Daniel Weintraub: Surprise culprit in price rigging
By Daniel Weintraub -- Bee Columnist
Published 2:15 a.m. PDT Sunday, May 5, 2002
A California state senator plowing through boxes of subpoenaed Enron Corp. documents has finally unearthed a smoking gun, the first tangible proof that energy traders tried to manipulate the price of electricity amid short supplies last summer.
One problem: The evidence doesn't implicate Enron so much as the managers of California's electricity grid, whose Folsom-based trader was caught red-handed trying to game the market. In a bizarre twist, it turns out that the state-created Independent System Operator, or ISO, was the one rigging the price of power, not the evil private generators who everyone suspected.
The incident happened last July 3, a scorcher in California's Central Valley, with temperatures eventually hitting 106 degrees. It was the third straight day near or above 100 degrees, and the air conditioners were churning, pressing the grid to its limits.
The grid managers, whose job is to ensure that the lights stay on, had bought up electricity reserves for each hour of the afternoon in what is known as the day-ahead market. That electricity didn't come cheap. But as the Independence Day holiday approached, demand failed to surge as much as the grid managers expected. In the real-time market, the hour-to-hour trading that sets the final price for electricity, the cost of reserves sunk to almost nothing.
A handful of electricity traders, apparently in the Northwest, noticed this price trend and tried to capitalize on it. The traders, the day before, had promised California electricity and stood to be paid top-dollar for that juice. Now, with the price falling, they could swoop in and fulfill their obligation by buying up the surplus at a penny per hour, essentially nothing. They had sold high. Now they could buy low. The difference would be their profit.
That's how markets work. The traders made a promise. They also took a risk. If the price of electricity went up after they were committed, they might lose money on the deal. As it dipped, they were about to make a killing. All of that buying and selling is supposed to guarantee the greatest possible supply at the lowest possible price. Most of the time it works.
But California's grid manager -- the ISO trader -- didn't like it. He didn't like the idea of these private traders making easy money off the price fluctuations. So he tried to thwart it. And the only way he could do so, ironically, was to cause the price to go up. That way, the traders who had promised the state electricity couldn't get off the hook by buying low and selling at the pre-arranged, much higher price.
It's as if you've agreed to buy a car from an auto broker for $20,000, then, before taking delivery, realized that the broker was going to get that car at auction for only $5,000. You've overpaid by a huge margin, but you can't get out of the deal. Instead, jealous of your seller's profit, you send a shill to the auction to drive his price up. You still have to pay the $20,000. But the guy who sold you the car makes a lot less on the deal than he otherwise would.
The ISO's trader, a man named Allen, called Enron's trading desk on the afternoon of July 3. He explained the situation to an Enron trader named Ryan -- but not before telling him that the telephone line on which they were speaking was not being recorded. He didn't know the call was being taped by Enron.
Allen wanted Enron to bid for some power at 6 p.m., at $91 an hour.
"We want it to clear it at that because of some issues we are seeing as far as others that are taking advantage of the market," he said, according to a transcript of the conversation.
Ryan was confused. Why would the grid manager want him to drive up the price of power?
The ISO trader explained further: "See, the day-ahead was purchased at like $100, and then what happened is that the hour-ahead ... a bunch of these people were buying it ... for a penny ... So we wanted to keep the price up high."
Now Ryan understood. But he didn't promise to play along. "I'll see what I can do," he said.
Three minutes later the phone rang again. It was Allen again, from the ISO. Pushing harder. And trying to put the Enron trader at ease.
"If you have any questions, let me know," Allen said. "I hope you know this is me from the ISO. I don't know if you think I'm somebody else, but you can call me at the hour-ahead desk."
Ryan was still reluctant. "I'm talking to my boss right now as far as, because of, you know, I don't want to be doing anything that's wrong," he said. "Even if it is helping you guys out, if it's wrong, I can't do it."
As it turned out, Enron did place a bid at the price requested. But that bid was consistent with what Enron had been doing earlier in the day, and the company says it was formulated before the ISO trader called.
The ISO employee has been fired, and an investigation continues. But the lack of outrage has been deafening. No congressional or legislative hearings on the subject. No indignant press conferences. No new calls for reforming the grid manager -- except from a few Republicans without any clout in Democrat-dominated Sacramento. Everyone has been assured this was an isolated incident, a lone ranger acting without the knowledge or approval of his superiors.
Maybe so. But this case should not be allowed to retreat so quickly into the shadows. The Independent System Operator is a non-profit private entity that, as its name suggests, is supposed to be independent. But its directors are appointed by the governor, and its hybrid nature makes it vulnerable to political influence. Electricity sellers and, ultimately, consumers need to have confidence that this impartial arbiter doesn't have its thumb resting on the scale.
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