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July - Duke Energy Employee Advocate

Deregulation - Page 23 - 2002

Deregulation Brings Problems to Ontario

Canadian Press - October 14, 2002

TORONTO (CP) - Ontario faces a serious shortage of generating capacity to meet its growing demand for electricity, the agency that oversees the supply of power in the province said Monday.

In a report, a panel of the Independent Electricity Market Operator warned the province needs to take immediate steps to deal with the situation that led to soaring prices this past summer.

``Ontario could face even more serious reliability problems next summer, leading to the possibility of supply interruptions and continued upward pressure on prices during periods of peak demand,'' the report said.

While nuclear reactors at Bruce and Pickering are expected to come on-stream over the next two years, it remains unclear when that will happen, the report said.

Part of the problem is that flaws in the four-month-old deregulated market have created uncertainty that may be keeping private investors from building new power plants.

``Ontario's electricity market, as currently structured, may not be sending clear, credible and consistent signals to prospective entrants,'' the report stated.

Energy Minister John Baird said he had yet to read the 140-page report but agreed the province needs more generation.

``That's a priority for me, it's a priority for the government,'' Baird said.

The report also found that power importers could have reaped huge profits without actually creating an increase in the supply under a practice known as ``gaming.''

Gaming occurs when power companies manipulate the market by deciding not to supply electricity to the grid at the last minute or shutting down plants for maintenance causing an increase in spot prices.

Investigations were underway to determine whether gaming helped cause huge price spikes, the panel said. NDP Leader Howard Hampton called gaming ``a very serious problem'' in the generation market, which the government deregulated May 1.

``Once a company can game the market, you're then only inches away from a situation where they can use their capacity to price gouge,'' Hampton said.

``It's this government's policies that have got us in trouble.''

At the same time as the panel issued its report, the government announced it would be reviewing the mandate of the Ontario Energy Board, the agency that oversees the province's energy market.

Among other things, the board sets energy prices.

The wide-ranging review of the board will include its governance, structure, legislative framework and performance measures.

Baird said the government wants to ensure better protection for consumers.

``We want a watchdog, a cop on the beat, to look out in the best interests of consumers.''

But Hampton said the government announced the review to deflect attention from its failed deregulation policies.

``The government is trying to push some very bad news off the front page,'' Hampton said.

``The government is trying to find someone to blame here.''

Last week, Premier Ernie Eves said he was unhappy that the board might cut a promised rebate to electricity customers who have been hit by higher prices in the deregulated power market.

He also criticized the board's recent approval of a request by Union Gas to charge more than one million residential customers a special $120 levy to account for higher operating costs over the winter of 2000-2001.

That amount is to be repaid over three months.

Eves made it clear he would like that decision undone.

Albuquerque May Ditch Deregulation

Albuquerque Journal – by Charles D. Brunt – October 13, 2002

(10/11/02) - ALBUQUERQUE, N.M. -- PNM, New Mexico's largest utility, has reached an agreement with a group of large energy users, state officials and the city of Albuquerque that could pull the plug on the state Legislature's plan to deregulate electric utilities in 2007.

That agreement also would give the utility's 378,000 electric customers a 4 percent rate cut beginning Sept. 1, 2003 and another 2.5 percent reduction two years later. That rate in 2005 would be frozen until Jan. 1, 2008, according to the agreement which still must be approved by state regulators.

Combined, the proposed rate cuts would reduce the average residential monthly bill by $2.78 per month, based on 500 kilowatt-hours of use.

The agreement calls for the signing parties to urge the state Legislature to repeal the law that would deregulate the state's electric utilities in 2007.

That provision represents a complete reversal for Public Service Company of New Mexico, which successfully pushed for the deregulation bill passed by the Legislature in 1999.

Jeff Sterba, PNM's president and CEO, attributed the switch to major changes in the electric utility business since 1999.

"I think what's changed is that the experiments to bring retail open access and retail competition to the fore have been mixed," Sterba said Thursday.

"You've got the California debacle which is an utter, abysmal failure largely because of bad design by the state and bad implementation," he said. "But even those states that are held out as examples of open access working -- Pennsylvania and Texas -- I think it's too early to tell whether or not they're providing benefit. "I'm not sure it makes sense for New Mexico to take on the risk of being a leading edge, and potentially a bleeding edge, player" in deregulation, he said. The agreement would allow PNM to avoid a lengthy and costly rate case before the Public Regulation Commission.

The state's largest utility since November 2001 has met with various groups -- most of which traditionally participate in rate-setting cases -- in an effort to address numerous issues related to the state's planned deregulation.

Issues have ranged from residential and commercial electric rates to how much oversight the PRC will have over PNM's investment in power plants.

Agencies involved in the process include PRC staff, the Attorney General's Office, city of Albuquerque, University of New Mexico, New Mexico Industrial Energy Consumers, which represents large energy users, and the U.S. Executive Agencies which represents federal interests such as Kirtland Air Force Base and the Department of Energy.

