A Decade After Enron’s Demise, Can Energy Markets Still Be Manipulated?

By Bob Shively, Enerdynamics President and Lead Instructor

Back in the days when Enron was a high-flying energy trading company, energy traders joked that when a new ISO tariff came out the trading companies would take their87690247 smartest analysts, lock them in a room with a large pizza, and not let them out until they had found all the profitable loopholes.  

Based on the recent stipulation between the Federal Energy Regulatory Commission (FERC) and JP Morgan’s energy trading arm, it sadly appears that such activities still exist[1]. More than a decade after Enron crashed in disgrace, and with the implementation of ISO Independent Market Monitors and FERC’s Office of Enforcement[2], how can energy trading companies still manipulate markets?

One issue for competitive wholesale electric markets is they are inevitably complex, which opens up opportunities for traders to find ways to exploit the rules to increase profits. In the case of JP Morgan, FERC alleges that the company’s strategies crossed the line into market manipulation[3].

Here are just a few of the strategies JP Morgan is alleged to have used. (If you need some background information on CAISO markets, see our electricity article in our most recent edition  of Energy Insider).

  • In one strategy units offered a high Pmin, but then offered day-ahead energy at -30/MWh (meaning the unit would pay CAISO for the right to generate). The unit then offered to ramp down in real-time using a real-time price that made it highly likely that CAISO would ramp the unit down to its minimum operating level.  The result was the unit would only generate its minimum amount and would be paid for that at a level approximately equal to $90/MWh (when market prices were typically $30-35/MWh).
  • In another strategy, units submitted self-schedules every third hour, while submitting high prices of $73 to $98/MWh for the next two subsequent hours. The result was that CAISO would self-schedule the units as requested, but then would be obligated to pay the as-bid price for the next two hours as the unit ramped down.
  • In a third strategy, units submitted -$30/MWh day-ahead offers for the end of an operating day. For the next day, the unit submitted offers for the hours between midnight and 2 a.m. at $999/MWh. As with the prior example, CAISO would be obligated under its tariffs to pay the $999/MWh price while the unit ramped down.

What can we learn from this?
First, it is extremely difficult, if not impossible, to write ISO tariffs that fairly reward generators for their costs while not providing opportunities for excessive profits. ISOs and their members must be continually alert for market participants’ manipulating rules (CAISO has since rewritten its rules in an attempt to block such strategies). 

And for companies involved in trading, strong processes are needed to rein in traders’ proclivity for maximizing profits any way possible. As FERC has pointed out, compliance with tariffs is not sufficient to avoid running afoul of market manipulation statutes. And activities that are perceived to be market manipulation can be very expensive when you get caught. 

As one of my friends who works for a utility told me after attending market behavior compliance training – it is a lot safer for a generator to just offer its true costs and let the market reward units that deserve profitability. But not all companies are focused on being safe!


[1] On July 20, 2013 FERC and JP Morgan’s energy trading arm agreed to a stipulation whereby JP Morgan would pay a civil penalty of $285 million plus give back an additional $125 million of alleged unjust profits. The stipulation concludes an investigation opened by FERC’s Office of Enforcement in response to multiple referrals by CAISO and MISO Departments of Market Monitoring.  The case investigated JP Morgan’s bidding strategies during the time period September 2010 through November 2012 when JP Morgan was responsible for bidding the output of several gas-fired power plants into CAISO and MISO markets.

[2] Under the Energy Policy Act of 2005, the Federal Energy Regulatory Commission (FERC) has strong authority to act to combat gaming of energy markets. FERC is authorized to issue penalties as high as $1 million per day per incident and can also suspend an entities ability to charge market based rates for its services. To assist FERC, each ISO has an Independent Market Monitor (IMM).

[3] For more details on FERC’s case and the specific strategies used, see: Order Approving Stipulation and Consent Agreement, Dockets Nos. IN11-8-000 and IN13-5-000 available athttp://www.ferc.gov/EventCalendar/Files/20130730080931-IN11-8-000.pdf

[4] The description of strategies is based on the description in the above stipulation.

About Enerdynamics

Enerdynamics was formed in 1995 to meet the growing demand for timely, dynamic and effective business training in the gas and electric industries. Our comprehensive education programs are focused on teaching you and your employees the business of energy. And because we have a firm grasp of what's happening in our industry on both a national and international scale, we can help you make sense of a world that often makes no sense at all.
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