MICRO-ECONOMICS CHAPTER 22 ASSIGNMENT A

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In the following excerpt quoted from the March 26 San Francisco Chronicle,
    1. What assumption of the Free Market Model does the behavior of the firms violate?

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    2. List four things that the firms do that violate that assumption:

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Regulators Say Attempts to Drive up Power Costs Were Industrywide
(excerpts from SF Chronicle 3-26-03)

In December 2000, a trader in charge of buying natural gas for Reliant Resources Inc.'s California plants began engaging in rapid-fire trades with an Enron unit, buying and selling vastly more gas than his plants could use. During some periods, the trades came at a rate of one every 10 seconds. The trades raised natural gas costs for other buyers by $1.15 billion over an eight-month period and boosted the cost of electricity -- of which natural gas is a key production component -- by $1. 6 billion during that time.
That incident was among voluminous evidence released after intensive investigations into the role power companies played in exacerbating the California energy crisis in 2000 and 2001. In fact, the federal investigation found the conduct of Reliant and three other companies so egregious that it recommended the companies lose their energy market trading privileges.  According to evidence gathered by federal and state regulators, attempts to drive up power and natural gas prices by energy firms were epidemic throughout the industry and had "profound adverse impacts" on prices in the power markets.
Among the findings:
-- Virtually every participant in the California energy market used trading tactics of various kinds in an attempt to drive up prices.
-- Natural gas traders engaged in "systematic efforts" to manipulate published price indexes, which are an important component of energy pricing.
-- Power companies used a Houston consulting firm, which it nicknamed the Mole, to coordinate plant shutdowns to capitalize on power shortages.
-- Companies shut down power plants and reduced electricity supply to drive up the price of power.
-- Some of the state's largest power producers during the summer of 2000 simply began charging the maximum allowable amount for electricity, regardless of demand or their production cost.
-- City-owned utilities in Los Angeles, Glendale (Los Angeles County), Redding and elsewhere were willing partners in Enron trading schemes attempting to manipulate the power market.
In all, the staff of the Federal Regulatory Energy Commission, which regulates the power business, recommended that California receive refunds of $3.3 billion and urged additional profit refunds from 37 companies, including some of the biggest names in the power business.
Evidence gathered by California parties that was presented to federal regulators, which was also unveiled Wednesday, included transcripts of conversations among traders and e-mails from various companies revealing jaw- dropping insight into how much control the firms had on California's markets, as well as a cavalier attitude toward the state's energy woes. Traders for Powerex, a division of the Canadian government, discuss how they "want to push the price up and keep the price up" in the state's real- time markets.
A discussion between traders working for Avista and Puget Energy centers on ending sales to California because it is launching investigations into the energy markets. The traders remarked that an upcoming Friday was expected to be hot and dry, leaving the state short on power -- a good day to withdraw electricity supply. "So they can sit in the dark," says a trader identified as Tony, who later remarks, "I shouldn't be saying this on a recorded line."
E-mails recovered from Duke Energy Inc. showed traders referring to a Houston consulting firm called Industrial Information Resources as the Mole. IIR provided daily and hourly information to power companies about plant outages, which California says would have helped power firms know about shortages and raise their prices accordingly.
In April 2000, a power trader for BP Energy called a trader at Reliant and asked him to join in on a secretive deal to artificially jack up the price of electricity headed for California.
FERC FINDINGS
-- Natural gas traders engaged in "systematic efforts" to manipulate published price indexes
-- Companies shut down plants and reduced electricity supply to drive up the price of power.
 
 

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