As of Thursday afternoon, only two of those agencies -- UNM and the U.S. Executives Agency -- had not signed the agreement.

PNM spokesman Frederick Bermudez said UNM supports the agreement, and will likely sign it after going through its own internal approval process. The U.S. Executive Agencies probably won't support it, he said. Albuquerque attorney Lou Campbell, a utility consultant for that agency, referred questions about the agreement to Lt. Col. Bill Wells at Tyndall Air Force Base in Florida. Attempts to reach Wells by phone Thursday afternoon were unsuccessful.

State Attorney General Patricia Madrid, whose office has been representing residential ratepayers and small business interests in the negotiations, said both are well served by the agreement.

The agreement not only includes $35 million in rate reductions, it "ensures the access to reliable energy from PNM for many years to come," Madrid said.

"Under the agreement, PNM can invest in potentially profitable so-called `merchant plants' which sell energy to others, but only under terms and conditions that protect New Mexicans' energy interests first and that guard against uneconomic investments."

PNM officials agree that utility customers aren't the only beneficiaries of the agreement.

"This agreement, this process, is an alternative to a litigated rate case," said Bermudez. Full-blown rate cases, he said, "take a lot of time and a lot of money."

"Generally, a litigated rate case takes one issue at a time -- rates only," he said. "This (process) looked at lots of other issues -- what else is on the table that PNM needs to look at as a company, and what's of concern to customers and other agencies. We got it all out on the table...."

"What we avoid is two litigated rate cases," said Bill J. Real, PNM's senior vice president for public policy.

"We would have litigated a rate case, which takes 12 to 15 months to get through, and we would have litigated all the merchant plant issues in the current, docketed case."

Besides lowered litigation costs, Sterba said, PNM gains "a greater level of certainty about regulation and prices."

"And we know what the rules of the road will be about building new generation," he said. Uncertainty in those areas make it difficult to attract capital, he said.

The agreement also provides opportunities in the wholesale electric market, he said, because revenues made from those transactions will flow to PNM's bottom line.

Because the agreement has all parties supporting a renewal of the Public Utility Act -- under which PNM currently operates -- consumers are still protected, Madrid said.

PNM, which filed the stipulated agreement with the state's Public Regulation Commission at 3 p.m. Thursday afternoon, hopes to get PRC approval by Dec. 31 -- before the next convening of the state Legislature…

Deregulation Turmoil in Virginia

Richmond Times-Dispatch – by Greg Edwards – October 11, 2002

(10/10/02) - The benefits of electric deregulation are not just around the corner, says Jackson E. Reasor Jr., a utility CEO and former Virginia lawmaker.

In fact, don't expect to see much competition in the electric-power industry for several years, Reasor told those attending a joint breakfast meeting of the Virginia Council of Farmer Cooperatives and the Friends of the Industry of Agriculture yesterday.

Virginia is one of the few states that have decided to move forward on the path to deregulation, Reasor noted. Much of Virginia has opened to competition this year, but the only place a competitor has been active is in Northern Virginia where Pepco Energy Services has offered consumers higher-priced electricity generated by burning landfill gas.

Virginia's method of structuring deregulation has made it difficult for competitors to enter the market, but it is not necessarily a bad thing that competition is slow in coming, Reasor said.

The goal of deregulation's supporters was to open up the system to competitors, not to force the development of competition, he said. In a state such as Virginia, which already has low electricity rates, competition is unlikely to develop quickly, he said.

Reasor warned, though, that some people in Virginia are suggesting that electric rates need to increase to promote competition. "I hope we'll not move in that direction," he said.

Reasor is president and CEO of the Virginia, Maryland and Delaware Association of Electric Cooperatives and of the Old Dominion Electric Cooperative, which generates and sells electricity to the association's members. He also once led the special General Assembly subcommittee that developed Virginia's deregulation law.

Lawmakers, he said, had intended that, as deregulation developed, the State Corporation Commission would provide a safety net for consumers, making sure the state did not end up with unregulated monopolies providing electricity after deregulation.

But somewhere during the process of deregulation, tremendous friction developed between the SCC and the legislature, which threatens the future of the SCC safety net, he said. In the short run, Reasor said, deregulation and restructuring of the utility industry probably will increase the cost of electricity to consumers. In the long run, it will probably help lower costs, he said. Reasor also talked about other challenges facing electric cooperatives.

The drought, he said, has threatened the continued operation of the Clover coal-fired power plant and the North Anna nuclear plant, in both of which Old Dominion shares ownership with Dominion Virginia Power.

And in the General Assembly, he said, the lobbyists who represent cooperatives are seeing an increasing antagonism among lawmakers -- particularly from urban areas -- against the very concept of cooperatives. Those lawmakers view cooperatives as some sort of socialistic or nonprofit anachronism "whose time has come and gone," he said.

