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July - Duke Energy Employee Advocate

Deregulation - Page 1 - 2003

Attorney General Targets Energy Companies

Puget Sound Business Journal – by Steve Ernst – February 7, 2003

The state Attorney General's Office is negotiating with several large energy companies to settle its antitrust investigation into the power markets of 2000 and 2001.

Attorney General Christine Gregoire told the Seattle City Council earlier this week that her office is in talks to settle its two-year antitrust investigation. That settlement could recoup millions of dollars for ratepayers.

Gregoire wouldn't say how much money she expects the state to receive in settlement payments, or when the negotiations might be concluded. Companies being investigated by the state are Enron Corp., Mirant Corp., Duke Energy Corp. and Reliant Resources.

In November, Gregoire's office reached a $15 million settlement with Oklahoma-based Williams Energy Marketing and Trading Co. over its distribution of natural gas during the energy crisis.

Williams was subpoenaed several times in California before it agreed to refund $387 million to that state. As part of that settlement, the states of Washington and Oregon each got $15 million.

Gregoire described Williams as a "minor player."

Gregoire told the City Council that her work is different from Seattle City Light's battle to have the Federal Energy Regulatory Commission approve refunds of roughly $278 million for power City Light purchased in 2000 and 2001.

She told the council that the Attorney General's Office would support Seattle City Light in its quest for refunds, but she wasn't optimistic that the commission would rule in City Light's favor.

"The staffing level at FERC is ridiculously low," Gregoire said. "And FERC is vested in its own decision."

By granting refunds, the commission would admit that it neglected to step in during in the crisis, she said…

Accounting Games Still Played

New York Times – by Neela Banerjee - February 7, 2003

(2/6/03) - THERE is no question that the scandal that began with Enron and has yet to entirely die away has decimated the energy marketing and trading industry. But some experts question whether the bruising has prompted energy companies to change the business practices that got them into trouble in the first place.

A number of doubts dog the business. Is a huge portion of the profit at some companies the ethereal stuff of mark-to-market accounting, a practice that allows the booking of possible future profits now rather than as they come in? Are companies disclosing more about their trading practices? Have they adopted more sophisticated risk management practices? Are they strengthening their corporate governance structures so that there is actual oversight within? The Financial Accounting Standards Board has promulgated a rule that should bring about greater transparency in companies' earnings, beginning with this year's first quarter.

And a new industry organization, the Committee of Chief Risk Officers, has issued recommendations to its 32 members, which include some of the largest energy marketers and traders, about practices they need to adopt to restore investor confidence.

Yet over all, the energy trading industry must do far more to restore investor confidence, analysts contend. They point out, for example, that the risk officers' group is self-appointed and includes several companies that have been accused of improper business activities. Moreover, some of the largest power traders still attribute an uncomfortably large percentage of net income to mark-to-market accounting. Yet the assumptions that underlie those profits remain opaque at many companies, the critics add.

''Has anything really changed?'' said Paul Patterson, an independent energy analyst who publishes The Glenrock Report. ''And the bigger question is of greater disclosure going forward. Has that really happened?''

Things may get even worse for energy companies as the year progresses. William F. Hederman Jr., the director of the market-monitoring office at the Federal Energy Regulatory Commission, estimated yesterday that energy companies faced more than $100 billion in debt coming due this year, much of which they will be unable to pay and will have to refinance to avert bankruptcy.

Already, the El Paso Corporation, the country's largest natural gas pipeline company, announced yesterday that it planned to cut its dividend sharply and sell $2.5 billion in assets to raise cash.

Energy trading has dwindled radically over the last year, because the creditworthiness of the trading companies has been severely eroded. Once the Enron scandal broke, credit rating agencies took a much harder look at Enron's former rivals and judged that for most of them, debt loads were too high, cash flow too low and accounting often inscrutable. The agencies downgraded many energy trading companies last year -- some of them several times, several to below investment grade.

As a consequence, many energy marketers are facing a liquidity squeeze, as they use available cash to reduce their debts. And the market for longer-term power trading has essentially dried up, because with credit ratings so low, companies would have to put up sizable collateral to conduct long-term trades.

Those problems, and not a fundamental rethinking of the soundness of industry methods and accounting, have done the most to make the trading companies less freewheeling in their reporting of profits, argues John C. Cassidy, a senior power analyst with Moody's Investors Service.

''I don't think the methodology has changed,'' Mr. Cassidy said. ''It's just that they can't do the one-, two- , four-year deals because they can't find counterparties.''

In their much happier recent past, the energy traders could execute such long-term deals and book the profits from them immediately, under mark-to-market accounting. The problem was that no one really knew the prices for power so far in the future, so the profits calculated for the contracts were based on models the traders themselves devised. The drying up of the market makes it harder to use such models now, but companies still do, say analysts, including Mr. Patterson.

Energy trading businesses that still recognize ''a considerable level'' of revenue from mark-to-market accounting include the Constellation Energy Group, American Electric Power, Duke Energy, Sempra Energy, TXU and Idacorp, Mr. Patterson said in a recent report. He urged investors to watch those companies' numbers carefully.

The numbers are likely to change under the influence of the accounting board's new rule, which limits certain uses of mark-to-market accounting. That, analysts said, will initially knock down the profits of many companies.

