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Duke Energy Employee Advocate

Electric Deregulation - January, 2001

"The Love of Money is the Root of ALL Evil"

Lobbyists, Advocates Battle for Leverage on Electricity Issue
Associated Press - by JOHN HOWARD - January 31, 2001

Rival lobbyists swarmed through the Capitol, battling to protect their interests as lawmakers wrangled over a multbillion-dollar scheme to stabilize California's deregulated electricity market.

The rescue plan changed hourly Tuesday and carried huge stakes, involving years of energy purchases affecting millions of Californians and their pocketbooks.

It also drew attention from agricultural advocates, power plant and utility lobbyists, consumer activists, state bureaucrats, company executives, business experts and consultants seeking to buttonhole lawmakers and pitch their positions.

The Capitol's corridors were crowded with advocates - a common sight when major issues confront the Legislature. And that crowd is likely to get larger as floor votes near on the power-purchasing plan and an omnibus proposal to overall the state's turbulent electricity industry.

In one Senate hearing, lawmakers spent hours wrestling over utility rates, an exercise that irked more than one lobbyist.

"Ratemaking? Why are they getting into ratemaking? It's like the animals have control of the zoo," said one utility advocate, flanked by colleagues outside the chambers.

The most important meetings weren't in hearing rooms but took place behind closed doors in party caucuses and in the offices of the governor and Assembly speaker. That's where a utility bailout was being hammered out, according to consumer activists.

"Rolling blackouts and the daily threats of bankruptcy are political leverage, and the starting point is a bailout for utilities," said Douglas Heller of the Foundation for Taxpayer and Consumer Rights.

The utilities are being told, " 'We'll get you your bailout, we'll get you your rate increase.' I'm afraid that's the politics of today," Heller said.

"In the short term, we want a solution that will allow the utilities to become credit-worthy entities," said Richard Hyde, an employee of North Carolina-based Duke Energy. Hyde has been in Sacramento for the past three weeks advocating his company's interests.

The state's two huge investor-owned utilities, although represented by their own lobbyists, brought in their own big guns - chief executives John Bryson of Southern California Edison Co. and Gordon Smith of Pacific Gas and Electric Co. Both huddled privately with Gov. Gray Davis.

"What do they need lobbyists for when they can send in their CEOs?" a senior administration official said.

But in the end, some say all the lobbying efforts may not amount to much.

"I don't think the lobbyists from the utilities, and certainly the out of state generators, are getting much sympathy," said Assemblywoman Hannah-Beth Jackson, D-Santa Barbara. "While we support profits, we don't support profiteering. They have really taken advantage of us."

Finding a Light In California’s Dark Crises
Sweat Labor Magazine - By Stephen F. Diamond - January 31, 2001

California Governor Gray Davis is, no doubt, about to announce a "solution" to this state’s energy crisis. But as with every other step in this sorry state of affairs, his proposal is likely to be "dead on arrival" – politically, if not financially. It fails to place at its center the one approach that can break the back of this particular crisis: a comprehensive solution. Instead it will leave the energy industry in a half dozen pieces – a high risk equity stake here; revenue bonds to bailout the utilities at ratepayers’ expense there; with the crown jewel generating assets still in the hands of the very utility companies and independent power producers who caused the problem in the first place.

No wonder that consumer groups are already planning a statewide ballot resolution to reverse the deregulation process. Ironically, the first piece of the proposal – forcing California consumers to finance long-term purchases of power that the utilities themselves say they can no longer afford, is being opposed as a "bailout" by Republican legislators.

Instead, a comprehensive solution would build on the growing number of voices – from conservative Central California newspaper publisher J. D. McClatchy to Ralph Nader-backed consumer advocates to San Francisco Mayor Willie Brown – for some form of public power. But rather than a state government controlled body, the key generating, transmission and distribution assets necessary to California’s future should be placed in the hands of a new kind of corporation – an independent public trust company, or PTC, owned and managed jointly by the major stakeholders in this drama.

After all, the leading politicians all take large campaign contributions from the major utilities and are close to giving up their last shred of credibility. The Los Angeles Times reported on January 31st that Governor Davis himself received contributions not only from California-based utilities but also from Duke Energy, one of the out of state "profiteers" he condemned recently for their role in pushing up energy prices. And the current management of the utilities has shown themselves incapable of understanding the very deregulation process that they unleashed on the state five years ago. It is time for a new form of corporate organization to emerge, with the political credibility and financial muscle to resolve with finality this crisis.

How would such a public trust company be formed? It would inevitably be complex but the outline of a solution could look like this: the major institutional investors who own much of the utilities’ debt and equity, together with the employee shareholders in the three large California utilities, would exchange their capital positions for capital in the new PTC, contributing the key California-based assets of the three utilities. They would be joined by the State of California that would contribute its promise of a "guarantee" of future power purchases and of future bond and equity offerings in return for an equal stake in the new company, held on behalf of all California consumers. In return for contributing their in-state assets, the three utilities would be allowed to retain their very profitable out-of-state generating assets bought with the ever-rising rates paid by California consumers over the past few years. In addition, no effort would be made to "pierce the corporate veil" and recover the billions in dividends paid to utility shareholders through share repurchase programs over the last three years.

Finally, the independent power producers would contribute – if necessary, with the assistance of a federal bankruptcy judge - a significant portion of the "profits" that they have "earned" in the form of abusing their market power when California was so vulnerable. They could also take a small equity stake in the new entity or "put" their generating assets back to the PTC at a reasonable profit for their "trouble." Thus, the new entity would be relieved of the burden of the nearly $12 billion in debt accumulated by the utilities at the hands of these companies in the last few months.

The result would be an entity with all of the assets necessary to ensure California the reliable and affordable power it needs over the long run. A company of this size – with the backing of the state itself – would have the financial weight to negotiate fairly and knowledgeably for the purchase of any power it might still need from out of state producers. It could very possibly do so without any further rate increases or layoffs. But it would also follow through on plans now in the pipeline for the expansion of power plant construction throughout the state.