Sen. Gramm Shakes the Money Tree

Public Citizen – Press Release – October 8, 2002

Revolving Door Continues: Sen. Gramm Accepts Post-Retirement Job at Banking Firm that Acquired Enron's Trading Operation

WASHINGTON, D.C. - Public Citizen today criticized U.S. Sen. Phil Gramm, former head of the Senate Banking Committee, for accepting a potentially lucrative job with UBS Warburg, a Swiss- based investment banking firm that earlier this year acquired the energy trading operations of Texas- based Enron Corp.

"Senator Gramm is the darling of the banks, the oil industry and Enron," said Public Citizen President Joan Claybrook. "In the Senate, he did the bidding of the banking industry and took its money. He did the bidding of the oil industry and took its money. He did the bidding of energy traders and took their money. Now, he's going to get paid directly from the company that took over Enron's fraudulent energy trading operation, a business Gramm helped create through a law that deregulated such trading."

UBS Warburg in January acquired Enron Corp's disgraced energy trading operation, which generated about 90 percent of Enron's $101 billion in revenue in 2000. UBS Warburg has said it paid nothing up front for the unit but will pay Enron one-third of the pre-tax profits from its operation. UBS will assume control of EnronOnline and use Enron's energy trading software, trading floors and office equipment.

Since 1989, Gramm has been Congress' second-largest recipient of campaign money from Enron, taking $101,350. In addition, Gramm is married to Dr. Wendy Gramm, who served on Enron's board of directors from 1993 to June 6, 2002. In that capacity, Dr. Gramm earned between $915,000 and $1.8 million in salary, director's fees and Enron stock.

"Senator Gramm was Enron's biggest booster in Congress," said Tyson Slocum, research director for Public Citizen's Critical Mass Energy and Environment Program. "He sponsored federal electricity deregulation legislation at Enron's behest and he was the primary sponsor of the Commodity Futures Modernization Act of 2000. Enron lobbied Gramm successfully for the passage of this bill, which removed nearly all government oversight from Enron's energy trading operations ― the same trading operations that UBS now controls.

"As a result of Gramm's coddling of Enron and the complete failure of energy deregulation, Gramm has helped commit many Americans to higher energy bills," Slocum said. "Now, his actions will be rewarded with a lucrative job earning him a salary that's likely many times that of most Americans, who have to pay higher utility bills because of Gramm's legislation."

After UBS acquired Enron's trading operations, the company paid $80,000 in the first half of 2002 to the Washington, D.C., firm Sullivan & Cromwell to lobby Congress (and presumably Gramm) and federal regulators on the "regulation of energy derivative contracts" and "oversight of the Gramm- Leach-Bliley Act." Gramm was the principal author of the law, which repealed the Depression-era Glass Steagall Act separating investment banking from commercial banks. Passage in 1999 paved the way for UBS Warburg to acquire the brokerage PaineWebber shortly thereafter.

In Enron's aftermath, every major energy trader in America has come under scrutiny from federal regulators for fraudulent trading practices. In response, U.S. Sen. Dianne Feinstein (D-Calif.) has introduced legislation to re-regulate energy trading. Several news reports have credited Gramm with blocking or organizing opposition to this important legislation.

"This job is payback for Senator Gramm's years of advocacy inside the Senate on behalf of the banking and energy industries," Claybrook said. "He had the gall to call himself the 'only consumer advocate of any significance in Washington.' In truth, consumers are better off without him."

The Deregulation Tar Baby

Minneapolis Star-Tribune – October 7, 2002

(10/1/02) - The shareholders of Xcel Energy and other utilities of late have been punished by their companies' incursions into what has proven to be a mercilessly volatile, unregulated power-production business.

For a time, conventional thinking was that the utilities were smart to diversify but stay within a fast-growing deregulated part of the trade they understood. Now onetime Wall Street darlings NRG Energy, Reliant, Duke Power and a dozen or so others have found the industry a tar baby from which they can't extricate themselves thanks to a slowdown in power demand, a surge of new plants and allegations that some players drove up profits through bogus- trading scams in California's power shortage of 2000.

Yet not every utility is in the dog house.

Allete Inc., the former Minnesota Power of Duluth and the state's second-largest utility, has gone a different way through its decade- long diversification into the automobile auction industry and car- related services. The company's stock also has held up well against the battered S&P utility index in the past three years.

Similarly, Fergus Falls-based Otter Tail Corp., which diversified into pipe manufacturing and even ownership of the Fargo-Moorhead Red Hawks baseball team of the Great Northern League, is reporting financial returns and stock prices that are the antithesis of some of the giant utilities.

"Allete and Otter Tail have done a pretty good job of taking their excess capital to invest in good, solid companies with good managements and stable cash flow," said Dave Parker, a regional utility analyst at Robert W. Baird & Co. in Milwaukee.

"In the case of Allete, the auto-auction business is not cyclical. It's not unlike utilities. It has good management. It's based in Indianapolis. And Allete management has stayed out of the way..."