Hardly any of the companies have provided guidance about how the rule would affect them. One exception cited in the Glenrock Report is Pinnacle West Capital, which issued a warning of a loss in December. On Tuesday, it reported a loss of $80.6 million in the fourth quarter of last year. It said that all but $14.9 million of the loss reflected the accounting change.

The risk officers' committee is working to improve transparency within the industry through disclosures of the impact of things like the accounting change. According to Michael Smith, the executive director of the group, its initial recommendations include ways to end conflicts of interests within companies; standardization of risk management practices; the creation of a clearinghouse that would ease the industry's liquidity squeeze; and a higher level of disclosure.

Debt analysts say the recommendations are a good start, but worry about whether they will be followed. In a recent report, Standard & Poor's noted that ''these firms have always been self-policing, yet many have engaged in or been accused of inappropriate corporate behavior.''

Suzanne Smith, director of corporate and government ratings at Standard & Poor's, explained the rating agency's anxiety.

''Over and over again, we talk about the execution risk of a strategy,'' she said. ''And what we ask is if the same management that got a company into this mess is going to be able to get it out.''

Another Trader Pleads Guilty

New York Times – by Kurt Eichenwald – February 6, 2003

(2/5/03) - A former senior trader with the Enron Corporation pleaded guilty yesterday to manipulating the California power market illegally during the state's energy crisis and then lying about his actions to federal law enforcement officials.

The trader, Jeffrey Richter, 33, was the former head of Enron's short-term California energy trading desk. He is the second Enron trader to plead guilty to manipulating the California energy market for the purpose of driving up prices and generating millions of dollars in excess profits for the company.

Mr. Richter entered his plea before Judge Martin J. Jenkins in Federal District Court in San Francisco. He was charged in a criminal information that was filed under seal on Jan. 30 and unsealed yesterday.

In the plea, Mr. Richter admitted that he worked with others on trading tactics that transformed portions of California's complex system for buying and transmitting energy into a fictional world, complete with bogus transmission schedules and imaginary congestion on power lines.

Such trading tactics, however, did not create the energy debacle that hobbled California in 2000 and 2001. Rather, they worsened an already bad situation, with the Enron traders devising ways to take advantage of the chaos in the market and pump up revenue.

In his statements to the court, Mr. Richter admitted to participating in two trading tactics that involved fraud. He also admitted lying to F.B.I. agents during an interview on Sept. 26, when he denied ever trying to mislead anyone through the submission of power schedules that proved to be false.

''I made an error in judgment in my responses,'' Mr. Richter told Judge Jenkins about his responses in that interview.

Prosecutors hailed the plea, saying that it should teach other potential defendants the danger of trying to mislead investigators. ''The most significant thing is that the defendant is admitting that he made false statements,'' said Matthew J. Jacobs, an assistant United States attorney handling the case. ''This should send a message that if anyone impedes or obstructs the investigation they can and will be prosecuted.''

The two schemes -- called Get Shorty and Load Shift by Enron traders -- took advantage of the structure in the newly deregulated markets. Under the rules, energy marketers like Enron had to schedule their deliveries of electricity to customers. Within that system, the marketers could be paid for altering their delivery schedules if a particular transmission line became congested. In addition, there were ways to profit from power emergencies -- by making commitments to deliver a fixed percentage of power in such an emergency to prevent the collapse of the system.

But those methods proved to be ways Enron could increase its revenue with little additional work. By filing bogus electricity schedules, Mr. Richter and his co-conspirators could artificially increase congestion on California transmission lines; then, they would be paid to relieve the congestion, which did not exist. Mr. Richter and the others made commitments to deliver energy they did not have and did not intend to supply. Mr. Richter joins Timothy N. Belden -- the former head of trading in Enron's office in Portland, Ore. -- in admitting that such trading constituted a crime. Mr. Belden, one of Enron's most influential and well-paid energy traders, pleaded guilty in October to manipulating the California market.

Court documents and internal Enron records suggest, however, that Mr. Richter played a far smaller role than Mr. Belden in both the organization and in the scheme. According to the records in Mr. Belden's case, the conspiracy began some time in 1998; the records in Mr. Richter's case say that he first began participating in manipulative schemes two years later.

Moreover, under his plea deal, Mr. Belden agreed to forfeit $2.1 million. No similar forfeiture agreement was included in Mr. Richter's deal; however, his pay was far less than that of Mr. Belden. According to internal Enron records, Mr. Richter received a $450,000 bonus for his work in 2000; Mr. Belden received $5 million.

Enron obtained huge sums from the trading in California. According to the earlier charges filed against Mr. Belden, West Power -- Enron's electric trading arm -- generated about $50 million in revenue in 1999, the year before the California energy crisis. By 2000, the document says, that amount jumped to $500 million. The next year, revenue spiked again, climbing 60 percent, to $800 million. Of course, much of that increase could be attributed to the huge rise in electricity prices in California, which would have taken place even without the criminal activity.

The accusations themselves are not new. They were first made public in May, when the Federal Energy Regulatory Commission disclosed internal Enron documents that showed the company engaged in such practices. The plea yesterday, however, involved only two of those tactics.

