Enron 2.0: Goldman-Linked Investors Set to Manipulate East Coast Electricity Prices

Posted on by

You’d think regulators and the public would remember how badly California was burned by Enron’s electricity price manipulations, which cost each resident more than $1300 in higher energy bills, and would be eager to avoid a rerun.

But memories are short. As David Cay Johnston reported in an important story at Aljazeera, Energy Partners, a Goldman-linked investment group, looks set to repeat Enron’s ploy on the East Coast.

I strongly suggest you read Johnston’s account in full, but here’s the short version. The key to energy price manipulation now is how tight the market is overall and how few participants bid at particular auctions.

Electricity is sold at what are called “clearing price auctions”. The price set for all bidders is based on the highest price that still helps fill the overall order. In other words, if A bids $5 for 20 units of energy, and B bids $10 for 5 units, but the need at that point is for 45 units, higher bids will be treated as filling the order. In our example, we are only at 25 units out of 45 so far. So then order C for 15 units at $25 is waved in, and the final bid, for 30 units at $50, is partially filled. The last bidder supplies only 5 units of the total, but his $50 bid is the clearing price, and everyone who bid lower also gets their offers filled at $50.

So if you reduce capacity (supply), all participants will tend to bid at higher prices because they know their odds of getting all or part of a bid are better than before. And a reduction in the number of bidders also makes it easier for the suppliers to collude informally. As Johnston explains:

Trading records and experiments conducted by Professor Sarosh Talukdar at Carnegie Mellon University and others show that the electricity auction rules tend to drive prices up, not down, until they approach the level that an unregulated monopolist could charge.

This occurs because suppliers learn to arrange their bids to ensure the highest price, a good example of how competition does not always favor customers or lower prices. While collusion among suppliers is illegal, learning how to jack up prices by studying bidding patterns is perfectly legal.

The original market rules, by the way, were drafted by a massive fraud posing as an electricity trading company named Enron.

Yes, sports fans, the “rules” that Enron devised so it could game energy markets are still in force!

So what, exactly, is the Energy Partners scheme? It bought three energy generating plants for $650 million. A mere five weeks after the deal closed, it said it needs to shutter Brayton Point, the second largest producer in New England, claiming it will cost the investors more than it’s worth to keep the plan running. Regulatory filings show that the electricity system in the region has gone from surplus to deficit, and baseline prices were already projected to double. Clearly, removing a major producer would lead to even greater price increases.

Johnston again:

With Brayton Point closed, New England consumers and businesses will spend as much as $2.6 billion more per year for electricity, critics of the deal suggest in documents filed with the Federal Energy Regulatory Commission.

That estimate will turn out to be conservative, I expect, based on what Enron traders did to California, Oregon and Washington electricity customers starting in 2000. In California alone the short-term market manipulations cost each resident more than $1,300, a total burden of about $45 billion.

One regulator that could block the closure of the plant, the Independent System Operator –New England, washed its hands of the matter, saying it’s not its job to worry its head about whether Energy Partners is really closing the plant so as to better manipulate the markets. Johnston called its decision “shocking” because this regulator’s supposed raison d’etre is to prevent price manipulation. If this isn’t in its wheelhouse, pray tell what is?

But the Independent System Operator isn’t the only regulator that has to bless this proposal. The Federal Energy Regulatory Commission also needs to approve or deny it. And FERC rules prohibit withholding capacity to manipulate rates or produce unjust and unreasonable rates.

The investors’ excuse that they made a big mistake and now realize they have to close the plant doesn’t pass the smell test. Johnston quotes FERC testimony from Tyson Slocum of Public Citizen:

In the world of business, a firm announcing that an asset purchased just 5 weeks ago is actually uneconomical to operate would be called incompetent, and such a firm would have difficulty attracting capital and staying in business. But the managing partners of Energy Capital Partners are a highly sophisticated all-star crew of former Wall Street financiers: four of the five managing partners are Goldman Sachs veterans, and the firm’s vice-presidents and principals are alumni of JP Morgan, Morgan Stanley, Bank of America, Credit Suisse and other financial powerhouses. These are not your run-of-the-mill owners and operators of power plants. They are Wall Streeters highly motivated to exploit the intricacies of power markets to make as much money as possible for their Cayman Islands-based affiliates.