Ontario Deregulation Confusion

Financial Post - October 5, 2002

(10/2/02) - Ontario has failed to develop a competitive electricity market -- largely because of its ownership of Ontario Power Generation Inc. and Hydro One Inc. -- and that has kept power producers and utilities from investing in the province, says the chief executive of Fortis Inc.

"The market continues to be dominated by the remnants of the old Ontario Hydro organization," Stan Marshall told reporters after a speech yesterday at the Toronto Board of Trade. "That's hardly a market, when you got a dominating generation company [OPG] that's owned by the Crown, a dominating distribution company [Hydro One] that's owned by the Crown and a market operator [the Independent Electricity Market Operator] that's owned by the Crown. In other words, there's no market, frankly speaking.

"The rules are not clear and they keep changing," Mr. Marshall added, citing the on-again, off-again privatization of Hydro One as an example. "What role will government play in Crown corporations? Will the government continue to own OPG and Hydro One? And how quickly will OPG reduce its dominance in the marketplace? You can't have a true market in the current circumstances. That's impossible.... Until that's resolved, a lot of the big players do not want to invest.

"Investment is not being made in new capacity and eventually, you are going to face a capacity crisis -- just like you saw in California."

Some companies -- such as Boralex Power and Sithe Energies -- have indicated an interest in building power plants in a restructured power market, although they have yet to begin. Others have not rushed in because the government has twice delayed the opening of the $10-billion market, causing uncertainty.

The only utility to build a major private-sector plant in the province is Calgary's TransAlta Corp., with a 650-megawatt operation in Sarnia that's expected to begin operating shortly. Meanwhile, OPG and ATCO Power Ltd. announced yesterday they have raised more than $403-million in debt financing to build a previously announced 580-megawatt plant near Windsor.

This lack of new capacity, as well as the failure to bring the Pickering nuclear operation back onstream, has put upward pressure on Ontario's electricity prices, forcing the province to import hydro to meet demand.

Mr. Marshall told a Bay Street crowd of about 150 people that "What deregulation advocates sometimes ignore -- or fail to fully appreciate -- is new capacity will not be built in advance if no one is prepared to pay for it and can't be constructed quickly when required."

Mr. Marshall -- whose St. John's, Nfld., company provides distribution or generation to more than 350,000 electricity customers in Canada, the United States, Belize and Cayman Islands -- said the initial growing pains Ontario is experiencing are common in electricity restructuring.

"Contrary to what many people in this province might think, the difficulties that have occurred here are not unique," he said. " Indeed, I would offer that it represents something closer to the classical model of privatization confused as restructuring. Not a lot of progress has been made in restructuring Ontario -- the changes have been more form than substance."

Even though there are flaws in the Ontario market, Mr. Marshall said he will look at investment opportunities in the province -- either buying a local distributor or a small hydroelectric generator.

"We are a long-term player and we have been in this business for 115 years and we know it takes a long time for things to change and get it right. So we want to be in here. Things will eventually change in Ontario."

Moss Landing Options

San Jose Mercury News – by Ken McLaughlin - October 5, 2002

In a major victory for environmentalists concerned with the possible degradation of the Elkhorn Slough, a Monterey County judge has ruled that more expensive cooling methods must be studied for Duke Energy's huge power plant at Moss Landing.

Superior Court Judge Robert O'Farrell's decision won't interrupt the flow of 2,550 megawatts of power -- about 5 percent of California's total electricity use on a hot summer day. But the decision, released Thursday, will force the Regional Water Quality Control Board to review its permit to make sure that the ``best technology available'' is being used to protect marine life, as required by the U.S. Clean Water Act.

``It's a clear victory that says that the water board messed up,'' said Deborah Sivas, director of the Earthjustice Environmental Law Clinic at Stanford University. ``It could eventually invalidate the permit.'' Officials at the board could not be reached for comment late Thursday.

The law clinic represents a group of environmentalists called Voices of the Wetlands, who had filed suit against the board for issuing a permit two years ago. Duke Energy, which bought the plant from Pacific Gas & Electric Co. in 1998, was also named in the suit.

The modernized plant -- which opened several months ago and became the largest non-nuclear power plant in California -- is not only more than 1,000 megawatts bigger than the plant PG&E operated there, it is 85 percent cleaner and 30 percent more efficient, Duke officials have argued.

They say it uses half as much cooling water per megawatt-hour, lessening its effect on the adjacent Monterey Bay National Marine Sanctuary.

Duke Energy officials said late Thursday that they had not decided whether to appeal the decision. ``At this point we just don't know,'' said Patrick Mullen, a spokesman for Duke.

But Mullen said the judge's decision simply ``prolongs the process.''

``The state needs to invest in and modernize older power plants and that's exactly what we've been doing,'' Mullen said. ``We've complied fully with the process.''

The dispute arises from the addition of two 530-megawatt, natural-gas-fired generating units. The lawsuit was over the fact that Duke decided to draw 1.2 billion gallons of water a day from the bay to cool its power plant rather than use a ``closed-cycle'' system.

