3-26-03

DOCKET NO. PA02-2-000

STAFF REPORT

PRICE MANIPULATION IN WESTERN MARKETS

FINDINGS AT A GLANCE

- The staff-level fact-finding investigation 

was formally launched Feb. 13, 2002, by 

order of the Commission, to determine 

whether Enron Corp. or any other sellers 

manipulated electricity and natural gas 

markets in California and other Western 

states in 2000 and 2001.

- Staff concludes that supply-demand 

imbalance, flawed market design and 

inconsistent rules made possible significant 

market manipulation as delineated in final 

investigation report. Without underlying 

market dysfunction, attempts to manipulate 

the market would not be successful.

- Markets for natural gas and electricity in 

California are inextricably linked, and 

dysfunctions in each fed off one another. 

Spot gas prices drove electricity prices, and 

manipulation of price indices apparently 

drove, at least in part, dysfunctions in the 

natural gas market. The report makes 

recommendations for steps the Commission 

can take to assure price indices accurately 

reflect market prices.

- Staff concludes that large-volume, rapidfire trading by a single company at Topock, 

a California border trading hub that was 

incorrectly thought to be liquid, substantially 

increased natural gas prices throughout 

California.

- Because of concerns about manipulation of 

price indices, the final report reiterates the 

staff’s recommendation that the Commission 

alter the natural gas pricing methodology in 

the California Refund Proceeding. Rather

than rely on published index prices, the staff 

recommends FERC calculate the refunds by 

valuing gas based on the prices at producing 

hubs plus transportation costs. Use of the 

alternative gas price inputs would result in 

higher refunds for electricity.

- Staff found that many trading strategies 

employed by Enron and other companies 

violated the anti-gaming provisions of their 

FERC-approved tariffs for the California 

ISO and PX markets. Staff recommends the 

Commission initiate proceedings to require 

companies to disgorge profits associated 

with these tariff violations.

- EnronOnline gave Enron knowledge of 

market conditions unavailable to its 

competitors. This informational trading 

advantage from EOL was highly lucrative 

for Enron, which could absorb losses in 

physical markets because of its profits in 

financial markets. Enron manipulated thinly 

traded physical markets to profit in financial 

markets. Staff estimates Enron’s profits 

from EOL exceeded $500 million in 2000 

and 2001. EOL was a primary driver of

wash trading, which created a false sense of 

liquidity, which can cause artificial volatility 

and distorted prices.

- Electricity prices in California’s spot 

markets were affected by economic 

withholding and inflated price bidding, in 

violation of tariff anti-gaming provisions. 

Staff recommends proceedings to require 

disgorgement of profits associated with 

these tariff violations. 

- Staff found no support for allegations that 

Williams Energy Marketing & Trading Co. 

cornered the market for natural gas in

California. Williams bought gas in 

proportion to its needs and had a small share 

of the market.