Indeed, the criminal cases against both Mr. Belden and Mr. Richter stem in large part from meetings they and another trader held with lawyers for Enron on Oct. 3, 2000. At the time, the meeting was being held to help the company prepare its defense against allegations that it was manipulating the California energy market. During that meeting, the traders described their trading activities. The lawyers' memos from those meetings and subsequent documentation became the basis for the regulatory commission's action and set in motion the continuing criminal inquiry.

Terry W. Bird, a lawyer for Mr. Richter, said after the hearing that his client was only admitting guilt for ''the limited offenses'' outlined in the charges. He added that his client had ''full intention of cooperating with the government as a demonstration of contrition.''

According to court documents, Mr. Richter transferred to Enron's West Power trading division in Portland in 1997. In June 1999, he became a trading assistant on West Power's short-term desk, where he managed electricity traders, schedulers and analysts and oversaw the buying and selling of electricity on the California wholesale market.

Mr. Richter faces a maximum penalty on each of the two counts of five years in prison and up to a $250,000 fine, plus restitution. The actual sentence, however, could be less depending on the nature of his cooperation.

More Suspicious Shutdowns

Los Angeles Times – by Nancy Rivera Brooks - February 4, 2003

(1/31/03) - State regulators have found more examples of "suspicious" power plant shutdowns during California's energy crisis, supporting a controversial assessment in September that most of the state's blackouts could have been avoided if plant owners had generated all the energy they were capable of, according to a report released Thursday.

The report to the state Public Utilities Commission reexamined the September conclusions in light of objections by the five companies that control most of the power plants.

The generators blasted the original report as misleading because it did not excuse legitimate plant outages. Thursday's report made slight adjustments to some of the conclusions, including that 14 of the 16 hours of blackouts in Southern California could have been avoided -- down from the original conclusion that all hours could have been avoided.

PUC investigators said generator complaints "ignore the fact that California experienced an unprecedented energy crisis during the period studied in the report and that the behavior of the generators contributed to that crisis."

In addition, more examples of "problematic outages" were uncovered in which power plants unexpectedly suffered several major problems at once, operators did not take "appropriate care" in preventive maintenance and plant shutdowns were extended because new problems were discovered, Thursday's report said.

In one instance cited, a Southern California plant operated by AES/Williams was out of service from Jan. 10 to Jan. 20, 2001, because of problems with fan motors that may have been caused by poor maintenance procedures.

During that period, Cal-ISO ordered about 60 hours of power interruptions, including blackouts, the report said.

A spokesman for Williams Cos., which markets the energy from the California plants owned by AES Corp., could not be reached for comment.

Pat Mullen, spokesman for Duke Energy, said the new staff report agrees with one instance in which Duke said the commission had mischaracterized a plant outage.

Duke has offered to explain other outages, but the PUC staff has not responded to the offer, he said. "We believe the public would be better served if the PUC completed its investigation and issued a final, documented report as opposed to issuing incomplete, unsubstantiated reports," Mullen said.

The PUC also Thursday announced the appointment of consumer advocate William Ahern as executive director, replacing Wesley Franklin, 54, who will become an advisor to new PUC President Michael Peevey.

Ahern, 59, spent 10 years at the PUC and most recently was a senior policy analyst with Consumers Union in San Francisco.

Separately, the California Department of Water Resources sued to break the state's long-term electricity contract with Allegheny Energy Inc., claiming that the company violated the terms of the expensive contract signed during the energy crisis.

The lawsuit, filed Wednesday in Sacramento Superior Court, seeks to terminate the $4.4-billion, 10-year contract because of Allegheny's deteriorating financial condition and because the Hagerstown, Md.-company transferred the contract to a newly formed subsidiary.

Allegheny Energy said it "categorically rejects" the department's allegations.

Duke’s Request Denied

Dow Jones – February 4, 2003

WASHINGTON (Dow Jones) -- A Federal Energy Regulatory Commission judge denied Thursday Duke Energy Corp.'s request that California parties disclose elements of their case that contends energy suppliers manipulated the state's power market in 2000-2001.

Duke had sought information on how data provided during a FERC-monitored discovery period ending Feb. 28 is being used by California state authorities and public utilities to support their allegations of market manipulation.

In rejecting the company's request, FERC Judge Peter Young said the 100-day evidence-collecting period running through February was an extraordinary measure taken by the commission. The discovery period doesn't permit the type of discovery which Duke Energy seeks from the California parties, Young said.

"I believe that discovery would short-circuit the very purpose of this proceeding," Young added.

California parties and energy suppliers can seek all facts relevant to their respective cases for and against alleged market manipulation, the judge said. But letting one side see substance of the other's case before final submission to FERC would allow "premature, argumentative rebuttal," he said.

The state is seeking refunds of $8.9 billion on wholesale power purchases during its energy crisis, as well as renegotiation of long-term contracts signed in the first half of 2001. Duke is among the energy suppliers from whom the state has sought data to support its allegations.

Judge Young also reiterated his warning - first made in a notice Tuesday - that some parties to the discovery period have shown disregard for professional and ethical standards and that all parties would be held to a higher standard going forward.

