Duke Energy Employee Advocate
Electric Deregulation - April, 2001
The Wall Street Journal - April 30, 2001
Two of the nation's bellwether states for energy deregulation are debating increasingly punitive approaches to prevent electricity generators from charging what the states consider to be excessively high prices.
California, which has had the most extreme problems with prices, has bred a more extreme response: Some Democratic lawmakers and the state's lieutenant governor want to make price-gouging by energy sellers a felony, punishable by hefty fines and possible jail time. New York, which also has been hit by high prices, has a more Scarlet Letter-like approach: financial penalties and public disclosure of generators who exploit the state's constricted energy markets to sell power at prices far exceeding historical levels.
Both states were among the first in the nation to deregulate energy markets and allow independent merchant generators to compete to sell power. But there has been a political backlash in both places as California has sunk deeper into its energy crisis and New York has been hit by price spikes and power shortages.
"Many who designed and supported the transition to competition are at their wits' end in the face of ever-escalating prices," says Richard Levitan, president of Levitan & Associates, a Boston energy-consulting firm.
The more punitive aspects of the two states' proposals also may be a response to the reluctance of the Federal Energy Regulatory Commission to firmly intervene in California with measures to control prices. Federal officials have said such intervention will backfire and discourage energy companies from building power plants.
"In California, it's the frustration of seeing the FERC not act," says Ken Rose, senior economist at the National Regulatory Research Institute at Ohio State University. "In New York, it's more prospective, that the FERC may not act in the future when they need it."
Politicians and regulators are erroneously assuming that higher-than-normal prices represent gouging, when in fact they have legitimate causes, such as production costs and high fuel charges, generators contend. Generators also argue that punitive measures could exacerbate power shortages by prompting energy producers to avoid selling in markets serving the two states.
The California proposal -- backed by Lt. Gov. Cruz Bustamante and fellow Democrats in the state Assembly -- would levy unspecified jail time and fines of as much as 10% of gross corporate assets on any energy seller that "colludes" and "conspires" to sell power at "unjust or unreasonable" prices. Democratic backers want the gouging bill to be passed under emergency conditions, to take effect this summer, but Assembly Republicans have just enough votes to block the two-thirds majority required. If passed with a simple majority in both houses, the bill would take effect 90 days after being signed by Gov. Gray Davis, a Democrat who hasn't yet taken a position on the proposal...
New York Times - April 30, 2001
Pacific Gas and Electric, the giant California utility, may have just made one of the largest bankruptcy filings in history, but it has been a banner year for the rest of its parent company, the PG&E Corporation.
In Bethesda, Md., far from the energy crisis in California, another PG&E subsidiary, National Energy Group, earned $162 million last year and ranked as the nation's third- largest power trader. Compensation for the unit's executives soared. Many investors now believe that the subsidiary, just a decade in the making, is by itself worth more than its 96-year-old utility sibling.
How did National Energy get so big so fast? By using cash, partly generated by its sister utility, to buy unregulated power plants in the Northeast, expand trading-floor operations and sell power across the country. The exact numbers are in dispute, but much of Nationals Energy's profits last year came from California.
Most other large utilities have done the same thing over the past decade, building national or even global power companies from roots in local monopolies. But nowhere is the success of these unregulated businesses more of an issue than in California, where PG&E's investments may be challenged in bankruptcy court.
And today, the offspring of the nation's utilities dominate that market, after industry leader Enron. Eight of the nation's 10 largest power marketers are affiliates or spinoffs of regulated utilities, controlling about 42 percent of power trading.
It is largely these unregulated power producers and traders whose sales of power in California have prompted accusations by state leaders of price gouging, and demands for the price caps that federal regulators took their first, halting steps toward embracing last week.
For example, Reliant Energy reported that operating income at its unregulated wholesale energy business soared to $216 million in the first quarter, or 16 percent more than at its regulated utility, which serves Houston. This week, Reliant expects to spin off its unregulated businesses through an initial public stock offering that would put a market value on the new company of as much as $8.8 billion — more than the rest of Reliant.
A number of other major utility companies have spinoffs or trading and generation units that now earn nearly as much as, or more than, their core utility operations. These include Duke Energy in Charlotte, N.C.; Sempra Energy of San Diego; the Southern Company in Atlanta; the Constellation Energy Group in Baltimore; and Utilicorp United in Kansas City, Mo.
In some places, the growth of the unregulated businesses continues to raise questions of fairness — particularly where utilities have been permitted to transfer plants to the new units at deep discounts to their market value. Critics say that ratepayers, whose bills paid for the plants' construction, should benefit more when the plants are sold.
New York Times - By PAUL KRUGMAN - April 29, 2001
Recently I received a letter from an economist I respect, chiding me for my "Naderite" columns on the California energy crisis. He just didn't believe that market manipulation by power companies could possibly be an important issue; it sounded too much to him like the sort of thing one hears from knee-jerk leftists, who blame greedy capitalists for every problem, be it third-world poverty or high apartment rents. The left has cried "Wolf!" so many times that sensible people have learned to discount such claims.
But now a bona fide wolf has arrived, whose predatory behavior is doing terrible damage to our most populous state — and nobody will believe it.
True, California would be heading for a summer of power shortages even if it had never deregulated. And even if there was workable competition in the wholesale electricity market, prices in that market would spike during periods of peak demand, transferring billions of dollars from either taxpayers or consumers to the generators.
But the evidence is now overwhelming that there isn't workable competition in California's power market, and that the actions of generators "gaming the system" have greatly magnified the crisis. The key fact is that California has somehow remained in a state of more or less continuous power shortage and very high wholesale prices regardless of the level of demand. A rash of outages has kept the electricity market conveniently — and very profitably — short of supply even during periods of low demand, when there ought to be lots of excess capacity.
As Frank Wolak, the Stanford economist who also advises the state's power grid, has pointed out, an outage at a power plant is a lot like an employee calling in sick. You can't tell directly whether he is really sick or has chosen to take the day off for other reasons, but you can look for circumstantial evidence. And such evidence has convinced Mr. Wolak that "generators use forced outages strategically to withhold capacity from the market" — a view shared by a growing number of other researchers.
Which brings us to the latest move by the Federal Energy Regulatory Commission. On Wednesday, the commission apparently decided to offer California some relief, and put new price caps in place on the California electricity market. I say "apparently" because the more you look at the plan the less likely it seems to be any help at all. Indeed, the measure was passed on a 2-to-1 vote, with William Massey — the one commissioner who has been sympathetic to calls for price controls — voting against it on the grounds that it would be ineffectual.
What's wrong with FERC's plan? First, it caps prices only in emergency conditions — ignoring the fact that electricity prices have stayed at hard- to-explain levels even when there is no emergency. In effect, the plan is laid out as if the electricity market were really competitive, in spite of all the evidence that it is not.
Second, even those emergency price caps are full of loopholes, offering extensive opportunities for what Mr. Wolak calls "megawatt laundering" — selling power to affiliated companies that for one reason or another are exempted from the price controls (for example, the controls do not apply to "imports" from neighboring states), then selling it back into the California market. Severin Borenstein of the University of California Energy Institute adds that because the allowed price depends on the cost of generation at the least efficient plant, generators will have a clear incentive to produce inefficiently: "I predict we will find some plants we never heard of before that are suddenly operating again, and they will be pretty inefficient."
The general verdict seems to be that this is not a serious plan. There are serious proposals to mitigate the crisis out there — indeed, last fall Mr. Wolak submitted a proposal that was well received by other experts — but FERC has ignored all of them.