That means the plant is sucking in and killing plankton, marine eggs and other parts of the marine food chain in the slough, Voices of the Wetlands argues. The group also contends that there are alternative cooling systems widely used by other power plants that use much less or no seawater.

At a Sept. 5 hearing, Voices of the Wetlands argued that Duke made no effort to implement the ``best available technology.'' Duke disputes the claim, saying that the closed-cycle alternative wasn't necessary. Officials cited biological surveys conducted in the 1980s.

The studies were used by the regional board staff in 1995 to find that there was no significant impact on fish and invertebrates. Duke produced cost estimates that it claimed made the alternative cooling technologies ``wholly disproportionate'' to any environmental benefits.

John Oliver, adjunct professor of oceanography at Moss Landing Marine Laboratories, said the impact of Duke's water extraction on the Elkhorn Slough is insignificant.

``All the science backs this up,'' he said. ``There's a much more important impact from increased tidal erosion.''

But O'Farrell ruled that the ``evidence is at best meager, and at worst, speculative and based on historical conjecture.''

The judge called the Elkhorn Slough ecosystem ``a threatened, biologically rich wetland system of exceptional value which has been subjected to 50 years of entrainment by the Moss Landing Plant and will be impacted for the life of the facility.”

Utility Union Has Little Faith in FERC

Dow Jones – by Campion Walsh – October 3, 2002

(9/29/02) - WASHINGTON - California Public Utilities Commission President Loretta Lynch joined utility union leaders and consumer advocates Sunday in asking Congress to drop electricity restructuring from its energy bill.

Power-market restructuring measures in the Senate and House versions of the bill would unwisely give more authority to the Federal Energy Regulatory Commission, which has failed to prevent or remedy price manipulation, Lynch said.

"If we're going to just continue to pass laws that FERC either can't or won't enforce, what good is that at the end of the day to California?," she told Dow Jones Newswires on the sidelines of a conference on electricity regulation.

State authorities shouldn't have to beg federal regulators to restrain manipulative interstate energy suppliers, as California did before, during and after its November 2000-May 2001 energy crisis, she said.

California authorities failed to convince two successive FERC chairmen, James Hoecker and Curtis Hebert, to crack down on profiteers, and under current FERC Chairman Pat Wood III, who took office in June 2001, redress for past manipulation has been slow, Lynch said.

A FERC judge's finding last week that El Paso Corp. had withheld natural gas pipeline capacity to California during the crisis was past due, and it could take another for the state to be compensated, she said.

The CPUC president called Sunday on audience of officials from the Utility Workers Union of America and advocacy groups such as Citizen Power and the Consumer Federation of America to lobby against more powers for FERC in the energy bill Congressional negotiators are trying to finish this week.

Participants in the weekend conference said House proposals to criminalize manipulative trading practices and strengthen FERC's ability to impose penalties miss the point.

"We don't think a game of cops and robbers is the way to regulate this industry," said Mark Cooper, research director at the Consumer Federation.

Cooper echoed state regulators' concerns that new federal authorities in the energy bill and FERC's standard market design proposal would run roughshod over states' rights. In an example of one contentious states' rights issue, Lynch and CPUC Commissioner Carl Wood took exception to a House proposal for new federal " eminent domain" authority to site power lines.

Lynch also addressed power generators' criticism of a CPUC report earlier this month that found the state's 2000-01 electricity crisis would have been avoided if power plants had operated at full available capacity.

The commission president emphasized the report didn't assign blame to power- generating companies or the California Independent System Operator, which was responsible for dispatching power supplies.

But power-supplying companies bear responsibility if they didn't bid available power into the market, Lynch said. "If they didn't even bid, it's much more difficult for the ISO to find it," she said.

"From that perspective, it's not the right question to say `Was it the ISO's fault or was it the generators' fault?'," she said. "The fact remains the plants did not produce what they could have produced."

The CPUC president said the commission continues to work on another report addressing responsibility for available capacity going unused, but declined to say when it would be finished.

Humbled Energy Sector Sends Execs Packing

Reuters – by Carolyn Koo - October 2, 2002

NEW YORK - Another one bites the dust. On Tuesday, Aquila Inc.'s Robert Green became the latest casualty in the growing exodus of top executives from an energy sector that has suffered through nosediving stock prices and sudden shifts in company strategies.

Green joins a series of top energy executives -- including Dynegy Inc.'s Chuck Watson, AES Corp.'s Dennis Bakke, and CMS Energy Corp.'s William McCormick -- undone by a credit crunch prompted by Enron Corp.'s collapse and an industrywide scandal over potentially fabricated power trades.

Former high fliers like Aquila, AES, Dynegy, Mirant Corp. and Williams Cos. Inc. are trading near all-time lows and desperately trying to remain viable by raising cash anyway they can, including selling off some valuable power plant and pipeline assets.