However, he said energy companies and the California parties have "for the most part" cooperated well with each other, given tight time constraints and massive amounts of data being exchanged.

FERC's commissioners are expected to decide by the end of March on California's requests for wholesale power purchase refunds and possible abrogation of some long-term contracts.

Reliant Energy to Refund $13.8 Million

Associated Press – by Mark Sherman – – February 3, 2003

WASHINGTON -- Reliant Energy agreed Friday to refund $13.8 million for withholding power to drive up prices in California in 2000, the latest evidence that energy companies manipulated the state's power supply.

The refund covers two days in June 2000, when transcripts of telephone calls between Reliant employees show that employees held back power to drive up prices in California's newly deregulated market. The transcripts were posted on the Web site of the Federal Energy Regulatory Commission, which announced the refunds.

The amount reflects the most money Reliant could have made by keeping power from the market, FERC said in a statement.

California Public Utilities Commission President Michael Peevey said he hopes energy regulators "continue with that trend" in other investigations of California's energy crisis in 2000 and 2001.

The settlement is separate from another proceeding at FERC in which California is seeking $8.9 billion for excessive power prices. A FERC judge has said companies charged $1.8 billion too much, but he did not consider evidence of manipulation.

FERC is expected to make a final decision on the larger refund issue in the spring.

Reliant cooperated with the investigation of manipulation, FERC said.

In one call, an unidentified Reliant trader said, "We decided that the prices were too low on the daily market, so we shut down everything except" one plant.

"Excellent. Excellent," a colleague replied.

In the same conversation, the two employees bragged about keeping an enormous amount of power from being supplied to the state. "We pulled about 2,000 megs off the market," said one.

The other said, "That's sweet."

Two thousand megawatts is enough to power 1.5 million homes.

Houston-based Reliant admitted no wrongdoing in the agreement, but it said that the senior official who directed traders to withhold power is no longer with the company. In a statement, the company called the June 2000 actions "an isolated situation."

Friday's announcement was an outgrowth of an ongoing investigation, begun a year ago, of possible manipulation of the deregulated California market. In May, FERC released internal Enron Corp. memos that described "Get Shorty," "Fat Boy" and other colorfully named trading schemes designed to boost prices.

Earlier, FERC ordered Williams Cos. to refund the state $8 million after investigators found that an employee sought to keep a Long Beach power plant out of service to take advantage of high prices. The shutdown allowed Williams to sell power to the state at the premium price of $750 a megawatt-hour, more than 10 times the price the company got in a contract with the state for power from the Long Beach plant, energy regulators said.

Federal Energy Regulatory Commission:

Utilities Losing Faith in Deregulation

Reuters – January 23, 2003

Aspirations to become an Enron have disappeared

LONDON, Jan 22 (Reuters) - Doubts about the future prospects of deregulated energy markets are growing among big utilities, with meddling by regulators and governments among the industry's top concerns, a survey published on Wednesday showed.

Over 40 percent of utilities are less positive about deregulation than a year ago, according to the survey by consultants Cap Gemini Ernst & Young survey.

"There has been a significant drop in confidence in deregulation over the last year," said Jayesh Parmar, vice president of utilities restructuring at Cap Gemini Ernst & Young.

Parmar said the sheer complexity of rules in many markets, as well as falling liquidity in wholesale markets had also drained confidence in deregulation, which is well under way in the European Union and in North America.

The survey, based on interviews with more than 130 executives between September and November last year, follows a traumatic year for the energy industry and deregulating markets.

In late 2001, Enron, a champion of free competition, and voted the most admired company in Cap Gemini's previous survey, collapsed in a financial scandal that cast a shadow over the whole energy trading industry. Last September, nuclear giant British Energy, the UK's biggest generator, had to seek an emergency loan from the government after a sharp decline in UK power prices -- sparked partly by market reforms in March 2001 -- pushed the company to the verge of insolvency.

The government's intervention angered other generators and raised questions about whether market reforms designed to increase competition had gone too far.

"In the UK, the fall-out from New Electricity Trading Arrangements (NETA) is a key concern," said Parmar.

Intervention by regulators and governments had also occurred in the Californian and Dutch energy markets, he said.

The most admired companies in the industry were the UK's Centrica, Germany's E.ON, Electricite de France , Sweden's Vattenfall and Duke Energy of the U.S., according to the survey.

Respondents were shunning the Enron-style model of trading without the backing of physical assets such as power stations.

"Aspirations to become an Enron have disappeared," said Parmar. "Now it's more about physical players managing risk."

Bigger Fines for Energy Companies

Employee Advocate – – January 23, 2003

The Houston Chronicle reports that Texas Public Utility Commission wants the deregulation laws changed to prevent abuses by energy companies.

PUC commissioners wrote "The statute currently has a cap on administrative penalties of $5,000 per violation. The Commission is concerned that this cap may not be enough of a deterrent to prevent the exercise of market power on manipulation of market rules that could potentially enrich a company by millions of dollars."

The Texas PUC and the Federal Energy Regulatory Commission (FERC) may be learning. FERC recently raised its penalty cap to $25,000 per violation, because of the same concerns.

