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Deregulation - Page 27 - 2002
Enron Utility Admits to InfractionsBloomberg Business News – November 24, 2002
WASHINGTON -- Enron Corp. used its Portland General Electric utility in Oregon to make bogus orders for power in California that helped run up costs for consumers and violated market rules, a federal regulator has concluded.
Portland General referred to the federal report in a filing Friday with the Securities and Exchange Commission.
The utility "does not contest" that technical violations occurred when it failed to make transactions with Enron Power Marketing public, the filing said. The utility "disagrees" with the staff's conclusions that the transactions hurt markets and were improper, the filing said.
According to a staff report filed last week with the Federal Energy Regulatory Commission, Enron and Portland General traders misled the operator of California's electricity market and rival companies into believing power lines would be overloaded so that Enron would be paid for relieving the congestion.
The report cites transactions in April and June 2000, before power prices in California surged tenfold and the state's largest utilities became insolvent. The commission has been investigating allegations of market manipulation by Enron after the now-bankrupt energy trader disclosed some of its methods.
"Traders described the trades as `goofy' and `screwy,' while transmission schedulers used terms such as `bogus' and `bizarre,' " the FERC report said, citing telephone transcripts.
In another development, court papers in New York indicate that J.P. Morgan Chase & Co. is trying to bar evidence of internal communications describing trades with Enron as "disguised loans" at a trial aimed at forcing insurers to cover $965 million in losses on the transactions.
The 11 insurers, who backed the value of gas trades among Enron, J.P. Morgan and offshore entity Mahonia Ltd., refused to honor the claim and argued the bank had used the trades as camouflage for lending Enron money. Houston-based Enron, once the world's largest energy trader, sought bankruptcy protection in December.
Keeping the internal documents out of court may be crucial to J.P. Morgan's case, some lawyers say. The $965 million in losses would wipe out almost a third of the $3.1 billion in profit before taxes the bank earned in the first nine months of this year.
The insurers have until Monday to respond to the request before U.S. District Judge Jed Rakoff, who will preside over a trial in New York that begins Dec. 2, the anniversary of Enron's bankruptcy filing.
California Files Lawsuit on Gas PricesAssociated Press – November 24, 2002
LOS ANGELES, Nov. 22 (AP) — The lieutenant governor of California filed a lawsuit this week against dozens of natural gas companies and two trade journals, contending they conspired to publish false information that led to price spikes.
Lt. Gov. Cruz M. Bustamante filed the 18-page complaint Wednesday in Los Angeles Superior Court.
Earlier this week, a state Senate committee heard testimony from a former official for Gas Daily, an industry trade journal, that gas traders would submit false information to manipulate prices.
The official, Michele Markey, was granted legal immunity in return for her testimony and for turning over documents about the natural gas indexes. The indexes are often used as a benchmark for natural gas or electricity contracts.
The lawsuit by Mr. Bustamante seeks an undisclosed sum on behalf of California ratepayers to cover increased energy costs, fines and punitive damages. It names the McGraw-Hill Companies, which owns Platts, the publisher of Gas Daily and Inside FERC Gas Market Reports; and dozens of companies and parent corporations, from the Southern California Gas Company to Sempra, Reliant and Duke Energy.
Publishers "knew that Gas Daily and Inside FERC Gas Market Reports were indexes relied upon in California to determine the price of natural gas and electric rates," a brief filed in the lawsuit says.
"Despite this knowledge, these defendants conspired with the other defendants," the brief says, adding that they knowingly reported false data and "employed absolutely no means to verify information."
At the legislative hearing, Ms. Markey said companies often exaggerated the volume or prices of gas they sold.
A Platts spokesman, Brian Jones, said Mr. Bustamante's lawsuit was baseless. The president of Platts, Harry Sachinis, has questioned parts of Ms. Markey's testimony.
A spokeswoman for Southern California Gas, Denise King, denied the allegations in the lawsuit, saying "any responsible inquiry would have established that we did not engage in any false reporting."
In a filing with the Federal Energy Regulatory Commission, the company said its reports to the trade press were accurate, Ms. King said.
Duke Hit with New LawsuitReuters – November 22, 2002
SAN FRANCISCO, Nov 21 (Reuters) - California Lt. Gov. Cruz Bustamante has filed a class-action lawsuit alleging that publisher McGraw-Hill Cos. and several energy companies worked together to jack up energy prices in the state.
The suit, filed late Wednesday in Los Angeles Superior Court on behalf of California utility customers, accused the companies of feeding false prices and trade volumes to two energy industry newsletters published by the Platts division of McGraw-Hill -- Gas Daily and Inside FERC Gas Market Reports.
"The defendants...engaged in a surreptitious course of conduct intended to artificially inflate the market price of natural gas within the state, and, in turn, affect the market price of electricity in California," the lawsuit said.
The class action lawsuit seeks unspecified damages.
