other mechanism to 
game the California energy market. They and other power companies, including 
AES Corp. and a partnership between NRG Energy Inc. and Dynegy Inc., have 
asserted that skyrocketing electricity demand forced them to run aging, 
decrepit power plants harder than ever to meet California's needs. 

While acknowledging that the company issued changes in output levels as 
frequently as every 10 minutes, company officials said it was done at the 
instructions of the ISO to maintain supply-demand balance. 

"As a part of routinely doing business within California and the California 
market design, we are required to do that," said Kevin Frankeny, an 
operations official with Reliant. "When the ISO (issues dispatch orders), 
they dispatch on a 10-minute basis. It can go up and down many times within 
an hour." 

Frankeny said he was not aware of any instances in which Reliant schedulers 
in Houston ordered dispatch changes without the ISO directing them to do it 
first. 

The ISO refused to comment on operations at any specific facility, but 
Stephanie McCorkle, an ISO spokeswoman, said the ramping tactics were used 
beyond dispatch instructions during periods of tight supply. And one of the 
plant operators said the orders to vary output came independently of the grid 
managers. "ISO was not calling Reliant every 10 minutes for that," said one 
of the operators. "Not for an individual unit." 

Officials with the California attorney general's office declined to comment 
on the legality of the ramping practice, citing a continuing investigation 
into whether wholesale energy prices are being manipulated. One source 
familiar with the state of various inquiries said the ramping, if proved to 
have been done to drive up prices, could violate the state's unfair business 
practices laws. 

Invisible practice 

How could companies such as Reliant tinker with output and not get caught? 

One of the plant workers said the practice was designed to be virtually 
invisible to regulators and grid operators. 

When power companies bid on hourly contracts, they agree to produce a certain 
amount of electricity over the given hour. Generators are paid based on an 
average of the spot market prices for that hour. By driving up the spot 
price, they can increase their hourly profits and still produce the total 
amount of energy required. 

The plant worker said the units would be ramped down immediately after their 
output measurement, which was performed at the top of each hour by the ISO. 
Then, he said, it was brought back up as the spot market price of electricity 
rose in response to the reduced output. By the time the ISO measured again, 
the output was back at the expected level. 

Another operator said the units were not always ramped up and down - that if 
the price reached a satisfactory level, generators would raise output and 
remain at that level as long as the price was right. Other times, if the 
price was low, output was brought down and kept down. 

The same operator said the amount of ramping appeared to be a matter of 
individual will of the company schedulers in Houston, with some being more 
aggressive than others. 

"What they would do, especially late at night, is if the price tanked, they 
would undergenerate," an operator said. "Then, mysteriously, the price would 
go up. 

"Then, if the schedule was at 70 (required megawatt hours of output), they'd 
say, 'Go up to 90.' That would cause the price to tank. And they'd say, 
'Bring it down again.' " 

Rapid changes 

These fluctuations occurred within time spans of as little as 10 to 15 
minutes, the operators said. But acceptable rates for bringing a unit from 
minimum to maximum levels when the plant was owned by Southern California 
Edison were more like 80 minutes, to avoid stressing the machinery, one of 
the workers said. Moreover, they were typically run at constant levels, which 
also reduced wear and tear. 

"They were basically ramping up as fast as they can, and then slamming the 
brakes on," said one of the operators. "They were increasing the fatigue on 
the units." 

ISO officials say they changed market operations last fall to crack down on 
gaming tactics, including instituting a so-called 10-minute market, rather 
than the hourly market, so that it could be more easily detected when 
companies were withholding power. 

But the ISO says generator outages have now become the primary tactic in 
driving up energy prices. 

A computer analysis by The Chronicle of shutdown data over a recent 39-day 
period shows Reliant and three other generating companies topped the list of 
plant shutdowns. Reliant also represented the largest amount of wattage lost 
among those companies. 

Plants owned by Reliant, AES, Mirant Corp. and Duke Energy Inc. accounted for 
more than half of the state's unplanned shutdowns, even though their 
generating capacity was no more than 25 percent of the state's total capacity 
from all sources. 

Reliant, one of California's largest and most profitable out-of-state 
generators, reported 319 shutdowns during the period in March and April. It 
was followed by Mirant Corp. of Atlanta (310), AES Corp. of Arlington, Va. 
(278) and Duke Energy North America of Charlotte, N.C. (261). 

Reliant's unplanned shutdowns deprived the system of more than 53,000 
megawatts over the 40-day period, an average of 1,368 per day - enough power 
for 1.4 million homes for one hour. 

Its Ormond Beach plant in Oxnard, with one generating unit down for 26 days, 

accounted for more than 30,000 of those missed megawatts. However, an 
operator who worked in that plant said the outages there appeared to be the 
result of legitimate equipment failures. 

Reliant says there are valid reasons for its plants now to be in need of 
repair. They are old: At 48, Etiwanda is the oldest of Reliant's five 
California plants. And the company says routine maintenance was deferred so 
the plants could remain in service during times of high summer demand. 

But the operators said the issue is not so clear-cut. One problem at 
Etiwanda, a tube leak, had been present for about a month and was previously 
reported to management, they said, but it had not deteriorated much, it was 
operating at full capacity and there was no immediate need to take the unit 
offline because of the problem. 

Moreover, at the time of the shutdown, the ISO had expressly asked Reliant to 
keep the unit online, the operators said. Richard Wheatley, a spokesman for 
Reliant, denied that any Reliant unit was taken offline for unnecessary 
maintenance. 

Ramping may be rampant 

Sources say Reliant was not alone in using the ramping practice. A source 
familiar with the state utilities commission investigation said output logs 
obtained from AES' Alamitos plant also reflected production fluctuations. And 
an operator who has worked at the El Segundo plant co-owned by NRG and Dynegy 
said the practice was used there, although less frequently. The scheduling 
calls came from Dynegy's trading floor in Houston, rather than NRG in 
Minneapolis, he said. 

Steve Stengel, a spokesman for Dynegy, said changes in output at El Segundo 
were a normal function of changing demand levels throughout the day, and 
denied the company was engaged in gaming the California market. 

In a May 2000 report, the California Energy Commission cited Reliant's 
Etiwanda plant, as well as the Alamitos and El Segundo plants, as some of the 
"major beneficiaries of high real-time prices" that spring. 

One way to obtain those high prices, the plant workers said, was the simple 
method of demanding a sky-high price and refusing to deliver power if that 
price was not met. 

On one occasion, one operator said, Reliant ordered a unit at Etiwanda to be 
shut off because the ISO would not meet the price of $1,000 per megawatt 
hour, even though the legal price cap at the time was $750. 

"The operator said, 'It's our unit, shut it off,' " the source said. 


E-mail Christian Berthelsen at cberthelsen@sfchronicle.com and Scott Winokur 
at swinokur@sfchronicle.com.