The charitable interpretation is that FERC still doesn't get it, that it just can't bring itself to believe that this time the wolf is real. The uncharitable interpretation is that last week's action was meant to fail. The Medley Report, an online newsletter, calls the FERC plan "a grand exercise in posturing without substance . . . a very clever temporary move by the Bush administration to deflect any political fallout" from the looming disaster.
Whatever the explanation, the plain fact is that FERC and the administration have yet to offer California any significant relief.
The Charlotte Observer - by Ted Reed - April 27, 2001
Even though Duke Energy Corp. is building one of power-starved California's biggest power plants, top executive Rick Priory said the company would hesitate to build more California plants because the state's energy economy resembles that of the Third World.
"It's no different than if it was Ecuador or Peru, and we had investments to make in those places," said Duke's chairman, president and chief executive officer, after the company's annual meeting Thursday.
"Any such investment would be subject to very careful scrutiny from our board of directors."
Priory said power investment in California involves "some of the same questions you might have in the Third World," including continual downgrades in state agency credit ratings, questions about whether power buyers are credit-worthy and a struggle between three companies for control of the state's transmission lines.
On Thursday, California Assemblyman Dennis Cardoza, D-Merced, proposed jailing individuals from companies that manipulate the energy market by withholding power.
"This Third World country just gave Duke a 374 percent profit increase (in California) to $744million in 2000," said Cardoza spokesman Doug White. "I don't know many third-world economies that produce that kind of profits.
"All our bill says is that if you do the right thing, you can keep making profits, but if you're a bad actor, manipulating the market on the backs of Californians, you have to worry about going to jail," he said.
Duke and other power producers have been intensely criticized about profiteering from California politicians, including Gov. Gray Davis, as the state's effort to partially deregulate spawned power shortages.
Priory said his remarks were not a threat to reduce Duke's commitment to California, but simply "an indicator of the rigor we'd have to go through with our board."
"You don't have to disregard the environment," he said. "You just have to run a little faster."
Duke's annual meeting Thursday celebrated the recent performance of the most profitable U.S. electric company. Duke has benefited from rising energy demand and rapid growth in its unregulated businesses, which include international operations and construction of gas-fired plants that sell power wholesale to utilities.
Meanwhile, shareholders rejected two shareholder-generated proposals. A proposal to eliminate corporate political contributions got 4.38 percent of the votes, while a proposal that would mandate Duke to replace 1 percent of system capacity with alternative energy sources each year for 20 years got 4.19 percent.
L. A. Times - April 27, 2001
The federal order aimed at stabilizing wholesale power costs in California is so flawed that prices will continue soaring, putting even greater pressure on state coffers and consumer bills, government officials and energy experts said Thursday.
The temporary cost controls, approved Wednesday, were characterized by the Federal Energy Regulatory Commission as the light at the end of California's deregulation debacle. That optimistic portrayal was called into question when the full details were released Thursday.
Although the price ceilings apply to companies that generate electricity in California, the order does not affect the hefty sales by out-of-state generators.
It imposes only loose restrictions on brokers, or marketers, allowing them to continue selling and reselling electricity for escalating prices before it reaches the state's market for its final purchase.
Moreover, the order does not cover periods when power supplies are not officially deemed to be dangerously low. That is a problem, according to California's grid operators, because suppliers have been able to boost prices even when there was no severe supply crunch.
Gov. Gray Davis blasted the order as a "shell game" that appears to offer aid to California but ultimately is empty. Davis was particularly critical of a provision that requires the state to give up some control of its transmission grid in exchange for the price protections.
Evidence of the market's seemingly unending volatility can be found every day. On Wednesday, the state paid $90.3 million to buy electricity for customers of Edison, PG&E, SDG&E--roughly double the daily costs of a month ago. Those runaway prices will not be derailed by the federal commission's long-awaited "price mitigation" order, said Severin Borenstein, director of the University of California Energy Institute. "This one is not going to work." Borenstein said the state could end up paying as much as $1 billion a week during the high-temperature, high-demand summer months.
The federal order--approved 2-1 by the three-member commission Wednesday--limits the price that power generators can charge when the state's electricity reserves slip to less than 7%, a so-called Stage 1 emergency. FERC staff originally had proposed price constraints only during Stage 3 emergencies, when the state is within 1.5% of running out of available power and rolling blackouts are imminent.
Under the commission's plan, the top price paid for power during electricity emergencies would be set by the least efficient generator, providing bigger profits for newer, more efficient generators. Generators also would be required to offer available power to California during an emergency.
The commission said the plan strikes a balance between consumers and energy producers by bringing price relief to a "dysfunctional" market while providing incentives for generators to invest in California's future.
But critics say the order allows marketers, or brokers, to avoid those price caps. All they must do is justify their prices based on what they paid, not how much the power cost to produce.
"Isn't that a loophole big enough to drive all the power through?" said S. David Freeman, who resigned as general manager of the Los Angeles Department of Water and Power this month to serve as an energy advisor to Davis. The order, Freeman said, "says in principle that California is right: A completely unrestrained market is no good. But it looks like a fig leaf, like a penny on the dollar."
Frank Wolak, a Stanford University economist, called the federal order "almost meaningless" because power plant owners, by cutting deals with marketers, can avoid both price caps and a provision of the order that requires them to sell any available electricity when California grid operators need it to keep the state from plunging into blackouts. Mike Florio, senior attorney with the Utility Reform Network, predicted that power sellers would create a "daisy chain," selling to one another to drive up prices.
Only the last company in the chain, which sells to grid operators at the California Independent System Operator, would be limited by the federal order from making much of a profit.
"All the money would have been made at the earlier steps in the chain," said Florio. "There are all kinds of ways to manipulate this." "They've probably already got the diagrams on the board in the trading room to figure out how to defeat this," he said.
In Washington, "inadequate" was the word commonly used by California Democratic lawmakers to describe their reaction to the federal order.
"FERC once again has completely missed the opportunity to assist California," grumbled Rep. Sam Farr (D-Carmel), leader of the California Democratic House members.
Democrats pledged to press ahead with congressional legislation that would temporarily impose cost-of-service based rates on wholesale power sales in the West.
"I have been waiting for FERC to act strongly for many months but, instead, it has taken action that appears more for public relations than to solve this crisis," said Sen. Barbara Boxer (D-Calif.).
Farr complained that the FERC order "only applies during power emergencies. This is totally inadequate. We have excessive rates at all hours."
"Never again should we allow California to be put in such a perilous position by out-of-state cartels," said Assemblyman Dennis Cardoza (D-Merced).
L. A. Times - April 26, 2001
Federal energy regulators agreed Wednesday to limited, temporary price constraints on wholesale electricity in California. The carefully measured ruling is intended to help the state get through what is expected to be a difficult, power-short summer.
The plan, announced by an ideologically divided Federal Energy Regulatory Commission, was more far-reaching than had been expected, but fell far short of a return to the regulated prices sought by Gov. Gray Davis and other California political leaders.
After months of refusing the state's demands for price caps, the commission voted 2 to 1 to put a lid on California's wholesale electricity prices starting May 1--but only when the state's supplies slip low enough to trigger an energy emergency.
If it works as intended, the ruling should hold down the prices paid by California utilities and the state government for electricity and, in turn, relieve some of the pressure for more consumer rate hikes. Precise details of the plan were unavailable Wednesday night, however, and some energy experts said they fear it contains loopholes that could undercut its intended effect.
FERC Chairman Curt Hebert--a strong advocate of energy deregulation--told reporters that the agency had tried to carry out a "balancing act" to limit price spikes while maintaining an economic incentive for producers to build new plants to supply California.