Johntson also points to auction records that show that immediately after they acquired Brayton Point, Energy Partners started withholding all of Brayton Point’s capacity from auctions. No wonder they’d rather close the plant and be done with it.

Curiously, Connecticut Attorney General George Jepsen seems to be the only state official alert enough to recognize what Energy Partners is up to and to oppose their scheme.

If you live on the East Coast, and don’t want to be victimized like Californians were 14 years ago, urge your Senators and Representatives, as well as your state attorney general, to tell FERC that they are firmly opposed to closing Brayton Point. Otherwise, you can expect to be in for a hot and very costly summer.

Print Friendly, PDF & Email


  1. John

    These folks invest in all sorts of energy production throughout the country. People everywhere should be vigilant with their local energy providers. No wonder there is a number of bills and laws in several states trying to put the brakes on solar energy production. This eats into the monopolies profits.

    Don’t feel left out though. My home away from home, Spain, pushed through an agressive tax on solar producers. They are trying to tax the sun. The problem is Endesa, a partial state owned enterprise electric utility, has been losing money due to the large investment in solar and wind technologies. Anyone caught not having their solar production metered can expect a huge fine.

    Come to think of it, my gut feeling is the fossil fuel energy companies had something to do with getting local governments here in Europe to eliminate their solar production subsidies. Once the subsidies stopped, solar panel installations stopped.

    1. rich

      Energy Future Holdings Goes from PEU to PEU

      Energy Future Holdings prepackaged bankruptcy comes as legendary Texas heat prepares to return.

      They announced the deal one month before the maximum price cap rises to $7,000 per megawatt hour, as approved by the Texas Public Utility Commission. This is up from $3,000 per megawatt hour in 2012. The cap rises to $9,000 per megawatt hour on June 1, 2015. That’s a 66% increase in the cap in just three years.

      Should power get out of balance the next two summers, electrical generators could make huge money. It’ll be a different PEU triumvirate looking to profit big from EFH. The question is how much Texas citizens will pay so billionaires can become kajillionaires.


  2. JGordon

    This is a great story. However, I will take the opposite tack and say that I believe that artificially inflating the price of energy will encourage many more people to purchase personal solar and wind equipment, and possibly even disconnect from the grid period (given the new corporate state push to tax people with renewable energy who connect to the grid).

    Therefore, I am in favor of these idiots gouging as much as they can. People are only going to change wasteful, unsustainable habits if their back is up against the wall, and this is a great way to see that happening sooner, while we still have options a relatively functional infrastructure, rather than later in what could be a Mad Max world.

    1. PaulW

      That’s a good observation. In Ontario the government subsidisies cheap electricity, thus people use more and the provincial debt simply grows larger. Everyone ends up owning an air conditioner and cranking it up all summer long – a Canadian summer, not a Deep South summer!. The only way people in this spoiled society will ever change is if they are forced to change.

      That’s not to justify the obvious criminal activity going on in New England. Yet such behavior does serve as a wake up call for the majority of people who don’t want to know about the criminal class running their society. Give the 1% enough rope, maybe they’ll hang themselves. A nice thought anyway.

    2. patb

      I’m with you, a summer of gouging and we will see people dumping the utilities
      and instead leasing big solar arrays and storage batteries.

      these idiots don’t realize that consumers now have choice, lots of choice.

    3. Code Name D

      Only the people who have money will be able to upgrade and go off-grid. I also wonder just how practically this will be for most people. Those who live in apartments or in densely populated will not have the needed surface area to put up enough solar panels – even if they did have the money.

      Do keep in mind that most can’t afford to upgrade their homes with simple insulation or energy efficient appliances. Jacking up utility rates will only make this problem worse, making it harder for them to upgrade.

  3. craazyman

    This is an awfully one-sided story. Brayton is an filthy old coal plant that EPA has called one of new England’s worst polluters, in a market where low natural gas prices set power prices and where upgrades aren’t economic due to new and quite stringent EPA regs. Dominion sold the plant last year. Why would the sharpies buy it? yeah, to shut it down and make money bringing environmentally clean energy into the region. Clean power is not free. market structures are complex and have to incentive new build clean power capacity and imports through transmission It’s not a Darth Vader meets Luke Skywalker situation. Environmentalists have wanted Brayton shut. Now they’re getting what they want

    1. TomDority

      I prefer to see the 3 sided story.
      Buy up (finance existing capital) to produce a interest stream without doing capitaol improvements….fast track depreciation, increase prices, take stock options, asset strip inflated asset prices. win win win …except for the end user.