California is demanding about $9 billion from energy companies to cover what the state claims it was overcharged for electricity at the height its energy crisis.
The 2000-2001 crisis stemmed from a combination of market manipulation, a severe energy shortage and badly flawed legislation aimed at deregulating the state's power market.
Reporters at the newsletters canvass energy traders daily, gathering prices and trading volumes to produce trade-weighted indices that the energy industry in turn uses to value millions of dollars of gas contracts.
About half of California's electricity production is fueled by natural gas.
In addition to McGraw-Hill, among the defendants named were Sempra Energy, Southern California Gas Co., El Paso Corp., Williams Cos., Mirant, Reliant Resources, Duke Energy, Dynegy, American Electric Power and Aquila Inc.
"The defendant publishers of Gas Daily and Inside FERC Gas Market Reports, charged with the duty to provide impartial reporting of natural gas prices, sloughed off all standards of journalistic integrity," the lawsuit said.
The lawsuit said "These defendants conspired with the other defendants...knowingly reporting false information, and employed absolutely no means to verify information given them by the market participant defendants."
A spokesman for McGraw-Hill said, "The claims made are baseless and the lawsuit is completely without legal and factual merit. We will aggressively defend ourselves and we expect to prevail."
Earlier this week, a former employee for Platts, under immunity from prosecution, testified at a California state Senate committee hearing that traders regularly inflated the prices and volumes of gas trades reported to industry publications.
The ex-employee also told state lawmakers that Platts had scrapped her effort to bring in outside auditors to examine Enron Corp's trading operation, suggesting that was because the now-bankrupt energy trader was a customer.
But Platts, which acquired Gas Daily in August 2001, disputed that account as misleading and inaccurate, saying its policy was to exclude questionable deals from its price valuations.
Platts President Harry Sachinis said in a statement that Platts had decided not to audit Enron's defunct online trading system because it had determined that an index based on one company's trades "would be unreliable and subject to manipulation."
CA Gets To Argue For RefundsDow Jones Newswires – by Jessica Berthold - November 22, 2002
(11/21/02) - LOS ANGELES -(Dow Jones)- California will get the chance to try to prove it deserves higher refunds from power suppliers in light of recent indications that energy firms may have manipulated power prices in the state during its 2000-01 energy crisis.
The Federal Energy Regulatory Commission Wednesday said California has until Feb. 28 to present new evidence of market manipulation, which could be used to form FERC's decision on issuing refunds for alleged power overcharges, said FERC spokesman Kevin Cadden.
Peter Navarro, economics professor for the University of California at Irvine said the move is good news for the state.
"There's a significant probability of a higher refund because we have learned a lot lately about market manipulation and will probably continue to learn more in the next 100 days," Navarro said.
The refund case was launched well before disclosures began to mount that energy firms may have engaged in gaming, inaccurate price reporting and collusion to withhold available power. FERC has already concluded that prices from October 2000-June 2001 were unjust and unreasonable, but hasn't assigned guilt in the matter.
FERC is in the process of calculating refunds based on comparing actual prices during the refund period with an estimate of what reasonable prices would have been. Prior to the Wednesday order, market manipulation was considered by FERC as a separate issue from refunds.
An industry group spokesman said he doubted that the market manipulation evidence California will present will have much impact on the refund amount.
"This information the state is going to try to introduce is nothing new, and it's not going to change the outcome. I just don't see this as having much effect," said Gary Ackerman, spokesman for the Western Power Trading Forum.
The order could, however, prolong the refund case, which would extend an atmosphere of uncertainty in the embattled energy sector, an analyst said.
"The timelines proposed by California suggest substantial delay to the eventual resolution of these lingering issues, an outcome we would view as negative for the companies involved," wrote Christine Tezak, an analyst for Schwab Capital Markets, in a research note shortly before the FERC order was issued.
Companies involved in the refund case include Allegheny Energy Inc., Dynegy Inc., Duke Energy Corp., Mirant Corp., Reliant Resource Inc. , Royal Dutch/Shell Group unit Coral Power, Sempra and Williams Companies .
FERC said the Wednesday order wouldn't delay calculation of refund amounts and that it intended to wrap up the issue "expeditiously".
Collusion As Key To Greater Refunds
The state's ability to present evidence that companies worked together to limit power supplies is seen by some as the key to substantially boosting the refund total. California originally put that total at $8.9 billion, but a FERC judge has said it will likely come in around $1 billion.
Market manipulation in the form of games like creating false congestion on power lines doesn't by itself account for much of what the state paid for power during the West's energy crisis, and thus isn't likely to bump up the refund amount significantly, said Severin Borenstein, director of the University of California Energy Institute at Berkeley.
"Market manipulation is on the edges, but the big money is in the exercise of market power," Borenstein said, referring to a company's ability to use its market share to influence prices.