"This is about as free market as you can get when it comes to mitigating prices," he said during the commission meeting.
But Commissioner William Massey, who dissented, said the plan was too narrowly written to be effective. Massey said evidence compiled by California's power grid operator shows that abusive pricing is taking place around the clock, not just during shortages.
"This agency is required to ensure just and reasonable prices during all hours," Massey said. "We are now 11 months into the California calamity. Now is not the time for half-a-loaf solutions."
The FERC plan sets up a complex scheme in which California regulators would use confidential data from power producers, in addition to fuel costs and other factors, to establish a target price for each electricity generator. During supply shortages, all generators would be required to offer electricity to the state's grid operator--the California Independent System Operator, or Cal-ISO. The suppliers would be paid based on the price of the least-efficient--and therefore costliest--generator called on to supply electricity.
Proponents said the arrangement preserves market principles by rewarding efficient producers. But critics said it would only pile on more costs for California consumers.
"It is amazing to me that FERC set the market based on the least efficient, most costly plant," said Sen. Dianne Feinstein, (D-Calif.), who is championing legislation to impose stricter price controls. "[That] will necessitate that the highest possible charge prevails." She called the FERC action "a small step forward," but added that it is not enough.
Rep. Bob Filner (D-San Diego), who is pursuing legislation in the House, called the FERC action "way too little, way too late."
"I guess they're under real pressure to do something," he said. "But they haven't got to the heart of the problem. We're still paying criminal prices."
California has demanded caps on wholesale prices since last year, when a confluence of events squeezed electricity prices up by 10, 20, even 50 times from the year before.
The plan approved late Wednesday night would limit the amount that power producers could charge during shortages, beginning with Stage 1 emergencies, in which reserves fall below 7.5% of anticipated demand. However, the limits do not amount to a fixed price cap, and some producers, especially the most efficient, would still be able to reap a generous profit.
During last summer and winter, the state faced entire weeks--at all hours--of Stage 1 and higher alerts. "If this is effective, it could reduce by maybe 40% the price of power this summer," said Gary Stern, director of market monitoring for Edison. He warned, however: "If it's not effective, prices could be even higher than people are projecting."
A megawatt-hour of electricity is enough to serve about 800 average homes for an hour. At its peak last year, the price of electricity soared to as high as $1,500 a megawatt-hour in California. Months earlier, prices had been averaging about $30 a megawatt-hour.
Stern and others expressed concern that FERC's plan appears to apply only to electricity generators, and not to the brokers who often buy electricity from them and sell it on the wholesale market.
"If it doesn't apply to marketers, it isn't going to work," Stern said. He predicted that power generators would simply sell their electricity to brokers to avoid the price limits.
One consumer advocate, Mike Florio of the Utility Reform Network, referred to that prospect as "megawatt laundering." Unless that issue and others have been addressed in the plan, there will be serious problems, he predicted.
"It may help a little," Florio said. "But I don't at this point have any reason to believe it will help a lot." Peter Navarro, a professor of economics at UC Irvine, said the FERC plan creates "Swiss-cheese caps" riddled with holes that will keep prices high.
"We're going to get played like a violin under these rules," he said.
The Charlotte Observer - By MICHAEL LIEDTKE (AP) - April 18, 2001
In Houston, it's known as "the power corner." Separated by just a few city blocks, four major power wholesalers run trading exchanges that have a strong influence on energy prices nationwide.
The trading floors run by Duke Energy Corp., Enron Corp., Reliant Energy Inc. and Dynegy Inc. represent ground zero in a power crisis threatening the quality of life in much of the western United States this summer.
By seizing on opportunities created by deregulation, the energy traders have turned up the juice in the electricity business in ways similar to how junk bond traders ignited Wall Street in the 1980s and venture capitalists fueled Silicon Valley last decade.
And thanks to an exemption granted in the early 1990s, nobody monitors daily trading to detect unfair or illegal practices.
Utility bills in California have gone up nearly fourfold in the past year, to $27.1 billion. Without fundamental changes in the energy market, this year's bill will rise to $70 billion -- more than $2,000 for every person in the state, according to operators of the state's power grid.
The staggering electricity price increases have pushed the state's largest utility, Pacific Gas and Electric, into bankruptcy and left No. 2 Southern California Edison on the brink of insolvency. California's once-ample budget surplus also has shriveled, as the state is spending about $50 million a day to buy enough power to keep the lights on.
The energy wholesalers say they're doing nothing wrong.
They blame the high prices on the rising price of natural gas, burned to generate electricity, and the state's botched deregulation plan. By failing to line up reliable power ahead of time and by imposing price caps for consumers, the state put itself into this mess, the companies say.
"There have been accusations of wrongdoing for eight months now, and there isn't a shred of evidence to support the allegations," said Gary Ackerman, executive director of the Western Power Trading Forum, a Menlo Park, Calif., trade group. "People are very angry and frustrated about electricity right now, and attorneys are trying to take that anger out on us."
Attorneys general in Washington, Oregon and California are probing whether the wholesalers have violated antitrust laws or engaged in unfair business practices. A California state Senate committee may issue subpoenas for records and the testimony of top energy executives, and at least five lawsuits accuse energy companies of market abuses.
"This is the best fraud I have ever seen," said attorney Michael Aguirre of San Diego, who is involved in one of the class-action suits. "The generators are doing everything that you think that they might be doing, only it's worse than you ever imagined."
The lawsuits and investigations allege that generators have conspired to hijack billions of dollars from consumers and taxpayers by withholding electricity from energy-starved California until the last minute, and then supplying it at exorbitant prices.
The Internet has provided the traders with the tools to do their jobs even better. Online marketplaces and password-protected exchanges provide them with invaluable real-time information on the buying and selling patterns of their rivals.
Two lawsuits allege that traders have parlayed the sensitive information collected online to fix prices artificially high, a violation of antitrust laws.
The online exchanges and other industry Web sites provide the energy traders with a window to see the energy availability and bids in markets around the country.
Power industry critics, however, contend the Web's instant access provides the traders a way to exploit a delicate supply-demand balance. If the scale is tipped even slightly toward an inadequate supply, they say, prices soar and energy traders reap huge gains.
"The whole trading thing is just a front that lets them game the market," Aguirre said. "They can get away with it because no one (outside the industry) can figure out what they are doing."
Whatever the energy traders are doing, it's not closely monitored by government regulators.
In 1993, the trading of energy products received an exemption from oversight by the Commodity Futures Trading Commission, a federal agency that oversees commodity and options trading to protect markets from fraud and manipulation. Energy is the only commodity that has received a blanket CFTC exemption.
The CFTC accepted the industry's contention that it shouldn't be subjected to the government's usual commodities regulation because its markets are dominated by "large sophisticated commercial entities" capable of protecting themselves - in short, that there would be no little people to hurt.
At the time, then-CFTC commissioner Sheila Bair scoffed at the reasoning, comparing energy traders to boiler room sales operations that had the potential to violate federal anti-fraud laws.
The Charlotte Observer - By Ted Reed - April 18, 2001
Duke Energy Corp. posted a 51 percent profit increase in the first quarter as demand for natural gas and power surged nationwide.
Duke's gains were fueled by its power trading and marketing unit, which showed a 324 percent rise in earnings before interest and taxes. Earnings in Duke's natural gas gathering and processing business rose 71 percent.
"Duke Energy is converting smart strategy to bottom-line results," chairman, president and chief executive Richard Priory said in a statement.
First-quarter revenues rose 126percent to $16.5billion, an indication that 2001 revenues will likely surpass the 2000 level of $49.3billion, which made Charlotte-based Duke the 17th largest U.S. company on the Fortune 500 list.
