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E-Mail Suggests DWP Role in Trading Scheme

June 23, 2002|NANCY VOGEL | TIMES STAFF WRITER

SACRAMENTO — Evidence uncovered by a state Senate investigation of California's electricity crisis includes a warning from an energy trader in which he suggests that the Los Angeles Department of Water and Power engaged in "ricochet," a trading scheme to raise power prices that the DWP has denied using.

Among the documents turned over to Senate investigators recently and obtained by The Times is a November 2000 e-mail from an employee of the energy-trading arm of Pacific Gas & Electric Corp. that specifically advised other power traders to "beware of ricochets with LDWP." The term "ricochet" is commonly used in the energy-trading business to refer to a scheme in which power is traded back and forth across the California border in order to inflate its price. The practice is also known as "megawatt laundering."

DWP officials declared under oath to state and federal investigators last month that the city utility did not engage in ricochet transactions in 2000.

State Sen. Joe Dunn (D-Santa Ana), chairman of the select committee to investigate possible price manipulation of California's now-defunct energy market, said Thursday that the PG&E National Energy Group e-mail will prompt him to hold hearings, perhaps as soon as this week.

"It's an area that we will be exploring in great detail, and I hope for their sake it doesn't turn out to be what it initially appears to be, and that is that LADWP committed perjury," Dunn said.

At the heart of the senator's comment is a two-sentence e-mail sent Nov. 12, 2000, by David Pierce, an employee of the unregulated trading division of San Francisco-based PG&E Corp. "If L.A. agrees to wheel power to Malin [the California-Oregon border] on your behalf, you must make sure that the power is delivered on the other side of the California border," states the e-mail.

Pierce goes on to say the California Independent System Operator, which manages most of the state's transmission grid, "is savvy to L.A.'s attempts to circumvent ricochets by showing an export and import of equal megawatts on the California side of the tie in order to hide the ricochet nature of the transaction."

In the fall of 2000, strategies such as the ricochet could have allowed a company to circumvent a federal price cap in California. At times, it also could have enabled a firm to take advantage of Cal-ISO's willingness to pay hundreds of dollars for a single megawatt on short notice to avoid triggering blackouts.

Ricochet is one of the strategies described by Enron Corp. in a December 2000 memo that was made public last month by federal energy regulators. The memo describes schemes that the now-bankrupt company was using in California's electricity market, including those dubbed Death Star, Fat Boy and Get Shorty.

In the ricochet scheme, according to the Enron memo, traders would buy electricity in the California market and arrange to sell it out of state to another company. Then Enron would buy back a similar amount of power, bring it to California and sell it at a higher price to state grid operators, who need power on short notice to balance the flow of electricity.

Henry Martinez, the DWP's assistant general manager for power, said Friday that he would study records to get a better understanding of the sort of transactions his agency might have been making in November 2000.

But, Martinez said, he believes that the PG&E e-mail refers to a different kind of transaction from the ricochet trades described by Enron. He said the e-mail probably uses ricochet to mean a transaction in which electricity flows to the state border, but is then redirected back into California.

"Think about it as though you're throwing a ball against a wall and the ball bounces back," Martinez said. "The wall is your connection between California and Oregon."

The DWP generally avoids such transactions, he said, because they are a headache to track.

"It's undesirable," Martinez said, "but I cannot say fully that we've never done it. I can't get a lot of details into what happened here until I get more facts."

S. David Freeman, who was general manager of the DWP in the fall of 2000 but now serves as chairman of the state's new public power authority, said he was not aware of the DWP ever engaging in Enron-style ricochet trades.

It may be that other companies used the DWP's extensive transmission grid to make such trades, Freeman said. The publicly owned utility holds rights to the main transmission line that crosses the California-Oregon border and connects Southern California to the Pacific Northwest.

"It is entirely theoretically possible that somebody did a ricochet transaction and used our lines and we wouldn't know about it," said Freeman. "We weren't traders; we didn't buy and sell power on a daily basis like Enron and those other guys."

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