Evidence like recently published phone conversations between Williams Companies and AES Corp. that suggest the companies worked together to withhold generation would be more likely to affect the refund amount than a former Enron Corp. trader's recent confession to wire fraud, Borenstein said.
"The ability to open the Enron stuff and put that in the record is important, and relevant in that it shows the firms did whatever they could to reap profits, but it amounts to tens of millions of dollars," Borenstein said.
Other important evidence includes recent disclosures that employees of five companies misreported natural gas prices to trade publications, Navarro said. Those companies are American Electric Power Co. , Dynegy, CMS Energy Corp., El Paso Corp. and Williams.
The prices were used by publications to compile indexes to which billions of dollars in contracts are pegged. Natural gas and electricity prices are intricately related in California, as much of the state's generation runs on natural gas. If gas indexes were inflated, then power-producers' costs were lower than thought, meaning the level of overcharges could be higher.
"Market manipulation didn't happen in a vacuum; it was facilitated by manipulation of the natural gas market," Navarro said.
California Gov. Gray Davis only offered faint praise to Wednesday's FERC order, noting that it sprang from a directive by the U.S. Ninth Circuit Court of Appeals.
"It's too bad we have to go to court to get FERC to do the right thing. At least the Ninth Circuit understands what FERC still doesn't seem to: the electricity market was manipulated and California is still owed billions," Davis said in a statement.
Trading Rides Into The SunsetForbes – by Dan Ackman – November 22, 2002
(11/21/02) - NEW YORK - The energy-trading business is leaving town--literally--but not before receiving a few swift kicks on the way out.
UBS Warburg said yesterday it would close its trading operations in Houston--a business it acquired from Enron--and consolidate with a much smaller staff in its Stamford, Conn., headquarters. Meanwhile, Oscar Wyatt, an energy mogul, added fresh charges to his attacks on El Paso, accusing it of engaging in "round-trip" trades, a charge the company has steadfastly denied.
Back in the real world, energy and natural-gas prices continue to fall even as world-beating energy traders pack up their desks. Commercial natural-gas prices in June were down 19% from a year earlier, according to the U.S. Energy Information Administration, even as the energy-trading market has shriveled. Electricity prices have been stable.
Wyatt, the former chairman of Coastal, which was sold to El Paso in 2000, is already lead plaintiff in a major shareholder class action against El Paso. His latest filing provides six examples of alleged "wash" trades taken from El Paso trading records. Five were with Reliant Resources and Duke Energy. Both of these companies have admitted engaging in wash trades. El Paso has insisted it never did likewise, but it has not commented on Wyatt's charges specifically.
The company is also in the midst of a major legal battle concerning its role in the California energy crisis. It has already been found guilty by a Federal Energy Regulatory Commission (FERC) administrative law judge of withholding power from the Golden State, a finding that the company insists is wrong. Arguments about what penalty the company will pay are scheduled for early December.
"Round-trip" or "wash" trades are prearranged simultaneous trades entered into for the purpose of artificially inflating sales revenue or manipulating prices. In El Paso's case, the suit claims the trades had the effect of inflating El Paso's revenue by $800 million between September 2001 and May 2002.
Whatever the effect of round-trip trades on energy company sales, the impact was minimal compared to the widely followed practice in the energy-trading industry of accounting for energy trades on a gross basis rather than a net basis. This practice--which El Paso concedes it engaged in along with Enron and others--allowed it to book the total value of energy trades as sales to the company, rather than the spread between the buy price and the sell price or the trading commission--as would be done by trading companies buying and selling stocks or bonds.
Gross accounting is what allowed El Paso, a company with just over 14,000 employees, to post 2001 sales of $57.5 billion, a figure comparable to Boeing and Home Depot, which have roughly 169,000 and 256,000 employees, respectively. Of course, El Paso CEO William Wise has long been paid as if he was running one of the larger companies in America.
El Paso has already indicated it would exit the energy-trading business. It also said it would "eliminate the use of mark-to-market accounting for certain energy contracts that are not derivatives." Mark-to-market accounting is another controversial practice because it allows a much earlier booking of supposed profits than accounting norms. The company has said that this decision "together with its decision to exit the energy-trading business, will result in an estimated aftertax charge in the fourth quarter of $400 million to $600 million."
But it has not said what effect the end of energy trading would have on revenue, though it would seem to be quite dramatic.
UBS Warburg, for its part, acquired Enron's Internet trading technology in bankruptcy. It agreed to pay Enron a cut of future profits rather than upfront. It has not said if it has earned any such profits.
Enron's trading operations had accounted for more than 90% of its revenue, which it said was just shy of $101 billion in 2000. It achieved such numbers with a staff of less than 1,000--a stunning and near unbelievable $90 million per employee. When UBS took control of the business, it had a staff of 630, but about a quarter of the traders were let go in August. Most of those left will be lost in the move to Connecticut.
