[Federal Register Volume 68, Number 62 (Tuesday, April 1, 2003)]
[Notices]
[Pages 15716-15718]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-7797]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Docket Nos. EL03-59-000 and EL03-60-000]


Order Proposing Revocation of Market-Based Rate Authority

Issued March 26, 2003.
Before Commissioners: Pat Wood, III, Chairman; William L. Massey, and 
Nora Mead Brownell: Reliant Energy Services, Inc., BP Energy Company.

    1. This order directs Reliant Energy Services, Inc. (Reliant) and 
BP Energy Company (BP Energy) to show cause to the Commission in paper 
hearings why their authority to sell power at market-based rates \1\ 
should not be revoked by the Commission in light of their apparent 
manipulation of electricity prices at the Palo Verde, Arizona trading 
hub, in violation of section 205(a) of the Federal Power Act's (FPA) 
requirement that rates be just and reasonable.\2\ This order also 
initiates proceedings under section 206 of the FPA,\3\ in Docket Nos. 
EL03-59-000 (for Reliant) and EL03-60-000 (for BP Energy), where the 
show cause filings will be considered.
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    \1\ Reliant and BP Energy are power marketers previously 
authorized to sell electric power at market-based rates. See Office 
Director Letter Orders issued on July 25, 1994 in Docket No. ER94-
1247-000 and March 12, 1999 in Docket No. ER99-1801-000 (granting 
Reliant market-based rate authority); Office Director Letter Orders 
issued on June 17, 1999 in Docket No. ER99-2895-000 and October 18, 
2000 in Docket No. ER00-3614-000 (granting BP Energy market-based 
rate authority).
    \2\ 16 U.S.C. 824d(a) (2000).
    \3\ 16 U.S.C. 824e (2000).
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    2. This order is necessary to fulfill the Commission's obligation 
to monitor competitive markets in order to protect wholesale 
electricity customers from unjust and unreasonable rates.

Background

    3. On February 13, 2002, the Commission directed a Staff fact-
finding investigation into whether any entity manipulated prices in 
electricity or natural gas markets in the West or otherwise exercised 
undue influence over wholesale electricity prices in the West, since 
January 1, 2000.\4\
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    \4\ Fact-Finding Investigation of Potential Manipulation of 
Electric and Natural Gas Prices, 98 FERC ]] 61,165 (2002) (February 
13 Order).
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    4. On August 13, 2002, Staff released its Initial Report in Docket 
No. PA02-2-000.\5\ In that Report, Staff recommended the initiation of 
various company-specific proceedings \6\ to further investigate 
possible misconduct, and recommended several generic changes to market-
based tariffs to prohibit the deliberate submission of false 
information or the deliberate omission of material information and to 
provide for the imposition of both refunds and penalties for 
violations.
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    \5\ The Initial Report is available on the Commission's Web site 
at http://www.ferc.gov/electric/bulkpower/pa02-2/Initial-Report-PA02-2-000.pdf.
    \6\ These proceedings, which are currently pending before the 
Commission, are Docket Nos. EL02-113-000, EL02-114-000, and EL02-
115-000.
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    5. In Staff's Final Report, being publicly released concurrently 
with this order,\7\ Staff notes evidence that indicates that Reliant 
and BP Energy appear to have engaged in coordinated efforts to 
manipulate electricity prices.
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    \7\ Final Report on Price Manipulation in Western Markets 
(Docket No. PA02-2-000 March 2003). The Staff Final Report is 
available on the Commission's website. We will incorporate the Staff 
Final report, and the underlying record in Docket No. PA02-2-000, by 
reference into the records in these proceedings.
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    6. Specifically, Staff points to three occasions where a BP Energy 
trader called a Reliant trader and asked him to buy power from an offer 
he was going