      1. rayduray


        I’m highly confident you’re a lot closer to the real story than is craazyman. He’s dreaming pipe dreams, methinks. Or maybe he’s just plumb loco. :)

  4. LAS

    I don’t know what’s going on with energy in NJ but something definitely is – 2 yrs ago I kept getting calls from energy providers that wanted us to sign up for switching from PSEG and I wouldn’t do it because of having tried something like that in the past that didn’t work out. But 4-5 months ago a letter came in the mail informing that our home there had been switched anyway. When I looked into this, I was told the township had made the decision to switch everyone in that community over as a group. At first this was upsetting, but then since that time I’ve been getting gas & electric bills half the cost or less than before this switch. Are these prices going to last? Guessing not. I just haven’t been following the local politics in NJ because of spending too much time working in NYC but there is definitely some weird stuff going on.

  5. john c. halasz

    Correction: Energy Partners bought 3 plants from Dominion, but the other 2 are in the Midwest.

  6. steelhead23

    The issue here is not market manipulation, nor is it the closing of a single coal-fired plant – it is the Enron legacy of so-called open electricity markets. I know just a bit about the history of deregulation and open markets for electricity. It is true that historically, local utilities would routinely operate uneconomical plants because they were not obligated to seek the lowest cost electricity. Ending that practice by forcing utilities (distributors) to divest their generation was a good idea. The rest of the market changes, particularly the market clearing price mechanism invites collusion (which Entergy, Enron, Dynergy, and others clearly did in 2000-01). End the market clearing price bidding system and electricity prices would miraculously drop overnight.

    Does anyone know of a good book about the 2001 West Coast energy crisis? There were some outcomes that are a bit hard to understand without investigation – like why did Calpine, which built a number of dispatchable combustion turbines, able to meet peak demand within minutes and should have been well positioned to profit from the shortages in 2001, instead go broke? Why was FERC so pathetically slow to react? Why did BPA, a major West Coast supplier ink contracts for 1,300 MW more than it could produce in 2000 going into the crisis. And why did nat. gas prices spike simultaneously with electricity? The Smartest Guys in the Room was an entertaining romp with the boyz from Enron, but it hardly tells the story of the crisis.

    1. rayduray

      Re: “like why did Calpine, which built a number of dispatchable combustion turbines, able to meet peak demand within minutes and should have been well positioned to profit from the shortages in 2001, instead go broke? “

      Calpine was relying on gas suppliers such as El Paso Gas who were co-conspirators with Enron and Dynergy in the California swindle. Unfortunately for Calpine they were not members of the club and were continually brutalized with high cost natural gas. The crescendo note of the criminality involved was when natgas which had been priced at $2/mmbtu forever went up to $50/mmbtu at the AZ/CA gate during the “crisis”. Calpine was simply not a member of the Halliburton/Enron/Dynergy/El Paso clique. And therefore they were crushed.

      We call this Texas 101. (I.e.: you’re either in the conspiracy club, or you’re not.)

    2. rayduray

      Re: Why was FERC so pathetically slow to react?

      Recall this was at the beginning of the Cheney Administration. And Dick Cheney insisted that FERC have a compliant staff and commissioners. In other words, the commissioners at FERC in 2001 were serving at the pleasure of Ken Lay, CEO of Enron. or as the Bush kid called him, “Kenny Boy”.

      This was one of the first and most egregious examples of “regulatory capture”, with the FERC doing everything in its power to contravene the remarkably honest yet not quite powerful enough effort of Loretta Lynch, Commissioner of the California PUC.


      The criminal co-conspirator to the Cheney Fraud in 2001 at FERC were primarily Curtis Hebert, Jr. and Patrick Wood III.


      Pat Wood was a particularly egregious example of regulatory capture. He is current serving as a non-executive Chairman of the Dynergy board:


      Which means he’s making a hell of a lot of money for doing nothing. Exactly what he did at FERC for a pittance and an opportunity to get rich off his hand’s-off regulatory lack of zeal.