L. A. Times - By JULIE TAMAKI - April 17, 2001
Lt. Gov. Cruz Bustamante wants to empower the state to throw power producers in jail. Atty. Gen. Bill Lockyer is offering a $50-million reward to anyone who helps him prosecute them for fraud. Senate leader John Burton is calling on the governor to commandeer their plants.
As the electricity crisis has escalated, so have efforts by lawmakers to go after the big energy companies--described as "pirates" or a "cartel"--that they say have brought California to its knees.
They want the mostly out-of-state companies, which Gov. Gray Davis recently described as "the biggest snakes on the planet Earth," punished and some of their earnings returned to the public.
* Bustamante proposed that the Legislature enact a law to make it a felony for energy companies to charge unreasonable and unjust prices. Prosecutors could use findings of unreasonable prices by regulatory bodies, such as the Federal Energy Regulatory Commission, to file charges against a generator. Punishment would include restitution, jail time or fines.
* Sen. Nell Soto (D-Pomona) and Sen. Jack Scott (D-Altadena) introduced legislation that would tax producers' "windfall profits" and give the money to taxpayers to offset their electricity bills. The charge would apply to a corporation's taxable net income for 2001, using 1999 as a comparison year.
* Offering potential rewards of hundreds of millions of dollars, Lockyer appealed to whistle-blowers to report suspected fraud by energy providers who sell electricity and natural gas to California government entities.
Lockyer said he will invoke a state law under which whistle-blowers whose information leads to the successful prosecution of a false claim may be entitled to a percentage of the financial penalties, which can be three times the actual losses.
"Since billions of state dollars may be recovered, the award to an informant could potentially range from $50 million to hundreds of millions of dollars," Lockyer said.
Duke Energy of Houston has announced plans to spend $1.6 billion to refurbish its California power plants to increase production.
But company spokesman Tom Williams said a windfall tax would have an inflationary effect, because the expense ultimately would be passed on to consumers. He said such measures could cause his and other companies to rethink their plans in the state.
"To make electricity plentiful, we have to build more power plants, but we cannot accomplish that by threatening every generator in the world with the confiscation of its assets and the imprisonment of its executives the moment they set foot in California," McClintock said. "It is no wonder that power plant applications in California are a fraction of what they are in states like Texas that welcome new power plant construction."
Others say the shortage is a manipulated one. Lockyer noted that his investigators have been examining whether producers have manipulated the market and withheld supplies to run up energy prices.
Santa Monica consumer advocate Harvey Rosenfield welcomed word of the windfall tax legislation, which he said embodies an idea he has been calling for since last fall.
"This is a crisis of greed," Rosenfield said. "There is no solution in this energy crisis that does not involve getting our money back from the thieves who have stolen it from us."
L. A. Times - By NANCY VOGEL - April 17, 2001
A key to controlling electricity prices in California this summer lies in a little-noticed bureaucratic process now underway at the Federal Energy Regulatory Commission.
FERC must decide whether to renew energy producers' right--first granted in 1998 for three years and then subject to review--to sell power to California at whatever price the market will bear.
Five big power plant owners and marketers have begun to petition the commission to allow them to continue doing just that.
By revoking the right of energy companies to charge as much as they like, FERC could quickly fix much of California's energy crisis, some say. Prices would be regulated by the commission, much as they were for 70 years before the 1990s, when the agency embraced competitive power markets.
It would spare the state from power prices that are expected to soar this summer, said Stanford economist Frank Wolak.
"If FERC refuses to grant market-based pricing to all these guys," said Wolak, "we're done. The financial side of the California power market is solved."
The federal agency can take as much time as it wishes to act on the companies' petitions, said commission spokeswoman Celeste Miller.
And it's not clear that the commission will crimp the energy companies' profits. It has turned away California's pleas that the agency cap wholesale electricity prices across the West. Commission Chairman Curtis L. Hebert, who wields great control, says price spikes will attract new power plant builders to California.
But in weighing whether to allow the companies to keep selling at market rates, FERC will be hard-pressed to ignore its own findings that the companies have manipulated the market, some say. To allow companies to earn market prices, federal regulators must first conclude that the firms do not wield "market power." That is the ability to drive prices up and keep them there by, for example, withholding electricity to create scarcity.
In a December report, the commission concluded that manipulation of California's market at times produces "unjust and unreasonable" prices. In March, it ordered more than a dozen power companies to rebate $124 million in excess charges for January and February.
On Monday, the commission told three companies to be prepared to rebate $588,000 for power they sold in March at prices higher than deemed reasonable.
"The evidence is pretty clear that this is not a sufficiently competitive market to meet the FERC standard," said Severin Borenstein, director of the University of California Energy Institute in Berkeley.
On Monday, U.S. Sens. Joseph Lieberman (D-Connecticut) and Jean Carnahan (D-Missouri) asked the General Accounting Office to investigate whether the commission is upholding its mandate to ensure that wholesale electricity prices are reasonable.
The senators pointed to "mounting evidence that FERC may not have fulfilled this role in the California situation." After California opened its electricity marketplace in March 1998, the cost of electricity consumed leaped from $7 billion in 1999 to $27 billion in 2000. So far this year, state taxpayers--buying electricity on behalf of financially crippled utilities--have committed $5.2 billion to power purchases.
Much of that money has been paid to a diverse group of power generators and marketers, some publicly owned and others under the jurisdiction of FERC.
Among those firms ordered by the federal agency to refund money is Williams Cos. of Tulsa, Okla. Williams holds an exclusive contract to sell the electricity generated at big power plants in Huntington Beach and Redondo Beach. The company controls enough power to supply roughly 4 million homes.
In March, FERC launched an investigation of Williams, accusing it of shutting down power plants last spring to drive up prices and earn nearly $11 million that is now subject to refund.
The same week that the federal commission made its investigation public, Williams petitioned the agency to extend its authority to sell electricity at prices set by the market. California officials filed a protest Friday.
"There is overwhelming evidence that Williams has exercised market power and collected rates well in excess of those that are just and reasonable," wrote the California Independent System Operator, which manages most of the state's transmission system. "Williams' continued ability to do so can only exacerbate conditions in California markets."
Williams spokeswoman Paula Hall-Collins downplayed the company's filing to the federal agency as a routine action.
Williams is the first company to file for an extension of its 1998 authority to sell at market prices in California. But the handful of other companies that purchased power plants from utilities under the state's 1996 deregulation plan are coming due for an extension. They include Virginia-based AES, Reliant Energy and Dynegy of Houston, and Duke Energy North America, based in Charlotte, N.C.
To decide that these companies do not wield market power, said Gary Stern, director of market monitoring for Southern California Edison, "in spite of all the evidence put before them, [would show] that regulation of the California market is a sham."
"Take a day that's hot," he said, "and you need 95% of the market running or you're going to have blackouts. The guy with 6% of the market recognizes that if he doesn't supply power they're going to have blackouts, and so he can charge anything he wants.
"Allowing market-based rates is simply relying on their benevolence or stupidity to keep from charging exorbitant prices," said Borenstein. "And if there are two things we've learned, [they are] that they're not benevolent and they're not stupid."
San Francisco Chronicle - by Robert D. Glynn - April 16, 2001
Last week, Pacific Gas and Electric Company filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Some are surprised, some not; and many wonder why and what it means.
We chose to file for Chapter 11 reorganization because we expect the court will provide the venue needed to reach a solution, which thus far the state has been unable to achieve. When the political and regulatory processes failed us, we turned to the court.