Companies Retreat From TradingReuters – November 21, 2002
LONDON, Nov 20 (Reuters) - TXU Europe's slide into administration on Tuesday is the latest U.S. corporate retreat from the European power trading market since Enron's collapse last year.
Energy companies, hit by credit-risk worries and scandals in the United States about sham deals, have been scaling back their power trading across Europe.
TXU has also blamed its financial crisis on a 25 percent slump in UK power prices since new electricity trading arrangements were launched last year.
Britain's largest generator, British Energy, has blamed the slump in power prices for pushing it close to insolvency.
NOV 20, 2002 - TXU Europe asks to be put into administration to protect the company from creditors.
OCT 21, 2002 - TXU Corp agrees to sell UK generation and retail businesses to Powergen for $2.9 billion.
OCT 11, 2002 - U.S. utility AEP bails out of power markets in mainland Europe and Scandinavia after giving a profit warning.
SEPT 26, 2002 - UK government lent British Energy an extra 240 million pounds ($378 million), bringing the total loan to 650 million pounds. The emergeny funding was extended by two months until November 29.
SEPT 20, 2002 - U.S.-owned Duke Energy pulled out of the German and Nordic power trading markets.
SEPT 5, 2002 - The UK's largest generator British Energy asks the government for an emergency loan of 410 million pounds. The company blames its financial crisis on a collapse in UK power prices.
AUG 8, 2002 - Williams announced plans to close its European energy trading headquarters in London which it had opened just a year previously.
AUG 6, 2002 - Aquila Inc announced plans to close down its power trading business
NOV 2001 - Enron's European trading arm goes into administration.
Ex-Trader Testifies to State SenatorsSan Francisco Chronicle – by Mark Martin – November 20, 2002
(11/19/02) - Sacramento -- Under immunity from prosecution, a former energy industry insider told California lawmakers Monday that traders manipulated the published price of natural gas -- a key ingredient in the sky-high power bills that consumers continue to pay.
The whistle-blower described how natural gas traders could inflate the volume and costs of gas trades to journals that compiled and published market information, which regulators then used in setting energy rates.
Gas prices reportedly skyrocketed in 2000 and 2001, pushing up the cost of electricity in California and in turn sending Pacific Gas & Electric into bankruptcy and sticking consumers with record-high rate increases. Natural gas is the main source of fuel for power plants in the state.
Michele Markey, a former gas trader and employee of the trade journal Gas Daily, provided more ammunition for California officials who insist the state's power crisis was more a result of corporate chicanery than electricity shortage.
"No matter where you turn in looking at the energy crisis, whether it be electricity or natural gas, you come to the same theme: fraudulent and manipulative behavior," said state Sen. Joe Dunn, D-Santa Ana, who chairs the legislative committee probing the energy crisis.
Markey, who was in charge of the group responsible for gathering gas prices for Gas Daily, walked the committee through several examples of published natural gas trades that she said were likely falsified. Markey has been subpoenaed to testify in front of two federal agencies probing irregularities in natural gas trading.
Trade journals such as Gas Daily rely on traders to tell them the volumes and prices of the gas they buy and sell, but they rarely check to make sure they're being told the truth, Markey said. That allows companies to provide incomplete or inaccurate data to indexes that are influential in setting prices in gas and electricity markets, she said.
"It was common industry knowledge that exaggeration was acceptable practice, " Markey said.
She pointed out several published sales that she said looked suspicious, including one company's sale of 7 billion cubic feet of natural gas in one morning -- enough to run California for a day.
Companies also could misrepresent the price at which they bought or sold gas, or the volume of a deal, which could have huge impacts on the market, she noted. Underreporting a price by 5 cents per thousand cubic feet of gas could end up changing the overall price in the market by $28 million over a year, she said.
Gas Daily is owned by Platts, a division of McGraw-Hill. The subscriber- supported journal is a state and federally recognized benchmark for gas prices.
A spokesman for Platts said Markey's allegations were off-base.
"Essentially, we haven't found any of our indices to have been manipulated, " Jim Keener said.
Keener said that if buyers and sellers report trades that deviate from a given range, reporters and editors at Gas Daily seek to verify the prices in writing with a company executive instead of relying on the word of a trader.
"If it's not verifiable, we just don't use it," said Keener, who added that the safeguards have become more formal since the energy crisis.
Markey, who quit Gas Daily in March, is the first industry insider to lay out the specifics of how easy it was to manipulate natural gas prices.
Seven energy companies have admitted to federal regulators this year that they participated in wash trades, a practice in which two companies buy and sell the same amount of gas back and forth for the sole purpose of boosting revenue.
SKEPTICISM ON PUBLISHED PRICES
This summer, investigators with the Federal Energy Regulatory Commission concluded in a report that published prices of natural gas costs during the energy crisis might not be a reliable indicator for what power companies actually paid.