Carol Biedrzycki, Texas Ratepayers Organization Executive Director, said "This whole market is about profits, and it is about money. Unless companies have cost associated with breaking a rule, they are going to break them. The law makes it more difficult than it should for the PUC to penalize a company when it fails to meet standards. That needs to be changed. But they are not asking for the level of enforcement authority that I think they need to effectively do their job."

Russian Deregulation Problems

Dow Jones – January 23, 2003

(1/21/03) - MOSCOW (Dow Jones) -- Weakening of Russian plans to create a market for electricity may buy re-election for President Vladimir Putin and his parliamentary supporters but may also increase the risk of a California-style crisis in five years' time.

Amendments crafted last weekend to a package reform bills remove the deadline for the introduction of a wholesale power market (it was to have been Jan. 1, 2005) and stipulate that household prices will stay regulated for three years after wholesale ones have been freed. Those amendments should now see the controversial bills getting through parliament without costing lawmakers their jobs this autumn or Putin his next year.

Some say it's only a short-term fix. "They will replicate the California experience, where the local utilities go bust and generators make vast profits," says Charles Henri Hirsch, managing director of Equinox Finance in Moscow.

Hirsch represents minority shareholders of AO Kostromskaya GRES, a wholesale generation company built around relatively new thermal power stations. Kostromskaya would be one of the first to profit from a California-style crisis.

Only a couple of weeks ago, it seemed that the government would push through the bills with a commitment to a free market by 2005. However, widespread heating and power failures at New Year - during which as many as 28,000 people were left without heating in temperatures as low as -30 degrees Celsius - appear to have led the government to keep a cap on household prices in particular.

The new amendments "may have been included in good faith...but mean (the government) will fail in its fundamental aim, which is to make the sector attractive to private investment," warned Derek Weaving, an analyst with United Financial Group in Moscow. "The California experience shows you cannot be half-hearted about liberalization."

The dilution of the draft laws represents a calculated gamble by the government that the Soviet-era electricity system isn't as close to collapse as was once thought. Hartmut Jacob, an analyst with Renaissance Capital, calculates that Russia's reserve margin - the gap between production capacity and peak consumption - was 27% in 2002.

Electricity Supply Risks 5 Years Away

Jacob, like Equinox's Hirsch, calculates that the real risks to Russia's electricity supply are about five years away. Hirsch's investment rests in part on the assumption that "less than 10%" of the country's thermal plants will keep operating as long as those of Kostroma's.

Some say the government can thus afford to slow down the reforms for a year or so to get the legislation right if that is its real agenda. Others argue, however, that the current overcapacity would help keep prices down as prices are freed.

Some feel that the removal of the deadline for the start of the market is just a tactical retreat and that the deadline will be decided by the government just as soon as Putin is re-elected in 2004.

"Of course (the new amendments) bring uncertainty into the market and investors may not like it but it represents a kind of consensus that can bring reform in the long run," said a spokesman for RAO Unified Energy Systems of Russia, whose chief executive, Anatoly Chubais - a keen reforms supporter - has been a lightning rod for criticism from politicians, minority shareholders and industrialists alike.

This barrage of criticism suggests the reforms offend too many people at once. Despite the failure of central planning and state regulation to sustain investment in the sector, there are still many who would prefer to have politicians setting prices to encourage the building of new power stations and lines.

"Where are the most dynamic investment programs in electric power in the world right now?" said Viktor Kudryavy, a vice president of the Russian Union of Producers lobby group. "In China, Vietnam and Iran and they're all state programs."

Like many Russians, he remains spooked by the experience of deregulation in the west and considers the current reform efforts a reckless experiment. "California was a crisis of comfort...three, six or nine hours without air conditioning," he says. "In Russia, it's life or death,"

The amended bills are now due to get their crucial second reading in the Duma Feb. 4 or 5, the news agency Prime-Tass quoted a senior Duma deputy as saying Tuesday.

Deregulation Hits a Snag

Puget Sound Business Journal (Seattle) – by Steve Ernst – January 21, 2003

Leaders cheer delay of energy plan

Bowing to pressure from a coalition of states in the Northwest and Southeast, the Federal Energy Regulatory Commission is putting the brakes on its plans for a nationwide, deregulated energy market.

The commission announced last week that it plans to delay implementation of what's called Standard Market Design — the blueprint for a deregulated, national wholesale market for electricity.

"While this may delay (standard markets) in some parts of the country, it is important to do it right than to do it fast," said commission Chairman Pat Wood in a statement.

Washington state political leaders and utility managers loathed the commission's plan for a standard, national market. They worried that the plan would increase power bills in the Northwest while turning jurisdiction of local power issues over to the federal government.

"I would characterize this as more of a tapping on the brakes," said Gary Zarker, superintendent of Seattle City Light and an opponent of the plan.

"I think a more measured pace is certainly welcomed," he said. "But I don't read in any of this where FERC has cooled its enthusiasm for moving on its vision for restructuring electrical markets."

State leaders worry that the commission's plan doesn't take into account the Northwest's hydroelectric-based power system, which sells electricity at cost rather than based on market prices.

"FERC's proposal is too sweeping, too fast and too theoretical," said Marilyn Showalter, chairwoman of the Washington Utilities and Transportation Commission, in a statement filed with the commission on Jan. 10.