We also took this action because: (1) our unreimbursed wholesale electricity costs were increasing at an estimated $300 million per month, or more; (2) continuing California Public Utilities Commission (CPUC) decisions, some of which we believe are illegal, were economically disadvantaging the company; and (3) negotiations with the California governor's staff were no longer making progress.
By filing for Chapter 11 reorganization, we can protect the legal rights of Pacific Gas and Electric Company, assure that all suppliers and other parties to whom we owe money are treated equitably, and continue delivering gas, electricity and customer service to 13 million Californians.
Some background: The rules California chose to govern its deregulated electricity industry, exacerbated by a supply shortage, resulted in extraordinarily high wholesale electricity prices. By year-end 2000, wholesale prices were almost 10 times higher than the year before, having peaked at 100 times the prior year's, and they continue to increase into 2001.
The heart of this crisis for our company is that unregulated wholesale electric prices are far higher than retail consumer rates, which remain frozen by state regulators. This means that customers' electric bills have not reflected the true cost of the power we have bought for them.
When this imbalance arose, we requested rate relief, making it clear that no business can afford to sell a product for less than it costs. That's common sense. When no rate relief was forthcoming, we sued the California Public Utilities Commission in Federal District Court, asking the commission to follow established federal rate doctrine requiring that prudently incurred wholesale electricity costs be allowed in retail rates, and that lawsuit is in progress.
To continue buying the electricity our customers were consuming, we used available cash and credit to finance the shortfall between customer rates and our wholesale costs. By October 2000, this shortfall had climbed to $3.4 billion, by November to $4.5 billion, and by year-end to $6.6 billion. And by the first quarter of this year to about $9 billion.
By January 2001, we exhausted our ability to continue financing our customers' electricity purchases. Our credit rating fell to below investment grade and subsequently to default.
During this time we sought access to the governor, and told his representatives that the matter was a true crisis, and needed prompt attention, including retail price increases.
Gov. Davis, in his Jan. 8 State of the State Address, said, "I reject the irresponsible notion that we can afford to allow our major utilities to go bankrupt. Our fate is tied to their fate. Bankruptcy would mean that millions of Californians would be subject to electricity blackouts, public safety would be jeopardized, businesses would close, jobs would be lost, investment would flee the state, and our economy would suffer a devastating blow."
For our customers, our action should have no significant impact. We intend to continue the normal delivery of gas, electricity and customer service during the Chapter 11 process.
We expect to pay our suppliers in full for goods and services received after the date of our Chapter 11 filing, and to pay electric commodity suppliers as provided by law. Moreover, we expect that at the end of the Chapter 11 process, all valid claims will be paid in full.
Our employees will continue to be paid. Health-care plans and other benefits for employees and most retirees will continue. Our qualified retirement plans for retirees and vested employees are fully funded and protected by federal law.
Our objective is to proceed through the Chapter 11 process as quickly as possible, to develop and implement a court-approved plan of reorganization and to emerge and rebuild value for our shareholders.
We are not seeking a rescue, a bailout or a handout. We are simply asking the state to follow the law, which allows us to recover wholesale power costs in retail rates. No entity, company or state can sustainably meet electricity consumers' needs with less.
(Robert D. Glynn is the chairman of PG&E)
Public Citizen - Press Release - April 11, 2001
Draft legislation being circulated by Rep. Joe Barton (R-Texas) will significantly erode public health and environmental standards by allowing new power plants to be exempt from certain emissions standards, Public Citizen said today.
The bill, which Barton reportedly will introduce next week, calls for suspending nitrogen oxides (NOx) standards for the operation of existing power plants. The plan also would allow a state governor during an electricity emergency to request the Environmental Protection Agency to waive for up to two years certain NOx emissions standards for new plants. Further, Barton's bill would allow a state's governor, upon declaring an emergency, to allow existing natural gas-fired power plants to exceed certain emissions limits for up to six months.
Nitrogen oxides are formed in high-temperature combustion processes, such as those found in automobiles and power plants. NOx emissions play a major role in the formation of ozone, which leads to global warming and contributes to the formation of acid rain. Exposure to NOx can negatively affect the respiratory system, particularly of children and the elderly.
"Instead of punishing profiteering power companies for creating this energy 'crisis,' Joe Barton's draft legislation rewards them," said Wenonah Hauter, director of Public Citizen's Critical Mass Energy and Environment Program. "Consumers should be outraged that Barton's bill will make it easier for these greedy companies to further pollute our environment while they rake in profits."
While Barton's proposal to gut environmental laws to build plants won't do anything to solve the electricity crisis, it will directly benefit his most generous campaign contributors. Nearly two-fifths of Barton's PAC contributions in the 1999-2000 election cycle - more than $210,000 - came from the energy industry, according to information from the Federal Election Commission.
"Joe Barton should know better than to reduce NOx emission standards," said Tom "Smitty" Smith, director of Public Citizen's Texas office. "With two Texas metropolitan areas [Houston and Dallas-Forth Worth] already out of compliance with minimum standards to ensure safe air, and three more areas on the verge [San Antonio, Austin and Longview/Marshall/Tyler], gutting environmental standards will only make matters worse -- not just in Texas, but throughout the country."
In writing his bill, Barton misidentified the cause of California's electricity crisis. Although he has said that the Golden State's power problems are caused by a shortage of power plants, in fact, the problems stem from deregulation's removal of public accountability from the power generation market, Hauter said.
State and federal investigations have pointed to manipulated prices and intentional power plant shutdowns as primary factors causing skyrocketing prices. A growing bipartisan group of Western governors and lawmakers has urged the federal government to enact temporary, region-wide wholesale price caps as the most effective short-term method for controlling the cost of electricity. Barton, however, has rejected this bipartisan approach, as has the electric utility industry.
Experience has shown that an overabundance of power is not the solution to deregulation troubles. Montana, where the electricity market was deregulated in 1997, has such an abundance of power that the state exports 40 to 60 percent of the power it produces. Still, electricity prices there have risen more than 400 percent since 1997, and nearly 1,000 Montana workers have been laid off because some of the state's largest employers have been forced to purchase overpriced electricity from the state's deregulated wholesale market.
The electric utility industry already is the source of 27 percent of nitrogen oxides emissions in the United States.
"It's time to clean the plants up - not allow more unwanted deadly exposure to pollutants," Hauter said. "Barton should not use energy deregulation failures as an excuse to reward his political contributors."
Public Citizen is a nonprofit consumer advocacy organization based in Washington, D.C. For more information, please visit www.citizen.org.
L. A. Times - By MICHAEL J. AGUIRRE - April 9, 2001
Gov. Gray Davis should follow Pacific Gas & Electric's example and admit that his electricity program is also bankrupt. The governor's primary objective was to keep the utilities from bankruptcy. He has failed. He should admit his failure and reformulate his policy. Whatever he does must be based on a clear understanding of the problem.
The people of California have a right to buy electricity at fair prices. Producers of electricity are entitled to a fair return on their investment. Before 1998, a balance between these two points was struck by the Public Utilities Commission using cost-of-service pricing. Utilities presented their production bills, the PUC reviewed them, determined a reasonable rate of return and set a rate high enough to cover both. California became the second most efficient user of electricity in the country under this system, and its utilities prospered.
In 1996, the electric power industry, with promises of lower prices, induced Gov. Pete Wilson, the PUC and the Legislature to reduce the commission's power to ensure just and reasonable electricity prices. Under the power industry's system competition, not regulation, would set prices, and prices would go down. PG&E head Robert Glynn represented it to be a "huge opportunity for consumers to lower their energy costs." , San Diego Gas & Electric and Southern California Edison, with PUC approval, then sold California's most significant generation plants, its gas-fired units, to five multinational corporations.