Commission staff members recommended that published gas prices not be included in the complicated formula the agency is using to determine whether California is owed refunds. The refund case is still pending at the commission.
Electricity generators were quick to point to the high price of natural gas as a primary reason for the soaring cost of a megawatt in California during the crisis, but some state officials have suggested those gas costs are now in question.
Some of the nation's biggest electricity producers, such as Reliant of Houston and Mirant of Atlanta, also were some of the biggest natural gas traders. Representatives of Reliant and Mirant were unavailable for comment late Monday.
Markey did not provide examples that fingered specific energy companies but noted that she had pushed for Platts to conduct an audit of a division of Enron she suspected of being one of the worst-behaved market participants. That audit was never conducted.
Dunn said he would review documents Markey submitted to his committee this week, and he pledged to turn over many of the materials to Attorney General Bill Lockyer for prosecution. Markey will exempt from prosecution under the deal she cut with the committee Monday to provide testimony.
The senator also said he would look at introducing legislation next year requiring all gas traders to publish accurately the volume and prices at which they make deals.
Energy Firms Accused of DeceptionNew York Times – by David Barboza – November 20, 2002
(11/19/02) - Some of the nation's largest energy traders appear to have reported false data about the price of natural gas to one of the industry's leading publications, according to a researcher who once tracked the data.
The researcher, Michele Markey, the former director of energy research at Gas Daily, a leading trade publication, told California state lawmakers yesterday that she had long suspected that the prices she had received in the last few years were erroneous.
The testimony by Ms. Markey comes shortly after five of the nation's largest energy traders admitted that some traders had submitted false natural gas pricing data to publishers compiling gas indexes.
Federal investigators are trying to determine whether big energy traders submitted false data to manipulate the indexes, which are used to track the natural gas market and to set prices for state utilities and for thousands of energy contracts worth millions of dollars.
Ms. Markey also told a state select committee investigating price manipulation during the California energy crisis that she pushed her publisher in 2001 to audit the trading books of Enron, one of the companies suspected of submitting false data.
"I was trying to show that the emperor's clothes were not there," she said. Gas Daily hired the auditing firm PricewaterhouseCoopers to conduct a review.
But she testified that the effort to audit Enron's online trading operation was scrapped , two weeks after Gas Daily was acquired by Platts, a division of the McGraw-Hill Companies, in August 2001.
Enron was one of Platts's biggest clients, she said. A spokesman for the McGraw-Hill Companies was unavailable for comment late yesterday.
State Senator Joseph Dunn, the California Democrat who has been leading the investigation into the state's energy crisis, said the testimony demonstrated that energy producers had manipulated gas and electric prices.
"No one can legitimately stand up anymore and say anything other than this was wholesale manipulation at every level," he said. "This was an effort to drive up prices by any means necessary."
The Federal Energy Regulatory Commission and the Commodity Futures Trading Commission are investigating whether major energy companies manipulated the markets. Both regulatory agencies have issued subpoenas to Ms. Markey, who left Gas Daily in March 2002.
The energy commission questioned the accuracy of published natural gas prices in a report released last summer.
The American Electric Power Company, the CMS Energy Corporation, Dynegy, the El Paso Corporation and the Williams Companies have each said recently that some traders reported false data. No explanations were given. Some traders have stopped reporting prices to publishers amid a sharp downturn in the profitability of natural gas and power trading operations.
Platts recently announced more stringent price-reporting rules.
Ms. Markey, who was granted immunity by the State Senate select panel investigating price manipulation in the state's wholesale energy market, said that information she had gathered had led her to believe that about 10 energy companies appeared to have falsified reports.
Ms. Markey, who used charts and graphs to back up her assertions, said that utilities often complained about the Gas Daily prices. Suspicious that the prices were often falsified, she said, she often requested more detailed information from energy traders, but the companies usually refused to comply.
New Evidence of Power FraudL. A. Times – by Nancy Rivera Brooks - November 18, 2002
(11/16/02) - New evidence has emerged that AES Corp. and Williams Cos. conspired to squeeze electricity supplies to California in early 2000, drawing an angry response Friday from state officials and bolstering contentions that the enormously expensive energy crisis was at least partly a fraud.
Indications of bogus power plant shutdowns, released Friday by federal regulators, may threaten a settlement unveiled Monday in which the state agreed to drop lawsuits accusing Williams of price gouging during the energy meltdown of 2000-01 in exchange for concessions by Williams on long-term electricity contracts.
The Federal Energy Regulatory Commission released a previously sealed investigation Friday showing Williams employees cutting deals in April and May 2000 with AES employees to shut down one Southern California power plant that AES operated for Williams and prolong a maintenance closure at another.
The FERC investigation found that Williams employee Rhonda Morgan, in two taped telephone conversations, told an AES worker on April 27 that "Williams wanted the outage to run long" at a Long Beach power plant that had closed for repairs two days before.