"It is not compatible with our cost-based electricity system, and would likely increase the price electricity consumers pay for power in Washington," she said.

Showalter led a coalition of regulators from 15 states that opposed the plan.

The commission is expected to release a white paper on its standard market design plan in April.

Getting the Goods on Energy Firms

San Francisco Chronicle – by Mark Martin – January 21, 2003

Lawyers try to show market manipulation

(1/20/03) - In their last chance to sway federal regulators, California lawyers are mounting a final hunt for evidence showing how energy companies manipulated the state's electricity markets during the 2000-01 energy crisis.

Attorneys for three state agencies and California's two largest utilities have deposed energy traders, reviewed power plant operations data and listened to companies' tape-recorded conversations in preparation for a final report on market manipulation to the Federal Energy Regulatory Commission.

The commission is expected this spring to resolve several long-simmering issues from the state's energy crisis that have billion-dollar ramifications for California consumers.

Granted a special, 100-day discovery period by FERC that includes subpoena power, the lawyers are hoping to convince the commission that dishonest trading strategies and artificially created power shortages contributed in large degree to the crisis.

"It's a monstrous effort," said Vickie Whitney, a deputy prosecutor with the California attorney general's office. Lawyers for the Public Utilities Commission, Electricity Oversight Board and utilities PG&E and Southern California Edison also are involved.


The group will submit a report by Feb. 28 that will argue to FERC that power companies ranging from Enron Corp. to much smaller trading firms acted illegally in California for a much longer period than just the months the state endured blackouts and record-high prices.

Their effort could play a large part in determining how long Californians will pay the sky-high electricity rates that are the continuing legacy of the energy crisis.

While Whitney said the team of lawyers has gained unprecedented access to internal company data, key evidence and witnesses remain unavailable, and federal prosecutors building a criminal case against Enron have seized much of the company's records and are not sharing them.

The prosecutors also have not allowed Timothy Belden, the Enron vice president who pleaded guilty last fall to manipulating the state's energy markets, to speak to others investigating the crisis.


Even FERC's staff, which is conducting its own probe of West Coast market manipulation, has complained that investigating Enron has been hindered by the Justice Department.

Energy industry officials say the state's latest effort to pin blame for the crisis on corporate greed will probably turn up nothing new.

"Every rock has already been overturned," said Patrick Mullen, a spokesman for Duke Energy, based in North Carolina. "It feels like we just keep copying the same documents for different people."

While there is hardly a consensus on the causes of the crisis, most agree a confluence of events -- everything from adverse weather to key missteps by regulators and politicians -- contributed to the blackouts and high prices that have stuck consumers with some of the largest energy bills in the nation.

But California's claims that the state was the victim of a widespread effort to rip off consumers were bolstered throughout 2002 as memos, e-mails and tape recordings spilled out showing companies deliberately toying with the state to gain profits. Among the findings:


-- Enron partnered with other West Coast electricity generators to create dozens of byzantine and dishonest trading schemes that zapped megawatts around the West Coast and created confusion and volatility in the marketplace, driving up prices.

In public testimony, federal energy investigators have said they now believe Enron created potentially illegal alliances with as many as a dozen electricity generators to control as many as 3,500 megawatts a day in California -- enough to power more than 3 million homes and enough to set prices in California.

-- Williams Cos., which saw its profits rise by 287 percent during the year- and-a-half period surrounding the California energy crisis, worked with Southern California power plants in early 2000 to withhold electricity from the state, earning millions in profits by narrowing supply and selling other, higher-priced energy.

-- A federal judge concluded in September that natural gas giant El Paso Corp. deliberately withheld at least 10 percent of the natural gas it was required to ship to California. The artificial shortage was a key component in higher electricity costs, as most power plants use natural gas for fuel.

But what energy investigators have never been able to prove is a vast conspiracy. Tape recordings between a Williams Cos. official and power plant operators showed how the company kept plants shut down to cause higher prices, but that is the only proof of what many officials allege was an industrywide practice.

"A few pieces of evidence get repeatedly trotted out as proof that the whole industry is corrupt, and that's just not true," said Jan Smutny-Jones, executive director of the Independent Energy Producers, a trade group representing power generators.

Whitney refused to say which companies have been targeted during the new probe, saying only that lawyers were casting "a very wide net."

Spokesmen for several of the largest power companies would only say their companies were cooperating with all investigations of their industry.

In addition to Belden, Whitney said lawyers have subpoenaed John Forney, another Enron energy trader who is believed to be cooperating with federal prosecutors. Forney will be deposed in Ohio next week, Whitney said. The group has also subpoenaed William Wise, the chairman of El Paso Corp.

What the FERC will do with any new evidence generated remains to be seen.

Pat Wood, FERC chairman, has said he would like to wrap up four issues regarding the California energy crisis by March: the state's claim that it is owed $8.9 billion; the state's request to throw out and rework billions of dollars of long-term energy contracts the governor signed during the peak of the crisis; the commission's own investigation of West Coast market abuses; and a probe of El Paso Natural Gas.

Whitney said the final report from the state will attempt to argue that the refund claim should be expanded.