These five companies led the onslaught on California consumers, raising electricity prices from $7 billion in 1999 to a projected $70 billion in 2001. California authorities have determined that 98% of the price bids submitted by these five companies--some 25,000--were based on monopoly, not competitive, pricing. Gov. Davis is right: "California's deregulation scheme is a colossal and dangerous failure."
No one--not Wilson, the PUC or the Legislature--provided an exit strategy if deregulation did not work. Davis has been unable or unwilling to come up with one. He failed to get on top of the problem when he took office, despite clear warning signs. He failed to see that he cannot finance ever higher prices with public funds, and he lacks the resolve to do what he must to stop them. His one effort to use tax funds to keep the utilities out of formal bankruptcy has failed, with 's filing for Chapter 11 last week.
There are no good choices now. However, we cannot continue down the road Davis has chosen. It leads to financial ruin. We cannot rely on private companies building new generation plants because the same price gougers will control how the new electricity gets priced. We cannot rely on the Federal Energy Regulatory Commission or President Bush. California can only rely on California to solve this problem.
As a first step, Gov. Davis should do what he threatened to do in his State of the State address: use the power of eminent domain to recover the gas-fired generation plants that the price manipulators are using to set monopoly prices. He can pay "just compensation" to the owners but not one dime more.
The governor should now recognize California's vital interest in protecting itself from these prices. Eminent domain is a reasonable tool to use to achieve that goal. It has been used in less compelling circumstances. For example, eminent domain was used in the early 1980s for George W. Bush's investment team to assemble the land on which the Texas Rangers' stadium is built, from which he and his partners profited handsomely. If eminent domain can be used for private profit, it can be used to protect the vital interests of the state of California. The plants should be divested to private ownership, but only to companies that are under PUC jurisdiction.
The PUC also should be used to plan how California can move forward to an improved cost-based system of regulation. What we cannot do is to continue on with the current plan, which is to have the governor set electricity prices behind closed doors, working with the very people who are suspected of unlawful price fixing. 's bankruptcy provides the governor with a new opportunity to move to a more effective program.
The governor should now stop using public funds to buy electricity. He should urge Edison to join in reorganizing under bankruptcy court protection. This will allow all parties to contest the unpaid billions of dollars of receivables owed to the power producers and their associates. This will send a message to Wall Street to stop funding such outrageous and predatory practices because they don't pay.
The state attorney general should conduct a criminal grand jury investigation into the alleged wrongdoing by the power generators. He should also join in the private litigation that asserts that the power producers violated the state's antitrust laws. He should follow the investigative trail to Houston, Tulsa, Atlanta and wherever else it leads.
(Michael J. Aguirre Has Filed a Private Attorney General's Lawsuit Against the Major Power Producers)
L. A. Times - April 7, 2001
California's largest utility, Pacific Gas & Electric, filed for federal bankruptcy protection Friday, unraveling the state's efforts to resolve the energy crisis and effectively turning the utility's future over to a federal judge.
Caught in a vice, with its debts surpassing $9 billion and its negotiations with Gov. Gray Davis "going nowhere," the San Francisco-based utility said it had no choice but to file for Chapter 11 reorganization.
It was the third-largest Chapter 11 filing in the nation's history, and by far the largest by a utility company. The only larger filings were those by Texaco Inc. in 1987 and Financial Corp. of America in 1998.
Under Chapter 11, the company can continue to operate while the court holds its creditors at bay. Eventually, the judge will work out a plan by which the creditors will be paid, though not necessarily the entire amount they are owed.
PG&E, which serves about 13 million people in Central and Northern California, has been squeezed ever tighter in the past year, during which the wholesale cost of electricity has risen tenfold and more. Under California's 1996 deregulation plan, the wholesale prices were allowed to rise untethered, while the rates that charged customers were held in place.
Duke Energy, a major power generator, issued a statement saying it regretted that was forced to file for reorganization, but added that the filing "provides a defined process to collect our past receivables and keep in business going forward."
Duke was not among the major creditors listed by . The largest was the Bank of New York, owed $2.2 billion, followed by the California Power Exchange at just under $2 billion. The Power Exchange is a now-defunct agency--itself in Bankruptcy Court--that was intended to serve as the state's main electricity marketplace under deregulation.
"They promoted deregulation, they reaped the financial rewards of deregulation for 3½ years, and now they and their shareholders are bearing the consequences of deregulation," said Harvey Rosenfield, president of the Foundation for Taxpayer and Consumer Rights.
Though the utilities did not propose deregulation, they did help shepherd it through the Legislature. In October 1997, Glynn, the chief, called deregulation "a huge opportunity for consumers to lower their energy costs, a huge opportunity for energy companies to prosper as national energy providers."
L. A. Times - April 7, 2001
Pacific Gas & Electric Co.'s bankruptcy filing sparked a sell-off in stocks of the utility's major lenders, power suppliers and bond insurers Friday, as investors feared that the companies' earnings would be hurt by the reorganization and that Southern California Edison might take the same route.
Shares of the utilities' own parent companies, Corp. and Edison International, respectively, also were hammered, even though and its other subsidiaries did not join Pacific Gas & Electric in filing under Chapter 11 of the U.S. bankruptcy laws. plunged $4.18, or 37%, to $7.20 a share, and Edison tumbled $4.39, or 35%, to $8.25 a share, both on the New York Stock Exchange. Sempra Energy, California's other major investor-owned utility, was off $1.85 to $22.30, also on the NYSE.
Under Chapter 11, Pacific Gas & Electric will keep operating, but its existing debts are frozen while the company works out a plan to pay its creditors. However, financial overhauls under Chapter 11 often result in creditors getting less than full payment.
"There's a fear they will not be paid what they're owed up to this point," said Linda Byus, who follows power-generating companies for the investment firm Dresdner Kleinwort Wasserstein in Chicago. "There is the possibility they won't get 100 cents on the dollar."
Power generators supplying electricity to California also saw their stocks fall sharply. They included Duke Energy Corp., which lost $2.30 to $40.10 a share; Enron Corp, down $2.20 to $53.50; Dynegy Inc., off $3.42 to $47.50; and Calpine Corp., down $3.66 to $47 a share, all on the NYSE. But AES Corp. bucked the trend and rose 97 cents to $43.97 on the NYSE.
The Day - By Paul Choiniere - April 6, 2001
With competition yet to emerge three years after the legislature passed an electric deregulation law, and with fears growing that a sharp price hike could hit when price limits are lifted in 2004, lawmakers are reconsidering the law.
State Sen. Melodie Peters, D-Waterford, announced Thursday the formation of a "working group" that will assess the status of electric deregulation and make recommendations to the legislature. Peters, co-chair of the Energy and Technology Committee, was one of the principal authors of the original legislation. She expects that any recommendations by the committee will not be acted on until the 2002 session.
Retail electric rates were fixed by the initial legislation at prices that are now lower than electricity is selling on the wholesale market. The situation has meant financial losses for utilities that have to supply the power and has raised the threat of a dramatic price increase when the cap is lifted at the end of 2003.
"We have to look at softening that blow," said Peters. "I think you have to prepare for the worst, and the worse being very large spikes (in price)."
Peters said she also wants to make sure that, if there are any lessons to be learned from the California energy crisis, those lessons are incorporated into Connecticut's law. In California, electric power shortages have led to blackouts across the state.
