Summary of the Enron Trading Strategies in California

Transcription

1 Summary of the Enron Trading Strategies in California Presented to: Midwest Board of Directors David B. Patton, Ph.D. Independent Market Monitor June 20, 2002

2 Summary of Enron Trading Strategies This presentation summarizes and evaluates the trading strategies s employed by Enron in California; Most of the strategies identified in the recent Enron memos are designed to circumvent or take advantage of California s market rules; Most of the problematic market rules are resolved under FERC s standard market design (SMD) and MISO s proposed markets. Key features of the SMD include: Two energy markets a spot market that would result in an efficient dispatch of the system and a day-ahead ahead market to ensure that adequate resources will be on- line to reliably serve the load the following day. These markets both set prices that vary by location when the transmission network is congested. These prices are set at the marginal value e of electricity at each location and reveal the value of transmission between locations. Participants are permitted to raise and lower their purchases and d sales in the day-ahead ahead market to arbitrage differences between the day-ahead ahead and real-time prices. Participants are also permitted to freely import and export from the system to arbitrage energy prices in other areas. -2-

3 Summary of Enron Trading Strategies Key elements of California s markets included: California s rules were guided by a principle that the ISO was not n to run a centralized market generators and loads are restricted from selling to or buying from the ISO. This is accomplished, in part, by requiring balanced schedules submitted day-ahead ahead to the ISO. California physically schedules transmission internal to California, making payments for congestion relief that were subject to gaming, g, rather than managing congestion through the central dispatch (and redispatch) of generation. -3-

4 Summary of Enron Trading Strategies The strategies fall in the following broad areas: Intertemporal arbitrage shifting output from the day-ahead ahead market to the real-time market when the real-time market is higher priced. Gaming of flawed market rules strategies designed to take advantage of flaws in market rules that are specific to California. Many of these strategies related to California s congestion management system or price caps. Gaming of standard market rules strategies that do not depend on flaws in market rules that could be employed elsewhere. In general, the intertemporal arbitrage strategies are likely to improve efficiency while the gaming strategies result in inefficient market costs. -4-

5 Inter-temporal temporal Arbitrage Strategies -5- These strategies are designed to shift resources from the day-ahead ahead to the real-time market, which will be facilitated under SMD. Fat Boy -- This strategy is designed to sell supplies in the real-time market at the imbalance price by submitting a balanced schedule day-ahead ahead consisting of the real supplies and a fictional load when the load does not occur in real time, the supplies are sold as an imbalance. Get Shorty -- This strategy involved selling ancillary services short in the day- ahead market and then buying them in the real-time market to satisfy its obligations. Richochet This strategy consisted of scheduling an export in the day-ahead ahead and then re-importing the power in real time to arbitrage between the day-ahead ahead and real- time markets. This can also be used to escape the $250 price cap p since the cap does not apply to imports.

6 Gaming California Market Rules: Congestion Management These strategies took advantage of flawed congestion management rules in California: Cutting Non-Firm Exports.. As described in the Enron memo, the California market rules for some period allowed non-firm transactions that were subsequently cut by the participant to be paid for relieving congestion. Wheel-Out. This strategy involved scheduling transactions that had a high likelihood of being cut by the ISO, but nonetheless earned congestion rents in the day-ahead ahead market. The following strategies could be implemented under SMD (although h not today) and are therefore described in more detail in the following charts. Death Star Load Shifting -6-

7 Death Star Strategy Death Star is a strategy that involves scheduling external transactions in a circular pattern. The purpose of this strategy is to earn congestion payments for apparently relieving congestion in a market without transmitting any power in reality the marketer would schedule in a circle to and from a single point. In the following example where A and B are within the MISO, the marketer would be paid $20 to schedule from A to B, but the schedule from B to C to A creates loop flow back across the MISO that exactly negates the benefit of the schedule in the MISO hence, the participant is being paid $20 for providing no real congestion c relief. C Loop Flow B A Price = $ 40 Scheduled Flow -7- Price = $ 60

8 Death Star Strategy The Death Star strategy is possible only when the transmission costs c of scheduling through the adjacent control areas are less than the congestion payment from the market in question. Generally, this requires that the external schedule cross a limited number of control areas and not incur significant congestion costs in the external areas. The more complex the seams are with other markets, the more likely ly that this type of strategy could be successful. -8-

9 Load Shifting Strategy The load shifting strategy employed by Enron in California involved ved scheduling fictional loads to create the illusion of congestion that would result in increased payments to its Firm Transmission Rights (FTRs( FTRs). This strategy was successfully employed in PJM using virtual bids s in the Day-Ahead market and could be employed under SMD. In theory, this strategy should be undermined in SMD by other participants who would submit virtual offers or loads that would reduce their purchases in the day-ahead ahead market in the artificially constrained area. However, the monitoring process should be designed to detect this s strategy and address this strategy if it becomes a problem. -9-

10 Gaming California Market Rules: Price Caps The following strategies were motivated by the $250 energy price cap in California. Export of Power from California.. When the prices outside California were greater than the $250 price cap, generators or traders would export to the t neighboring market. External transactions that are motivated by real price differences es are efficiency enhancing and should be encouraged. Over Scheduling Energy Between Locations.. This strategy involves a participant scheduling more energy out of a constrained location than it has there to receive payments for relieving congestion. Since it does not have the power, it pays for the imbalance in real time. This was motivated by the $250 price cap -- congestion payments were not capped, but the imbalance settlement was. -10-

11 Gaming California Market Rules: Other Selling Non-Firm Energy as Firm.. Enron would schedule firm transactions without procuring the ancillary services that are required for a firm transaction. This is a per se violation of California s rules. This should not be possible under SMD because ancillary services should be scheduled on unit specific basis -11-

12 Conclusions First and foremost, the market rules must be designed to limit opportunities o for gaming flaws in the market rules elsewhere have been the primary cause of gaming. The remaining exposure to gaming should be addressed through market monitoring. Similar to exercising market power, most of the gaming strategies s require that participants engage in conduct that would not be economically rational in a competitive market. The monitoring function is well positioned to quickly detect these games since day-ahead ahead and spot market bids, offers, and other information will be received and analyzed on a real-time basis. -12-