-----Original Message-----
From: 	Williams III, Bill  
Sent:	Monday, May 21, 2001 2:01 PM
To:	Causholli, Monika; Dean, Craig; Guzman, Mark; Harasin, Leaf; Linder, Eric; Merris, Steven; Meyers, Bert; Porter, David V.; Slinger, Ryan; Solberg, Geir; Symes, Kate; Williams III, Bill
Cc:	Forney, John
Subject:	FW: SF Chron. "investigation" alleges Reliant's Traders directed power plants to withhold supply to raise prices

Check out the full story at the bottom.


 -----Original Message-----
From: 	Hall, Steve C.  
Sent:	Monday, May 21, 2001 10:17 AM
To:	Yoder, Christian; Belden, Tim; Badeer, Robert; Richter, Jeff; Williams III, Bill; Sanders, Richard; 'gfergus@brobeck.com'
Subject:	SF Chron. "investigation" alleges Reliant's Traders directed power plants to withhold supply to raise prices

An excerpt:
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." 

Power juggling ramped up price 
Insiders say manipulation also strained equipment 
Christian Berthelsen, Scott Winokur, Chronicle Staff Writers <mailto:cberthelsen@sfchronicle.com>
Sunday, May 20, 2001 
?2001 San Francisco Chronicle </chronicle/info/copyright> 
URL: <http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2001/05/20/MN121438.DTL>
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 <mailto:cberthelsen@sfchronicle.com> and Scott Winokur at swinokur@sfchronicle.com <mailto:swinokur@sfchronicle.com>.