"We're examining all ramifications," she said. "I think it's going to be fine-tuning with a focus on some areas. Right now we're doing well. We want to avoid any kind of California scenario."
Also serving on the working group will be Rep. Demetrios Giannaros, D-Farmington, Peters' fellow co-chairman on the Energy and Technology Committee. A professor of economics at the University of Hartford, Giannaros has said that if the law is not adjusted it will squelch any competition and create an unregulated monopoly by the time price controls are lifted.
The issue most likely to get attention is the so-called "standard offer" portion of the law. The term refers to the price consumers pay if they do not choose to buy their electricity from a particular competitor. On an electric bill it appears as the "general service charge" and accounts for about 50 percent of the bill. It is the portion of the bill subject to competition, with all the other charges fixed by regulation.
The "standard offer" was set at 5.5 cents per kilowatt hour by the Department of Public Utility Control. DPUC Chairman Donald Downes now concedes the agency's "crystal ball" was a bit hazy and it set the standard offer too low. Electricity is selling wholesale for about 7 cents per kilowatt hour. Given current market conditions no company can provide customers a better price than the standard offer and so no competition has been created. Giannaros said if the state cannot generate competition between now and the end of 2003, when the standard offer ends, the market will be dominated by just a couple of companies at that time and prices will increase substantially. He has proposed gradually increasing the standard offer over the next couple of years in hopes of generating competition.
Peters is not offering any specifics on what changes should be made to the law passed by the legislature in 1998. She said the group will consider the possibility of extending the standard offer for a longer period of time, increasing it, or eliminating it.
The group will also examine other issues such as possibly deregulating billing and metering services, something not included in the 1998 legislation, Peters said. And lawmakers need to make sure enough natural gas can be brought into the state to power a new generation of natural gas-fired power plants that will be coming on line in the coming years, she said.
Also serving on the work group will be the two ranking Republicans from the energy committee, Sen. Tom Herlihy, R-Simsbury, and Rep. Kevin DelGobbo, R-Naugatuck. Representatives from the DPUC and the state Office of Consumer Counsel will also participate.
The deregulation law created an immediate 10 percent cut in electric rates, but the competition that was supposed to continue to drive down rates has not happened. Peters called for patience.
"When the legislature passed deregulation in 1998 we fully expected that the development of a competitive marketplace for electricity would take time to develop," Peters said.
Downes said an increase in the standard offer would not necessarily translate into higher electric bills. Northeast Utilities was forced to sell off its power plants, including Millstone Nuclear Power Station, and those sale prices far exceeded expectations. That is likely to lead to additional savings that will be passed on to consumers, potentially offsetting any increase in the standard offer, Downes said.
NU subsidiary Select Energy is obligated to provide the standard offer service to half the state's consumers. Consolidated Edison cited that obligation, and the potential losses that could result, as the reason it broke off its plans to merge with the Connecticut company. NRG Energy Inc. of Minnesota provides 40 percent of that service and Duke Energy of North Carolina 10 percent. The companies won the right to be the suppliers through a competitive bidding process.
Michael G. Morris, president, chairman and chief executive officer of NU, has urged the legislature to raise the standard offer.
San Jose Mercury News - By Steve Johnson - April 6, 2001
All across the West, an unsettling realization is sinking in: The threat of blackouts and electric rate hikes is no longer confined to California.
In the past few months, consumers in at least eight other Western states have been slapped with higher electricity bills or are being asked to pay more soon, largely because of the same out-of-control wholesale market that is wreaking havoc here. Wholesale prices in the Pacific Northwest are even higher than in California, raising fears that California could have a harder time finding power when it desperately needs it.
So far, officials in most Western states expect to get through the summer without blackouts. Even so, electricity supplies are worrisomely thin.
"I don't recall a time when it has been as tight as this," said Robert Dintelman, assistant executive director of the Western Systems Coordinating Council, which plans to release a report today assessing power supplies throughout the region.
The problem is expected to receive intense scrutiny Tuesday when officials from California and 10 other Western states meet with the Federal Energy Regulatory Commission in Boise, Idaho, to discuss the spreading energy crisis and what can be done about it.
In April last year, wholesale power at peak times was selling for about $36 a megawatt-hour in California, vs. $31 at a Washington trading hub and $35 at another hub in Oregon, according to a survey by Energy NewsData. On Wednesday, the top price in California was $300 per megawatt-hour, vs. $345 in Oregon and $350 in Washington. If that price difference persists into the summer, some energy specialists fear electricity suppliers may be more willing to sell to Washington or Oregon than California during emergencies, which could result in a nasty interstate rivalry.
"The last thing that any of us needs is some sort of civil war between the states because everyone will lose," said Tom Williams, a spokesman for Duke Energy of Charlotte, N.C. Unfortunately, he added, "I don't think imports are going to show up in California this summer. And if they do, they're going to be very, very expensive."
Aside from Arizona and California, rate increases recently have been approved or proposed in portions of Colorado, Idaho, Nevada, Oregon, Utah, Washington and Wyoming. California's rates are still higher in many cases. Even so, the change in some of these other communities is not insignificant. A temporary 50 percent rate increase approved in Tacoma, Washington, in December raised the average monthly electric bill for a home with electric heat from $85.30 to $123.70. And the bill could go up more in October.
Associated Press - April 6, 2001
While Gov. Gray Davis prepared to speak to the state Thursday night about California's energy crisis, economic forecasters predicted the power crunch would lead to higher taxes and scrapped public projects.
Among other things, he was expected to talk about the more than 40 percent rate increases approved last week by the Public Utilities Commission for customers of the state's two largest utilities, Pacific Gas and Electric Co. and Southern California Edison Co. He has asked California television stations to carry his remarks live. California has been hit with rolling blackouts and tight power supplies blamed in part on soaring wholesale electricity costs.
On Wednesday, the state got more bad economic news: The UCLA Anderson Business Forecast said Californians would face higher taxes and a tighter state budget because of the billions of state dollars being spent on emergency power. The blackouts and the state's scrutiny of private power suppliers also threaten to scare away new businesses, the report said.
Facing continued refusal from federal energy regulators to cap high energy prices, Davis said Wednesday he would be willing to support a windfall-profits tax on electric generators that have made a fortune selling power to California this year.
A bill to that effect was introduced Wednesday in the state Assembly. It would tax gross receipts that ``significantly exceed'' the cost of producing power and tax profits of power marketers who have bought power and later sold it at much higher rates.
``We continue to allow some electricity generators and middlemen to reap enormous profits on their sales of electricity into the state. This profiteering must stop,' Democratic Assemblywoman Ellen Corbett said.
Duke Energy spokesman Tom Williams said he doubted a tax on a selected industry would be legal. He added that such a tax would discourage generators from building new power plants in California.
Associated Press - April 5, 2001
Using her strongest language since the power crisis began, the state's top utilities regulator lashed out at electricity producers Wednesday, saying California is ``at war'' with its power suppliers.
``What California is in, is a war against sellers, who are taking so much value out of the California economy,'' said Loretta Lynch, chairwoman of the state Public Utilities Commission.
Lynch made the remarks in a speech peppered with attacks against wholesalers at a quarterly economic forecasting conference held by UCLA's Anderson School.
She also called on federal authorities to place a price cap on what wholesalers can charge.
``Already (suppliers) have fleeced the utilities, and therefore the ratepayers, and now they are fleecing the state,' Lynch said.
``Duke did not set up the system,'' Duke Energy spokesman Tom Williams said. ``It was set by others, by regulators, the governor, the legislators, the utilities and consumer advocates.''