By uniting behind one entity a new political momentum could be created to reverse – on a national scale – the disastrous effort to create an illusory "free market" in such a crucial component of our economy. While the PTC would represent a major step forward in solving this energy crisis, it seems clear that a new approach to national energy planning is required.

And such a company would indeed have the public trust so necessary to any resolution of this situation. The PTC would be managed through a blue-ribbon board of directors representing all of the major stakeholders: institutional investors like pension funds, employees, technical experts, consumers, and the state government.

How could such an effort get started? The pain generated by this crisis is certainly widespread but will no doubt be felt acutely by the major institutional investors like pension funds that thought they were investing in rock solid utility company stocks and bonds when in fact they had purchased a new form of "adventure" capital. Already the shareholder lawsuits have begun, with one shareholder suing Southern California Edison for misleading investors about the company’s financial position. Others are sure to follow. The pension funds, together with the utility employees and retirees who hold large equity positions in companies like PG&E, should have a strong interest in stepping forward to provide the credible leadership this situation requires. If not now, when?

SWEAT Labor Magazine On-Line: http://

It's Greed, Stupid! Debunking the 10 Myths of Utility Deregulation
Public Citizen - Press Release - January 30, 2001

Proponents of deregulation have developed a repertoire of excuses for why electricity deregulation is failing miserably. Rather than admitting that a speculative market for a life-sustaining commodity such as electricity does not work, they have cultivated such myths as, "California just didn't deregulate enough."

In fact, if the retail price for electricity was completely deregulated as the industry suggests, the average consumer's electric bill would be $600, rather than the approximately $55 charged before deregulation, according to Public Citizen's calculations.

This is just one of ten myths debunked by a Public Citizen report released today (available at The report examines in detail arguments that deregulation proponents are making and explains why these contentions are false.

"Already, consumers and small businesses have been hijacked because California's deregulation law, which has allowed so-called 'free market' forces to reign in California's electricity market, has allowed power suppliers to rake in billions in excess profits," Public Citizen President Joan Claybrook said.

By both exerting market power and manipulating the next day's spot market for electricity, these suppliers keep electricity supplies low and prices high, for instance by employing unscheduled power plant closings. They have created a crisis in California that may drive the state into a recession and has done nothing to ensure that consumers have affordable, reliable electricity.

In keeping with their long-range business plans to dramatically expand sales, power suppliers blame the current problems on too few power plants. Their solution is to repeal power plant and transmission line siting laws and to suspend environmental regulations that protect people's health, so that they can engage in a building frenzy.

"If the power suppliers selling electricity in California have their way and retail prices for this important commodity are left to the vagaries of the market, the average consumer could be paying 12 times more for electricity than they were before deregulation," said Wenonah Hauter, director of Public Citizen's Critical Mass Energy and Environment Program.

The myths include:

  • Prices are high because California's strict environmental standards have slowed power plant construction. In fact, there is currently more than enough capacity to meet maximum demands. Power demand during four of the past six months in California was lower than during the same period in 1999. However, power producers under deregulation have strong incentives not to run plants at full capacity or to shut them down altogether to manipulate prices. Even so, since April 1999, the state's Energy Commission has approved nine major new power plant projects, six of which are under construction.

  • The purpose of deregulation was to lower costs for consumers. To the contrary, deregulation has resulted in higher prices for consumers. Even if long-term contracts are entered into with suppliers, as is being discussed by state officials, consumers will still be paying an average of three times more for the price of electricity than they would have under sensible regulation.

  • Deregulation is good for the environment. Market forces driving deregulation will only encourage cost-cutting measures that will result in more pollution. In fact, deregulation creates incentives to produce power from the cheapest source - dirty coal plants. Suppliers want to continue operating these older plants as long as possible, because it costs less than building new, more efficient plants. (The new plants being proposed would run in addition to existing plants.) Deregulation thus provides no incentive for conservation, which produces no profits for power producers.

  • California's energy crisis is best resolved through state, not federal, actions. Under the deregulation law, California's utilities sold most of their fossil fuel power plants to out-of-state power wholesalers who are profiting at the expense of consumers. To remedy this situation requires federal action. The best short-term solution for the crisis would be for the federal government to impose cost-based rates on these power suppliers, who now are charging utilities outrageous prices and far more than utilities are permitted to charge consumers. The federal government is the sole entity with the power to do this. This action would give California time to thoughtfully restructure its electric industry.

  • California's utilities are close to bankruptcy and need to be bailed out. In fact, the utilities' parent companies have spent billions on buying other assets in recent months. They should be forced to sell off these assets before having the state - and therefore, the taxpayers - assume the burden and future risk for utility debts.

  • Electricity deregulation is working in other states. In other states that have deregulated, like Pennsylvania, the temporary protections that made deregulation legislation politically viable for passage are still in effect. Pennsylvania's utilities have a regulated rate for electricity that new suppliers must beat to be competitive. Over the next few years, as these protections are sunset, we will see many states follow in California's footsteps if deregulation is not canceled.

Duke Energy denies profiteering
The Charlotte Observer - by Ted Reed - January 30, 2001

Duke Energy Co. chief Rick Priory has assailed California officials, including the governor, who say Duke is profiteering in the state and withholding power to create scarcity.

"Duke is being accused of doing things we would never engage in," said Priory, Duke chairman, president and CEO, in an interview. "It's bizarre, because Duke is a company that has spent 100 years doing nothing but keeping the lights on day and night.

"Besides, we're just 5 percent of the California market, so how are we going to manipulate it?" he asked. "We're smart, but not that smart."

Priory spoke angrily of charges against Duke and other out-of-state power companies, invited in 1997 to bid on California power plants as part of the state's deregulation of its power industry. He said he has had little chance to respond because, "We don't have the microphone."

Many of the charges were included in California Gov. Gray Davis' Jan. 8 State of the State address. The state's energy crisis was the principal subject.

Davis said California has lost control of its power industry to out-of-state, private companies.