In the case of Aquila, they're even eschewing the trading and marketing business that was viewed as the engine behind earnings growth as recently as a year ago but is now suffering from lackluster volumes and a reduction in counterparties.

These revamped companies now require a different kind of executive to run the show.

"The executive who was helping to drive growth, especially as a merchant power and gas business was evolving, has quite a different skill set from the kind of executive you need today -- getting the balance sheet right, restoring credibility," said Ron Lumbra of recruitment firm Russell Reynolds.

"The industry looks so different today that the kind of executive leadership one needs is different from two or three years ago."


Aquila has also cut jobs and backed out of a $415 million acquisition. Meanwhile, Mirant has raised about $1.8 billion from asset sales since the beginning of this year.

"Companies are closing foreign offices. They're getting out of ancillary products. It's very much a stick-to-the-knitting, hunker-down mentality," Lumbra said.

"That's got to emanate from the top, so you need leadership that not only believes in it but thrives in that kind of environment."

Stock prices mired in the single digits also increase the cries for CEO changes.

Dynegy's stock price is down 96 percent year-to-date, while AES has posted an 85 percent drop, Aquila has posted an 84 percent drop and CMS has lost 66 percent.

"When a company stock price plummets, there are people who are going to have to take responsibility," said Phil Gaddis, the head of the national energy practice at executive recruitment firm AccountPros.

More executives could yet make their way to the exits, say investors and recruiters. One candidate is El Paso Corp.'s Chairman and Chief Executive William Wise.

The company, whose stock is down 80 percent on the year, was hard hit last week after a judge found that it had squeezed natural gas prices during California's power crisis. The ruling, which could lead to millions or even billions of dollars in fines, sent the stock spiraling downwards.

"I would not be surprised if there's pressure on El Paso with the recent decision and the stock price reaction to it," said James Elliott, a portfolio manager with Dominick & Dominick Advisors.


The exorbitant severance packages that many executives receive for a job not always well done have become a particularly sore spot for investors -- as well as the employees at the companies who get laid off and don't even get medical insurance, never mind severance.

Aquila's Green is getting a severance package valued at $7.6 million, which is three times his base salary plus average bonuses paid over the past three years.

"It troubles me that severances are what they are for senior-level executives," said Gaddis.

"They've gotten out of hand, especially when you've got a work force, in the case of bankrupt companies, that are taking little or no severance."

Certifying Outage Causes May be Required

Reuters – by Chris Baltimore - October 2, 2002

WASHINGTON, Oct 1 (Reuters) - The Federal Energy Regulatory Commission said Tuesday it may require owners of U.S. power plants to certify that plant outages leading to higher power prices are due to mechanical or other legitimate problems.

The California Public Utilities Commission recently blamed five power plant owners for helping to drive prices higher by scheduling unneeded maintenance work during the state's power crisis of 2000-01.

A report the California commission released on Sept. 17 said the state could have been spared blackouts at the height of the energy crisis if five big generating companies had kept their plants running at full capacity.

William Hederman, director of FERC's new office of market oversight, told an energy conference that the agency was considering a new requirement to have power company executives take "personal responsibility" and certify that an outage was for a legitimate reason.

"We would seek some sort of certification" from a plant owner attesting that a plant was temporarily shut or scaled back for a "technical reason," Hederman said in one of his first public appearances.

The proposal has not yet been completed, and might be included in the commission's wide-sweeping standard market design rules unveiled earlier this year, Hederman said.

Such a FERC action would mirror a similar approach launched by the Securities and Exchange Commission in August.

As part of a set of business law reforms sparked by the accounting scandal of bankrupt Enron Corp., Congress ordered the SEC to require the top executives of more than 900 large U.S. companies to certify the accuracy and completeness of financial results.

Power traders were surprised by the FERC announcement.

"It might not be a bad thing. I would rather have FERC in there (checking outages) because at least there is some independence," a trader with one merchant generator said, noting the California Independent System Operator is governed by appointees of California Gov. Gray Davis.

FERC has demanded that the California ISO appoint new, independent, board members following complaints from suppliers. A state agency, the California Department of Water Resources, is currently the main buyer of power.

"The FERC must really be convinced that there was some gaming going on," one Southeast wholesale electricity trader said. "It will depend on how punitive the damages are as to whether it will have any impact."

"Based on an hour-by-hour and plant-by-plant analysis of this data, this report concludes that most of California's power blackouts and service interruptions need not have occurred," it said.

Energy firms, including Mirant Corp and Duke Energy, reacted angrily to the California report and denied any wrongdoing. The companies said the report ignored the role of the California ISO in directing electricity from power plants.

The companies said that they did not act improperly.

In Broad Daylight

New York Times – by Paul Krugman – September 28, 2002

You are one of only a handful of major players selling wholesale electricity. Surely the thought has to occur to you: what would happen to prices if one of my plants just happened to go off line? And when companies act on that thought . . . well, you get the picture."

