-----Original Message-----
From: Ken Smith [mailto:ken@kdscommunications.com]
Sent: Friday, September 21, 2001 4:19 PM
To: Scott Govenar; Susan J Mara; Denne, Karen; Dasovich, Jeff
Subject: FYI -- Dow Jones report on out-of-market purchases; meeting on Monday


FERC To Examine Alleged Market Manipulation By Calif ISO 	 Dow Jones <http://quicken.excite.com/images/DJBN.gif>	
Updated: Friday, September 21, 2001 04:53 PM ET 	  <http://quicken.excite.com/images/email_friend.gif>  Email this article to a friend! <http://quicken.excite.com/investments/news/story/mailit/?story=/news/stories/dj/20010921/BT20010921006618.htm&symbol=PCG> 
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By Jason Leopold 

Of DOW JONES NEWSWIRES 

LOS ANGELES (Dow Jones)--Federal energy regulators may investigate whether the operator of California's wholesale electricity market has been manipulating its power-purchasing practices to reduce the costs of power the state purchased under long-term contracts, according to documents obtained Friday by Dow Jones Newswires Friday. 

At issue is whether the California Independent System Operator has violated its own market rules by purchasing expensive power secured by the state under contracts rather than cheaper power available in the spot market. The state's need to sell off surplus power secured under those contracts has proven embarrassing for Gov. Gray Davis, who signed $43 billion in deals to head off a summer of spiking prices and blackouts that never materialized. 

The Federal Energy Regulatory Commission will hold a meeting in California Monday to address generators' complaints. The energy companies say that the California ISO's purchasing decisions are difficult to comprehend and out of line with the market, according to a letter sent by Andrea Wolfman, lead FERC counsel for market oversight and enforcement. 

The letter was sent to the ISO, the California Department of Water Resources - which has been buying power in lieu of the state's struggling utilities since mid-January - and several generators, all of which were to attend the meeting. 

"Recently we have become concerned that the scheduling and dispatch procedures of the California ISO, as they have had to change in the last nine months, are not well understood or are not well suited to the current market structure," Wolfman said in her letter. "The purpose of the meeting is to develop agreement between the ISO and those that participate in the scheduling and dispatch (generators, utilities, CDWR) on appropriate practices and procedures." 

ISO Procedures Need Explaining -FERC 

The ISO's main responsibility is keeping power supply and demand in balance on the state's electrical grid. As part of that job, the ISO determines which power plants to call into service and which suppliers to buy power from. 

If the ISO can't explain how it makes its decisions, FERC may conduct an audit of the organization and investigate the possibility it has manipulated the market, Wolfman's office said. 

"As discussed, FERC may schedule a technical conference and operational audit of CAISO," a second letter from FERC's market oversight and enforcement division states. "This unprecedented examination of CAISO operations could lead to the belief that complaints by generators of market manipulation and other practices by the ISO should be investigated." 

The ISO's operating rules generally call for it to purchase the cheapest power first. 

"The information that (generators) have provided all leads to a theory that the CAISO is manipulating the market in order to purchase surplus DWR power at high prices and protect Gov. Davis from political embarrassment," the second letter says. 

The ISO has said only that the market isn't operating as intended, and declined to answer other questions about the allegations or discuss Monday's meeting. 

Generators Confused 

Generators, including Mirant Corp. ( MIR <http://quicken.excite.com/investments/quotes/?symbol=MIR>, news <http://quicken.excite.com/investments/news/?symbol=MIR>, msgs <http://quicken.excite.com/investments/discuss/?symbol=MIR>), Reliant Energy Inc. ( REI <http://quicken.excite.com/investments/quotes/?symbol=REI>, news <http://quicken.excite.com/investments/news/?symbol=REI>, msgs <http://quicken.excite.com/investments/discuss/?symbol=REI>), Williams Cos. ( WMB <http://quicken.excite.com/investments/quotes/?symbol=WMB>, news <http://quicken.excite.com/investments/news/?symbol=WMB>, msgs <http://quicken.excite.com/investments/discuss/?symbol=WMB>), Duke Energy ( DUK <http://quicken.excite.com/investments/quotes/?symbol=DUK>, news <http://quicken.excite.com/investments/news/?symbol=DUK>, msgs <http://quicken.excite.com/investments/discuss/?symbol=DUK>) and Dynegy Inc. ( DYN <http://quicken.excite.com/investments/quotes/?symbol=DYN>, news <http://quicken.excite.com/investments/news/?symbol=DYN>, msgs <http://quicken.excite.com/investments/discuss/?symbol=DYN>), have bought apparently inexpensive power in the ISO's spot market only to find weeks later that the price was much higher. That's because, according to the allegations, the ISO is letting DWR supply expensive power into the market as "out-of-market" purchases that aren't averaged into the real-time prices that ISO market participants see. 

DWR continues to buy out-of-market power regularly at the ISO's request, DWR operations chief Pete Garris has said, but those purchases are being made in the spot market and are never being satisfied by power from DWR's long-term contracts. 

The out-of-market purchases appear to be expensive, however. According to the ISO's August market report, the average out-of-market price for peak hours was $55.90 a megawatt-hour, compared with $26.49/MWh on the ISO computerized market. Brokered prices of western electricity have been lower than the out-of-market prices for months. 

None of the companies mentioned was willing to comment on the record. 

The meeting is scheduled to be held at the ISO's headquarters in Folsom, Calif., and representatives from power producers, utilities and the state are expected to attend. FERC will serve as facilitator, Wolfman said. The meeting isn't open to the public. 

The meeting will begin with a presentation by the ISO on its practices and operational procedures, followed by adjustments that may be needed to improve the market. 

"The objective is to develop a written set of procedures that is agreed to by all the market participants and that is consistent with good utility practices," Wolfman said in the letter. 

-By Jason Leopold, Dow Jones Newswires; 323-658-3874; jason.leopold@dowjones.com <mailto:jason.leopold@dowjones.com>