FERC is considering granting California refunds for unjust power prices that occurred between October 2000 and June 2001. Whitney said the state would attempt to convince FERC that the commission should expand the refund period back to January 2000 because of companies' illicit behavior.

FERC spokesmen said the commission will take California's report seriously, and if lawyers uncover new examples of market abuses, the commission would consider extending its investigations and delaying decisions.

"What the commission will decide is to what extent manipulation occurred -- whether manipulation was the spark that set off the wildfire or whether it was more akin to someone on the edge of the forest fanning the flames," said FERC spokesman Bryan Lee.


Over the past year, evidence suggesting energy companies manipulated the state's electrical markets has surfaced, contradicting key assumptions made during the energy crisis. Here are some of those contradictions. .

-- What we were told then

On March 31, 1998, California became the first state in the nation to open deregulated energy markets. Officials said the creation of two agencies - one that served as an electricity trading floor and another that managed the power grid - would lead to lower prices while guarding against price manipulation.

-- What we now know

Perot Systems, the company hired to develop the software to run the state's deregulated market, attempted to market its knowledge of the California system - and its flaws - to power companies and utilities before the market even opened. During the market's opening week, a Perot representative suggested to Enron that it use its market "allies" to profit from the system. .

-- What we were told then

Energy industry officials said before and during the energy crisis that merchant generators were not willfully withholding power. Doing so, they said, would not only violate market rules, but also -wouldn't make economic sense because companies -wouldn't be paid for unsold energy.

-- What we know now

In Tulsa, Okla., an official of Williams Cos. told an employee of an out-of- service Southern California power plant in April 2000 that "it -wouldn't hurt Williams' feelings if the outage ran long" and discussed the fact that it has led to higher power prices. Based on the taped recordings Williams must forfeit $8 million in profits. .

-- What we were told then

In December 2000, Enron and other energy traders refused to sell electricity to California utilities because they feared that financially unstable utilities would not be able to pay them.

-- What we now know

Just three months earlier, a group of Enron lawyers met in Portland with several energy traders for a briefing on the company's trading practices. At the meeting, traders walked the attorneys through various strategies to jack up power prices in California and the West. .

-- What we were told then

As blackouts rolled across California in late 2000 and early 2001, grid operators blamed the emergency on a shortfall in California's electricity supply resulting from numerous plants being shut down for repairs and limited resources from out-of-state power generators.

-- What we now know

California power plants could have squeezed out enough additional electricity to avoid most of the rolling blackouts that darkened the state and led to record rate increases, according to a report by state regulators.

Although the study by the state Public Utilities Commission concluded that big generators had the ability to produce more power, investigators said they -couldn't determine if companies withheld power intentionally.

-- What we were told then

In May 2002, the country's largest power companies attempted to distance themselves from possibly illegal trading practices outlined in internal Enron memos and told federal regulators that they played by the rules during California's energy crisis.

-- What we now know

Dozens of energy companies and public utilities earned money on transactions that resemble some of Enron's strategies, according to a study by state power grid officials. .

-- What we were told then

A shortage of natural gas and a pipeline explosion in New Mexico led to a tighter supply of gas to California. The shortage led to higher gas prices, which caused higher electricity prices because gas is the primary fuel used in most of the state's power plants.

-- What we now know

A federal judge ruled in September 2002 that El Paso Corp. of Texas deliberately withheld at least 10 percent of the natural gas it was required to ship to California during the energy crisis in an effort to drive up gas prices. .

-- What we were told then

Natural gas prices tripled, according to published reports, throughout 2000 and 2001, in part causing higher electricity prices.

-- What we now know

Natural gas traders routinely misled trade publications about the prices and volume at which they sold gas. Federal energy investigators have questioned whether companies actually paid the published price of gas. .

Deregulation Problems are Big in Texas

Employee Advocate – – January 20, 2003

In December, the Fort Worth Star-Telegram reported on the many deregulation problems faced by the citizens of Texas. Nearly a year into deregulation problems abound.

A 73-year-old retiree said "This is ridiculous. You don't really know what your options are. You could change [companies], but as soon as you do, someone could file bankruptcy on you, and then you're messed up. ... So I just don't know. I don't know what lies ahead. We're talking about changing electric companies -- but I've got real mixed feelings. I guess I've got to choose. But I feel like it's just damned if you do and damned if you don't. So I just don't know."

Most customers have not bothered to switch providers.

There was a decline in fuel cost, but the PUC increased rates! Attorney Kristin Doyle said "This is a pure transfer of money from customers to utility. It is likely that customers would be paying far less if the market had never been deregulated."

Complaints have been lodged about billing problems and difficulties in switching customers to other companies.

Tim Morstad, policy analyst with the Texas office of Consumers Union, said "Rather than companies competing on providing superior service, consumers have experienced door-to-door sales tactics ... billing nightmares and more. One year later, are Texas consumers better off under restructuring? Are they saving much money, is the system as reliable, is service as good as before, is the market healthy? The answer is no."

Florida Shuns Deregulation

The Orlando Sentinel – by Christopher Boyd - January 15, 2003

(1/12/03) - A year after the movement to reshape Florida's electricity market collapsed, the power industry is back to business as usual.