"We have surrendered the decisions about where electricity is sold, and for how much, to private companies with only one objective: maximizing unheard-of profits," he said.

"Worst of all, there's evidence that some generators may be purposely withholding electricity from the California grid to create artificial scarcity, which in turn drives up the price astronomically," said Davis, who proposed criminal penalties for generators who deliberately withhold power.

Since then, state inspectors have made unannounced visits to California generating facilities, including dozens of unannounced visits to Duke's four plants, seeking evidence of power withholding.

"Some people keep them waiting, but we invite them right in," said Priory. "The people at our plants have creating electricity in their blood. If a bearing goes out, that's a crisis for them."

Because of increased demand, Duke has ratcheted up production at its four plants by 50percent between 1999 and 2000. It plans to modernize three of the four sites, spending $1.6billion to increase capacity by 40percent, to about 5,000 megawatts.

Priory said he has been puzzled by California's management of its energy needs, which has led to a series of rotating blackouts, financial losses for thousands of businesses, and potential bankruptcy for the state's largest utilities.

California's deregulation plan left the state unable to adapt when demand for natural gas spiked.

In-state generation could not keep up with growing demand. And utilities did not buy "forward" power to meet future needs, forcing them to buy higher-priced power in spot markets.

After Duke acquired its four California plants, Priory visited the state to seek more rapid regulatory approval of its plans to expand the plants' capacity.

"From the time we got to California, we saw a supply shortfall," Priory said. "In late 1999, I did a tour of the state, talking to top energy officials, telling them that it appeared to us that a train wreck was coming. But everybody I met with said they were not responsible."

So far, only one expansion has been approved. It will take capacity at the Moss Landing plant in Monterey County from 1,500 to 2,560 megawatts in 2002, accounting for half of California's new generation that year.

In July 2000, Duke made a proposal to Davis, offering to provide up to 2,000 megawatts of electricity at $50 a megawatt hour for five years.

Since then, the market price has risen to between $85 and $95 for future power, and between $300 to $400 for immediate power.

But despite seeking an appointment to meet with Davis for the past seven months, Priory has been unable to get one.

Today, Priory views California's problems as largely a failure of risk management. Because California benefited for so long from buying surplus power from out-of-state producers at low rates, it did not buy power futures. Instead, California utilities buy most of their power in the volatile next-day market.

The concept appalls Priory, who says Duke's single most important role is managing risk. Duke Power buys coal for its power plants far in advance, and Duke Energy North America sells power months or years in advance, locking in a return that will assure a profit. It keeps 10percent as a margin, in case a plant fails.

"Duke is a risk management company; that's what we do for a living," Priory said. "But in California, they didn't manage their price risk."

Power Companies Capitalizing on Information to "Manipulate the World..."
L. A. Times - January 25, 2001

The same Wall Street firm that is advising Assembly Speaker Bob Hertzberg on solutions to the energy crisis stated on its Web site that the blackouts plaguing California are a tactic "likely intended to soften up the Legislature and the voters to the need for a rate increase."

Economists for Credit Suisse First Boston Corp., which has provided two financial experts to assist Hertzberg (D-Sherman Oaks) in drafting crisis legislation, stated in a recent commentary that the blackouts represent a threat of "the unthinkable" that politicians will almost always move to avoid.

They likened California's electricity woes to a moment in New York City's financial crisis a quarter of a century ago when the city could not make some welfare payments and meet police and fire payrolls.

"That prospect helped energize some legislative and banker concessions that got us over the hump," the commentary states. "The unthinkable rarely will be permitted to happen."

As in any Wall Street firm, the economists and researchers who provide analysis for investors are independent of the investment bankers who underwrite deals for large corporations. It is the investment banking arm of the company that is assisting California lawmakers. Another financial firm, Goldman Sachs, is advising Gov. Gray Davis. Consumer advocates, who have claimed for weeks that energy wholesalers and generators were willfully manipulating California with power shortages, reacted angrily to the banking company's take on the state's crisis. "It confirms our worst suspicions," said Harvey Rosenfield, president of the Santa Monica-based Foundation for Taxpayer and Consumer Rights. "They [power companies] are using blackouts to blackmail the state to put up the money to bail out the utilities."

Hertzberg initially intended to pay the Credit Suisse First Boston bankers for their time, but later determined it would be a conflict of interest to formally hire them because of the firm's clients in the energy business, said his spokesman, Paul Hefner.

"There was no place we could find someone with this type of experience that did not have a relationship," Hefner said.

A Credit Suisse spokesman said the company's understanding all along was that the work was being done at no charge. He declined further comment.

At the same time that it is advising California politicians, Credit Suisse First Boston is encouraging investors to acquire holdings in the power generating companies that supply electricity to the state.

Credit Suisse First Boston notes on its Web site that the power companies are shrewdly capitalizing on information about power shortages to "manipulate the world around them" by selling their power to the wholesale market when the shortages are most acute.

Among the companies it recommends are some of the largest suppliers to California, including Duke Energy, AES and Reliant Energy.

San Francisco Attorney Lays Energy Crisis at Feet of Power Companies
The Recorder - by Dennis J. Opatrny - January 22, 2001

Firing the first legal salvo in California's energy crisis, San Francisco City Attorney Louise Renne last Thursday sued 13 energy producers for allegedly creating artificially short supplies to keep prices high.

"While the energy companies want Californians to believe that the crisis is a result of market forces, the power shortage and high prices are in fact due to the illegal manipulation of the market by the energy producers themselves," Renne told a City Hall news conference.

"By their anticompetitive conduct, the energy companies have dangerously destabilized California's economy," she added. "California consumers and taxpayers deserve better."

Renne's lawsuit, People v. Dynegy et al., 318189, was filed in San Francisco Superior Court and asks for an injunction to stop the alleged anticompetitive behavior and to refund an estimated $1 billion in illegal profits.

The litigation is based on the state's Business and Profession Code Section 17200, which bans unfair business practices.