In a conversation later that day with Eric Pendergraft, identified in the FERC report as a high-ranking AES employee, Morgan said, "I don't wanna do something underhanded, but if there's work you can continue to do ... "
Pendergraft responded: "I understand. You don't have to talk anymore."
AES extended the outage through May 5.
Williams, which has a contract to market the electricity from AES electricity plants in California, earned more than$10 million by selling more expensive electricity from other AES plants to the California Independent System Operator during the outages at the Long Beach and Huntington Beach plants totaling 17 days, FERC investigators found.
AES and Williams settled the inquiry in April 2001, without admitting wrongdoing, after Williams agreed to refund $8 million to Cal-ISO -- $2 million less than the profit Williams made. Cal-ISO runs electricity markets for last-minute power and operates the long-distance transmission grid serving about 75% of the state.
The disclosures give added juice to accusations that energy suppliers worked together to drive up prices in the state's electricity markets, which were created under California's ill-fated venture into power deregulation.
In May, FERC released Enron Corp. documents showing that the energy company used trading tactics to create artificial shortages and boost prices.
Former Enron trader Timothy N. Belden has pleaded guilty to conspiracy to commit wire fraud in connection with the ploys, and the Justice Department and the California attorney general are pursuing separate antitrust investigations against other energy suppliers, including AES of Arlington, Va., and Williams of Tulsa, Okla.
The fresh evidence released Friday presented California officials an opportunity to renew demands that FERC order $9 billion returned to the state for alleged overcharges during the energy crisis.
But a top state official said California is unlikely to gain any ground in that proceeding because the allegations come as part of an investigation that was settled last year and because a recent FERC ruling limited the kinds of evidence that the state can present.
At the very least, the damaging new details gleaned from recorded conversations between Williams and AES employees -- who at times laugh at their "games" that earned Williams a more than tenfold profit on its power -- gave California politicians a chance to claim vindication and accuse FERC of moving too slowly to help the state.
FERC, which acts as a sort of federal utilities commission, was criticized Tuesday in a report by the Democratic staff of the Senate Governmental Affairs Committee, which said the commission failed to devote enough resources to respond aggressively to reports of price gouging or other misdeeds.
"Almost a year and a half ago, when I went public with charts and graphs that showed power plants shut down for maintenance at sometimes four times the normal rate, the energy companies and Vice President [Dick] Cheney scoffed at the implication that the energy supply was being manipulated," Sen. Barbara Boxer (D-Calif.) said.
"Now we know the truth. FERC should immediately order refunds for California. We want our money back from this thievery."
Steve Maviglio, a spokesman for Gov. Gray Davis, called the allegations "very serious" and said they could threaten the settlement with Williams, which the Davis administration had estimated would save the state as much as $1.4 billion in power costs over 10 years.
"We have until Dec. 15 to pull the plug on the settlement ... and we can continue to pursue criminal fraud charges," Maviglio said.
Loretta Lynch, president of the California Public Utilities Commission, said the FERC report lent credence to a recent PUC report that concluded that the state's generators withheld power from the state, causing unnecessary blackouts.
"This shows that FERC, despite all of its promises, is not doing its job," Lynch said. "FERC, even when they catch the energy suppliers in shenanigans, they slap them on the wrist."
Lynch said the new evidence would not aid California's demands for power refunds because FERC ruled Nov. 1 that the state could not present evidence of market manipulation in the proceeding.
A FERC spokesman declined to comment.
Williams and AES denied wrongdoing Friday, and Williams said the state was aware of the FERC findings when it negotiated the settlement announced Monday. That deal requires$417 million in concessions from Williams, including a $147-million cash payment.
Williams, in a statement, acknowledged that some employees engaged in "an inap-propriate conversation" about whether to extend the maintenance period at the Long Beach plant. But both companies said the outages were legitimate and were conducted during the normal spring maintenance period.
Morgan was disciplined and later fired as part of a recent downsizing of the company's troubled trading operation.
Overall system reliability and the prices paid to other market participants were not affected by the outages, Williams said.
The FERC investigation concerned the operation of the AES-owned Alamitos power plant in Long Beach and AES' Huntington Beach plant -- both large facilities containing several smaller plants. Both plants had generation units under contract with Williams to provide electricity to Cal-ISO at $63 a megawatt-hour -- enough power to supply about 750 typical homes for an hour.
The shutdowns allowed Williams to sell power to Cal-ISO from other AES plants at a premium price -- $750 a megawatt-hour, FERC documents show.
The FERC report, which had been under seal, was released Friday in response to a court order sought by the Wall Street Journal, which first reported details of the investigation.
The probe made use of telephone conversations between workers, which are routinely tape-recorded in the energy trading industry.