If California's energy debacle never occurred, and if Enron Corp. hadn't emerged as a case study for corporate corruption, Florida might be well along the path to energy deregulation. But those who want to trade kilowatts like pork bellies concede it won't happen anytime soon.

The state's four large investor-owned utilities -- which include Progress Energy and Florida Power & Light Co. in Central Florida -- have all but forgotten the challenges of deregulation and are back to their old concerns: oil and natural gas prices and plant construction.

Not that construction is without controversy. The Florida Public Service Commission recently adopted bidding rules that could give out-of-state energy companies a greater opportunity to enter the electricity-generation business.

"The state needs about 1,000 megawatts of new generating capacity every year, assuming that old capacity continues to run well," said Michael Green, executive director of the Florida Partnership for Affordable Competitive Energy, which represents would-be power-plant builders. "That's about $600 million a year of capacity, and that's significant."

The new PSC rules would put the plant builders in a better position to compete for new projects. Until now, the investor-owned utilities have built all the state's primary generating plants and included construction and operating costs in consumers' electric bills.

Advocates of the change say competition could mean lower-cost plants, which ultimately could mean cheaper electricity.

"The change in the rules is something that is really needed," said Mike Twomey, executive director of Florida Utility Watch, a consumer watchdog group. "It would be a good thing for consumers if other companies could build plants, so long as the investor-owned utilities aren't undermined in some way." The incumbent utilities haven't decided whether to appeal the bid rules.

"Florida is well-served now," Florida Power & Light spokesman Bill Swank said. "We have rates that are below the national average and reserve margins of electricity, which is a result of the Florida regulatory climate."

Progress Energy, formerly Florida Power Corp., agrees. "We thought the system was working very well," company spokesman Aaron Perlut said. "We may ask for a rehearing on the bid rule."

For Progress Energy, the big issue of 2003 is more parochial. Five of the cities it serves -- four of them in Central Florida -- are considering taking over the power lines within their borders. Progress is in arbitration with Winter Park and will begin arbitration with Apopka this spring. It is also negotiating long-term franchise agreements with Casselberry and Longwood.

But the overarching uncertainty of 2003 is how a possible war in Iraq might impact fuel costs. "We're expecting our fuel cost to remain reasonably stable this year," Perlut said. "That's the projection we're working with."

CA Seeking $8.9 Billion in Refunds

Dow Jones – by Jessica Berthold – January 11, 2003

(1/9/03) - LOS ANGELES -- California Democrats in the U.S. House of Representatives on Thursday urged the nation's top federal energy regulator to approve a higher refund amount than has been recommended for electricity overcharges in the state, according to a prepared statement from U.S. Rep. Anna G. Eshoo (D-Calif.) .

At issue is last month's finding by a Federal Energy Regulatory Commission judge that power suppliers overcharged the state $1.8 billion during California's 2000-01 energy crisis. That amount would be subtracted from the $3 billion still owed to the suppliers by the state, meaning generators would be owed $1.2 billion after refunds, said the opinion by Administrative Law Judge Bruce Birchman.

Judge Birchman's recommendation still must be approved by the full commission. Thursday's letter from the 33 House Democrats was addressed to FERC Chairman Patrick Wood III.

"In our view, given the manipulation of energy supplies and prices in the West, it is unacceptable for the Commission to approve findings that will leave Californians in debt to the energy suppliers that gouged them," the letter said.

California is seeking $8.9 billion in refunds for alleged overcharges covering the period June 2000 through June 2001. The state's estimate includes about $5 billion from alleged overcharges to the state's power-buying agency and overcharges from June 2000 through October 2000, both of which FERC has said it won't consider.

Judge Birchman's opinion was issued without consideration of recent disclosures that suggest energy-firm employees engaged in market manipulation, the legislators' letter said.

"The judge was constrained by the instructions the Commission provided when it initiated the refund proceedings on July 25, 2001. The Commission's instructions failed to allow the consideration of information that was discovered after the instructions were handed down," the letter said.

Two weeks before Birchman's recommendation was made, FERC said the state could have until Feb. 28 to submit evidence of market manipulation in the refund case, which the commission may consider in its final decision.

Since July 2001, Enron Corp's top power trader pleaded guilty on wire fraud charges for the purpose of manipulating the state's power market; a FERC law judge found El Paso withheld natural gas capacity during the state's energy crisis; and several companies said their employees had reported false natural gas prices to trade publications.

Those natural gas prices are used to compile energy indexes to which billions of dollars in contracts are pegged.

Other developments since July include the release of Enron memos detailing trading strategies allegedly used to game the market, and a report by the state's grid operator that said more than 20 companies also may have used Enron- style trading tactics.

Revelations of false natural gas price reporting is of particular importance, the letter said. In calculating his refund amount, Birchman estimated a fair price of electricity based on the cost of natural gas, which fuels many of the state's power plants, the letter said.

"In so doing, (Birchman) relied on industry-compiled indices. The manipulation of these indices ... creates serious doubts about the accuracy of Judge Birchman's findings," the letter said.

Parties in the refund case include Mirant Corp., Reliant Resources Inc., Duke Energy Corp., Dynegy, Inc., and Williams Cos, among others.

Deregulation - Page 29 - 2002