This one is particularly amazing ...


Electricity traders' tech habits get scrutiny 
Posted at 10:23 p.m. PDT Sunday, June 10, 2001 
BY JENNIFER BJORHUS 

Mercury News 


State officials investigating California's extraordinary energy prices are 
zeroing in on how energy traders use the technology tools of their profession 
-- from e-mail and specialized software to Internet energy data sites and 
online trading floors.

This technology may be key, they say, to helping traders acquire the intimate 
knowledge needed to manipulate California's troubled energy market. With 
minute-to-minute knowledge of market conditions, some traders went even 
further, two lawsuits charge, illegally coordinating bids and sending 
electricity prices to record-breaking levels.

The state Attorney General's Office has subpoenaed from power generators 
software used to formulate bidding strategies, names of employees providing 
computer support, communications with a prominent industry Web site and the 
name of firms that handle computer networks.

And a state Senate committee has hired an information technology consultant 
to help them look into how traders tracked patterns on the state's 
Internet-based spot market, among other things.

``Once you were knowledgeable about its operations, the opportunity to game 
it became pretty obvious,'' said Sen. Joe Dunn, D-Garden Grove, who chairs 
the committee.


Anti-trust laws

Working together, or colluding, to fix prices is illegal and violates state 
and federal anti-trust laws. 

Sharing sensitive industry data, if it involved financial markets, would be 
considered insider trading and would be treated far differently, said Anjali 
Sheffrin, head of market analysis for the Independent System Operator, which 
manages the state's power grid. 

The Securities and Exchange Commission polices the nation's stock markets, 
but wholesale energy trading goes largely unwatched by federal regulators.

San Diego attorney Mike Aguirre agreed with Sheffrin. Aguirre is part of a 
team of lawyers who have filed two lawsuits against leading power generators 
such as Dynegy, Duke Energy and Williams Energy Services.

``It's basically an embryonic kind of trading market that involves the 
sharing of inside information, and the only reason they're getting away with 
it is there's no SEC cop,'' he said.

Energy companies dismiss these charges as speculation.

``All of these `What ifs?' '' said Dynegy spokesman Steve Stengel. ``The fact 
of the matter is we've played by the rules, we've acted ethically, we haven't 
done anything wrong.''

Energy companies say the way they use technology is all above board.

``That's something that we're proud of, that we have all of the tools to do 
the best possible job in the trading,'' said Paula Hall-Collins, spokeswoman 
for Tulsa-based Williams Co.

Not everyone is persuaded that energy companies actually conspired to hike 
prices.

Some public officials and energy industry players call the technology focus a 
red herring. California's energy problems are far more fundamental, they say, 
than click-happy energy traders with spreadsheets. The now-defunct California 
Power Exchange, for example, was something of a sitting duck, unable to 
freely shop around for the best electricity prices.


Wealth of data

Other experts believe the sheer wealth of data floating around -- from river 
flows to 30-day forecasts of power line outages -- gives traders an unfair 
advantage. ``That's exactly the issue,'' said Severin Borenstein, director of 
the University of California Energy Institute. ``The issue is whether all 
this information is actually doing more harm to competition than benefit to 
the efficiency of procuring and selling power.''

The best illustration of this is a somewhat legendary Web site blunder.

In that incident, an energy industry association called the Western Systems 
Coordinating Council posted highly sensitive real-time data about 
transmission of extra-high voltage electricity in California. 

Alarmed that such information could be used to game the market, the state's 
grid operator last October demanded that the trade group take the information 
off the site, which it did.

A former energy trader who spoke to the Mercury News on the condition that he 
not be identified, said: ``When you can calculate exactly what a market needs 
and where its surplus is going to come from, then you have the ability to 
essentially fix prices. It's like a linear equation. You know exactly what 
the end equation is going to be.''

At issue are how traders employ the tools that, like the telephone and fax 
machine, are standard in trading electricity: software, data Web sites and 
Internet energy exchanges.

Dunn and other public officials acknowledge that it isn't clear how 
technology was used in suspected abuses. And no one has turned up slam-dunk 
evidence of collusion.

The ISO has done extensive studies that conclude traders drove up prices 
through gaming. The high prices have cost the state at least $6.7 billion 
since May 2000.

``Energy traders trade information among themselves,'' the ISO's Sheffrin 
charged, comparing it to insider-trading. ``These traders are calling each 
other up all the time.''

The former energy trader who talked to the Mercury News agreed energy traders 
as a very incestuous group. 

They talk and e-mail every day. ``Sometimes many, many, many times a day,'' 
he said. ``Some of them have instant messaging.'' He said he believes it 
could amount to ``de facto collusion.''

But proving collusion in court is extremely difficult.

The sticking point, said UC's Borenstein, is showing exactly what energy 
traders did with the information.

``These guys aren't actually sitting down in a room together,'' Borenstein 
said. ``They sort of watched each other and said, `Well, other firms are 
keeping capacity out and we will too.' ''

The former energy trader said he doubted that investigators would prove 
collusion because traders will cover their tracks. ``They're expunging 
hard-drive data as we speak,'' he said. ``The documents are long gone.''


Lawsuits

Two class-action lawsuits, filed on behalf of taxpayers by San Francisco and 
by Lt. Gov. Cruz Bustamante, accuse the energy companies of colluding to 
drive up prices. Neither lawsuit clearly documents how the energy companies 
engaged in secretive data-sharing.

The Bustamante suit, however, targets a new Internet site for wholesale 
energy trading launched last fall by heavy-hitter energy companies such as 
Duke and Reliant. The Atlanta-based Web site, IntercontinentalExchange, is 
one of at least a dozen such electronic trading floors that have popped up on 
the Internet in the last four years. None of these trading exchanges -- which 
analysts say are the wave of the future -- are regulated.

IntercontinentalExchange declined to comment since it is not a party to the 
suit.

The lawsuit charges the site ``has several features that support collusive 
behavior amongst market participants.'' 

One is that only approved traders have access to IntercontinentalExchange and 
those traders can pick who they want to trade with and shut other traders 
out. And more importantly, Aguirre said, the energy companies who own many of 
these Web exchanges get the tremendous benefit of having a record of all the 
trades.

``It gives them an enormous amount of market data that no one else has access 
to,'' he said. ``It's a conduit for collusion.''






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Contact Jennifer Bjorhus at jbjorhus@sjmercury.com or (408) 920-5660.




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