At Huntington Beach, an unnamed AES worker told a Williams employee that AES wanted to shut down one of its generation units on May 6, 2000, because Cal-ISO was not paying enough for the unit's electricity to cover the air pollution credits that AES would have to buy to run the unit, the documents show.
The request was unusual because the unit in question was required to operate under contract to Cal-ISO to provide a reliable source of electricity.
"The Williams employee laughed, saying, 'That's weird,' " the FERC report said. "The AES employee responded, 'Yeah, They're playing games.' The AES employee added that AES was 'mad because of emission credits, or afraid they're all going to get used up or something.' ... He added that 'it's just some big game they're playing right now.' The Williams and AES personnel laughed throughout the conversation regarding AES' shutdown plan, calling the events 'pretty wild' and 'kinda interesting,' " the report said.
In a later conversation, a Cal-ISO coordinator objected to shutting the unit to conserve pollution credits. In a taped conversation with Morgan, who monitored AES outages for Williams, the Cal-ISO coordinator said: "So take some of that money that you just raped us out of Alamitos 4 and buy some damn credits."
Morgan laughed and said, "Good answer, man," the report said. Morgan later confirmed to the Cal-ISO official that there was nothing wrong with the unit.
Williams subsequently changed its reason for the outage, saying the company needed to dredge mussel shells and other debris that were clogging cooling seawater tunnels that fed the power plant.
The Cal-ISO coordinator refused to accept that reason, saying he had worked at the plant when Southern California Edison owned it and mussel shells had never been a problem because Edison routinely flushed the tunnels with hot water. AES did not take that precaution, the FERC report said.
Williams later changed its explanation again for the outage, saying it was not for maintenance but was instead an unspecified "forced outage," which Cal-ISO accepted.
FERC Releases Embarrassing DocumentsReuters – November 17, 2002
(11/15/02) - WASHINGTON (Reuters) - Employees from two companies may have schemed to drive up electricity prices during California's power crisis of 2000-2001 by lengthening generating unit outages, according to documents released on Friday.
The documents, released by the Federal Energy Regulatory Commission, detailed conversations between employees of Williams Cos. Inc. and its trading partner AES Corp. Tulsa, Oklahoma-based Williams had exclusive rights to sell power generated by two Los Angeles-area power plants operated by Arlington, Virginia-based AES.
Williams employees discussed with their AES counterparts ways to extend maintenance on plants to keep them inoperable longer than necessary, according to FERC documents ordered released by a California judge. The documents include conversations recorded by the companies and turned over to FERC investigators.
In a response issued on Friday, Williams admitted the conversations were "inappropriate," but they "did not result in any inappropriate actions." The firm said its actions were "within the market rules," and the maintenance work was "considered necessary by the plant operator."
AES said it did not act improperly. The firm "never engaged in illegal or improper behavior in this matter" said AES Senior Vice President Ken Woodcock.
The extended outages allowed Williams to sell some of its power into the California grid for $750 per megawatt-hour, documents show. Triple-digit power prices were commonplace during the state's power shortage, but have since fallen with slack demand. Prices in the western market have recently hovered near $30 per mwh.
California's grid operator filed a complaint with the FERC over the incident, and Williams settled the case last year by foregoing $8 million in payments while admitting no fault.
According to information in the documents from California's grid operator, Williams logged $10 million in net operating revenue from payments it received over 17 days in April and May of 2000 while the plants were shut down.
Williams said it did not give AES any financial incentive to extend the outage period.
Earlier this week, Williams struck a deal with the state of California to renegotiate its long-term contract to save the state $1.4 billion.
The documents detail potentially incriminating conversations between Williams unit schedulers and AES staff.
In the first, Rhonda Morgan, cited as a Williams employee, expressed the firm's preference that the Alamitos 4 unit stay down for maintenance.
"It wouldn't hurt Williams' feelings if the outage ran long," Morgan said in one conversation.
In a second conversation with Eric Pendergraft, cited as a "high-ranking AES employee," Morgan said, "It wouldn't hurt, you know, we wouldn't like throw a fit if it took any longer."
"I understand. You don't have to talk anymore," Pendergraft responded, adding the extended outage "might work out."
The unit was off-line from April 24 to May 6 of 2000 for maintenance. In its response, Williams said the grid operator reviewed and approved the outage, and it did not affect the reliability of the state's power.
Williams said it took immediate action and "counseled the employee to prevent similar incidents" after learning of the incident. Morgan is no longer with the company, Williams said.
The FERC documents also detailed an outage at AES' Huntington Beach 2 unit, which was shut down on May 6, 2000.
Williams initially informed the California grid operator on May 5 the unit would enter a forced outage because the unit ran out of credits to produce nitrogen oxides under a pollution reduction program administered by the state of California.
In telephone conversations, Williams and AES employees laughed over the unusual nature of the outages as "pretty wild" and "kinda interesting." An unnamed AES employee said the plan was "just some big game they're playing right now."