Named as defendants are Dynegy Power Marketing Inc., Enron Energy Services Inc., Enron Power Marketing Inc., PG&E Energy Trading Holding Corp., Reliant Energy Services Inc., all of Houston, Tex., Sempra Energy Trading Corp. of Stamford, Conn., Sempra Energy Resources of San Diego, Southern Company Energy Marketing of Atlanta, Williams Energy Marketing and Trading Co. of Tulsa, Okla., Duke Energy Trading and Marketing, a Delaware corporation, Morgan Stanley Capital Group Inc., N.Y., and NRG Energy Inc., of Minneapolis, Minn.

Renne filed the lawsuit on a day that saw the state order a second round of rolling blackouts because of a shortage of available energy on the open market.

According to the Associated Press, the outages started mid-morning in Northern California and rolled to the Oregon border. The outages affected an estimated 1 million customers for at least an hour into the early afternoon.

Asked if other cities would like to join the litigation, Renne replied, "I don't think there is a public agency in the state that isn't interested in this matter." None has yet signed on, however.

The city attorney said her major concern was for older Californians, whom she said "are fearful" when they learn that their energy will be shut off.

"People are afraid and it's just not right," she said.

In a prepared statement released by his office, Sa Francisco Mayor Willie Brown said he supports the lawsuit as a way to find a remedy for an increasingly intolerable situation.

"These energy producers are engaging in unfair business practices by artificially holding down supply to drive up prices," the mayor said. "The city of San Francisco must take action."

The complaint echoed California Gov. Gray Davis' assertion that "deregulation is a failed experiment" that has not led to lower energy prices or a reliable source of power.

It alleged that the energy producers manipulated the power supply by withholding energy from the open market and then colluded to drive up the opening bid that all purchasers would have to pay.

As a result, the state "was forced to make large amounts of real-time purchases of wholesale energy on the spot market at ever-increasing prices to meet California's energy demand," the lawsuit said.

Joining the lawsuit as co-counsel is attorney Patrick Coughlin of Milberg Weiss Bershad Hynes & Lerach in San Francisco. Coughlin worked with the city in its successful litigation against the tobacco industry.

California Utilities' Pain Yields Duke Energy Gain
Associated Press - By MICHAEL LIEDTKE - January 19, 2001

The financial pain of California's major utilities translated into a handsome gain for power generator Duke Energy, which more than doubled its revenues in the fourth quarter and topped Wall Street's earnings expectations.

The Charlotte, N.C.-based company on Thursday reported fourth-quarter net income of $284 million, or 38 cents per share, a considerable improvement over last year's fourth quarter, when it had a net loss of $189 million.

Excluding special charges, Duke had earnings of $352 million, or 94 cents per share, beating the consensus estimate of 88 cents by analysts polled by First Call/Financial Thomson.

Duke Energy benefited handsomely from the energy price spike because it owns four California power plants that generate with a total capacity of 3,300 megawatts, enough to supply more than 3 million homes. The company didn't break down its profits by state.

The company had fourth quarter revenues of $15.4 billion, compared with $6.2 billion in revenues during the same period a year earlier. For all of 2000, Duke Energy earned $1.78 billion, or $4.78 per share, up from $1.51 billion, or $4.08 per share, in 1999.

Duke's shares rose $1.88 to $73.81 in early afternoon trading Friday on the New York Stock Exchange. Duke is the first major provider of California electricity to disclose how much it prospered from market conditions that have pushed the state's two largest utilities, Pacific Gas and Electric and Southern California Edison, to the brink of bankruptcy.

Richard B. Priory, the company's chairman, president and chief executive officer, said in a statement that the increased expectations reflect confidence in the company's proven performance, solid strategy and successful expansion into key regions around the world. He did not mention the California crisis.

Other power generators are expected to register profit gains much larger than Duke, which has most of its operations outside of California.

For instance, Houston-based Dynegy's fourth-quarter profits are expected to double. Other major California power generators scheduled to release their results during the next three weeks include Reliant Energy, Southern Energy and San Jose-based Calpine Corp.

The generators are releasing their robust profits against a backdrop of rolling blackouts in California, creating a potentially awkward situation.

On the one hand, the companies are hoping the profits will push up their recently slumping stocks, but they don't want to provide ammunition to Californians who believe out-of-state generators are gouging the state.

"They have a bit of a juggling act to do," said analyst Tim Winter of A.G. Edwards & Sons in St. Louis. The financial distress of California's utilities is starting to infect the out-of-state generators.

Duke, for instance, reserved $110 million in the fourth quarter in case it doesn't collect on debts owed for electricity sales in California. As of Dec. 31, Duke said it had about $400 million in outstanding electricity bills in California. With their cash reserves evaporating and no borrowing power, both PG&E and SoCal Edison have started defaulting on their bills.

The volatile market conditions in California also have hurt the stocks of power generator's. Thursday's closing price of Duke's stock represented a 20 percent decrease from the company's record high of $90.44 reached during the fourth quarter.

Even so, Duke's market value has increased by $8 billion, or 44 percent, since the end of 1999.

Blackouts And Lawsuits And No End in Sight
The Wall Street Journal - January 19, 2001

California has weathered earthquakes, wildfires, floods and droughts. But now a man-made disaster is threatening to short-circuit the world's sixth-largest economy.

For a second day, rolling blackouts shut down businesses, dimmed households and even threatened California's citrus crop. People were trapped in elevators and traffic was snarled. Supermarkets were crowded with customers buying flashlights and firewood. California Steel Industries Inc. in Fontana shut down its steel-rolling lines yesterday, losing about $2.4 million worth of production. And the crisis set off new legal fireworks as the city of San Francisco, hit by blackouts, sued power traders and generators, accusing them of conspiring to restrict supplies.

The California Independent System Operator, which runs the state's electrical grid and ensures reliability, declared its highest level of power emergency for the fifth time this year. Engineers at the ISO's control room in Folsom, Calif., were pressed into service phoning suppliers to coax a few more megawatts into the system.