I wrote that in March 2001, when the California electricity crisis was at its height. Even then the experts I talked to — economists who followed the situation closely, and kept an open mind — believed that energy companies were deliberately creating shortages. But only in the last few weeks, with a series of damning reports and judgments, has conventional wisdom grudgingly accepted the obvious.

And that's the real mystery of the California crisis: how could a $30 billion robbery take place in broad daylight?

True, it was always hard to pin down specific acts of market manipulation. Stanford's Frank Wolak likens energy companies to an employee who keeps calling in sick: the pattern is clear, but unless you catch him faking an ailment, it's hard to prove that he is malingering.

But the evidence is starting to pile up. First there were those Enron memos. Then the California Public Utilities Commission determined that most of the blackouts that afflicted California between November 2000 and May 2001 took place not because generating capacity was inadequate, but because the major power companies kept much of their capacity off line. Most recently, a judge for the Federal Energy Regulatory Commission has ruled that El Paso Corporation used its control over a key pipeline to create an artificial natural gas shortage.

But why did energy companies think they could get away with it?

One answer might be that the apparent malefactors are very big contributors to the Republican Party. Some analysts have suggested that energy companies felt free to manipulate markets because they believed they had bought protection from federal regulation — the conspiracy-minded point out that severe power shortages began just after the 2000 election, and ended when Democrats gained control of the Senate.

Federal regulators certainly seemed determined to see and hear no evil, and above all not to reveal evidence of evil to state officials. A previous FERC ruling on El Paso was, in the view of many observers, a whitewash. In another case, AES/Williams was accused of shutting down generating units, forcing the power system to buy power at vastly higher prices from other units of the same company. In April 2001, FERC and Williams reached a settlement in which the company repaid the extra profits, but paid no penalty — and FERC sealed the evidence. Last week CBS News reported that "federal regulators have power control room audiotapes that prove traders from Williams Energy called plant operators and told them to turn off the juice. The government sealed the tapes in a secret settlement" — the same settlement? — "and still refuses to release them."

If that's true, FERC caught at least one power company red-handed, in the middle of the crisis, at a time when state officials were begging the agency to take action — and then suppressed the evidence. Yet this story has received little national play.

For some reason it has never been cool to talk about what was really happening in California. When the crisis was in full swing, most commentators clung to a story line that blamed meddlesome bureaucrats, not profiteering corporations. When the crisis came to an end, it suddenly became old news.

Maybe our national faith in free markets is so strong that people just don't want to talk about a case in which markets went spectacularly bad. But I'm still puzzled by the lack of attention, not just to the disaster, but to hints of a cover-up. After all, this was the most spectacular abuse of market power since the days of the robber barons — and the feds did nothing to stop it.

And if FERC was strangely ineffective during the California crisis, what can we expect from other agencies? Across the government, from the Interior Department and the Forest Service to the Environmental Protection Agency, former lobbyists for the regulated industries now hold key positions — and they show little inclination to make trouble for their once and future employers.

So we ignore California's experience at our peril. It's all too likely to be the shape of things to come.

Off Come the Deregulation Gloves

Dow Jones – by M. Golden, J. Berthold – September 28, 2002

(9/20/02) - NEW YORK - Well, at least the gloves are off.

Thanks to a most serious accusation by the California Public Utilities Commission on Tuesday, we should find out over the next couple of weeks whether independent power producers indeed created the California electricity crisis, or whether the causes had their roots in supply and demand, despite two years of accusations from the administration of Gov. Gray Davis.

The course of electricity deregulation in the U.S. ought to be forever influenced by the revelation.

Commission President Loretta Lynch on Tuesday issued the results of an investigation claiming generators caused the vast majority of the state's power cuts during the 2000-2001 energy crisis.

Even assuming all plant breakdowns were legitimate, the CPUC report says, the power companies idled healthy generators as hundreds of thousands of homes went without power, businesses shut down and cars crashed into each other because street lights stopped working. They did so simply to "drive up prices," CPUC General Council Gary Cohen told a special investigation committee of the state Senate.

That's the nastiest accusation you could level at a power company, but the commission said it has the data to prove it. If so, any new attempts at deregulation must assume that energy companies are willing to risk public safety to make an extra buck, which may lead to the conclusion that electricity should be re-regulated.

"This is a positive development," Stanford University economist Frank Wolak said. Wolak also chairs the market surveillance committee of the California Independent System Operator, which runs the state's high-voltage grid and real-time power market.

Wolak figures the debate has moved beyond endless name calling. Now, the CPUC is saying, here's what we measure that they did. Generators must show that the commission's numbers are in error or explain what was going on. And, Wolak said, the Federal Energy Regulatory Commission ought to figure out who is right.

Do Or Die Time

In general, the power companies involved said the accusation is untrue, that they generated as much power as they could. But generators said that they need time to refute the specific accusations in the report, the results of which were reported in summary form.