L. A. Times - April 4, 2001
Deregulation: Senate panel will investigate whether suppliers were being misleading when they promised lower rates for consumers while they were also predicting bigger profits for investors.
In the summer of 1999, a top official with a major player in California's power market testified during a congressional committee hearing in support of speeding up deregulation. Unleashing market forces, said the Dynegy Inc. executive, would ensure "maximum customer savings" and "low-cost power."
That same month, the Houston-based firm made a far different pitch to Wall Street: Deregulation and major swings in electricity prices would boost revenue and stock value. "We know how to take advantage of volatility spikes across the gas and power market," Chief Executive Officer Charles Watson declared in a publication targeting large investors. "The energy marketplace," he predicted, "will simply get more volatile."
Dynegy was not alone, a review of federal filings, company documents and public records shows. In the years since California's pioneering deregulation plan was approved, other major out-of-state energy suppliers were sending similar, seemingly contradictory signals to the public and stock buyers.
Now, those divergent messages--electricity prices will fall but corporate revenue and profits will climb--will be a key focus of a special state Senate committee charged with investigating the alleged manipulation in the power market.
"How you can tell your investors you're about to make a whole ton of money in the very short term, and tell the consumers of California you're about to get lower rates?" said Sen. Joe Dunn (D-Santa Ana), a former consumer attorney who is heading the legislative probe.
Investigations by the state attorney general and federal regulators are continuing, but remain largely secret. The Senate panel could offer the most open and wide-ranging examination yet of alleged misconduct among power sellers. The bipartisan panel expects to begin requesting documents from power producers as early as today and begin hearings in a few weeks. Committee members stress that they are hoping the power companies will cooperate but are ready to issue subpoenas if necessary.
Suppliers Deny Misleading Public
"Somewhere along the line, there may be a skunk in the woodpile. And if there is, we need to find out about it," said K. Maurice Johannessen (R-Redding), the committee's ranking Republican.
Another panel member, Sen. Debra Bowen (D-Marina del Rey), noted that all companies try to maximize profits. "But [we want] to understand how the market was manipulated and how sellers took advantage of the market." The power traders strongly deny acting improperly or sending misleading signals to the public.
"Hogwash," said Tom Williams, spokesman for North Carolina-based Duke Energy. Spokesmen for Dynegy said there was nothing inconsistent in the statements of their executives.
The companies maintain that California's problems stem from soaring electricity demand, lagging power plant construction and a faulty deregulation plan adopted by the Legislature in 1996. "You have a flawed structure there," said Dynegy spokesman John Sousa.
Sousa and executives of other power suppliers say their comments to the general public and to Wall Street are not contradictory because unfettered competition--not the California model--would have created opportunities to both make money and cut rates.
Still, regulators, lawmakers and ratepayer groups note that only half the promises made by the power dealers have been realized so far--their earnings and stock prices have risen at record rates as electricity prices have soared. "The big lie was, while they were telling ratepayers to 'Trust us, we're going to lower your rates,' they were planning the entire time to raise the rates," said San Diego attorney Michael Aguirre, a former federal prosecutor who specialized in fraud cases. Aguirre is representing state ratepayers in a class-action lawsuit against the power companies.
Just last month, California's independent grid operator reported that many power sellers "used well-planned strategies to ensure maximum possible prices." Potential overcharges could total nearly $6.3 billion.
The Senate panel wants to track information that Dynegy and other generators were providing to the investment community in the 1990s as a possible way of determining whether they entered the California market with plans to run up electricity costs. Among many other things, the committee plans to seek internal projections of how the firms expected wholesale prices and profits to rise under deregulation.
Members also want to know how the suppliers expected to recoup billions in outlays for California power plants being unloaded by regulated utilities. Some of the purchases were far above book value, stunning analysts. "What did they know that the rest of us didn't at the time they were purchasing those generations facilities?" asked Dunn. "They knew something."
One thing the power wholesalers say they did know was that tight power supplies in California would probably boost prices, at least for a time.
"They were going anywhere where they thought energy [use] would spike upward," recalled market analyst Joan Goodman, who was familiar with company pitches. "California was one of those places because it didn't have sufficient [power] plants."
Duke Energy projected that prices would rise after 2000, although the company says it did not foresee the huge increases that occurred, according to spokesman Williams.
However, when the company sealed one of the first packages of power plant purchases in the state in 1997, Chief Executive Officer Richard Priory said in a press release it would "deliver greater value" to California customers.
The publicity spin was similar when Edison's sprawling beachfront power plant in El Segundo changed hands the following year. "Consumers in California will begin to benefit from more competitively priced electricity and more vibrant economy," announced Craig Mataczynski, vice president of Minneapolis-based NRG Corp., a partner in the purchase with Dynegy.
Big Growth Was Predicted
But to its Wall Street audience, the power suppliers emphasized climbing revenues.
Atlanta-based Southern Co., now Mirant, told investors in 1999 that its plan to buy plants and market power had brought the company to the "doorstep of significant growth opportunities."
"We believe our strategies will result in the best shareholder return available," Bill Dahlberg, then-chief executive officer, said shortly after buying three California plants.
Mirant spokeswoman Jamie Stephenson said assurances given the public and assumptions directed to Wall Street were "just a different way of delivering the same message." The firm was saying it would be "reliable to shareholders and reliable to consumers."
Now, with rolling blackouts and record electricity bill increases, federal and state authorities are alleging that large energy suppliers played the power market too hard.
Last month, the Federal Energy Regulatory Commission said it found evidence of $124 million in "unjust and unreasonable" charges during the severest periods of electricity shortage. The commission, often criticized for being too lenient on private power companies, ordered the firms to refund the money or further justify the charges. Some firms are contesting the findings, saying the prices they charged were justified.
Investigators and regulators have faced a vexing challenge trying to unravel the complex financial workings of the large power traders. The companies closely guard information, and some recently refused to comply with subpoenas from the state Public Utilities Commission, which is also probing the power market.
Whether the Senate investigating committee will have the resources and tenacity to get much further remains to be seen. But Democrats and Republicans alike insist they are serious about untangling how the power market went haywire.
"I haven't seen that much smoke where there hasn't been a fire," Dunn said.
L. A. Times - April 3, 2001
Though Gov. Davis raised the possibility, he has since backed away from it. Still, consumer groups urge him to act. Others say a takeover could worsen the state's energy crisis.
Private energy companies spent less than $3 billion to buy the power plants at the heart of California's electricity crisis.
Those firms made record profits in the past year as their plants generated such high-priced electricity that the state has committed $14.7 billion toward buying power--burning through its budget surplus and authorizing record rate increases that again raised the question of whether it would be cheaper for California to simply seize the plants. It would be a radical step, and one fraught with complicated legal issues, but even the normally cautious Gov. Gray Davis broached the possibility of grabbing power plants during his annual State of the State speech.
"If I have to use the power of eminent domain to prevent generators from driving consumers into the dark and utilities into bankruptcy, then that's what I will do," Davis said in January when he used the legal term for government's ability to seize private property.
Davis has since backed away from such rhetoric, and now his spokesman says taking the plants would be "a last resort." But last week's approval of rate increases as high as 46% is renewing calls by consumer groups and some political leaders for him to do just that.
"This is really radical," admitted Nettie Hoge, director of the Utility Reform Network in San Francisco, who said she initially opposed the idea. "But what I've realized is, this is a very radical situation we're in. Extraordinary circumstances call for extraordinary actions."
Numerous other observers--including economists, attorneys and at least one other consumer advocate--caution that a state takeover of the generating plants could make matters worse.
It could saddle the state with decades-old, dirty plants and scare energy firms away from building power stations in California.