The two, the Southern California Edison unit of Edison International and the Pacific Gas & Electric unit of PG&E Corp., earlier this week failed to pay some debts to suppliers and financial creditors. They are accumulating vast deficits as the price of the power they must buy soars but what they can charge is fixed -- thanks to a rate freeze they once pushed for. Both say they are now on the brink of seeking protection under federal bankruptcy laws.

Although both had enough cash on hand to cover the bills they didn't pay, they chose not to use it. The companies haven't explained the reason they haven't paid. Some analysts interpreted this as presaging a bankruptcy-law filing, while others saw it as a move by the utilities to put more heat on public officials to bail them out. If that's the case, "this would be the biggest game of chicken I've ever seen," said Dan Scotto, a bond analyst at BNP Paribas. The utilities for several weeks have been angling for the state to issue bonds to help pay their outstanding power bills and to amortize the cost over several years with a levy on ratepayers.

Generators and traders that are on the hook for several billion dollars in unpaid bills by Edison and PG&E are increasingly reluctant to sell more juice to the state without assurances they'll be paid. Mr. Davis said four of them -- Duke Energy Corp., Dynegy Inc., Southern Co. and Reliant Energy Inc. -- threatened to force the two utilities into bankruptcy by 12:01 p.m. yesterday unless the state stepped in with its full faith and credit to buy power on behalf of the utilities. Following that threat, Gov. Davis signed the emergency order, formalizing the state's role as a middleman.

In a conference call with the governor Wednesday, the generators told him that if the utilities didn't meet their obligations by noon yesterday, they'd have the right to put the utilities into bankruptcy. "We told him we were due to be paid," said Marce Fuller, chief executive of Southern's Southern Energy unit. It isn't clear that generators would actually push for a bankruptcy-law filing because some observers believe a bankruptcy judge might force producers to accept sharply discounted payments on the power they've already sold.

Out-of-State Electricity Provider Duke Energy Sees Profit Windfall
L. A. Times - By NANCY RIVERA BROOKS - January 19, 2001

The first of the much-anticipated earnings reports from California electricity generators was released late Thursday and the company, Duke Energy, reported sharply higher income and revenue for the fourth quarter and all of 2000. The Charlotte, N.C.-based energy company owns power plants in California that generate 2,950 megawatts, or about 5%, of the state's supply.

Duke's earnings, not counting taxes and interest, nearly doubled to $4 billion for the year, while revenue jumped 127% to $49.3 billion. Duke said it also took a charge of $110 million for potential losses related to energy sales in California, of $400 million owed the company Dec. 30 for electricity and natural gas.

Southern California Edison and Pacific Gas & Electric are nearly out of cash and have said they can't pay their bills. For the fourth quarter ended Dec. 31, Duke reported a profit of $284 million, or 38 cents per share on a split-adjusted basis, compared with a net loss of $189 million, or 26 cents, a year ago. Revenue rose nearly 150% to $15.4 billion.

Earlier Thursday, Duke said it is continuing to work with Gov. Gray Davis and the Legislature "to provide solutions to help relieve California's energy crisis." Duke was among four energy companies that threatened to push the utilities into bankruptcy Thursday, prompting Davis to declare a state emergency.

"The tireless hours of work with the various stakeholders involved in this crisis have been productive, including our discussion with the governor and legislative leadership last night," said Harvey Padewer, Duke's president of its energy services group.

He said the company controls only a small portion of California's electricity supply.

"It is obvious that with such a small percentage of the market, we cannot control the current crisis or the flow of power in the state," Padewer said. "In fact, for all of 2001, 90% of our generation has already been sold to other suppliers with California delivery points. All of our available generation is running flat out to meet these obligations and to supply the state's power grid during this crisis.

"There are many players in the California energy market, and all, not just a few, must be involved in providing solutions, including other suppliers in the region," he said.

Bush Signals California is on its Own
L. A. Times - January 19, 2001

President-elect George W. Bush on Thursday dismissed the price caps sought by Gov. Gray Davis as a way out of California's deepening electricity crisis, and instead proposed relaxing environmental rules that he said keep the state's power plants from running full tilt.

Bush, in interviews with the Associated Press and several television networks, signaled that the state will be pretty much on its own in resolving the roiling crisis that threatens daily life and economic growth in one of the nation's richest regions.

"It's their law," Bush said in the AP interview, referring to the state's 1996 deregulation legislation. "California is going to have to address and correct the law that has caused some of this to happen."

The president-elect and his chief economic advisor, Lawrence B. Lindsey, discounted the danger that the state's problems pose for the national economy. "It remains to be seen how long and severe the effects will be," Lindsey said in an interview.

The Bush team's assessment of California's problem squares with that of other politicians, policy makers and independent experts who believe that the first steps out of the crisis must be taken in Sacramento, not Washington. But coming as rolling blackouts darken wide swaths of the state, it seems certain to provoke comparisons to President Gerald Ford's refusal to help New York City out of its fiscal morass in 1975, a decision memorialized by the tabloid headline: "Ford to City: Drop Dead."

And while he is correct that the deregulation law is of California's own making, many of the environmental regulations that Bush appeared to be referring to are created by federal, not state, law.

The outcry from state politicians began only minutes after Bush's remarks were made public Thursday. "It's one thing to blame California," Sen Dianne Feinstein (D-Calif.) said in an interview. "At the same time, you're going to have people who are going to die. You're going to have businesses that go out of business.

"For a president to put a thumb in the eye of the state makes very little long-term sense," Feinstein said. "It is shortsighted, and it does not show a deep understanding of the issue."

She said she will ask for a meeting with Bush in an attempt to persuade him to support a temporary price cap on wholesale electricity prices.

"Why would the new president ignore the largest, most populous state in the nation?" asked Rep. Anna G. Eshoo (D-Atherton).

"This crisis threatens the future of high technology. As a representative of Silicon Valley, I can't understand why President-elect Bush or the Congress would turn their backs on the industry that has produced the New Economy." In Sacramento, Davis portrayed the need for price caps as one that reaches beyond California's borders. He sought to ally himself with other Western governors, many of them Republicans…

And in a separate interview with CNN, (Bush) put much of the blame for the state's problems on strict environmental rules. "If there's any environmental regulations that's preventing California from having a 100% max output at their plants--as I understand there may be--then we need to relax those regulations," he said.