[[Page 15717]]

to place on an electronic trading platform (Bloomberg). The Reliant 
trader would then sell the power back to the BP Energy trader at the 
same price, but the transaction would not take place on the electronic 
trading platform.
    7. On one of the occasions the BP Energy trader with the aid of 
Reliant's trader appears to have manipulated the price of electricity 
delivered at Palo Verde, a trading hub in Arizona to affect the value 
of his trading position (such that a higher price raises the value of 
the trader's portfolio).
    8. Recorded telephone conversations and transcripts provided to 
Staff by Reliant in Docket No. PA02-2-000 document the manipulation.\8\ 
The BP trader contacted the Reliant trader and offered a transaction. 
The BP trader would offer to sell electricity on the Bloomberg 
electronic platform, the Reliant trader would buy at the posted price, 
and the BP trader would then buy back the power (off the Bloomberg 
electronic platform) at the same price to undo the sale. The BP trader 
goes on to explain that he is trying to move the market price up to 
$43.10 but no one will buy it at that price, so he needs the Reliant 
trader to ``lift his offer'\9\ in order to increase the price.
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    \8\ The conversations and transcripts are non-public. They will 
be made available to parties subject to an appropriate protective 
order.
    The Staff's Final Report indicates that when Staff asked BP 
Energy for information and telephone transcripts containing other 
information concerning these events, BP Energy stated simply that it 
had no information regarding the activity of its trader because it 
did not keep telephone records.
    \9\ I.e., to buy at the price posted on the Bloomberg electronic 
platform.
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    9. Several days later the same BP trader contacted the same Reliant 
trader and offered a similar proposal, again, apparently to manipulate 
the price in order to increase the value of his trading position under 
the company's mark-to-market accounting.
    10. The BP trader goes on to explain that they are marking their 
books on the October Palo Verde price. He notes that power for delivery 
in October at Palo Verde had traded as high as $44, and he wants to 
move the price even higher because of his long position. He indicates 
that he will post an offer to sell at $44.15 and asks the Reliant 
trader to lift that offer and then he will buy it back from him at the 
same price. The BP trader then posts the offer on the Bloomberg 
electronic platform. Shortly thereafter, the BP trader asks the Reliant 
trader to lift the offer because he senses the market beginning to 
move. The Reliant trader lifts the offer and asks the BP trader what 
they should do next. The evidence indicates that the BP trader informed 
the Reliant trader that he will buy the power back at the same price.