"So take some of that money that you just raped us out of ... and buy some damn credits," a grid operator staffer told Williams employee Morgan.
"Good answer, man," Morgan responded.
The grid operator found the pollution credit justification "totally unacceptable," and Williams later cited a buildup of mussel shells in the cooling tunnels of the plant, the documents said.
The grid operator eventually had to accept it as a "forced outage," which allowed Williams to sell power it acquired elsewhere to California for a higher price.
Energy Firms May Have ColludedDow Jones – November 17, 2002
(11/15/02) - On the day that Williams Cos. reported a giant loss related to its energy-trading business, a federal investigative report surfaced that provides fresh indications the Tulsa, Okla., energy company colluded with partner AES Corp. to drive up power prices during the California electricity crisis, Friday's Wall Street Journal reported.
The report, released Thursday by the Federal Energy Regulatory Commission as a result of a public-records lawsuit filed by The Wall Street Journal, contains excerpts of a series of damaging telephone conversations between Williams and AES officials. AES, of Arlington, Va., was running two power plants in the Los Angeles area whose output was exclusively marketed by Williams. Those plants were viewed by the state's electrical-grid operators as crucial to maintaining a reliable flow of electricity in Southern California.
The conversations, recorded by Williams under a routine company policy, took place in April and May of 2000, only a couple of weeks before California's wholesale-electricity prices erupted in a frenzied climb that became the 13- month California energy crisis. According to the FERC document, employees discussed purposely prolonging a maintenance outage at the AES Alamitos plant. The shutdowns enabled Williams to collect $750 per megawatt hour for electricity it supplied to the grid operator from alternative sources. In some cases, this alternative power came from different generating units located within the same plant that was to supply energy from certain other units at an agreed-upon $63 per megawatt hour. That allowed Williams to make an additional $10 million for selling power during a 15-day period.
The report is the latest revelation showing a pattern of manipulation by big energy companies that had flocked to California to take advantage of its deregulated market in the late 1990s. Last month, for example, Enron Corp.'s chief West Coast power trader Timothy Belden pleaded guilty to wire fraud and admitted that he conspired to manipulate California's wholesale-energy market with the aim of making illegal profits for Enron. People familiar with the proceedings said a federal grand jury during the past week has issued subpoenas to a slew of power companies with the aim of determining whether they worked together to rig the market. Williams and AES both received subpoenas.
The investigative report, written by the FERC staff, stemmed from a complaint filed with the commission by the California Independent System Operator, which runs the state's grid. Williams settled the case without admitting wrongdoing by waiving $8 million in payments it was owed by the ISO, on behalf of the state's utilities. The company settled the case only after the FERC threatened to make public the investigative report released Thursday.
Bill Hobbs, president of Williams Energy Marketing & Trading, said Thursday that the company cooperated in the FERC investigation that led to the ISO settlement in the belief that certain documents would be kept confidential.
While Williams and other energy traders reaped huge profits in California and elsewhere in 2000 and 2001, this year is shaping up to be a very different story. Following Enron's collapse in late 2001, the power-trading market contracted and banks balked at lending money to big energy companies with heavy exposure to troubled deregulated markets like California.
Thursday, Williams said it swung to a loss of $294.1 million, or 58 cents a share, for the third quarter, from a profit of $221.3 million, or 44 cents a share, a year ago. The results included an energy-trading loss of $316.6 million, mostly from changes to the value of its energy-trading portfolio.
AES spokeswoman Sandra Ross said her firm regards the case as "ancient history. We have nothing further to add."
Wall Street Journal Staff Reporters Rebecca Smith and Chip Cummins contributed to this report.
Williams May Lose CA DealBloomberg News – November 17, 2002
SACRAMENTO, CALIF.- California may pull out of a settlement with Williams Cos. Over its role in the state’s energy crisis. The company said an employee tried to prolong a shutdown of a power plant to manipulate price.
“This is a serious allegation, and we are reviewing it,” said Steven Maviglio, a spokesman for California Gov. Gary Davis. “We have until Dec. 15 to pull the plug.”
The request for a delay in repairs at AES Corp.’s Alamitors plant was made in April 2000. It was made by Rhonda Morgan, then a manager at Williams, which has an agreement to sell the plant’s power, the company said in a statement. Both companies have received subpoenas in a federal grand jury probe of market abuse.
Williams, the second-biggest U. S. natural-gas pipeline owner, this week agreed to cut prices, pay $150 million and provide the state of California with six generating turbines to settle allegations over price manipulations during California’s energy crisis in 2000 and 2001. State officials weren’t aware of the conversations between Williams and AES when they signed the agreement, Maviglio said.
The settlement will become final Dec. 31 if neither party withdraws be the middle of next month, Maviglio said. The state attorney general’s office will continue to look into allegations of price manipulation, said a spokesmen.