Lynch and her staff haven't shared all the data behind the report with the generators or anybody else. Duke Energy Corp. (DUK) and Xcel Energy Inc. (XEL) unit NRG Energy, however, quickly checked the few dates and hours the report did give on their power output and found that the commission blatantly misrepresented the facts. The two companies said they have the data to prove this, and a spokesman for Duke called the commission's actions "despicable."

Wolak's own previous analyses of confidential ISO data leads him to expect that the commission's report will largely be proven right. He thinks the generators' profits rose due to blackouts and that they did what all companies do - maximize profits.

There are, however, reasons to think the commission's accusation makes little sense. Even if generators tried to keep prices high on normal days by using aggressive bidding strategies, prices on blackout days had usually already risen to the cap set by regulators. If prices couldn't go any higher, what's the point in holding back sales? All that does is surrender market share.

"Why would a producer withhold production for the benefit of his competitors?" asked Gary Ackerman, head of the Western Power Trading Forum, an industry association.

If the commission is right, then thousands of power plant employees have kept quiet while their neighbors suffered. That sort of conspiracy is hard to imagine. The plant employees were longtime utility workers who had only started working for the independent power producers after the utilities were forced to sell off their plants. How much blind loyalty had they developed to the new bosses? Plus, most plant employees belong to unions, so they would have been protected if they chose to blow the whistle on their new employers.

Shortage Of Screaming

If the commission is right, then the Independent System Operator also kept relatively quiet at the time. The report is based largely on data collected by the ISO, which can see exactly how much power each plant is producing. It knows which units are off line for maintenance.

ISO employees worked 16-hour days to stave off blackouts. For a system operator, ordering blackouts is a crushing admission of failure. If ISO operators were forced to do so because generators weren't producing everything they could, they would have been screaming it from the rooftops each and every time it happened.

During the worst of the crisis, the ISO operations staff held press briefings almost every day on the system's status, but they didn't say that blackouts would have been avoided had generators produced all available power.

On Thursday, Jim Detmers, the ISO's head of system operations, said in an interview that the generators' accounts of why available capacity wasn't used were plausible, at least in some cases. Some of the unused available power may, in fact, have been in the ISO's control. Even during blackouts, the ISO needed power held in reserve to ensure that the system wouldn't collapse entirely in the face of an unexpected plant or transmission-line outage.

"If you take (reserves) down below 1,000 megawatts and lose any given generator unit, it could subject the whole western grid to blackouts," Detmers said.

The ISO hasn't confirmed or denied generators' accounts of what happened during specific hours on specific days, but is examining its records, Detmers said.

When asked if the commission's general conclusion was fair, Detmers wasn't sure.

"I don't know," Detmers said. "We would gladly take a look at their information to see. Hopefully, we can get full information from the CPUC. (The generators') answers aren't necessarily complete, either."

Regulators Politicized

The ISO's attorneys did get the U.S. Department of Energy and a federal court to order generators to offer all their available capacity, because the ISO thought the generators were ignoring dispatch orders. But, after the crisis began, Gov. Davis got the leadership of the ISO and the CPUC fully under his control, and they have come to serve his political agenda, rather than act as reasonably fair regulators.

The average Californian, at least, seems to think so. In a man-on-the-street article, the Orange County Register asked people if they were angry that energy companies caused unnecessary blackouts. Most of those quoted couched their responses with phrases like, "If it's true."

Energy industry representative Ackerman called the report "a drive-by shooting of the energy companies," because the commission didn't release the data to back up the findings. Commission President Lynch didn't show the final report to her fellow commissioners until just before releasing it and didn't ask them to approve it.

On Tuesday, the generating companies had to ask the media for copies of the report so that they could respond. Appendices to the report, which supposedly provide company-specific detail, have yet to be released.

"If you have information that is damning, that puts your enemy in a hole, you show it," Ackerman said. "They're not showing anything but the results. Let people look at it, subject it to verification, and if it stands the test of time, that will bear out."

In fact, two of the companies blasted by the commission get a nearly clean bill of health in the report, even though Lynch and her staff didn't say so publicly. Mirant Corp. (MIR) looks relatively saint-like when it comes to generating all available power, and Williams Cos. (WMB) looks pretty good, too. Almost all of the power those companies didn't generate according to examples in the report was due to outages.

But, because the investigation clearly had an agenda beyond finding out the truth, Lynch's presentation folded unit outages back in when she talked about these two companies, even though the findings claimed to be about capacity that was available but unused.

The report does cite specific examples of Duke, Reliant Resources (RRI), and the partnership of NRG Energy and Dynegy Inc. (DYN) not generating available electricity at times when power was cut for thousands of customers.

Those companies must prove to some reasonable judge, whether the FERC or the U.S. Congress, that the commission is wrong. If the commission releases the rest of its data, the generators will have to respond to that, too.

People at the companies said this is exactly what they plan to do. They plan to violate confidentiality agreements with the commission. They plan to take off the gloves

We'll see.

Deregulation - Page 22 - 2002