Discussion

    11. We find that BP Energy and Reliant, in the transactions 
identified above, appear to have manipulated electricity prices at Palo 
Verde, an important trading hub.\10\
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    \10\ The Palo Verde trading hub previously was presumed to be 
liquid and not subject to price manipulation. The transactions 
identified and discussed above suggest that that presumption is not 
true. In addition, although electricity price indices are not as 
critical a part of the market price formation process in the 
electric industry as natural gas price indices are in the natural 
gas industry, they were nevertheless considered by many to be an 
important part of electricity market price discovery.
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    12. The Commission's grant of authority to sell power at market-
based rates, as opposed to at cost-based rates, depends on a 
functioning, competitive market for wholesale power unimpaired by 
market manipulation. Moreover, implicit in Commission orders granting 
market-based rates is a presumption that a company's behavior will not 
involve fraud or deception. Companies failing to adhere to such 
standards are subject to revocation of their market-based rate 
authority.\11\
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    \11\ Fact Finding Investigation of Potential Manipulation of 
Electric and Natural Gas Prices, 99 FERC ]] 61,272 at 62,153-54 
(2002); accord Investigation of Terms and Conditions of Public 
Utility Market-Based Rate Authorizations, 97 FERC ]] 61,220 at 
61,975-77 (2001); GWF Energy, LLC, et al., 98 FERC ]] 61,330 at 
62,390 (2002); New York Independent System Operator, Inc., 91 FERC 
]] 61,218 at 61,798-800 (2000), order on reh'g, 97 FERC ]] 61,155 
(2001); Washington Water Power Company, 83 FERC ]] 61,097 at 61,462-
64, order in response to show cause presentation, 83 FERC ]] 61,282 
(1998); Kansas City Power & Light Company, 74 FERC ]] 61,066 at 
61,175, order on reh'g, 75 FERC ]] 61,244 (1996).
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    13. The information in Staff's Final Report indicates that BP 
Energy and Reliant appear to have violated FPA section 205(a)'s 
requirement that rates be just and reasonable by manipulating the 
electricity prices at Palo Verde.\12\ In view of the foregoing, we are 
therefore requiring Reliant and BP Energy to show cause to the 
Commission in a paper hearing why the Commission should not revoke 
their market-based rate authority. The Commission will institute FPA 
section 206 proceedings and direct BP Energy and Reliant to show cause 
in those proceedings why their market-based rate authorizations should 
not be revoked.
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    \12\ Further context is provided in the Staff's Final Report.
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    14. In cases where, as here, the Commission institutes section 206 
proceedings on its own motion, section 206(b) requires that the 
Commission establish effective dates that are no earlier than 60 days 
after publication of notice of the Commission's investigation in the 
Federal Register, and no later than five months subsequent to 
expiration of the 60-day period. In order to give maximum protection to 
customers, we will establish the statutorily-directed effective dates, 
in this context the dates that we would revoke their market-based rate 
authorities, at the earliest date allowed,\13\ 60 days after 
publication of the order initiating the Commission's investigations in 
Docket Nos. EL03-59-000 and EL03-60-000 in the Federal Register. In 
addition, section 206 requires that, if no final decision has been 
rendered by that date, the Commission must provide its estimate as to 
when it reasonably expects to make such a decision. Given the times for 
filing identified in this order, and the nature and complexity of the 
matters to be resolved, the Commission estimates that it will be able 
to reach a final decision by July 31, 2003.
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    \13\ See e.g., Canal Electric Company, 46 FERC ]] 61,153, reh'g 
denied, 47 FERC ]] 61,275 (1989).
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    The Commission orders:
    (A) Reliant is hereby directed, within 21 days of the date of this 
order, to show cause to the Commission in a paper hearing, in Docket 
No. EL03-59-000, why it should not be found to have violated section 
205 of the FPA and why its market-based rate authority should not be 
revoked.
    (B) BP Energy is hereby directed, within 21 days of the date of 
this order, to show cause to the Commission in a paper hearing, in 
Docket No. EL03-60-000, why it should not be found to have violated 
section 205 of the FPA and why its market-based rate authority should 
not be revoked.
    (C) The Secretary shall promptly publish a copy of this order in 
the Federal Register.
    (D) The effective dates in Docket Nos. EL03-59-000 and EL03-60-000 
will be 60 days following publication in the Federal Register of the 
order discussed in Ordering Paragraph (C) above.
    (E) Pursuant to the authority contained in and subject to the 
jurisdiction conferred upon the Federal Energy Regulatory Commission by 
section 402(a) of the Department of Energy Organization Act and the 
Federal Power Act, particularly section 206 thereof, and pursuant to 
the Commission's Rules of Practice and Procedure and the regulations 
under the Federal Power Act (18 CFR chapter I), the Commission hereby 
institutes investigations of BP Energy's and Reliant's market-based 
rates, in Docket Nos. EL03-59-000 and EL03-60-000,

[[Page 15718]]

respectively, as discussed in the body of this order.
    (F) Any interested person desiring to be heard in these proceedings 
should file notices of intervention or motions to intervene with the 
Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426, in accordance with rule 214 of the Commission's 
Rules of Practice and Procedure (18 CFR 385.214) within 21 days of the 
date of this order.
    (G) Responses to the show cause submissions filed pursuant to 
Ordering Paragraphs (A) and (B) above may be submitted within 15 days 
of the date of filing of the show cause submissions.

    By the Commission.
Magalie R. Salas,
Secretary.
[FR Doc. 03-7797 Filed 3-31-03; 8:45 am]
BILLING CODE 6717-01-P