    3. rayduray

      Re: Why did BPA, a major West Coast supplier ink contracts for 1,300 MW more than it could produce in 2000 going into the crisis.

      Wishful thinking.

      See: http://www.nwcouncil.org/history/EnergyCrisis

      It turns out that your 1,300 MW number may have been a prudent guess, since the actual shortfall of production was more like 4,000 average MW in 2000 and 2001.

      Which lead me to wonder how the connivers are planning to strip the consumer of assets when the electricity production at the Glen Canyon and Hoover Dams falls to zero. That’s going to be an exciting episode. Already the production of these two key Southwest dams is threatened with near complete collapse.


      Pray for a Super El Nino! That’s always good for a few million acre feet of restorative waters in the Colorado basin. :)

  7. Luke The Debtor

    Could GS be closing the coal plant to force higher natural gas pipeline commitments? New England natural gas prices rose this past winter due to insufficient pipeline capacity. Shutting down coal plants forces the issue in favor of higher commitments.

    If clean energy sources (hydro, wind and solar) are to be developed in place of coal, natural gas and oil, then natural gas use must increase. That is because natural gas power plants can cope with short-term (diurnal) and mid-term (seasonal) power fluctuations while the clean energy infrastructure is brought to full scale use. Coal plants cannot fulfill these needs.

    1. Yves Smith Post author

      This isn’t Goldman, it’s a fund where several of the partners are ex-Goldman.

  8. rayduray

    Re: “Does anyone know of a good book about the 2001 West Coast energy crisis?

    Ya, sure, youbetcha! We got you covered. Only the book is in a format that will require you to follow along. This is a substantive discussion of the California energy crisis while it was in progress. You’ll note that a lot of people on the thread hoped to find easy money. Your humble correspondent, on the other hand, was apoplectic at the ruin of California’s and other West Coast citizens for the sake of some 1% swindlers: I first interject my rudeness at entry 37 on Feb. 17, 2001 at the height of the crisis:


    Now what you can do is follow the thread and glean a tremendous amount of information, or else you can try to contact David Freeman who was working for LADWP during the crisis and can tell you a ripping yarn. Or else there’s an energy consultant in Portland name of, drats, I forget his name. Sorry. bad memories.

    But here’s me at my cantankerous best:


    I’ll get back to you with the name of energy consultant from Portland.
    Bada Bing!
    McCullough Research:


    Call Robert McCullough or David Freeman and if they are willing to talk to you I can guarandamtee you that you’ll be twice as smart as when you dialed their numbers.

  9. meets

    This post is incredibly clueless.

    First of all, it’s not shutting down until 2017.

    Secondly, with new environmental regs and cheap natural gas prices, there is no way this old, dirty plant will be profitable to operate by then, even if it is now.

    If these guys hadn’t made plans to shut it down, Dominion would. Why do you think they sold it for a fraction of what it used to be worth? In fact, the New Englans ISO was already planning for the shutdown.

    If anyone got caught by surprise, they don’t know what they’re doing.

    So why did they buy it? For one, two other plants were included in the sale. Secondly, they were hoping to clear in the forward capacity action (essentially to get paid to remain available). But they did not clear. Third, they could make their investment back and more before shutting down in 2017.

    Dynegy is doing the same thing with the Ameren acquisition. They just haven’t announced their shutdown plans yet.

    1. Yves Smith Post author

      I suggest you reconsider your position. The plant is valued at $54 million, which is over 8% of the purchase price. That’s not trivial. And the bigger tell, which you choose to ignore, is that they new owners IMMEDIATELY started withholding electricity from auctions. That’s not the behavior of an electricity provider dealing in good faith.

      The fact that plant is old does not mean that the real play here is market manipulation, as opposed to acting as an operator. Nice try at diversion, though.

      1. meets

        If the plant did not clear the forward auction, which it obviously didn’t when Dominion offered it into the auction, then they are under no obligation to offer it in the daily auctions. Companies decide to do this all the time. The small margins, if there even are any margins, are often not worth it.

        It didn’t clear the forward auction because it is an uneconomical plant.

        Besides, the New England ISO can call the plant on at anytime for reliability. Have they done so?

        Dominion also decided to shut down the Salem coal plant. Is that market manipulation too?

Comments are closed.