Several of the companies that own power plants in the state have complained that clean-air rules limit how much power they can generate. Executives at some of those companies--Houston-based Enron, for example--have close ties to Bush and his advisors...

California in State of Emergency Over Power
New York Times - By JAMES STERNGOLD - January 18, 2001

Gov. Gray Davis of California declared a state of emergency late this evening after the state was forced to cut power temporarily for hundreds of thousands of people on a swath from Oregon to Bakersfield.

While planned, controlled blackouts have occurred before in the state on a modest scale, this was the first time that they were carried out over such a large area. And despite frantic efforts by utilities and state officials to line up enough power for later in the week, the prospect of continuing blackouts put pressure on the governor to step in and take emergency actions.

Governor Davis provided few specifics in his announcement, other than saying that the state's two largest utilities, Pacific Gas and Electric and Southern California Edison, were on the verge of being forced into bankruptcy and that he was ordering a state agency, the Department of Water Resources, to become the principal purchaser of electricity from the big generating companies that supply the state. The state would then sell the power to the financially strapped private utilities.

"The imminent threat of widespread and prolonged disruption of electrical power to California's emergency services, law enforcement, schools, hospitals, homes, businesses and agriculture constitutes a condition of extreme peril to the safety of persons and property within the state which, by reason of its magnitude, is likely to be beyond the control of the services, personnel, equipment, and facilities of any single county or city," Governor Davis said in his declaration.

The emergency declaration recognized that one of the factors that caused the blackouts and threatened more in the days ahead was the fact that the big generating companies were resisting selling their power to utilities that might never be able to pay for it.

The governor said four of these generators, the Duke Energy Corporation, the Southern Company, Reliant Energy Inc. and Dynergy Inc., were prepared to finally put the utilities into bankruptcy court, but had agreed to wait now that the state, which enjoys a solid credit rating, had stepped in and would be the primary buyer of their power. The governor said the arrangement was contingent on the Legislature's passing a bill on Thursday giving the state the ability to buy power on a large scale.

Today's blackouts began at 11:40 a.m. and ran for three hours in Central and Northern California. About 500,000 utility customers at a time in checkerboard patterns were denied power by Pacific Gas and Electric for about an hour, then had service restored as another block was blacked out…

Utility defaults; Duke, BofA may take hit
The Charlotte Observer - January 17, 2001

Southern California Edison, California's second-largest utility, seemed to edge close to bankruptcy Tuesday, as it defaulted on $596 million of bills while its credit rating was lowered to junk status.

Credit agencies Standard & Poor's and Moody's Investor Service lowered ratings on SoCal Edison and Pacific Gas & Electric, the state's largest utility, as California legislators continued to seek a solution to the state's energy crisis. Two of Charlotte's biggest companies, Bank of America Corp. and Duke Energy Corp., both creditors of Southern California Edison, said their exposure was minimal, but they are hopeful a solution emerges quickly. Late Tuesday, the California Legislature was moving toward creating a credit-worthy company to buy power to supply the state.

The credit-rating cuts triggered default provisions on some credit lines and bank loans. Together, Southern California Edison and Pacific Gas & Electric Co. have run up $11.5 billion in losses because they're caught in a squeeze between rising gas prices from suppliers and fixed rates for customers.

Bank of America, one of the biggest lenders to the utilities, said Tuesday that its global exposure to utilities is about $5 billion. The bank declined to specify its California exposure, which analysts have put at about $500 million. Jim Hance, vice chairman and chief financial officer, told analysts during a conference call that if any California utilities default on loans, the bank has set aside enough money this quarter to cover any losses.

"It is incumbent for all of us to work this thing through so that California can maintain its electricity for customers and still pay its obligations," Hance said. "We expect a resolution; we just don't know what it is."

Duke spokesman Cathy Roche said Southern California Edison's default had little impact on Duke. She would not say how much Duke is owed for power it sold to the companies.

Dynegy Corp., the Houston-based power provider, said it would consider pushing the utilities into involuntary bankruptcy unless they pay for their supplies, the Los Angeles Times reported Tuesday. Duke is monitoring the situation, which changes hourly, said spokesman Tom Williams.

Duke accounts for 5 percent of California generation, part of the 30 percent generated by out-of-state companies. Duke is increasing output at three of its four California plants, which currently produce 3,351 megawatts, enough to serve about 3.4 million homes. In 2002, Duke expects to add 1,060 megawatts at its Moss Landing plant in Monterey County, making it California's largest generating plant.

Because of strict construction guidelines, no new generation has been built in California in 12 years. With rapid expansion in the state's economy, particularly in the energy-guzzling high-tech sector, demand for electricity has outpaced supply.

That has resulted in shortages such as the one that occurred Tuesday, when the state faced its second Stage Three power emergency in a week.

Operators of the state's power grid declared the emergency after reserves dropped, saying rolling blackouts were possible but "not imminent."

California Regulators Order Rolling Blackouts
New York Times - By JAMES STERNGOLD - January 17, 2001

After narrowly averting disaster for weeks, California was hit for the first time today with rotating power blackouts affecting tens of millions of people as cool weather and a sudden decline in hydroelectric generation pushed the state's teetering electric system over the edge.

The planned blackouts began at 11:40 a.m. P.S.T., and for several hours affected only Northern California. Large blocks of utility customers, about 500,000 at one time, were ordered shut down by the Pacific Gas and Electric Company for about one hour, then had their power restored as another block was blacked out.

"We are trying to manage the picture here today, but we've come to the end of the road here as far as supply within California and out-of-state resources go," said Jim Detmers, managing director for operations at the Independent System Operator, the agency that oversees the state's power grid.

The blackouts come a day after the Independent System Operator declared its second power emergency in a week. But in both of those previous so-called stage three alerts, imposed when the power reserve fall below 1.5 percent, California narrowly escaped statewide blackouts.

