Power Struggle At Calif Grid Operator Could Cost CEO His Job

By Jason Leopold

California's grid operator is in the midst of its own power crisis. An internal struggle between Michael Kahn, the chairman of the California Independent System Operator, and Terry Winter, president and chief executive of the ISO, about allegations of market manipulation by Enron Corp. and other energy companies could cost Winter his job, people close to the matter said Thursday. At issue are the internal Enron memos which describe the trading strategies the company used to boost power prices in California. Winter testified before a Senate committee in Washington, D.C. two weeks ago that California's two-year old power crisis was not caused by manipulative trading tactics detailed in the memos but was instead the result of a poorly designed electricity market and the ability of generators to influence wholesale prices because of an imbalance between supply and demand. Kahn, however, an appointee of Gov. Gray Davis, has said that the Enron memos prove that the company manipulated the energy market in California and has renewed his call for at least $9 billion in refunds. Winter, according to people who work closely with him, is coming under scrutiny because he does not agree with Davis and has not publicly villified the generators. "Terry is a friend of the energy companies," a person who has worked with him at the ISO said. "If there is proof they willfully manipulated the market he'll speak out about it. But he believes these Enron memos aren't the smoking guns. And he's not about to jump on the bandwagon."

Winter has been at odds with Davis since at least December 2000, when Winter went behind Davis' back to ask the Federal Energy Regulatory Commission to remove a cap on wholesale power prices in California because generators were selling their supplies to other states. Davis spokesman Steve Maviglio said at the time that Winter was "adding gasoline to the fire." Shortly after that episode the state Legislature dismantled the 26-member ISO board and appointed six members from his administration. Kahn, an attorney by trade, was appointed chairman. Under Kahn, the ISO board has been criticized for not being an independent body largely because of its anti-generator rhetoric.

But market watchers believe the Enron memos give Kahn the credibility he needs to renew his demand for refunds. Market watchers have criticized Winter's testimony and a recent report by the ISO's market monitoring committee because it clears the ISO for many missed opportunities to spot the alleged market manipulation. "The ISO does not like to admit that they've been outsmarted," said Robert McCullough, a Portland-based energy analyst. "They are willing to accept they were outsmarted on bidding but not on the operation of the grid. Simply put, the ISO's department of Market Analysis is part of their mandate to protect Winter's expertise."

The ISO has managed to escape much of the blame for California's power crisis even though the Enron memos say that traders were able to outfox the ISO and reap windfall profits because of loopholes in the system. While it's too soon to tell how much of an impact Enron or other energy companies have had on California's electricity crisis it's clear that the ISO believes the company barely contributed to it.

Frank Wolak, the head of the ISO's Department of Market Analysis, said that Enron's trading strategies played a small role in the state's power problems, contributing only about $500 million to California's request for $10 billion in refunds from power suppliers. FERC, meanwhile, is conducting its own investigation into Enron's role in California's electricity crisis. The agency is expected to release its findings later this year.

--Jason Leopold; (310)_551-9940; jasonleopold@hotmail.com