Pacific Gas and Electric and Southern California Edison are sinking under billions of dollars in debt, which they incurred when they were forced to buy electricity from suppliers for far higher prices than the utilities could charge their customers. Wholesale power prices have risen sharply since June, while retail electricity rates are frozen by state regulation.

The State Legislature is considering a bill that would have the state government buy power from the generating companies at long-term rates and then sell it to the utilities. But some financial analysts described the effort as too modest to avert a potentially far-reaching financial breakdown.

On Tuesday, the financial condition of the two utilities were further shaken. The two biggest credit-rating agencies finally downgraded their ratings for the bonds of Southern California Edison and Pacific Gas and Electric to one of their lowest levels. The step pushed the bonds of the two huge companies below investment grade, or into the status of junk bonds.

Adding to the downward spiral, Southern California Edison filed documents with the Securities and Exchange Commission Tuesday saying it was suspending $596 million in payments to creditors, including payments it owed some power producers.

Trying to Follow the Money in California's Energy Mess
New York Times - January 12, 2001

Where did the money go?

Since last spring, California's two biggest utilities have spent $12 billion more for power than they have collected from ratepayers. With the utilities threatening bankruptcy, the Legislature called into emergency session, companies putting off expansion plans and residents braced for rate increases, the search for explanations — or scapegoats — has reached a fever pitch.

"Never again can we allow out-of-state profiteers to hold Californians hostage," Gov. Gray Davis thundered in a speech this week condemning power producers, before flying off to a Washington meeting called by President Clinton seeking solutions to the state's energy mess.

But understanding where the money went is a more complicated matter than pointing to a few rapacious corporations. For while billions have poured out of the state, that flow, many experts say, is an inevitable result of the ill-designed deregulation program that California put in place three years ago, at the behest in part of its now sickly utilities.

Certainly, much of California's immense electric bill has been paid to companies based outside the state, with the owners of power plants and concerns that trade and market electricity capturing much of it.

Even the municipal power authority in Los Angeles — considered a dowager when it held onto its plants while deregulation swirled around it — has made an extra $200 million selling power over the last two years. None of this, in hindsight, should have been a surprise. Since deregulation was first approved four years ago, all of the players have pursued their self-interests.

The trouble is that the marketplace in which those interests have clashed turns out to have been ill-conceived. And a power surplus that made the utilities hungry for deregulation has turned into a shortage, with the state's booming economy straining both generating capacity and the natural gas supplies that run many of the power plants. Throw in a few untimely generator shutdowns and cold, dry weather in the Northwest that reduced the supply of hydroelectric power from that region, and the result is a recipe for a debacle.

"California designed the world's most complicated market that people said would not work well and which they've been trying to fix ever since," said Paul Joskow, director of the Center for Energy and Environmental Policy Research at the Massachusetts Institute of Technology.

Among other miscalculations, the obscure state agency that was supposed to ensure the reliability of the state's power grid instead has added to the volatility in prices, critics say.

California's energy problems took on crisis proportions only when San Diego Gas and Electric, having sold all its power plants, was freed to pass along its wholesale costs to customers last summer, driving bills up 300 percent during air-conditioning season. Unable to do the same, Edison and Pacific Gas and Electric have had to pay up to $1,400 a megawatt-hour for electricity, while charging customers about $64.

Power Suppliers Pressured to Share Pain With California Utilities
The Wall Street Journal - January 11, 2001

Electricity generators and traders, earlier this week derided as profiteers by California Gov. Gray Davis, are being pressured to bankroll the state's beleaguered investor-owned utilities until a more permanent solution can be found to the state's power crisis.

The push to make suppliers share the pain came in the wake of a Washington, D.C., energy summit called by the Clinton administration. The meeting has brought together state and federal leaders and the heads of many of the electric industry's top companies.

If those continuing discussions bear fruit, power suppliers, including companies that bought the cast-off plants of the California utilities and other sellers, might volunteer to take less money than they are owed. Power suppliers, speaking on condition they not be identified, said it was too early to say how such a deal might be structured.

Democrat John Burton, president pro tem of the California State Senate and another summit participant, said the governor's threat -- made in his state-of-the-state address Monday -- that the state might exercise its powers of eminent domain to seize generation plants seems to have had an effect. Mr. Burton says that after the seven-hour summit he is "more optimistic" suppliers will cut some kind of deal because they are "scared" the utilities are going "belly-up."

Another incentive to negotiate for suppliers such as Southern Co., Dynegy Inc. and Duke Energy Corp. is their faltering stock prices. Since the end of September, when California's power crisis deepened, the value of shares in companies that bought divested utility plants have declined by 14% to 36%, according to Ray Niles, utility analyst at Salomon Smith Barney. "It's been a pretty steady bleed," he says.

Governor Pledges to Save California From Power Crisis
New York Times - By JAMES STERNGOLD - January 9, 2001

Calling California's two-year experiment in electricity deregulation a "colossal and dangerous failure," Gov. Gray Davis proposed several major steps today to reassert the state's control over its power market, including the creation of a new state energy authority that could buy generating plants from private utilities and build new plants.

In his annual address to the California legislature, Mr. Davis, a Democrat, also promised that he would not allow California's two largest private utilities to continue their recent slide toward bankruptcy, saying that he would use all the state's powers, including taking control of power plants and transmission grids if necessary, to keep the system working.

"We will regain control over the power that's generated in California and commit it to the public good," he said in his speech this evening in the Assembly chambers here.

Mr. Davis's proposals will now be debated by a state legislature that has already been considering even stronger measures to tame soaring wholesale electricity prices and power shortages in many parts of the state. The governor's plans represent a startling turnaround from the mood that existed four years ago when the deregulation plan passed the legislature unanimously on promises that market forces would bring power costs down — a drastic miscalculation, as it turned out.

In his speech, the governor said he would push for new laws under which power generators that deliberately withheld supplies from the market to force prices up could be criminally prosecuted.

Most Californians Think Electricity Crunch Is Artificial
L. A. Times - By MARK Z. BARABAK - January 7, 2001

Faced with higher energy costs, many Californians believe the state is experiencing an artificial electricity shortage driven by greed, and a sizable majority favor re-regulating the power industry, according to a Los Angeles Times poll.

The energy crunch is still abstract to many, who have yet to receive higher monthly electricity bills. Even so, it has had a sharply negative effect on public attitudes, compounding Californians' worries about the economy as they become notably less confident concerning the state's overall direction.

Two-thirds of respondents consider a recession likely in the next year.

And--perhaps as a consequence--Californians are less approving than they were just a few months ago of the job performance of Gov. Gray Davis and the state Legislature. Davis received poor marks for his handling of the electricity squeeze, as did the state's privately owned utilities and the California Public Utilities Commission. The poll, conducted Thursday and Friday nights, comes as California is grappling with fallout from the landmark 1996 decision to deregulate the electricity industry and, separately, with the skyrocketing price of natural gas. The surge in energy costs has seized people's attention in a way few issues have in recent years. Four in five Californians say they have been following news of the state's chaotic energy situation, with a third saying they are paying close attention.

Two in five Californians say the power crisis is the most important matter now facing the state. The last time that question was asked, in June 1999, the energy issue barely registered. Back then, 34% said education was the most important issue; today only 19% say education is uppermost in their minds.

In 1996, under Republican Gov. Pete Wilson, the Legislature voted to deregulate the electricity industry. At the time, California power prices were considerably higher than prices elsewhere in the country. Deregulation was supposed to foster competition and, with it, lower prices.

Customers of municipally owned utilities in Los Angeles, Pasadena, Riverside, Sacramento and elsewhere have not been affected by deregulation or soaring electricity prices.

Still, a solid majority of Californians, 66%, now view deregulation as a mistake. That is a shift from October, before the crisis grew acute, when a bit more than half of Californians either supported deregulation or had no opinion. At that time, 47% disapproved.

Now, the state's plunge into a free energy market is viewed with stark negativity: Californians favor re-regulation of the electricity industry 2 to 1.

Nearly three in five Californians consider the state's power crunch a very serious problem, and nearly seven in 10 worry that blackouts will hit their neighborhoods.

"We just ended up with a raw deal," said respondent Stephanie Farley, 42. Her most recent gas and electric bill was $604 for a three-bedroom home in National City, outside San Diego. Under deregulation, she has paid as much as $800 a month for power, considerably more than her old bill.

Farley's utility company, San Diego Gas & Electric, is no longer subject to the rate freeze and last summer increased its rates dramatically as its wholesale costs rose.

"There was no consideration for what it was going to cost," Farley said of the move to let electricity prices fluctuate with supply and demand. "Somebody messed up somewhere."

Indeed, the poll found a deep vein of public skepticism about the causes of the electricity crisis. More than half said they do not believe there is a shortage. Asked to explain their doubts, many asserted that greed on the part of utility companies and electricity wholesalers, rather than a lack of available electricity, is responsible for exploding prices. "How can we go so many years with no problems at all, then suddenly we run into an energy crisis?" asked Carl Fisher, 79, a retired postal worker in Camarillo. His answer: The privately owned energy wholesalers are "playing games . . . jacking up the prices, trying to benefit themselves."

Max Hobbs, 59, of Glendale, agreed: "Some providers under deregulation have, it seems to me, set up a situation where they have tried to create an artificial shortage, and that's a big part of the problem."

Like a fallen power line, deregulation and the ensuing controversy have burned just about everyone--and every institution--they have touched.

Private utilities take the largest share of the blame, with a third of people surveyed holding them responsible for the current problem, rather than the wholesale energy suppliers that have profited from deregulation. The Legislature gets the next biggest share of blame, from 22% of those surveyed. It is followed by deregulation in principle, with 18% citing that as the core problem, and the PUC--charged with overseeing the state's energy industry--which 12% believe is most responsible. Seven percent blame the electricity wholesalers.

N. C. Leaders Seek to Delay Deregulation
The Charlotte Observer - by Ted Reed - January 6, 2001

N.C. lawmakers are thinking twice about efforts to deregulate the state's utility industry, now that California's deregulated market is in turmoil.

"With the complexities in California and other places, it's not going to hurt us one bit to sit back for a while," said Sen. David Hoyle, D-Gaston, co-chair of a legislative panel that is studying deregulation.

"I figure we've already gotten a few billion dollars worth of experience free," Hoyle said Friday.

In California, the state's two largest utilities say they face bankruptcy unless they are given permission to raise rates. The companies will meet Tuesday with California officials as well as top officials in the Clinton administration to seek a solution.

In Raleigh, the panel met Thursday to discuss slowing the pace of deregulation efforts in North Carolina. Members discussed deregulating the wholesale and retail electric markets separately, thus ensuring the state would have sufficient power plants to satisfy demand when retail markets are deregulated.

The commission will likely move this year to ask the legislature to deregulate the wholesale market first, but would not act as quickly to deregulate the retail market, where power is delivered to individual consumers.

The commission did not formally change its commitment to full deregulation by 2006, but Hoyle said there now is no rush to meet that date.

Duke Energy Chairman Rick Priory, a member of the panel, called the plan "directionally correct" because one of the principal problems in California is that it opened the wholesale and retail markets at the same time, which resulted in shortages. That forced the state's utilities to pay high prices to buy power on the open market.

"California did not allow a wholesale market to get in place before they opened it to competition in the retail market," said Duke spokesman Joe Maher.

In South Carolina, legislation on deregulation will likely be introduced this year, just as it has in the past two sessions, but little progress is expected.

"We'll be moving at about the same pace we have been, which is very slowly," said Rep. Harry Cato, R-Travelers Rest, who is chairman of the Labor, Commerce and Industry Committee.

Cato said some legislators are reluctant to act on deregulation because of California's problems, but he doesn't buy it. "We can't sweep deregulation under the carpet and pretend its not there," he said.

Deregulation - December - 2000